10-K

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark one)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2003
OR
o	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 (State or other jurisdiction of incorporation or organization)	94-2754624 (I.R.S. Employer Identification No.)
4560 Horton Street, Emeryville, California (Address of principal executive offices)	94608 (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)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 Par Value
Warrant to Purchase Common Stock, $0.01 Par Value

        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: ý    No: o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes: ý    No: o

        The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based upon the closing price of Common Stock on June 30, 2003 as reported on the NASDAQ National Market, was approximately $3.5 billion. Shares of Common Stock held by each executive officer and director and by each shareholder whose beneficial ownership exceeds 5% of the outstanding Common Stock at June 30, 2003 have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

        The aggregate market value of voting and non-voting stock held by non-affiliates of the registrant as of January 31, 2004 was $4.4 billion. The number of shares outstanding of each of the registrant's classes of common stock as of January 31, 2004:

Title of Class	Number of shares
Common Stock, $0.01 par value	187,524,120

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement to be filed in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held on May 27, 2004 are incorporated by reference into Part II and into Part III of this Report.

PART I

ITEM 1.    BUSINESS

Our Policy on Forward-Looking Statements

        This 10-K contains forward-looking statements regarding our expectations, hopes or intentions regarding the future, including statements relating to sales growth, product development initiatives, new product marketing, acquisitions, competition, in- and out-licensing activities and expected cost savings that involve risks and uncertainties and are subject to change. The forward-looking statements contained in this 10-K reflect our current beliefs and expectations on the date of this 10-K. Actual results, performance or outcomes may differ from current expectations. Our actual performance may differ from current expectations due to many factors, including the outcome of clinical trials, regulatory review and approvals, manufacturing capabilities, intellectual property protections and defenses, stock-price and interest-rate volatility and marketing effectiveness. In particular, there can be no assurance that we will increase sales of existing products, successfully develop and receive approval to market new products, or achieve market acceptance for such new products. There can be no assurance that our out-licensing activity will generate significant revenue, or that our in-licensing activities will fully protect us from claims of infringement by third parties. In addition, we may engage in business opportunities, the successful completion of which is subject to certain risks, including stockholder and regulatory approvals and the integration of operations. We have discussed the important factors, which we believe could cause actual results to differ from what is expressed in the forward-looking statements, in Part II, Item 7, of this 10-K, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the caption "Factors That May Affect Future Results." Consistent with SEC Regulation FD, we do not undertake an obligation to update the forward-looking information contained in this 10-K.

Company Summary

        Chiron Corporation is a global pharmaceutical company that leverages a diverse business model to develop and commercialize high-value products that make a difference in people's lives. We apply our advanced understanding of the biology of cancer and infectious disease to develop products from our platforms in proteins (therapeutic proteins and monoclonal antibodies), small molecules and vaccines. We commercialize our products through three business units: blood testing, vaccines and biopharmaceuticals.

Focus on Cancer and Infectious Disease

        Chiron is focused on developing products for cancer and infectious diseases. We continue to build upon our cancer franchise, which has three dimensions: immune-based therapies, antibodies and novel small molecule anti-cancer agents. In the infectious disease area, we have a range of products spanning all three of our business units.

Blood Testing

        Chiron Blood Testing develops and commercializes a range of blood safety products used by the blood banking and transfusion medicine industry. Our commercial products include:

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Procleix® HIV-1/HCV Assay: A nucleic acid test (NAT) co-developed with Gen-Probe Incorporated for the simultaneous detection of HIV-1 and hepatitis C virus (HCV) in whole blood, organs and tissue;



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RIBA® tests: Immunodiagnostic supplemental confirmatory tests for HIV and HCV developed by Chiron and marketed through our joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc., a Johnson & Johnson company; and

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A line of immunodiagnostics screening tests for infectious diseases, also marketed through our joint business contractual arrangement with Ortho.

        Also available for sale outside the United States or under IND are the following products:

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Procleix® Ultrio™ Assay: A nucleic acid test co-developed with Gen-Probe Incorporated for the simultaneous detection of HIV-1, HCV and hepatitis B virus (HBV) in whole blood, organs and tissue; and



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Procleix® WNV Assay: A nucleic acid test co-developed with Gen-Probe Incorporated for the detection of West Nile virus (WNV) in whole blood, organs and tissue.

Vaccines

        Chiron Vaccines, the fifth largest vaccines business in the world, currently offers more than 30 vaccines including flu, meningococcal, travel and pediatric vaccines. We provide a range of vaccines, including:

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Fluvirin®, Agrippal® S1 and Begrivac™, trivalent influenza vaccines;



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Fluad®, an innovative adjuvanted influenza vaccine;



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Menjugate®, a conjugated vaccine against meningococcal meningitis caused by the bacterium N. meningitidis serogroup C;



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Encepur™, a preservative-free vaccine against tick-borne encephalitis;



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Rabipur®/RabAvert®, a cell culture vaccine against rabies;



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Arilvax™, a vaccine against yellow fever;



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DTP, diphtheria, tetanus and pertussis (whooping couch) vaccine; and



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Oral polio vaccine.

Biopharmaceuticals

        Chiron Biopharmaceuticals discovers, develops, manufactures and markets a range of therapeutic products. Our products include:

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TOBI® (tobramycin solution for inhalation) for pseudomonal lung infections in cystic fibrosis patients;



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Proleukin® (aldesleukin) for cancer (metastatic melanoma and renal cell carcinoma); and



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Betaseron® (interferon beta-1b) for multiple sclerosis.

Intellectual Property

        Chiron has a large portfolio of intellectual property, with key positions in hepatitis C virus and HIV. Chiron has entered into numerous collaborations and licensing agreements with major companies, particularly in the areas of blood screening and diagnostics.

Corporate History, Headquarters and Website Information

        We were incorporated in California in 1981 and merged into a Delaware corporation in November 1986. Our principal executive offices are located at 4560 Horton Street, Emeryville, California 94608, and our main telephone number is (510) 655-8730. Investors can obtain access to this annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K

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and all amendments to these reports, free of charge, on our website at http://www.chiron.com as soon as reasonably practicable after such filings are electronically filed with the SEC.

        We also make available on our website our Corporate Governance Guidelines, the charters of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee of our board of directors, and our Code of Conduct. The information contained on our website, or on other websites linked to our website, is not part of this report.

Product Descriptions

Blood Testing

        Our blood testing business consists of two separate collaborations: an alliance with Gen-Probe Incorporated and a joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc.

        Our collaboration with Gen-Probe is focused on developing and commercializing nucleic acid testing (NAT) products using transcription-mediated amplification technology to screen donated blood, plasma, organs and tissue for viral infection. Compared to immunodiagnostic testing, where infection is determined by the presence of antibodies, testing directly for the presence of viral nucleic acids improves the sensitivity of the test and enables infection to be detected earlier than previously approved technologies. Under the terms of the collaboration agreement, Gen-Probe performs certain product development and assay and instrument manufacturing functions, while Chiron and Gen-Probe jointly participate in new assay and instrument research and development. Chiron sells the collaboration's products under the Procleix® brand name, and Gen-Probe receives a percentage of our sales revenues.

        The Chiron/Gen-Probe collaboration's first product, the Procleix® HIV-1/HCV Assay and System received FDA approval in February 2002 and CE Mark in Europe in 2003. It is the first and only NAT test that allows for the simultaneous detection of HIV-1 and hepatitis C virus (HCV) and is performed on a semi-automated instrument system. The Procleix® HIV-1/HCV Assay and System is commercially available in the United States and throughout Europe, Australia and New Zealand and is under evaluation in South American and Asian countries.

        On July 1, 2003, following a 9-month development cycle, Chiron introduced the Procleix® WNV Assay under an Investigational New Drug (IND) protocol. The test was developed in collaboration with Gen-Probe in response to an FDA request for a NAT test able to detect the West Nile virus by the start of the 2003 mosquito season. Between July 1 and December 31, 2003 over 800 confirmed West Nile virus contaminated units of donated blood were detected by the Procleix® WNV Assay, potentially preventing over two thousand transfusion transmissions of the virus. The primary market for this product is the U.S., though European and Asian medical authorities have expressed interest in conducting epidemiological studies in 2004. We expect to begin pivotal clinical trials of the Procleix® WNV Assay in the first half of 2004 as a first step towards seeking licensure of this assay in the United States.

        The Procleix® Ultrio™ Assay is the collaboration's premium product offering that adds the direct detection of hepatitis B virus (HBV) to the approved Procleix® HIV-1/HCV Assay allowing for three results to be obtained in the same amount of time, and using the same instrumentation. Over 350 million people worldwide are chronic carriers of HBV, with over 2 billion infected. HBV is the leading cause of liver cancer in the world and is at its highest prevalence in Southeast Asia, Southern Europe, India and Africa. In the U.S. and Western Europe infection rates are estimated at approximately 2% of the population. The Procleix® Ultrio™ Assay received CE Mark Registration in Europe in January 2004. Clinical trials in the U.S. began in the fourth quarter 2003 on the semi automated instrument system, to be followed on the fully automated TIGRIS™ instrument. Chiron expects to file a Biologics License Application (BLA) in 2004.

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        Our joint business contractual arrangement with Ortho-Clinical Diagnostics was formed in 1989, to develop and sell immunodiagnostic tests to detect retroviruses and hepatitis viruses in blood. The joint business contractual arrangement sells a full line of immunodiagnostic tests for hepatitis viruses and retroviruses and provides supplemental tests and microplate and chemiluminescent instrument systems to automate test performance and data collection. We manufacture, and perform research on, viral antigens for further manufacture by Ortho-Clinical Diagnostics into testing assays and supplemental hepatitis and HIV tests. Ortho-Clinical Diagnostics manufactures and sells the assays and instrument systems. Chiron and Ortho-Clinical Diagnostics share equally in the pretax operating earnings generated under the contractual arrangement. The joint business contractual arrangement holds the immunodiagnostic rights to our hepatitis and retrovirus patents and receives royalties from the sale of hepatitis C virus and HIV tests sold by Abbott Laboratories, Inc. and from sales of hepatitis C virus tests by Bio-Rad Laboratories, Inc. and certain other licensees.

        Chiron has engaged Gen-Probe and Ortho-Clinical Diagnostics in extensive business continuity planning to limit any disruption to our current source of these blood safety products in the event of a loss of manufacturing capability. Chiron maintains several months' supply of NAT reagents in inventory. Ortho maintains similar inventories of immunodiagnostics products.

        Sales of nucleic acid testing products accounted for 11%, 10% and 4% of our consolidated total revenues in 2003, 2002 and 2001, respectively. Revenues related to our arrangement with Ortho, including the joint business contractual arrangement, accounted for approximately 8%, 10% and 9% of our consolidated total revenues in 2003, 2002 and 2001, respectively.

Vaccines

        Following the acquisition of United Kingdom based PowderJect Pharmaceuticals in July 2003, Chiron commenced sales of Fluvirin®, a trivalent influenza vaccine. Fluvirin® is one of only two injectable flu vaccines approved for use in the U.S. by the regulatory authorities. Between 10% and 20% of the U.S. population contracts the flu each year. Vaccination not only decreases the risk of illness for the vaccine recipient, but also helps prevent the spread of the flu virus and limits its role in the potential development of life-threatening complications. In an average year in the U.S., flu kills an estimated thirty-six thousand people, primarily in the over-65 population, and results in one hundred and fourteen thousand people being hospitalized. In addition to its U.S. approval, Fluvirin® is registered for use in over 20 countries. The vast majority of Fluvirin® production is supplied to the U.S. market, with the United Kingdom accounting for most of the balance. Chiron's flu vaccine franchise is complemented by three other established brands, Agrippal® S1, Begrivac™, and Fluad®, which are marketed outside of the U.S., largely in Europe.

        In 2000, Chiron commenced sales of Menjugate®, a conjugate vaccine against meningococcal disease caused by the bacterium N. meningitidis serogroup C. Invasive infection with the bacteria N. meningitidis can lead to meningitis and septicemia (blood poisoning). Meningococcal meningitis, which can be caused by multiple serogroups (A, B, C, W, Y and others), is associated with both high mortality and morbidity. In March 2000, the Medicines Control Agency approved Menjugate® for sale in the United Kingdom. The National Health Service in the United Kingdom accepted our tender to supply Menjugate® each year since then. We are also selling Menjugate® in Canada, Germany, Ireland, Spain, Hungary, France and Australia. We have received approval to market Menjugate® elsewhere in the European Union through the mutual recognition procedure.

        Chiron also manufactures and markets Fluad®, an adjuvanted flu vaccine, which uses our proprietary MF-59, an adjuvant which improves the body's immune response to vaccination. Adjuvants are compounds that amplify the immune response generated by vaccine antigens. This adjuvanted vaccine accords longer lasting protection to older patients protecting them from influenza and its complications. Fluad® currently is marketed in Germany, Austria, Italy (under the trade names Fluad

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and Influpozzi Adiuvato) and Spain (under the trade name Chiromas). We have gained approval to market Fluad® in 12 countries of the European Union through the European mutual recognition procedure.

        In 2000, we entered into a co-promotion and co-marketing agreement with Aventis Pasteur MSD related to Menjugate® and Fluad®. Under the agreement, Aventis Pasteur MSD assists Chiron in marketing and sales efforts (co-promotion) related to Menjugate® in the United Kingdom and Ireland. Aventis Pasteur MSD distributes, co-markets and sells Menjugate® under its own label in the rest of Europe. Aventis Pasteur MSD similarly co-markets Fluad® in Europe.

        In Italy, we manufacture and/or market vaccines for:

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meningococcal infection;



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haemophilus influenza type b;



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influenza;



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measles;



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mumps;



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rubella; and



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polio (oral vaccine).

        Also in Italy, under license, we market vaccines for pneumococcal disease.

        In Germany, we manufacture and/or market vaccines for:

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meningococcal infection;



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diphtheria;



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tetanus;



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pertussis;



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influenza;



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rabies;



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tick-borne encephalitis; and



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cholera.

        Also in Germany, under distribution agreements with other manufacturers, we market vaccines for:

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hepatitis A virus;



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measles;



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mumps;



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rubella;



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typhoid fever;



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pneumococcal disease;



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polio (inactivated vaccine); and



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hepatitis B (recombinant vaccine).

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        In the United Kingdom, we manufacture and/or market vaccines for:

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influenza;



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yellow fever; and



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tetanus.

        Also in the United Kingdom, under distribution agreements, we sell vaccines for rabies.

        In India, we manufacture, through Chiron Behring Vaccines Limited, a vaccine against rabies.

        We market most of our manufactured vaccines in other European countries and in the Middle East, the Far East, Africa and South America, and to international health agencies such as the World Health Organization. We market our flu and rabies vaccines in the U.S.

        In addition to revenues from the sale of the vaccines described above, Chiron receives royalties from the sale of certain vaccines from Merck and Company, Inc. and SmithKline Beecham Biologics (now part of GlaxoSmithKline plc), based upon technology developed by Chiron. Merck's hepatitis B virus vaccine, based on Chiron technology, was the first genetically engineered vaccine licensed by the U.S. Food and Drug Administration for human use.

        Sales of Fluvirin® accounted for approximately 12% of our consolidated total revenues in 2003, with sales of our flu vaccine franchise accounting for approximately 19% of our consolidated total revenues in 2003. Sales of pediatric and other vaccines accounted for approximately 11% of our consolidated revenues in 2003. No other single vaccine product or class of vaccine product accounted for 10% or more of our consolidated total revenues in any of the last three fiscal years.

Biopharmaceuticals

        We manufacture interferon beta-1b which is marketed by Schering AG and its affiliates, including Berlex Laboratories, Inc. (collectively "Schering"), under the trade names Betaseron® (in the U.S and other non-European markets) and Betaferon® (in Europe). Boehringer Ingelheim also supplies Betaferon® to Schering for sale in Europe. Multiple sclerosis is an autoimmune disease in which the patient's immune system attacks and destroys an element of the patient's own central nervous system. The active ingredient in Betaseron® is a modified form of a beta interferon produced naturally by the human body. Interferons help to regulate the immune system, and Betaseron® is thought to help slow down the immune system's attack on nerve tissue. While the ways in which Betaseron® actually affects multiple sclerosis are not clearly understood, it has been demonstrated clinically that Betaseron® may decrease the nerve damage associated with multiple sclerosis. It has been shown to reduce the overall frequency of multiple sclerosis relapses, which are also called exacerbations or attacks, as well as the number of moderate and severe relapses. Betaseron® is approved for relapsing/remitting multiple sclerosis in over 70 countries, including the U.S. and the European Union, and for secondary progressive multiple sclerosis in approximately 60 countries, including the European Union, Canada, Australia and New Zealand. In the second quarter of 2002, we launched a room temperature formulation of Betaseron®, which is the only beta interferon currently marketed in the U.S. that can be stored at room temperature long term, up to two years. To further increase ease of use, a diluent syringe presentation for Betaseron® was introduced in the U.S. in January 2004 and in Japan in December 2003.

        TOBI® is a stable, premixed, proprietary formulation of the antibiotic tobramycin for delivery by inhalation using a nebulizer. TOBI® has been tested and approved for cystic fibrosis patients with Pseudomonas aeruginosa lung infections. Pseudomonas aeruginosa is the most common bacterium causing lung infections in people with cystic fibrosis. Cystic fibrosis is caused by a genetic mutation that prevents cells from building a special protein required for normal movement of sodium chloride (salt) in and out of cells lining the lungs and other organs. This abnormal movement causes secretion of

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thick, sticky mucus in the airways. This mucus is not cleared from the airways and, as a result, bacteria begin to grow, causing infection. The use of oral and intravenous antibiotics to treat pseudomonal and other bacterial infections is well established. In cystic fibrosis patients with pseudomonal lung infections, tobramycin is the most commonly used intravenous antibiotic. The advantage of inhalation is that it permits higher antibiotic concentrations in the lung and reduces side effects by limiting systemic exposure. Appropriate treatment of these chronic lung infections is a major contributor to the extended life span of patients with cystic fibrosis and to improve quality of life. The TOBI® formulation is well tolerated by patients, thereby leading to increased patient compliance and more effective control of infection. Treatment with TOBI® decreases the bacterial load, reduces the associated inflammatory response, and improves overall lung function. TOBI® is the first and only inhaled antibiotic solution to be approved by the U.S. Food and Drug Administration. TOBI® is marketed in the U.S., the European Union, Canada, Switzerland, Norway, Israel, Argentina and Brazil.

        Chiron manufactures and markets Proleukin®, a recombinant form of interleukin-2. Interleukin-2 is a protein produced naturally in the body in very small quantities. Interleukin-2 stimulates the immune system to increase the production and function of immune cells. While the precise anti-tumor mechanism of Proleukin® is unknown, research has demonstrated that Proleukin® induces the proliferation of immune cells, including natural killer and cytotoxic T cells that can recognize and mobilize against tumor-specific antigens on the surface of malignant cells. We market Proleukin® directly or through distributors in the U.S. and over 50 other countries in North America, Europe, Asia and South America to treat metastatic renal cell carcinoma (a type of kidney cancer), and in the U.S. and Canada to treat metastatic melanoma (a form of skin cancer).

        Sales of Betaseron®, which include product sales to Berlex Laboratories and Schering and royalties earned on Schering's European sales of Betaferon®, accounted for approximately 11% (7% product sales and 4% royalties), 13% (9% product sales and 4% royalties) and 12% (9% product sales and 3% royalties) of our consolidated total revenues in 2003, 2002 and 2001, respectively. Sales of TOBI® accounted for approximately 10%, 12% and 11% of our consolidated total revenues in 2003, 2002 and 2001, respectively. No other biopharmaceutical product accounted for 10% or more of our consolidated total revenues in any of the last three fiscal years.

Research and Development

        As a global pharmaceutical company, our focus on treatment of cancer and infectious disease in the Vaccines and Biopharmaceutical business units starts with the discovery process, using our three product platforms—proteins (therapeutic proteins and antibodies), small molecules and vaccines—and if successful, continues into the clinic and on to commercialization. In addition to our research and development activities, technologies that are developed in collaborations with third parties, as well as technologies licensed from outside parties, also are sources of potential products for our business units.

        Products or product candidates that are inappropriate for our commercial organization are out-licensed to other companies. This portfolio of intellectual property is, and will continue to be, an important part of our business model.

Blood Testing

        Chiron participates in the development of a range of hepatitis and retrovirus immunoassays for use in screening of donated blood, plasma, organs and tissue and in in-vitro clinical diagnostics through the joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc.

        Chiron and Gen-Probe Incorporated are working toward expanding the nucleic acid test menu on the Procleix® System. The current menu consists of a combination test for HIV-1 and hepatitis C virus and is being expanded to include other transfusion transmitted viruses, such as hepatitis B virus, hepatitis A virus, Parvo virus B19 and the West Nile virus.

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        Chiron is also developing enhancements to the current Procleix® Instrumentation System to provide a higher level of automation. The Procleix® Optiva™ System, which consists of multiple components is expected to automate several of the manual tasks performed on the current platform. In addition, clinical trials of the fully automated TIGRIS™ instrument, which is under development by Gen-Probe, are expected to begin in the first quarter of 2004. The Procleix® Ultrio™ Assay was designed to be run on both the current Procleix® Instrumentation System as well as TIGRIS. Future assays described above are also being designed to run on the TIGRIS instrument.

        Two agreements entered into at the end of 2003 have the potential to move the business unit into the expanded realm of Blood Safety:

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The licensure of proprietary nucleic acid technology from Infectio Diagnostic Inc. (IDI) for which Chiron obtained the rights to all current and future products for the detection of bacteria in platelets and blood products for transfusion. Over the course of the next two years IDI will transfer all research and development and manufacturing to Chiron. This technology enables the rapid detection of bacteria in platelets, which is critical given the five-day shelf life of platelet concentrates; and



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The formation of a collaboration with ZymeQuest to develop and commercialize ZymeQuest's enzyme conversion system which converts groups A, B and AB red blood cells to enzyme-converted universal blood group O. Chiron made an equity investment in ZymeQuest and obtained worldwide marketing and commercial rights to the technology. We anticipate the technology to fill a critical need for blood and transfusion centers as up to 10% of the global blood supply is discarded each year due to non-matches between blood on the shelf and patients.

Vaccines

        We are building on our successful flu vaccine franchise by developing next generation cell-culture production technology. This approach has the potential to increase the flexibility of our production process, while adding incremental capacity. We have currently undertaken a number of clinical studies, in which the vaccine demonstrated satisfactory safety and immunogenicity. We plan to initiate phase III testing in 2004.

        We are building on the success of Menjugate®, Chiron's conjugate vaccine against Meningococcus C infection, through the development of other vaccines against additional Meningococcal strains responsible for human disease. These include a second-generation vaccine candidate utilizing Chiron's novel genomic approach against Meningococcus B for which no broadly efficacious vaccine is currently available, which will enter phase I testing in 2004, and a tetravalent conjugate ACWY vaccine, which is currently in phase II. Through collaborations, Chiron also is obtaining human safety and immunogenicity information on hepatitis C virus vaccines candidates, and Chiron's vaccine against HIV, which began Phase I testing in 2003.

        We are also developing novel adjuvants, compounds that amplify the immune response generated by vaccine antigens. One of our adjuvants, MF-59, is a component of Fluad®, our novel flu vaccine. In addition, we are conducting preclinical investigations of alternative delivery approaches for vaccines that may be used in lieu of injection, such as via intranasal or oral administration.

Biopharmaceuticals

Research

        We create proteins (therapeutic proteins and monoclonal antibodies) and small molecules as therapeutic agents for the treatment of cancer and infectious diseases. The drug discovery process is

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somewhat different for these therapeutic modalities but starts with the identification and validation of targets using a variety of technologies.

        With small molecules, the initial drug starting points are identified by high throughput screening, and structure based drug design, if the structure of the target has been solved. Optimization of potency, selectivity and drug properties are followed by in vivo testing and further improvements.

        Proteins produced naturally by the human body play a variety of roles, including controlling disease. Administered as therapeutic agents, some proteins or specific antibodies can enhance the patient's natural ability to fight disease. As in the small molecule development process therapeutic proteins and antibodies can be engineered to improve their activity and drug properties, and genetically engineered cells can produce large quantities of the proteins at reasonable cost.

Development

        Our Biopharmaceuticals business unit focus is in oncology and infectious disease. We conduct clinical trials by contracting some services with Clinical Research Organizations. Chiron is subject to the general risks of drug development, and as such, we expect both pipeline advancement and attrition in any given year.

Development—Infectious Disease

        Chiron continues to build its portfolio of products to treat and prevent infectious disease.

        Tifacogin    Tifacogin (recombinant Tissue Factor Pathway Inhibitor), a coagulation inhibitor, was developed in collaboration with Pfizer, Inc. (formerly Pharmacia & Upjohn, Inc.). In October 2003 Chiron acquired all of Pfizer, Inc.'s interest in tifacogin, in return for which Pfizer will receive royalties on sales of tifacogin. We are initiating plans for a Phase III trial for tifacogin in patients with severe community-acquired pneumonia.

        Daptomycin    We acquired rights in the antibiotic daptomycin for certain countries outside of the U.S. from Cubist Pharmaceuticals, Inc. Daptomycin has been approved by the FDA for the treatment of complicated skin and skin structure infections caused by Gram-positive bacteria. We are determining the regulatory path forward for daptomycin in the European union.

        Cyclosporine for Inhalation    We acquired worldwide development and commercial rights from Novartis for aerosolized cyclosporine (ACsA), a therapy under evaluation for treatment of acute rejections in lung transplant recipients. We plan to file an NDA in 2004.

        TOBI® (tobramycin) for Inhalation    We are working to develop and register a product combining TOBI® and a new inhalation device. In December 2001, we entered into a collaboration with Nektar Therapeutics, Inc. (formerly Inhale Therapeutic Systems, Inc.) to develop a dry powder formulation of TOBI® for use with such new device. Our goal is to improve convenience through the development of a portable device which will reduce the time to deliver TOBI® to the cystic fibrosis patient's lungs. We initiated Phase I clinical trials in 2003 to test the new device and the dry powder formulation of TOBI. We anticipate Phase I results for this study in the first half of 2004 and, based on an understanding with the FDA, may move directly to Phase III testing.

        SILCAAT    Proleukin® (aldesleukin), a recombinant protein already approved for marketing as a treatment for certain forms of kidney and skin cancer, is being clinically evaluated for treatment of patients with HIV infection through an agreement between Chiron, the National Institutes Allergy and Infectious Disease (NIAID) and University of Minnesota.

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Development—Oncology

        Chiron's oncology franchise has three dimensions: immune-based therapies, monoclonal antibodies and novel cancer agents.

        Proleukin® (aldesleukin) for injection plus rituximab    We are expanding enrollment in the Phase II study of Proleukin (aldesleukin) for injection plus rituximab in patients with low-grade non-Hodgkin's lymphoma who have failed rituximab therapy. In addition, a new controlled study will be initiated to study Proleukin plus rituximab in rituximab-naïve patients to determine the combination's potential as an early treatment option in non-Hodgkin's lymphoma.

        Tezacitabine    We are conducting a Phase II clinical trial for tezacitabine, one of several novel cancer therapies we are developing, to study the compound's safety and efficacy as a second-line therapy in gastroesophogeal cancer.

        GFKI    We have initiated Phase I clinical trials for a growth factor kinase inhibitor, GFKI, Chiron's first small-molecule oncology compound.

        Anti-CD40    We are planning to file an investigational new drug application (IND) for a monoclonal antibody oncology compound, anti-CD40, in 2004.

        Cardioxane™ dexrazoxane    We are analyzing results of a clinical trial and considering a submitting license amendment in the E.U.

Development—Discontinued Projects

        During the year the following projects were discontinued:

        PA-2794    In addition to our collaboration with Nektar regarding TOBI®, we entered into a collaboration with Nektar in June 2002 to develop a dry powder formulation of PA-2794, a proprietary anti-infective for treatment of lung infections. Development of PA-2794 was discontinued in 2003.

        Angiozyme    In 2003, we discontinued our research and development of Angiozyme, a synthetic ribozyme designed as an angiogenesis inhibitor for cancer and developed jointly in a collaboration led by Sirna Pharmaceuticals, Inc. (formerly Ribozyme Pharmaceuticals).

Research and Development Expenses and Related Revenues

        Research and development expenses for the years ended December 31, 2003, 2002 and 2001 for Chiron-sponsored research, including payments to collaboration partners, was $409.8 million, $325.8 million and $344.4 million, respectively. Under contracts where we recognize revenue based upon research and development work performed, the revenues amounted to $16.8 million, $19.5 million and $30.2 million in 2003, 2002 and 2001, respectively. We recorded these revenues in "Collaborative agreement revenues" and "Other revenues" in the Consolidated Statements of Operations. Generally, these revenues include fees for research services as they are performed or completed and milestone payments upon attainment of specified benchmarks.

Commercialization

        Technologies arising out of our research and development efforts are commercialized in various ways:

•

We market and distribute certain products, either directly or through distributors. See "Sales and Marketing" below;

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•

We develop other products in collaboration with third parties. Under collaboration agreements, marketing rights may be assigned to us or to the collaborator or shared by both parties. In the event marketing rights are assigned to the collaborator, we often retain the right to manufacture and supply key raw materials; and



•

We license other technologies to third parties, with the licensee assuming responsibility for further development. We generally receive royalties on sales of the resulting product. Agreements under which we currently derive royalty revenues for technologies licensed to third parties include:



•

an agreement with Bayer Corporation relating to, among other things, use of Chiron's hepatitis C virus and HIV technologies for nucleic acid amplification in in vitro diagnostics;



•

agreements relating to hepatitis B virus vaccines;



•

an agreement with GlaxoSmithKline plc relating to recombinant vaccine manufacturing technology;



•

agreements with Novo Nordisk AS relating to technology used in the manufacture of recombinant human insulin and glucagon;



•

a license to Abbott Laboratories, Inc. under our hepatitis C virus related patents for use in nucleic acid amplification in clinical diagnostics, excluding blood screening;



•

licenses to F. Hoffmann-LaRoche Limited and Roche Molecular Systems, Inc. under our hepatitis C virus and HIV related patents for use in nucleic acid amplification in in vitro diagnostics and in blood screening; and



•

a license to Baxter under our hepatitis C virus and HIV related patents for use in plasma fractionation.

Sales and Marketing

        We maintain several specialized marketing and sales forces that concentrate on individual classes of customers and markets.

        Our blood testing global marketing, U.S. sales and global distribution organization for nucleic acid testing products is based in Emeryville, California and has representatives around the world. Our two primary regional offices are located in Paris, France and Hong Kong, China. We sell products to the public sector through tenders and to private sector blood banks and hospitals directly and through distributors.

        Our vaccine international marketing organization and our marketing and sales organization for the German market are based in Marburg, Germany. Our marketing and sales organization for the Italian market is headquartered in Siena, Italy. Our sales and marketing organization for the United Kingdom market is based in Oxford, United Kingdom and we plan to further enhance our marketing organization in the U.S., which will be based in Philadelphia. Currently we market our influenza vaccine in the U.S. through a network of specialist distributors. Generally, we focus our direct sales efforts on pediatricians and general practitioners. We also sell products to the public sector through tenders (a bid solicitation process) and to private sector pharmacies directly and through wholesalers and distributors.

        Our biopharmaceutical marketing and sales organization for the U.S. is headquartered in Emeryville, California, and its European operation is headquartered in London, England. We focus our sales efforts on specialist physicians, principally oncologists and pulmonologists, who are based in hospitals and large clinics. Generally, we sell products to wholesalers, distributors, clinics and hospital pharmacies.

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Patents

        Patents are very important to our business. We have a policy of seeking patents on inventions arising from our research and development activities. The time and expense required to develop and obtain regulatory approval to market human healthcare products is significant. Without the protection of patents or trade secrets, competitors may be able to use our inventions to manufacture and market competitive products without being required to undertake the lengthy and expensive development efforts made by us. We also receive significant revenue through the licensing of these patents to third parties. We have a substantial number of granted patents and pending patent applications in the U.S. and other important markets. Additionally, we have licensed a number of patents and patent applications from third parties. Additional information is provided below on the certain patents held or licensed by Chiron that relate to our key products. The existence of such patents does not mean they are valid or can be enforced against competitive products. We seek term extensions for some patents, which are available in certain countries based on delays in the grant of regulatory approvals for the sale of products covered by these patents. For these reasons the expiration dates provided below are not definitive.

        Trade secrets and confidential information are also important to our commercial success. Although we seek to protect trade secrets and confidential information, others may obtain access to such information or develop the same or similar information independently. Also, third parties may obtain patent protection that precludes us from using our trade secrets or confidential information.

Blood Testing

        The Procleix® HIV-1/HCV Assay is covered by numerous patents held by Chiron in the U.S. and worldwide. These patents contain claims directed to methods of hybridization, methods for determining the presence of the hepatitis C virus in a sample and to probes/primers utilized in such a process. The hepatitis C virus patent family expire in the U.S. in 2015 and 2016 and expire in Europe in 2010. The earliest family of European HIV related patents expires in 2005. The Procleix® System product line is also covered by several patents held by Gen-Probe Incorporated and licensed to Chiron.

        The hepatitis C virus immunoassay diagnostic products sold by our joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc. are covered by numerous patents in the U.S. and worldwide. These patents contain claims directed to hepatitis C virus immunoassay methods, kits and hepatitis C virus polypeptides. In the U.S., patents expire between 2011 and 2017. The earliest European family of patents expire in 2010.

        The HIV immunoassay diagnostic products sold by our joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc. are covered by numerous patents in the U.S. and worldwide. The earliest patents expire in 2019 in the U.S. and 2005 in Europe.

        Chiron owns additional HCV and HIV patent families and pending applications.

Vaccines

        Fluad®, our adjuvanted flu vaccine, contains the proprietary adjuvant MF-59. The U.S. and German patents containing claims related to MF-59 expire in 2018 and 2010, respectively.

Biopharmaceuticals

        One of the earliest patent families that relate to Betaseron® interferon beta-1b and Betaferon® in the U.S. and Europe relate to serine-17 interferon-beta protein used in manufacturing the product. The U.S. patent in this family expires in 2007. The European patent in this family expires in 2008.

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        The patent family related to our first generation TOBI® tobramycin product includes claims related to product formulation and methods of treating pseudomonas aeruginosa infections. The U.S. and European patents expire in 2014 and 2015, respectively.

        Chiron owns or is the exclusive licensee of various patent families related to IL2, Proleukin® (aldesleukin), the serine-125 Interleukin-2 mutein product, and uses thereof. The patents related to the Proleukin® product will expire in the U.S. in 2006-2012 and in Europe in 2004-2005.

        Chiron owns additional pending patent applications directed to the use of IL2 in combination therapy in oncology or infectious disease.

        Chiron owns patent applications related to the use of TFPI or TFPI analogs in severe pneumonia. Any eventual patent in this family will expire in 2022.

Trademarks

        Registered trademarks of Chiron and our subsidiaries:

•

Proleukin®



•

TOBI®



•

Procleix®



•

Fluvirin®



•

Menjugate®



•

Fluad®



•

Agrippal®



•

Rabavert®



•

RIBA®



•

Rabipur®

        Trademarks of Chiron and our subsidiaries:

•

Begrivac™



•

Encepur™



•

Polioral™



•

Triacelluvax™



•

Ultrio™



•

Optiva™



•

Cardioxane™



•

Arilvax™

        This report also includes trademarks, service marks and trade names of other companies.

Seasonality

        Sales of certain of our products, particularly flu vaccines, are seasonal, with higher sales in the third and fourth quarters of the year. Encepur™, our vaccine against tick-borne encephalitis, is also seasonal with higher sales in the first half of the year.

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Major Revenue Sources

        We have an agreement with Berlex Laboratories, Inc. and its parent company, Schering AG of Germany for Betaseron® interferon beta-1b. Revenues recognized under this agreement, together with certain other arrangements with Berlex Laboratories and Schering, contributed 11% of our consolidated total revenues in 2003, 13% of our consolidated total revenues in 2002 and 12% of our consolidated total revenues in 2001.

Competition

        We operate in a highly competitive environment, and we expect competition to increase. Competitors include large pharmaceutical, chemical and blood testing companies, and biotechnology companies. Some of these competitors, particularly large pharmaceutical and blood testing companies, have greater resources than us. Chiron and our competitors apply rapidly evolving technologies and new developments that frequently result in price competition and product obsolescence. Substantial consolidation is underway in the global healthcare industry and is expected to produce greater efficiencies and even more intense competition. To compete effectively, we invest heavily in research and development, maintain specialized sales forces that concentrate on individual classes of customers and spend significant amounts on advertising, promotion and selling.

        Important biotechnology research is performed in universities and nonprofit research organizations. These entities are becoming more active in seeking patent protection and licensing revenues for their discoveries. The competition among large pharmaceutical companies and smaller biotechnology companies to acquire technologies from these entities also is intensifying. We actively collaborate with such entities in research, and have and will continue to license their technologies for further development. However, these institutions also compete with us to recruit scientific personnel and to establish proprietary positions in technology.

Blood Testing

        We are the sole manufacturer of hepatitis C virus antigens for use in immunodiagnostic assays of the Ortho-Clinical Diagnostics, Inc. joint business contractual arrangement. We also manufacture hepatitis C virus antigens for Abbott Laboratories, Inc.'s immunodiagnostic assays. In the immunodiagnostic blood testing market, the Ortho-Clinical Diagnostics joint business contractual arrangement competes with Abbott Laboratories. The joint business contractual arrangement has experienced increased competitive pressures from Abbott Laboratories with the introduction of the ABBOTT PRISM® instrument system. The joint business contractual arrangement also develops and sells immunodiagnostic instruments and assays to detect hepatitis, retrovirus and other agents in clinical diagnostic applications. Many other companies, including F. Hoffmann-LaRoche Limited and Bayer Corporation, have substantial positions in the market segment.

        The Procleix® system product line is based on proprietary Transcription Mediated Amplification (TMA) technology developed by Gen-Probe. The primary competition is with polymerase chain reaction (PCR) based products. PCR-based products are supplied to the market by F. Hoffmann-LaRoche, a Chiron licensee, or developed in-house by blood banks (referred to as "homebrew"). The commercial market for nucleic acid testing products in the blood banking and plasma industries has developed rapidly as regulatory agencies in developed countries began in 1999 to develop policies and mandates that require this new technology to be implemented as an additional measure to improve blood safety. In developing countries there has been a move to implement nucleic acid based tests in the private health care sector and we anticipate this expanding to the public arena over the next several years. Competition in this sector is the same as in the developed countries.

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        Currently we are in multi-year contracts though the tender process with the public sector blood services of many countries with the most significant ex-U.S., in terms of size, being the United Kingdom, Belgium, France and Australia.

        In addition, in 2002 we signed a multi-year agreement with the American Red Cross, which represents approximately 50% of the 14 million units of blood collected in the U.S. each year.

Vaccines

        Four large companies hold the majority share of the worldwide vaccine market: Merck and Company, Inc., GlaxoSmithKline plc, Wyeth and Aventis Pasteur. Chiron is the world's fifth largest vaccines company. Aventis Pasteur has a strategic alliance with Merck in Europe. All of these companies have substantial research and development programs. Additionally, there are a number of biotechnology companies involved in research programs, primarily involving a limited range of vaccines.

        The competitive factors in vaccines are proven ability to supply product (particularly for flu sales in the U.S.), price, the introduction of new products, including vaccines against diseases for which no vaccine was previously available, and new combination vaccines that combine existing vaccines for several diseases into a single product. Public health authorities, medical practitioners and patients frequently favor combination vaccines, particularly in pediatric vaccines, because they eliminate the need for multiple injections and may increase overall compliance with recommended vaccination schedules. As new combination vaccines are introduced, older combinations and single products often become obsolete. We may be limited in our ability to develop and market certain combination vaccines if one of the vaccines, which would otherwise be included in the combination, is covered by valid and enforceable patents or other proprietary rights held by third parties.

        We believe flu vaccines remain competitive in all markets. Competition varies by market according to product license approvals. All flu vaccines producers, including Chiron, face an annual change in flu strains, which can act as a barrier for new competitors.

        Menjugate®, our meningococcal C vaccine, faces competition from vaccines produced by two other companies, both of which participated in tenders. These companies are also competing for future meningococcal vaccine business in the worldwide market.

Biopharmaceuticals

        Betaseron® interferon beta-1b, as a treatment for multiple sclerosis, competes with Avonex®, a recombinant beta interferon sold by Biogen, Inc., Rebif®, a recombinant beta interferon from Serono, S.A., marketed and sold in the U.S. by Pfizer Inc., and with Copaxone® from Teva Pharmaceutical Industries, Ltd. Novantrone® is marketed and sold by Serono for the treatment of secondary progressive multiple sclerosis. Other companies have treatments for multiple sclerosis in clinical development.

        TOBI® tobramycin is the first and only inhaled antibiotic solution to be approved by the U.S. Food and Drug Administration. Pursuant to the U.S. Food and Drug Administration's orphan drug regulations, TOBI has limited exclusivity in the U.S. through December 2004. However, the use of oral and intravenous antibiotics to treat pseudomonal and other bacterial infections is well established. In cystic fibrosis patients with pseudomonal lung infections, tobramycin is the most commonly used intravenous antibiotic. The advantage of inhalation is that it permits higher antibiotic concentrations in the lung and reduces side effects by limiting systemic exposure. Competitive medical therapies include generic antibiotics, anti-inflammatory drugs, pharmacist compounded generic tobramycin, oral replacement enzymes to maintain nutrition and mucolytics to clear pulmonary secretions.

        Proleukin® (aldesleukin) is the only product approved by the U.S. Food and Drug Administration to treat metastatic renal cell carcinoma and one of two approved treatments for metastatic melanoma.

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However, there are numerous products that are used to treat both cancers on an off-label basis, including alpha interferons sold by F. Hoffmann-LaRoche Limited and Schering-Plough Corporation. Other competitors include Eli Lilly and Company, Bristol-Myers Squibb Company and Celgene Corporation.

Government Regulation

        Regulation by governmental authorities in the U.S. and other important markets is a significant factor in the manufacture and sale of Chiron's products and in our research and development activities.

Blood Testing

        In the U.S., blood testing products, whether based upon immunodiagnostic or nucleic acid testing technologies, may only be used pursuant to the terms of approval of specific license applications in which the product's safety and effectiveness must be demonstrated based upon well controlled studies. Upon approval of the license application, the product may be marketed for the specific uses, which were identified in the approval. Facilities, processes and operations used for the manufacture, testing, storage and distribution of Chiron's blood testing products in the U.S. are subject to U.S. Food and Drug Administration approval and periodic inspection.

        In Europe, our blood testing products are regulated through the In Vitro Diagnostic Medical Devices Directive. During the transition period that ended in December 2003, manufacturers and distributors of in vitro diagnostic devices could sell these products under the current local country regulations or under the provisions of the Directive. The Procleix® HIV-1/HCV Assay and Procleix® Ultrio™ Assay are in compliance with the IVD Directive that went into effect December 6, 2003.

        For all our products, the time and expense needed to complete the required clinical studies, prepare and submit the required applications and supporting documentation and respond to inquiries generated by regulatory review can far exceed the time and expense of the research initially required to create the product. These factors largely determine the speed with which a successful research program is translated into a marketed product.

Biopharmaceuticals and Vaccines

        In the U.S., Chiron's therapeutic and vaccine products (both commercial and investigational) are primarily regulated under federal law and are subject to rigorous U.S. Food and Drug Administration approval procedures. No product can be marketed in the U.S. until an appropriate application is approved by the U.S. Food and Drug Administration. The U.S. Food and Drug Administration applies the approval procedures on a product-by-product basis and typically requires, among other things, an extensive three-phase human clinical testing program. In Phase I, studies are conducted with a relatively small number of subjects to assess the safety of the product. In Phase II, the product is evaluated in a larger group of subjects to begin to assess efficacy and appropriate dosing. Phase III studies are conducted in the target population with a number of subjects that is large enough to provide sufficient data to establish statistically the safety and efficacy of the product. The U.S. Food and Drug Administration approves products to treat specified medical conditions or disorders. Further studies would be required to market the product for other uses. The U.S. Food and Drug Administration must inspect and approve all facilities used to manufacture, fill, test and distribute biologic products. If any change in manufacturing facilities or processes occurs after U.S. Food and Drug Administration approval, additional regulatory review and possibly additional clinical studies may be required.

        Licensing procedures in Europe are comparable to those in the U.S. In 1995, the European Union established a centralized procedure for licensing of products derived from the use of high technology/biotechnology processes. This procedure leads to the grant of a single license for the entire European

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Union. Effective January 1, 1998, the European Union has also adopted a decentralized procedure under which a license granted in one member state is mutually recognized by the other member states, leading to a grant of licenses in member states recognizing the original license. This procedure is replacing independent national licensing of products in the European Union. In addition, products must receive specific country pricing approvals before they can be marketed in that country.

Compliance with Environmental Laws

        We do not expect expenses for compliance with environmental laws to have a material impact upon our capital expenditures, earnings or competitive position.

Employees

        As of December 31, 2003, Chiron and its subsidiaries had 5,332 employees.

Relationship With Novartis AG

        In January 1995, we established an alliance with Novartis, a life sciences company headquartered in Basel, Switzerland. As of January 31, 2004, Novartis owned 42% of our outstanding common stock.

        We have entered into a series of agreements with Novartis as discussed in Note 9, "Related Party Transactions," of Notes to Consolidated Financial Statements, which provide, among other things and subject to certain conditions and exceptions:

•

Novartis will not increase its ownership interest in Chiron above 55% unless it acquires all of Chiron's outstanding capital stock in a "buy-out" transaction. Novartis may exceed this amount and increase its ownership interest up to 79.9% in a transaction approved by a majority of the independent members of Chiron's Board of Directors.



•

Novartis has the right to nominate three members to Chiron's twelve member Board of Directors. The number of directors that Novartis may nominate declines if Novartis' ownership interest in Chiron is less than 30%.



•

Novartis provided certain funding to Chiron for research on certain adult and pediatric vaccines, Insulin-like Growth Factor-I, Factor VIII and Herpes Simplex Virus-thymidine kinase. Funding under this agreement ended December 31, 2001. In exchange for providing this funding, Novartis has certain co-promotion rights for certain vaccines and an interest in certain royalties on sales of certain products resulting from the funded research.



•

Novartis will guarantee certain indebtedness on behalf of Chiron through January 1, 2008.



•

Chiron may require Novartis to purchase shares of Chiron's common stock directly from Chiron at fair market value, up to a maximum subscription amount (initially $500.0 million, subject to adjustment based on other purchases made by Novartis under related agreements or otherwise).



•

Novartis has an option to purchase newly issued shares of Chiron's common stock directly from Chiron at fair market value, subject to the standstill restrictions described above.



•

Chiron and Novartis will cooperate in research, development, manufacturing and marketing of biotechnology products on an arm's-length basis while remaining independent to pursue their respective corporate strategies and opportunities.

ITEM 2.    PROPERTIES

Emeryville Campus

        Our principal executive offices are located in Emeryville, California. As of December 31, 2003, our campus consisted of 25 buildings, of which 15 are leased and 10 are owned. Our Emeryville facilities include research and development, manufacturing and administrative facilities and a parking structure for our biopharmaceutical, vaccine and blood testing businesses.

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Other Facilities

        In 2003, Chiron's Board of Directors approved $50.7 million in expenditures for a 25-year lease for buildings and $42.2 million for capital improvements, both of which are part of a $97.0 million project for a new flu vaccines manufacturing facility in Liverpool, England. The new manufacturing facility will replace existing flu vaccines manufacturing facilities in Liverpool, England.

        We also own and lease manufacturing facilities in Vacaville, California used principally for our biopharmaceutical business. The owned facility has available capacity due to lower than expected demand for certain of our products and improved production yields from other facilities. As a result, we have entered into contract manufacturing agreements to utilize this available capacity (see the Biopharmaceuticals section in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" below).

        We have the following facilities for our vaccines operations:

Owned

•

Manufacturing, administrative and research and development facilities in Rosia, Italy;



•

Manufacturing, administrative and research and development facilities in Siena, Italy;



•

Manufacturing facilities in Liverpool, England; and



•

Manufacturing facilities in Ankleshwar, India

Leased

•

Manufacturing facilities in Liverpool, England;



•

Administrative and research and development facilities in Oxford, England;



•

Administrative and research and development facilities in Madison, Wisconsin;



•

Manufacturing and administrative facilities in Solna and Matfors, Sweden;



•

Manufacturing, research and development facilities in Marburg, Germany;



•

Administrative and sales offices in Mumbai, India;



•

Sales office in Thailand;



•

Sales office in China;



•

Sales office in Brno-Slatina, Czech Republic; and



•

Administrative and warehouse facilities in Amsterdam, The Netherlands.

        We have the following facilities for our biopharmaceutical operations:

•

research and development and administrative facilities in Seattle, Washington (leased);



•

manufacturing and distribution facilities in Annandale, New Jersey (leased);



•

several sales offices in Europe and Canada (leased); and



•

a sales and marketing and administrative facility in Cranford, England (owned).

        We owned research and development, manufacturing and administrative facilities in Claremont, California. We used the facilities principally for our former ophthalmic products business, which we sold to Bausch & Lomb Incorporated in December 1997. Bausch & Lomb occupied a significant

19

portion of the facilities under a three-year lease, which expired in December 2000. We sold the last warehouse on the Claremont campus in April 2001.

        We lease a number of other facilities in North America and Europe primarily for sales and service offices.

        We believe that our current facilities are in good operating condition and are adequate for our current needs; however, we are expanding to meet future requirements. We continually evaluate future requirements for our facilities.

ITEM 3.    LEGAL PROCEEDINGS

Average Wholesale Price Litigation

        The Office of the Inspector General of the United States Department of Health and Human Services is investigating pharmaceutical industry practices concerning reporting of average wholesale prices for products covered by Medicare and Medicaid. Chiron and a number of other companies have received document subpoenas in connection with that investigation. Chiron has produced documents responsive to two subpoenas, which relate specifically to pricing of certain generic oncology drugs sold by Cetus-Ben Venue Therapeutics, a joint venture between Chiron and Ben Venue Laboratories. Chiron sold its interest in that joint venture in 1996. It appears that the Office of the Inspector General's investigation is connected to a pending, but as yet unserved, qui tam (whistle blower) lawsuit, in which Chiron and other companies are named defendants.

        Certain State Attorneys General also are investigating reporting of average wholesale prices related to State Medicaid programs. In September 2000, the Office of the Attorney General of the State of California Department of Justice propounded a document subpoena to Chiron focused on pricing of certain generic oncology drugs sold by Cetus-Ben Venue under the Medi-Cal program. In December 2003, the Attorneys General for the States of Florida and Kentucky informed Chiron that they were investigating Chiron's calculation and reporting of the average manufacturer price and best price to the Center for Medicare and Medicaid Services and the Health Care Financing Administration.

        It is anticipated that additional lawsuits involving the average wholesale price issues for these and other products sold by Chiron through Medicaid and/or Medicare may arise. If any such action resulted in a final judgment against Chiron, Chiron could face substantial damages exposure. It is not currently possible to estimate the probability of loss or to estimate the amount of liability related to these matters.

        In February 2002, the State of Montana through its Attorney General filed a complaint in the First Judicial District Court in Lewis and Clark County against numerous biotechnology and pharmaceutical companies, including Chiron, in connection with setting average wholesale prices for various products, including DepoCyt®, that are reimbursed by Medicare and Medicaid. In March 2002, a similar suit was filed by the State of Nevada's Attorney General in the Second Judicial District Court in Washoe County against Chiron. Between July and September 2002, three similar class action lawsuits were also filed in two California Superior Courts against Chiron (the "California Actions"). In each suit, Plaintiffs alleged that Defendants violated respective state and common laws, and sought both compensatory and punitive damages. In October 2002 and February 2003, the Montana, Nevada and California actions were coordinated and consolidated with the In re Pharmaceutical Industry Average Wholesale Price Litigation pre-trial proceedings. In August 2003, the States of Montana and Nevada both filed amended complaints that did not name Chiron as a defendant. As of February 2004, all claims in the California Actions were dismissed with prejudice respect to Chiron. Therefore, Chiron is no longer a party to any of these actions.

        In January 2003, the County of Suffolk filed a complaint in the United States District Court for the Eastern District of New York against 29 biotechnology and pharmaceutical companies, including

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Chiron, in connection with setting average wholesale prices for various products, including TOBI®, which are reimbursed by Medicaid. Plaintiff alleged that defendants violated federal racketeering laws, federal and state laws on Medicaid fraud, and state laws on unfair trade practice, breach of contract, fraud and unjust enrichment by devising and implementing a fraudulent pricing scheme against Medicaid beneficiaries, and sought declaratory relief, as well as compensatory and punitive damages.

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

F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc.—HIV

        On March 11, 2003, the U.S. Patent and Trademark Office issued Chiron's U.S. Patent No. 6,531,276 (addressed to Methods For Detecting Human Immunodeficiency Virus Nucleic Acid) (the "'276 Patent"). Chiron asserts that under its October 10, 2000 HIV Probe License Agreement and the January 1, 2001 HIV Blood Screening Agreement (the "License Agreements") with F. Hoffman-La Roche Ltd. and Roche Molecular Systems (collectively, "Roche"), that Roche is obligated to pay certain licensing fees and ongoing royalties for the sale of certain Roche HIV nucleic acid tests which infringe the '276 Patent. Roche disputes these obligations on a variety of grounds including non-infringement and invalidity. Roche further contests the rate at which royalties must be paid if in fact its products are covered by the License Agreements. In November 2003, Chiron initiated an arbitration against Roche pursuant to the rules of the CPR Institute for Dispute Resolution. The arbitration is currently scheduled to begin in June, 2004.

        It is not known when nor on what basis this matter will be resolved.

F. Hoffmann-La Roche A.G. and Roche Diagnostics GmbH—HCV

        In September 1999, F. Hoffman-LaRoche AG ("Roche") filed an appeal with the Court of Appeals in Dusseldorf, Germany, regarding a Regional Court's decision to enjoin Roche from the import, use, possession and sale of certain hepatitis C virus immunoassay products in Germany based on Chiron's EP 0 318 216 (the "'216 patent"). After withdrawing certain claims from the '216 patent, Chiron rescinded that injunction and substituted EP 0 450 931 (the "'931 patent") and Chiron's German Patent Nos. DD 298 527, DD 298 524 and DD 287 104 (collectively, the "German Patents") in the appellate proceeding. In October 2003, the Court of Appeals ruled that Roche's HCV immunoassay kits containing a certain antigen infringe all three German Patents. Accordingly, the Court of Appeals granted Chiron the right to enjoin Roche from the import, use, possession and sale of such kits in Germany. Chiron has enforced the injunction. Roche is attempting to appeal this decision to the German Federal Supreme Court.

        In July 2000, Chiron filed suit against Roche Diagnostics GmbH ("Roche Diagnostics") in the German Federal Court ("Landgericht") in Dusseldorf, Germany, asserting that Roche Diagnostics' manufacture and sale of hepatitis C immunoassay products infringe Chiron's German Patent No. DD 298 524 (the "'524 patent"). In July 2003, the Landgericht decided that Roche Diagnostics' HCV immunoassay kits containing a certain antigen infringe Chiron's '524 patent. Accordingly, the Landgericht granted Chiron the right to enjoin Roche Diagnostics from the import, use, possession and sale of such kits in Germany. In August 2003, Chiron enforced the injunction against Roche Diagnostics. In November 2003, Roche Diagnostics filed an appeal with the Court of Appeals.

        In December 2000, Roche Diagnostics initiated nullity proceedings before the German Federal Patent Court ("Bundespatentgericht") regarding Chiron's '931 patent and the German Patents. In August 2002, the Bundespatentgericht upheld the validity of the German Patents, but nullified the German portion of the '931 patent. In November 2002, both Chiron and Roche Diagnostics filed appeals before the Federal Supreme Court regarding the Bundespatentgericht's nullity decisions. Certain infringement actions related to the '931, '104 and '527 nullity proceedings are currently stayed pending the outcome of these appeals.

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

German Red Cross Donation Service and Working Society of Physicians

        In October 2001, the German Red Cross Donation Service and Working Society of Physicians brought a complaint against Chiron and Hoffman-La Roche before the Commission of the European Communities (the "Commission"). These matters generally alleged that Chiron and Roche have engaged in certain anticompetitive actions that violate Articles 81 and 82 of the Treaty Establishing the European Community (the "EC Treaty") in connection with HIV and hepatitis C virus nucleic acid tests in blood screening. The complainants sought a determination that Roche pricing for its blood screening kits based upon the number of donations tested is unreasonable and should be prohibited through interim measures to be ordered by the Commission prior to final resolution of the action. Blood banks from The Netherlands, United Kingdom, Finland and Luxembourg filed similar complaints against Chiron and Roche in about February of 2002. Chiron contested all of these complaints.

        In July 2003, the European Commission accepted a joint settlement proposal made by Chiron and Roche. As part of the settlement, Chiron and Roche agreed to modify certain terms of their agreements under which Roche has licensed Chiron's hepatitis C virus and HIV-1 intellectual property for use in nucleic acid testing products in Europe. In resolving their inquiry, the European Commission concluded that the modified agreements satisfy the criteria for an individual exemption under Article 81(3) of the Treaty.

Laboratory Corporation of America Holdings

        In April 2003, Chiron filed a complaint in the United States District Court for the Northern District of California against Laboratory Corporation of America Holdings ("LabCorp Holdings"), Laboratory Corporation of America ("LabCorp") and National Genetics Institute ("NGI") (collectively, the "Defendants"), seeking damages and an injunction against Defendants' manufacture, use and sale of the UltraQual™ HCV RT-PCR assay and HCV SUPERQUANT™ assay for infringing Chiron's U.S. Patent No. 6,074,816 (the "'816 patent"). The Defendants filed a complaint in the United States District Court for the District of Delaware against Chiron seeking a declaratory judgment that Defendants infringe neither the '816 patent, nor U.S. Patent Nos. 5,712,088, 5,863,719, 6,074,816, and 5,714,596 (collectively, the "Chiron Hepatitis C virus-related patents"), and that the Chiron Hepatitis C virus-related patents are invalid. In August 2003, the Delaware Court granted Defendants' motion to enjoin Chiron from proceeding with the California action and compel Chiron to dismiss that action. Chiron has appealed this judgment to the United States Court of Appeals for the Federal Circuit, and a hearing is scheduled for March 2004. The Delaware Court has scheduled a trial for May 2005.

        In August 2003, Chiron filed a complaint in the United States District Court for the Northern District of California against Laboratory Corporation of America Holdings, Laboratory Corporation of America and National Genetics Institute (collectively, the "Defendants"), seeking damages and an injunction against Defendants manufacture, use and sale of certain HIV assays for infringing Chiron's U.S. Patent No. 6,531,276 (the "'276 patent"). In February 2004, Chiron voluntarily dismissed this case without prejudice and refiled the complaint before the United States District Court for the Central District of California.

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

Institut Pasteur

        In April 2003, Institut Pasteur filed a complaint in the United States District Court for the District of Columbia against Chiron seeking reversal of certain judgments entered by the Board of Patent Appeals and Interferences (the "Board") of the United States Patent and Trademark Office in Patent Interference No. 103,659 (the "'659 Interference"). The '659 Interference involved claims in Chiron's

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U.S. Patent No. 5,156,949 (the "'949 patent") and in certain U.S. patent applications assigned to Institut Pasteur (the "Chang applications"), relating to HIV immunodiagnostic methods. In the '659 Interference, the Board decided that the inventors of Chiron's '949 patent were the first to invent the technology at issue. Institut Pasteur asks the Court to reverse the Board's decision.

        It is not known when nor on what basis this matter will be resolved.

Active Biotech AB

        In June 2003, PowderJect Pharmaceuticals Plc ("PowderJect") filed a Request for Arbitration before the Arbitral Tribunal of the Arbitration Institute of the Stockholm Chamber of Commerce in Sweden against Active Biotech AB ("Active Biotech"). PowderJect claims that Active Biotech breached certain warranties and representations made in the July 2, 2001 Agreement by which PowderJect acquired SBL Vaccin AB ("SBL") from Active Biotech (the "Agreement"). PowderJect seeks compensatory damages and legal fees. The arbitration hearing is currently scheduled to begin in April 2004.

        It is not known when nor on what basis this matter will be resolved.

Sorin Biomedica/Snia

        In June 1994, Sorin Biomedica S.p.A. ("Sorin") filed a lawsuit with the Court of Milan, Italy against Chiron and Ortho Diagnostic Systems S.p.A. seeking a declaration of nullity and non-infringement of the Italian counterpart to Chiron's European Patent 0 318 216 (the "'216 patent") claiming hepatitis C virus immunodiagnostic technology. Chiron denied Sorin's allegations and filed a counterclaim seeking a declaration of infringement. In February 1997, the Court enjoined Sorin from manufacturing or selling hepatitis C virus immunoassay kits in Italy. The Court ruled in October 1999 that certain '216 patent claims were valid and that Sorin's hepatitis C virus immunoassay infringed the '216 patent. In June 2000, the European Patent Office Technical Board Of Appeals upheld the validity of the '216 patent in an amended form which deleted claims that Chiron alleged to have been infringed by Sorin. In December 2000, Snia S.p.A., Sorin's parent company, ("Snia") filed an appeal in the Court of Milan asking the Court to declare the Italian portion of the '216 patent null and void and to award Snia damages. In March 2001, Chiron denied Snia's allegations and asked the Court to dismiss the case. In May 2002, the Court of Appeal of Milan declared that Snia's claims were inadmissible and dismissed Snia's appeal. In July 2003, Snia filed an appeal before the Supreme Court. Chiron in October 2003 filed its counter appeal.

        In January 2002, Chiron filed a complaint against Snia in the Court of Milan asserting that Snia's manufacture and sale of certain hepatitis C virus immunodiagnostics in Italy infringe the '931 patent. Chiron seeks a declaration of infringement based on the '931 patent, as well as damages. Trial is currently scheduled for December 1, 2004.

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

Sysmex Corporation

        In March 2001, Chiron filed a complaint and petition for preliminary injunction with the Osaka District Court in Japan against Sysmex Corporation ("Sysmex") seeking damages and an injunction against Sysmex's manufacture and sale of the Ranream HCV II Ex kit for infringing Chiron's Japanese Patent No. 2733138 (the "'138 patent") claiming hepatitis C virus immunodiagnostic technology. Sysmex denied the infringement allegations and filed two invalidation appeals with the Japanese Patent Office Board of Appeals against the '138 patent. In February 2003, the Japanese Patent Office Board of Appeals, ruling on one of the invalidation appeals, found that the '138 patent was invalid. In May 2003, Chiron filed an appeal of the invalidation judgment before the Tokyo High Court. Furthermore, the second invalidation appeal has been stayed pending Chiron's appeal to the Tokyo High Court.

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

Federal Express

        On September 3, 1999, Federal Express Corporation 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 Federal Express Corporation complaint alleges that defendants are liable for damages caused by a fire that destroyed a Federal Express Corporation aircraft and the majority of its cargo in September 1996. Chiron owned and was shipping on the aircraft a machine that is alleged to have been involved in the fire. The machine was manufactured, serviced and packed for shipment by the PE Defendants.

        It is not known when nor on what basis this litigation will be concluded.

Bayer Corporation

        In January 2002, Bayer Corporation filed a complaint in the United States District Court for the District of Delaware against Chiron relating to the Stock Purchase Agreement dated September 17, 1998 between Chiron, Bayer Corporation and Chiron Diagnostics Corporation. Bayer Corporation alleges that Chiron violated certain representations and warranties made in the Stock Purchase Agreement and additionally seeks damages for alleged misrepresentation and fraud made in connection with the sale of Chiron Diagnostics Corporation. Based on these allegations, Bayer Corporation sought both compensatory and punitive damages. In April 2003, the parties settled the dispute and dismissed the case with prejudice except for Bayer's claim to indemnity for certain tax payments and for certain unasserted third party claims.

Roxane Laboratories, Inc.

        In June 2003, Chiron and Children's Hospital and Regional Medical Center (collectively, "Plaintiffs"), filed a complaint in the United States District Court for the District of Delaware against Roxane Laboratories, Inc. ("Roxane") seeking damages and an injunction against Roxane's manufacture, use and sale or importation of an alleged generic version of Chiron's tobramycin solution for inhalation (TOBI®) described in Roxane's Abbreviated New Drug Application No. 65-105, for infringing Chiron's U.S. Patent No. 5,508,269 (the "'269 patent"). In October 2003, pursuant to a settlement agreement, the lawsuit was dismissed. Under the settlement terms, Roxane, which had previously withdrawn its U.S. Food and Drug Administration application for approval of a generic equivalent of TOBI®, agreed it would not seek U.S. approval to market the product until the '269 patent expires in 2014. Chiron and Children's Hospital agreed to dismiss their infringement relief claims against Roxane, and Roxane dropped its challenge to the '269 patent. No party received monetary compensation as part of the settlement. This matter is now concluded.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were brought to a vote of Chiron's stockholders in the quarter ended December 31, 2003.

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EXECUTIVE OFFICERS OF THE REGISTRANT

        The executive officers of Chiron, who serve at the discretion of the Board of Directors, are as follows, in alphabetical order:

Name	Age	Title
Jack Goldstein	56	Vice President; President, Chiron Blood Testing
William G. Green	59	Senior Vice President, General Counsel and Secretary
John A. Lambert	51	Vice President; President, Chiron Vaccines
Seán P. Lance	56	Chairman of the Board
Leone D. Patterson	41	Vice President, Controller
Howard H. Pien	46	President and Chief Executive Officer
Rino Rappuoli	52	Vice President, Chief Scientific Officer
Linda W. Short	58	Vice President, Corporate Resources
David V. Smith	44	Vice President and Chief Financial Officer
Bryan L Walser	38	Vice President, Corporate Strategy
Craig A. Wheeler	43	Vice President; President, Chiron BioPharmaceuticals

Dr. Goldstein joined Chiron in September 2002 as Vice President and President, Chiron Blood Testing Division. From 2000 to 2002, Dr. Goldstein was General Partner at Windamere Venture Partners, L.L.C., a venture fund making investments in early stage biotechnology, pharmaceutical, medical device and diagnostic companies. From 1997 to 2001, Dr. Goldstein was President and CEO of Applied Imaging Corporation, a leading supplier of instrument systems for prenatal and cancer genetics. From 1999 until 2002, Dr. Goldstein also served as Chairman of the Board of Applied Imaging and continues to serve as a Director. From 1986 to 1997, Dr. Goldstein worked for Johnson & Johnson in various executive management positions, including President of Ortho Diagnostic Systems and Executive Vice President of Professional Diagnostics at Johnson & Johnson World Headquarters. Dr. Goldstein holds a B.A. degree in Biology from Rider University, an M.S. in Immunology and a Ph.D. in Microbiology from St. John's University.

Mr. Green joined Chiron as Vice President and General Counsel in October 1990, having served as Secretary or Assistant Secretary since Chiron's inception in 1981. Since March 2004, Mr. Green has served on a part-time basis as General Counsel, Secretary and member of the Management Committee of the Gordon & Betty Moore Foundation, a private, philanthropic foundation, in which Chiron directors, Lewis W. Coleman and Edward E. Penhoet also are employed respectively as the Chief Executive Officer and a Chief Program Officer. In February 1992, he became Senior Vice President, General Counsel and Secretary. In addition, from February through August 2002, Mr. Green served as President of Chiron's Blood Testing division. From 1981 to 1990, he was a partner in the San Francisco law firm of Brobeck, Phleger & Harrison.

Mr. Lambert joined Chiron as Vice President; President of Chiron Vaccines, in March 2001. Based in Europe, Mr. Lambert is responsible for the commercial operations of Chiron's global vaccines business. Prior to joining Chiron, Mr. Lambert headed John Lambert Associates, a company that provided consulting and coaching at the chief executive level to organizations both in the United Kingdom and internationally. From 1998 to 2000, Mr. Lambert was the President of Aventis Pasteur MSD, where he headed the vaccines venture formed between Pasteur Mérieux Connaught (now Aventis Pasteur) and Merck & Company, Inc. following four years as that company's Vice President of Operations. From 1998 to 1994, Mr. Lambert held various positions with the Pasteur Mérieux Connaught Group, in increasing levels of responsibility, including Managing Director of Mérieux UK Ltd. Mr. Lambert also is the Vice-President of the European Vaccines Manufacturers. Mr. Lambert is a non-executive director of a U.K. Stock Exchange listed company, S.R. Pharma PLC in London,

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which conducts research in the fields of cancer and allergy. Mr. Lambert serves as a member of the board of the Global Alliance for Vaccines and Immunization, a public-private partnership focused on saving lives and improving health, especially of children in developing countries, through the use of vaccines.

Mr. Lance assumed the position of Chairman of Chiron's Board in May 1999. Mr. Lance served as President and Chief Executive Officer of Chiron from May 1998 until April 2003, when Mr. Pien succeeded him. Mr. Lance has indicated that he intends to retire and resign as Chairman of the Board at Chiron's Annual Meeting of Shareholders in May 2004. Contemporaneously, Mr. Pien will assume the position of Chairman of Chiron's Board. Mr. Lance joined Chiron from Glaxo Wellcome plc. where he spent more than 12 years in positions of national and global management responsibility, including Chief Operating Officer and Chief Executive designate of Glaxo Wellcome plc. Mr. Lance began his pharmaceutical industry career in the Republic of South Africa at the Noristan Group of Companies, Ltd. in 1967, and has served in leadership roles in a variety of national and international pharmaceutical associations. He was a past president of the International Federation of Pharmaceutical Manufacturers Associations (IFPMA). Mr. Lance currently serves on the board of directors of Global Alliance TB Drug Development, the African Leadership Institute, and on the supervisory board of Crucell, N.V., a public company on which Chiron director, Pieter J. Strijkert, serves as chairman of the board. He served as a member of the board of directors of iKnowMed from April 2000 to August 2002, California Healthcare Institute from October, 2000 to January 2004, and Bay Area Bioscience from June, 2000 to July 9, 2002.

Ms. Patterson joined Chiron in 1999 as Director of special projects in the corporate finance group. She has served as the Company's Controller since 2001, and more recently, was promoted to Vice President, Controller as of November 2003. Before joining Chiron, Ms. Patterson worked at KPMG LLP as a senior manager in the San Francisco audit practice for two years. Prior to that, she was with KPMG Auckland in the New Zealand audit practice for eight years.

Mr. Pien joined Chiron in April 2003 as President and Chief Executive Officer, and a director. In September 2003, Chiron announced that chairman Seán P. Lance intends to retire from active service with Chiron and its board of directors as of the annual meeting of stockholders in May 2004. The board of directors has determined that it will elect Chiron president and chief executive officer Mr. Pien as chairman at the same meeting. Following that election, Mr. Pien is expected to serve as Chiron's chairman, president and chief executive officer. Mr. Pien joins Chiron from GlaxoSmithKline (GSK), which resulted from the merger of GlaxoWellcome and SmithKline Beecham, where he spent over twelve years in positions of international and global management responsibility, including: President of Pharmaceuticals International GSK from December 2000 to March 2003, including service as a member of the Corporate Executive Team; President, Pharmaceuticals, SmithKline Beecham (1998 to 2000); President, Pharmaceuticals-North America, SmithKline Beecham (1998); Senior Vice President and Director-North Asia (1997); Managing Director and Senior Vice President-UK (1995 to 1997); Vice President and Director, Marketing-US (1993 to 1995); Vice President and Director, Product Marketing-US, heading the arthritis, cardiovascular and vaccine groups (1992 to 1993); and Vice President and Director of New Product Development-US (1991 to 1992). Prior to joining SmithKline Beecham, Mr. Pien worked six years for Abbott Laboratories and five years for Merck & Co., in positions of sales, marketing research licensing and product management. Mr. Pien served as a director of ViroPharma Incorporated from 1998 to 2003.

Dr. Rappuoli joined Chiron as head of European vaccines research in 1992 with the acquisition of Italian vaccines company, Sclavo SpA, where he served as head of research and development. He was responsible for Chiron Infectious Disease and Vaccine Research, serving as Vice President, Vaccine Research, Research and Development from February 2000 to January 2004. At Chiron, he led the development of Menjugate® conjugate vaccine against meningococcus C and the first recombinant bacterial vaccine, against pertussis. Most recently, he was promoted to Vice President, Chief Scientific

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Officer, effective February 2004. Dr. Rappuoli earned his doctoral and bachelor's degrees in biological sciences at the University of Siena, and also served as a visiting scientist at the Rockefeller University in New York and at the Harvard Medical School. Dr. Rappuoli is co-founder of the field of cellular microbiology, a discipline combining cell biology and microbiology, and has pioneered the genomic approach to vaccine development termed "reverse vaccinology". He is member of numerous international associations, including the European Molecular Biology Organization and the American Society for Microbiology; and the research directors group of the European Commission. Dr. Rappuoli also has served on many committees, among which the NIH Search Committee for the Director of the Vaccine Research Center (Bethesda, Maryland). He is co-chairman of the R/D Task Force of the Global Alliance for Vaccines and Immunization. He has won several prestigious international awards including the Paul Ehrlich, Ludwig Darmstaedter Prize, and IUMS Arima award. Dr. Rappuoli currently serves as a director of Fondazione Monte Dei Paschhi di Siena, a private organization in Siena, Italy.

Ms. Short joined Chiron in November 1997, as Vice President, Human Resources. In May 1999, she was promoted to Vice President, Corporate Resources with increased responsibilities, overseeing human resources, facilities planning, information management, organizational learning, payroll and benefits, compensation and stock administration. Prior to joining Chiron, she was the Director of Human Resources of Industrial Indemnity from 1994 to 1997. From 1983 to 1994, Ms. Short held various managerial positions with the Bank of America.

Mr. Smith joined Chiron as Vice President, Controller in February 1999 and was designated Chiron's principal accounting officer. In February 2002, Mr. Smith was appointed Vice President, Finance. Upon the resignation of James R. Sulat, Chief Financial Officer in April 2003, Mr. Smith was appointed interim Chief Financial Officer. In November 2003, Mr. Smith was appointed Chief Financial Officer. Prior to joining Chiron, Mr. Smith served as the Vice President, Finance and Chief Financial Officer of Anergen, Inc. from 1997 until he joined Chiron. From 1988 to 1997, Mr. Smith held various financial management positions with Genentech, Inc., in both the United States and Europe, most recently as Director of Accounting.

Dr. Walser joined Chiron as Division Vice President, Corporate Strategy in November 2001. Prior to joining Chiron, Dr. Walser was a principal in WRW, a Los-Angeles-based management consultancy working with The Rockefeller Foundation and the Boston Consulting Group on a variety of issues in biotechnology and healthcare. Before that, Dr. Walser trained in the Emergency Medicine program at UCLA, and worked for several years in Los Angeles with the healthcare practice of the Boston Consulting Group. Dr. Walser earned his undergraduate degree from Stanford, his medical degree from the University of Virginia School of Medicine and his law degree, magna cum laude, from Harvard Law School.

Mr. Wheeler joined Chiron in August 2001 as Vice President, President of Chiron BioPharmaceuticals, responsible for the commercial operations of Chiron's biopharmaceuticals business. Prior to joining Chiron, Mr. Wheeler was a senior member of The Boston Consulting Group's health care practice and a key contributor to the firm's practice in hospital strategy, disease management, and pharmaceutical capabilities. Based in Boston, he joined the firm in 1988. Before joining the Boston Consulting Group, Mr. Wheeler worked for Merck's MSDRL research unit, where he served as a senior engineer in process development. He recently served as the leader of The Boston Consulting Group's Scientist's Network. In partnership with the Rockefeller Foundation, he has joined the Global Alliance for TB Drug Development, a public-private partnership to develop new anti-tuberculosis drugs.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Our common stock is traded in the NASDAQ National Market System under the symbol CHIR. As of December 31, 2003, there were 4,159 holders of record of Chiron common stock. We have declared no cash dividends since our inception and do not expect to pay any dividends in the foreseeable future. Pursuant to an agreement with Novartis, Novartis must approve our declaration and payment of dividends. See "Relationship with Novartis AG" above.

        Information regarding Chiron's equity compensation plans is set forth in the section entitled "Equity Plan Compensation Information" in Chiron's proxy statement to be filed pursuant to Regulation 14A within 120 days of Chiron's fiscal year end, of which is incorporated herein by reference.

        The quarterly high and low closing sales prices (rounded to the nearest one-hundredth) of our common stock for 2003 and 2002 are shown below.

	2003				2002
	High		Low		High		Low
First Quarter	$	40.72	$	34.41	$	48.68	$	39.80
Second Quarter		49.00		37.68		46.68		33.36
Third Quarter		56.75		43.23		41.98		27.41
Fourth Quarter		56.98		51.75		42.51		35.47

ITEM 6.    SELECTED FINANCIAL DATA

        We have derived the selected consolidated financial data presented below as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 from the audited Consolidated Financial Statements contained elsewhere in this Form 10-K. The selected consolidated financial data presented below as of December 31, 2001, 2000 and 1999 and for the years ended December 31, 2000 and 1999 was derived from our audited Consolidated Financial Statements not contained herein. Operating results for the periods presented below are not necessarily indicative of the results that may be expected for future years.

	Year Ended December 31,
	2003		2002		2001		2000		1999
	(In thousands, except per share data)
Total revenues	$	1,766,361	$	1,276,280	$	1,140,667	$	972,119	$	762,646
Income from continuing operations		220,338		181,145		174,758		16,102		128,404
Basic earnings per share from continuing operations		1.18		0.96		0.92		0.09		0.71
Diluted earnings per share from continuing operations		1.15		0.94		0.90		0.08		0.69
Total assets		4,195,169		2,960,344		2,866,909		2,458,076		2,444,778
Long-term debt and capital leases		1,084,386		416,954		408,696		3,039		96,958

        Several factors affected the comparability of information between 2003 and 2002. The first factor relates to the effects of our acquisition of PowderJect Pharmaceuticals for $947.8 million in July 2003. Total revenues for PowderJect Pharmaceuticals in 2003 were $244.7 million. In addition we recorded a $45.3 million charge for purchased in-process research and development. The amortization expense for the acquired intangible assets associated with this acquisition was $25.3 million in 2003. Second, we issued $500.0 million of convertible debentures in July 2003 and third, in July 2003, we entered into a new six-year lease to rent a research and development facility in Emeryville, California following the

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expiration of the existing operating lease. We accounted for this new lease as a capital lease and, as a result, recorded the leased facility and the corresponding liability on our balance sheet effective July 1, 2003. The amount recorded on the balance sheet for the leased facility was $157.5 million.

        We have described the acquisition of PowderJect Pharmaceuticals throughout Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." We have described the issuance of $500.0 million aggregate principal amount of convertible debentures in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Other—Interest Expense." We have described the new capital lease in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Contractual Obligations."

        Factors that affected the comparability of information between 2002 and 2001 include (i) our implementation of Statement of Financial Accounting Standards (referred to as SFAS) No. 142 on January 1, 2002, which requires that assembled workforce be reclassified to goodwill and that goodwill (including assembled workforce) no longer be amortized, (ii) the commercial sale of the Procleix® HIV-1/HCV Assay in the U.S in 2002 which was the primary contributor to increased worldwide product sales related to tests and instruments and the provision of services from $48.3 million in 2001 to $125.4 million in 2002 and (iii) our acquisition of Matrix Pharmaceutical, Inc. for $67.0 million including a $45.2 million charge for purchased in-process research and development. The goodwill and assembled workforce amortization expense was $17.1 million in 2001. We have described the implementation of SFAS No. 142 in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Biopharmaceuticals—Amortization expense" and "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Vaccines—Amortization expense" below. We have described the commercial sale of the Procleix® HIV-1/HCV Assay in the U.S in 2002 in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Blood testing—Product sales" below. We have described the acquisition of Matrix Pharmaceutical, Inc. in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Other—Purchased in-process research and development" below.

        Factors that affected the comparability of information between 2001 and 2000 include (i) issuance of zero coupon Liquid Yield Option Notes in June 2001 for proceeds of $401.8 million, (ii) a full-year of TOBI® tobramycin sales of $123.1 million and (iii) a full year of amortization expense on goodwill and other acquired intangible assets of $38.4 million recognized in 2001 as a result of our acquisition of PathoGenesis Corporation in the fourth quarter 2000. In 2000, we recognized TOBI® sales of $27.8 million (including $2.2 million from the last seven days in September 2000) and amortization expense on goodwill and other acquired intangible assets of $9.6 million. We have described the issuance of the Liquid Yield Option Notes in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Sources and Uses of Cash—Financing activities" below.

        Factors that affected the comparability of information between 2000 and 1999 were (i) shipments of $101.5 million of Menjugate® vaccine for a universal vaccination program in the United Kingdom, which began in the second quarter 2000 and (ii) our acquisition of PathoGenesis for $720.7 million in cash in the fourth quarter 2000, including the $171.6 million of purchased in-process research and development.

        See Note 17, "Segment Information," of Notes to Consolidated Financial Statements for geographic information and operating results by operating segment.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        We are a global pharmaceutical company that participates in three healthcare markets: blood testing, vaccines and biopharmaceuticals. Our revenues consist of product sales, revenues from a joint business contractual arrangement, collaborative agreement revenues, royalty and license fee revenues and other revenues, primarily consisting of contract manufacturing and grant revenues. The blood testing segment consists of an alliance with Gen-Probe Incorporated and our one-half share in the pretax operating earnings generated by the joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc., a Johnson & Johnson company. Our alliance with Gen-Probe is focused on developing and commercializing nucleic acid testing products using transcription-mediated amplification technology to screen donated blood and plasma products for viral infection. Our joint business arrangement with Ortho-Clinical Diagnostics is operated under a contractual arrangement and is not a separate and distinct legal entity. Through our joint business contractual arrangement with Ortho-Clinical Diagnostics, we sell a line of immunodiagnostic tests to detect hepatitis viruses and retroviruses and provide supplemental tests and microplate and chemiluminescent instrument systems to automate test performance and data collection. The vaccines segment consists of flu vaccines, including Fluvirin®, a product we obtained as part of our third quarter 2003 acquisition of PowderJect Pharmaceuticals (discussed below), a meningococcal vaccine, travel vaccines, which include rabies and tick-borne encephalitis vaccines and two products we obtained as part of our acquisition of PowderJect Pharmaceuticals, Arilvax™ and Dukoral™, and pediatric and other vaccines. We sell these vaccines primarily in the U.S., Germany, Italy, the United Kingdom and other international markets. Our vaccines segment is also involved in the development of other novel vaccines and vaccination technology. The biopharmaceuticals segment consists of therapeutic products and services, with an emphasis on the treatment of cancer and infectious disease. Our in-house capabilities span three types of therapeutics, including small molecules, therapeutic proteins and monoclonal antibodies. The biopharmaceuticals segment also includes collaborations with Berlex Laboratories, Inc. and its parent company, Schering AG of Germany, related to Betaseron® interferon beta-1b. We view certain other revenues and expenses as not belonging to any one segment. As a result, we have aggregated these items into an "Other" segment.

        On July 8, 2003, we acquired PowderJect Pharmaceuticals plc, a company based in Oxford, England that develops and commercializes vaccines. We accounted for the acquisition of this business under the purchase method of accounting and included PowderJect Pharmaceuticals' operating results in our consolidated operating results beginning July 8, 2003. PowderJect Pharmaceuticals is part of our vaccines segment. We allocated the purchase price based on the fair value of the assets acquired and liabilities assumed. We allocated $45.3 million of the purchase price to purchased in-process research and development in 2003.

        In 2003, our income from continuing operations was $220.3 million, or $1.15 per diluted share. In 2002, our income from continuing operations was $181.1 million or $0.94 per diluted share.

        In 2003, total revenues were $1,766.4 million compared to $1,276.3 million in 2002. In 2003, product sales were $1,345.8 million compared to $914.1 million in 2002, reflecting our acquisition of PowderJect Pharmaceuticals during the third quarter 2003. Total revenues for PowderJect Pharmaceuticals in 2003 were $244.7 million. PowderJect Pharmaceuticals flu vaccine sales were $219.2 million in 2003. In 2003, our total revenues reflected the benefit of the movement in exchange rates, in particular the movement in the Euro to U.S. dollar exchange rate. In 2003, the movement in exchange rates added approximately 8% to our total revenues. Our vaccines segment reflects the greatest impact of the movement in exchange rates, which added approximately 15% to our total 2003

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vaccines revenues. Similarly, our total Euro-based expenses increased due to the movement in exchange rates.

        In 2003, increases in product sales were seen across all three of our business units, and in particular flu vaccines and Procleix® products. Our share of revenues from our joint business contractual arrangement with Ortho Clinical Diagnostics was $108.3 million compared to $104.6 million in 2002, up primarily due to a one-time benefit in the first quarter 2003 from a change in estimate relating to revenues from Ortho Clinical Diagnostics' non-U.S. affiliate sales, as discussed below. Royalty and license fees, collaborative agreement revenues and other revenues were $312.2 million in 2003 compared to $257.6 million in 2002, up primarily due to HCV/HIV product royalties and license fees from our intellectual property portfolio and Betaferon royalties.

        In 2003, gross margins decreased to 58% from 63% in 2002, largely due to (i) changes in the product mix of our three segments and (ii) additional costs of $24.4 million in 2003 associated with the sale of inventory acquired during the acquisition of PowderJect Pharmaceuticals. These additional costs related to a fair value adjustment on the acquisition of PowderJect Pharmaceuticals. Excluding these additional costs, gross margins in 2003 would have been 59%. In particular, vaccine product sales accounted for 50% of total product revenues in 2003 up from 39% in 2002, which had a significant impact on gross margins.

        In 2003, research and development expenses totaled $409.8 million, compared to $325.8 million in 2002. Research and development expenses for PowderJect Pharmaceuticals were $16.2 million in 2003. The 2003 spending reflects our increased level of investment across all three of our segments. The main beneficiaries of this increase include our meningococcal vaccines franchise, flu cell culture, tifacogin, and interleukin-2 in combination with various monoclonal antibodies. In addition, there were additional expenses related to the in-licensing of daptomycin from Cubist Pharmaceuticals and purchased in-process technology associated with our investment in ZymeQuest Inc. We are collaborating with ZymeQuest, Inc. to develop and commercialize a enzymatic conversion system which converts group A, B and AB red blood cells to enzyme-converted group O (ECO®) red blood cells, and costs associated with an agreement with Infectio Diagnostics Inc. in which we licensed proprietary nucleic acid-based technology for the rapid detection of bacterial contamination in platelets and blood products.

        In 2003, selling general and administrative expenses totaled $378.9 million compared to $283.7 million in 2002 with PowderJect Pharmaceuticals contributing approximately $37.6 million in 2003. The remaining increase in selling, general and administrative expenses resulted from additional costs associated with the enhancement of current business processes and headcount, the Euro to U.S. Dollar exchange rate fluctuation, the expansion of our customer base for the Procleix® HIV-1/HCV Assay in the U.S., Europe and other international markets, the preparation and roll-out of the West Nile virus assay under IND testing, ongoing sales and marketing programs to support TOBI® tobramycin in the U.S. and continued market penetration in Europe and continued investment in and defense of our patents and technology.

        The reported effective tax rate for 2003 is 28.7% of pretax income from continuing operations, including the charge for purchased in-process research and development related to the PowderJect Pharmaceuticals acquisition. The reported effective tax rate for 2002 was 31.6% of pretax income from continuing operations, including the charge for purchased in-process research and development related to the Matrix Pharmaceutical acquisition. The effective tax rates for 2003 and 2002 after excluding the impact of the in-process research and development charges were 25% and 27%. The 2003 effective tax rate is lower than the 2002 effective tax rate due to increased benefits associated with our research and development activities and an increase in income earned in lower tax jurisdictions.

        On February 20, 2002, we acquired Matrix Pharmaceutical, Inc., a company that was developing tezacitabine, a drug to treat cancer. We accounted for the acquisition as an asset purchase and included Matrix Pharmaceutical's operating results in our consolidated operating results beginning on

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February 20, 2002. Matrix Pharmaceutical is part of our biopharmaceuticals segment. We allocated the purchase price based on the fair value of the assets acquired and liabilities assumed. We allocated $45.2 million of the purchase price to purchased in-process research and development, which we charged operations in 2002.

Critical Accounting Policies and The Use of Estimates

        The preparation of financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to investments; inventories; derivatives; capital leases; intangible assets; goodwill; purchased in-process research and development; product discounts, rebates and returns; bad debts; collaborative, royalty and license arrangements; restructuring; pension and other post-retirement benefits; income taxes; and litigation and other contingencies. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.

        Our blood testing segment includes our one-half share in the pretax operating earnings generated by the joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc., a Johnson & Johnson company. Our joint business arrangement with Ortho-Clinical Diagnostics is a contractual arrangement and is not a separate and distinct legal entity. Through our joint business contractual arrangement with Ortho-Clinical Diagnostics, we sell a line of immunodiagnostic tests to detect hepatitis viruses and retroviruses and provide supplemental tests and microplate and chemiluminescent instrument systems to automate test performance and data collection. Prior to 2003, we had accounted for revenues relating to non-U.S. affiliate sales on a one-quarter lag, with an adjustment of the estimate to actual in the subsequent quarter. More current information of non-U.S. affiliate sales of our joint business contractual arrangement became available in the first quarter 2003, and as a result, we are able to recognize revenues relating to non-U.S. affiliate sales on a one-month lag. The effect of this change, net of tax, was an increase to net income by $3.2 million for revenues from the joint business arrangement for the year ended December 31, 2003.

        For sales of Betaseron® interferon beta-1b, we recognize revenues upon shipment to our marketing partner, Schering, and additional revenues upon Schering's subsequent sale of Betaseron® to patients. Upon shipment to Schering, we recognize the contractually determined fixed amount of the fee to which we are entitled because at this point, there is persuasive evidence of an arrangement, delivery has occurred, the price due from Schering is fixed or determinable and collectibility is reasonably assured. Upon receiving the relevant customer sales reports from Schering, we recognize the incremental portion of the fee related to Schering's shipments to its customers because this portion of the fee is not determinable until receipt of the related sales reports. We also earn royalties on our marketing partner's European sales of Betaferon® in those cases where we do not supply the product. Prior to 2002, we had accounted for revenues from non-U.S. product sales on a one-quarter lag and royalties as a percentage of forecast received from our marketing partner, with an adjustment of the estimate to actual in the subsequent quarter. More current information of non-U.S. Betaseron® sales became available in 2002, and as a result, we were able to recognize revenues from Betaseron® product sales and Betaferon® royalties on a current basis beginning in the first quarter 2002. The effect of this change, net of tax, was an increase in net income for the year ended December 31, 2002 by $3.1 million for product sales and $2.8 million for royalties.

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        We believe the following critical accounting policies incorporate our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:

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Purchased in-process research and development—We allocate the purchase price of acquisitions based on the fair value of the assets acquired and liabilities assumed. To assist in determining the value of the in-process research and development and certain other intangibles, a third party valuation is typically obtained as of the acquisition date. We use the income approach to value in-process research and development. The income approach is based on the premise that the value of a security or asset is the present value of the future earning capacity that is available for distribution to the subject investors in the security or asset. We perform a discounted cash flow analysis, utilizing anticipated revenues, expenses and net cash flow forecasts related to the technology. Given the high risk associated with the development of new drugs, we probability adjust the revenue and expense forecasts to reflect the risk of advancement through the regulatory approval process based on the stage of development in the regulatory process. Such a valuation requires significant estimates and assumptions. We believe the fair value assigned to the in-process research and development is based on reasonable assumptions. However, these assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. Additionally, estimates for the purchase price allocation may change as subsequent information becomes available. For the PowderJect Pharmaceuticals acquisition, we initially allocated $122.7 million of the purchase price to purchased in-process research and development, which we charged to operations in the third quarter 2003. In the fourth quarter 2003, upon completion of strategic assessments of the value of certain research and development projects, we revised the allocation of a portion of the purchase price resulting in a $77.4 million decrease to purchased in-process research and development which we credited to operations and which was offset against goodwill. For the Matrix Pharmaceutical acquisition, we allocated $54.8 million of the purchase price to purchased in-process research and development, which we charged to operations in the first quarter 2002. We do not anticipate that there will be any alternative future use for the purchased in-process research and development. For the Matrix Pharmaceutical acquisition, we also allocated a portion of the purchase price to a liability for asset disposal and lease cancellation for the San Diego, California facility closed during the third quarter 2002. In the fourth quarter 2002, we found an assignee for the manufacturing facility lease and revised the allocation of the purchase price resulting in a $9.6 million decrease to purchased in-process research and development (as the residual amount allocated to in-process research and development was less than the estimated fair value of the in-process research and development), which we credited to operations.



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Investments—We invest in marketable debt and equity securities. The prices of some of our marketable securities are subject to considerable volatility. We record an impairment charge when we believe that an investment in a marketable security has experienced a decline in fair value, as measured by quoted market prices, that is other-than-temporary. Generally, we believe that an investment in a marketable security is impaired if its quoted market price has been below its carrying value for each trading day in a six-month period, at which point we write down the investment. However, in determining whether impairment of a marketable security is considered to be other-than-temporary, we consider all available factors in the evaluation. These factors may include, but are not limited to, (i) whether the issuer of the securities is experiencing depressed and declining earnings in relation to competitors, erosion of market share, and deteriorating financial position, (ii) whether the issuer is experiencing financial difficulties and its market is experiencing difficulties, (iii) ongoing activity in our collaborations with the issuer, if any, and (iv) the issuer's prospects for favorable clinical trial results, new product initiatives and new collaborative agreements. Decreases in the fair value of these securities may impact our profitability. To reduce this risk, we hedge a portion of our equity securities exposure through forward sales contracts. Our marketable debt securities consist of a

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diversified portfolio of high-quality investment-grade securities. We do not hedge our marketable debt securities.

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Inventories—We maintain inventory reserves primarily for product failures, expiration and obsolescence. The manufacturing processes for many of our products are complex. Slight deviations anywhere in the manufacturing process may result in unacceptable changes in the products that may result in failures or recalls and, therefore, additional inventory reserves. Obsolete inventory, due to the expiration of shelf life, and the seasonal nature of some of our products, may result in additional inventory reserves. In estimating inventory obsolescence reserves, we analyze on a product-by-product basis (i) the shelf life and the expiration date, (ii) sales forecasts and (iii) inventory levels compared to forecasted usage. Judgment is required in determining whether the forecasted sales and usage information is sufficiently reliable to enable us to estimate an inventory obsolescence reserve. In addition, we operate in a highly competitive environment, with rapidly changing technologies. New technology or changes in production processes may result in product obsolescence. As a result, we may be required to record additional inventory reserves.



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Product returns and rebates—In estimating returns, we analyze (i) historical returns and sales patterns, (ii) our experience with similar products, (iii) current inventory on hand at the distributors and in the distribution channel and the remaining shelf life of that inventory, (iv) current economic trends, (v) distributors practices, (vi) changes in demand, particularly due to the seasonality of certain of our products and (vii) introduction of new competing products. In arriving at the allowance for product returns we primarily use one of the following methodologies depending on the product: (i) we match the actual returns to the actual sale on a product-by-product basis to assess the historical trend for returns, and based on an analysis of the historical trend, the appropriate return percentage for the current period is then applied to current period sales to arrive at the product returns charge against revenue for the period or (ii) for seasonal products we analyze our actual returns over the previous seasons to arrive at the average actual returns percentage, which is then applied to the current season's sales to arrive at the charge against revenue for the current period. In estimating rebates, we use historical trends to analyze rebates against revenue on a product-by-product basis to arrive at an expected rebate percentage. This expected rebate percentage is applied to current period sales to arrive at the rebates expense for the period. If actual product returns and rebates are greater than our estimates, additional product return and rebates accruals may be required. If actual product returns and rebates are less than our estimates, we may have to reverse certain accruals.



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Collaborative, royalty and license arrangements—We recognize up-front refundable fees as revenues upon the later of when they become nonrefundable or when performance obligations are completed. In situations where continuing performance obligations exist, we defer and amortize up-front nonrefundable fees ratably over the performance period, which is typically stipulated by the contract; otherwise, we recognize them as revenues when collection is reasonably assured. In arrangements with multiple deliverables, there may be significant judgment in separating the different revenue generating activities and in determining whether each is a separate earnings process. Milestones, if any, related to scientific or technical achievements are recognized in income when the milestone is accomplished. The terms of such arrangements may cause our operating results to vary considerably from period to period. We estimate royalty revenues based on previous period royalties received or on product sales forecast information provided by the third party licensee. In the subsequent quarter, we record an adjustment equal to the difference between those estimated royalty revenues recorded in the previous quarter and the contractual percentage of the third party's actual product sales for that period. We exercise judgment in determining whether the forecast information provided by licensees is sufficiently reliable for us to base our royalty revenue recognition thereon.

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Income taxes—Significant management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowances that might be required against the deferred tax assets. We record valuation allowances to reduce deferred tax assets to the amounts that are more likely than not to be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances. If we determined that we would be able to realize our deferred tax assets in the future in excess of our net deferred tax assets, adjustments to the deferred tax assets would increase income by reducing tax expense in the period that we made such determination. Likewise, if we determined that we would not be able to realize all or part of our net deferred tax assets in the future, adjustments to the deferred tax assets would decrease income by increasing tax expense in the period that we made such determination. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examination of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ materially from the amount accrued. In evaluating the exposure associated with various tax filing positions, we accrue charges for probable exposures. We maintain an allowance for tax contingencies, the balance of which management believes to be adequate.



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Litigation and other contingencies—We establish and maintain accruals for litigation and other contingencies when we believe a loss to be probable and reasonably estimable, as required by SFAS No. 5, "Accounting for Contingencies." We base our accruals on information available internally within the company at the time of such determination and after management has consulted with and obtained advice from external professional advisors. Judgment is required in both the determination of probability and as to whether such an exposure is reasonably estimable. Information may become available to us after that time, for which adjustments to accruals may be required.



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Goodwill and intangible assets—The valuation in connection with the initial purchase price allocation and the ongoing evaluation for impairment of goodwill and intangible assets requires significant management estimates and judgment. The purchase price allocation process requires management estimates and judgment as to expectations for various products and business strategies. If any of the significant assumptions differ from the estimates and judgments used in the purchase price allocation, this could result in different valuations for goodwill and intangible assets. For the PowderJect Pharmaceuticals acquisition, we initially allocated $451.8 million of the purchase price to goodwill in the third quarter 2003. In the fourth quarter 2003, the allocation of the purchase price changed as we completed the strategic assessments of the value of certain research and development projects and adjusted the purchased in-process research and development, and upon finalization of certain estimates. Accordingly, goodwill associated with the PowderJect Pharmaceuticals acquisition was adjusted to $503.0 million in the fourth quarter 2003. We are in the process of finalizing certain estimates; thus both the purchase price and the allocation of the purchase price are subject to change. The preliminary purchase price and allocation reflect management's decision to cease operations at the Madison Wisconsin facility and the Swedish facility. We have accrued approximately $28.1 million in estimated exit costs associated with these operations. In addition, we are finalizing certain estimates associated with various other direct acquisition costs. Once it is established, we must test goodwill annually for impairment using a two-step process as required by SFAS No. 142 "Goodwill and Other Intangible Assets." In addition, in certain circumstances, we must assess if goodwill should be tested for impairment between annual tests. Intangible assets with definite useful lives must be tested for impairment in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." When we conduct our impairment tests for goodwill and intangibles, factors that are considered important in determining whether impairment might exist include significant continued under-performance compared to peers, significant changes in the

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underlying business and products of our reporting units, or other factors specific to each asset or reporting unit being evaluated. Any changes in key assumptions about the business and its prospects, or changes in market conditions or other externalities, could result in an impairment charge and such a charge could have a material adverse effect on our consolidated results of operations.

        The accounting policies of our reportable segments are the same as those described in Note 1, "The Company and Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements.

        Certain minor arithmetical variances between the following narrative and the Consolidated Financial Statements may arise due to rounding.

Results of Operations

Blood testing

        Product sales    Our blood testing segment recognized product sales of $228.5 million, $148.0 million and $68.5 million in 2003, 2002 and 2001, respectively.

        Procleix® System    On February 27, 2002, the U.S. Food and Drug Administration approved the Procleix® HIV-1/ HCV Assay. Under a collaboration agreement with Gen-Probe Incorporated, we market and sell the Procleix HIV-1/ HCV Assay and the related instrument system. In addition to selling directly in the U.S., we also sell in various European and Asia / Pacific markets, directly and through distributors. We record revenue based upon the reported results obtained from the customer from the use of assays to screen donations or upon sale and delivery of the assays, depending on the underlying contract. In the case of equipment sales or leases, we record revenue upon the sale and transfer of the title to the instrument or ratably over the life of the lease term, respectively. For the provision of service on the instruments, we recognize revenue ratably over the life of the service agreement.

        Worldwide product sales related to tests, instruments and the provision of services were $200.1 million, $125.4 million and $48.3 million in 2003, 2002 and 2001, respectively.

        The increase in product sales in 2003 as compared with 2002 primarily related to commercial pricing in the U.S. commencing May 1, 2002 for the Procleix® HIV-1/ HCV Assay following the U.S. Food and Drug Administration approval in February 2002. In addition, after the first quarter 2002, we signed new commercial contracts including those with existing America's Blood Centers customers, the American Red Cross, the U.S. military and the Association of Independent Blood Centers to provide the Procleix HIV-1/ HCV Assay. Other factors contributing to the increase in 2003 were (i) the introduction of the West Nile virus assay on an investigational-use basis in the U.S. and (ii) market share gains in the U.S. and increased sales to several markets abroad for the Procleix HIV-1/ HCV Assay. Slightly offsetting the increase in product sales related to tests, instruments and the provision of services in 2003 as compared with 2002, was additional revenue recognized in the first quarter 2002 under contracts with all our U.S. customers for increased donations exceeding contractual minimums.

        The increase in product sales in 2002 as compared with 2001 related primarily to the commercial sale of the Procleix® HIV-1/ HCV Assay in the U.S. following the U.S. Food and Drug Administration approval in February 2002. During 2002, we signed new commercial contracts including those with existing America's Blood Centers customers, the American Red Cross, the U.S. military and the Association of Independent Blood Centers to provide the Procleix HIV-1/ HCV Assay. In addition, in 2002, we experienced continued expansion in several markets outside the U.S. In the first and second quarters of 2002, we recognized additional revenue under previously existing contracts with all our U.S. customers for increased donations exceeding contractual minimums.

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        Ortho-Clinical Diagnostics    Under our joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc., we manufacture bulk reagents and antigens and confirmatory test kits for immunodiagnostic products. We recognized product sales under this arrangement of $28.4 million, $22.7 million and $20.3 million in 2003, 2002 and 2001, respectively. The increase in 2003 as compared with 2002 primarily related to an increase in products manufactured for Ortho-Clinical Diagnostics. In addition, the timing of manufacturing services under the arrangement contributed to the increase in 2003 as compared with 2002. We also supply bulk antigens for Ortho-Clinical Diagnostics to be included in products to be sold by Bayer under a June 2001 agreement with Ortho-Clinical Diagnostics and Bayer Corporation (see also "Royalty and license fee revenues—Bayer" below). The increase in 2002 as compared with 2001 primarily related to the timing of manufacturing services rendered by Chiron.

        We expect competitive pressures related to our blood testing products to continue, primarily as a result of the introduction of competing products into the market, as listed in Part I, Item 1. "Business-Competition" above.

        Revenues from joint business contractual arrangement    Revenues from our joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc. was $108.3 million, $104.6 million and $84.5 million in 2003, 2002 and 2001, respectively. The increase in 2003 as compared with 2002 primarily resulted from (i) a one-time benefit in the first quarter 2003 due to a change in estimate relating to revenues from Ortho-Clinical Diagnostics' non-U.S. affiliate sales, (ii) the timing of Ortho-Clinical Diagnostics' shipments to third parties and (iii) increased profitability of Ortho-Clinical Diagnostics' foreign affiliates. Offsetting the increase were lower profits from Ortho-Clinical Diagnostics' U.S. operations. Prior to the first quarter 2003, we had accounted for revenues relating to Ortho-Clinical Diagnostics' non-U.S. affiliate sales on a one-quarter lag. More current information is now available to us and as such, we now recognize revenues relating to non-U.S. affiliate sales on a one-month lag, consistent with the method of how we recognize revenues relating to Ortho-Clinical Diagnostics' sales for the U.S. portion of Ortho-Clinical Diagnostics' operations.

        The increase in 2002 as compared with 2001 primarily was due to the timing of Ortho's shipments to third parties, increased profitability of Ortho-Clinical Diagnostics' foreign affiliates, expanding sales of assays used on Ortho's Vitros® ECi immunodiagnostic system and nominal price increases in the U.S.

        Collaborative agreement revenues    We recognize collaborative agreement revenues for fees received as we perform research services and achieve specified milestones. Under the Ortho-Clinical Diagnostics, Inc. joint business arrangement, we conduct research and development services related to immunodiagnostic products. Our blood testing segment recognized total collaborative agreement revenues of $9.0 million, $9.4 million and $11.3 million in 2003, 2002 and 2001, respectively. The majority of collaborative agreement revenues recognized by our blood testing segment related to immunodiagnostic products. The fluctuations between 2003 and 2002, and 2002 and 2001, primarily were due to the timing of research services.

        Collaborative agreement revenues tend to fluctuate based on the amount and timing of research services performed, the status of projects under collaboration and the achievement of milestones. Due to the nature of our collaborative agreement revenues, results in any one period are not necessarily indicative of results to be achieved in the future. Our ability to generate additional collaborative agreement revenues may depend, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners.

        Royalty and license fee revenues    Our blood testing segment earns royalties from third parties based on their sales of immunodiagnostic and nucleic acid testing probe diagnostic products utilizing our hepatitis C virus and HIV-related patents, for use in the blood screening and plasma fractionation

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markets. Our blood testing segment also earns license fees related to our hepatitis C virus and HIV-related patents for technologies used by third parties to develop products for use in the blood screening and plasma fractionation markets. The blood testing segment recognized royalty and license fee revenues of $75.4 million, $53.5 million and $20.6 million in 2003, 2002 and 2001, respectively.

        Baxter A.G.    In June 2003, we entered into two license agreements with Baxter A.G. related to our hepatitis C virus and HIV technology for use in the plasma fractionation market for which we recognized a license fee in the second quarter 2003. In addition, we recognized royalty revenues under one of these agreements.

        F. Hoffmann-LaRoche settlement    In October 2000, we entered into three license agreements with F. Hoffmann-LaRoche Limited and several of its affiliated companies related to the settlement of certain litigation in the U.S. and certain other countries for the use of our hepatitis C virus and HIV intellectual property. Two agreements relate to in vitro diagnostic products. See "Other—Royalty and license fee revenues" below. The third agreement for blood screening was superseded in May 2001 by two new agreements, one for each of hepatitis C virus and HIV. Revenues under these agreements were $61.8 million, $48.5 million and $18.1 million in 2003, 2002 and 2001, respectively. The increase in 2003 as compared with 2002 related to (i) a $4.0 million one-time payment estimated using an alternative methodology under an agreement with F. Hoffmann-La Roche relating to back royalties, (ii) a contractual increase in the royalty rates and (iii) increased donations. Under these new agreements, royalties continue through the lives of the hepatitis C virus and HIV-related patents covering F. Hoffmann-La Roche's nucleic acid testing products. Currently, the applicable issued hepatitis C virus-related patents begin to expire in 2015 for the U.S. and in 2010 for Europe. Currently, the applicable issued HIV-related patent in Europe expires in 2005. An HIV-related patent was issued in the U.S. on March 13, 2003. This patent will expire seventeen years from the date of issuance. As permitted under the terms of its licensing agreement, F. Hoffmann-La Roche has decided to institute arbitration proceedings in regard to the application of the U.S. patent. During any pending arbitration proceedings, F. Hoffmann-La Roche remains obligated to make all quarterly royalty payments, subject to a right to be reimbursed by us if it is determined in the arbitration that such royalty payments were not due.

        The increase in 2002 as compared with 2001 related to (i) a contractual increase in the royalty rates, (ii) increased testing volume and (iii) positive adjustments of the estimate to actual testing in subsequent periods.

        Bayer    In June 2001, Chiron and Ortho-Clinical Diagnostics, Inc. entered into an agreement with Bayer Corporation for the clinical diagnostic market. Under this agreement, Bayer manufactures and sells certain of Ortho-Clinical Diagnostics' hepatitis C virus and HIV immunodiagnostic products for use on Bayer's instrument platforms. Bayer paid us a license fee of $45.3 million, which we deferred (due to our continuing manufacturing obligations) and began recognizing as revenue in the third quarter 2001. We will recognize the remaining amount ratably through 2010.

        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, our ability to generate additional royalty and license fee revenues may depend, in part, on our ability to market and capitalize on our technologies. We have no assurance that we will be able to do so or that future royalty and license fee revenues will not decline.

        Gross profit    Blood testing gross profit as a percentage of net product sales was 41%, 41% and 28% in 2003, 2002 and 2001, respectively. The increase in blood testing gross profit in 2002 as compared to 2001 related to the increase in nucleic acid testing product sales as a percentage of total blood testing product sales.

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        In November 2003, Chiron and Gen-Probe Incorporated agreed to amend their world-wide blood screening collaboration agreement in order to adopt permanent, fixed revenue shares for each party. Effective January 1, 2004, Gen-Probe's share will be set at 45.75% of net revenues for assays, which include a test for the hepatitis C virus. For commercial assays, which do not test for the hepatitis C virus, such as the prospective West Nile test, the agreement remains unchanged with each party retaining 50% of the net revenues after deduction of appropriate expenses.

        Blood testing gross profit percentages may fluctuate in future periods as the blood testing product and customer mix changes.

        Research and development    Our blood testing segment recognized research and development expenses of $32.5 million, $19.4 million and $17.2 million in 2003, 2002 and 2001, respectively. The increase in research and development spending in 2003 as compared with 2002 is primarily related to (i) purchased in-process technology associated with our investment in ZymeQuest Inc. We are collaborating with ZymeQuest, Inc. to develop and commercialize a enzymatic conversion system which converts group A, B and AB red blood cells to enzyme-converted group O (ECO®) red blood cells, and (ii) costs associated with an agreement with Infectio Diagnostics Inc. in which we licensed proprietary nucleic acid-based technology for the rapid detection of bacterial contamination in platelets and blood products. The remaining increase in costs is due to the continued development of nucleic acid testing products.

        The increase in research and development spending in 2002 compared with 2001 primarily was due to the continued development of nucleic acid testing products and the timing of activities under the Ortho-Clinical Diagnostics joint business arrangement.

        Research and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial-related activities.

        Selling, general and administrative    Our blood testing segment recognized selling, general and administrative expenses of $40.2 million, $30.8 million and $29.3 million in 2003, 2002 and 2001, respectively. The increased selling, general and administrative expenses in 2003 as compared with 2002 related to the expansion of our customer base for the Procleix® HIV-1/HCV Assay in the U.S., Europe and other international markets and the preparation and roll-out of the West Nile virus assay under IND testing.

        The increased selling, general and administrative expenses in 2002 compared with 2001 related to the expansion of our customer base for the Procleix® HIV-1/HCV Assay in the U.S., Europe and other international markets

        We expect continued growth in selling, general and administrative expenses related to nucleic acid testing technology and products as our sales opportunities expand in new markets through anticipated additional nucleic acid testing adoption.

Vaccines

        Product sales    We sell flu, meningococcal, travel, pediatric and other vaccines in the U.S., Germany, Italy, the United Kingdom and other international markets. Vaccine product sales were $678.3 million, $357.4 million and $365.7 million in 2003, 2002 and 2001, respectively.

        Sales of our flu vaccines were $332.4 million, $90.0 million and $74.7 million in 2003, 2002 and 2001, respectively. Flu vaccines sales increased in 2003 as compared with 2002, primarily as a result of additional sales of flu vaccine products following our third quarter 2003 acquisition of PowderJect Pharmaceuticals. PowderJect Pharmaceuticals flu vaccine sales were $219.2 million in 2003. Excluding PowderJect Pharmaceuticals, sales of our remaining flu vaccines increased primarily as a result of the

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benefit of the movement in the Euro to U.S. Dollar exchange rate and price and volume increases in Germany and Italy.

        The increase in flu vaccine sales in 2002 as compared with 2001 resulted from being first to the market in Germany, increased sales to new countries, such as China, increased sales to existing countries due to increased awareness in the overall influenza vaccines market and improved production yields.

        Menjugate®, our conjugate vaccine against meningococcal infection caused by the bacterium N. meningitidis serogroup C, sales were $65.5 million, $55.0 million and $105.6 million in 2003, 2002 and 2001, respectively. The increase in Menjugate sales in 2003 as compared with 2002 primarily related to the tender sales to Australia and the benefit of the movement in the Euro to U.S. Dollar exchange rate. In 2002 there were, as expected, fewer shipments to existing markets than in 2001 as a result of a universal vaccination program that occurred in the Province of Quebec, partially offset by shipments to new markets.

        Sales of our travel vaccines, comprised of tick-borne encephalitis, rabies vaccines and two products we obtained as part of our third quarter 2003 acquisition of PowderJect Pharmaceuticals, Arilvax™ and Dukoral™ were $87.8 million, $64.3 million and $51.7 million in 2003, 2002 and 2001, respectively. The increase in travel vaccines sales in 2003 as compared with 2002 primarily resulted from (i) increased fourth quarter 2003 sale of tick-borne encephalitis for vaccines that are typically sold in the first half of the year, (ii) additional sales of travel vaccine products following our third quarter 2003 acquisition of PowderJect Pharmaceuticals and (iii) the benefit of the movement in the Euro to U.S. Dollar exchange rate.

        The increase in travel vaccine sales in 2002 as compared with 2001 primarily resulted from increased tick-borne encephalitis vaccine sales with the 2002 launch of a new adult formulation and a pediatric formulation in Germany.

        Sales of our pediatric and other vaccines were $192.5 million, $148.1 million and $133.6 million in 2003, 2002 and 2001, respectively. The increase in pediatric and other vaccines sales in 2003 as compared with 2002 was primarily due to (i) additional sales of other vaccine products following our third quarter 2003 acquisition of PowderJect Pharmaceuticals, (ii) the timing of tender sales for measles, mumps and rubella vaccines and diphtheria, tetanus and pertussis vaccines and (iii) the benefit of the movement in the Euro to U.S. Dollar exchange rate. Contributing to the increase in 2002 pediatric and other vaccines sales as compared with 2001 were increased polio vaccine sales to non-profit organizations and developing markets such as India.

        Certain of our vaccine products, particularly our flu vaccines, are seasonal and typically have higher sales in the third and fourth quarters of the year. In addition, we expect Menjugate® sales to continue to fluctuate as public health authorities consider adoption of broad vaccination programs.

        We expect competitive pressures related to many of our vaccine products to continue into the future, primarily as a result of the introduction of competing products into the market, including, but not limited to, new combination vaccines, as listed in Part I, Item 1., "Business—Competition" above.

        Collaborative agreement revenues    We recognize collaborative agreement revenues for fees received as we perform research services and achieve specified milestones. Our vaccines segment recognized collaborative agreement revenues of $4.2 million, $0.7 million and $0.01 million in 2003, 2002 and 2001, respectively. In the first quarter 2002, we entered into an agreement to supply a vaccine for meningococcal meningitis caused by the bacterium N. meningitidis serogroup B to the Ministry of Health in New Zealand. We recognized $2.3 million of revenue under this arrangement in 2003. In addition, as a result of our third quarter 2003 acquisition of PowderJect Pharmaceuticals, we recognized revenue under an agreement with MedImmune, Inc.

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        The balance of collaborative agreement revenues recognized in our vaccines segment consisted of various other arrangements, which individually were not material.

        Collaborative agreement revenues tend to fluctuate based on the amount and timing of research services performed, the status of projects under collaboration and the achievement of milestones. Due to the nature of our collaborative agreement revenues, results in any one period are not necessarily indicative of results to be achieved in the future. In addition, the collaboration agreements typically provide for certain milestone payments and various royalties on future product sales if the collaborative partners commercialize a product using our technology. Also, our ability to generate additional collaborative agreement revenues may depend, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners.

        Royalty and license fee revenues    Our vaccines segment earns royalties on third party sales of, and license fees on, several products. The vaccines segment recognized royalty and license fee revenues of $12.7 million, $12.3 million and $16.5 million in 2003, 2002 and 2001, respectively.

        GlaxoSmithKline    An agreement with GlaxoSmithKline plc provides for royalties on sales of certain vaccine products. Under this agreement, we recognized $7.1 million, $7.0 million and $6.1 million of such royalties in 2003, 2002 and 2001, respectively.

        Other    In 2003, 2002 and 2001, we recognized $5.6 million, $5.3 million and $10.4 million, respectively, of royalty revenues primarily on third party sales of hepatitis B virus vaccine products. The decrease in 2002 as compared with 2001 primarily related to (i) a decrease in sales of hepatitis B virus vaccine products due to competitive multivalent hepatitis B virus vaccine products and (ii) reduced royalties starting in the fourth quarter 2001 due to certain terms of one of the hepatitis B virus arrangements expiring in the third quarter 2001. Certain patents related to the production of hepatitis B vaccine products expire beginning in 2004, which will result in reductions in royalty revenues recognized under one arrangement.

        Royalty and license fee revenues may fluctuate based on the nature of the related agreements, the timing of receipt of license fees and the expiration of patents. Results in any one period are not necessarily indicative of results to be achieved in the future. In addition, our ability to generate additional royalty and license fee revenues may depend, in part, on our ability to market and capitalize on our technologies.

        Other revenues    Our vaccines segment recognized other revenues of $13.5 million, $17.9 million and $21.0 million in 2003, 2002 and 2001, respectively.

        Grant and contract revenues    Our vaccines segment other revenues included grant and contract revenues of $9.7 million, $14.6 million and $15.0 million for 2003, 2002 and 2001, respectively. In the second quarter 2000, we entered into an agreement with the U.S. National Institutes of Health to advance our HIV vaccine program into human clinical trials. Under this arrangement, we could receive $23.2 million over five years. Under supplemental arrangements, we may perform other work related to the National Institutes of Health's HIV vaccine program on a grant or contract-by-contract basis. A majority of the grant and contract revenues, $7.3 million, $10.1 million and $9.9 million in 2003, 2002 and 2001, respectively, were recognized under these arrangements.

        Contract manufacturing revenues    Included in our vaccines segment other revenues are contract manufacturing revenues of $2.2 million, $1.5 million and $2.2 million for 2003, 2002 and 2001, respectively. The fluctuations resulted from a change in the level of contract manufacturing activities.

        The balance of other revenues recognized in our vaccines segment consisted of various other arrangements, which individually were not material.

        Other revenues recognized in our vaccines segment may fluctuate due to the nature of the revenues recognized and the timing of events giving rise to these revenues.

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        Gross profit    Vaccines gross profit as a percentage of net product sales was 53%, 58% and 63% in 2003, 2002 and 2001, respectively. The decrease in gross profit in 2003 as compared with 2002 related to additional costs of $24.4 million in 2003 associated with the sale of inventory acquired during the acquisition of PowderJect Pharmaceuticals. These additional costs related to a fair value adjustment on the acquisition of PowderJect Pharmaceuticals. Excluding these additional costs, vaccine gross profit as a percentage of net product sales for 2003 would have been 57%. In addition, the vaccine gross profit margin in 2003 was negatively impacted by the shutdown of certain facilities, in the first quarter 2003, to ensure compliance with regulatory requirements.

        The decrease in vaccine gross profit margin in 2002 as compared with 2001 primarily related to (i) increased product reserves in 2002 due to various issues, including seasonality patterns, excess and obsolete inventory and production yields, (ii) lower sales of Menjugate® vaccine, which has a relatively high gross profit margin and (iii) the commencement, in the fourth quarter 2001, of royalty payments to Novartis AG based on Menjugate sales under the December 1995 Limited Liability Company Agreement (see Note 9, "Related Party Transactions," in the Notes to Consolidated Financial Statements).

        Vaccines gross profit percentages may fluctuate significantly in future periods due to product and customer mix, seasonality and ordering patterns and production yields.

        Research and development    Our vaccines segment recognized research and development expenses of $129.7 million, $70.1 million and $63.1 million in 2003, 2002 and 2001, respectively. The increase in research and development spending in 2003 compared with 2002 resulted mainly from the advancement of several programs in our meningococcal franchise and flu cell culture. Also, there was $16.2 million of incremental research and development expense following our third quarter acquisition of PowderJect Pharmaceuticals.

        We have recently completed a Phase III trial in the U.S. for Menjugate® vaccine. We are currently compiling the data from this trial and anticipate filing a BLA for Menjugate in 2004. The study was conducted in conjunction with the Northern California Kaiser Permanente Vaccines Research Center, and will expand the vaccine's safety database for a U.S. population relative to the safety profile of the current U.S.-licensed meningococcal polysaccharide vaccine Menomune® (A, C, Y, W-135).

        The increase in research and development spending in 2002 compared with 2001 primarily was due to progress in the development of our meningococcal franchise and work related to the HIV vaccine program, partially funded by the U.S. National Institutes of Health.

        In April 2001, Chiron, Rhein Biotech N.V. (now a part of Berna Biotech) and GreenCross Vaccine Corporation entered into a collaboration agreement to research and develop certain pediatric combination vaccine products for sale outside of Europe and North America. Under the collaboration agreement, we have commitments for a portion of the research and development expenses, which actually began in the first quarter 2001, with Berna Biotech and GreenCross Vaccine Corporation. The collaboration agreement also requires capital commitments from Chiron, Berna Biotech and GreenCross Vaccine Corporation (see "Liquidity and Capital Resources—Sources and uses of cash" below).

        Research and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial-related activities.

        Selling, general and administrative    Our vaccines segment recognized selling, general and administrative expenses of $135.8 million, $89.9 million and $78.2 million in 2003, 2002 and 2001, respectively. The increase in selling, general and administrative expenses in 2003 compared with 2002 primarily relates to additional expenses following our third quarter acquisition of PowderJect Pharmaceuticals. Excluding $34.8 million of additional selling, general and administrative expenses associated with PowderJect Pharmaceuticals, including integration costs of $9.2 million, the remaining

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increase in selling, general and administrative expenses resulted from additional costs associated with the enhancement of current business processes and headcount and the Euro to U.S. Dollar exchange rate fluctuation. These increases were partially offset by (i) a payment made in the first quarter 2002 to the German government in lieu of statutory price reductions on prescription drugs that are reimbursed under the German government's healthcare program that was expensed in the first quarter 2002 and (ii) increased sales and marketing costs associated with the 2002 launch of our newly formulated tick-borne encephalitis vaccine.

        The increase in selling, general and administrative expenses in 2002 as compared with 2001 related to (i) a payment made in the first quarter 2002 to the German government as discussed above, (ii) increased sales and marketing costs associated with the 2002 launch of our newly formulated tick-borne encephalitis vaccine and increased flu vaccine sales and (iii) additional costs associated with the enhancement of current business processes and headcount. These increases were partially offset by the reduced commissions paid under a co-marketing and co-promotion agreement with Aventis Pasteur MSD related to sales of Menjugate® vaccine.

        Amortization expense    Our vaccines segment recognized amortization expense of $31.2 million, $5.6 million and $8.3 million in 2003, 2002 and 2001, respectively. The increase in amortization expense in 2003 as compared with 2002 relates to the intangibles acquired following our acquisition of PowderJect Pharmaceuticals in the third quarter 2003. Acquired intangible assets included the fair value of distribution rights, a contract manufacturing agreement and developed product technologies. The distribution rights and the contract manufacturing agreement are being amortized on a straight-line basis over 1 to 4 years. Developed product technologies are being amortized using either the estimated sales method over 10 years or on a straight-line basis over 1 to 15 years.

        In the second quarter 1998, we acquired the remaining 51% interest in Chiron Behring from Hoechst AG and accounted for the acquisition under the purchase method of accounting. We allocated a portion of the purchase price to acquired intangible assets and goodwill. Acquired intangible assets included the fair value of trademarks, patents and customer lists, which we are amortizing on a straight-line basis over 6 to 20 years. Acquired intangible assets also included the assembled workforce. On January 1, 2002, the assembled workforce was reclassified to goodwill and goodwill was no longer amortized. This change was the primary reason for the decrease in amortization expense in 2002 as compared with 2001. As circumstances dictate, we will evaluate the useful life and carrying value of each intangible asset, which may result in future adjustments to the amortization periods or book values. The goodwill and assembled workforce amortization expense was $2.4 million in 2001.

Biopharmaceuticals

        Product sales    Biopharmaceutical product sales were $439.1 million, $408.7 million and $337.7 million in 2003, 2002 and 2001, respectively. Biopharmaceutical product sales in 2003, 2002 and 2001 consisted principally of Betaseron® interferon beta-1b, TOBI® tobramycin and Proleukin® (aldesleukin).

        Betaseron® interferon beta-1b    We manufacture interferon beta-1b which is marketed by Schering AG and its affiliates, including Berlex Laboratories, Inc. (collectively "Schering"), under the trade names Betaseron® (in the U.S and other non-European markets) and Betaferon® (in Europe). Boehringer Ingelheim also supplies Betaferon to Schering for sale in Europe. For product manufactured by us, we recognize a portion of revenue for product sales upon shipment to Schering and the remainder based on a contractual percentage of sales by Schering, both of which we record as product sales. For product manufactured by Boehringer Ingelheim and marketed by Schering in Europe under the trade name Betaferon, we receive royalties calculated at the same percentage of sales less supply costs, which we record in royalty and license fee revenues. Starting in the fourth quarter 2003, the amount we recorded as product sales, based on a percentage of sales by Schering, and Betaferon

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royalties, declined by five percentage points pursuant to our contractual agreement with Schering. As a result, we estimate that the percentage of sales per unit on which our payments are based will decrease, reducing our per unit revenue by approximately 18% (for sales of Chiron product) and approximately 34% (for royalties from sales of Boehringer Ingelheim product) from that received prior to the decline. However, there are a number of mitigating considerations, including (i) the transitional supply agreement, discussed in "Royalty and license fee revenues—Betaferon" below, (ii) the volume mix of Chiron product and Boehringer Ingelheim product and (iii) the launch of product upgrades with ease-of-use features. We believe these considerations will partially offset this contractual change.

        In October 2003, the U.S. Food and Drug Administration approved a new pre-filled diluent syringe for Betaseron®. The pre-filled diluent syringe was launched in January 2004 and enhances the delivery mode and shortens preparation, helping to simplify injections of Betaseron. In the first quarter 2003, the U.S. Food and Drug Administration approved new labeling for Betaseron. The labeling expands the indication for Betaseron to treat all relapsing forms of multiple sclerosis to reduce the frequency of clinical exacerbations. Relapsing forms of multiple sclerosis include relapsing-remitting, the most common form, and secondary progressive multiple sclerosis with relapses.

        Pursuant to our agreement with Schering, we began supplying Betaferon® to Schering in the fourth quarter 2002 for certain additional European markets, which were previously supplied by Boehringer Ingelheim. This resulted in a shift of revenue recognized under this agreement to product sales, and a decrease in royalty revenues beginning in the fourth quarter 2002. In 2003, Schering extended its supply agreement with Boehringer Ingelheim through 2008. The exact shift of revenue in the future will be contingent on our production capacity, Schering's minimum purchase commitment under the extended supply agreement with Boehringer Ingelheim, and market demand. The shift to product sales is expected to increase over the next three years. We expect overall, biopharmaceutical earnings to be largely unaffected by the transition. In order to supply Betaferon to Schering, we are required to make capital improvements to our existing manufacturing facilities to increase capacity. During 2003 and 2002, we recorded charges related to process development and test runs associated with this project. See "Research and development" below.

        Betaseron® product sales were $124.9 million, $118.5 million and $96.4 million in 2003, 2002 and 2001, respectively. The increases in Betaseron product sales in 2003 as compared with 2002, primarily related to (i) price increases, (ii) the benefit of the movement in foreign exchange rates and (iii) increased patient demand attributed to an overall increase in the market for interferon beta-1b products for multiple sclerosis. These increases were partially offset by (i) a decline in the amount we recorded as product sales, based on a percentage of sales by Schering, by five percentage points pursuant to our contractual agreement with Schering, (ii) fluctuations in wholesaler ordering patterns, and (iii) incremental revenues recognized in the first quarter 2002 related to the effect of recording revenue based on more current information available from Schering. In 2002, Schering converted to wholesaler distribution from direct distribution method. Prior to the first quarter 2002, we accounted for revenues from non-U.S. product sales based on information provided by Schering on a one-quarter lag. More current information of non-U.S. Betaseron sales became available in 2002, and as a result, we were able to begin recognizing revenues from Betaseron product sales on a current basis. This change resulted in incremental revenues recognized during the first quarter 2002 of $4.3 million. Inventory ordering patterns as well as foreign currency exchange rates may influence future Betaseron sales.

        The increases in Betaseron® product sales in 2002 as compared with 2001, primarily related to (i) increased underlying patient demand from end users in the U.S. and certain international markets, (ii) price increases and (iii) fluctuations in wholesaler inventory levels, following the conversion to wholesaler distribution in 2002. As discussed above, prior to 2002, we accounted for non-U.S. product sales based on information provided by Schering on a one-quarter lag. More current information of non-U.S. Betaseron sales was available in 2002, and as a result, we were able to recognize Betaseron

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product sales on a current basis. As a result, there were incremental product sales revenues recognized during the first quarter 2002 of $4.3 million.

        As discussed in "Royalties and license fee revenues" below, Betaferon® royalties also increased in 2003 as compared with 2002, and in 2002 as compared with 2001.

        TOBI® tobramycin    We sell TOBI® directly in the U.S. and certain international markets. We recognized TOBI sales of $172.0 million, $146.9 million and $123.1 million in 2003, 2002 and 2001, respectively. Increased TOBI sales in 2003 as compared with 2002, primarily related to (i) greater product penetration in various European countries, (ii) price increases, (iii) the benefit of the movement in the Euro to U.S. dollar exchange rate and (iv) increased use and improved compliance in the U.S. by patients with cystic fibrosis. These increases were partially offset by a change in sales adjustments. Increased TOBI sales in 2002 as compared with 2001 primarily related to (i) the progress of the TOBI product launch in various European countries, (ii) increased use and compliance in the U.S. by patients with cystic fibrosis and (iii) price increases. Fluctuations in foreign exchange rates, principally the Euro, have also contributed slightly to the increase in 2002 TOBI sales. In 2002, these increases were partially offset by an increased level of Medicaid rebates.

        We continue to pursue the use of TOBI® to treat other serious lung infections and to seek approval in other countries. Wholesaler ordering patterns as well as reimbursement and government pressures, competition, foreign currency exchange rates and the level of rebates may influence future TOBI sales. In December 2002, the U.S. Food and Drug Administration tentatively approved an abbreviated new drug application for an inhaled tobramycin for sale in the U.S. following expiration of the orphan drug status of TOBI in December 2004. Subsequently, the application was withdrawn and under terms of a settlement agreement reached in October 2003, approval will not be sought to market this generic product until the 2014 expiration of our patent in the U.S. covering the formulation of TOBI.

        Proleukin® (aldesleukin)    Proleukin® is approved in over 50 countries for the treatment of metastatic (Stage IV) renal cell carcinoma and in Canada and the U.S. for the treatment of metastatic (Stage IV) melanoma. Sales of Proleukin were $115.1 million, $114.3 million and $93.3 million in 2003, 2002 and 2001, respectively. The increase in Proleukin product sales in 2003 as compared with 2002 primarily related to (i) price increases, (ii) increase in patient demand in the U.S. and (iii) the benefit of the movement in the Euro to U.S. Dollar exchange rate. These increases were partially offset by wholesaler ordering patterns and a decrease in underlying patient demand in Europe. Proleukin product sales in 2002 as compared with 2001 increased primarily as a result of stabilization of wholesale ordering patterns, from those experienced in 2001, relative to demand and price increases. In 2001, wholesalers significantly reduced inventories from quantities held at the end of 2000. In 2002, wholesalers decreased inventories only slightly. Fluctuations in foreign exchange rates, principally the Euro, have also contributed slightly to the increase in 2002 Proleukin sales.

        Wholesale ordering patterns, reimbursement pressures and foreign currency exchange rates may influence future Proleukin® sales.

        The balance of product sales recognized in our biopharmaceuticals segment consisted of various other products, which individually were not material.

        We expect competitive pressures related to many of our biopharmaceutical products to continue into the future, primarily as a result of the introduction of competing products into the market, as listed in Part I, Item 1., "Business—Competition" above.

        Collaborative agreement revenues    We recognize collaborative agreement revenues for fees received as we perform research services and achieve specified milestones. Our biopharmaceuticals

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segment recognized collaborative agreement revenues of $5.3 million, $12.1 million and $25.0 million in 2003, 2002 and 2001, respectively.

        S*BIO    In the second quarter 2000, we invested in a Singapore-based venture, S*BIO Pte Ltd, to research and develop therapeutic, diagnostic, vaccine and antibody products. We also granted S*BIO certain rights to our gene expression and combinatorial chemistry technology. Under this arrangement, we received approximately $23.7 million for technology transfer and research services. We recognized collaborative agreement revenues of $8.8 million and $12.1 million in 2002 and 2001, respectively, under this arrangement. The technology transfer period and the related revenue recognition period ended in the third quarter 2002.

        GlaxoSmithKline plc    In the fourth quarter 2002, we entered into a collaboration agreement and license agreement with GlaxoSmithKline plc related to certain of our MC-4R compound patents. Under this arrangement, we recognized collaborative agreement revenues of $3.3 million for 2003.

        Novartis    In 1996, Chiron and Novartis entered into an agreement which provided, among other things, for certain cross licenses between Chiron and Novartis, and under which Novartis paid us $60.0 million over five years. In connection with this agreement, we recognized collaborative agreement revenues of $10.0 million in 2001. This agreement expired in the fourth quarter 2001.

        Our "Other" segment also earned collaborative agreement revenues under a third Novartis agreement. See "Other—Collaborative agreement revenues" below.

        The balance of collaborative agreement revenues recognized in our biopharmaceuticals segment consisted of various other agreements, which individually were not material.

        Collaborative agreement revenues tend to fluctuate based on the amount and timing of research services performed, the status of projects under collaboration and our achievement of performance milestones. Due to the nature of our collaborative agreement revenues, results in any one period are not necessarily indicative of results to be achieved in the future. In addition, the collaboration agreements typically provide for certain milestone payments and various royalties on future product sales if the collaborative partners commercialize a product using our technology. Also, our ability to generate additional collaborative agreement revenues may depend, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners.

        Royalty and license fee revenues    Our biopharmaceuticals segment earns royalties on third party sales of several products, including Betaferon® interferon beta-1b and recombinant insulin and glucagon products. Our biopharmaceuticals segment also earns license fees for technologies, such as hepatitis C virus patents, used by third parties to develop therapeutic products. The biopharmaceuticals segment recognized royalty and license fee revenues of $87.7 million, $63.3 million and $59.8 million in 2003, 2002 and 2001, respectively.

        Betaferon® interferon beta-1b    We manufacture interferon beta-1b which is marketed by Schering AG and its affiliates, including Berlex Laboratories, Inc. (collectively "Schering"), under the trade names Betaseron® (in the U.S and other non-European markets) and Betaferon® (in Europe). Boehringer Ingelheim also supplies Betaferon to Schering for sale in Europe. For product manufactured by Boehringer Ingelheim, we receive royalties calculated as a percentage of sales less the amount paid or incurred by Schering for supply costs, including Schering's cost to purchase product from Boehringer Ingelheim.

        In 2003, 2002 and 2001, we recognized Betaferon® royalties of $63.8 million, $46.9 million and $38.9 million, respectively, under this arrangement. The increase in Betaferon royalties in 2003 compared with 2002 was due to (i) benefit in the movement of the Euro to U.S. dollar exchange rate, (ii) the benefit of a reduction of the allocated cost under a three-year limited cost sharing arrangement under the transitional supply agreement with Schering, (iii) increase in demand and (iv) a positive

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impact of the difference between the adjustment of estimated royalty to actual royalty. These increases were partially offset by (i) a decline in our royalty rate in the fourth quarter 2003 by five percentage points, pursuant to our contractual agreement with Schering, (ii) incremental revenues recognized during the first quarter 2002 of $3.9 million related to a change in our methodology of recognizing these royalties and (iii) a shift in revenue from royalty revenue to product sales. Prior to 2002, we accounted for Betaferon® royalties as a percentage of forecast received from Schering, with an adjustment of the estimate to actual in the subsequent quarter. More current information of European Betaseron® sales was available in 2002, and as a result, we were able to recognize Betaferon royalties on a current basis beginning in the first quarter 2002.

        The increase in Betaferon® royalties in 2002 compared with 2001 was due to (i) increased utilization of beta interferon therapy for multiple sclerosis, (ii) fluctuations in foreign exchange rates, principally the Euro and (iii) incremental revenues recognized during the first quarter 2002 of $3.9 million related to a change in our methodology of recognizing these royalties as discussed above. These increases were offset partially by the shift of revenue from royalties to product sales related to Switzerland as Schering began to sell product purchased in 2001 into the market.

        As discussed in "Product sales—Betaseron®" above, we began supplying Betaferon® to Schering in the fourth quarter 2002 for certain additional European markets, which was previously supplied by Boehringer Ingelheim. This resulted in a shift of revenue recognized under this agreement to product sales, with a decrease in royalty revenues, beginning in the fourth quarter 2002. In 2003, Schering extended its supply agreement with Boehringer Ingelheim through 2008. The exact shift of revenue in the future will be contingent on our production capacity, Schering's minimum purchase commitment under the extended supply agreement with Boehringer Ingelheim and market demand. The shift to product sales is expected to increase over the next three years. We expect overall biopharmaceutical earnings to be largely unaffected by the transition. Future Betaferon royalties will be influenced by demand, price changes, decline in our royalty rate and foreign currency exchange rates.

        Novo Nordisk    We earn royalty revenues on insulin and glucagon product sales by Novo Nordisk AS. We recognized $8.5 million, $7.5 million and $6.9 million in 2003, 2002 and 2001, respectively, under this arrangement. Patents related to the production of insulin and glucagons began expiring in late 2003 and as a result, significant reductions in royalty revenue recognized under this arrangement in future periods are expected.

        Boehringer Ingelheim    In December 2003, we granted Boehringer Ingelheim a nonexclusive license for the research, development and commercialization of small molecule therapeutics against hepatitis C virus drug targets. We recognized $4.0 million in 2003 under this arrangement.

        The balance of royalty and license fee revenues recognized in our biopharmaceuticals segment consisted of various other agreements, which individually were not material.

        Royalty and license fee revenues may fluctuate based on the nature of the related agreements, the timing of receipt of license fees and the expiration of patents. Results in any one period are not necessarily indicative of results to be achieved in the future. Also, the license agreements typically provide for certain milestone payments and various royalties on future product sales if the licensees commercialize a product using our technology. However, we have no assurance that the licensees will meet their development objectives or commercialize a product using our technology. In addition, our ability to generate additional royalty and license fee revenues may depend, in part, on our ability to market and capitalize on our technologies. We have no assurance that we will be able to do so or that future royalty and license fee revenues will not decline.

        Other revenues    Our biopharmaceuticals segment recognized other revenues of $29.5 million, $17.5 million and $19.7 million in 2003, 2002 and 2001, respectively.

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        Contract manufacturing revenues    Our biopharmaceuticals segment recognized contract manufacturing revenues of $13.5 million, $14.0 million and $16.1 million for 2003, 2002 and 2001, respectively. The fluctuations in 2003 as compared to 2002, and in 2002 as compared to 2001, resulted from the level of activity and the timing of contract manufacturing activities.

        Biogen and Serono settlements    A U.S. Court of Appeals partially reversed a District Court ruling in connection with certain patents owned by Chiron and licensed exclusively to Schering AG's U.S. subsidiary, Berlex Laboratories. As a result of the ruling and prior agreements between Biogen and Berlex, Biogen was required to make a settlement payment to Schering. In accordance with an earlier contract between Chiron and Berlex, we recognized approximately $13.0 million in 2003, which represented our share of this settlement payment. In addition, there was a similar settlement between Berlex and Serono of which we recognized approximately $1.4 million in 2003.

        The balance of other revenues recognized in our biopharmaceuticals segment consisted of various other arrangements, which individually were not material.

        Other revenues recognized in our biopharmaceuticals segment may fluctuate due to the nature of the revenues recognized and the timing of events giving rise to these revenues. We cannot guarantee that we will be successful in obtaining additional revenues or that these revenues will not decline.

        Gross profit    Biopharmaceutical gross profit as a percentage of net product sales was 72%, 73% and 71% in 2003, 2002 and 2001, respectively. The decrease in biopharmaceutical gross profit margins in 2003 as compared to 2002 was the result of higher annual facility maintenance costs, non-recurring expenses related to production, less favorable mix of biopharmaceutical product sales, the increased cost of producing the Betaseron ® pre-filled syringe presentation and a decline in Betaseron product sales, based on a percentage of sales by Schering, by five percentage points pursuant to our contractual agreement with Schering, offset by price increases. The increase in biopharmaceutical gross profit margins in 2002 as compared with 2001 was the result of a more favorable mix of biopharmaceutical product sales, price increases effective early in 2002 and a decrease in royalty expenses.

        We are obligated to pay royalties on sales of certain therapeutic products in the U.S. and in Europe to the former limited partners of Cetus Healthcare Limited Partnership (see Note 13, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements). One of these agreements expired on December 31, 2001. This had a slightly positive impact on gross profit margins in 2002 compared to 2001.

        Biopharmaceutical gross profit percentages may fluctuate significantly in future periods due to production yields, increased cost to produce the Betaseron ® pre-filled syringe presentation, the decline in Betaseron product sales, based on a percentage of sales by Schering, by five percentage points pursuant to our contractual agreement with Schering and as the biopharmaceutical product and customer mix changes.

        Research and development    Our biopharmaceuticals segment recognized research and development expenses of $247.2 million, $236.3 million and $264.9 million in 2003, 2002 and 2001, respectively.

        The increase in research and development spending in 2003 as compared with 2002 primarily related to costs associated with a license agreement with Cubist Pharmaceuticals, Inc. for the development and commercialization of Cubist's antibiotic daptomycin and the investment in other development projects, including those activities related to the development of (i) interleukin-2 in combination with various monoclonal antibodies, (ii) a dry powder formulation of our inhaled TOBI® tobramycin product for the treatment of pseudomonas aeruginosa in cystic fibrosis patients, (iii) tifacogin, as discussed below and (iv) tezacitabine, obtained as a part of the acquisition of Matrix Pharmaceutical in the first quarter 2002. In addition, we are required to make capital improvements to

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our existing manufacturing facilities to support the supply of Betaferon® interferon beta-1b to Schering. In connection with this project, we are continuing to incur expenses relating to the development of new processes and the performance of test runs related to the installed equipment. These increases were partially offset by decreases in the activities for various clinical trials, including (i) transfer of the responsibility of the SILCAAT trial to NIAID and the University of Minnesota in the fourth quarter 2002, discussed below, and (ii) termination of our development activities for HBV-MF59, an immunotherapy for patients with chronic hepatitis B infection and PA-1806, a compound for gram negative infections in cystic fibrosis patients.

        In April 2003, we acquired exclusive worldwide development and commercial rights from Novartis for aerosolized cyclosporine (ACsA), a therapy under evaluation for treatment of rejection and reduction of mortality in lung transplant recipients.

        In October 2003, we entered into a license agreement with Cubist Pharmaceuticals, Inc. for the development and commercialization of Cubist's antibiotic daptomycin for injection in Western and Eastern Europe, Australia, New Zealand, India and certain Central American, South American and Middle Eastern countries. In exchange for these development and commercialization rights, we have agreed to pay Cubist up to $50.0 million. This $50.0 million includes $18.0 million, which was paid by Chiron up front in the fourth quarter 2003, $10.0 million of which was used to purchase restricted Cubist common stock at a 50 percent premium over market price and up to $32.0 million of additional payments to Cubist upon the achievement of certain regulatory and sales milestones. We will also pay Cubist a tiered royalty on daptomycin for injection made by Chiron. We recorded $10.6 million of the up front payment, related to the purchase of in-process research and development as research and development expense in the fourth quarter 2003.

        In October 2003, we acquired all of Pfizer, Inc.'s, formerly Pharmacia Corp.'s, interest in tifacogin, in return for which Pfizer will receive royalties on sales of tifacogin. We are initiating plans for a Phase III trial for tifacogin in patients with severe community-acquired pneumonia.

        In the fourth quarter 2002, we reached an agreement in principle to transfer responsibility for the SILCAAT (referred to also as Proleukin® (aldesleukin) for HIV) trial, a Phase III study for recombinant human interleukin-2 (IL-2, aldeseleukin), to the National Institutes Allergy and Infectious Disease (NIAID) and the University of Minnesota. Responsibility for the SILCAAT study was transferred to NIAID and University of Minnesota effective February 14, 2003. Our research and development expenses related to the SILCAAT trial decreased in 2003 as a result of transferring responsibility for the trial. However, under the agreement, we are obligated to fund a maximum of $18.0 million over the lifetime of the trial and to supply clinical materials and certain other support services, of which $6.0 million has been paid in 2003.

        The decrease in research and development spending in 2002 as compared with 2001 primarily related to the timing of various clinical trials, including (i) the conclusion of the clinical trial for tifacogin (recombinant Tissue Factor Pathway Inhibitor) for severe sepsis in the fourth quarter 2001, (ii) the conclusion of reimbursed manufacturing activities to our partner, Sirna Therapeutics Inc. (formerly Ribozyme Pharmaceuticals Co.), for production of Angiozyme for 2002 clinical trials in cancer and (iii) the conclusion of our Phase I trials for HIV using a non-nucleoside HIV reverse transcriptase inhibitor (NNRTI) compound. The decreases were partially offset by the progress in other development projects, including those activities related to (i) our December 2001 collaboration agreement with Nektar Therapeutics (formerly Inhale Therapeutic Systems, Inc.) for the development of a dry powder formulation of our inhaled TOBI® product for the treatment of pseudomonas aeruginosa in cystic fibrosis patients, (ii) the development of tezacitabine, and (iii) the development of interleukin-2 in combination with various monoclonal antibodies. In addition, as discussed in "Product sales—Betaseron®" above, we are required to make capital improvements to our existing manufacturing facilities to support the supply of Betaferon® to Schering. In 2002, in connection with this project, we

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incurred expenses relating to the development of new processes and the performance of test runs related to the installed equipment.

        Research and development expenses may fluctuate from period to period depending upon the stage of certain projects and the level of pre-clinical and clinical trial-related activities.

        Selling, general and administrative    Our biopharmaceuticals segment recognized selling, general and administrative expenses of $116.0 million, $95.4 million and $79.8 million in 2003, 2002 and 2001, respectively. The increase in selling, general and administrative expenses in 2003 as compared with 2002 related to (i) ongoing sales and marketing programs to support TOBI® tobramycin in the U.S. and continued market penetration in Europe, (ii) continued investment in and defense of our patents and technology, (iii) sales and marketing costs for various biopharmaceutical post-market approval commitments, (iv) additional costs associated with the enhancement of current business processes and (v) the Euro to U.S. Dollar exchange rate fluctuation. In addition, the increase in 2003 as compared with 2002 was impacted by increased costs following the acquisition of Pulmopharm in the third quarter 2002.

        The increase in selling, general and administrative expenses in 2002 as compared with 2001 related to sales and marketing costs for various biopharmaceutical post-market approval commitments and support for continued market penetration of TOBI® in Europe, and costs following the acquisition of Pulmopharm in the third quarter 2002.

        Amortization expense    Our biopharmaceuticals segment recognized amortization expense of $25.1 million, $24.3 million and $38.4 million for 2003, 2002 and 2001, respectively. The increase in amortization expense in 2003 compared to 2002 related to the distribution rights acquired upon acquisition of Pulmopharm in the third quarter 2002. We acquired PathoGenesis Corporation on September 21, 2000 and accounted for the acquisition under the purchase method of accounting. We allocated a portion of the purchase price to purchased technologies, acquired intangible assets and goodwill, which related to the biopharmaceuticals segment. Purchased technologies, which were concluded to have alternative future uses, represented the fair value of research and development projects, which we will develop further after the acquisition date. We are amortizing purchased technologies on a straight-line basis over 15 years. Acquired intangible assets included the fair value of trademarks and trade names, patents and databases, which we are amortizing on a straight-line basis over 13 to 16 years. On January 1, 2002, assembled workforce was reclassified to goodwill and goodwill ceased to be amortized. This change was the primary reason for the decrease in amortization expense in 2002 as compared with 2001. As circumstances dictate, we evaluate the useful life and value of each intangible asset, which may result in future adjustments to the amortization periods or carrying values. Goodwill (including assembled workforce) amortization expense was $14.7 million in 2001.

Other

        Collaborative agreement revenues    We recognize collaborative agreement revenues for fees received as we perform research services and achieve specified milestones. Our other segment did not recognize collaborative agreement revenues in 2003 and 2002. Our other segment recognized collaborative agreement revenues of $9.1 million in 2001 under an agreement with Novartis AG. Under the December 1995 Limited Liability Company Agreement as amended (see Note 9, "Related Party Transactions," in the Notes to Consolidated Financial Statements), Novartis agreed to provide, at our request, research funding for certain projects. The funded projects consisted of certain adult and pediatric vaccines, Insulin-like Growth Factor-I, Factor VIII and Herpes Simplex Virus-thymidine kinase. This agreement as amended expired on December 31, 2001.

        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 our collaborative agreement revenues, results in any one period are not necessarily indicative

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of results to be achieved in the future. Our ability to generate additional collaborative agreement revenues may depend, in part, on our ability to initiate and maintain relationships with potential and current collaborative partners. We have no assurance that new relationships will be established or that collaborative agreement revenues will be achieved.

        Royalty and license fee revenues    Our other segment earns royalties on third party sales of, and license fees on, several products. Our other segment recognized royalty and license fee revenues of $74.3 million, $69.6 million and $101.4 million in 2003, 2002 and 2001, respectively.

        Our other segment's royalty and license fee revenues related to the use of our hepatitis C virus and HIV related patents by various third parties was $74.3 million, $69.0 million and $99.0 million in 2003, 2002 and 2001, respectively

        F. Hoffmann-LaRoche settlement    In October 2000, we entered into three license agreements with F. Hoffmann-LaRoche Limited related to the settlement of litigation in the U.S. and certain other countries for use of our hepatitis C virus and HIV nucleic acid testing intellectual property for use in clinical diagnostics.

        Under the hepatitis C virus agreement, we received $85.0 million, of which we recognized $40.0 million in the fourth quarter 2000. We deferred the remaining $45.0 million, which becomes nonrefundable through 2005. In the first quarter 2001, we began recognizing portions of the $45.0 million based upon the greater of (i) the scheduled quarterly minimum non-refundable amount or (ii) the actual earned credits as royalties on future sales related to F. Hoffmann-LaRoche's use of our hepatitis C virus patent in its in vitro diagnostic products. The agreement also provides for royalties on future sales related to F. Hoffmann-LaRoche's use of our hepatitis C virus patent in its in vitro diagnostic products, which commenced in the first quarter 2001. Royalty revenues recognized under this agreement in 2003 compared with 2002 decreased as the annual minimum royalty under this agreement expired at the end of 2002. The increase in royalty revenues in 2002 compared to 2001 primarily related to increased product sales recognized by F. Hoffmann-LaRoche.

        Under the HIV agreement, we received $10.0 million in the fourth quarter 2000, which we deferred, and received $10.0 million in the first quarter 2001. These amounts included a refundable license fee and royalties for past sales related to F. Hoffmann-LaRoche's use of our HIV related patent in its in vitro diagnostic products in Europe. These amounts became nonrefundable in January 2001 when the European Patent Office Board of Technical Appeals upheld our HIV related patent. As a result, we recognized the entire $20.0 million as revenue in the first quarter 2001. The agreement also provides for royalties on future sales related to F. Hoffmann-LaRoche's use of our HIV related patent in its in vitro diagnostic products, which also commenced in the first quarter 2001 when the European Patent Office Board of Technical Appeals upheld our HIV related patent. Royalty revenues recognized under this agreement in 2003 were consistent with 2002.

        Under these agreements, such royalties will continue through the lives of the hepatitis C virus and HIV-related patents covering F. Hoffmann-La Roche's nucleic acid testing products. Currently, the applicable issued hepatitis C virus-related patents expire in 2015 for the U.S. and in 2010 for Europe. Currently, the applicable issued HIV-related patent in Europe expires in 2005. An HIV-related patent directed to nucleic acid testing methods for HIV-1 was issued in the U.S. on March 13, 2003. This patent will expire seventeen years from the date of issuance. The issuance of the patent triggered a milestone payment to Chiron of $10.0 million from F. Hoffmann-La Roche, which was received in April 2003. As permitted under the terms of its licensing agreement, F. Hoffmann-La Roche has decided to institute arbitration proceedings in regard to the application of the U.S. patent. We have deferred recognition of this $10.0 million milestone payment and interest as of December 31, 2003. During any pending arbitration proceedings, F. Hoffmann-La Roche remains obligated to make all quarterly royalty payments, subject to a right to be reimbursed by Chiron if it is determined in the arbitration that such royalty payments were not due.

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        See "Blood testing—Royalties and license fee revenues" above for a discussion of the third agreement entered into with F. Hoffmann-LaRoche in October 2000 and two additional agreements entered into with F. Hoffmann-LaRoche in May 2001, which superseded the October 2000 agreement.

        Bayer    In connection with the sale of Chiron Diagnostics to Bayer Corporation, we granted Bayer rights under HIV and hepatitis C virus related patents for use in nucleic acid diagnostic tests (excluding blood screening). In exchange for these rights, Bayer paid us a license fee of $100.0 million, which became nonrefundable in decreasing amounts over a period of three years, commencing in 1999. We recognized license fee revenues in 2001, which represented the portion of the $100.0 million payment that became nonrefundable during that period. We recognized the final portion of revenue in the fourth quarter 2001. In addition, the cross-license agreement provides for royalties to us on HIV and hepatitis C virus products sold by Bayer, which increased in 2003 compared with 2002 primarily due to increased donations and a contractual increase in the royalty rates.

        F. Hoffmann-LaRoche PCR agreement    Under a July 1991 agreement between F. Hoffmann-LaRoche Limited and Cetus Corporation (a company acquired by Chiron), we received royalties on sales of polymerase chain reaction products and services sold by F. Hoffmann-LaRoche and its licensees. We did not recognize any revenue under this agreement in 2003. In 2002 and 2001 we recognized $0.7 million and $2.4 million, respectively, under this agreement. F. Hoffmann-LaRoche's royalty obligations, with certain limited exceptions for future products, expired in the fourth quarter 2000. We recorded the adjustment of the estimate to actual for the final fourth quarter 2000 royalties in the first quarter 2001. The amount recognized in 2002 is a back royalty relating to 2000 that resulted from a royalty audit conducted in 2002.

        The balance of royalty and license fee revenues for 2003, 2002 and 2001 consisted of various other agreements, which individually were not material.

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

        Other revenues    Our other segment recognized other revenues of $1.0 million in 2002 relating to Matrix Pharmaceutical contract manufacturing projects that were not completed at the time of the acquisition.

        Selling, general and administrative    In 2003, 2002 and 2001, our other segment recognized selling, general and administrative expenses of $86.9 million, $67.6 million and $65.3 million, respectively. The increase in selling, general and administrative expenses in 2003 as compared with 2002 primarily resulted from integration costs of $2.8 million incurred by the other segment associated with our third quarter acquisition of PowderJect Pharmaceuticals, an impairment charge associated with long-lived assets, employee-related expenses, severance costs, additional consulting costs and a charitable donation to the Chiron Foundation. These increases were partially offset by lower litigation costs in 2003 related to our investment in and defense of our patents and technology.

        The increase in selling, general and administrative expenses in 2002 as compared with 2001 was due to our continued investment in and defense of our patents and technology partially offset by a decrease in consulting expenses.

        Purchased in-process research and development    Purchased in-process research and development charged to operations was $45.3 million and $45.2 million in 2003 and 2002, respectively. There was no purchased in-process research and development in 2001.

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        On July 8, 2003, we acquired PowderJect Pharmaceuticals and accounted for the acquisition using the purchase method of accounting. We allocated the purchase price based on the fair value of the assets acquired and liabilities assumed. We allocated $45.3 million of the purchase price to purchased in-process research and development, which we charged to operations in 2003. We do not anticipate that there will be any alternative future use for the in-process research and development. In valuing the purchased in-process research and development, we used probability-of-success-adjusted cash flows and a 14% discount rate. Cash flows from projects including those relating to (i) certain travel vaccines and (ii) vaccines for allergies were assumed to commence between 2004 and 2012.

        On February 20, 2002, we acquired Matrix Pharmaceutical, Inc. and accounted for the acquisition as an asset purchase. We allocated the purchase price based on the fair value of the assets acquired and liabilities assumed. We allocated $45.2 million of the purchase price to purchased in-process research and development, which we charged to operations in 2002. We do not anticipate that there will be any alternative future use for the in-process research and development. In valuing the purchased in-process research and development, we used probability-of-success-adjusted cash flows and a 20% discount rate. We assumed revenue from tezacitabine to commence after 2005. As with all pharmaceutical products, the probability of commercial success for any research and development project is highly uncertain.

        Interest expense    In 2003, 2002 and 2001, we incurred interest expense of $19.1 million, $12.8 million and $7.5 million, respectively. The increase in 2003 as compared with 2002 primarily related to interest expense recognized on the $500.0 million convertible debentures that were issued on July 30, 2003.

        The increase in interest expense in 2002 as compared with 2001 was primarily due to the interest expense recognized on the Liquid Yield Option Notes that were issued in June 2001.

        Interest and other income, net    Interest and other income, net, primarily consisted of interest income on our cash and investment balances and other non-operating gains and losses. In 2003, 2002 and 2001, we recognized interest income of $23.2 million, $36.2 million and $51.6 million, respectively. The decrease in interest income in 2003 as compared with 2002 primarily was due to lower average cash and investment balances following the acquisition of PowderJect Pharmaceuticals and lower average interest rates.

        The decrease in interest income in 2002 as compared with 2001 was primarily due to lower average interest rates, partially offset by higher average cash and investment balances following the $401.8 million received upon issuance of the Liquid Yield Option Notes in June 2001.

        In 2003, 2002 and 2001, we recognized gains of $9.4 million, $14.3 million and $8.7 million, respectively, related to the sale of certain equity securities.

        There were no losses attributable to impairment of equity securities in 2003. In 2002 and 2001, we recognized losses attributable to the impairment of certain debt and equity securities of $7.5 million and $5.5 million, respectively.

        In the second quarter 2001, we recorded a charge of $1.5 million to write-down debt securities with a face value of $5.0 million due to the decline in the credit rating of the issuer. On March 1, 2002, the issuer paid us $5.1 million—the full principal plus interest. We recorded $1.5 million in interest and other income, net, for the year ended December 31, 2002.

        On December 31, 1998, we completed the sale of our 30% interest in General Injectibles & Vaccines, Inc., a distribution business, to Henry Schein, Inc. and received payment in full of certain advances we made to General Injectibles & Vaccines. The agreement also provided for us to receive additional payments, calculated as a pre-determined percentage of Henry Schein's gross profit, through 2003. We received $2.0 million, $5.4 million and $2.5 million in 2003, 2002 and 2001, respectively.

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        Income taxes    The reported effective tax rate for 2003 is 28.7% of pretax income from continuing operations, including the charge for purchased in-process research and development related to the PowderJect Pharmaceuticals acquisition. The reported effective tax rate for 2002 was 31.6% of pretax income from continuing operations, including the charge for purchased in-process research and development related to the Matrix Pharmaceutical acquisition. The effective tax rates for 2003 and 2002 after excluding the impact of the in-process research and development charges were 25% and 27%. The 2003 effective tax rate is lower than the 2002 effective tax rate due to increased benefits associated with our research and development activities and an increase in income earned in lower tax jurisdictions.

        The reported effective tax rate for 2001 was 31.4% of pretax income from continuing operations, which reflects the amortization of goodwill and acquired identifiable intangible assets related to the PathoGenesis Corporation acquisition. The 2002 reported effective tax rate is slightly higher than the 2001 reported effective tax rate due to the charge for non-deductible in-process research and development in 2002, which outweighed the increased benefits realized in 2002 from foreign income taxed at rates lower than the U.S. tax rate and the absence of non-deductible goodwill amortization in 2002.

        The effective tax rate may be affected in future period by changes in management's estimates with respect to our deferred tax assets, by the impact of acquisitions and new tax legislation, or by other items.

        Management believes the acquisition of PowderJect Pharmaceuticals may cause an increase in the future effective tax rate and is in the process of evaluating certain options that may mitigate any potential increase. Specifically, most of PowderJect Pharmaceutical's profits earned are in the United Kingdom, subject to a 30% marginal tax rate.

        Discontinued operations    In a strategic effort to focus on our core businesses of blood testing, vaccines and biopharmaceuticals, we completed the sale of Chiron Diagnostics and Chiron Vision in 1998 and 1997, respectively. The "Gain (loss) from discontinued operations, net of taxes" consisted of the following during the years ended December 31:

	2003			2002			2001
	(In thousands)
Reversal of reserves for retention and severance obligations	$	—		$	—		$	1,600
Reversal of reserves (net charge) for indemnity obligations		(5,222	)		—			1,500
Gain on the sale of real estate assets		—			—			1,644
Employee settlement		—			(438	)
Income tax benefit		12,197			118			534
	$	6,975		$	(320	)	$	5,278

        We reversed approximately $2.3 million related to unutilized reserves for Chiron Diagnostics and Chiron Vision, which were recorded as a "Gain from discontinued operations" for the year ended December 31, 2003.

        In 2003, Chiron and Bayer Corporation reached a settlement agreement relating to certain claims raised by Bayer under the Stock Purchase Agreement dated September 17, 1998, between Chiron and Bayer for Chiron Diagnostics. Under this settlement agreement, we made a payment to Bayer during the first quarter 2003. We utilized an amount previously reserved for indemnity obligations, based upon the settlement agreement with Bayer. These amounts resulted in a net charge of $7.6 million, offset by an income tax benefit of $9.0 million, resulting in a net gain of $1.4 million, which was recorded as a "Gain from discontinued operations" for the year ended December 31, 2003.

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        In 2002, we recognized a charge of $0.4 million related to a settlement with a former employee arising out of the sale of Chiron Diagnostics. This amount was recorded as a "Loss from discontinued operations" for the year ended December 31, 2002.

        Under the terms of the Bayer agreement, we were responsible for retention and severance payments to specific U.S. and international employees and, accordingly, we reserved for such retention and severance obligations. In 2001, we reversed approximately $1.6 million for retention and severance obligations based upon a final reconciliation from Bayer. We recorded this amount as a "Gain from discontinued operations."

        Under the terms of the Bausch & Lomb agreement related to the sale of Chiron Vision, we provided customary indemnities and, accordingly, reserved for such contractual obligations to indemnify Bausch & Lomb against certain potential claims. In 2001, we reversed the remaining reserves of $1.5 million upon the sale of the remaining real estate assets, as discussed below. We recorded this amount as a "Gain from discontinued operations."

        We retained certain Chiron Vision assets, including certain Chiron Vision real estate assets, upon the completion of the sale. As of March 31, 2001, the remaining real estate assets amounted to $1.9 million. In April 2001, we sold these remaining real estate assets and recognized a net gain on the sale of these assets of $1.6 million. This gain was recorded as a "Gain from discontinued operations."

        In connection with the sale of Chiron Diagnostics and Chiron Vision, we recorded cumulative net deferred tax assets of $0.1 million and $8.5 million at December 31, 2003 and 2002, respectively, principally attributable to the timing of the deduction of certain expenses associated with these sales. We also recorded corresponding valuation allowances of $0.1 million and $8.5 million at December 31, 2003 and 2002, respectively, to offset these deferred tax assets, as we believe that it is more likely than not that the deferred tax assets to which the valuation allowance relates will not be realized. We will report the future recognition of these deferred tax assets, if any, as a component of "Gain (loss) from discontinued operations."

        "Gain (loss) from discontinued operations" included an income tax benefit of $12.2 million, $0.1 million and $0.5 million in 2003, 2002 and 2001, respectively. The tax benefit in 2003 related to the settlement agreement with Bayer and the reversal of valuation allowances against deferred tax assets that were established at the time of the sale of Chiron Diagnostics. The tax benefit in 2002 related to the charge for a settlement with a former employee arising out of the sale, as discussed above. The tax benefit in 2001 related to the reversal of reserves and valuation allowances against deferred tax assets that were established at the time of the sale.

New Accounting Standards

        In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which addresses consolidation by business enterprises of variable interest entities ("VIEs") either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 ("Revised Interpretations") resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than our first quarter of fiscal 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. Special Purpose Entities (SPEs") created prior to February 1, 2003 may be accounted for under the original or revised interpretation's provision no later than our fourth quarter of fiscal 2003. Non-SPEs created prior to February 1, 2003, should be accounted for under the revised interpretation's provisions no later than

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our first quarter of fiscal 2004. We have not entered into any material arrangements with VIEs created prior to or after January 31, 2003.

Liquidity and Capital Resources

        Our capital requirements have generally been funded by cash flow from operations, borrowings from commercial banks and issuance of debt securities and common stock. Our cash, cash equivalents and investments in marketable debt securities, which totaled $1,098.8 million at December 31, 2003, are invested in a diversified portfolio of financial instruments, including money market funds and instruments, corporate notes and bonds, government or government agency securities and other debt securities issued by financial institutions and other issuers with strong credit ratings. By policy, the amount of credit exposure to any one institution is limited. Investments are generally not collateralized and mature within three years.

        In June 2001 we issued zero coupon convertible Liquid Yield Option Notes (LYONs). The holders of the LYONs may require us to purchase all, or a portion of, their LYONs on June 12, 2004 at a purchase price of $584.31 per LYON. The accreted value on June 12, 2004 will be $426.5 million. We may choose to pay the purchase price in cash, shares of Chiron common stock or any combination thereof. Given our ability to pay the purchase price in shares of Chiron common stock, we continue to classify the LYONs as long-term liabilities as of December 31, 2003. Additional alternatives open to us to satisfy requests to purchase the LYONs include issuing new debt or equity securities. The next dates on which the holders may require us to purchase the LYONs following June 12, 2004 are June 12, 2006, and every fifth year thereafter until maturity in 2031.

        We believe that our cash, cash equivalents and marketable debt securities, together with funds provided by operations and leasing arrangements, will be sufficient to meet our foreseeable operating cash requirements over at least the next twelve months including any cash utilized under our stock repurchase program, the potential purchase of all, or a portion, of the LYONS and our contractual obligations of $312.2 million in the next twelve months as discussed in the Contractual Obligations table below. We also believe that our cash, cash equivalents and marketable debt securities, together with funds provided by operations and leasing arrangements, will be sufficient to meet our contractual obligations of $1.6 billion arising after twelve months as discussed in the Contractual Obligations table below. On July 30, 2003, we issued $500.0 million aggregate principal amount of convertible debentures, which mature on August 1, 2033. We are using the net proceeds from the issuance for general corporate purposes. In addition, we believe we could access additional funds from the debt and capital markets.

Sources and Uses of Cash

        We had cash and cash equivalents of $364.3 million and $248.0 million at December 31, 2003 and 2002, respectively.

        Operating activities    In 2003, net cash provided by operating activities was $413.9 million as compared with $268.2 million in 2002. The increase in cash provided by operating activities was primarily due to (i) higher income from continuing operations before depreciation and amortization and other non-cash charges, which increased mainly due to flu vaccine sales following the acquisition of PowderJect and higher product sales of Procleix® system, partially offset by increases in research and development costs. Increases in research and development costs were primarily due to the development of a dry powder formulation of our inhaled TOBI® tobramycin product, the development of tezacitabine, the development of interleukin-2 in combination with various monoclonal antibodies, expansion of our meningococcal franchise and development of flu cell culture. We also incurred costs associated with our collaboration with ZymeQuest Inc. to develop and commercialize an enzymatic conversion system, our license agreement with Infectio Diagnostics, and the in-licensing of daptomycin, (ii) higher royalty payments received under the Betaferon® and Roche royalty arrangements,

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(iii) $14.4 million of cash received as a result of the Biogen and Serono settlements in connection with the McCormick patents (see "Biopharmaceuticals—Other revenues" above), (iv) an increase in accounts payable and accrued liabilities at December 31, 2003 as compared to a decrease at December 31, 2002 driven by the timing of payments and our acquisition of PowderJect and (v) excluding the effect of acquisitions, a decrease in inventories at December 31, 2003 as compared to an increase in inventories at December 31, 2002. Partially offsetting these increases was a payment made to Bayer Corporation as a result of a settlement agreement relating to certain claims raised by Bayer in connection under the Stock Purchase Agreement dated September 17, 1998.

        At December 31, 2003, Chiron had foreign net operating loss carryforwards of approximately $20.8 million, of which approximately $5.3 million begins expiring over the period 2008 to 2018 and the remaining $15.5 million is available to offset future taxable income without limitation. At December 31, 2003, Chiron had foreign net operating loss carryforwards attributed to the acquisition of PowderJect Pharmaceuticals of approximately $0.7 million, all of which are available to offset future taxable income without limitation. At December 31, 2003, Chiron had federal net operating loss carryforwards, attributable to the acquisition of Matrix Pharmaceutical, Inc., of approximately $49.2 million, which are available to offset future domestic taxable income ratably through 2021. At December 31, 2003, Chiron had federal net operating loss carryforwards attributable to the acquisition of PowderJect Pharmaceuticals of approximately $13.0 million, which are available to offset future domestic taxable income ratably through 2022. At December 31, 2003, Chiron had $23.4 million of state net operating loss carryforwards, which expire between 2004 and 2021 and state net operating loss carryforwards, attributable to the acquisition of Matrix Pharmaceutical, Inc., of approximately $27.3 million, which are available to offset future state taxable income ratably through 2013. At December 31, 2003, Chiron had utilized all of the remaining federal business tax credit carryforwards attributed to the PathoGenesis Corporation acquisition. At December 31, 2003, Chiron had state business tax credit carryovers of $16.3 million, which are available to offset future state tax liabilities without limitation, and foreign business tax credit carryovers of $22.2 million.

        In 2002, net cash provided by operating activities was $268.2 million as compared with $262.0 million in 2001. The increase in cash provided by operating activities largely was due to (i) higher income from operations before the charge for in-process research and development, depreciation and amortization and other non-cash charges and (ii) increased cash due to the timing of payments received under the Betaferon® interferon beta-1b and Roche royalty arrangements. These increases were partially offset by (i) the $45.3 million license fee payment received from Bayer in June 2001, (ii) increased accounts receivable primarily driven by increases in product sales and royalty receivables due to an increase in Betaferon® sales and increased blood screening royalties due to contractual price increases and increased blood testing volume, (iii) lower accrued liabilities and other payables due to the timing of payments and (iv) increased payments in 2002. Increased payments in 2002 as compared with 2001, included payments to (i) Gen-Probe Incorporated upon resolution of certain contractual disputes which were accrued for in the fourth quarter 2001 and (ii) the German government in lieu of statutory price reductions on prescription drugs that are reimbursed under the German government's healthcare program (see "Results of Operations—Vaccines—Selling, general and administrative" above).

        In 2001, net cash provided by operating activities was $262.0 million as compared with $373.4 million in 2000. The decrease in cash provided by operating activities largely was due to (i) higher tax payments, (ii) the timing of royalty and license fee payments under the F. Hoffman La-Roche Limited settlement agreements (see "Blood testing—Royalty and license fee revenues" and "Other—Royalty and license fee revenues" above) and (iii) $13.9 million of cash received upon the settlement of a cross currency interest rate swap in 2000. We made $134.8 million ($49.6 million domestic and $85.2 million foreign) in tax payments in 2001 as compared with $9.9 million in 2000. Domestic tax payments in 2001 included approximately $39.8 million related to the filing of our fiscal year 2000 tax return in September 2001. Foreign tax payments in 2001 primarily related to tax

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payments made by our Italian subsidiary. Our Italian subsidiary posted profits in both 2000 and 2001, and is taxed at a substantially higher tax rate than our domestic and other foreign subsidiaries. As a result, our Italian subsidiary made significant tax payments in 2001. The decrease in cash provided by operating activities were offset partially by a $45.3 million license fee payment received from Bayer Corporation in June 2001, as discussed in "Blood testing—Royalty and license fee revenues" above.

        We anticipate that research and development expenditures in 2004 will primarily be driven by (i) those activities under our December 2001 and June 2002 collaboration agreements with Nektar Therapeutics (formerly Inhale Therapeutic Systems, Inc.) related to, among other things, the development of a dry powder formulation of our inhaled TOBI® product for the treatment of pseudomonas aeruginosa in cystic fibrosis patients, (ii) those activities related to the development of interleukin-2 in combination with various monoclonal antibodies, (iii) expansion of our meningococcal franchise, (iv) development of flu cell culture, (v) research activities focused on identifying several novel vaccines and therapeutics for clinical development in the areas of oncology and infectious disease and (vi) those activities related to development with tifacogin in severe community-acquired pneumonia. In addition, we are required to make capital improvements to our existing manufacturing facilities to support the supply of Betaferon® to Schering. In connection with this project, we are continuing to incur expenses relating to the development of new processes and the performance of test runs related to installed equipment. Net cash from operating activities are expected to fund these research and development activities.

        Investing activities    In 2003, net cash used in investing activities consisted of purchases of investments in marketable debt securities of $920.8 million, cash paid for acquisitions, net of cash acquired of $815.4 million, capital expenditures of $139.4 million, purchases of equity securities and interests in affiliated companies of $14.2 million and other uses of cash of $0.9 million. In 2003, cash paid for acquisitions, net of cash acquired, consisted of cash paid to acquire PowderJect Pharmaceuticals, net of cash acquired, of $814.7 million and cash paid for acquisition costs related to the acquisitions of PathoGenesis Corporation and Matrix Pharmaceutical of $0.7 million. Cash used in investing activities was offset by proceeds from sales and maturities of investments in marketable debt securities of $1,213.6 million, proceeds from the sale of equity securities and interests in affiliates companies of $12.6 million and proceeds from notes receivable of $0.8 million.

        On July 8, 2003, we acquired PowderJect Pharmaceuticals, a company based in Oxford, England that develops and commercializes vaccines. We acquired all of the outstanding shares of common stock of PowderJect Pharmaceuticals for a total preliminary estimated purchase price of approximately $947.8 million. We are in the process of finalizing certain estimates; thus both the purchase price and the allocation of the purchase price are subject to change. The preliminary purchase price and allocation reflect management's decision to cease operations at the Madison, Wisconsin facility and the Swedish facility. We have accrued approximately $28.1 million in estimated exit costs associated with these operations. As part of the acquisition of PowderJect, we assumed the debt of PowderJect including convertible notes with a face value of 35.0 million British Pounds (fair value of $57.0 million at July 8, 2003). We repaid the convertible notes during the third quarter 2003 and the payment is included in "Repayment of debt and capital leases" in the Consolidated Statement of Cash Flows for the year ended December 31, 2003.

        In April 2001, we entered into a collaboration with Rhein Biotech N.V. (now part of Berna Biotech) and GreenCross Vaccine Corporation to research and develop certain pediatric combination vaccine products for sale outside of Europe and North America. The collaboration agreement requires capital commitments from Chiron, Berna Biotech and GreenCross Vaccine. Our commitment is approximately 26.4 million Euro ($33.1 million at December 31, 2003) for the expansion of Chiron's Italian manufacturing facilities, of which Chiron had incurred costs of 15.3 million Euro ($19.2 million), as of December 31, 2003. This agreement began in the fourth quarter 2001 and is expected to continue through 2008. We currently are evaluating various financing alternatives to fund this expansion.

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        The purchases of equity securities and interests in affiliated companies in 2003 consisted of (i) a payment of $6.7 million for the purchase of restricted Cubist common stock, (ii) a payment of $1.0 million for an equity investment in ZymeQuest and (iii) equity contributions under several venture capital funds including a $1.3 million capital contribution under two 2003 limited partnership agreements, a $0.6 million capital contribution under a 2002 limited partnership agreement, a $2.0 million capital contribution under a 2001 limited partnership agreement and a $2.7 million capital contribution under a 2000 limited partnership agreement. In 2003, we became a limited partner of Burrill Life Sciences Capital Fund, L.P. We will pay $10.0 million over 6 years, of which $1 million has been paid through December 31, 2003 for a 6.92% ownership. In 2003, we became a limited partner of Forward Venture V, L.P. We will pay $5.0 million over five years, of which $0.5 million has been paid through December 31, 2003, for a 4.47% ownership. In 2002, we became a limited partner of TPG Biotechnology Partners, L.P. We will pay $5.0 million over ten years, of which $1.9 million has been paid through December 31, 2003, for an 8.10% ownership. In 2001, we became a limited partner of Forward Venture IV, L.P. We will pay $15.0 million over ten years, of which $9.0 million has been paid through December 31, 2003, for a 6.35% ownership. In 2000, Chiron became a limited partner of Burrill Biotechnology Capital Fund, L.P. Chiron will pay $25.0 million over five years, of which $19.7 million has been paid through December 31, 2003, for a 23.26% ownership.

        In 2002, net cash used in investing activities consisted of purchases of investments in marketable debt securities of $796.5 million, capital expenditures of $105.7 million, net cash paid to acquire Matrix Pharmaceutical, Inc. of $55.5 million, purchases of equity securities and interests in affiliated companies of $6.8 million, cash paid to acquire Pulmopharm of $2.4 million, cash paid for acquisition costs related to the acquisition of PathoGenesis of $0.5 million and other uses of cash of $6.1 million. Cash used in investing activities was offset by proceeds from the sale and maturity of investments in marketable debt securities of $723.6 million, proceeds from the sale of equity securities and interests in affiliated companies of $18.9 million, proceeds from equity forward contracts of $6.0 million, proceeds from notes receivable of $6.4 million and proceeds from sales of assets of $0.5 million.

        The purchases of equity securities and interests in affiliated companies consisted of a $1.9 million capital contribution under a 2001 limited partnership agreement, a $3.6 million capital contribution under a 2000 limited partnership agreement and a $1.3 million capital contribution under a 2002 limited partnership agreement.

        The proceeds from notes receivable of $6.4 million in 2002 related to amounts collected under promissory notes received in consideration for payment under biopharmaceutical license agreements with SkyePharma plc and Bristol-Myers Squibb Company.

        In 2001, net cash used in investing activities consisted of purchases of investments in marketable debt securities of $987.3 million, capital expenditures of $64.9 million, purchases of equity securities and interest in affiliated companies of $14.9 million, cash paid for acquisition costs of PathoGenesis Corporation of $9.9 million and other uses of cash of $5.5 million. Cash used in investing activities was offset by proceeds from the sale and maturity of investments in marketable debt securities of $681.6 million, proceeds from the sale of assets of $8.2 million, proceeds from the sale of equity securities and interests in affiliated companies of $15.1 million and proceeds from notes receivable of $6.4 million.

        In April 2001, we sold the remaining Chiron Vision real estate assets for $3.3 million in cash, and in January 2001, we sold various assets of our San Diego facility for $4.9 million in cash. The purchases of equity securities and interests in affiliated companies consisted of a $5.3 million capital contribution under a 2001 limited partnership agreement, a $6.6 million capital contribution under a 2000 limited partnership agreement and a $3.0 million capital contribution under a joint venture agreement. Under the joint venture agreement, we invested in a Singapore-based joint venture, S*BIO, to research and develop therapeutic, diagnostic and vaccine products. We had invested $8.0 million, which we wrote off

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entirely due to the early stage of the joint venture's research and development activities, for a 19.9% ownership interest and are accounting for the investment under the cost method.

        The proceeds from notes receivable of $6.4 million in 2001 related to amounts collected under an April 1999 biopharmaceutical license agreement and a February 2000 agreement to sell substantially all assets of our Australian subsidiary to Mimotopes.

        Financing activities    In 2003, net cash provided by financing activities consisted of $500.0 million of proceeds from the issuance of convertible debentures (discussed below), $123.6 million of proceeds from the reissuance of treasury stock (related to stock option exercises), $2.1 million of proceeds from put options sold to reduce the costs of our share repurchase program, and $1.2 million from borrowings from a government agency in Italy. Cash provided by financing activities was offset by $207.7 million for the acquisition of treasury stock, $62.5 million for the repayment of debt and capital leases, $10.7 million for the payment of issuance costs on the convertible debentures and $2.4 million for the net repayment of short-term borrowings.

        On July 30, 2003, we issued $500.0 million aggregate principal amount of convertible debentures, which mature on August 1, 2033. The debentures accrue interest at a rate of 1.625% per year. Interest is payable on February 1 and August 1 each year commencing February 1, 2004. The debentures are senior, unsecured obligations of Chiron and rank equal in right of payment with all of our existing and future unsecured and unsubordinated indebtedness.

        Holders of the convertible debentures may convert their securities into shares of Chiron common stock when certain Chiron common stock price targets have been met, if the debentures have been called for redemption, if the credit rating assigned to Chiron's long-term senior debt is below specified levels or upon the occurrence and continuance of specified corporate transactions. For each $1,000 principal amount of debentures surrendered for conversion, the holder will receive 14.6113 shares of Chiron common stock. This is equivalent to an initial conversion price of approximately $68.44 per share of common stock. Upon conversion, holders will not receive any cash payment for accrued and unpaid interest.

        The holders of the debentures may require us to repurchase the debentures on August 1, 2008, August 1, 2013, August 1, 2018, August 1, 2023 and August 1, 2028. The repurchase price will be equal to the principal and accrued and unpaid interest. Chiron may choose to pay the repurchase price in cash or Chiron common stock or any combination of the two.

        On or after August 5, 2008, we may redeem for cash all or part of the debentures at a redemption price of $1,000.00 per debenture plus accrued and unpaid interest.

        Our Board of Directors authorized the repurchase of our common stock on the open market to offset the dilution associated with the issuance of new shares under the stock option and employee stock purchase plans and the granting of share rights. In 2001, the Board of Directors granted authority to purchase up to 10.0 million shares. On December 6, 2002, the Board of Directors granted authority to buy an additional 5.0 million shares through December 31, 2003. On December 5, 2003, the Board of Directors granted authority to buy an additional 5.0 million shares and authorized such repurchases through December 31, 2004. As of December 31, 2003, Chiron is authorized to repurchase up to an additional 5.0 million shares of its common stock.

        In January 2001, we initiated a put option program to reduce the effective cost of repurchasing our common stock. Under this program, we entered into contracts with third parties to sell put options on Chiron stock, entitling the holders to sell to us a specified number of shares at a specified price per share on a specified date. For the year ended December 31, 2003, we collected premiums of $2.1 million and for contracts that were exercised, we purchased 0.2 million shares. At December 31, 2003, Chiron had no outstanding put option contracts.

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        In 2002, net cash used in financing activities consisted of $155.0 million for the acquisition of treasury stock, $0.5 million for the repayment of short-term borrowings and $0.2 million for the repayment of debt. Cash used in financing activities was offset by proceeds from the reissuance of treasury stock (related to stock option exercises) of $27.5 million and proceeds from put options of $5.4 million.

        For the year ended December 31, 2002, we collected premiums of $4.3 million and, for contracts that were exercised, we purchased 0.3 million shares in connection with the put option program. As of December 31, 2002, we had an outstanding put option contract with a third party entitling the holder to sell us 0.5 million shares. The option expired on January 29, 2003 and had an exercise price of $38.11 per share. The amount of our obligation to repurchase such shares upon exercise of the outstanding put options, totaling $19.1 million, was reclassified from "Additional paid-in capital" to "Put options" in temporary equity in the Consolidated Balance Sheets at December 31, 2002. On January 29, 2003, our closing stock price was $37.94. Although the closing stock price was below the stipulated $38.11, the third party elected not to exercise the options. As a result, the temporary equity of $19.1 million was reclassified to permanent equity in the first quarter 2003.

        In 2001, net cash provided by financing activities consisted of $401.8 million in proceeds from the issuance of the Liquid Yield Option Notes (LYONs), $65.7 million in proceeds from the reissuance of treasury stock (primarily related to stock option exercises) and $8.2 million in proceeds from put options. Cash provided by financing activities was offset by $9.9 million for the payment of issuance costs on the LYONs, $201.0 million for the acquisition of treasury stock, $1.4 million for the repayment of debt and $0.6 million for the repayment of short-term borrowings.

        We issued zero coupon LYONs in June 2001 for proceeds of $401.8 million. The LYONs mature on June 12, 2031. At the option of the holder, we may be required to purchase all, or a portion, of the LYONs on June 12, 2004 and 2006, and every five years thereafter. In addition, upon a change in control of Chiron occurring on or before June 12, 2006, each holder may require us to purchase all or a portion of such holder's LYONs for cash at a price equal to 100% of the issue price for such LYONs plus any accrued original issue discount and contingent additional principal (and accrued original issue discount thereon) to the date of purchase. Beginning on June 12, 2004 and continuing through June 12, 2006, the holder may receive contingent additional principal if Chiron's stock price falls below the threshold specified in the indenture. The contingent additional principal will replace the original issue discount and bear an effective yield of 2.0 to 9.0% per year for the two-year period. Based on market conditions as of December 31, 2003, contingent additional principal would have been zero, and the original issue discount of 2% per year would apply. After June 12, 2006, the original issue discount will continue to accrue at 2.0% per year.

        In the event that the holders of the LYONs require us to purchase all, or a portion, of the LYONs on June 12, 2004, funding for such purchases may be provided by cash from operations, cash and investments on hand, borrowings or issuance of debt or common stock.

        In March 2004, we entered into a worldwide, exclusive, multi-product, collaborative arrangement with XOMA Ltd. for the development and commercialization of antibody products for the treatment of cancer. Under the terms of the arrangement, the parties agreed to jointly research, develop, and commercialize multiple antibody product candidates. Under the arrangement, the parties agreed to share development and commercialization expenses, including preclinical and clinical development, manufacturing and worldwide marketing costs, as well as revenues, generally on a 70-30 basis, with our share being 70% and XOMA's share being 30%. We have agreed to make an initial payment of $10.0 million and make a loan facility of up to $50.0 million available to Xoma to fund Xoma's share of development expenses. The collaboration will initially focus on preclinical, process development and scale up work, with a potential Investigative New Drug (IND) filing anticipated early on in the collaboration.

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        From time to time, we evaluate a number of business development opportunities. To the extent that we are successful in reaching agreements with third parties, these transactions may involve selling a significant portion of our current investment portfolio, incurring additional debt or issuing additional Chiron shares.

Contractual Obligations

        Our contractual obligations as of December 31, 2003 were as follows:

		Obligations by period
Contractual Obligations		Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
		(in thousands)
Long-term debt(1)		$	926,709	$	—	$	683	$	574	$	925,452
Capital lease obligations(2)			172,589		3,546		5,601		5,375		158,067
Other non-current liabilities(3)			69,448		—		19,975		155		49,318
Operating leases(4)			268,831		33,597		54,300		38,855		142,079
Purchase obligations:
	Technology services agreement(5)		59,100		5,910		11,820		11,820		29,550
	Purchase orders(6)		59,864		58,211		1,653		—		—
Supply agreement(7)			100,000		25,000		50,000		25,000		—
Plant expansion(8)			40,700		40,700		—		—		—
Berna biotech(9)			13,900		2,780		5,560		5,560		—
Capital commitments(10)			30,700		30,700		—		—		—
Infonet(11)			4,500		1,200		2,400		900		—
Letters of credit(12)			12,700		12,700		—		—		—
Research and development arrangements(13)			49,400		30,400		19,000		—		—
Insurance-related items(14)			12,900		12,900		—		—		—
Manufacturing and supply agreement(15)			33,100		8,300		16,600		8,200		—
Supply agreement(16)			28,740		5,099		11,213		12,428		—
Burrill Life Sciences Capital Fund, L.P.(17).			9,000		9,000		—		—		—
Forward Venture V L.P(18)			4,500		4,500		—		—		—
TPG Biotechnology Partners, L.P(19)			3,100		3,100		—		—		—
Forward Ventures IV L.P(20)			6,000		6,000		—		—		—
Burrill Biotechnology Capital Fund L.P(21)			5,300		5,300		—		—		—
Contract manufacturing agreement(22)			33,789		5,332		11,242		8,608		8,607
FDA compliance agreement(23)			5,400		5,400		—		—		—
Revolving credit agreement(24)			2,500		2,500		—		—		—
Total		$	1,952,770	$	312,175	$	210,047	$	117,475	$	1,313,073

(1)

On July 30, 2003, we issued $500.0 million aggregate principal amount of convertible debentures, which mature on August 1, 2033. The debentures accrue interest at a rate of 1.625% per year and interest is payable on February 1 and August 1 commencing February 1, 2004. The debentures are senior, unsecured obligations of Chiron and rank equal in right of payment with all of Chiron's existing and future unsecured and unsubordinated indebtedness.

In June 2001, we issued zero coupon Liquid Yield Option Notes (LYONs) with a face value of $730.0 million and a yield to maturity of 2.0%. The LYONs are carried net of an original issue discount of $328.2 million, which is being accreted to interest expense over the life of the LYONs using the effective interest method. The LYONs mature on June 12, 2031, at a face value of

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$1,000 per note. The LYONs are uncollateralized and unsubordinated, and rank equal in right of payment to Chiron's existing and future uncollateralized and unsubordinated indebtedness.

We had various other notes payable totaling $4.0 million at December 31, 2003.

(2)

In July 2003, we entered into a new six-year lease to rent a research and development facility in Emeryville, California following the expiration of the existing operating lease. We accounted for this new lease as a capital lease effective July 1, 2003 and, as a result, recorded the leased facility and the corresponding liability on our balance sheet. The amount recorded on the balance sheet for the leased facility is $157.5 million. The amount of the leased facility less the expected value of the facility at the end of the lease term is being amortized on a straight-line basis over the lease term. We expect the value of the facility at the end of the lease term will be approximately $151.6 million. At the inception of the lease, the future minimum lease payments, exclusive of a residual value guarantee, are approximately $15.7 million over the lease term. The interest payments represent variable-rate interest payments indexed to a three-month London interbank offered rate plus 40 basis points. The lease provides a $156.0 million residual value guarantee from us to the lessors in the event of property value declines. Consequently, our maximum payment obligation is $156.0 million upon termination of the lease on or before July 1, 2009. On or before July 1, 2009, we can choose to either purchase the facility from the lessors or sell the facility to a third party. This option accelerates if we default on our lease payments or in the event of other defined events. As of July 1, 2003, Novartis AG had guaranteed (under provisions of the Investment Agreement) payments on this lease commitment, including payment of the residual value guarantee, to a maximum of $173.3 million.

(3)

Other non-current liabilities as recorded in the Consolidated Balance Sheet as of December 31, 2003.

(4)

We lease laboratory, office and manufacturing facilities, land and equipment under noncancelable operating leases, which expire through 2021.

(5)

Effective August 1, 2003, Chiron and IBM Corporation amended and restated the previous ten-year information technology services agreement which was effective on July 1, 1998. Under this revised agreement, IBM agreed to provide us with a full range of information services until March 31, 2010. We can terminate this agreement at any time beginning April 1, 2004, subject to certain termination charges. If we do not terminate this agreement, future payments to IBM are expected to be approximately $59.1 million. Payments to IBM are subject to adjustment depending upon the levels of services and infrastructure equipment provided by IBM, as well as inflation.

(6)

We had noncancelable purchase orders for ongoing operations of $59.9 million at December 31, 2003.

(7)

In connection with the production of our flu vaccine products, we must purchase large quantities of chicken eggs. Currently, for Fluvirin® vaccine, we purchase those eggs and incubation services from a single supplier in the United Kingdom and, pursuant to the contract with that supplier, we are required to make specified minimum purchases of 14.0 million British Pounds ($25.0 million at December 31, 2003) each year from that supplier through 2007.

(8)

In 2003, our Board of Directors approved $50.7 million in expenditures for a 25-year lease for buildings and $42.2 million for capital improvements, both of which are part of a $97.0 million project for a new flu vaccines manufacturing facility in Liverpool, England. The new manufacturing facility will replace existing flu vaccines manufacturing facilities in Liverpool, England. As of December 31, 2003, we have incurred $1.5 million for capital improvements.

(9)

In April 2001, Chiron, Rhein Biotech N.V. (now part of Berna Biotech) and GreenCross Vaccine Corporation entered into a collaboration to research and develop certain pediatric combination vaccine products for sale outside of Europe and North America. The collaboration agreement requires capital commitments from Chiron, Berna Biotech and GreenCross Vaccine. Our

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commitment is approximately 26.4 million Euro ($33.1 million at December 31, 2003) for the expansion of our Italian manufacturing facilities, of which we have incurred costs of 15.3 million Euro ($19.2 million), as of December 31, 2003. This agreement began in the fourth quarter 2001 and is expected to continue through 2008. The amount of the commitment remaining at December 31, 2003 is $13.9 million. The remaining commitment is allocated on a straight-line basis until 2008.

(10)

We had various other firm purchase and capital project commitments totaling approximately $30.7 million at December 31, 2003.

(11)

In 2003, we entered into a four year Communication Services Agreement with Infonet USA Corporation. The contract requires a minimum monthly payment of $0.1 million and our commitment at December 31, 2003, totaled $4.5 million.

(12)

At December 31, 2003, we had $12.7 million available under letters of credit, which is required by German law, related to ongoing legal proceedings in Germany.

(13)

We participate in a number of research and development arrangements with other pharmaceutical and biotechnology companies to research, develop and market certain technologies and products. Chiron and its collaborative partners generally contribute certain technologies and research efforts and commit, subject to certain limitations and cancellation clauses, to share costs related to certain research and development activities, including those related to clinical trials. At December 31, 2003, aggregate annual noncancelable funding commitments under collaborative arrangements are as follows: 2004—$8.5 million and 2005—$18.9 million. We may also be required to make payments to certain collaborative partners upon the achievement of specified milestones. At December 31, 2003, aggregate milestone payments that may become due under these noncancelable collaborative arrangements totaled $5.3 million. These milestone payments are due upon the achievement of various technical milestones, completion of trials and regulatory filings.

In addition to these collaboration arrangements, we have entered into contracts where we are responsible for all the costs related to research and development activities. At December 31, 2003, aggregate annual noncancelable commitments under these contracts are as follows: 2004—$3.0 million and 2005—$0.1 million. At December 31, 2003, aggregate milestone payments that may become due under these noncancelable arrangements totaled $13.6 million. These milestone payments are due upon the achievement of various technical milestones, completion of trials and regulatory filings.

(14)

We had various performance bonds and insurance-related letters of credit in the amount of $12.9 million available at December 31, 2003. There are no amounts outstanding under these letters of credit at December 31, 2003.

(15)

Effective February 2003, Chiron and Baxter Pharmaceutical Solutions LLC executed an eight-year manufacturing and supply agreement. Under this agreement, Baxter agreed to perform certain manufacturing procedures and supply us with a key component for a certain biopharmaceutical product. We have certain minimum purchase obligations under this agreement and are required to pay the difference, if any, between the actual quantity purchased and the minimum purchase obligation. We can terminate this agreement in the fifth year with prior notice. Our minimum purchase obligation under this agreement is expected to be approximately $36.4 million over four years from regulatory approval, which occurred in 2003. We have paid $3.3 million towards the minimum purchase obligation as of December 31, 2003. As of December 31, 2003, the remaining minimum purchase obligation of $33.1 million is allocated ratably over four years.

(16)

Effective October 2002, Chiron and Medical Associates Network, Inc., Medimop Medical Projects, Ltd. and Medimop Medical Projects North, Ltd. (referred to as Med Parties in this section) executed a five-year supply agreement. Under this agreement, the Med Parties agreed to provide us with a presentation device for certain pharmaceutical products. Under this agreement, we have minimum purchase requirements. Our minimum purchase obligation for the next five

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years is approximately $28.7 million. We can terminate the agreement at any time beginning January 1, 2005 subject to twelve-months notification. If we do not terminate the agreement by December 31, 2007, the agreement will be automatically renewed for an additional twelve months.

(17)

In 2003, we became a limited partner of Burrill Life Sciences Capital Fund, L.P. We will pay $10.0 million over 6 years, of which $1.0 million has been paid through December 31, 2003 for a 6.92% ownership. The partnership agreement does not allocate the contribution across future years, therefore we have included the remaining contributions in 'less than 1 year' for presentation purposes.

(18)

In 2003, we became a limited partner of Forward Venture V, L.P. We will pay $5.0 million over five years, of which $0.5 million has been paid through December 31, 2003, for a 4.47% ownership. The partnership agreement does not allocate the contribution across future years, therefore we have included the remaining contributions in 'less than 1 year' for presentation purposes.

(19)

In 2002, we became a limited partner of TPG Biotechnology Partners, L.P. We will pay $5.0 million over 10 years, of which $1.9 million has been paid through December 31, 2003, for an 8.10% ownership. The partnership agreement does not allocate the contribution across future years, therefore we have included the remaining contributions in 'less than 1 year' for presentation purposes.

(20)

In 2001, we became a limited partner of Forward Venture IV, L.P. We will pay $15.0 million over ten years, of which $9.0 million has been paid through December 31, 2003, for a 6.35% ownership. The partnership agreement does not allocate the contribution across future years, therefore we have included the remaining contributions in 'less than 1 year' for presentation purposes.

(21)

In 2000, we became a limited partner of Burrill Biotechnology Capital Fund, L.P. We will pay $25.0 million over five years, of which $19.7 million has been paid through December 31, 2003, for a 23.26% ownership. The partnership agreement does not allocate the contribution across future years, therefore we have included the remaining contributions in 'less than 1 year' for presentation purposes.

(22)

Effective June 2003, Chiron and SynCo B.V. executed a seven and a half-year contract manufacturing agreement. Under this agreement, SynCo agreed to provide services related to the production of certain of our vaccine products for the European and U.S. markets. We have a firm binding order for products to be delivered by SynCo in 2004, 2005 and 2006 under this agreement. Our minimum purchase obligation under this agreement, subject to adjustment depending on the quantities purchased by us in years 2007 through 2010, inflation and movement in the Euro to U.S. Dollar exchange rate, is expected to be approximately $33.8 million over the term of the agreement.

(23)

In June 2003, Chiron and SynCo B.V. executed an FDA compliance agreement. Under this agreement, we will fund certain costs required to bring SynCo's Amsterdam manufacturing facility into compliance to support approval by the U.S. Food and Drug Administration to manufacture certain vaccine products for the U.S. market. Our funding commitment under this agreement is expected to be approximately $10.9 million through the first quarter 2005, of which we have paid 4.7 million Euro ($5.5 million) as of December 31, 2003.

(24)

In August 2003, we entered into a $2.5 million revolving credit agreement with Nektar Therapeutics to support the financing of equipment, facility improvements and other capital expenditures related to the manufacture of clinical supplies in support of a program to develop a dry powder formulation of TOBI® tobramycin. Each advance made under this revolving line of credit matures on the sixth anniversary of the initial advance. As of December 31, 2003, Nektar Therapeutics has not drawn from the revolving line of credit.

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Borrowing Arrangements

        Under a revolving, committed, uncollateralized credit agreement with a major financial institution, we can borrow up to $100.0 million in the U.S. This credit facility is guaranteed by Novartis AG under a November 1994 Investment Agreement, provides various interest rate options and matures in February 2006. There were no borrowings outstanding under this credit facility at December 31, 2003 and December 31, 2002. In December 1999, Chiron and Novartis amended the November 1994 Investment Agreement to reduce the maximum amount of our obligations that Novartis would guarantee from $725.0 million to $702.5 million.

        We also have various credit facilities available outside the U.S. There were no outstanding borrowings under these facilities at December 31, 2003. Borrowings under these facilities totaled $0.1 million at December 31, 2002. One facility is maintained for our 51%-owned Indian subsidiary, and allows for total borrowings of 200 million Indian Rupee ($4.4 million at December 31, 2003). There were no outstanding borrowings under this facility at December 31, 2003. At December 31, 2002, $0.1 million was outstanding under this facility. Our Italian subsidiary also has various facilities, related to its receivables, which allow for total borrowings of 10.9 million Euro ($13.6 million at December 31, 2003). There were no outstanding borrowings under these facilities at December 31, 2003 and December 31, 2002.

Off-Balance Sheet Arrangements

        As of December 31, 2003, we do not have any off-balance sheet debt arrangements.

Market Risk Management

        Our cash flow from operations and earnings are subject to fluctuations due to changes in foreign currency exchange rates, interest rates, the fair value of equity securities held and the realized value of investment securities sold. We attempt to limit our exposure to some or all of these market risks through the use of various financial instruments. These activities are discussed in further detail in Item 7A. "Quantitative and Qualitative Disclosures About Market Risk."

Factors That May Affect Future Results

        As a global pharmaceutical company, we are engaged in a rapidly evolving and often unpredictable business. The forward-looking statements contained in this 10-K and in other periodic reports, press releases and other statements issued by us from time to time reflect our 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 our control, which could cause actual results to differ.

If our focus on the research and development of emerging technologies does not result in the creation of commercial products, our business could be harmed.

        We focus our research and development activities on areas in which we have 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 these 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 lacks 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. Further, success in clinical

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trials will likely lead to increased investment, adversely affecting short-term profitability, to bring such products to market. 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.

Conflicts with or decisions by third parties we collaborate with could harm our business.

        An important part of our business strategy depends upon collaborations with third parties, including research collaborations and joint efforts to develop and commercialize new products. As circumstances change, Chiron and our strategic partners may develop conflicting priorities or other conflicts of interest. We 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, we may disagree with our strategic partners as to how best to realize the value associated with a current product or a product in development. In some cases, the strategic partner may have responsibility for formulating and implementing key strategic or operational plans. In addition, merger and acquisition activity within the pharmaceutical and biotechnology industries may affect our strategic partners, causing them to reprioritize their efforts related to the research collaborations and other joint efforts with us. 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 our profitability.

If we fail to obtain or maintain the regulatory approvals we need to market our products, our business will suffer.

        We must obtain and maintain regulatory approval in order to market most of our products. Generally, these approvals are on a product-by-product and country-by-country basis. In the case of therapeutic products, a separate approval is required for each therapeutic indication. 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. In addition, regulations may be amended from time to time. Revised regulations may require us to reformulate products on a country or regional basis, obtain additional regulatory approvals, or accept additional risks that our products will not maintain market acceptance or be eligible for third party insurance coverage. Increased regulatory scrutiny and restrictions regarding marketing practices for products that are subject to government reimbursement may impact the sales of such products. There is no guarantee that we will be able to satisfy these new regulatory requirements and may suffer a loss of revenue as a result.

Our products are complex and difficult to manufacture on a large-scale basis, which could cause us to delay product launches, experience shortages of products or prevent us from offering products on a volume basis.

        Most of our 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 anywhere in the manufacturing process, including quality control, labeling and packaging, may result in unacceptable changes in the products that may result in lot failures or product recalls, or liability to a third party to the extent we are contract manufacturing products in our facilities for such third party. Manufacturing processes which are used to produce the smaller quantities of material needed for research and

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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. Additionally, 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. For some of our products, we rely on others to supply raw materials and to manufacture those products according to regulatory requirements.

        In addition, any prolonged interruption in our operations or those of our partners could result in our inability to satisfy the product demands of our customers. A number of factors could cause interruptions, including equipment malfunctions or failures, interruptions due to labor action, damage to a facility due to natural disasters, such as an earthquake, suspension of power supplied to these facilities arising out of regional power shortages or terrorist activities and armed conflict, including as a result of the disruption of operations of our subsidiaries and our customers, suppliers, distributors, couriers, collaborative partners, licensees and clinical trial sites.

Our mishandling of hazardous materials could result in substantial costs and harm to our business.

        In connection with our research and manufacturing activities, we utilize some hazardous materials. We believe we take great care to ensure we have appropriate procedures and permits in place for storing and handling such hazardous materials. We could be subject to loss of our permits, government fines or penalties and/or other adverse governmental action if such hazardous materials are stored, handled or released into the environment in violation of law or any permit. A substantial fine or penalty, the payment of significant environmental remediation costs or the loss of a permit or other authorization to operate or engage in our ordinary course of business could result in material, unanticipated expenses and the possible inability to satisfy customer demand.

If any of our third party suppliers or manufacturers cannot adequately meet our needs, our business could be harmed.

        We use raw materials and other supplies that generally are available from multiple commercial sources. Certain manufacturing processes, however, use materials that are available from sole sources, or that are in short supply, or are difficult for the supplier to produce and certify in accordance with our specifications. From time to time, concerns are raised with respect to potential contamination of biological materials that are supplied to us. These concerns can further tighten market conditions for materials that may be in short supply or available from limited sources. Moreover, regulatory approvals to market our products may be conditioned upon obtaining certain materials from specified sources. Our ability to substitute material from an alternate source may be delayed pending regulatory approval of such alternate source. Although we work to mitigate the risks associated with relying on sole suppliers, there is a possibility that material shortages could impact production.

        We purchase bulk powdered tobramycin, the primary basic raw material in TOBI® tobramycin, from two of the principal worldwide suppliers of the drug. We anticipate that either one of these suppliers alone will be able to supply sufficient quantities to meet current needs; however, there can be no assurance that these suppliers will be able to meet future demand in a timely and cost-effective manner. As a result, our operations could be adversely affected by an interruption or reduction in the supply of bulk-powdered tobramycin.

        We have entered into contracts with third parties for the production and packaging of TOBI®. Over time, we can use alternative production and packaging sources. However, if the contracted third parties become unable to produce or package sufficient quantities of TOBI® due to work stoppages or other factors, our operations could be disrupted until alternative sources are secured.

        In connection with the production of our flu vaccine products, we must purchase large quantities of chicken eggs. Currently, for Fluvirin® vaccine, we purchase those eggs and incubation services from a

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single supplier in the United Kingdom and, pursuant to the contract with that supplier, we are required to make specified minimum purchases from that supplier through 2007. If our supplier were to fail to supply eggs in sufficient quantities or quality, including as a result of any health or other issues related to the chickens, our business would be materially adversely affected.

        We are a key provider for the blood screening field of nucleic acid testing and immunodiagnostics. In nucleic acid testing, we rely on our collaborative partner, Gen-Probe, to manufacture the West Nile virus assay, currently in use on an investigational-use basis in the U.S. and the Procleix® HIV-1/ HCV Assay. We currently source the related instrument system from third party suppliers. Currently, Gen-Probe is the only manufacturer of nucleic acid testing products using Transcription-Mediated Amplification technology. In immunodiagnostics, under the Ortho-Clinical Diagnostics, Inc. contract, we manufacture bulk reagents and antigens and confirmatory test kits sold in the clinical diagnostics and blood screening fields. While we and our partners work to mitigate the risks associated with being a key provider, there can be no assurance that our partner, Gen-Probe, will be able to provide sufficient quantities of the Procleix HIV-1/ HCV Assay or that we will be able to manufacture sufficient bulk reagents and antigens and confirmatory test kits for immunodiagnostic products. Our difficulties or delays or those of our partners' could cause a public health concern for the blood supply, as well as increase costs and cause loss of revenue or market share.

If we cannot obtain necessary licenses to third party patents for the manufacture or sale of our products, we may have to withdraw from the market or delay the introduction of the affected product.

        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 products and products in development by us and our strategic partners. It is likely that third parties will obtain these patents in the future. Certain of these patents may be broad enough to prevent or delay us and our strategic partners from manufacturing or marketing products important to our current and future business. We cannot accurately predict the scope, validity and enforceability of these patents, if granted, the extent to which we may wish or need to obtain licenses to these patents, and the cost and availability of these licenses. If we do not or cannot obtain these licenses, products may be withdrawn from the market or delays could be encountered in market introduction while an attempt is made to design around these patents, or we could find that the development, manufacture or sale of such products is foreclosed. We could also incur substantial costs in licensing or challenging the validity and scope of these patents.

Because most of our products are based on technologies that are unfamiliar to the healthcare community, they may not be accepted by healthcare providers and patients, which could harm our business.

        We may experience difficulties in launching new products, many of which are novel products based on technologies that are unfamiliar to the healthcare community. We have 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 our products directly (for example, by recommending a decreased dosage of our product in conjunction with a concomitant therapy or a government entity withdrawing its recommendation to screen blood donations for certain viruses) or indirectly (for example, by recommending a competitive product over our product).

If we are unable to avoid significant exposure to product liability claims, our business could be harmed.

        We are exposed to product liability and other claims in the event that the use of our products is alleged to have resulted in adverse effects. While we will continue to take precautions, we may not avoid significant product liability exposure. Although we maintain product liability insurance, there is

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no guarantee that this coverage will be sufficient. It is not feasible to obtain adequate insurance coverage for certain products and we are self-insured in relation to these products. If we are sued for any injury caused by our products, we could suffer a significant financial loss.

        As we are a key provider for the blood screening field of nucleic acid testing and immunodiagnostics, we may have product liability in addition to contract exposure, in the event that our difficulties or delays or those of our partners could cause a public health concern for the blood supply.

If we are unable to successfully compete in the highly competitive healthcare industry, our business could be harmed.

        We operate in a highly competitive environment, and the competition is expected to increase. Competitors include large pharmaceutical, chemical and blood testing companies, and biotechnology companies. Some of these competitors, particularly large pharmaceutical and blood testing companies, have greater resources than us. Accordingly, even if we are successful in launching a product, we 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 access to certain raw materials;



•

The competitor may have more efficient manufacturing processes;



•

The competitor may adapt more quickly to technological change;



•

The competitor may have greater marketing capabilities;



•

The competitive product may have therapeutic or other advantages; or



•

New competitors may enter into markets where we currently have significant competitive advantage.

        The technologies applied by our competitors and us are rapidly evolving, and new developments frequently result in price competition and product obsolescence. In addition, we may be impacted by competition from generic forms of our products or substitute products. Specific to one product, TOBI®, a generic form of this product may be available from our competitors, which may cause loss of revenue or market share. In December 2002, the U.S. Food and Drug Administration tentatively approved an abbreviated new drug application for an inhaled tobramycin for sale in the U.S. following expiration of the orphan drug status of TOBI in December 2004. Subsequently, the application was withdrawn and under terms of a settlement agreement reached in October 2003, approval will not be sought to market this generic product until the 2014 expiration of our patent in the U.S. covering the formulation of TOBI.

Our patents may not prevent competition or generate revenues.

        We seek to obtain patents on many of our inventions. Without the protection of patents, competitors may be able to use our inventions to manufacture and market competing products without being required to undertake the lengthy and expensive development efforts made by us and without having to pay royalties or otherwise compensate us for the use of the invention. We have no assurance that patents and patent applications owned or licensed to us 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. We do not know how many of our 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. We have engaged in significant

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litigation to determine the scope and validity of certain of our patents and expect to continue to do so. An adverse outcome of litigation could result in the reduction or loss of royalty revenues. Engaging in patent litigation against one party may place significant royalty revenues received or to be received from other parties at risk. Even if we are successful in obtaining and defending patents, there can be no assurance that these patents will provide substantial protection. The length of time necessary to resolve patent litigation successfully 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 our 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). In addition, 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. In addition, royalty revenues may decline as patents expire.

Sales of our products may be adversely affected by the availability and amount of reimbursement to the user of our products from third parties, such as the government and insurance companies.

        In the U.S. and other significant markets, sales of our 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. If the United States Congress enacts legislative proposals addressing parallel importation currently being deliberated, revenues from certain products may be affected by this change in U.S. policy. 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.

If our efforts to integrate acquired or licensed businesses or technologies into our business are not successful, our business could be harmed.

        As part of our business strategy, we expect to continue to grow our business through in-licensing, collaborations or acquisitions of products or companies. For example, we are currently in the process of completing the integration of PowderJect Pharmaceuticals. The failure to adequately address the financial, operational or legal risks raised by such transactions, including our integration of PowderJect, could harm our business. Financial aspects related to these transactions may alter our financial position, reported operating results or stock price, and include:

•

Use of cash resources;



•

Potentially dilutive issuances of equity securities;



•

The incurrence of debt and contingent liabilities, impairment losses or restructuring charges;



•

Large write-offs and difficulties in assessment of the relative percentages of in-process research and development expense that can be immediately written off as compared to the amount which must be amortized over the appropriate life of the asset; and



•

Amortization expenses related to other intangible assets.

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        Operational risks that could harm our existing operations or prevent realization of anticipated benefits from such transactions include:

•

Challenges associated with managing an increasingly diversified business;



•

Difficulties in assimilating the operations, products, technology, information systems or personnel of the acquired company;



•

Diversion of management's attention from other business concerns;



•

Inability to maintain uniform standards, controls, procedures and policies;



•

The assumption of known and unknown liabilities of the acquired company, including intellectual property claims; and



•

Subsequent loss of key personnel.

        Legal risks may include requirements to obtain the consent of our stockholders or a third party, or the approval of various regulatory authorities.

        If such efforts to integrate acquired or licensed businesses or technologies into our business are not successful, our business could be harmed.

If we cannot initiate and maintain revenue-generating relationships with third parties, we may not be able to grow our revenues in the near to medium term.

        Many products in our current pipeline are in relatively early stages of research or development. Our ability to grow earnings in the near- to medium-term may depend, in part, on our ability to initiate and maintain other revenue generating relationships with third parties, such as licenses to certain of our technologies, and on our ability to identify and successfully acquire rights to later-stage products from third parties. We may fail to establish such other sources of revenue.

Fluctuations in interest rates, foreign currency exchange rates and levels of indebtedness could harm our business.

        We have significant cash balances and investments. Our financial results, therefore, are sensitive to interest rate fluctuations. In addition, we sell products in many countries throughout the world, and our financial results could be significantly affected by fluctuations in foreign currency exchange rates or by weak economic conditions in foreign markets.

        We have significant debt balances following the issuance of our most recent convertible debt offerings. Therefore, our financial results will reflect increased interest expense and we could be harmed by a negative change to our credit rating by the debt rating agencies.

        The holders of the Liquid Yield Option Notes (LYONs) due 2031 may require us to purchase all, or a portion, of the LYONs on June 12, 2004. We may choose to pay the purchase price in cash or in shares of Chiron common stock. To the extent we elect to purchase the LYONs for cash, our inability to replace the LYONs with new debt securities could adversely affect our cash balances and our business. To the extent we elect to pay for the LYONs in shares of Chiron common stock, the existing common stockholders would experience dilution as a result of the newly issued shares of Chiron common stock.

Our relationship with Novartis AG could limit our ability to enter into transactions, pursue opportunities in conflict with Novartis and cause the price of our common stock to decline.

        We have an alliance with Novartis AG, a life sciences company headquartered in Basel, Switzerland. Under a series of agreements between Chiron and Novartis, and as a result of subsequent

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stock issuances by Chiron, Novartis' ownership interest in Chiron was approximately 42.4% as of December 31, 2003. The governance agreement between Chiron and Novartis contains provisions that require the approval of Novartis before we enter into certain corporate transactions. These transactions generally include significant debt or equity issuances, debt or equity repurchases, most mergers and acquisitions, the payment of cash dividends, amendments to Chiron's certificate of incorporation or by-laws, and other transactions that would adversely impact the rights of Novartis, or discriminate against Novartis, as a Chiron stockholder. In addition, a majority of the independent directors must approve any material transactions between Chiron and Novartis. These provisions may limit our ability to enter into transactions with third parties otherwise viewed as beneficial to Chiron. All of our shares owned by Novartis are eligible for sale in the public market subject to compliance with the applicable securities laws. We have agreed that, upon Novartis' request, we will file one or more registration statements under the Securities Act in order to permit Novartis to offer and sell shares of our common stock. Sales of a substantial number of shares of our common stock by Novartis in the public market could adversely affect the market price of our common stock.

Volatility of our stock price could negatively impact our profitability.

        The price of our stock, like that of other pharmaceutical companies, is subject to significant volatility. Any number of events, both internal and external to us, may affect our stock price. These include, without limitation:

•

Fluctuations in earnings from period to period;



•

Results of clinical trials conducted by us or by our competitors;



•

Announcements by us or our competitors regarding product development efforts, including the status of regulatory approval applications;



•

The outcome of legal proceedings, including claims filed by us against third parties to enforce our patents and claims filed by third parties against us relating to patents held by the third parties;



•

The launch of competing products;



•

The resolution of (or failure to resolve) disputes with strategic partners;



•

Corporate restructuring by us;



•

The sale of a substantial number of shares held by our existing stockholders;



•

Licensing activities by us; and



•

The acquisition or sale by us of products, products in development or businesses.

        In connection with our research and development collaborations, from time to time we may invest in equity securities of our strategic 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 our stock. Changes in the market price of these securities may impact our profitability.

We are subject to taxation in a number of jurisdictions and changes to the corporate tax rate and laws of any of these jurisdictions could increase the amount of corporate taxes we have to pay.

        We pay taxes principally in the U.S., Germany, Italy, The Netherlands and, with the acquisition of PowderJect, the United Kingdom. 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 our future tax provision. We have 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, income

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taxes payable in particular jurisdictions could increase. While we believe that all material tax liabilities are reflected properly in our balance sheet, we are presently under audit in several jurisdictions and may be subject to further audits in the future, and we have no assurance that we will prevail in all cases in the event the taxing authorities disagree with our interpretations of the tax law. In addition, we have assumed liabilities for all income taxes incurred prior to the sales of our former subsidiaries, Chiron Vision (subject to certain limitations) and Chiron Diagnostics. Future levels of research and development spending, capital investment and export sales will impact our entitlement to related tax credits and benefits which have the effect of lowering our effective tax rate.

Volatility of earnings could negatively impact our business.

        Our operating results may vary considerably from quarter to quarter. Any number of factors may affect our quarterly operating results. These factors include, but are not limited to the following:

•

Inventory management practices, including wholesale ordering patterns;



•

The level of pre-clinical and clinical trial-related activities;



•

Seasonality of certain vaccine products;



•

The tender driven nature of certain vaccine products;



•

The nature of our collaborative, royalty and license arrangements and other revenue sources;



•

Foreign currency exchange rate fluctuations; and



•

The level of product reserves due to various issues, including seasonality patterns, excess and obsolete inventory, and production yields.

        Our results in any one quarter are not necessarily indicative of results to be expected for a full year.

Revisions to accounting standards, financial reporting and corporate governance requirements and tax laws could result in changes to our standard practices and could require a significant expenditure of time, attention and resources, especially by senior management.

        We must follow accounting standards, financial reporting and corporate governance requirements and tax laws set by the governing bodies and lawmakers in the U.S. and other countries where we do business. From time to time, these governing bodies and lawmakers implement new and revised rules and laws. These new and revised accounting standards, financial reporting and corporate governance requirements and tax laws may require changes to our financial statements, the composition of our board of directors, the composition, the responsibility and manner of operation of various board-level committees, the information filed by us with the governing bodies and enforcement of tax laws against us. Implementing changes required by such new standards, requirements or laws likely will require a significant expenditure of time, attention and resources, especially by our senior management. It is impossible to predict the impact, if any, on Chiron of future changes to accounting standards, financial reporting and corporate governance requirements and tax laws. In addition, it is possible that the application of certain current accounting standards may change due to environmental factors, which may necessitate a change in our standard practice related to these accounting standards.

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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

        A significant portion of our operations consists of manufacturing and sales activities in western European countries. As a result, our financial results may be affected by changes in the foreign currency exchange rates of those countries. Our primary exposures to foreign exchange rates are associated with the value of the Euro and the value of the Great British Pound. A decrease in the value of the U.S. Dollar vis-à-vis the Euro will result in a higher value of our non-U.S. Dollar based revenues. Similarly, a decrease in the value of the U.S. Dollar vis-à-vis the Great British Pound will result in a higher value of our Pound-denominated expenditures. To manage foreign currency exchange risks, we enter into foreign currency forward contracts and purchase foreign currency option contracts. We do not use any of these derivative instruments for trading or speculative purposes. The total notional principal amount of these derivative financial instruments at December 31, 2003 and 2002 was $113.6 million and $56.4 million, respectively.

        We use foreign currency forward contracts to hedge the gains and losses generated by the remeasurement of certain assets and liabilities denominated in foreign currencies. Typically, these contracts have maturities of three months or less. At December 31, 2003, our exposures amounted to $75.3 million and were offset by foreign currency forward contracts with a notional principal amount of $80.2 million (fair value of $85.6 million). The notional principal amount of the foreign currency forward contracts was $24.0 million (fair value of $28.0 million) at December 31, 2002. Based on exposures at December 31, 2003, a 10% movement against our portfolio of transaction exposures and hedge contracts would result in a gain or loss of approximately $0.5 million. A 10% movement in the value of the dollar versus our portfolio of transaction exposures has occurred only once in the last 12 quarters (in the second quarter of 2002). Foreign currency gains from continuing operations, including the impact of hedging, were $5.5 million, $0.7 million and $1.9 million in 2003, 2002 and 2001, respectively.

        We may selectively hedge anticipated currency exposures by purchasing foreign currency option contracts and forward contracts. Our primary anticipated exposures are related to foreign revenues and expenditures related to our Western European operations. To limit hedging costs, we generally purchase out-of-the-money foreign currency option contracts. At December 31, 2003, anticipated exposures associated with certain Euro-denominated revenues amounted to $47.1 million and were partially offset by foreign currency option contracts with a notional principal amount of $33.4 million (fair value of $0.07 million). The notional principal amount of the foreign currency option contracts was $32.4 million (fair value of $0.02 million) at December 31, 2002. Based on exposures at December 31, 2003, a 10% adverse movement against this portfolio of anticipated exposures and hedge contracts would result in a loss of approximately $5.9 million. A 10% movement in the value of the dollar versus this portfolio of anticipated exposures has occurred once in the last 12 quarters, in the second quarter 2002.

Interest Rate Risk

        We have exposure to changes in interest rates in both our investment portfolio and certain floating rate liabilities and lease commitments where interest rates are tied to the London Inter-Bank Offered Rate. We have a diversified portfolio of financial instruments, including money market funds and instruments, corporate notes and bonds, government agency securities and other debt securities issued by financial institutions and other issuers with strong credit ratings. Changes in interest rates do not affect interest expense incurred on our convertible debentures because the debentures bear interest at fixed rates.

        Our investment portfolio amounted to approximately $1,098.8 million at December 31, 2003. As of that date, we also had $173.3 million of floating rate obligations tied to the London Inter-Bank Offered Rate. We have a "natural hedge" against this exposure as a result of our portfolio holdings in floating

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rate fixed income securities tied to the London Inter-Bank Offered Rate. The analysis below describes the impact of changes in interest rates to us and is based on a net investment portfolio of $925.5 million.

        The analysis assumes an immediate parallel increase or decrease in interest rates of 100-basis points and examines the impact to us over the next twelve months. An immediate increase in interest rates of 100-basis points results in higher interest income of $3.5 million over the 12-month period. Similarly, a 100-basis point decrease results in a decrease in reported income of $9.3 million. Fluctuations in the value of our investment securities caused by changed in interest rates (gains or losses on the carrying value) are recorded in other comprehensive income, and are realized only if we sell the underlying securities.

        A larger than 150-basis point movement in short-term interest rates has occurred in two of the last ten years, a 50-100 basis point movement has occurred in four of the last ten years, and a 0-50 basis point movement has occurred in four of the last ten years.

Equity Securities Risk

        We have exposure to equity price risk because of our investments in equity securities. Typically, we obtain these securities through our collaboration agreements with other pharmaceutical and biotechnology partners. We classify a majority of these securities as available-for-sale and, consequently, record them on the balance sheet at fair value with unrealized gains or losses reported as a component of comprehensive income or loss. We periodically review the carrying values of these securities. We recognize other-than-temporary losses against earnings in the same period the loss was deemed to have occurred. Changes in share prices affect the value of our equity portfolio. To reduce this risk, we hedged a portion of our exposure through forward sales contracts. The forward sales contracts substantially offset the long position and, in effect, neutralize the impact of market valuation shifts on the hedged securities. The notional principal amount of our forward sales contracts at December 31, 2003 was $64.8 million (versus a fair value of $54.2 million). A lower fair value indicates a gain on forward sales contracts since we sold the shares forward at higher prices. The notional principal amount of our forward sales contracts at December 31, 2002 was $70.5 million (fair value of $53.1 million). In the future, we may use additional hedging strategies in order to mitigate the potential adverse impact from changes in the market value of stock prices. We have no assurance that other-than-temporary losses will not have a material adverse impact on our future results of operations. We recorded charges of $7.5 million and $1.1 million in 2002 and 2001, respectively, to write down certain available-for-sale equity securities for which we deemed the decline in fair value to be other-than-temporary. There was no such charge in 2003. At December 31, 2003, if the market price of our equity investments, including warrants, decreased by 10%, the market value of the equity portfolio would decrease by $4.1 million.

Counterparty Risk

        We manage the risk of counterparty default on our debt securities and derivative financial instruments through the use of credit standards, counterparty diversification and monitoring of counterparty financial condition. We execute debt securities and derivative financial instruments with financial institutions and other issuers with strong credit ratings, which minimizes risk of loss due to nonpayment or deterioration in credit rating. In 2001, we recorded a charge of $1.5 million to write-down debt securities with a face value of $5.0 million due to the decline in the credit rating of the issuer. On March 1, 2002, the issuer paid us the full principal plus interest, thus offsetting the prior loss. We have not experienced any permanent losses due to counterparty default.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        We incorporate the information required for this item by reference to the financial statements listed in Item 15(a) of Part IV of this 10-K.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        Not applicable.

ITEM 9A.    CONTROLS AND PROCEDURES

(a)    Evaluation of disclosure controls and procedures    As of the end of the period covered by this Annual Report, Chiron carried out an evaluation under the supervision and with the participation of Chiron's management, including Chiron's CEO and CFO, of the effectiveness of the design and operation of Chiron's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14 or 15d-14. Based on that evaluation, Chiron's management, including the CEO and CFO, concluded that Chiron's disclosure controls and procedures were effective in timely alerting them to material information relating to Chiron, required to be included in Chiron's periodic SEC filings.

(b)    Changes in internal controls    There have been no significant changes in Chiron's internal controls over financial reporting or in other factors that could significantly affect internal controls over financial reporting during the most recent fiscal quarter.

(c)    Limitations on the effectiveness of controls    It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        We incorporate the information required for this item by reference to our definitive Proxy Statement for our 2004 Annual Meeting. We intend to file our Proxy Statement with the Securities and Exchange Commission (the "Commission") within 120 days of December 31, 2003. For information on directors, see the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement. For information on our executive officers, refer to the section entitled "Executive Officers of the Registrant" which appears at the end of Part I of this 10-K.

ITEM 11.    EXECUTIVE COMPENSATION

        We incorporate the information required for this item by reference to our Proxy Statement. See the section entitled "Compensation of Directors and Executive Officers" in the Proxy Statement.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        We incorporate the information required for this item by reference to our Proxy Statement. See the sections entitled "Certain Beneficial Owners", "Security Ownership of Directors and Executive Officers" and "Equity Plan Compensation Information" in the Proxy Statement.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        We incorporate the information required for this item by reference to our Proxy Statement. See the section entitled "Certain Relationships and Related Transactions" in the Proxy Statement.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

        We incorporate the information required by this item by reference to our Proxy Statement. See section entitled "Ratification of Appointment of Independent Auditors—Independent Auditor Fee Information" in the Proxy Statement.

        Except for the information incorporated by the references in Items 10, 11, 12, 13 and 14 of this 10-K, our definitive Proxy Statement is not deemed filed as part of this 10-K.

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)

1.    Index to Consolidated Financial Statements

	Page Number
Report of Ernst & Young LLP, Independent Auditors	F-1
Independent Auditors' Report	F-2
Consolidated Balance Sheets at December 31, 2003 and 2002	F-3 – F-4
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2003	F-5 – F-6
Consolidated Statements of Comprehensive Income for each of the three years in the period ended December 31, 2003	F-7
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2003	F-8 – F-9
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2003	F-10 – F-11
Notes to Consolidated Financial Statements	F-12 – F-73

2.

Index to Financial Statement Schedules

	Page Number
II Valuation and Qualifying Accounts and Reserves	F-74

        We omitted all other schedules because those schedules are not applicable, not required or because the required information is included in the Consolidated Financial Statements or accompanying notes.

(b)

Reports on Form 8-K

        On October 29, 2003, Chiron filed a Current Report on Form 8-K, furnishing under Item 12, Chiron's preliminary results for its third quarter ended September 30, 2003, via a press release.

(c)

Exhibits

Exhibit Number	Exhibit
3.01	Restated Certificate of Incorporation of Chiron, as filed with the Office of the Secretary of State of Delaware on August 17, 1987, incorporated by reference to Exhibit 3.01 of Chiron's report on Form 10-K for fiscal year 1996.
3.02	Certificate of Amendment of Restated Certificate of Incorporation of Chiron, 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 Chiron's report on Form 10-K for fiscal year 1996.
3.03	Certificate of Amendment of Restated Certificate of Incorporation of Chiron, as filed with the Office of the Secretary of State of Delaware on May 22, 1996, incorporated by reference to Exhibit 3.04 of Chiron's report on Form 10-Q for the period ended June 30, 1996.
3.04	Bylaws of Chiron, as amended and restated.

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4.01	Indenture between Chiron and State Street Bank and Trust Company, dated as of June 12, 2001, incorporated by reference to Exhibit 4.01 of Chiron's report on Form 10-Q for the period ended June 30, 2001.
4.02	Registration Rights Agreement between Chiron and Merrill Lynch & Co., Inc., and Merrill Lynch, Pierce, Fenner & Smith, Incorporated, incorporated by reference to Exhibit 4.02 of Chiron's report on Form 10-Q for the period ended June 30, 2001.
4.03	Form of Liquid Yield Option Note™ due 2031 (Zero Coupon—Senior) (included as exhibits A-1 and A-2 to the Indenture filed as Exhibit 4.01 to Chiron's report on Form 10-Q for the period ended June 30, 2001), incorporated by reference to Exhibit 4.03 of Chiron's report on Form 10-Q for the period ended June 30, 2001.
4.04	Indenture between Chiron and U.S. Bank National Association, as trustee, dated as of July 30, 2003, incorporated by reference to Exhibit 4.1 of Chiron's registration statement on Form-3 filed with the Commission on September 23, 2003.
4.05	Registration Rights Agreement dated as of July 30, 2003, between Chiron and Morgan Stanley & Co., Goldman, Sachs & Co., Banc of America Securities LLC and BNP Paribas Securities Corp., incorporated by reference to Exhibit 4.3 of Chiron's registration statement on Form-3 filed with the Commission on September 23, 2003.
4.06	Form of Convertible Debentures (included in Exhibit 4.04), incorporated by reference to Exhibit 4.2 of Chiron's registration statement on Form-3 filed with the Commission on September 23, 2003.
4.07	Reserved
10.001	Purchase Agreement between BNP Leasing Corporation and Chiron, dated June 28, 1996, incorporated by reference to Exhibit 10.90 of Chiron's report on Form 10-Q for the period ended June 30, 1996.
10.002	Lease Agreement between BNP Leasing Corporation and Chiron, dated June 28, 1996, incorporated by reference to Exhibit 10.91 of Chiron's report on Form 10-Q for the period ended June 30, 1996.
10.003	Ground Lease between BNP Leasing Corporation and Chiron, dated June 28, 1996, incorporated by reference to Exhibit 10.92 of Chiron's report on Form 10-Q for the period ended June 30, 1996.
10.004	Second Amendment between BNP Paribas Leasing Corporation, a Delaware corporation (as successor in interest to BNP Leasing Corporation) ("BNPLC"), and Chiron, dated July 1, 2003, incorporated by reference to Exhibit 10.004 of Chiron's report on Form 10-Q for the period ended June 30, 2003.
10.005	Agreement for Lease dated effective December 23, 2003, between Intercity Pharma Limited, as developer, and Evans Vaccines Limited, as tenant. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission.") .
10.006	through 10.099 Reserved

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10.101	Revolving Credit Agreement, dated as of February 27, 1998, between Chiron and Bank of America National Trust and Savings Association, incorporated by reference to Exhibit 10.101 of Chiron's report on Form 10-K for fiscal year 1997.
10.102	Amended and Restated Revolving Credit Agreement, dated as of August 13, 2002, by and between Chiron and Bank of America, N.A., and exhibits thereto, incorporated by reference to Exhibit 10.102 of Chiron's report on Form 10-Q for September 30, 2002.
10.103	Reserved
10.104	Stock Purchase and Warrant Agreement dated May 9, 1989, between Cetus Corporation and Hoffmann-La Roche Inc. (initially filed as Exhibit 10.36 of Chiron's report on Form 10-Q for the period ended September 30, 1994), incorporated by reference to Exhibit 10.104 of Chiron's report on Form 10-Q for the period ended June 30, 1999.
10.105	Letter Agreement, dated as of December 12, 1991, relating to Stock Purchase and Warrant Agreement between Chiron and Hoffmann-La Roche Inc., incorporated by reference to Exhibit 10.51 of Chiron's report on Form 10-K for fiscal year 1996.
10.106	through 10.199 Reserved
10.201	Agreement between Chiron and Ortho Diagnostic Systems, Inc., a New Jersey corporation, dated August 17, 1989, and Amendment to Collaboration Agreement between Ortho Diagnostic Systems, Inc. and Chiron, dated December 22, 1989 (with certain confidential information deleted), (initially filed as Exhibit 10.29 to Chiron's report on Form 10-K for fiscal year 1989, and refiled as Exhibit 10.14 of Chiron's report on Form 10-Q for the period ended September 30, 1994), incorporated by reference to Exhibit 10.201 of Chiron's report on Form 10-Q for the period ended March 31, 1999.
10.202	License and Supply Agreement between Ortho Diagnostic Systems, Inc., a New Jersey corporation, Chiron and Abbott Laboratories, an Illinois corporation, dated August 17, 1989 (with certain confidential information deleted) (initially filed as Exhibit 10.31 to Chiron's report on Form 10-K for fiscal year 1989, and refiled as Exhibit 10.15 of Chiron's report on Form 10-Q for the quarter ended June 30, 1994), incorporated by reference to Exhibit 10.202 of Chiron's report on Form 10-Q for the period ended March 31, 1999.
10.203	Regulatory Filing, Development and Supply Agreement between Chiron, Cetus Oncology Corporation, a wholly-owned subsidiary of Chiron, and Schering AG, a German company, dated as of May 10, 1993 (initially filed as Exhibit 10.50 to Chiron's report on Form 10-Q for period ended September 30, 1993), incorporated by reference to Exhibit 10.203 of Chiron's report on Form 10-K for fiscal year 1998. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission.")
10.204	Letter Agreement dated December 30, 1993 by and between Chiron and Schering AG, a German company (initially filed as Exhibit 10.51 to Chiron's report on Form 10-K for fiscal year 1993), incorporated by reference to Exhibit 10.204 of Chiron's report on Form 10-K for fiscal year 1998. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential portions of material have been omitted and filed separately with the Securities and Exchange Commission.")

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10.205	Amendment Agreement (HDS Fees and Deeply Discounted Vials) dated as of September 23, 1997 between Chiron and Schering Aktiengesellschaft, incorporated by reference to Exhibit 10.205 of Chiron's report on Form 10-K for fiscal year 1997. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.206	Agreement between Chiron and Cephalon, Inc. dated as of January 7, 1994, and Letter Agreements between Chiron and Cephalon dated January 13, 1995 and May 23, 1995 (initially filed as Exhibit 10.85 to Chiron's report on Form 10-K for fiscal year 1995), incorporated by reference to Exhibit 10.206 of Chiron's report on Form 10-Q for period ended March 31, 1999. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.207	Letter Agreement dated as of December 4, 1997, between Chiron and Ortho Pharmaceutical Corporation and Ortho Biotech, Inc., incorporated by reference to Exhibit 10.207 of Chiron's report on Form 10-K for fiscal year 1997. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.208	Contract Manufacturing Agreement dated as of March 17, 2000, between Chiron S.p.A. and SynCo Bio Partners B.V., incorporated by reference to Exhibit 10.208 of Chiron's report on Form 10-Q for the period ended June 30, 2000.
10.209	Second Amendment Agreement dated as of June 15, 2001, between Chiron and Schering Aktiengesellschaft, incorporated by reference to Exhibit 10.209 of Chiron's report on Form 10-Q for the period ended June 30, 2001. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.210	Contract Manufacturing Agreement dated as of July 26, 2001, between Chiron S.p.A. and SynCo Bio Partners B.V., incorporated by reference to Exhibit 10.210 of Chiron's report on Form 10-Q for the period ended September 30, 2001. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.211	Side Letter Agreement dated as of December 20, 2002, between Chiron and Schering Berlin, Inc., incorporated by reference to Exhibit 10.211 of Chiron's report on Form 10-Q for the period ended March 31, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)

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10.212	Contract Manufacturing Agreement dated as of June 12, 2003 between Chiron S.r.l., Chiron Behring GmbH & Co., and SynCo Bio Partners B.V., incorporated by reference to Exhibit 10.212 of Chiron's report on Form 10-Q for the period ended June 30, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.213	FDA Compliance Agreement dated as of June 12, 2003 between Chiron S.r.l, Chiron Behring GmbH & Co and SynCo Bio Partners B.V., incorporated by reference to Exhibit 10.213 of Chiron's report on Form 10-Q for the period ended June 30, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.214	Through 10.299 Reserved
10.301	Settlement Agreement on Purified IL-2, made as of April 14, 1995, by and between Cetus Oncology Corporation, dba Chiron Therapeutics, a Delaware corporation, and Takeda Chemical Industries, Ltd., a Japanese corporation, incorporated by reference to Exhibit 10.74 of the Chiron's report on Form 10-Q for the period ended July 2, 1995. (We have omitted certain information from the Agreement pursuant to our request for confidential treatment under Rule 24b-2.)
10.302	Agreement, effective as of December 21, 1988, by and between Hoffmann- La Roche Inc., a New Jersey corporation, and Cetus Corporation, incorporated by reference to Exhibit 10.70 of Chiron's report on Form 10-Q for the period ended April 2, 1995. (We have omitted certain information from the Agreement pursuant to our request for confidential treatment under Rule 24b-2.)
10.303	Agreement, effective as of December 21, 1988, by and among F. Hoffmann- La Roche Ltd., a Swiss corporation, Cetus Corporation, and EuroCetus International, B.V., a Netherlands Antilles corporation, incorporated by reference to Exhibit 10.71 of Chiron's report on Form 10-Q for the period ended April 2, 1995. (We have omitted certain information from the Agreement pursuant to our request for confidential treatment under Rule 24b-2.)
10.304	License Agreement made and entered into December 1, 1987, by and between Sloan Kettering Institute for Cancer Research, a not-for-profit New York corporation, and Cetus Corporation, incorporated by reference to Exhibit 10.75 of Chiron's report on Form 10-Q for the period ended July 2, 1995. (We have omitted certain information from the Agreement pursuant to our request for confidential treatment under Rule 24b-2.)
10.305	Cross-License Agreement dated as of November 30, 1998, between Chiron and Chiron Diagnostics Corporation, incorporated by reference to Exhibit 10.311 of Chiron's current report on Form 8-K dated November 30, 1998. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")

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10.306	HCV Probe License and Option Agreement dated September 26, 1999, between Abbott Laboratories, an Illinois corporation, and Chiron, incorporated by reference to Exhibit 10.306 of Chiron's report on Form 10-Q for the period ended September 30, 1999. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.307	HCV Probe License Agreement dated October 10, 2000, between Chiron, F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.307 of Chiron's report on Form 10-Q for the period ended September 30, 2000. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.308	HIV Probe License Agreement dated October 10, 2000, between Chiron, F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.308 of Chiron's report on Form 10-Q for the period ended September 30, 2000. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.309	Blood Screening HCV/HIV Probe License Agreement dated October 10, 2000, between Chiron, F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.309 of Chiron's report on Form 10-Q for the period ended September 30, 2000. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.310	License Agreement dated January 1, 1994, between Children's Hospital and Medical Center and PathoGenesis Corporation, initially filed as Exhibit 10.13 to PathoGenesis Corporation's Registration Statement on Form S-1 Registration No. 33-97070. (PathoGenesis Corporation omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to a request by PathoGenesis Corporation for confidential treatment under Rule 24b-2. Brackets denote such omissions.)
10.311	Agreement with Gen-Probe Incorporated dated June 11, 1998, incorporated by reference to Exhibit 10.311 of Chiron's Form 10-K for fiscal year 2000. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.") (We have omitted certain information from the Agreement relating to rights and obligations assigned by Chiron to unrelated third party subsequent to the execution of Agreement. We have identified the omitted information by the following statement: "Provision Assigned.")

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10.312	Addendum to Agreement with Gen-Probe Incorporated dated June 11, 1998, incorporated by reference to Exhibit 10.312 of Chiron's Form 10-K for fiscal year 2000. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.") (We have omitted certain information from the Agreement relating to rights and obligations assigned by Chiron to unrelated third party subsequent to the execution of Agreement. We have identified the omitted information by the following statement: "Provision Assigned.")
10.313	Amendment to Agreement with Gen-Probe Incorporated dated December 7, 1999, incorporated by reference to Exhibit 10.313 of Chiron's Form 10-K for fiscal year 2000. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.") (We have omitted certain information from the Agreement relating to rights and obligations assigned by Chiron to unrelated third party subsequent to the execution of Agreement. We have identified the omitted information by the following statement: "Provision Assigned.")
10.314	Amendment No. 2 to Agreement with Gen-Probe Incorporated dated February 1, 2000, incorporated by reference to Exhibit 10.314 of Chiron's report on Form 10-K for fiscal year 2003. (We have omitted certain information from the Agreement relating to rights and obligations assigned by Chiron to unrelated third party subsequent to the execution of Agreement. We have identified the omitted information by the following statement: "Provision Assigned.")
10.315	Blood Screening HCV Probe License Agreement dated effective as of January 1, 2001, between Chiron, F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.315 of Chiron's report on Form 10-Q for the period ended June 30, 2001. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.316	Blood Screening HIV Probe License Agreement dated effective as of January 1, 2001, between Chiron, F. Hoffmann-La Roche Ltd. and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.315 of Chiron's report on Form 10-Q for the period ended June 30, 2001. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.317	Association Agreement Regarding the Sale and Servicing of Blood Screening Products, dated as of May 1, 2002, between America's Blood Centers and Chiron, and Form of Member Supplement, incorporated by reference to Exhibit 10.317 of Chiron's report on Form 10-Q for the period ended June 30, 2002. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)

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10.318	Amendment No. 3 to Agreement with Gen-Probe Incorporated entered into effective April 1, 2002, incorporated by reference to Exhibit 10.318 of Chiron's report on Form 10-Q for the period ended September 30, 2002. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.319	Sale and Servicing Agreement made effective as of August 1, 2002, between The American National Red Cross and Chiron, incorporated by reference to Exhibit 10.319 of Chiron's report on Form 10-K for fiscal 2002. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.320	Amendment No. 4 to Agreement with Gen-Probe Incorporated entered into effective March 5, 2003, incorporated by reference to Exhibit 10.320 of Chiron's report on Form 10-Q for the period ended March 31, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.321	Blood Screening HCV Probe License Agreement-European Union dated effective as of July 1, 2003, between Chiron, F. Hoffmann-La Roche Ltd., and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.321 of Chiron's report on Form 10-Q for the period ended June 30, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.322	Blood Screening HIV Probe License Agreement-European Union dated effective as of July 1, 2003, between Chiron, F. Hoffmann-La Roche Ltd., and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.322 of Chiron's report on Form 10-Q for the period ended June 30, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.323	HCV Probe License and Option Agreement-European Union dated effective as of July 1, 2003, between Chiron, F. Hoffmann-La Roche Ltd., and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.323 of Chiron's report on Form 10-Q for the period ended June 30, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.324	HIV Probe License and Option Agreement-European Union dated effective as of July 1, 2003, between Chiron, F. Hoffmann-La Roche Ltd., and Roche Molecular Systems, Inc., incorporated by reference to Exhibit 10.324 of Chiron's report on Form 10-Q for the period ended June 30, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)

86

10.325	Agreement, dated as of July 1, 2003, between The American National Red Cross and Chiron, incorporated by reference to Exhibit 10.325 of Chiron's report on Form 10-Q for the period ended September 30, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.326	WNV Association Agreement, dated as of July 1, 2003, between America's Blood Centers and Chiron, and Form of Member Supplement, incorporated by reference to Exhibit 10.326 of Chiron's report on Form 10-Q for the period ended September 30, 2003. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.327	Amendment No. 5 to Agreement with Gen-Probe Incorporated entered into effective as of January 1, 2004.
10.328	Future Blood Screening Assay—West Nile Virus Addendum dated October 21, 2003, amending Agreement entered into as of June 11, 1998 by and between Gen-Probe Incorporated and Chiron. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.329	Future Blood Screening Assay—Ultrios Addendum dated March 24, 2003 amending Agreement entered into as of June 11, 1998 by and between Gen-Probe Incorporated and Chiron. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested".)
10.330	Through 10.399 Reserved
10.401	Stock Purchase Agreement, dated as of October 21, 1997, between Bausch & Lomb Incorporated and Chiron, incorporated by reference to Exhibit 99.1 of Chiron's current report on Form 8-K dated January 12, 1998.
10.402	Stock Purchase Agreement, dated as of September 17, 1998, among Bayer Corporation, Chiron and Chiron Diagnostics Corporation, and Exhibits thereto, incorporated by reference to Exhibit 10.402 of Chiron's report on Form 10-Q for the period ended September 27, 1998. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.403	Asset Transfer Agreement dated November 30, 1998, among Chiron, Chiron Diagnostics Corporation and Bayer Corporation, incorporated by reference to Exhibit 10.403 of Chiron's current report on Form 8-K dated November 30, 1998.
10.404	Agreement and Plan of Merger, dated as of January 6, 2002, among Chiron, Manon Acquisition Corp. and Matrix Pharmaceutical, Inc., incorporated by reference to Exhibit (d)(1) of Chiron's Schedule TO-T No. 00542277, filed with the Securities and Exchange Commission on January 14, 2002.

87

10.405	Through 10.499 Reserved
10.501	Chiron 1991 Stock Option Plan, as amended and restated, incorporated by reference to Exhibit 10.501 of Chiron's report on Form 10-Q for the period ended June 30, 2003.*
10.502	Form of Stock Option Agreement, and Addendum to Stock Option Agreement (Executives), Chiron 1991 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.502 of Chiron's report on Form 10-K for fiscal year 2001.*
10.503	Forms of Stock Option Agreements, Chiron 1991 Stock Option Plan, as amended, for Non-Employee Directors of Chiron, incorporated by reference to Exhibit 10.503 of Chiron's report on Form 10-Q for the period ended June 30, 2002.*
10.504	Form of Automatic Share Right Agreement for Executive Officers, Chiron 1991 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.504 of Chiron's report on Form 10-K for fiscal year 2001.*
10.505	Form of Amendment Letter to Automatic Share Rights Letter Agreement for Non-Employee Directors of Chiron, Chiron 1991 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.505 of Chiron's report on Form 10-Q for the period ended June 30, 2002.*
10.506	Form of Amendment Letter to Automatic Stock Option Agreement for Non-Employee Directors of Chiron, Chiron 1991 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.506 of Chiron's report on Form 10-Q for the period ended June 30, 2002.*
10.507	Chiron Executive Officer Severance Plan.*
10.508	Reserved.
10.509	Description of Chiron's 2003 Executive Officers Variable Compensation Program.*
10.510	Form of Performance Unit Agreement, Chiron 1991 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.94 of Chiron's report on Form 10-K for fiscal year 1996.*
10.511	Audit Committee Charter, incorporated by reference to Exhibit 10.511 of Chiron's report on Form 10-K for fiscal year 2003.
10.512	Change-in-Control Severance Plan, incorporated by reference to Exhibit 10.512 to Chiron's report on Form 10-Q for the period ended March 31, 2001.*
10.513	Form of Performance Stock Option Agreement for Executive Officers, Chiron 1991 Stock Option Plan, as amended and restated, incorporated by reference to Exhibit 10.513 of Chiron's report on Form 10-K for fiscal year 2001.*
10.514	Form of Amendment Letter to Share Rights Letter Agreement for Executive Officers, Chiron 1991 Stock Option Plan, as amended and restated, incorporated by reference to Exhibit 10.514 of Chiron's report on Form 10-K for fiscal year 2001.*
10.515	Form of Amendment Letter to Stock Option Agreement (Special Executive Form) for Executive Officers, Chiron 1991 Stock Option Plan, as amended and restated, incorporated by reference to Exhibit 10.515 of Chiron's report on Form 10-K for fiscal year 2001.*
10.516	Compensation Committee Charter, incorporated by reference to Exhibit 10.319 of Chiron's report on Form 10-K for fiscal year 2002.

88

10.517	Chiron Supplemental Executive Retirement Plan, as amended and restated effective March 1, 2003, incorporated by reference to Exhibit 10.517 of Chiron's report on Form 10-Q for the period ended March 31, 2003.*
10.518	Nominating and Corporate Governance Committee Charter, incorporated by reference to Exhibit 10. 518 of Chiron's report on Form 10-Q for the period ended June 30, 2003.
10.519	Corporate Governance Guidelines, incorporated by reference to Exhibit 10. 519 of Chiron's report on Form 10-Q for the period ended September 30, 2003.
10.520	Through 10.599 Reserved
10.601	Indemnification Agreement between Chiron and Dr. William J. Rutter, dated as of February 12, 1987 (which form of agreement is used for each member of Chiron's Board of Directors) (initially filed as Exhibit 10.21 of Chiron's report on Form 10-Q for the period ended September 30, 1994), incorporated by reference to Exhibit 10.601 of Chiron's report on Form 10-Q for the period ended June 30, 1999.
10.602	Supplemental Benefits Agreement, dated July 21, 1989, between Chiron and Dr. William J. Rutter (initially filed as Exhibit 10.27 of Chiron's report on Form 10-Q for the period ended September 30, 1994), incorporated by reference to Exhibit 10.602 of Chiron's report on Form 10-Q for the period ended June 30, 1999.*
10.603	Letter Agreement dated September 26, 1990 between Chiron and William G. Green (initially filed as Exhibit 10.41 of Chiron's report on Form 10-K for fiscal year 1992), incorporated by reference to Exhibit 10.603 of Chiron's report on Form 10-K for fiscal year 1998.*
10.604	Letter Agreements dated September 11, 1992, July 15, 1994 and September 14, 1994 between Chiron and Lewis T. Williams (initially filed as Exhibit 10.54 of Chiron's report on Form 10-Q for the period ended September 30, 1994), incorporated by reference to Exhibit 10.604 of Chiron's report on Form 10-Q for the period ended June 30, 1999. *
10.605	Letter Agreement dated January 27, 1998, between Chiron and Lewis T. Williams, incorporated by reference to Exhibit 10.605 of Chiron's report on Form 10-K for fiscal year 1997
10.606	Letter Agreement dated December 18, 2001, between Chiron and Lewis T. Williams, incorporated by reference to Exhibit 10.606 of Chiron's report on Form 10-K for fiscal year 2001.*
10.607	Through 10.610 Reserved
10.611	Letter Agreement dated March 18, 1998 between Chiron and Seán P. Lance, incorporated by reference to Exhibit 10.611 of Chiron's report on Form 10-K for fiscal year 1997.*
10.612	Amended and Restated Promissory Note dated as of August 7, 1998, executed by Seán P. Lance for the benefit of Chiron, incorporated by reference to Exhibit 10.612 of Chiron's report on Form 10-K for fiscal year 1998.*
10.613	Letter Agreement dated March 19, 1998 between Chiron and James R. Sulat, incorporated by reference to Exhibit 10.612 of Chiron's report on Form 10-K for fiscal year 1997.*
10.614	Letter Agreement dated February 20, 2001 between Chiron and Lewis T. Williams, incorporated by reference to Exhibit 10.614 of Chiron's report on Form 10-K for fiscal year 2000.*

89

10.615	Consulting Agreement dated February 25, 2000, between Chiron and Dr. Edward E. Penhoet, incorporated by reference to Exhibit 10.615 of Chiron's report on Form 10-K for fiscal year 1999.*
10.616	Consulting Agreement dated February 25, 2000, between Chiron and Dr. William J. Rutter, incorporated by reference to Exhibit 10.616 of Chiron's report on Form 10-K for fiscal year 1999.*
10.617	Reserved
10.618	Amendment dated February 14, 2001 to Consulting Agreement dated February 25, 2000, between Chiron and Dr. William J. Rutter, incorporated by reference to Exhibit 10.618 of Chiron's report on Form 10-K for fiscal year 2000.*
10.619	Amendment dated March 1, 2002 to Consulting Agreement dated February 25, 2000, between Chiron and Dr. William J. Rutter, incorporated by reference to Exhibit 10.619 of Chiron's report on Form 10-K for fiscal year 2001.*
10.620	Letter Agreement dated August 1, 2001, between Chiron and Craig A. Wheeler, incorporated by reference to Exhibit 10.620 of Chiron's report on Form 10-K for fiscal year 2003.*
10.621	Letter Agreement dated March 19, 2003, between Chiron and Howard H. Pien, incorporated by reference to Exhibit 10.621 of Chiron's report on Form 10-Q for the period ended March 31, 2003.*
10.622	Letter Agreement dated February 16, 2001, between Chiron and John A. Lambert, incorporated by reference to Exhibit 10.622 of Chiron's report on Form 10-Q for the period ended March 31, 2003.*
10.623	Letter agreement dated July 1, 2003, between Chiron and John A. Lambert.*
10.624	Letter Agreement dated August 12, 2003, between Chiron and Craig A. Wheeler, incorporated by reference to Exhibit 10.624 of Chiron's report on Form 10-Q for the period ended September 30, 2003.*
10.625	Letter agreement dated January 26, 2004 between Chiron and John A. Lambert.*
10.626	Through 10.699 Reserved
10.701	Investment Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.54 of the Chiron's current report on Form 8-K dated November 20, 1994), incorporated by reference to Exhibit 10.701 of Chiron's report on Form 10-Q for the period ended June 30, 1999.
10.702	Governance Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy Corporation and Chiron Corporation (initially filed as Exhibit 10.55 of Chiron's current report on Form 8-K dated November 20, 1994), incorporated by reference to Exhibit 10.702 of Chiron's report on Form 10-Q for the period ended June 30, 1999.
10.703	Subscription Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.56 of Chiron's current report on Form 8-K dated November 20, 1994), incorporated by reference to Exhibit 10.703 of Chiron's report on Form 10-Q for the period ended June 30, 1999.

90

10.704	Cooperation and Collaboration Agreement dated as of November 20, 1994, between Ciba-Geigy Limited and Chiron Corporation (initially filed as Exhibit 10.57 of Chiron's current report on Form 8-K dated November 20, 1994), incorporated by reference to Exhibit 10.704 of Chiron's report on Form 10-Q for the period ended June 30, 1999.
10.705	Registration Rights Agreement dated as of November 20, 1994 between Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.58 of Chiron's current report on Form 8-K dated November 20, 1994), incorporated by reference to Exhibit 10.705 of Chiron's report on Form 10-Q for the period ended June 30, 1999.
10.706	Market Price Option Agreement dated as of November 20, 1994 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.59 of Chiron's current report on Form 8-K dated November 20, 1994), incorporated by reference to Exhibit 10.706 of Chiron's report on Form 10-Q for the period ended June 30, 1999.
10.707	Amendment dated as of January 3, 1995 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.60 of Chiron's current report on Form 8-K dated January 4, 1995), incorporated by reference to Exhibit 10.707 of Chiron's report on Form 10-Q for the period ended September 30, 1999.
10.708	Supplemental Agreement dated as of January 3, 1995 among Ciba-Geigy Limited, Ciba-Geigy Corporation, Ciba Biotech Partnership, Inc. and Chiron Corporation (initially filed as Exhibit 10.61 of Chiron's current report on Form 8-K dated January 4, 1995), incorporated by reference to Exhibit 10.708 of Chiron's report on Form 10-Q for the period ended September 30, 1999.
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 Chiron Corporation, (initially filed as Exhibit 10.62 of Chiron's current report on Form 8-K dated January 4, 1995), incorporated by reference to Exhibit 10.709 of Chiron's report on Form 10-Q for the period ended September 30, 1999.*
10.710	Agreement, dated November 27, 1996, between Ciba-Geigy Limited and Chiron, incorporated by reference to Exhibit 10.92 of Chiron's current report on Form 8-K filed with the Commission on December 17, 1996.
10.711	Amendment dated March 26, 1997, to Agreement dated November 27, 1996, between Novartis Pharma AG and Chiron, incorporated by reference to Exhibit 10.44 of Chiron's report on Form 10-Q for the period ended March 30, 1997.
10.712	Letter Agreement dated December 19, 1997, between Novartis Pharma AG and Chiron, incorporated by reference to Exhibit 10.712 of Chiron's report on Form 10-K for fiscal year 1997.
10.713	Letter Agreement dated December 24, 1997, between Novartis Corporation and Chiron, incorporated by reference to Exhibit 10.713 of Chiron's report on Form 10-K for fiscal year 1997. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")

91

10.714	Letter Agreement, dated May 6, 1996, as to consent to assignment of contracts to Novartis Limited, among the Registrant, Ciba-Geigy Limited, Ciba-Geigy Corporation and Ciba Biotech Partnership, Inc., incorporated by reference to Exhibit 10.43 of Chiron's report on Form 10-K for fiscal year 1996.
10.715	Letter Agreement, dated December 19, 1996, regarding compensation paid by Chiron for director services performed by employees of Ciba-Geigy Limited, incorporated by reference to Exhibit 10.44 of Chiron's report on Form 10-K for fiscal year 1996.*
10.716	Letter Agreement dated September 30, 1999, between Novartis Corporation and Chiron, incorporated by reference to Exhibit 10.716 of Chiron's report on Form 10-Q for the period ended September 30, 1999. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.717	Chiron Funding L.L.C. Limited Liability Company Agreement, entered into and effective as of December 28, 1995, among Chiron, Chiron Biocine Company and Biocine S.p.A. and Ciba-Geigy Corporation, incorporated by reference to Exhibit 10.80 of Chiron's report on Form 10-K for fiscal year 1995. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.718	Agreement between Ciba-Geigy Limited and Chiron made November 15, 1995, incorporated by reference to Exhibit 10.81 of Chiron's report on Form 10-K for fiscal year 1995. (We have omitted certain information from the Agreement and filed it separately with the Securities and Exchange Commission pursuant to our request for confidential treatment under Rule 24b-2. We have identified the omitted confidential information by the following statement: "Confidential Treatment Requested.")
10.719	Reimbursement Agreement dated as of March 24, 1995, between Ciba-Geigy Limited, a Swiss corporation, and Chiron, incorporated by reference to Exhibit 10.76 of Chiron's report on Form 10-Q for the period ended July 2, 1995.
10.720	Reimbursement Agreement, dated as of June 28, 1996, between Ciba-Geigy Limited, a Swiss corporation, and Chiron, incorporated by reference to Exhibit 10.94 of Chiron's report on Form 10-Q for the period ended June 30, 1996.
10.721	Reimbursement Agreement, dated as of July 12, 1996, between Ciba-Geigy Limited, a Swiss corporation, and Chiron, incorporated by reference to Exhibit 10.93 of Chiron's report on Form 10-Q for the period ended June 30, 1996.
10.722	Letter Agreement dated December 31, 1999 between Novartis Corporation and Chiron, incorporated by reference to Exhibit 10.44 of Chiron's report on Form 10-K for fiscal year 1999.*
10.723	Letter Agreement dated December 7, 2000, between Novartis Corporation and Chiron, incorporated by reference to Exhibit 10.723 of Chiron's report on Form 10-K for fiscal year 2000.
10.724	Amendment dated May 18, 2001 to Governance Agreement dated as of November 20, 1994 among Chiron and Novartis AG as successor-in-interest to Ciba-Geigy Limited, incorporated by reference to Exhibit 10.319 of Chiron's report on Form 10-K for fiscal 2003.

92

10.725	Amendment dated October 21, 2002 to Governance Agreement dated as of November 20, 1994, between Chiron and Novartis AG as successor-in-interest to Ciba-Geigy Limited, incorporated by reference to Exhibit 10.319 of Chiron's report on Form 10-K for fiscal 2002.
10.726	Amendment dated February 21, 2003 to Governance Agreement dated as of November 20, 1994, between Chiron and Novartis AG, as successor-in-interest to Ciba-Geigy Limited, incorporated by reference to Exhibit 10.727 of Chiron's report on Form 10-Q for the period ended March 31, 2003.*
10.727	Amendment dated March 11, 2003 to Governance Agreement dated as of November 20, 1994, between Chiron and Novartis AG, as successor-in-interest to Ciba-Geigy Limited, incorporated by reference to Exhibit 10.728 of Chiron's report on Form 10-Q for the period ended March 31, 2003.*
10.728	Amendment dated May 16, 2003 to Governance Agreement dated as of November 20, 1994, between Chiron and Novartis AG, as successor-in-interest to Ciba-Geigy Limited, incorporated by reference to Exhibit 10.528 of Chiron's report on Form 10-Q for the period ended June 30, 2003.
10.729	Amendment dated December 5, 2003 to Governance Agreement dated as of November 20, 1994, between Chiron and Novartis AG, as successor-in-interest to Ciba-Geigy Limited.
10.730	Through 10.799 Reserved
10.801	Through 10.899 Reserved
16	See Item 304 of Reg. S-K (KPMG LLP was dismissed, effective 3/5/2002; and that was within Chiron's 2 most recent fiscal years; Ernst & Young LLP was appointed to serve as independent auditors for Fiscal year commencing 1/1/2002.
21	List of Chiron's Subsidiaries.
23.1	Consent of Ernst & Young LLP, Independent Auditors.
23.2	Consent of KPMG LLP, Independent Auditors.
24	Power of Attorney. We incorporate the Power of Attorney on pages 94 and 95 by reference.
31.1	Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2	Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*

Management contract, compensatory plan or arrangement.

93

SIGNATURES

        Pursuant to the requirements section 13 or 15(d) of the Securities Exchange Act of 1934, Chiron has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	CHIRON CORPORATION
Date: March 3, 2004	By:	/s/  HOWARD H. PIEN Howard H. Pien President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS:

        That the undersigned officers and directors of Chiron Corporation, a Delaware corporation, do hereby constitute and appoint Howard H. Pien and David V. Smith, and each of them, the lawful attorney and agent or attorneys and agents, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents, and any one of them, determine may be necessary or advisable or required to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules or regulations or requirements of the Securities and Exchange Commission in connection with this Form 10-K Report. Without limiting the generality of the foregoing power and authority, the powers granted include the power and authority to sign the names of the undersigned officers and directors in the capacities indicated below to this Form 10-K report or amendments or supplements thereto, and each of the undersigned hereby ratifies and confirms all that said attorneys and agents or either of them, shall do or cause to be done by virtue hereof. This Power of Attorney may be signed in several counterparts.

        IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his name.

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/  HOWARD H. PIEN Howard H. Pien	President and Chief Executive Officer; Director (Principal Executive Officer)	March 3, 2004
/s/  DAVID V. SMITH David V. Smith	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 3, 2004
/s/  SEÁN P. LANCE Seán P. Lance	Chairman of the Board	March 3, 2004

94

/s/  RAYMUND BREU, PH.D. Raymund Breu, Ph.D.	Director	March 3, 2004
/s/  VAUGHN D. BRYSON Vaughn D. Bryson	Director	March 3, 2004
/s/  LEWIS W. COLEMAN Lewis W. Coleman	Director	March 3, 2004
/s/  PIERRE E. DOUAZE Pierre E. Douaze	Director	March 3, 2004
/s/  J. RICHARD FREDERICKS J. Richard Fredericks	Director	March 3, 2004
/s/  PAUL L. HERRLING, PH.D. Paul L. Herrling, Ph.D.	Director	March 3, 2004
/s/  DENISE M. O'LEARY Denise M. O'Leary	Director	March 3, 2004
/s/  EDWARD E. PENHOET, PH.D. Edward E. Penhoet, Ph.D.	Director	March 3, 2004
/s/  PIETER J. STRIJKERT, PH.D. Pieter J. Strijkert, Ph.D.	Director	March 3, 2004

95

ERNST & YOUNG LLP, INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Chiron Corporation:

        We have audited the accompanying consolidated balance sheets of Chiron Corporation as of December 31, 2003 and 2002, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for the years then ended. Our audits also included the financial statement schedule for the years ended December 31, 2003 and 2002 listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chiron Corporation at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

        As discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets.

	/s/ Ernst & Young LLP
Palo Alto, California January 26, 2004

F-1

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Chiron Corporation:

        We have audited the accompanying consolidated statements of operations, comprehensive income, stockholders' equity and cash flows of Chiron Corporation and subsidiaries (Chiron) for the year ended December 31, 2001. In connection with our audit of the consolidated financial statements, we also have audited the consolidated 2001 financial statement schedule as listed in the accompanying index. These consolidated financial statements and consolidated 2001 financial statement schedule are the responsibility of Chiron's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated 2001 financial statement schedule based on our audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Chiron Corporation and subsidiaries for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related consolidated 2001 financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

San Francisco, California
January 28, 2002

F-2

CHIRON CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

				December 31,
				2003			2002
ASSETS
Current assets:
	Cash and cash equivalents			$	364,270		$	247,950
	Short-term investments in marketable debt securities				174,212			626,130
		Total cash and short-term investments			538,482			874,080
	Accounts receivable, net of allowances of $36,865 in 2003 and $23,543 in 2002:
		Unrelated parties			382,816			278,429
		Related parties			117			196
					382,933			278,625
	Current portion of notes receivable				1,479			718
	Inventories, net of reserves of $35,117 in 2003 and $32,762 in 2002				199,625			146,005
	Assets held for sale				2,992			—
	Current net deferred income tax asset				50,204			38,450
	Derivative financial instruments				9,463			12,006
	Other current assets:
		Unrelated parties			71,913			35,455
		Related parties			558			383
					72,471			35,838
			Total current assets		1,257,649			1,385,722
Noncurrent investments in marketable debt securities					560,292			414,447
Property, plant, equipment and leasehold improvements, at cost:
	Land and buildings				366,275			168,144
	Laboratory, production and office equipment				615,814			418,255
	Leasehold improvements				112,200			93,463
	Construction-in-progress				144,162			74,717
					1,238,451			754,579
	Less accumulated depreciation and amortization				(548,701	)		(381,021	)
		Property, plant, equipment and leasehold improvements, net			689,750			373,558
Purchased technologies, net of accumulated amortization of $95,836 in 2003 and $74,328 in 2002					236,707			257,613
Goodwill					787,587			239,746
Other intangible assets, net of accumulated amortization of $165,530 in 2003 and $105,662 in 2002					486,889			147,089
Investments in equity securities and affiliated companies					121,576			87,167
Equity method investments					953			—
Noncurrent notes receivable					7,500			8,939
Noncurrent derivative financial instruments					7,391			9,007
Other noncurrent assets:
	Unrelated parties				37,092			34,889
	Related parties				1,783			2,167
					38,875			37,056
				$	4,195,169		$	2,960,344

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-3

CHIRON CORPORATION

CONSOLIDATED BALANCE SHEETS (Continued)

(In thousands, except share data)

				December 31,
				2003			2002
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable:
		Unrelated parties		$	101,002		$	57,294
		Related parties			1,199			1,728
					102,201			59,022
	Accrued compensation and related expenses				83,311			59,498
	Short-term borrowings				—			71
	Current portion of capital lease				570			—
	Current portion of unearned revenue				47,873			26,610
	Income taxes payable				15,270			21,883
	Other current liabilities:
		Unrelated parties			187,631			131,552
		Related parties			57			—
					187,688			131,552
			Total current liabilities		436,913			298,636
Long-term debt					926,709			416,954
Capital lease					157,677			—
Noncurrent derivative financial instruments					—			253
Noncurrent net deferred income tax liability					107,496			45,743
Noncurrent unearned revenue					45,564			62,580
Other noncurrent liabilities					69,448			35,813
Minority interest					7,002			5,355
			Total liabilities		1,750,809			865,334
Commitments and contingencies
Put options					—			19,054
Stockholders' equity:
	Preferred stock, $0.01 par value; 5,000,000 shares authorized; none outstanding				—			—
	Common stock, $0.01 par value; 499,500,000 shares authorized; 191,682,000 outstanding in 2003 and 2002				1,917			1,917
	Restricted common stock, $0.01 par value; 500,000 shares authorized; none outstanding				—			—
	Additional paid-in capital				2,503,195			2,445,208
	Deferred stock compensation				(12,871	)		(11,349	)
	Accumulated deficit				(46,634	)		(221,236	)
	Accumulated other comprehensive income				216,302			54,861
	Treasury stock, at cost (4,567,000 shares in 2003 and 4,830,000 shares in 2002)				(217,549	)		(193,445	)
			Total stockholders' equity		2,444,360			2,075,956
				$	4,195,169		$	2,960,344

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-4

CHIRON CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

				Year Ended December 31,
				2003		2002		2001
Revenues:
	Product sales, net:
		Unrelated parties		$	1,345,054	$	909,793	$	769,520
		Related parties			779		4,328		2,366
					1,345,833		914,121		771,886
	Revenues from joint business arrangement				108,298		104,576		84,528
	Collaborative agreement revenues:
		Unrelated parties			18,562		13,417		14,099
		Related parties			—		8,725		31,216
					18,562		22,142		45,315
	Royalty and license fee revenues				250,142		198,816		198,236
	Other revenues:
		Unrelated parties			43,008		36,438		40,702
		Related parties			518		187		—
					43,526		36,625		40,702
			Total revenues		1,766,361		1,276,280		1,140,667
Operating expenses:
	Cost of sales:
		Unrelated parties			566,541		337,816		276,291
		Related parties			5,356		3,992		1,284
					571,897		341,808		277,575
	Research and development:
		Unrelated parties			396,503		323,056		344,415
		Related parties			13,303		2,736		—
					409,806		325,792		344,415
	Selling, general and administrative:
		Unrelated parties			376,683		281,637		251,795
		Related parties			2,207		2,075		822
					378,890		283,712		252,617
	Purchased in-process research and development				45,300		45,181		—
	Amortization expense				56,365		29,857		46,752
	Restructuring and reorganization charges				1,654		—		64
	Other operating expenses				11,376		16,952		19,133
			Total operating expenses		1,475,288		1,043,302		940,556
Income from operations				$	291,073	$	232,978	$	200,111

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-5

CHIRON CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(In thousands, except per share data)

		Year Ended December 31,
		2003			2002			2001
Income from operations		$	291,073		$	232,978		$	200,111
Gain on sale of assets			—			—			2,426
Interest expense			(19,104	)		(12,821	)		(7,507	)
Interest and other income, net:
	Unrelated parties		40,914			48,766			59,599
	Related parties		(2,246	)		(2,404	)		1,315
			38,668			46,362			60,914
Minority interest			(1,753	)		(1,664	)		(1,194	)
Income from continuing operations before income taxes			308,884			264,855			254,750
Provision for income taxes			88,546			83,710			79,992
Income from continuing operations			220,338			181,145			174,758
Gain (loss) from discontinued operations, net of taxes			6,975			(320	)		5,278
Net income		$	227,313		$	180,825		$	180,036
Basic earnings per share:
	Income from continuing operations	$	1.18		$	0.96		$	0.92
	Net income	$	1.22		$	0.96		$	0.95
Diluted earnings per share:
	Income from continuing operations	$	1.15		$	0.94		$	0.90
	Net income	$	1.19		$	0.94		$	0.92

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-6

CHIRON CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

			Year Ended December 31,
			2003			2002			2001
Net income			$	227,313		$	180,825		$	180,036
Other comprehensive income (loss):
	Change in foreign currency translation adjustment during the period, net of tax benefit (provision) of $0, $3,972 and ($5,510) in 2003, 2002 and 2001, respectively			155,782			89,210			(23,425	)
	Unrealized gains (losses) from investments:
		Net unrealized holding gains (losses) arising during the period, net of tax benefit (provision) of $(5,551), $4,556 and $7,045 in 2003, 2002 and 2001, respectively		12,378			(8,765	)		(9,861	)
		Reclassification adjustment for net gains included in income, net of tax provision of $3,654, $2,569 and $3,239 in 2003, 2002 and 2001, respectively		(5,716	)		(4,017	)		(5,236	)
	Net unrealized gains (losses) from investments			6,662			(12,782	)		(15,097	)
	Minimum pension liability adjustment, net of tax (provision) of ($167), ($35) and ($73) in 2003, 2002 and 2001, respectively			(1,003	)		(281	)		(261	)
	Other comprehensive income (loss)			161,441			76,147			(38,783	)
Comprehensive income			$	388,754		$	256,972		$	141,253

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-7

CHIRON CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

	Common Stock												Accumulated Other Comprehensive Income (Loss)			Treasury Stock
				Additional Paid-in Capital			Deferred Stock Compensation			Accumulated Deficit
	Shares	Amount														Shares		Amount			Total
Balances at December 31, 2000	191,682	$	1,917	$	2,418,032		$	(22,986	)	$	(438,967	)	$	17,497		(2,183	)	$	(94,411	)	$	1,881,082
Repurchase of treasury stock	—		—		—			—			—			—		(3,627	)		(171,864	)		(171,864	)
Exercise of stock options	—		—		(583	)		—			(81,344	)		—		3,193			143,547			61,620
Exercise of stock warrant	—		—		—			—			(18,513	)		—		419			18,513			—
Exercise of put options	—		—		(1,548	)		—			—			—		(400	)		(18,586	)		(20,134	)
Premiums from put options	—		—		9,320			—			—			—		—			—			9,320
Temporary equity related to put options	—		—		(13,764	)		—			—			—		—			—			(13,764	)
Tax benefits from employee stock plans	—		—		25,893			—			—			—		—			—			25,893
Employee stock purchase plan	—		—		—			—			(2,209	)		—		257			11,740			9,531
Deferred stock compensation	—		—		3,931			(3,931	)		—			—		—			—			—
Amortization of deferred stock compensation	—		—		—			9,411			—			—		—			—			9,411
Foreign currency translation adjustment	—		—		—			—			—			(23,425	)	—			—			(23,425	)
Net unrealized loss from investments	—		—		—			—			—			(15,097	)	—			—			(15,097	)
Minimum pension liability adjustment	—		—		—			—			—			(261	)	—			—			(261	)
Net income	—		—		—			—			180,036			—		—			—			180,036
Balances at December 31, 2001	191,682	$	1,917	$	2,441,281		$	(17,506	)	$	(360,997	)	$	(21,286	)	(2,341	)	$	(111,061	)	$	1,932,348
Repurchase of treasury stock	—		—		—			—			—			—		(3,837	)		(147,721	)		(147,721	)
Exercise of stock options	—		—		(1,893	)		—			(37,546	)		—		1,354			62,604			23,165
Exercise of put options	—		—		(879	)		—			—			—		(300	)		(10,482	)		(11,361	)
Premiums from put options	—		—		4,249			—			—			—		—			—			4,249
Temporary equity related to put options	—		—		(5,290	)		—			—			—		—			—			(5,290	)
Tax benefits from employee stock plans	—		—		8,677			—			—			—		—			—			8,677
Employee stock purchase plan	—		—		—			—			(3,518	)		—		294			13,215			9,697
Forfeitures of deferred stock compensation	—		—		(7,488	)		7,488			—			—		—			—			—
Deferred stock compensation	—		—		6,551			(6,551	)		—			—		—			—			—
Amortization of deferred stock compensation	—		—		—			5,220			—			—		—			—			5,220
Foreign currency translation adjustment	—		—		—			—			—			89,210		—			—			89,210
Net unrealized loss from investments	—		—		—			—			—			(12,782	)	—			—			(12,782	)
Minimum pension liability adjustment	—		—		—			—			—			(281	)	—			—			(281	)
Net income	—		—		—			—			180,825			—		—			—			180,825
Balances at December 31, 2002	191,682	$	1,917	$	2,445,208		$	(11,349	)	$	(221,236	)	$	54,861		(4,830	)	$	(193,445	)	$	2,075,956

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-8

CHIRON CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)

(In thousands)

	Common Stock												Accumulated Other Comprehensive Income (Loss)			Treasury Stock
				Additional Paid-in Capital			Deferred Stock Compensation			Accumulated Deficit
	Shares	Amount														Shares		Amount			Total
Balances at December 31, 2002	191,682	$	1,917	$	2,445,208		$	(11,349	)	$	(221,236	)	$	54,861		(4,830	)	$	(193,445	)	$	2,075,956
Repurchase of treasury stock	—		—		—			—			—			—		(4,199	)		(202,788	)		(202,788	)
Exercise of stock options	—		—		(4,463	)		—			(49,314	)		—		4,367			174,638			120,861
Exercise of put options	—		—		(328	)		—			—			—		(220	)		(8,999	)		(9,327	)
Premiums from put options	—		—		2,144			—			—			—		—			—			2,144
Temporary equity related to put options	—		—		19,054			—			—			—		—			—			19,054
Tax benefits from employee stock plans	—		—		33,061			—			—			—		—			—			33,061
Employee stock purchase plan	—		—		—			—			(3,397	)		—		315			13,045			9,648
Forfeitures of deferred stock compensation	—		—		(1,319	)		1,319			—			—		—			—			—
Deferred stock compensation	—		—		9,838			(9,838	)		—			—		—			—			—
Amortization of deferred stock compensation	—		—		—			6,997			—			—		—			—			6,997
Foreign currency translation adjustment	—		—		—			—			—			155,782		—			—			155,782
Net unrealized gain from investments	—		—		—			—			—			6,662		—			—			6,662
Minimum pension liability adjustment	—		—		—			—			—			(1,003	)	—			—			(1,003	)
Net income	—		—		—			—			227,313			—		—			—			227,313
Balances at December 31, 2003	191,682	$	1,917	$	2,503,195		$	(12,871	)	$	(46,634	)	$	216,302		(4,567	)	$	(217,549	)	$	2,444,360

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-9

CHIRON CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

				Year Ended December 31,
				2003			2002			2001
Cash flows from operating activities:
	Net income			$	227,313		$	180,825		$	180,036
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			145,723			124,258			115,046
		Amortization of marketable debt securities			8,883			10,152			4,184
		Amortization of deferred stock compensation			6,997			5,220			9,411
		Amortization of discount on Liquid Yield Option Notes			8,330			8,165			4,422
		Amortization of bond issuance costs on Liquid Yield Option Notes and Convertible debentures			4,252			3,344			1,793
		Purchased in-process research and development			45,300			45,181			—
		Gain on sale of assets			—			—			(2,426	)
		(Gain) loss from discontinued operations			(6,975	)		320			(5,278	)
		Net gain on sale of marketable debt securities			(895	)		(339	)		(836	)
		Net gain on sale of equity securities			(9,370	)		(14,323	)		(8,706	)
		Gain on sale of interests in affiliated companies			(2,012	)		(5,433	)		(2,500	)
		Gain on repayment of debt security			—			(1,500	)		—
		Other-than-temporary loss on investments			—			7,525			5,543
		Equity in loss of equity method investments			2,325			2,447			1,269
		Minority interest			1,753			1,664			1,194
		Changes in reserves (accounts receivable allowance, product returns allowance and inventory reserves)			36,466			33,269			37,736
		Deferred income taxes			(14,808	)		(5,555	)		(13,714	)
		Other, net			518			2,240			(8,265	)
Changes, excluding effect of acquisitions and dispositions, to:
		Accounts receivable			(69,956	)		(69,780	)		(30,981	)
		Inventories			31,726			(49,015	)		(13,065	)
		Other current assets			(20,584	)		899			(1,942	)
		Derivative financial instruments			(674	)		533			(3,936	)
		Other noncurrent assets			(3,105	)		(197	)		(15,799	)
		Accounts payable, accrued expenses and income taxes payable			28,168			(39,658	)		(21,073	)
		Current portion of unearned revenue			12,795			(488	)		(21,406	)
		Other current liabilities			(19,134	)		12,107			33,135
		Other noncurrent liabilities			829			16,370			18,152
			Net cash provided by operating activities	$	413,865		$	268,231		$	261,994

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-10

CHIRON CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

			Year Ended December 31,
			2003			2002			2001
Cash flows from investing activities:
	Purchases of investments in marketable debt securities		$	(920,768	)	$	(796,506	)	$	(987,291	)
	Proceeds from sale and maturity of investments in marketable debt securities			1,213,630			723,593			681,601
	Proceeds from notes receivable			750			6,402			6,400
	Capital expenditures			(139,399	)		(105,739	)		(64,878	)
	Proceeds from sales of assets			—			451			8,217
	Proceeds from equity forward contracts			—			5,989			—
	Purchases of equity securities and interests in affiliated companies			(14,240	)		(6,801	)		(14,897	)
	Proceeds from sale of equity securities and interests in affiliated companies			12,646			18,886			15,071
	Cash paid for acquisitions, net of cash acquired			(815,420	)		(58,350	)		(9,854	)
	Other, net			(887	)		(6,092	)		(5,463	)
		Net cash used in investing activities		(663,688	)		(218,167	)		(371,094	)
Cash flows from financing activities:
	Net repayment of short-term borrowings			(2,436	)		(455	)		(619	)
	Repayment of debt and capital leases			(62,454	)		(174	)		(1,350	)
	Proceeds from issuance of Liquid Yield Option Notes			—			—			401,829
	Borrowings from a government agency			1,243			—			—
	Payment of issuance costs on Convertible debentures and Liquid Yield Option Notes			(10,684	)		—			(9,929	)
	Payments to acquire treasury stock			(207,689	)		(155,049	)		(201,046	)
	Proceeds from reissuance of treasury stock			123,625			27,493			65,727
	Proceeds from issuance of Convertible debentures			500,000			—			—
	Proceeds from put options			2,144			5,398			8,171
		Net cash provided by (used in) financing activities		343,749			(122,787	)		262,783
Effect of exchange rate changes on cash and cash equivalents				22,394			—			—
		Net increase (decrease) in cash and cash equivalents		116,320			(72,723	)		153,683
Cash and cash equivalents at beginning of the year				247,950			320,673			166,990
Cash and cash equivalents at end of the year			$	364,270		$	247,950		$	320,673

The accompanying Notes to Consolidated Financial Statements are integral to this statement.

F-11

CHIRON CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003

Note 1—The Company and Summary of Significant Accounting Policies

The Company and Basis of Presentation

        Chiron Corporation is a global pharmaceutical company that develops, manufactures and markets therapeutic products for the prevention and treatment of infectious disease utilizing innovations in biology and chemistry. Chiron participates in three global healthcare markets: (i) blood testing; (ii) adult and pediatric vaccines; and (iii) biopharmaceuticals, with an emphasis on the treatment of cancer and infectious disease. Chiron is applying a broad and integrated scientific approach to the development of innovative products for preventing and treating cancer and infectious disease. This approach is supported by research strengths in therapeutic proteins, small molecules and vaccines.

        On December 29, 1997, Chiron completed the sale of its ophthalmics business, Chiron Vision, to Bausch & Lomb Incorporated, and on November 30, 1998, Chiron completed the sale of its in vitro diagnostics business, Chiron Diagnostics, to Bayer Corporation. Chiron's Consolidated Statements of Operations reflect the reversal of valuation allowances against deferred tax assets that were established at the time of sale, the reversal of retention and severance obligations, the expiration of certain contractual obligations and the final sale of the remaining real estate assets in the gain (loss) from discontinued operations (see Note 4).

        On February 20, 2002, Chiron acquired Matrix Pharmaceutical, Inc., a company that was developing tezacitabine, a drug to treat cancer. Chiron included Matrix Pharmaceutical's operating results, including the seven business days from February 20 to 28, 2002, in its consolidated operating results beginning on March 1, 2002 (see Note 5).

        On July 1, 2002, Chiron completed its acquisition of Pulmopharm GmbH, a distributor of TOBI® tobramycin products in Germany and Austria by purchasing the remaining 80.1% ownership. Previously, Chiron owned 19.9% of Pulmopharm and accounted for the investment under the equity method. Chiron included Pulmopharm's operating results in its consolidated operating results beginning on July 1, 2002 (see Note 5).

        On July 8, 2003, Chiron acquired PowderJect Pharmaceuticals plc, a company based in Oxford, England that develops and commercializes vaccines. Chiron included PowderJect Pharmaceuticals' operating results in its consolidated operating results beginning July 8, 2003 (see Note 5). PowderJect Pharmaceuticals is part of Chiron's vaccines segment.

Principles of Consolidation

        The Consolidated Financial Statements include the accounts of Chiron and its majority-owned subsidiaries. For consolidated majority-owned subsidiaries in which Chiron owns less than 100%, Chiron records minority interest in the Consolidated Financial Statements to account for the ownership interest of the minority owner. Investments in joint ventures, limited partnerships and interests in which Chiron has an equity interest of 50% or less are accounted for using either the equity or cost method. All intercompany accounts and transactions have been eliminated in consolidation.

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        Chiron's most significant consolidated majority-owned subsidiaries and respective ownership percentages are as follows:

Name	Percentage Ownership
Chiron Healthcare Ireland Limited	100	%
31 Corsa Verwaltungsgesellschaft mbH	100	%
Chiron Behring GmbH & Co	100	%
Chiron S.r.l	100	%
Chiron B.V	100	%
Chiron Iberia SL	100	%
Chiron Corporation Limited	100	%
Chiron Investment Corporation	100	%
Chiron GmbH	100	%
Chiron France S.a.s	100	%
Chiron Italia S.r.l	100	%
Chiron Blood Testing S.a.r.l	100	%
PowderJect Pharmaceuticals Limited	100	%
Evans Vaccines Limited	100	%
Chiron Behring Vaccines Private Limited	51	%

        Chiron is a limited partner of several venture capital funds: Burrill Life Sciences Capital Fund, L.P., Forward Ventures V, L.P., TPG Biotechnology Partners, L.P., Forward Venture IV, L.P. and Burrill Biotechnology Capital Fund, L.P. Chiron accounts for these investments under the equity method of accounting pursuant to Emerging Issues Task Force Topic No. D-46 "Accounting for Limited Partnership Investments."

Use of Estimates and Reclassifications

        The preparation of financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to investments; inventories; derivatives; capital leases; intangible assets; goodwill; purchased in-process research and development; product discounts, rebates and returns; bad debts; collaborative, royalty and license arrangements; restructuring; pension and other post-retirement benefits; income taxes; and litigation and other contingencies. Chiron bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.

        Chiron's blood testing segment includes Chiron's one-half share in the pretax operating earnings generated by the joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc., a Johnson & Johnson company. Chiron accounts separately for research and development and manufacturing cost reimbursements and certain product sale revenues received from Ortho-Clinical

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Diagnostics but relating to the joint business contractual arrangement. Chiron's joint business arrangement with Ortho-Clinical Diagnostics is a contractual arrangement and is not a separate and distinct legal entity. Through Chiron's joint business contractual arrangement with Ortho-Clinical Diagnostics, Chiron sells a line of immunodiagnostic tests to detect hepatitis viruses and retroviruses and provides supplemental tests and microplate and chemiluminescent instrument systems to automate test performance and data collection. Prior to the first quarter 2003, Chiron had accounted for revenues relating to Ortho-Clinical Diagnostics' non-U.S. affiliate sales on a one-quarter lag, with an adjustment of the estimate to actual in the subsequent quarter. More current information of Ortho-Clinical Diagnostics' non-U.S. affiliate sales became available in the first quarter 2003, and as a result, Chiron is able to recognize revenues relating to Ortho-Clinical Diagnostics' non-U.S. affiliate sales on a one-month lag. The effect of this change, net of tax, was an increase to net income by $3.2 million for revenues from the joint business contractual arrangement for the year ended December 31, 2003.

        Chiron recognizes a portion of revenue for product sales of Betaseron® interferon beta-1b upon shipment to its marketing partner, and the remainder based on a contractual percentage of sales by its marketing partner. Chiron also earns royalties on the marketing partner's European sales of Betaferon® in those cases where Chiron does not supply the product. Prior to the first quarter 2002, Chiron had accounted for revenues from non-U.S. product sales on a one-quarter lag and royalties as a percentage of forecast received from its marketing partner, with an adjustment of the estimate to actual in the subsequent quarter. More current information of non-U.S. Betaseron® sales became available in 2002, and as a result, Chiron is able to recognize revenues from Betaseron product sales and Betaferon royalties on a current basis. The effect of this change, net of tax, was a decrease in net loss for the first quarter 2002 and an increase in net income for the year ended December 31, 2002, by $3.1 million for product sales and $2.8 million for royalties.

        Chiron currently owns a facility in London, England for international operations. Chiron has committed to a plan to sell this facility and expects to complete the sale of this facility within one year. Chiron is actively marketing this facility, which is available for immediate sale. This facility is classified as "Assets held for sale" in the Consolidated Balance Sheet at December 31, 2003. In anticipation of this facility being classified as held for sale at December 31, 2003, the remaining estimated useful life of this facility was revised. This has resulted in an additional $1.5 million of depreciation expense in 2003.

        Chiron, prior to filing its financial statements on Form 10-K, publicly releases an unaudited condensed balance sheet and statement of operations. Between the date of Chiron's earnings release and the filing of Form 10-K, reclassifications may be required. These reclassifications, when made, have no effect on income from continuing operations, net income or earnings per share.

        Certain previously reported amounts have been reclassified to conform with the current year presentation.

Cash Equivalents, Investments in Marketable Debt Securities and Investments in Equity Securities

        All highly-liquid investments with maturities of three months or less from the date of purchase are considered to be cash equivalents. Cash equivalents and short-term investments in marketable debt securities consist principally of money market instruments, including corporate notes and bonds,

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commercial paper and government agency securities. Noncurrent investments in marketable debt securities consist principally of corporate notes and bonds and government agency securities with maturities greater than one year. The cost of securities sold is based on the specific identification method for debt securities and on the average cost method for equity securities.

        Chiron has classified its investments in debt and equity securities as available-for-sale. Chiron has in the past, and may in the future, classify certain equity securities as trading. Available-for-sale securities are recorded at fair value based upon year-end quoted market prices. Unrealized gains and losses, deemed as temporary in nature, are reported as a separate component of comprehensive income or loss. Trading securities, if any, are recorded at fair value based upon year-end quoted market prices. Unrealized gains and losses on trading securities are included in results of operations.

        Chiron periodically reviews its debt and equity securities by comparing the market value to the carrying value of the security. Impairment, if any, is based on the excess of the carrying value over the market value. If impairment is considered other-than-temporary, the security's cost is written down to market value through earnings. Generally, Chiron believes that an investment is impaired if its market value has been below its carrying value for each trading day in a six-month period. However, in determining whether impairment is considered to be other-than-temporary, Chiron considers all available factors in its evaluation. These factors include but are not limited to (i) whether the issuer of the securities is experiencing depressed and declining earnings in relation to competitors, erosion of market share, and deteriorating financial position, (ii) whether the issuer is experiencing financial difficulties and its market is experiencing difficulties, (iii) ongoing activity in our collaborations with the issuer and (iv) the issuers' prospects for favorable clinical trial results, new product initiatives and new collaborative agreements.

Inventories

        Inventories, net of reserves, are stated at the lower of cost or market using the moving weighted-average cost method. Chiron maintains inventory reserves primarily for product failures, expiration and obsolescence. Inventory that is obsolete (inventory that will no longer be used in the manufacturing process), expired, or in excess of forecasted usage is written down to its market value, if lower than cost.

        Inventories, net of reserves, consisted of the following at December 31:

	2003		2002
	(In thousands)
Finished goods	$	38,640	$	32,697
Work-in-process		105,359		77,232
Raw materials		55,626		36,076
	$	199,625	$	146,005

Derivative Financial Instruments

        Chiron uses various derivatives, such as foreign currency option contracts and foreign currency forward contracts, to reduce foreign exchange risks. Chiron also uses forward sales contracts to reduce

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equity securities risk. Derivatives are not used for trading or speculative purposes. Chiron's control environment includes policies and procedures for risk assessment and the approval, reporting and monitoring of foreign currency and equity securities hedging activities. Counterparties to Chiron's hedging agreements are major financial institutions. These hedging agreements are generally not collateralized. Chiron manages the risk of counterparty default on its derivatives through the use of credit standards, counterparty diversification and monitoring of counterparty financial condition. Chiron has not experienced any losses due to counterparty default. All derivatives are recorded on the balance sheet at fair value. Changes in the fair value of derivatives are accounted for depending upon the exposure being hedged and whether the derivatives qualify and are designated for hedge accounting.

Foreign Currency Hedging

        A significant portion of Chiron's operations consists of manufacturing and sales activities in western European countries. As a result, Chiron's financial results may be affected by changes in the foreign currency exchange rates of those countries.

        Chiron may selectively hedge anticipated currency exposures by purchasing foreign currency option contracts and forward contracts, which are designated as cash flow hedges and typically expire within twelve months. Changes in the fair value of these contracts are recorded in comprehensive income and are recognized in earnings when the forecasted transaction occurs. When the contracts expire, any amounts recorded in comprehensive income are reclassified to earnings.

        Chiron also uses foreign currency forward contracts to mitigate the gains and losses generated by the remeasurement of certain assets and liabilities denominated in foreign currencies. These derivatives are not designated as hedges. Changes in the fair value of foreign currency forward contracts are recognized currently in earnings. Typically, changes in the fair value of foreign currency forward contracts are offset largely by changes upon remeasurement of the underlying assets and liabilities. These contracts usually have maturities of three months or less.

        Because the critical terms of the derivative instrument and the underlying exposure are the same, Chiron expects that changes in the fair value of the underlying exposure will be offset completely by changes in the fair value of the derivative instrument, both at inception and on an ongoing basis. The critical terms are reviewed quarterly. All time value changes are deemed ineffective and are recognized immediately in earnings. Hedge ineffectiveness was not material for the years ended December 31, 2003, 2002 and 2001.

Equity Securities Hedging

        Chiron has exposure to equity price risk because of its investments in equity securities. Typically, these securities are obtained through collaboration agreements with other pharmaceutical and biotechnology partners. Changes in share prices affect the value of Chiron's equity investment portfolio.

        Chiron selectively enters into forward sales contracts, which are designated as fair value hedges and normally expire within two to four years. At the inception of the hedge, the difference between the cost and the fair value of the equity security remains in comprehensive income. Subsequent changes in the fair value of the forward sales contracts and the underlying equity security are recognized in earnings. When forward sales contracts mature and the underlying equity security is sold, any amounts

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previously recorded in comprehensive income related to the underlying equity security sold are reclassified to earnings.

        Chiron recognized a gain of $9.4 million related to the termination of three fair value hedges and the sale of the underlying shares for the year ended December 31, 2003. This gain is recorded in "Interest and other income, net" in the Consolidated Statements of Operations for the year ended December 31, 2003. Chiron recognized a gain of $7.8 million related to the termination of two fair value hedges and the sale of the underlying shares for the year ended December 31, 2002. This gain is recorded in "Interest and other income, net" in the Consolidated Statements of Operations for the year ended December 31, 2002. There were no gains or losses recognized in "Interest and other income, net" from the termination of fair value hedges during the year ended December 31, 2001.

Property, Plant, Equipment and Leasehold Improvements

        Property, plant, equipment and leasehold improvements are recorded at cost less accumulated depreciation. Depreciation on property, plant and equipment, including assets held under capital leases, is computed using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 10 years for equipment and 15 to 40 years for buildings. Leasehold improvements are amortized on a straight-line basis over the shorter of the asset's useful life or remaining lease term. Depreciation and amortization expense was $75.9 million, $73.2 million and $56.5 million in 2003, 2002 and 2001, respectively. Repairs and maintenance are expensed as incurred. Costs incurred in construction, including related interest costs, are capitalized during the construction period. Interest capitalized for the year ended December 31, 2003 was $1.7 million. There was no interest capitalized for the years ended December 31, 2002 and 2001, as it was not material.

Leases

        Leases are recorded as capital leases when any of the following criteria is met: (i) ownership is transferred to Chiron at the end of the lease term, (ii) the lease contains a bargain purchase option, (iii) the lease term is at least 75 percent of the leased property's estimated remaining economic life or (iv) the present value of the minimum lease payments at the beginning of the lease term is 90 percent or more of the fair value of the leased property. All other leases are classified as operating leases. Capital leases are recorded as assets and liabilities at the lower of the present value of the minimum lease payments at the beginning of the lease term or the fair value of the leased property at the inception of the lease. The amount of the leased property less the expected value of the property at the end of the lease term is amortized on a straight-line basis over the lease term.

Computer Software Costs for Internal Use

        Costs of computer software developed for internal use are capitalized and amortized using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 5 years. The unamortized portion of computer software costs developed for internal use was $14.7 million, $7.7 million and $9.5 million at December 31, 2003, 2002 and 2001, respectively. Depreciation and amortization expense stated above includes amortization expense related to costs of computer software for internal use of $7.6 million, $5.7 million and $5.1 million in 2003, 2002 and 2001, respectively.

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Intangible and Other Long-Lived Assets

        Intangible assets consist principally of purchased technologies, developed product technologies and patents. Purchased technologies and patents are amortized on a straight-line basis over their estimated useful lives, ranging from 3 to 17 years. Developed product technologies are amortized using either the estimated sales method over 10 years or on a straight-line basis over 1 to 15 years. Chiron periodically reviews the useful lives of its intangible and long-lived assets, which may result in future adjustments to the amortization periods. Amortization expense for the years ended December 31, 2003, 2002 and 2001 was $69.8 million, $51.1 million and $58.5 million, respectively. Amortization of purchased technologies and developed product technologies was included primarily in "Amortization expense" and amortization of patents was included primarily in "Research and Development" in the Consolidated Statements of Operations.

        Effective January 1, 2002, goodwill (including assembled workforce) and intangible assets with indefinite useful lives are no longer amortized, but instead, are tested for impairment at least annually. Any impairment loss from the annual test will be recognized as part of operations. Chiron performed its annual impairment test as of June 30, 2003, which indicated no impairment.

        Prior to January 1, 2002, Chiron periodically evaluated the recoverability of goodwill. Impairment, if any, was based on the excess of the carrying value over the fair value, calculated based upon the projected undiscounted net cash flows associated with such goodwill.

        For acquisitions made after June 30, 2001, intangible assets acquired in a purchase business combination are recognized and reported apart from goodwill and any purchase price allocable to an assembled workforce may not be accounted for separately.

        Chiron evaluated the existing intangible assets and goodwill that were acquired in purchase business combination prior to July 1, 2001 and reclassified assembled workforce with a net carrying value of $7.8 million to goodwill on January 1, 2002. On January 1, 2002, Chiron reassessed the useful lives and residual values of all intangible assets (excluding goodwill and assembled workforce) acquired in purchase business combinations. No adjustments to amortization periods were necessary. Chiron has no intangible assets with indefinite useful lives. Chiron also assessed whether there is an indication that goodwill is impaired as of January 1, 2002. To accomplish this, Chiron identified its reporting units as of January 1, 2002. Chiron then determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of January 1, 2002. Chiron subsequently determined the fair value of each reporting unit using the present value of expected future cash flows and compared it to the reporting unit's carrying amount. Each reporting unit's fair value exceeds its carrying amount. Based on this analysis, Chiron had no indication of an impairment of goodwill at January 1, 2002.

        Effective January 1, 2002, long-lived assets to be held and used are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Long-lived assets to be disposed of by sale are reported at the lower of the carrying value or the fair value less costs to sell. Long-lived assets to be disposed of other than by

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sale will have their useful lives and salvage value revised to reflect the cease of use in the future. The results of operations of long-lived assets to be disposed of by sale or to be disposed of other than by sale are presented as discontinued operations.

        Prior to January 1, 2002, Chiron evaluated the recoverability of its intangible and long-lived assets (excluding goodwill), as circumstances dictated. Impairment, if any, was based on the excess of the carrying value of such assets over their respective fair values, calculated based upon the projected discounted net cash flows associated with such assets.

Put Options

        Chiron has, in the past, used written put options to reduce the effective costs of repurchasing its common stock. After expiration of existing put options in the second quarter of 2003, Chiron discontinued the use of put options. Chiron had no put options outstanding at December 31, 2003.

Comprehensive Income

        Chiron has displayed the detailed changes in the components of comprehensive income in the Consolidated Statements of Comprehensive Income. Accumulated other comprehensive income (loss) balances by component were as follows (in thousands):

		Foreign Currency Translation Adjustment			Net Unrealized Gains (Losses) from Investments			Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Income (Loss)
Balance, net, at December 31, 2000		$	(53,792	)	$	72,346		$	(1,057	)	$	17,497
	Period change		(23,425	)		(15,097	)		(261	)		(38,783	)
Balance, net, at December 31, 2001			(77,217	)		57,249			(1,318	)		(21,286	)
	Period change		89,210			(12,782	)		(281	)		76,147
Balance, net, at December 31, 2002			11,993			44,467			(1,599	)		54,861
	Period change		155,782			6,662			(1,003	)		161,441
Balance, net, at December 31, 2003		$	167,775		$	51,129		$	(2,602	)	$	216,302

        In the first and second quarters of 2001, the foreign currency translation component of comprehensive income included the tax effects of the non-permanently reinvested 2000 earnings in Chiron's German and Italian vaccines business in accordance with the investment and tax policy adopted in 2000. During the first and second quarters of 2001, the undistributed 2001 earnings in Chiron's German and Italian vaccines business were expected to be reinvested permanently and, as a result, no tax effect was provided on the foreign currency translation component of comprehensive income. Beginning in the third quarter of 2001, tax effects associated with the decision not to permanently reinvest the 2001 earnings in Chiron's German and Italian vaccines business were recorded. For all other foreign jurisdictions, the undistributed earnings of Chiron's foreign investments are expected to be reinvested permanently. In the fourth quarter 2002, Chiron's German and Italian vaccines subsidiaries remitted dividends to Chiron. Chiron included these dividends and the related foreign tax credits in determining its 2002 tax provision. As a result, Chiron reversed all cumulative tax

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effects previously recorded associated with its decision not to permanently reinvest the 2001 earnings of its German and Italian vaccines business. For 2003, there was no change as to the expected re-investment of all undistributed earnings. There were no dividends paid from Chiron's German or Italian vaccines subsidiaries during 2003.

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 years ended December 31, 2003 and 2002, Chiron charged losses of $52.7 million and $41.1 million, respectively, to "Accumulated deficit" in the Consolidated Balance Sheets.

Revenue Recognition

        "Product sales, net" primarily consist of revenues recognized upon shipment of products to customers. Chiron's blood testing segment recognizes revenues related to nucleic acid testing product sales, which primarily consist of revenue derived from the sale and use of assays, revenue derived from the sale, lease or rental of equipment and revenue from providing field service for the instruments. Revenue is recorded based upon the reported results obtained from the customer from the use of assays to screen donations or upon sale and delivery of the assays, depending on the underlying contract. In the case of equipment sales or leases, revenue is recorded upon the sale and transfer of the title to the instrument or ratably over the life of the lease term, respectively. For the provision of service on the instruments, revenue is recognized ratably over the life of the service agreement. For sales of Betaseron® interferon beta-1b, Chiron recognizes revenues upon shipment to its marketing partner, Schering, and additional revenues upon Schering's subsequent sale of Betaseron to patients. Upon shipment to Schering, Chiron recognizes the contractually determined fixed amount of the fee to which Chiron is entitled because at this point, there is persuasive evidence of an arrangement, delivery has occurred, the price due from Schering is fixed or determinable and collectibility is reasonably assured. Upon receiving the relevant customer sales reports from Schering, Chiron recognizes the incremental portion of the fee related to Schering's shipments to its customers because this portion of the fee is not determinable until receipt of the related sales reports. Provisions for discounts and rebates to customers, and returns and other adjustments are provided for in the same period the related product sales are recorded. Provisions for rebates to customers and returns and other adjustments are based upon analyses of historical rebates and returns. Provisions for discounts are based upon a set percentage of the previous month's sales.

        "Revenues from joint business arrangement" represents Chiron's one-half share in the pretax operating earnings generated by the joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc., a Johnson & Johnson company. The arrangement was established in 1989, based largely on the screening, using immunodiagnostic technology, of blood in blood banks and other similar settings for the presence of HIV and hepatitis viruses. Through this arrangement, Ortho-Clinical Diagnostics sells a full line of tests required to screen for hepatitis viruses and retroviruses and provides supplemental tests and microplate-based instrument systems to automate test performance and

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data collection. In addition, Chiron and Ortho-Clinical Diagnostics jointly hold the immunodiagnostic rights to Chiron's hepatitis and retrovirus technology and receive royalties from the sales of hepatitis C virus and HIV tests by licensees.

        Chiron manufactures viral antigens and supplemental hepatitis tests and sells these tests to Ortho-Clinical Diagnostics, while Ortho-Clinical Diagnostics manufactures and sells assays and instrument systems. The revenue from the sale of these antigens and tests, from Chiron to Ortho-Clinical Diagnostics, are recorded in product sales, with the corresponding costs recorded in cost of sales. Reimbursements from Ortho-Clinical Diagnostics for research costs incurred by Chiron are recorded in collaborative agreement revenues and the related research expenses are recorded in research and development expenses. In addition to these product revenues and reimbursements, Chiron shares in the defined pre-tax operating earnings of the Ortho-Clinical Diagnostics joint business activity at a pre-determined percentage (50%), as defined in the agreement, rather than from an ownership interest in an entity. Chiron receives contractually defined profit sharing payments from Ortho-Clinical Diagnostics on a quarterly basis.

        "Collaborative agreement revenues" are earned and recognized based upon work performed or upon the attainment of specified milestones. Under contracts where Chiron recognizes revenue based upon research and development work performed, the revenues amounted to $16.8 million, $19.5 million and $30.2 million in 2003, 2002 and 2001, respectively. These amounts were recorded in "Collaborative agreement revenues" and "Other Revenues" in the Consolidated Statements of Operations.

        "Royalty and license fee revenues" consist of product royalty payments and fees under license agreements and are recognized when earned. Chiron estimates royalty revenues based on previous period royalties received or on product sales forecast information provided by the third party licensee. In the subsequent quarter, Chiron records an adjustment equal to the difference between those royalty revenues recorded in the previous quarter and the contractual percentage of the third party's actual product sales for that period. Up-front refundable fees are deferred and recognized as revenues upon the later of when they become nonrefundable or when performance obligations are completed. Up-front nonrefundable fees where Chiron has no continuing performance obligations are recognized as revenues when collection is reasonably assured. In situations where continuing performance obligations exist, up-front nonrefundable fees are deferred and amortized ratably over the performance period. Milestones, if any, related to scientific or technical achievements are recognized in income when the milestone is accomplished.

        "Other revenues" primarily consist of fees for manufacturing, sales and marketing services performed, commission fees and grants from government agencies and are recognized when earned.

Contract Manufacturing Revenues and Expenses

        Contract manufacturing revenues and expenses are recognized upon meeting the criteria for substantial performance and acceptance as defined through the terms of the contract and recorded in "Other revenues" and "Other operating expenses," respectively, in the Consolidated Statements of Operations.

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Shipping and Handling Fees and Costs

        Shipping and handling fees billed to customers for product shipments are recorded in "Product sales, net" in the Consolidated Statements of Operations. Shipping and handling costs incurred for inventory purchases are recorded in "Cost of sales" in the Consolidated Statements of Operations upon sale of product.

Research and Development Expense and Purchased In-Process Research and Development

        Research and development costs are charged to expense when incurred. Research and development includes costs such as clinical trial expenses, contracted research and license agreement fees, supplies and materials, salaries and employee benefits, equipment depreciation and allocations of various corporate costs.

        Purchased in-process research and development from a business combination represent the value assigned or paid for acquired research and development for which there is no alternative future use as of the date of acquisition. The income approach is used to value purchased in-process research and development. The income approach is based on the premise that the value of a security or asset is the present value of the future earning capacity that is available for distribution to the subject investors in the security or asset. Purchased in-process research and development is charged to expense as part of the allocation of the purchase price of a business combination.

Advertising Expenses

        Chiron expenses the costs of advertising, including promotional expenses, as incurred. Advertising expenses for the years ended December 31, 2003, 2002 and 2001 were $20.2 million, $14.8 million and $17.9 million, respectively.

Income Taxes

        Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, net operating losses and business tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

        A valuation allowance has been established against the recorded deferred income tax assets to the extent that management believes it more likely than not that a portion of the deferred income tax assets are not realizable.

Stock-Based Compensation

        Chiron measures compensation expense for its stock-based employee compensation plans using the intrinsic value method. Compensation expense is based on the difference, if any, between the fair value of Chiron's common stock and the exercise price of the option or share right on the measurement date,

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which is typically the date of grant. This amount is recorded as "Deferred stock compensation" in the Consolidated Balance Sheets and amortized as a charge to operations over the vesting period of the applicable options or share rights. Compensation expense is included primarily in "Selling, general and administrative" in the Consolidated Statements of Operations.

        The following table illustrates the effect on net income and related net income per share, had compensation cost for stock-based compensation plans been determined based upon the fair value method:

			2003		2002		2001
			(In thousands, except per share data)
Net income:
	As reported		$	227,313	$	180,825	$	180,036
		Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		5,571		3,185		5,964
		Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		100,849		67,142		56,935
		Pro forma	$	132,035	$	116,868	$	129,065
Basic net income per share:
		As reported	$	1.22	$	0.96	$	0.95
		Pro forma	$	0.71	$	0.62	$	0.68
Diluted net income per share:
		As reported	$	1.19	$	0.94	$	0.92
		Pro forma	$	0.69	$	0.61	$	0.66

Foreign Currency Translation

        The financial statements of Chiron's foreign subsidiaries and equity investments are generally measured using the local currency. Accordingly, the assets and liabilities of Chiron's foreign subsidiaries and equity investments are translated into U.S. dollars using the exchange rates in effect at the end of the period. Revenues and expenses are translated using the average exchange rates for the period. Adjustments resulting from currency translations are included in comprehensive income.

Concentration of Risk

        Financial instruments, which potentially expose Chiron to concentrations of credit risk, consist primarily of cash, investments (such as debt securities), derivatives and trade accounts receivable. Chiron invests cash, which is not required for immediate operating needs, in a diversified portfolio of financial instruments issued by financial institutions and other issuers with strong credit ratings.

        By policy, the amount of credit exposure to any one institution or issuer is limited. These investments are generally not collateralized and primarily mature within three years. In 2001, Chiron recorded a charge of $1.5 million to write-down debt securities with a face value of $5.0 million due to

F-23

the decline in the credit rating of the issuer. On March 1, 2002, the issuer paid Chiron the full principal plus interest. Chiron has not experienced any other losses due to counterparty default.

        Chiron uses various derivatives to reduce foreign exchange risks and equity securities risk. Counterparties to these derivative agreements are major financial institutions. Chiron manages the risk of counterparty default through the use of credit standards, diversification and monitoring of financial conditions of these institutions. Chiron has not experienced any losses due to counterparty default.

        Chiron has not experienced any significant credit losses from its accounts receivable from the joint business contractual arrangement, royalty and license fee agreements or collaborative research agreements, and none are currently expected. Other accounts receivable arise from product sales to customers and as a result of contract manufacturing activities. Chiron performs ongoing credit evaluations of these customers and generally does not require collateral. Chiron maintains reserves for potential trade and non-trade receivable credit losses, and such losses have been within management's expectations.

        Chiron purchases bulk powdered tobramycin, the primary basic raw material in TOBI® tobramycin, from two of the principal worldwide suppliers of the drug. Chiron anticipates that either one of these suppliers alone will be able to supply sufficient quantities to meet current needs; however, there is some degree of risk that these suppliers will not be able to meet future demand in a timely and cost-effective manner. As a result, Chiron's operations could be adversely affected by an interruption or reduction in the supply of bulk-powdered tobramycin.

        Chiron has entered into contracts with third parties for the production and packaging of TOBI® and the pre-filled diluent syringe for Betaseron® interferon beta-1b. Over time, Chiron can use alternative production and packaging sources. However, if the contracted third parties become unable to produce or package sufficient quantities of TOBI or the pre-filled diluent syringe for Betaseron due to work stoppages or other factors, Chiron's operations could be disrupted until alternative sources are secured.

        In connection with the production of Chiron's flu vaccine products, Chiron must purchase large quantities of chicken eggs. Currently, for Fluvirin® vaccine, Chiron purchases those eggs and incubation services from a single supplier in the United Kingdom and, pursuant to the contract with that supplier, Chiron is required to make specified minimum purchases from that supplier through 2007. If Chiron's supplier were to fail to supply eggs in sufficient quantities or quality, including as a result of any health or other issues related to the chickens, Chiron's business would be materially adversely affected.

        In nucleic acid testing, Chiron relies on our collaborative partner, Gen-Probe, to manufacture the West Nile virus assay, currently in use on an investigational-use basis in the U.S. and the Procleix® HIV-1/ HCV Assay. Chiron currently sources the related instrument system from third party suppliers. Currently, Gen-Probe is the only manufacturer of nucleic acid testing products using Transcription-Mediated Amplification technology. In immunodiagnostics, under the Ortho-Clinical Diagnostics, Inc. contract, Chiron manufactures bulk reagents and antigens and confirmatory test kits sold in the clinical diagnostics and blood screening fields. While Chiron and Chiron's partners work to mitigate the risks associated with being a key provider, there is some degree of risk that Chiron's partner, Gen-Probe, will not be able to provide sufficient quantities of the Procleix HIV-1/ HCV Assay and the West Nile Virus Assay or that Chiron will not be able to manufacture sufficient bulk reagents and antigens and

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confirmatory test kits for immunodiagnostic products. As a result, Chiron's operations could be adversely affected.

New Accounting Standards

        In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51," which addresses consolidation by business enterprises of variable interest entities ("VIEs") either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB completed deliberations of proposed modifications to FIN 46 ("Revised Interpretations") resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than our first quarter of fiscal 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. Special Purpose Entities ("SPEs") created prior to February 1, 2003 may be accounted for under the original or revised interpretation's provision no later than our fourth quarter of fiscal 2003. Non-SPEs created prior to February 1, 2003, should be accounted for under the revised interpretation's provisions no later than our first quarter of fiscal 2004. We have not entered into any material arrangements with VIEs created prior to or after January 31, 2003.

Note 2—Earnings Per Share

        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; (ii) performance units (see Note 14) to the extent that dilutive shares are assumed issuable; (iii) the assumed exercise of outstanding put options (see Note 14), which are included under the reverse treasury-stock method; and (iv) convertible notes and debentures, which are included under the if-converted method (see Note 12). Due to rounding, quarterly amounts may not sum to full year amounts.

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        The following table sets forth the computation for basic and diluted earnings per share on income from continuing operations for the years ended December 31:

			2003		2002		2001
			(In thousands, except per share data)
Income (Numerator):
	Income from continuing operations available to common stockholders		$	220,338	$	181,145	$	174,758
	Plus: Interest on 1.625% convertible debentures, net of taxes			2,638		—		—
	Income from continuing operations available to common stockholders, plus assumed conversions		$	222,976	$	181,145	$	174,758
Shares (Denominator):
	Weighted-average common shares outstanding			186,835		188,792		189,553
	Effect of dilutive securities:
		Stock options and equivalents		4,339		3,357		5,023
		Warrants		—		—		242
		Put options		1		3		17
		1.625% convertible debentures		2,740		—		—
	Weighted-average common shares outstanding, plus assumed conversions			193,915		192,152		194,835
Basic earnings per share from continuing operations			$	1.18	$	0.96	$	0.92
Diluted earnings per share from continuing operations			$	1.15	$	0.94	$	0.90

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        The following table sets forth the computation for basic and diluted earnings per share on net income for the years ended December 31:

			2003		2002		2001
			(In thousands, except per share data)
Income (Numerator):
	Net income available to common stockholders		$	227,313	$	180,825	$	180,036
	Plus: Interest on 1.625% convertible debentures, net of taxes			2,638		—		—
	Net income available to common stockholders, plus assumed conversions		$	229,951	$	180,825	$	180,036
Shares (Denominator):
	Weighted-average common shares outstanding			186,835		188,792		189,553
	Effect of dilutive securities:
		Stock options and equivalents		4,339		3,357		5,023
		Warrants		—		—		242
		Put options		1		3		17
		1.625% convertible debentures		2,740		—		—
	Weighted-average common shares outstanding, plus assumed conversions			193,915		192,152		194,835
Basic earnings per share			$	1.22	$	0.96	$	0.95
Diluted earnings per share			$	1.19	$	0.94	$	0.92

        Stock options to purchase 7.3 million shares, 15.1 million shares and 7.4 million shares with exercise prices greater than the average market prices of common stock were outstanding during the years ended December 31, 2003, 2002 and 2001, respectively. These options were excluded from the respective computations of diluted earnings per share, as their inclusion would be antidilutive.

        In addition, for the years ended December 31, 2003, 2002 and 2001, 5.2 million shares of common stock issuable upon conversion of the Liquid Yield Option Notes (see Note 12) were excluded from the computations of diluted earnings per share as their inclusion would be antidilutive.

        As a result of the acquisition of Cetus on December 12, 1991, a warrant to purchase 0.6 million shares of Chiron common stock with an exercise price of $13.125 per share was outstanding. On July 31, 2001, the holder elected a cashless exercise of the warrant, based upon Chiron's closing stock price on August 3, 2001, for which Chiron issued approximately 0.4 million shares of its common stock.

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Note 3—Supplemental Cash Flow Information

				2003			2002			2001
				(In thousands)
Interest paid				$	2,310		$	876		$	749
Income taxes paid				$	70,240		$	132,124		$	134,827
Noncash investing and financing activities:
	Acquisitions:
		Cash acquired		$	92,178		$	18,208			—
		Fair value of all other assets acquired			1,074,668			53,682			—
		Liabilities assumed			(141,110	)		(4,980	)		—
		Reduction of income taxes payable			—			1,739			—
		Income taxes payable			(17,741	)		—			—
		Net deferred tax asset (liability)			(60,170	)		8,425			—
		Carrying value of original investment			—			(310	)		—
		Acquisition costs not yet paid as of December 31, 2003 and 2002			(40,930	)		(707	)		—
			Total cash paid	$	906,895		$	76,057		$	—
	Capital Lease:			$	157,500		$	—		$	—
	Exercise of common stock warrant			$	—		$	—		$	18,513

Note 4—Discontinued Operations

        In a strategic effort to focus on its core businesses of blood testing, vaccines and biopharmaceuticals, Chiron completed the sale of Chiron Diagnostics and Chiron Vision in 1998 and 1997, respectively. Basic and diluted earnings per share from discontinued operations were both $0.04 for the year ended December 31, 2003. Discontinued operations had no impact on basic and diluted earnings per share for the year ended December 31, 2002. Basic earnings per share from discontinued operations was $0.03 for the year ended December 31, 2001. Diluted earnings per share from discontinued operations was $0.02 for the year ended December 31, 2001.

        The "Gain (loss) from discontinued operations, net of taxes" consisted of the following as of December 31:

	2003			2002			2001
	(In thousands)
Reversal of reserves for retention and severance obligations	$	—		$	—		$	1,600
Reversal of reserves (net charge) for indemnity obligations		(5,222	)		—			1,500
Gain on the sale of real estate assets		—			—			1,644
Employee settlement		—			(438	)		—
Income tax benefit		12,197			118			534
	$	6,975		$	(320	)	$	5,278

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Chiron Diagnostics

        In the third quarter 2003, Chiron reversed approximately $1.8 million related to unutilized reserves for Chiron Diagnostics, which was recorded as a "Gain from discontinued operations" for the year ended December 31, 2003.

        In the second quarter 2003, Chiron reversed approximately $0.5 million related to unutilized reserves for Chiron Diagnostics and Chiron Vision, which was recorded as a "Gain from discontinued operations" for the year ended December 31, 2003.

        In the first quarter 2003, Chiron and Bayer Corporation reached a settlement agreement relating to certain claims raised by Bayer under the Stock Purchase Agreement dated September 17, 1998, between Chiron and Bayer for Chiron Diagnostics. Under this settlement agreement, Chiron was required to make a payment to Bayer during the first quarter 2003. Chiron utilized an amount previously reserved for indemnity obligations, based upon the settlement agreement with Bayer. These amounts resulted in a net charge of $7.6 million, offset by an income tax benefit of $9.0 million, resulting in a net gain of $1.4 million, which was recorded as a "Gain from discontinued operations" for the year ended December 31, 2003.

        In the third quarter of 2002, Chiron recognized a charge of $0.4 million related to a settlement with a former employee arising out of the sale of Chiron Diagnostics. This amount was recorded as a "(loss) from discontinued operations" for the year ended December 31, 2002.

        Under the terms of the stock purchase agreement with Bayer, Chiron was responsible for retention and severance payments to specific U.S. and international employees and, accordingly, reserved for such retention and severance obligations. In the third quarter of 2001, Chiron reversed approximately $1.6 million reserved for retention and severance obligations based upon a final reconciliation from Bayer. This amount was recorded as a "Gain from discontinued operations" for the year ended December 31, 2001. Chiron has also provided other customary indemnities under the terms of this agreement.

Chiron Vision

        Upon completion of the sale of all of the outstanding capital stock of Chiron Vision to Bausch & Lomb Incorporated, Chiron retained Chiron Vision's cash and cash equivalents totaling $2.7 million, certain Chiron Vision real estate assets with a carrying value of $25.1 million and Chiron Vision's future noncancelable operating lease costs totaling $1.1 million. Under the terms of the Bausch & Lomb agreement, Chiron provided customary indemnities and, accordingly, reserved for such contractual obligations to indemnify Bausch & Lomb against certain potential claims. In the second quarter of 2001, Chiron reversed the remaining reserves of $1.5 million upon the sale of the remaining real estate assets, as discussed below.

        For a period of three years following the completion of the sale, Chiron Vision had the right to use a portion of the real estate assets, which were occupied at closing, on a rent-free basis. In April 2001, Chiron sold these real estate assets and recognized a net gain on the sale of these assets of $1.6 million. These amounts were recorded as a "Gain from discontinued operations."

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Income Taxes

        In connection with the sale of Chiron Diagnostics and Chiron Vision, Chiron recorded cumulative net deferred tax assets of $0.1 million and $8.5 million at December 31, 2003 and 2002, respectively, principally attributable to the timing of the deduction of certain expenses associated with these sales. Chiron also recorded corresponding valuation allowances of $0.1 million and $8.5 million at December 31, 2003 and 2002, respectively, to offset these deferred tax assets, as management believes that it is more likely than not that the deferred tax assets to which the valuation allowance relates will not be realized. The future recognition of these deferred tax assets will be reported as a component of "Gain (loss) from discontinued operations."

        "Gain (loss) from discontinued operations" included an income tax benefit of $12.2 million, $0.1 million and $0.5 million in 2003, 2002 and 2001, respectively. The tax benefit in 2003 related to the settlement of outstanding items with Bayer regarding the sale of Chiron Diagnostics and the reversal of valuation allowances against deferred tax assets that were established at the time of the sale of Chiron Diagnostics. The tax benefit in 2002 related to the charge for a settlement with a former employee, arising out of the sale, as discussed above. The tax benefit in 2001 related to the reversal of reserves and valuation allowances against deferred tax assets that were set up at the time of the sale, also discussed above.

Note 5—Acquisitions

        PowderJect Pharmaceuticals plc    On July 8, 2003, Chiron acquired PowderJect Pharmaceuticals, a company based in Oxford, England that develops and commercializes vaccines. Chiron acquired all of the outstanding shares of common stock of PowderJect Pharmaceuticals for 550 pence per ordinary share, which, including estimated acquisition costs, resulted in a total preliminary purchase price of approximately $947.8 million. PowderJect Pharmaceuticals is part of Chiron's vaccines segment. PowderJect Pharmaceuticals' products, including vaccines for influenza, expand Chiron's portfolio of vaccine products. Chiron accounted for the acquisition as a business combination and included PowderJect Pharmaceuticals' operating results in its consolidated operating results beginning July 8, 2003.

        The components and allocation of the preliminary purchase price, based on their estimated fair values is summarized in the following table (in thousands). Chiron is in the process of finalizing certain estimates; thus both the purchase price and the allocation of the purchase price are subject to change. The preliminary purchase price and allocation reflect management's decision to cease operations at the Madison, Wisconsin facility and the Swedish facility. Chiron has accrued approximately $28.1 million in estimated exit costs associated with these operations. These exit costs are included in the estimated

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acquisition costs. In addition, Chiron is finalizing certain estimates associated with various other direct acquisition costs.

Consideration and acquisition costs:
	Cash paid for common stock		$	831,026
	Cash paid for options on common stock			59,153
	Acquisition costs paid as of December 31, 2003			16,716
	Estimated acquisition costs not yet paid as of December 31, 2003			40,930
		Total preliminary purchase price	$	947,825
Allocation of preliminary purchase price:
	Cash and cash equivalents		$	92,178
	Short-term marketable securities			8,840
	Accounts receivable, net			42,732
	Inventories			68,375
	Property, plant and equipment			64,599
	Goodwill			502,961
	Acquired intangible assets			335,500
	Other assets			6,361
	Income taxes payable			(17,741	)
	Current liabilities			(61,465	)
	Net deferred tax liability			(60,170	)
	Long-term liabilities			(79,645	)
	Purchased in-process research and development			45,300
		Total preliminary purchase price	$	947,825

        Chiron allocated the preliminary purchase price based on the fair value of the assets acquired and liabilities assumed. Chiron allocated a portion of the purchase price to purchased in-process research and development, which it charged to earnings in 2003. Purchased in-process research and development represented the valuation of acquired, to-be-completed research projects. Purchased in-process research and development was determined using the income approach, which is based on the premise that the value of a security or asset is the present value of the future earning capacity that is available for distribution to the subject investors in the security or asset. In valuing the purchased in-process research and development, Chiron used probability-of-success-adjusted cash flows and a 14% discount rate. Cash flows from projects including those relating to (i) certain travel vaccines and (ii) vaccines for allergies were assumed to commence between 2004 and 2012. Given the high risk associated with the development of new drugs, Chiron probability adjusted the revenue and expense forecasts to reflect the risk of advancement through the regulatory approval process based on the stage of development in the regulatory process. Such a valuation requires significant estimates and assumptions. Chiron believes that fair value assigned to purchased in-process research and development is based on reasonable assumptions. However, these assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur. To assist in determining the value of the purchased in-process research and development, a third-party valuation was obtained as of the acquisition date.

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        Acquired intangible assets included the fair value of distribution rights, a contract manufacturing agreement and developed product technologies. The distribution rights and the contract manufacturing agreement are being amortized on a straight-line basis over 1 to 4 years. The weighted average amortization period for these intangible assets is 2 years. Developed product technologies are being amortized using either the estimated sales method over 10 years or on a straight-line basis over 1 to 15 years. The weighted average amortization period for these intangible assets is 11 years. The weighted average amortization period for total acquired intangible assets is 10 years.

        Income taxes payable of $17.7 million relates to current tax liabilities associated with PowderJect Pharmaceuticals at the date of acquisition. The net deferred tax liability of $60.2 million is comprised of current and non-current deferred tax assets of $40.5 million primarily related to net operating losses incurred from April 1, 2003 through the acquisition date, reserves and depreciation timing differences and a non-current deferred tax liability of $100.7 million related to acquired intangibles.

        The following unaudited pro forma information presents the results of continuing operations and net income of Chiron and PowderJect Pharmaceuticals for the years ended December 31, 2003 and 2002 as if Chiron's acquisition of PowderJect Pharmaceuticals had been consummated as of January 1, 2003 and 2002, respectively. The pro forma results exclude the nonrecurring charge for purchased in-process research and development, which resulted directly from the transaction. The unaudited pro forma condensed combined financial information does not reflect any incremental direct costs, including any restructuring charges to be recorded in connection with the acquisition, or potential cost savings, which may result from the consolidation of certain operations of Chiron and PowderJect Pharmaceuticals. Accordingly, the unaudited pro forma financial information is presented for illustrative purposes and not necessarily indicative of the results of operations of the combined company that would have occurred had the acquisition occurred at the beginning of each period presented, nor is it necessarily indicative of future operating results. The unaudited pro forma information is as follows (in thousands, except per share data):

		Year Ended December 31,
		2003		2002
Total revenues		$	1,833,944	$	1,508,739
Income from continuing operations		$	229,646	$	144,053
Net income		$	236,621	$	143,733
Pro forma earnings per share from continuing operations:
	Basic	$	1.23	$	0.76
	Diluted	$	1.20	$	0.75
Pro forma earnings per share from net income:
	Basic	$	1.27	$	0.76
	Diluted	$	1.23	$	0.75

        Pulmopharm GmbH    On July 1, 2002, Chiron completed the acquisition of Pulmopharm GmbH, a distributor of TOBI® tobramycin products in Germany and Austria by purchasing the remaining 80.1% ownership that Chiron did not previously own. Previously, Chiron owned 19.9% of Pulmopharm and accounted for the investment under the equity method. Chiron's acquisition of all of the remaining outstanding shares of common stock of Pulmopharm, including estimated acquisition costs, resulted in a

F-32

total purchase price of approximately $3.7 million, which included $0.2 million for a contingent payment relating to future revenues during the earn-out period. The acquisition resulted in the recognition of $3.8 million of intangible assets relating to the distribution rights, $1.2 million of goodwill, $0.3 million of tangible assets and $1.6 million of deferred tax liabilities on the acquisition date. The amortization period for acquired intangible assets relating to the distribution rights is 3.75 years. In addition, on the acquisition date, the carrying value of the original investment in Pulmopharm, which totaled $0.3 million, was reclassified to goodwill. Chiron accounted for the acquisition as a business combination and included Pulmopharm's operating results in its consolidated operating results beginning on July 1, 2002. Pulmopharm is part of Chiron's biopharmaceuticals segment. During 2003, the contingent payment of $0.2 million was reversed and goodwill was adjusted accordingly, as certain revenues were not achieved during the earn-out period.

        Matrix Pharmaceutical, Inc.    On February 20, 2002, Chiron acquired Matrix Pharmaceutical, Inc., a company that was developing tezacitabine, a drug to treat cancer. Chiron acquired all of the outstanding shares of common stock of Matrix Pharmaceutical at $2.21 per share, which, including acquisition costs, resulted in a total purchase price of approximately $67.0 million. Matrix Pharmaceutical is part of Chiron's biopharmaceuticals segment. Tezacitabine expanded Chiron's portfolio of cancer therapeutics.

        Chiron accounted for the acquisition as an asset purchase and included Matrix Pharmaceutical's operating results, including the seven business days from February 20 to 28, 2002, in its consolidated operating results beginning on March 1, 2002. The components and allocation of the purchase price, based on their fair values, consisted of the following (in thousands):

Consideration and acquisition costs:
	Cash paid for common stock		$	58,737
	Cash paid for options on common stock			2,231
	Acquisition costs			6,078
		Total purchase price	$	67,046
Allocation of purchase price:
	Cash and cash equivalents		$	17,337
	Assets held for sale			2,300
	Deferred tax asset			10,000
	Other assets			1,469
	Purchased in-process research and development			45,181
	Accounts payable			(2,898	)
	Reduction of income taxes payable			1,739
	Accrued liabilities			(8,082	)
		Total purchase price	$	67,046

        Acquisition costs included contractual severance and involuntary termination costs, as well as other direct acquisition costs. Approximately $5.1 million represented severance payments, assumed by Chiron, to eligible employees as defined by their employment agreements.

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        Chiron allocated the purchase price based on the fair value of the assets acquired and liabilities assumed. Chiron allocated a portion of the purchase price to purchased in-process research and development, which was charged to earnings in 2002. Purchased in-process research and development represented the fair value, calculated using probability-of-success-adjusted cash flows and a 20% discount rate, at the acquisition date. Chiron assumed cash flows from tezacitabine to commence after 2005. As with all pharmaceutical products, the probability of commercial success for any research and development project is highly uncertain.

        Chiron ceased manufacturing operations at the San Diego, California facility and closed the facility during the third quarter 2002.

        As indicated in the above table, a portion of the purchase price was allocated to assets held for sale. In March 2002, Chiron sold the leasehold improvements and assigned the lease related to a facility located in Fremont, California. Chiron received an amount equivalent to the fair value of the assets at the date of acquisition.

        Chiron paid $0.7 million related to severance payments included in acquisition costs for Matrix Pharmaceuticals and Pathogenesis for the year ended December 31, 2003. This payment is reflected in the Consolidated Statement of Cash Flows as a component of "Cash paid for acquisitions, net of cash acquired" for the year ended December 31, 2003.

        In March 2002, Chiron paid $6.0 million related to a bank loan assumed during the purchase of Matrix Pharmaceutical. This payment is reflected on the Consolidated Statement of Cash Flows as a component of "Cash paid for acquisitions, net of cash acquired" for the year ended December 31, 2002.

        The deferred tax asset primarily related to future utilization of net operating loss carryforwards. Chiron acquired federal and state net operating loss carryforwards and business credits attributed to Matrix Pharmaceutical of approximately $290.6 million and $9.5 million, respectively. The utilization of such net operating loss and business tax credit carryforwards is limited in any one year under provisions of the Internal Revenue Code. As such, a significant portion of Matrix Pharmaceutical's net operating loss carryforwards is expected to expire unutilized.

Note 6—Restructuring and Reorganization

        For the year ended December 31, 2003, Chiron recorded net restructuring and reorganization charges of $1.7 million, which included charges of $1.8 million and a charge reversal of $0.1 million. The charges, included in "Restructuring and reorganization charges" in the consolidated statement of operations, consisted of termination and other employee-related costs recognized in connection with the elimination of 15 positions in its Amsterdam manufacturing facility. Termination notice has been provided. Chiron has decided to retain one of the 15 positions and recorded a charge reversal of $0.1 million accordingly. Of the 14 positions for elimination, 13 were terminated as of December 31, 2003.

        Chiron previously recorded restructuring and reorganization charges related to (i) the closure of its Puerto Rico and St. Louis, Missouri facilities and (ii) the ongoing restructuring of its business operations. The closure of its Puerto Rico and St. Louis facilities and the ongoing restructuring of its business operations consisted of termination and other employee-related costs recognized in connection

F-34

with the elimination of 371 positions in manufacturing, research, development, sales, marketing and other administrative functions, and facility-related costs. Employee termination costs included wage continuation, advance notice pay and medical and other benefits. Facility-related costs included losses on disposal of property, plant and equipment, lease payments and other related costs. For the year ended December 31, 2003, Chiron had no restructuring and reorganization adjustments related to these items. Of 371 positions for elimination, 370 were terminated as of December 31, 2003. For the year ended December 31, 2002, Chiron had no restructuring and reorganization adjustments. Of the 371 positions for elimination, 365 were terminated as of December 31, 2002. For the year ended December 31, 2001, Chiron recorded net restructuring and reorganization charges of $0.1 million, which included a charge of $0.3 million and a charge reversal of $0.2 million. The charge of $0.3 million primarily related to revised estimates of termination and other employee-related costs recognized in connection with the elimination of 371 positions, of which 360 had terminated as of December 31, 2001. The charge reversal of $0.2 million primarily related to revised estimates of facility-related costs.

        Chiron expects to substantially settle the restructuring and reorganization accruals within one to six years of accruing the related charges. As of December 31, 2003, $0.6 million was included in "Other current liabilities" in the Consolidated Balance Sheet. As of December 31, 2002, $0.2 million and $0.1 million were included in "Other current liabilities" and "Other noncurrent liabilities," respectively, in the Consolidated Balance Sheet.

Note 7—Intangible Assets

        Chiron adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," (SFAS No. 142) effective January 1, 2002. A reconciliation of reported net income to adjusted net income, as if SFAS No. 142 had been implemented as of January 1, 2001, is as follows (in thousands, except per share data):

		Year Ended December 31,
		2003		2002		2001
Reported net income		$	227,313	$	180,825	$	180,036
	Add back: Goodwill (including assembled workforce) amortization		—		—		17,074
Adjusted net income		$	227,313	$	180,825	$	197,110
Basic earnings per share:
	Reported net income	$	1.22	$	0.96	$	0.95
	Goodwill (including assembled workforce) amortization		—		—		0.09
	Adjusted net income	$	1.22	$	0.96	$	1.04
Diluted earnings per share:
	Reported net income	$	1.19	$	0.94	$	0.92
	Goodwill (including assembled workforce) amortization		—		—		0.09
	Adjusted net income	$	1.19	$	0.94	$	1.01

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        Intangible assets subject to amortization consisted of the following (in thousands):

		December 31, 2003						December 31, 2002
		Gross Carrying Value		Accumulated Amortization		Net Carrying Value		Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Purchased technologies		$	332,543	$	95,836	$	236,707	$	331,941	$	74,328	$	257,613
Patents		$	119,675	$	61,747	$	57,928	$	106,723	$	52,136	$	54,587
Trademarks			61,082		20,507		40,575		53,394		14,928		38,466
Licenses and technology rights(1)(2)			49,087		27,818		21,269		35,243		16,063		19,180
Developed product technologies(3)			347,233		23,093		324,140		—		—		—
Customer relationships			28,824		9,952		18,872		24,082		7,054		17,028
Know how(4)			13,090		6,023		7,067		10,935		4,245		6,690
Databases			7,100		1,538		5,562		7,100		1,065		6,035
Other			26,328		14,852		11,476		15,274		10,171		5,103
	Total other intangible assets	$	652,419	$	165,530	$	486,889	$	252,751	$	105,662	$	147,089
Total intangible assets subject to amortization		$	984,962	$	261,366	$	723,596	$	584,692	$	179,990	$	404,702

(1)

Intangible assets related to distribution rights and a contract manufacturing agreement with a gross carrying value of $9.7 million and accumulated amortization of $3.7 million acquired in the acquisition of PowderJect Pharmaceuticals during 2003 (see Note 5) were included in Licenses and technology rights at December 31, 2003. The gross carrying value of these intangible assets has increased approximately $0.6 million due to exchange rate fluctuations between the acquisition date and December 31, 2003.

(2)

Intangible assets with a gross carrying value of $4.9 million and accumulated amortization of $2.1 million related to the distribution rights acquired in the acquisition of Pulmopharm were included in Licenses and technology rights at December 31, 2003. The gross carrying value of these intangible assets has increased approximately $1.1 million due to exchange rate fluctuations between the acquisition date and December 31, 2003.

(3)

Intangible assets with a gross carrying value of $347.2 million and accumulated amortization of $23.0 million acquired in the acquisition of PowderJect Pharmaceuticals during 2003 (see Note 5) were included in Developed product technologies at December 31, 2003. The gross carrying value of these intangible assets has increased approximately $20.8 million due to exchange rate fluctuations between the acquisition date and December 31, 2003.

(4)

Upon acquisition of a 100% interest in Chiron Behring by the second quarter 1998, Chiron acquired a portfolio of products that were created by Behring and are currently being sold internationally. These products embody Chiron Behring's proprietary "know-how" consisting of unpatented technology and trade secrets. Since the unpatented technology and trade secrets meet the separability criterion, Chiron has recognized them collectively as a separate intangible asset apart from goodwill in accordance with SFAS No. 141, "Business Combinations".

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        Aggregate amortization expense is as follows (in thousands):

For the year ended December 31, 2003 (reported)	$	69,836
For the year ended December 31, 2004 (estimated)	$	91,608
For the year ended December 31, 2005 (estimated)	$	88,935
For the year ended December 31, 2006 (estimated)	$	94,990
For the year ended December 31, 2007 (estimated)	$	93,835
For the year ended December 31, 2008 (estimated)	$	90,295

        The changes in the carrying value of goodwill by reporting unit consisted of the following (in thousands):

		Biopharmaceuticals			Vaccines		Total
Balance as of December 31, 2001		$	196,513		$	28,229	$	224,742
	Goodwill acquired (Note 5)		1,512			—		1,512
	Assembled workforce		1,875			5,946		7,821
	Tax impact of implementation(5)		(675	)		—		(675	)
	Effect of exchange rate changes		—			6,346		6,346
Balance as of December 31, 2002			199,225			40,521		239,746
	Goodwill acquired (Note 5)					502,961		502,961
	Reversal of contingent payment (Note 5)		(200	)		—		(200	)
	Effect of exchange rate changes					56,613		56,613
	Realization of tax benefits(6)		(11,533	)		—		(11,533	)
Balance as of December 31, 2003		$	187,492		$	600,095	$	787,587

(5)

SFAS No. 142 required that, upon implementation, any remaining deferred tax liability related to assembled workforce at January 1, 2002 also be reclassified to goodwill.

(6)

SFAS No. 109 requires that the realization of acquired tax benefits subject to valuation allowance be applied to goodwill.

        Chiron performed its annual impairment test for goodwill as of June 30, 2003. Based on this analysis, Chiron has no indication of an impairment loss.

Note 8—Research and Development Arrangements

        Chiron participates in a number of research and development arrangements with other pharmaceutical and biotechnology companies to research, develop and market certain technologies and products. Chiron and its collaborative partners generally contribute certain technologies and research efforts and commit, subject to certain limitations and cancellation clauses, to share costs related to certain research and development activities, including those related to clinical trials. At December 31, 2003 aggregate annual noncancelable funding commitments under collaborative arrangements are as follows: 2004—$8.5 million and 2005—$18.9 million. Chiron may also be required to make payments to

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certain collaborative partners upon the achievement of specified milestones. At December 31, 2003 aggregate milestone payments that may become due under these noncancelable collaborative arrangements totaled $5.3 million. These milestone payments are due upon the achievement of various technical milestones, completion of trials and regulatory filings. From the inception of these contracts up until December 31, 2003, total costs incurred under these collaborative arrangements totaled $25.4 million.

        In addition to these collaboration arrangements, Chiron has entered into contracts where Chiron is responsible for all the costs related to research and development activities. At December 31, 2003, aggregate annual noncancelable commitments under these contracts are as follows: 2004—$3.0 million and 2005—$0.1 million. At December 31, 2003 aggregate milestone payments that may become due under these noncancelable arrangements totaled $13.6 million. These milestone payments are due upon the achievement of various technical milestones, completion of trials and regulatory filings. From inception of these contracts up until December 31, 2003, total costs incurred under these contracts totaled $49.2 million.

        In October 2003, Chiron entered into a license agreement with Cubist Pharmaceuticals, Inc. for the development and commercialization of Cubist's antibiotic daptomycin for injection in Western and Eastern Europe, Australia, New Zealand, India and certain Central American, South American and Middle Eastern countries. In exchange for these development and commercialization rights, Chiron agreed to pay Cubist up to $50.0 million. This $50.0 million includes $18.0 million, which was paid by Chiron in the fourth quarter 2003, $10.0 million of which was used to purchase restricted Cubist common stock at a 50 percent premium over market price, and up to $32.0 million of additional payments to Cubist upon the achievement of certain regulatory and sales milestones. Chiron will also pay Cubist a tiered royalty on daptomycin for injection made by Chiron. Chiron recorded $10.6 million of the up front payment related to the purchase of in-process research and development with no alternate future use as research and development expenses in 2003 and $6.7 million and $0.7 million of the up front payment as an equity investment and prepaid research and development, respectively, in the Consolidated Balance Sheet at December 31, 2003. The equity investment was recorded at fair value. This agreement is cancelable by Chiron at any time with twelve months written notice. As of December 31, 2003, Chiron has not paid any amount in regard to milestones or royalties.

        In June 2000, Chiron invested in a Singapore-based venture, S*BIO Pte Ltd, to research and develop therapeutic, diagnostic, vaccine and antibody products. Chiron also granted S*BIO certain rights to its gene expression and combinatorial chemistry technology. Under this arrangement, Chiron received approximately $23.7 million over three years for technology transfer and research services. Chiron recognized collaborative agreement revenues of $8.8 million and $12.1 million in 2002 and 2001, respectively, under this arrangement. Since inception, Chiron has invested $8.0 million for a 19.9% ownership interest, which was written off entirely due to the early stage of S*BIO's research and development activities. Chiron accounts for the investment on the cost method. The technology transfer period ended in the third quarter 2002.

        On November 1, 1999, Chiron entered into a patent and license agreement with Scios, Inc. Under this agreement, Chiron advanced $7.5 million in return for a promissory note, which was recorded as "Noncurrent notes receivable" in the Consolidated Balance Sheets at both December 31, 2003 and 2002. The note, which bears interest at the prime rate (4.0% at December 31, 2003 and 4.25% at

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December 31, 2002), is due with accrued interest on December 31, 2006 and will be forgiven (principal and accrued interest) if the U.S. Food and Drug Administration approves any product covered by the patent and license agreement for marketing in the U.S. prior to December 31, 2006. Chiron may pay additional milestone payments if certain development objectives are met. In addition, Chiron may pay royalties of 4% on future net product sales of the product under the patent and license agreement.

        On December 28, 2000, Chiron received a $3.5 million promissory note in consideration for a payment under a biopharmaceutical license agreement with SkyePharma plc. The note bore interest at the London interbank offered rate plus 3.0% (4.4% at December 31, 2002). The interest was due quarterly, and the principal was payable in three equal installments. The first payments of $1.2 million was received in 2001 and the final two payments were received in 2002. In November 2002, Chiron signed an agreement with SkyePharma to terminate their collaboration and manufacturing agreements. As a result of the termination, Chiron granted back to SkyPharma plc the rights licensed by Chiron under the collaboration agreement for $3.0 million. Chiron included this amount as a component of "Other revenues" in the Consolidated Statements of Operations in 2002. Chiron recorded a $1.0 million promissory note in connection with this transaction which was presented in "Current portion of notes receivable" at December 31, 2003 and in "Noncurrent notes receivable" at December 31, 2002, in the Consolidated Balance Sheets. In addition, in December 2002, SkyePharma plc paid the final $1.1 million installment due under the $3.5 million promissory note.

        Occasionally, Chiron invests in equity securities of its corporate partners. The price of these securities is subject to significant volatility. Chiron performs periodic reviews for temporary or other-than-temporary impairment of its securities and records adjustments to the carrying values of those securities accordingly. In 2002 and 2001, Chiron recognized losses attributable to the other-than-temporary impairment of certain of these equity securities of $7.5 million, $4.0 million, respectively. There was no such loss in 2003.

Note 9—Related Party Transactions

Novartis

        Chiron has an alliance with Novartis AG, a life sciences company headquartered in Basel, Switzerland. Under a series of agreements between Chiron and Novartis, effective January 1995, Novartis increased its ownership interest in Chiron to 49.9%. As a result of subsequent stock issuances by Chiron, Novartis' ownership interest in Chiron has been reduced to approximately 42.4% as of December 31, 2003.

The Governance Agreement

        In January 1995, Chiron and Novartis AG entered into a Governance Agreement whereby Novartis agreed not to increase its ownership interest in Chiron above 55% unless it acquires all of Chiron's outstanding capital stock in a "buy-out transaction." Novartis may exceed these standstill amounts and increase its ownership interest up to 79.9% if a majority of the independent directors of Chiron's Board of Directors approves the transaction. Novartis has the right, but not the obligation, to initiate the buy-out transaction. If Novartis proposes a buy-out transaction, the independent directors may accept the proposal subject to stockholder approval. If the independent directors do not accept the proposal,

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Novartis may request binding arbitration to determine the third party sales value. The independent directors may delay the arbitration up to one year. Upon determination of the third party sales value by arbitration, Novartis may either proceed with the proposed buy-out transaction at the third party sales value determined by arbitration or withdraw its proposed buy-out transaction. If Novartis withdraws its proposed buy-out transaction, Novartis cannot withdraw any subsequent proposal that resulted in a second arbitration to determine the third party sales value of Chiron.

        If Chiron's Board of Directors authorizes the issuance of any equity and convertible debt securities, Novartis may purchase a portion of such securities sufficient to preserve its ownership interest in Chiron. Such purchases must occur at the same time and on the same terms as the new securities are issued and sold to third parties. In addition, Chiron may require Novartis to purchase shares of Chiron's common stock directly from Chiron at fair market value, up to $500.0 million. No such purchases occurred in 2003, 2002 and 2001 (including the 1.625% Convertible Debentures issued in July 2003 and the Liquid Yield Option Notes issued in June 2001).

        As long as Novartis owns at least 40% of Chiron's outstanding voting stock, Chiron may not engage in certain corporate transactions without Novartis' approval. These transactions generally include significant debt or equity issuances, debt or equity repurchases, most mergers and acquisitions, the payment of cash dividends, amendments to Chiron's Certificate of Incorporation or By-laws, and other transactions that would adversely impact the rights of Novartis, or discriminate against Novartis, as a Chiron stockholder. In addition, a majority of the independent directors must approve any material transactions between Chiron and Novartis.

        Under the terms of the Governance Agreement, Novartis may nominate three members of Chiron's Board of Directors. The number of directors that Novartis may nominate declines if Novartis' ownership interest in Chiron is less than 30%.

The Investment Agreement

        Under the terms of the Investment Agreement, Novartis AG guaranteed certain Chiron obligations under revolving credit facilities through January 1, 2008. The principal amount of indebtedness under the guaranteed credit facilities may not exceed $402.5 million. In November 1996, Chiron and Novartis agreed that Chiron could increase the maximum borrowing amount under the guaranteed credit facilities by up to $300.0 million. In exchange for this increase, the amount of Chiron's common stock required to be purchased by a Novartis affiliate (at Chiron's request) would be reduced by an equal amount. Under the Investment Agreement, Novartis had guaranteed $100.0 million under a U.S. credit facility (see Note 12) and $173.3 million of Chiron's lease commitments (see Note 13) as of December 31, 2003.

        Also under the terms of the Investment Agreement, Chiron granted to individuals who on November 20, 1994 held options under Chiron's fixed stock option plan the right to receive cash payments from Novartis upon surrender for cancellation of such options. The right to receive the payment vests as the underlying options vest. Once vested, the right is exercisable at any time the option is outstanding. For options that vested after 1995, the optionee must surrender the underlying options to receive the payment. In 2003, 2002 and 2001, Novartis made no payments to eligible option holders in connection with the surrender for cancellation of such options.

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The Limited Liability Company Agreement

        In December 1995, Chiron and Novartis AG entered into a Limited Liability Company agreement (also known as the R&D Funding Agreement). Under the terms of this agreement, Novartis funded certain research and development projects, including certain adult and pediatric vaccines and Insulin-like Growth Factor-I. In December 1997, this agreement was amended to include research and development activities related to Factor VIII gene therapy and Herpes Simplex Virus-thymidine kinase. The R&D Funding Agreement provides that Novartis will purchase interests in a limited liability company as a means of providing this funding. In December 2000, this agreement was amended to provide that, through December 31, 2001, at Chiron's request, Novartis would fund up to 100% of the development costs incurred between January 1, 1995 and December 31, 2000 on these projects. The amount of funding that Novartis was obligated to provide was subject to an aggregate limit of $265.0 million. Under this agreement, in 2001, Chiron recognized collaborative agreement revenues of $9.1 million. This agreement expired on December 31, 2001.

        In consideration of the funding provided by Novartis under the R&D Funding Agreement, Novartis may receive royalties on future worldwide sales from certain adult and pediatric vaccines, Insulin-like Growth Factor-I, Factor VIII and Herpes Simplex Virus-thymidine kinase, if any, which Chiron successfully develops. Novartis also has co-promotional rights, in countries other than in North America and Europe, for certain adult vaccines. Chiron will pay royalties on the designated products for a minimum of 10 years from the later of October 1, 2001 or the date of the first commercial sale of individual products covered by the amended R&D Funding Agreement. For the years ended December 31, 2003, 2002 and 2001, Chiron recorded royalties to Novartis of $2.4 million, $2.3 million and $0.7 million, respectively, which were recorded in "Cost of Sales—Related Parties" in the Consolidated Statements of Operations. Chiron has the right, but not the obligation, to buy-out Novartis' interests in the designated products for a price equal to the aggregate amount of research and development funding provided by Novartis, less any payments to or profits earned by Novartis in connection with the designated products, plus interest at the London interbank offered rate. Chiron allowed its buy-out right to lapse on January 1, 2002.

The November 1996 Agreement

        In November 1996, in connection with the U.S. Federal Trade Commission's review of the merger between Ciba-Geigy Limited and Sandoz Limited which created Novartis AG, Chiron and Novartis entered into a consent order pursuant to which Chiron granted a royalty-bearing license to Rhone-Poulenc Rorer, Inc. under certain Chiron patents related to the Herpes Simplex Virus-thymidine kinase gene in the field of gene therapy. Chiron and Novartis entered into a separate agreement which provided, among other things, for certain cross licenses between Chiron and Novartis, and under which Novartis paid Chiron $60.0 million over five years. In connection with the agreement, in 2001, Chiron recognized collaborative agreement revenues of $10.0 million. This agreement expired in the fourth quarter 2001.

The April 2003 Agreement

        In April 2003, Chiron acquired exclusive worldwide development and commercial rights from Novartis for aerosolized cyclosporine (ACsA), a therapy under evaluation for treatment of acute

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rejections in lung transplant recipients for $0.5 million, which was expensed as research and development costs in 2003.

SynCo B.V. Agreements

        In December 1999, Chiron sold its Amsterdam manufacturing facility and related machinery and equipment assets to SynCo B.V., a company owned by a director of Chiron, for $15.0 million in cash. The sale of the Amsterdam manufacturing facility resulted in a gain of $1.2 million, of which $0.3 million was deferred as a result of the leaseback described below. Chiron is amortizing the unearned revenue as a reduction to rent expense over the lease term.

        Chiron is leasing back office and warehouse space in the Amsterdam facility for some operational and administrative activities. The lease is a noncancelable-operating lease, which expires in 2004 and may be extended for a period of two consecutive years. Annual rent and utilities was 1.2 million Euro ($1.3 million), 1.4 million Euro ($1.3 million), and 0.6 million Euro ($0.5 million) for the years ended December 31, 2003, 2002 and 2001, respectively.

        As of December 31, 1999, Chiron exercised its option to lease certain equipment under the same terms as the office and warehouse lease. For the years ended December 31, 2003 and 2002, Chiron incurred expenses of approximately 0.04 million Euro ($0.04 million) and 0.03 million Euro ($0.03 million), respectively. Also, at the option of SynCo, Chiron may provide various administrative services to SynCo. As of December 31, 2003, no such administrative services were being provided. At the option of Chiron, SynCo may provide various manufacturing and quality control services to Chiron. For the year ended December 31, 2001, Chiron incurred expenses of approximately $0.6 million, which were included in "Cost of Sales—Related parties" in the Consolidated Statements of Operations, related to such manufacturing and quality control services. In July 2001, Chiron and SynCo entered into another agreement, to include the manufacture of certain vaccine products through January 1, 2004 upon Chiron's request. For the years ended December 31, 2003 and 2002, Chiron incurred expenses of approximately $2.5 million and $0.9 million, respectively, which were included in "Cost of Sales—Related Parties" in the Consolidated Statements of Operations, related to such manufacture of certain vaccine products.

        Effective June 2003, Chiron and SynCo B.V. executed a seven and a half-year contract manufacturing agreement. Under this agreement, SynCo agreed to provide services related to the production of certain of Chiron's vaccine products for the European and U.S. markets. Chiron has a firm binding order for products to be delivered by SynCo in 2004, 2005 and 2006 under this agreement. Chiron's minimum purchase obligation under this agreement, subject to adjustment depending on the quantities purchased by Chiron in years 2007 through 2010, inflation and movement in the Euro to U.S. Dollar exchange rate, is expected to be approximately $33.8 million over the term of the agreement.

        Simultaneously in June 2003, Chiron and SynCo B.V. executed an FDA compliance agreement. Under this agreement, Chiron will fund certain costs required to bring SynCo's Amsterdam manufacturing facility into compliance to support approval by the U.S. Food and Drug Administration to manufacture certain vaccine products for the U.S. market. Chiron's funding commitment under this agreement is expected to be approximately $10.9 million through the first quarter 2005, of which

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Chiron had paid 4.7 million Euro ($5.5 million) for the year ended December 31, 2003, which is recorded in "Research and development—Related Parties" in the Consolidated Statements of Operations.

ZymeQuest Agreements

        In December 2003, Chiron entered into an agreement with ZymeQuest®, Inc. to develop and commercialize ZymeQuest's enzymatic conversion system, which converts groups A, B and AB red blood cells to enzyme-converted group O red blood cells. In addition, Chiron paid $7.5 million for an equity investment in ZymeQuest and acquired 13.92% of ZymeQuest's outstanding shares. The excess over Chiron's share of ZymeQuest's net tangible assets was $6.5 million, which was recorded as "Research and development—Related Parties" in the Consolidated Statements of Operations for the year ended December 31, 2003. At December 31, 2003, our equity investment in ZymeQuest was $1.0 million and is included in "Equity method investments", in the Consolidated Balance Sheets.

Note 10—Joint Business Arrangement

        "Revenues from joint business arrangement" represents Chiron's one-half share in the pretax operating earnings generated by the joint business contractual arrangement with Ortho Clinical Diagnostics, Inc., a Johnson & Johnson company. The arrangement was established in 1989, based largely on the screening, using immunodiagnostic technology, of blood in blood banks and other similar settings for the presence of HIV and hepatitis viruses. Through this arrangement, Ortho-Clinical Diagnostics sells a full line of tests required to screen for hepatitis viruses and retroviruses and provides supplemental tests and microplate-based instrument systems to automate test performance and data collection. In addition, Chiron and Ortho-Clinical Diagnostics jointly hold the immunodiagnostic rights to Chiron's hepatitis and retrovirus technology and receive royalties from the sales of hepatitis C virus and HIV tests by licensees.

        Chiron manufactures viral antigens and supplemental hepatitis tests and sells these tests to Ortho-Clinical Diagnostics, while Ortho-Clinical Diagnostics manufactures and sells assays and instrument systems. The revenue from the sale of these antigens and tests, from Chiron to Ortho-Clinical Diagnostics, are recorded in product sales, with the corresponding costs recorded in cost of sales. Reimbursements from Ortho-Clinical Diagnostics for research costs incurred by Chiron and the related research expenses are separately recorded. In addition to these product revenues and reimbursements, Chiron shares in the defined pre-tax operating earnings of the Ortho-Clinical Diagnostics joint business activity at a pre-determined percentage (50%), as defined in the agreement, rather than from an ownership interest in an entity. Chiron receives contractually defined profit sharing payments from Ortho-Clinical Diagnostics on a quarterly basis.

        Chiron records its share of earnings from the joint business contractual arrangement on a one-month lag using estimates provided by Ortho-Clinical Diagnostics, Inc. Profit sharing distributions are payable to Chiron within 90 days after the end of each quarter. At December 31, 2003 and 2002, $34.5 million and $23.3 million, respectively, were due from Ortho Clinical Diagnostics for profit sharing and reimbursement of costs. In 2003, 2002 and 2001, Chiron's 50% share of the earnings from the joint business contractual arrangement, which was recorded in "Revenues from joint business arrangement," was $108.3 million, $104.6 million and $84.5 million, respectively. Revenues recognized

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under the cost reimbursement portion of the arrangement in 2003, 2002 and 2001 were $28.4 million, $22.7 million and $20.3 million, respectively, for product sales and $9.0 million, $9.4 million and $11.3 million, respectively, for collaborative research. The cost of sales associated with the product sales recognized related to this arrangement in 2003, 2002 and 2001 were $29.0 million, $22.7 million and $21.2 million, respectively. Research and development costs incurred for collaborative research related to this arrangement in 2003, 2002 and 2001 were $10.0 million, $10.7 million and $9.7 million, respectively.

Note 11—Fair Value of Financial Instruments

Marketable Securities

        Available-for-sale securities consisted of the following at December 31:

	2003									2002
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value		Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(In thousands)									(In thousands)
U.S. Government	$	147,477	$	269	$	(2	)	$	147,744	$	231,055	$	1,890	$	(1,332	)	$	231,613
Corporate Debt		575,913		615		(345	)		576,183		756,280		736		—			757,016
Other		10,577		—		—			10,577		51,948		—		—			51,948
		733,967		884		(347	)		734,504		1,039,283		2,626		(1,332	)		1,040,577
Equity		29,568		66,908		(202	)		96,274		18,017		47,858		(7	)		65,868
	$	763,535	$	67,792	$	(549	)	$	830,778	$	1,057,300	$	50,484	$	(1,339	)	$	1,106,445

        Related to equity securities, Chiron selectively enters into forward sales contracts, which are designated as fair value hedges. At the inception of the hedge, the difference between the cost and the fair value of the equity security remains in comprehensive income. Subsequent changes in the fair value of the forward sales contract and the underlying equity security are recognized in earnings. For 2003, the above table includes net unrealized gains on equity securities of $6.8 million, which were offset completely in earnings by the changes in the fair value of the related forward sales contracts.

        Available-for-sale securities were classified in the Consolidated Balance Sheets as follows at December 31:

	2003		2002
	(In thousands)
Short-term investments in marketable debt securities	$	174,212	$	626,130
Noncurrent investments in marketable debt securities		560,292		414,447
Investments in marketable equity securities, included in "Investments in equity securities and affiliated companies"		96,274		65,868
	$	830,778	$	1,106,445

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        The cost and estimated fair value of available-for-sale debt securities by contractual maturity consisted of the following at December 31, 2003:

	Adjusted Cost		Fair Value
	(In thousands)
Due in one year or less	$	173,973	$	174,212
Due in one to five years		559,994		560,292
	$	733,967	$	734,504

        Chiron had no trading securities at December 31, 2003 and 2002.

        There are no significant unrealized losses for available-for-sale securities at December 31, 2003.

Other Financial Instruments

        The carrying amounts and fair values of other financial instruments, were as follows at December 31:

		2003				2002
		Carrying Amount		Fair Value		Carrying Amount		Fair Value
		(In thousands)
Nonmarketable equity investments (including cost method investments)		$	26,255	$	26,255	$	21,299	$	21,299
Notes receivable			8,979		11,486		9,657		11,644
Employee loans receivable			2,314		2,529		2,503		2,503
Deposits			1,744		1,620		1,869		1,582
Interest receivable on equity forward sales contracts			2,808		2,808		3,087		3,087
Advance from lessors			—		—		7,571		7,571
Non-current payable			554		554		2,639		2,639
Liquid Yield Option Notes			422,746		435,465		414,416		419,758
1.625% Convertible Debenture Notes			500,000		555,060		—		—
Other notes payable (see Note 12)			3,963		3,963		2,538		2,538
Derivative financial instruments:
	Equity forward sales contracts (asset)		10,637		10,637		17,445		17,445
	Foreign currency forward contracts (asset)		6,144		6,144		3,547		3,547
	Foreign currency option contracts (asset)		73		73		21		21
			16,854		16,854		21,013		21,013
	Embedded derivative instruments (liability)		—		—		253		253

        The fair value estimates provided above were based on information available at December 31, 2003 and 2002. Judgment was required in interpreting market data to develop the estimates of fair value. As such, these estimated fair values are not necessarily indicative of the amounts that Chiron could realize in a current market exchange.

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        The fair value of certain nonmarketable equity investments was based on estimated market prices determined by an option-pricing model. The carrying values of variable rate notes receivable, certain employee loans receivable and notes payable approximated fair value due to the market-based nature of these instruments. The fair values of the fixed rate notes receivable, employee loans receivable and the deposits were based on the discounted value of expected future cash flows using current rates for assets with similar maturities. The carrying values of the interest-bearing advance and non-current payable approximated fair value due to the market-based nature of these instruments. The fair value of Liquid Yield Option Notes and 1.625% Convertible Debenture Notes were based on the market price at the close of business on the last day of the fiscal year. Changes in the fair value of these notes have no effect on our financial position. The fair values of the equity forward sales contracts (including the related interest receivable), the foreign currency forward contracts, and the foreign currency option contracts were based on estimated market prices, determined by a broker. Included in current assets and current liabilities were certain other financial instruments whose carrying values approximated fair value due to the short-term nature of such instruments.

Equity Forward Sales Contracts

        Beginning in 2001, Chiron designated its equity forward sales contracts as fair value hedges. "Interest and other income, net" in the Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001 included net gains of $0.5 million, $1.1 million and $2.4 million, respectively, for changes in the time value of these fair value hedges. Chiron considers all time value changes to be ineffective and, therefore, recognizes them immediately in earnings.

Foreign Currency Forward Contracts

        Foreign currency forward contracts are used to mitigate the effect of currency changes on transactions denominated in foreign currencies and are not accounted for as hedges using hedge accounting treatment under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Foreign currency transaction gains from continuing operations, net of the impact of hedging with foreign currency forward contracts, were $5.5 million, $0.7 million and $1.9 million in 2003, 2002 and 2001, respectively.

Foreign Currency Option Contracts

        Beginning in 2001, Chiron designated its foreign currency option contracts as cash flow hedges. For cash flow hedges, derivative gains and losses included in comprehensive income are reclassified into earnings at the time the forecasted revenue is recognized.

Embedded Derivative Instruments

        The contingent additional principal and contingent cash interest features of the Liquid Yield Option Notes are considered embedded derivatives. The value of the embedded derivatives is reassessed at each balance sheet date, and any change from the prior balance sheet date is reflected currently in earnings. The change in the value of the embedded derivatives was $0.2 million for the year ended December 31, 2003 and was not material for the years ended December 31, 2002 and 2001.

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Note 12—Debt Obligations

        Long-term debt consisted of the following at December 31:

	2003		2002
	(In thousands)
Convertible debentures	$	500,000	$	—
Liquid Yield Option Notes, net of unamortized discount of $307,254 in 2003 and $315,584 in 2002		422,746		414,416
Other notes payable		3,963		2,538
	$	926,709	$	416,954

Convertible Debentures

        On July 30, 2003, Chiron issued $500.0 million aggregate principal amount of convertible debentures, which mature on August 1, 2033. The convertible debentures accrue interest at a rate of 1.625% per year and interest is payable on February 1 and August 1 commencing February 1, 2004. The debentures are senior, unsecured obligations of Chiron and rank equal in right of payment with all of Chiron's existing and future unsecured and unsubordinated indebtedness.

        The holders of the debentures may convert their debentures into shares of Chiron common stock when certain Chiron common stock price targets have been met at certain times, if the debentures have been called for redemption, if the credit rating assigned to Chiron's long-term senior debt is below specified levels or upon the occurrence and continuance of specified corporate transactions. For each $1,000 principal amount of debentures surrendered for conversion, the holder will receive 14.6113 shares of Chiron common stock. This is equivalent to an initial conversion price of approximately $68.44 per share of common stock. Upon conversion, holders will not receive any cash payment for accrued interest. Instead, accrued interest will be deemed paid by the common stock received by holders on conversion.

        The holders of the debentures may require Chiron to repurchase the debentures on August 1, 2008, August 1, 2013, August 1, 2018, August 1, 2023 and August 1, 2028. The repurchase price will be equal to the principal and accrued and unpaid interest. Chiron may choose to pay the repurchase price in cash or Chiron common stock or any combination of the two.

        On or after August 5, 2008, Chiron may redeem for cash all or part of the debentures at a redemption price of principal plus accrued and unpaid interest.

        If Chiron undergoes certain change in control transactions, the holders of the debentures have the option to require Chiron to repurchase all or part of the debentures. The repurchase price will be equal to the principal and accrued and unpaid interest. Chiron may choose to pay the repurchase price in cash or Chiron common stock or any combination of the two.

        Bond issuance costs amounted to approximately $10.9 million and are being amortized to interest expense on a straight-line basis, which approximated the effective interest method, over five years, which represents the period from the issue date to the earliest redemption date. These bond issuance costs are recorded in "Other intangible assets, net" in the Consolidated Balance Sheets at December 31, 2003.

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Liquid Yield Option Notes

        In June 2001, Chiron issued zero coupon Liquid Yield Option Notes (LYONs) with a face value of $730.0 million and a yield to maturity of 2.0%. The LYONs are carried net of an original issue discount of $328.2 million, which is being accreted to interest expense over the life of the LYONs using the effective interest method. No beneficial conversion feature existed at the time of the issuance of the LYONs. The LYONs mature on June 12, 2031, at a face value of $1,000 per note. The LYONs are uncollateralized and unsubordinated, and rank equal in right of payment to Chiron's existing and future uncollateralized and unsubordinated indebtedness.

        Beginning on June 12, 2004 and continuing through June 12, 2006, the holder may receive contingent additional principal if Chiron's stock price falls below the threshold specified in the indenture. The contingent additional principal is based on two factors: Chiron's stock price and Chiron's senior debt rate. Based on Chiron's senior debt rate of 2.90% at December 31, 2003, if Chiron's average closing stock price for 20 consecutive trading days ending on the third trading day prior to June 12, 2004 was below $41.61 Chiron would become obligated to pay contingent additional principal. The contingent additional principal will replace the original issue discount and bear an effective yield of 2.0 to 9.0% per year for the two-year period. After June 12, 2006, the original issue discount will continue to accrue at 2.0% per year.

        Beginning after June 12, 2006, the holder may receive contingent cash interest during any six-month period if the average market price of the LYONs is greater than or equal to the threshold specified in the indenture. The contingent cash interest in respect of any quarterly period will equal 0.0625% of the average market price of a LYONs for a five trading day measurement period preceding the applicable six-month period.

        At the option of the holder, Chiron may be required to purchase all, or a portion, of the LYONs on the following dates at the following prices:

Date	Price
June 12, 2004	$	584.31
June 12, 2006	$	608.04
June 12, 2011	$	671.65
June 12, 2016	$	741.92
June 12, 2021	$	819.54
June 12, 2026	$	905.29

        The purchase prices would increase for any accrued contingent additional principal and accrued original issue discount thereon. If the holders require Chiron to purchase all, or a portion, of the LYONs, Chiron may choose to pay the purchase price in cash, Chiron common shares, or any combination of the two. Given Chiron's ability to pay the purchase price in Chiron's common shares, the LYONs continue to be classified as long-term liabilities as of December 31, 2003.

        Holders may convert the LYONs at any time on or before the maturity date. For each LYONs converted, the holder will receive 7.1613 shares of Chiron common stock. Any accrued original discount, contingent additional principal and unpaid contingent cash interest are ineligible for conversion.

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        Upon a change in control of Chiron occurring on or before June 12, 2006, each holder may require Chiron to purchase all or a portion of such holder's LYONs for cash at a price equal to 100% of the issue price for such LYONs plus any accrued original issue discount and contingent additional principal (and accrued original issue discount thereon) to the date of purchase. The change in control definition allows Novartis to acquire beneficial ownership of up to 79.9% of Chiron's common stock without triggering a change in control for purposes of the LYONs.

        Chiron may redeem all or a portion of the LYONs for cash at any time after June 12, 2006, at specified redemption prices.

        Bond issuance costs amounted to approximately $10.0 million and are being amortized to interest expense on a straight-line basis, which approximated the effective interest method, over three years, which represents the period from the issue date to the earliest put date. Bond issuance costs are recorded in "Other intangible assets, net" in the Consolidated Balance Sheets at December 31, 2003 and 2002.

Other Notes Payable

        Chiron had various other notes payable with average interest rates of 3.3% and 4.5% at December 31, 2003 and 2002, respectively. Maturities range from 2005 to 2015. Future maturities of other notes payable are as follows: 2005-$0.4 million; 2006-$0.3 million; 2007-$0.3 million; 2008-$0.3 million; and $2.7 million thereafter. Approximately $2.6 million of the other notes payable were collateralized by land and buildings with a net book value of $3.3 million at December 31, 2003.

Short-Term Borrowings

        Under a revolving, committed, uncollateralized 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 AG under a November 1994 Investment Agreement (see Note 9), provides various interest rate options and matures in February 2006. There were no borrowings outstanding under this credit facility at December 31, 2003 and 2002. In December 1999, Chiron and Novartis amended the November 1994 Investment Agreement to reduce the maximum amount of our obligations that Novartis would guarantee from $725.0 million to $702.5 million.

        Chiron also has various credit facilities available outside the U.S. There were no outstanding borrowings under these facilities at December 31, 2003. Borrowings under these facilities totaled $0.1 million at December 31, 2002. One facility is maintained for our 51%-owned Indian subsidiary, and allows for total borrowings of 200 million Indian Rupee ($4.4 million at December 31, 2003). At December 31, 2002, $0.1 million was outstanding under this facility. Our Italian subsidiary also has various facilities, related to its receivables, which allow for total borrowings of 10.9 million Euro ($13.6 million at December 31, 2003).

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Note 13—Commitments and Contingencies

Capital Commitments

        In 2003, Chiron's Board of Directors approved $50.7 million in expenditures for a 25-year lease for buildings and $42.2 million for capital improvements, both of which are part of a $97.0 million project for a new flu vaccines manufacturing facility in Liverpool, England. The new manufacturing facility will replace existing flu vaccines manufacturing facilities in Liverpool, England. As of December 31, 2003, Chiron has incurred $1.5 million for capital improvements.

        In April 2001, Chiron, Rhein Biotech N.V. (now part of Berna Biotech) and GreenCross Vaccine Corporation entered into a collaboration to research and develop certain pediatric combination vaccine products for sale outside of Europe and North America. The collaboration agreement requires capital commitments from Chiron, Berna Biotech and GreenCross Vaccine. Chiron's commitment is approximately 26.4 million Euro ($33.1 million at December 31, 2003) for the expansion of Chiron's Italian manufacturing facilities, of which Chiron had incurred costs of 15.3 million Euro ($19.2 million), as of December 31, 2003. This agreement began in the fourth quarter 2001 and is expected to continue through 2008.

        Chiron had various other firm purchase and capital project commitments totaling approximately $30.7 million at December 31, 2003.

Operating Leases

        Chiron leases laboratory, office and manufacturing facilities, land and equipment under noncancelable operating leases, which expire through 2021. Rent expense, net of sublease income, from continuing operations was $37.7 million, $28.0 million and $28.3 million in 2003, 2002 and 2001, respectively. Future minimum lease payments under these leases, net of future minimum payments to be received under subleases, are as follows (in millions):

2004	$	33.6
2005	$	28.7
2006	$	25.6
2007	$	21.3
2008	$	17.6
Thereafter	$	142.1

        Total future minimum rentals to be received under noncancelable subleases approximated $0.2 million as of December 31, 2003.

Capital Leases

        In July 2003, Chiron entered into a new six-year lease to rent a research and development facility in Emeryville, California following the expiration of the existing operating lease. Effective July 1, 2003, Chiron accounted for this new lease as a capital lease and, as a result, recorded the leased facility and the corresponding liability on its balance sheet. The amount recorded on the balance sheet for the leased facility is $157.5 million. The amount of the leased facility less the expected value of the facility at the end of the lease term is being amortized on a straight-line basis over the lease term. Chiron expects the value of the facility at the end of the lease term will be approximately $151.6 million. At

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the inception of the lease, the future minimum lease payments, exclusive of a residual value guarantee, are approximately $15.7 million over the lease term. The interest payments represent variable-rate interest payments indexed to a three-month London interbank offered rate plus 40 basis points. The lease provides a $156.0 million residual value guarantee from Chiron to the lessors in the event of property value declines. Consequently, Chiron's maximum payment obligation is $156.0 million upon termination of the lease on or before July 1, 2009. On or before July 1, 2009, Chiron can choose to either purchase the facility from the lessors or sell the facility to a third party. This option accelerates if Chiron defaults on its lease payments or in the event of other defined events. As of July 1, 2003, Novartis AG had guaranteed (under provisions of the Investment Agreement) payments on this lease commitment, including payment of the residual value guarantee, to a maximum of $173.3 million. For the year ended December 31, 2003, $0.5 million has been recorded as depreciation expense for the capital lease.

        Property, plant and equipment includes the following amounts for assets subject to capital leases:

	2003
	(In thousands)
Buildings	$	157,500
Equipment		1,012
		158,512
Less accumulated depreciation		(806	)
	$	157,706

        Depreciation expense for the year ended December 31, 2003 was $0.8 million.

        Future minimum lease payments and residual value under these capital leases are as follows:

	(In thousands)
2004	$	3,546
2005		2,827
2006		2,774
2007		2,694
2008		2,681
Thereafter		158,067
Total minimum lease payments and residual value		172,589
Amounts representing interest		(14,342	)
Present value of net minimum lease payment and residual value	$	158,247

Cetus Healthcare Limited Partnerships

        In 1987 and 1990, Cetus and its affiliate, EuroCetus International N.V., exercised their options to repurchase all of the limited partnership interests in Cetus Healthcare Limited Partnership and Cetus Healthcare Limited Partnership II. Under the Cetus Healthcare Limited Partnership purchase agreements, which expired on December 31, 2001, Chiron was obligated to pay royalties on sales of

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certain therapeutic products in the U.S. and certain diagnostic products worldwide, as well as a portion of license, distribution or other fees with respect to such products, to the former limited partners of Cetus Healthcare Limited Partnership. Under the Cetus Healthcare Limited Partnership II purchase agreements, which expire on December 31, 2005, Chiron is obligated to pay royalties and a portion of other income with respect to sales of certain products in Europe to the former limited partners of Cetus Healthcare Limited Partnership II. Chiron is unable to estimate future costs subject to this obligation since these costs are based on future product sales.

Other Commitments and Contingencies

        Effective June 2003, Chiron and SynCo B.V., a related party, executed a seven and a half-year contract manufacturing agreement. Under this agreement, SynCo agreed to provide services related to the production of certain of Chiron's vaccine products for the European and U.S. markets. Chiron has a firm binding order for products to be delivered by SynCo in 2004, 2005 and 2006 under this agreement. Chiron's minimum purchase obligation under this agreement, subject to adjustment depending on the quantities purchased by Chiron in years 2007 through 2010, inflation and movement in the Euro to U.S. Dollar exchange rate, is expected to be approximately $33.8 million over the term of the agreement.

        Simultaneously in June 2003, Chiron and SynCo B.V. executed an FDA compliance agreement. Under this agreement, Chiron will fund certain costs required to bring SynCo's Amsterdam manufacturing facility into compliance to support approval by the U.S. Food and Drug Administration to manufacture certain vaccine products for the U.S. market. Chiron's funding commitment under this agreement is expected to be approximately $10.9 million through the first quarter 2005, of which Chiron had paid 4.7 million Euro ($5.5 million) as of December 31, 2003.

        Effective February 2003, Chiron and Baxter Pharmaceutical Solutions LLC executed an eight-year manufacturing and supply agreement. Under this agreement, Baxter agreed to perform certain manufacturing procedures and supply Chiron with a key component for a certain biopharmaceutical product. Chiron has certain minimum purchase obligations under this agreement and is required to pay the difference, if any, between the actual quantity purchased and the minimum purchase obligation. Chiron can terminate this agreement in the fifth year with prior notice. Chiron's minimum purchase obligation under this agreement is expected to be approximately $36.4 million over four years from regulatory approval, which occurred in 2003. Chiron has paid $3.3 million towards the minimum purchase obligation as of December 31, 2003.

        In connection with the production of our flu vaccine products, Chiron must purchase large quantities of chicken eggs. Currently, for Fluvirin® vaccine, Chiron purchases those eggs and incubation services from a single supplier in the United Kingdom and, pursuant to the contract with that supplier, Chiron is required to make specified minimum purchases of 14.0 million British Pounds ($25.0 million at December 31, 2003) each year from that supplier through 2007.

        In August 2003, Chiron entered into a $2.5 million revolving credit agreement with Nektar Therapeutics to support the financing of equipment, facility improvements and other capital expenditures related to the manufacture of clinical supplies in support of a program to develop a dry powder formulation of TOBI® tobramycin. Each advance made under this revolving line of credit

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matures on the sixth anniversary of the initial advance. As of December 31, 2003, Nektar Therapeutics has not drawn from the revolving line of credit.

        Effective October 2002, Chiron and Medical Associates Network, Inc., Medimop Medical Projects, Ltd. and Medimop Medical Projects North, Ltd. (referred to as Med Parties in this section) executed a five-year supply agreement. Under this agreement, the Med Parties agreed to provide Chiron with a presentation device for certain pharmaceutical products. Chiron has agreed to fund the Med Parties up to $1.5 million through 2003 to acquire the tools and equipment to manufacture the presentation device. Chiron has paid $1.3 million as of December 31, 2003. Under this agreement, Chiron has minimum purchase requirements. Chiron's minimum purchase obligation for the next five years is approximately $28.7 million. Chiron can terminate the agreement at any time beginning January 1, 2005 subject to twelve-months notification. If Chiron does not terminate the agreement by December 31, 2007, the agreement will be automatically renewed for an additional twelve months.

        Effective June 2002, Chiron and VWR International, Inc. executed a seven-year managed services agreement. Under this agreement, VWR agreed to provide Chiron purchasing and delivery services. Chiron can terminate this agreement at any time with six-months notice and a minimum payment obligation of $0.4 million. If Chiron does not terminate this agreement, payments to VWR are expected to be approximately $6.2 million, of which approximately $1.3 million has been paid as of December 31, 2003. At the end of the initial term, Chiron has the option to renew the agreement for an additional three years.

        In 2003, Chiron became a limited partner of Burrill Life Sciences Capital Fund, L.P. Chiron will pay $10.0 million over 6 years, of which $1.0 million has been paid through December 31, 2003 for a 6.92% ownership. In 2003, Chiron became a limited partner of Forward Venture V, L.P. Chiron will pay $5.0 million over five years, of which $0.5 million has been paid through December 31, 2003, for a 4.47% ownership. In 2002, Chiron became a limited partner of TPG Biotechnology Partners, L.P. Chiron will pay $5.0 million over ten years, of which $1.9 million has been paid through December 31, 2003, for an 8.10% ownership. In 2001, Chiron became a limited partner of Forward Venture IV, L.P. Chiron will pay $15.0 million over ten years, of which $9.0 million has been paid through December 31, 2003, for a 6.35% ownership. In 2000, Chiron became a limited partner of Burrill Biotechnology Capital Fund, L.P. Chiron will pay $25.0 million over five years, of which $19.7 million has been paid through December 31, 2003, for a 23.26% ownership.

        In 2003, Chiron also entered into a four year Communication Services Agreement with Infonet USA Corporation. The contract requires a minimum monthly payment of $0.1 million and Chiron's commitment at December 31, 2003, totaled $4.5 million.

        Effective August 1, 2003, Chiron and IBM Corporation amended and restated the previous ten-year information technology services agreement which was effective on July 1, 1998. Under this revised agreement, IBM agreed to provide Chiron with a full range of information services until March 31, 2010. Chiron can terminate this agreement at any time beginning April 1, 2004, subject to certain termination charges. If Chiron does not terminate this agreement, future payments to IBM are expected to be approximately $59.1 million. Payments to IBM are subject to adjustment depending upon the levels of services and infrastructure equipment provided by IBM, as well as inflation.

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        At December 31, 2003, Chiron had $12.7 million available under letters of credit, which is required by German law, related to ongoing legal proceedings in Germany. Chiron also had various performance bonds and insurance-related letters of credit in the amount of $12.9 million available at December 31, 2003. There are no amounts outstanding under these letters of credit at December 31, 2003.

        Chiron had noncancelable purchase orders for ongoing operations of $59.9 million at December 31, 2003.

        Chiron has various commitments and contingencies associated with research and development arrangements with other pharmaceutical and biotechnology companies (see Note 8).

        Chiron is self-insured up to specific levels for certain liabilities. Our self-insurance liability at December 31, 2003, for general liability coverage does not reflect incurred but not reported claims or claims for unknown occurrence, as the amount of this accrual cannot be reasonably estimated at December 31, 2003.

        Chiron enters into indemnification provisions under its agreements with other companies in its ordinary course of business, typically with business partners, contractors, clinical sites, insurers and customers. Under these provisions Chiron generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of Chiron's activities. These indemnification provisions generally survive termination of the underlying agreement. In some cases, the maximum potential amount of future payments Chiron could be required to make under these indemnification provisions is unlimited. The estimated fair value of the indemnity obligations of these agreements is minimal. Accordingly, Chiron has no liabilities recorded for these agreements as of December 31, 2003. Chiron has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements.

        Chiron 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 Chiron's consolidated financial position and results of operations or cash flows.

        Chiron is presently under examination in several domestic and international tax jurisdictions. While there is no assurance that Chiron will prevail in all tax examinations in the event the taxing authorities disagree with Chiron's interpretation of the tax law, Chiron's management does not believe, based upon information known to it, that the final resolution of any of these audits will have a material adverse effect upon Chiron's consolidated financial position and results of operations or cash flows. Adequate provisions have been made for these tax examinations.

Note 14—Stockholders' Equity

Stock Compensation Plans

        At December 31, 2003, Chiron has two stock-based compensation plans—a fixed stock option plan and an employee stock purchase plan, which are described below.

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Fixed Stock Option Plan

        Chiron's fixed stock option plan provides for the grant to employees of either nonqualified or incentive options and provides for the grant to directors, consultants and contractors of nonqualified options. Incentive options are to be granted at not less than the fair market value of common stock at the date of grant and nonqualified options at not less than 85% of such fair market value. Options are exercisable based on vesting terms determined by Chiron's Board of Directors (generally 4 years), and option terms cannot exceed 10 years.

        In 2000, Chiron adopted the Executive Long-Term Incentive Plan, relating to stock options granted to certain executives under Chiron's fixed stock option plan. These stock options are granted at not less than the fair market value of common stock on the date of grant and generally vest upon the earlier of 7 years of service or the achievement of specified performance objectives as established by the Compensation Committee of the Board of Directors. As a result, Chiron does not record compensation expense related to these stock options. Currently, the performance objectives are based on total stockholder return over a three-year period as measured against certain published benchmark indices that represent Chiron's peer group. If total stockholder return falls between 105% and 125% of the benchmark indices over that 3-year period, the stock options will vest from 10% to 100%. The Compensation Committee awarded 800,000, 955,000 and 858,000 stock options (which are included in the below tables) in 2003, 2002 and 2001, respectively, related to the Executive Long-Term Incentive Plan. At December 31, 2003 and 2002, 380,200 and 171,600 stock options, respectively, were exercisable under this plan. No awards were exercisable at December 31, 2001.

        In 1996, the stockholders approved an amendment to Chiron's fixed stock option plan, allowing certain executives to receive performance units. Performance units are stock awards issued upon the attainment of certain pre-established performance goals as established by the Compensation Committee of the Board of Directors. Currently, the performance units are based on total stockholder return over a three-year period as measured against certain published benchmark indices that represent Chiron's peer group. In order to qualify for a stock award, Chiron's stockholder return must be within 15% of the three-year rolling weighted-average of the benchmark indices. In accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," compensation expense related to these awards is based on the extent to which the performance criteria are met. No such expense was recognized in 2003, 2002 or 2001. There were no performance units awarded in 2003, 2002 or 2001. No awards were exercisable at December 31, 2003, 2002 and 2001.

        In 1996, the stockholders also approved an amendment to Chiron's fixed stock option plan, permitting the award of share rights to certain key individuals and non-employee directors, allowing them the right to receive shares of Chiron's common stock, subject to certain vesting terms. In 2003, the Compensation Committee awarded certain key individuals an aggregate of 188,450 share rights that vest over four years, and also awarded 33,190 share rights to non-employee directors that were fully vested at the time of grant and exercisable following the cessation of their service on the Board. In 2002, the Compensation Committee awarded certain key individuals an aggregate of 164,883 share rights that generally vest over four years. There were no share rights awarded to non-employee directors in 2002. In 2001, the Compensation Committee awarded certain key individuals an aggregate of 113,631 share rights that vest over four years. There were no share rights awarded to non-employee directors in 2001. The intrinsic value of the share rights is recognized ratably over the related vesting

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periods. In 2003, 2002 and 2001, Chiron recognized $7.4 million, $5.2 million and $9.5 million of compensation expense, respectively.

        At December 31, 2003, 5.6 million shares were available for grant. In January 2002, the stockholders approved an amendment to Chiron's fixed stock option plan, increasing the maximum number of shares that may be issued by 13.0 million shares to 73.3 million shares.

        Under Chiron's fixed stock option plan, the aggregate number of shares of Chiron's common stock that may be subject to awards will be increased by 1.50% of the number of Chiron common equivalent shares outstanding as of the last day of the preceding fiscal year. At December 31, 2003, there were 7.3 million shares of Chiron's common stock that have not been made available for grant under this provision. These shares of Chiron's common stock are in addition to the 5.6 million shares available for grant at December 31, 2003.

        A summary of stock option and share right activity is as follows:

		2003			2002			2001
Outstanding options and share rights at January 1,			25,985,907			22,099,984			20,050,210
	Granted		7,236,493			7,092,665			7,018,086
	Forfeited		(1,710,648	)		(1,853,120	)		(1,775,336	)
	Exercised		(4,366,547	)		(1,353,622	)		(3,192,976	)
Outstanding options and share rights at December 31,			27,145,205			25,985,907			22,099,984
Options exercisable at December 31,			12,913,430			12,548,651			9,698,458
Weighted average exercise price of:
	Outstanding options at December 31,	$	39.56		$	36.84		$	35.37
	Options granted	$	43.11		$	39.02		$	45.54
	Options forfeited	$	43.66		$	42.20		$	37.36
	Options exercised	$	27.68		$	17.11		$	19.30
Weighted-average grant-date fair value of options granted during the year calculated pursuant to SFAS No. 123		$	24.47		$	22.78		$	26.84
Weighted-average grant-date fair value of share rights granted during the year calculated pursuant to SFAS No. 123		$	44.20		$	39.76		$	46.66

        The weighted-average grant-date fair value of each option and share right grant was estimated using the Black-Scholes option-pricing model and the following weighted-average assumptions: expected volatility of 61%, 62% and 61% for 2003, 2002 and 2001, respectively; risk-free interest rates of 3.3%, 2.8% and 4.4% for 2003, 2002 and 2001, respectively; and an average expected life of 6 years for 2003 and 5 years for 2002 and 2001. No dividends were factored into the calculation in 2003, 2002 or 2001.

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        The following table summarizes information concerning options and share rights at December 31, 2003:

	Outstanding				Exercisable
Range of Exercise Prices	Number Outstanding	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number Outstanding	Weighted-Average Exercise Price
Less than $38	9,239,189	5.95	$	26.50	5,613,989	$	22.75
$38 to $46	8,646,479	7.89		41.97	3,314,553		42.59
$46 to $51	6,090,761	8.71		48.88	1,584,622		47.07
$51 to $57	3,168,776	6.99		53.10	2,400,266		52.91
	27,145,205	7.31	$	39.56	12,913,430	$	36.43

Employee Stock Purchase Plan

        Chiron has a stock purchase plan for U.S. employees in which eligible employees may participate through payroll deductions. At the end of each quarter, funds deducted from participating employees' salaries are used to purchase common stock at 85% of the lower of market value at the quarterly purchase date or the employees' eligibility date for participation. Purchases of shares made under the plan were 0.3 million in each of the years 2003, 2002 and 2001. Under this plan, 6.5 million shares have been reserved for issuance.

        Pro forma compensation cost is reported for the fair value of the employees' purchase rights, which was estimated using the Black-Scholes model and the following assumptions: expected volatility of 23%, 35% and 38% for 2003, 2002 and 2001, respectively; risk-free interest rates of 1.3%, 1.3% and 2.2% for 2003, 2002 and 2001, respectively; and an average expected life of one year for 2003, 2002 and 2001. No dividends were factored into the calculation in 2003, 2002 and 2001. The weighted-average fair value of the purchase rights granted was $11.18, $10.39 and $13.36 per share in 2003, 2002 and 2001, respectively.

Common Stock Warrant

        As a result of the acquisition of Cetus Corporation on December 12, 1991, a warrant to purchase 0.6 million shares of Chiron common stock with an exercise price of $13.125 per share was outstanding. On July 31, 2001, the holder elected a cashless exercise of the warrant, based upon Chiron's closing stock price on August 3, 2001, for which Chiron issued approximately 0.4 million shares of its common stock.

Put Options

        In January 2001, Chiron initiated a put option program. Under this program, Chiron entered into contracts with third parties to sell put options on Chiron stock, entitling the holders to sell to Chiron a specified number of shares at a specified price per share on a specified date. In connection with the sales, Chiron collected premiums, which were recorded in "Additional paid-in capital" in the Consolidated Balance Sheets. For the years ended December 31, 2003 and 2002, Chiron recorded a

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premium of $2.1 million and $4.3 million, respectively and, for contracts which expired, purchased 0.2 million and 0.3 million shares, in connection with the put option program. As of December 31, 2003, Chiron had no outstanding put options.

        As of December 31, 2002, Chiron had an outstanding put option contract with a third party entitling the holder to sell to Chiron 0.5 million shares at $38.11 per share. The option expired unexercised on January 29, 2003. This put option contract was initially classified as equity. However, because the settlement options available to Chiron could require Chiron to deliver cash if the put option was exercised by the counter-party, the cash redemption value, totaling $19.1 million, was reclassified from "Additional paid-in capital" to "Put options" in temporary equity in the Consolidated Balance Sheet at December 31, 2002. Upon expiration, the options were not exercised and the temporary equity of $19.1 million was reclassified to permanent equity in the first quarter 2003.

Stock Repurchase Program

        Chiron's Board of Directors authorized the repurchase of Chiron common stock on the open market to offset the dilution associated with the operation of the stock option and employee stock purchase plans and the granting of share rights. In 2001, the Board of Directors granted authority to purchase up to 10.0 million shares. On December 6, 2002, the Board of Directors granted authority to buy an additional 5.0 million shares through December 31, 2003. On December 5, 2003, the Board of Directors granted authority to buy an additional 5.0 million shares and authorized such repurchases through December 31, 2004. As of December 31, 2003, Chiron is authorized to repurchase up to an additional 5.0 million shares of its common stock.

Note 15—Other Employee Benefit Plans

Retirement Savings Plans

        Chiron sponsors a defined-contribution savings plan under Section 401(k) of the Internal Revenue Code covering substantially all full-time U.S. employees. Participating employees may contribute up to 25% of their eligible compensation up to the annual Internal Revenue Service contribution limit. Chiron also sponsors various defined-contribution savings plans covering its full-time non-U.S. employees including defined-contribution plans associated with the acquisition of PowderJect Pharmaceuticals (Note 5). In addition, Chiron sponsors a Supplemental Executive Retirement Program, which allows U.S. executives to defer up to 25% of their eligible compensation. Executives may also defer an additional 75% for their bonuses. Chiron matched employee contributions according to specified formulas and contributed $9.3 million, $6.9 million and $5.8 million in 2003, 2002 and 2001, respectively, related to these plans.

Pension Plan

        Chiron has a non-contributory retirement program covering substantially all employees of its wholly-owned German subsidiary. The benefits for this program are based primarily on years of service and employee compensation. The program is a defined-benefit pension plan and is not externally funded.

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        The components of net periodic pension costs were as follows for the years ended December 31:

	2003		2002		2001
	(in thousands)
Service cost	$	404	$	383	$	339
Interest cost		717		595		476
Termination benefits		31		—		—
Recognized actuarial loss		45		83		50
	$	1,197	$	1,061	$	865

        The change in the projected benefit obligation, reconciliation of funded status and weighted average assumptions were as follows for the years ended December 31:

		2003			2002			2001
		(in thousands)
Change in projected benefit obligation:
	Projected benefit obligation at beginning of year	$	12,310		$	9,163		$	8,912
	Service cost		404			383			339
	Interest cost		717			595			476
	Benefits paid		(380	)		(271	)		(239	)
	Actuarial (gain) loss		(742	)		559			161
	Transfer		(563	)		—			—
	Other		286			36			55
	Foreign currency translation		2,393			1,845			(541	)
	Projected benefit obligation at end of year	$	14,425		$	12,310		$	9,163
Reconciliation of funded status:
	Funded status	$	(14,425	)	$	(12,310	)	$	(9,163	)
	Unrecognized actuarial loss		2,092			2,478			1,644
	Unrecognized prior service cost		(2,952	)		(1,781	)		(1,465	)
Net amount recognized		$	(15,285	)	$	(11,613	)	$	(8,984	)
Weighted average assumptions:
	Discount rate		5.00	%		6.00	%		6.00	%
	Rate of compensation increase		2.75	%		3.00	%		3.00	%

        The amounts recognized in the Consolidated Balance Sheets were as follows at December 31:

	2003		2002		2001
	(in thousands)
Accrued pension cost	$	12,333	$	9,832	$	7,519
Accumulated other comprehensive income		2,952		1,781		1,465
	$	15,285	$	11,613	$	8,984

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        Chiron also sponsors defined benefit plans associated with the acquisition of PowderJect Pharmaceuticals on July 8, 2003 (Note 5). The benefits for these defined benefit plans are based primarily on years of service and employee compensation. Chiron contributes a percentage of pensionable earnings if the defined benefit plan is in a deficit position. These contributions are determined by a qualified independent actuary based on an annual valuation.

        The components of net periodic pension costs for these defined benefit plans are as follows for the period ended December 31:

	2003
	(In thousands)
Service cost	$	903
Interest cost		606
Expected return on plan assets		(422	)
Recognized actuarial loss		191
	$	1,278

        The change in the projected benefit obligations, change in the fair value of plan assets, reconciliation of funded status and weighted average assumptions of these defined benefit plans are as follows for the period ended December 31:

		2003
		(In thousands)
Change in projected benefit obligation:
	Projected benefit obligation at July 8, 2003	$	22,685
	Service cost		903
	Interest cost		606
	Benefits paid		(60	)
	Actuarial loss		1,339
	Other		1,012
	Foreign currency translation		2,198
	Projected benefit obligation at end of year	$	28,683

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Change in the fair value of plan assets:
	Fair value of plan assets at July 8, 2003	$	10,679
	Actual return on plan assets		1,501
	Employee contributions		171
	Employer contributions		754
	Other		976
	Benefits paid		(31	)
	Foreign currency translation		1,112
		$	15,162
Reconciliation of funded status:
	Funded status	$	(13,521	)
	Unrecognized actuarial loss		8,636
Net amount recognized		$	(4,885	)
Weighted average assumptions:
	Discount rate		5.25%-5.40	%
	Rate of compensation increase		3.00	%
	Expected long-term rate of return on plan assets		7.00%-7.75	%

        The amounts recognized in the Consolidated Balance Sheet for these benefit plans are as follows at December 31:

	2003
Accrued pension cost	$	4,885
Accumulated other comprehensive income		—
	$	4,885

Postemployment Benefits Other Than to Retirees

        In December 2003, the Board of Directors approved an executive severance plan for its executive officers, excluding the Chairman, Chief Executive Officer and certain other executives with employment agreements. The plan provides a single level of coverage for all executives who, as a result of workforce reduction or job elimination, lose their positions with Chiron. The severance benefit is equivalent to 6 weeks salary and target bonus per year of service with a minimum payment of 26 weeks and maximum payment of 104 weeks severance, plus various insurance coverage.

        In February 2001, the Board of Directors approved a change in control severance plan for its executive officers. The plan provides for three levels of coverage: Tier 1 is applicable to the Chief Executive Officer and provides a change in control severance benefit of three times base salary and bonus plus various insurance coverage; Tier 2 applies to other Executive Committee members and

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provides a change in control severance benefit of two times base salary and bonus plus various insurance coverage; and Tier 3 applies to all other executives and provides a change in control severance benefit equal to one time base salary and bonus plus various insurance coverage.

        Effective October 1, 1997 (restated October 15, 1998), Chiron adopted the Chiron Corporation Severance Plan, which provides certain post employment salary and employee benefits to employees who are involuntarily terminated as a result of a workforce reduction or job elimination.

        Benefits payable under these plans are accrued when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated in accordance with SFAS No. 112, "Employers' Accounting for Post Employment Benefits".

Note 16—Non-Operating Income and Expense

Interest and Other Income, Net

        "Interest and other income, net" in the Consolidated Statements of Operations consisted of the following for the years ended December 31:

	2003			2002			2001
	(In thousands)
Interest income	$	23,187		$	36,203		$	51,617
Write-down of debt and equity securities (see Notes 1 and 8)		—			(7,525	)		(5,543	)
Net gain on sale of marketable debt securities		895			339			836
Net gain on sale of equity securities		9,370			14,323			8,706
Gain on sale of interests in affiliated companies (see below)		2,012			5,433			2,500
Gain on repayment of debt security (see below)		—			1,500			—
Net realized gain on foreign exchange transactions		5,451			702			1,881
Equity in loss of equity method investments (see below)		(2,325	)		(2,447	)		(1,269	)
Other income (expense)		78			(2,166	)		2,186
	$	38,668		$	46,362		$	60,914

        In December 1998, Chiron completed the sale of its 30% interest in General Injectibles & Vaccines, Inc. to Henry Schein, Inc. and received payment in full of certain advances made by Chiron to General Injectibles & Vaccines. The agreement also provided for Chiron to receive additional payments, calculated as a pre-determined percentage of the gross profit of products contributed by General Injectibles & Vaccines to Henry Schein, through 2003. Chiron received $2.0 million, $5.4 million and $2.5 million in 2003, 2002 and 2001, respectively, which was recorded in "Interest and other income, net" in the Consolidated Statements of Operations.

        In the second quarter 2001, Chiron recorded a charge of $1.5 million to write-down debt securities with a face value of $5.0 million due to the decline in the credit rating of the issuer. On March 1, 2002, the issuer paid Chiron $5.1 million—the full principal plus interest. Chiron recorded $1.5 million in "Interest and other income, net" in the Consolidated Statements of Operations for the year ended December 31, 2002.

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        As discussed in Note 1, Chiron is a limited partner of Burrill Life Sciences Capital Fund, L.P., Forward Ventures V, L.P., TPG Biotechnology Partners, L.P., Forward Venture IV, L.P. and Burrill Biotechnology Capital Fund, L.P. Chiron accounts for these investments under the equity method of accounting pursuant to Emerging Issues Task Force Topic No. D-46 "Accounting for Limited Partnership Investments."

Note 17—Segment Information

        Chiron is organized based on the products and services that it offers. Under this organizational structure, there are three reportable segments: (i) blood testing, (ii) vaccines and (iii) biopharmaceuticals. The blood testing segment consists of an alliance with Gen-Probe Incorporated and Chiron's one-half share in the pretax operating earnings generated by the joint business contractual arrangement with Ortho-Clinical Diagnostics, Inc., a Johnson & Johnson company. Chiron's alliance with Gen-Probe is focused on developing and commercializing nucleic acid testing products using Transcription-Mediated Amplification technology to screen donated blood and plasma products for viral infection. Chiron's joint business arrangement with Ortho-Clinical Diagnostics is operated under a contractual arrangement and is not a separate and distinct legal entity. Through Chiron's joint business contractual arrangement with Ortho-Clinical Diagnostics, Chiron sells a line of immunodiagnostic tests to detect hepatitis viruses and retroviruses and provides supplemental tests and microplate and chemiluminescent instrument systems to automate test performance and data collection. The vaccines segment consists principally of adult and pediatric vaccines for viral and bacterial infections. Chiron sells these vaccines in the U.S., Germany, Italy, the United Kingdom and other international markets. The vaccines segment is also involved in the development of novel vaccines and vaccination technology. The biopharmaceuticals segment consists of therapeutic products and services, with an emphasis on the treatment of cancer and infectious diseases, using the development and acquisition of technologies related to therapeutic proteins and small molecules.

        Revenues and expenses associated with Chiron's research and development activities specifically benefit each of the reportable segments and as such, have been included in the results of operations of the respective reportable segment.

        Chiron views certain other revenues and expenses, particularly Novartis AG research and development funding which terminated in 2001, certain royalty and license fee revenues primarily related to HIV and hepatitis C virus related patents, and unallocated corporate expenses, as not belonging to any one reportable segment. As a result, Chiron has aggregated these items into an "Other" segment.

        For the year ended December 31, 2002, research and development expenses of $1.8 million previously allocated to the biopharmaceuticals segment, have been allocated to the vaccines segment to conform with the current period presentation.

        The accounting policies of Chiron'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 restructuring and reorganization charges and the purchased in-process research and development, which are shown as reconciling items in the table below.

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

				2003		2002		2001
Revenues
	Blood testing:
		Product sales, net:
			Procleix® System	$	200,066	$	125,392	$	48,250
			Ortho-Clinical Diagnostics		28,391		22,652		20,277
		Total product sales, net			228,457		148,044		68,527
		Revenues from joint business arrangement			108,298		104,576		84,528
		Collaborative agreement revenues			9,012		9,420		11,250
		Royalty and license fee revenues			75,407		53,548		20,589
		Other revenues			466		232		9
			Total blood testing revenues		421,640		315,820		184,903
	Vaccines:
		Product sales, net:
			Influenza vaccines		332,428		89,995		74,684
			Menjugate®		65,548		54,971		105,598
			Travel vaccines		87,831		64,335		51,747
			Pediatric and other vaccines		192,511		148,108		133,629
		Total product sales, net			678,318		357,409		365,658
		Collaborative agreement revenues			4,222		655		11
		Royalty and license fee revenues			12,747		12,309		16,472
		Other revenues			13,522		17,890		20,958
			Total vaccines revenues		708,809		388,263		403,099
	Biopharmaceuticals:
		Product sales, net:
			Betaseron® interferon beta-1b		124,936		118,513		96,423
			TOBI® tobramycin		172,047		146,874		123,072
			Proleukin® (aldesleukin)		115,075		114,281		93,335
			Other		27,000		29,000		24,871
		Total product sales, net			439,058		408,668		337,701
		Collaborative agreement revenues			5,328		12,067		24,955
		Royalty and license fee revenues			87,698		63,314		59,811
		Other revenues			29,538		17,464		19,735
			Total biopharmaceuticals revenues		561,622		501,513		442,202
	Other:
		Collaborative agreement revenues			—		—		9,099
		Royalty and license fee revenues			74,290		69,645		101,364
		Other revenues			—		1,039		—
			Total other revenues		74,290		70,684		110,463
	Total revenues			$	1,766,361	$	1,276,280	$	1,140,667

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Income from continuing operations
	Blood testing		$	214,444		$	178,006		$	88,918
	Vaccines			95,092			69,572			116,193
	Biopharmaceuticals			40,997			19,884			(50,489	)
	Other			(12,506	)		10,697			45,553
		Segment income from operations		338,027			278,159			200,175
	Operating income (expense) reconciling items:
		Purchased in-process research and development		(45,300	)		(45,181	)		—
		Restructuring and reorganization charges		(1,654	)		—			(64	)
	Income from operations			291,073			232,978			200,111
		Gain on sale of assets		—			—			2,426
		Interest expense		(19,104	)		(12,821	)		(7,507	)
		Interest and other income, net		38,668			46,362			60,914
		Minority interest		(1,753	)		(1,664	)		(1,194	)
	Income from continuing operations before income taxes		$	308,884		$	264,855		$	254,750

Segment Assets, Depreciation and Amortization Expenses and Capital Expenditures

        Chiron does not evaluate the performance of and allocate resources to its reportable segments based on the financial position of each reportable segment. Rather, Chiron evaluates the performance of and allocates resources to its reportable segments based on (i) income from continuing operations, including depreciation and amortization expenses, and (ii) capital expenditures.

        Depreciation and amortization expenses for property, plant, equipment and leasehold improvements and intangible assets, are included with other operating expenses. Depreciation and amortization expenses not specifically related to a reportable segment are allocated to each segment based upon each segment's percentage of total operating expenses. Depreciation and amortization expenses for each reportable segment were as follows:

			2003		2002		2001
			(In thousands)
Depreciation and amortization expenses
	Blood testing		$	7,881	$	4,742	$	4,371
	Vaccines			83,473		54,760		30,788
	Biopharmaceuticals			44,859		58,337		73,775
	Other			9,510		6,419		6,112
		Total depreciation and amortization expenses	$	145,723	$	124,258	$	115,046

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        Capital expenditures are specifically identified by each reportable segment. Capital expenditures for each reportable segment were as follows:

			2003		2002		2001
			(In thousands)
Capital expenditures
	Blood testing		$	2,449	$	4,120	$	5,347
	Vaccines			66,310		28,140		19,707
	Biopharmaceuticals			197,872		38,674		25,341
	Other			30,268		34,805		14,483
		Total capital expenditures	$	296,899	$	105,739	$	64,878

        Capital expenditures in 2003 for the "Biopharmaceuticals" segment include a capital lease addition of $157.5 million as discussed in Note 13.

Geographic Area Information

        Revenues from product sales by geographic area are based on the customers' shipping locations rather than the customers' country of domicile. Collaborative agreement, license fee, revenues from joint business arrangement and other revenues by geographic area are based on the country of domicile of the counterparty to the agreement. Royalty revenues by geographic area are based on the location to which the product earning the royalties is shipped.

			2003		2002		2001
			(In thousands)
Revenues
	Domestic		$	865,878	$	624,597	$	531,761
	Belgium			60,757		30,673		30,959
	Canada			23,863		19,995		68,177
	France			58,126		48,777		15,936
	Germany			199,951		152,485		160,745
	Italy			70,014		46,118		47,043
	Japan			41,638		31,167		24,364
	United Kingdom			71,577		46,386		32,659
	Other			374,557		276,082		229,023
		Total revenues	$	1,766,361	$	1,276,280	$	1,140,667

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			2003		2002		2001
			(In thousands)
Long-lived assets
	Domestic		$	422,596	$	246,431	$	221,106
	Germany			50,926		30,217		25,475
	Italy			125,772		83,435		58,563
	United Kingdom			76,279		4,572		4,340
	Other			14,177		8,903		3,904
		Total long-lived assets	$	689,750	$	373,558	$	313,388

Major Customers

        One significant customer accounted for 10.7%, 13.1% and 12.2% of total revenues in 2003, 2002 and 2001, respectively. Chiron's biopharmaceuticals segment revenue included 33.7%, 33.3% and 31.4% of revenues from the major customer in 2003, 2002 and 2001, respectively. Chiron's blood testing, vaccines and other segments had no major customers in 2003, 2002 and 2001.

Note 18—Income Taxes

        For financial reporting purposes, "Income from continuing operations before income taxes" included the following components for the years ended December 31:

	2003		2002		2001
	(In thousands)
Domestic income	$	170,964	$	161,145	$	110,124
Foreign income		137,920		103,710		144,626
	$	308,884	$	264,855	$	254,750

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Components of Provision for Income Taxes from Continuing Operations

        Significant components of the provision for income tax expense from continuing operations were as follows for the years ended December 31:

		2003			2002			2001
		(In thousands)
Current Tax Expense:
	Domestic	$	89,502		$	44,785		$	50,397
	Foreign		13,852			44,480			43,309
			103,354			89,265			93,706
Deferred Tax Expense:
	Domestic		(5,634	)		(8,045	)		(10,330	)
	Foreign		(9,174	)		2,490			(3,384	)
			(14,808	)		(5,555	)		(13,714	)
Provision for income taxes from continuing operations		$	88,546		$	83,710		$	79,992

        In 2003, 2002 and 2001, Chiron realized stock option tax benefits, recorded as an increase to additional paid-in capital, of approximately $33.1 million, $8.7 million and $25.9 million, respectively.

        Chiron is presently under examination in several domestic and international tax jurisdictions. While there is no assurance that Chiron will prevail in all tax examinations in the event the taxing authorities disagree with Chiron's interpretation of the tax law, Chiron's management does not believe, based upon information known to it, that the final resolution of any of these audits will have a material adverse effect upon Chiron's consolidated financial position and results of operations and cash flows. Adequate provisions have been made for these tax examinations.

        The total amount of goodwill attributable to the purchase of PowderJect Pharmaceuticals is $503.0 million, of which approximately $231.0 million is expected to be deductible for state income tax purposes over the next fifteen years.

F-68

Rate Reconciliation

        A reconciliation of the expected statutory tax rate (computed at the U.S. statutory income tax rate of 35.0%) to the actual tax rate on income from continuing operations for the years ended December 31 is as follows:

		2003		2002		2001
Expected statutory tax rate		35.0	%	35.0	%	35.0	%
Increases (reductions) in tax resulting from the following:
	State taxes, net of federal benefit	0.9	%	0.4	%	3.5	%
	Net impact of foreign tax rates and foreign tax credits	(10.8	)%	(2.0	)%	(5.8	)%
	Purchased in-process research and development (see below)	5.1	%	6.0	%	—
	Amortization of goodwill (see below)	—		—		1.9	%
	Tax benefit attributed to Extraterritorial Income Exclusion (Foreign Sales Corporation in 2001)	(1.0	)%	(0.8	)%	(2.2	)%
	Utilization of current year research & development tax credits	(2.8	)%	(1.8	)%	(4.5	)%
	Redetermination of prior years research & development tax credits(1)	—		(5.3	)%	—
	Other	2.3	%	0.1	%	3.5	%
Actual tax rate on income from continuing operations		28.7	%	31.6	%	31.4	%

(1)

In connection with an IRS audit of the return filings for 1996, 1997 and 1998, Chiron determined that it had understated its claimed research and development credits in those years. Based on Chiron's recomputations and the results of discussions to-date with the Internal Revenue Service, Chiron claimed additional credits of approximately $14.0 million.

        Purchased in-process research and development charge in 2003 was a permanent difference associated with the acquisition of PowderJect Pharmaceuticals (Note 5). The purchased in-process research and development charge in 2002 was a permanent difference associated with the acquisition of Matrix Pharmaceutical, Inc. The amortization of goodwill was a permanent difference associated with the acquisition of PathoGenesis Corporation.

Summary of Deferred Income Taxes

        Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their basis for income tax purposes and the tax effects of net operating loss and tax credit carryforwards.

        Net deferred tax assets have been recognized based on management's estimates of future taxable income for U.S. and certain foreign jurisdictions in which Chiron's operations have historically been profitable.

F-69

        Significant components of Chiron's deferred income tax assets and liabilities from continuing operations were as follows at December 31:

		2003			2002
		(In thousands)
Deferred income tax assets:
	Capitalized research and development costs	$	932		$	1,193
	Deferred revenue		31,688			31,003
	Reserves and expense accruals		101,530			73,329
	Net operating loss carryovers		54,775			26,739
	Business tax credit carryovers		38,481			16,806
	Other deferred income tax assets		2,105			1,048
			229,511			150,118
	Less valuation allowance		(35,204	)		(14,101	)
			194,307			136,017
Deferred income tax liabilities:
	Basis differences—purchase accounting and intangibles		181,867			89,785
	Patent costs expensed for tax purposes		12,222			10,723
	Depreciation and amortization		4,430			3,166
	Tax effect of unrealized other comprehensive income		30,368			28,442
	Tax effect of contingent payment debt instrument		22,446			11,063
	Other deferred income tax liabilities		266			131
			251,599			143,310
	Net deferred income tax liability	$	(57,292	)	$	(7,293	)

        The above net deferred income tax liability has been reflected in the accompanying Consolidated Balance Sheets as follows:

	2003			2002
	(In thousands)
Current asset	$	50,204		$	38,450
Noncurrent liability		(107,496	)		(45,743	)
Net deferred income tax liability	$	(57,292	)	$	(7,293	)

        Chiron has permanently invested approximately $233.0 million of earnings of certain foreign subsidiaries outside the U.S. Should such earnings be remitted to the U.S., additional U.S. taxes of approximately $50.0 million would accrue.

        The net increase in the valuation allowance for the years ended December 31, 2003 and 2002 was $21.1 and $13.2 million respectively, primarily attributable to acquired net operating losses of Matrix Pharmaceutical, Inc. in 2002 and of PowderJect Pharmaceutical in 2003 as well as foreign net operating losses in jurisdictions where Chiron has no history of taxable income. The net decrease in the valuation allowance for the year ended December 31, 2001 was $8.3 million.

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Tax Operating Loss and Credit Carryforwards

        At December 31, 2003, Chiron had foreign net operating loss carryforwards of approximately $20.8 million, of which approximately $5.3 million begins expiring over the period 2008 to 2018 and the remaining $15.5 million is available to offset future taxable income without limitation.

        At December 31, 2003, Chiron had foreign net operating loss carryforwards attributed to the acquisition of PowderJect Pharmaceuticals of approximately $0.7 million, all of which are available to offset future taxable income without limitation.

        At December 31, 2003, Chiron had federal net operating loss carryforwards, attributable to the acquisition of Matrix Pharmaceutical, Inc., of approximately $49.2 million, which are available to offset future domestic taxable income ratably through 2021.

        At December 31, 2003, Chiron had federal net operating loss carryforwards, attributable to the acquisition of PowderJect Pharmaceuticals of approximately $13.0 million, which are available to offset future domestic taxable income ratably through 2022.

        At December 31, 2003, Chiron had $23.4 million of state net operating loss carryforwards, which expire between 2004 and 2021 and state net operating loss carryforwards, attributable to the acquisition of Matrix Pharmaceutical, Inc., of approximately $27.3 million, which are available to offset future state taxable income ratably through 2013.

        At December 31, 2003, Chiron had utilized all of the remaining federal business tax credit carryforwards attributed to the PathoGenesis Corporation acquisition. At December 31, 2003, Chiron had state business tax credit carryovers of $16.3 million, which are available to offset future state tax liabilities without limitation, and foreign business tax credit carryovers of $22.2 million.

Note 19—Legal Proceedings

        The Office of the Inspector General of the United States Department of Health and Human Services is investigating pharmaceutical industry practices concerning reporting of average wholesale prices for products covered by Medicare and Medicaid. Chiron and a number of other companies have received document subpoenas in connection with that investigation. Chiron has produced documents responsive to two subpoenas, which relate specifically to pricing of certain generic oncology drugs sold by Cetus-Ben Venue Therapeutics, a joint venture between Chiron and Ben Venue Laboratories. Chiron sold its interest in that joint venture in 1996. It appears that the Office of the Inspector General's investigation is connected to a pending, but as yet unserved, qui tam (whistle blower) lawsuit, in which Chiron and other companies are named defendants.

        Certain State Attorneys General also are investigating reporting of average wholesale prices related to State Medicaid programs. In September 2000, the Office of the Attorney General of the State of California Department of Justice propounded a document subpoena to Chiron focused on pricing of certain generic oncology drugs sold by Cetus-Ben Venue under the Medi-Cal program. In December 2003, the Attorneys General for the States of Florida and Kentucky informed Chiron that they were investigating Chiron's calculation and reporting of the average manufacturer price and best price to the Center for Medicare and Medicaid Services and the Health Care Financing Administration.

F-71

        It is anticipated that additional lawsuits involving the average wholesale price issues for these and other products sold by Chiron through Medicaid and/or Medicare may arise. If any such action resulted in a final judgment against Chiron, Chiron could face substantial damages exposure. It is not currently possible to estimate the probability of loss or to estimate the amount of liability related to these matters.

        Chiron 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 Chiron's consolidated financial position and results of operations or cash flows.

Note 20—Quarterly Financial Data (Unaudited)

		2003
		Dec. 31		Sept. 30			June 30		Mar. 31
		(In thousands, except per share data)
Total revenues		$	554,581	$	540,473		$	350,272	$	321,035
Gross margin from net product sales			234,103		258,294			148,508		133,031
Income (loss) from continuing operations:
	Income (loss)		117,963		(20,153	)		61,459		61,069
	Basic income (loss) per share		0.63		(0.11	)		0.33		0.33
	Diluted income (loss) per share		0.59		(0.11	)		0.32		0.32
Net income (loss):
	Income (loss)		121,800		(18,979	)		61,997		62,495
	Basic income (loss) per share		0.65		(0.10	)		0.33		0.33
	Diluted income (loss) per share		0.61		(0.10	)		0.33		0.33

		2002
		Dec. 31		Sept. 30		June 30		Mar. 31
		(In thousands, except per share data)
Total revenues		$	356,324	$	368,481	$	299,278	$	252,197
Gross margin from net product sales			155,069		174,758		135,068		107,418
Income (loss) from continuing operations:
	Income (loss)		67,102		82,536		50,444		(18,937	)
	Basic income (loss) per share		0.36		0.44		0.27		(0.10	)
	Diluted income (loss) per share		0.35		0.43		0.26		(0.10	)
Net income (loss):
	Income (loss)		67,102		82,216		50,444		(18,937	)
	Basic income (loss) per share		0.36		0.44		0.27		(0.10	)
	Diluted income (loss) per share		0.35		0.43		0.26		(0.10	)

F-72

        Certain minor arithmetical variances between the table above and the Consolidated Financial Statements may arise due to rounding.

        Historically, Chiron's operating results have varied considerably from period to period due to the nature of Chiron's collaborative, royalty and license arrangements and the seasonality of the vaccine products. In addition, the mix of products sold and the introduction of new products will affect the comparability of gross margins from quarter to quarter. As a consequence, Chiron's results in any one quarter are not necessarily indicative of results to be expected for a full year. Accordingly, Chiron should be evaluated on the basis of annual financial information.

Continuing Operations

        On July 8, 2003, Chiron acquired PowderJect Pharmaceuticals (see Note 5), a company based in Oxford, England that develops and commercializes vaccines. Total revenues for PowderJect Pharmaceuticals were $128.2 million and $116.5 million in the fourth quarter 2003 and the third quarter 2003, respectively. Gross margin from net product sales for PowderJect Pharmaceuticals was $56.1 million and $69.6 million in the fourth quarter 2003 and the third quarter 2003, respectively.

        Chiron allocated $122.7 million of the purchase price to purchased in-process research and development, which it charged to earnings in the third quarter 2003. In the fourth quarter 2003, upon completion of strategic assessments of the value of certain research and development projects, Chiron revised the allocation of the purchase price resulting in a $77.4 million decrease to purchased in-process research and development which was offset to goodwill. The amortization expense for the acquired intangibles associated with this acquisition was $13.2 million and $12.1 million in the fourth quarter 2003 and the third quarter 2003, respectively.

        On July 30, 2003, Chiron issued $500.0 million aggregate principal amount of convertible debentures, which mature on August 1, 2033. The convertible debentures accrue interest at a rate of 1.625% per year and interest is payable on February 1 and August 1 commencing February 1, 2004. The debentures are senior, unsecured obligations of Chiron and rank equal in right of payment with all of Chiron's existing and future unsecured and unsubordinated indebtedness.

Discontinued Operations (see Note 4)

        "Gain (loss) from discontinued operations" included an income tax benefit of $3.8 million in the fourth quarter of 2003. The tax benefit related to the reversal of valuation allowances against deferred tax assets that were established at the time of the sale of Chiron Diagnostics, as the timing differences for which such valuation allowances relate have now been reversed or written off.

F-73

SCHEDULE II

CHIRON CORPORATION

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

Description	Balance at Beginning of Year		Charged to Costs and Expenses, Net of Reversals		Utilizations			Balance At End of Year
	(In thousands)
2003:
Accounts receivable and product returns allowance	$	23,543	$	23,152	$	(9,830	)	$	36,865
Inventory reserves		32,762		13,314		(10,959	)		35,117
Restructuring and reorganization accrual		334		1,654		(1,343	)		645
2002:
Accounts receivable and product returns allowance	$	18,772	$	17,529	$	(12,758	)	$	23,543
Inventory reserves		26,892		15,740		(9,870	)		32,762
Restructuring and reorganization accrual		693		—		(359	)		334
2001:
Accounts receivable and product returns allowance	$	14,576	$	27,531	$	(23,335	)	$	18,772
Inventory reserves		27,374		10,205		(10,687	)		26,892
Restructuring and reorganization accrual		2,655		64		(2,026	)		693

F-74

QuickLinks

DOCUMENTS INCORPORATED BY REFERENCE
PART I

ITEM 1. BUSINESS

ITEM 2. PROPERTIES

ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

EXECUTIVE OFFICERS OF THE REGISTRANT
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

SIGNATURES
POWER OF ATTORNEY
ERNST & YOUNG LLP, INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
CHIRON CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
CHIRON CORPORATION CONSOLIDATED BALANCE SHEETS (Continued) (In thousands, except share data)
CHIRON CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
CHIRON CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) (In thousands, except per share data)
CHIRON CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
CHIRON CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
CHIRON CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) (In thousands)
CHIRON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
CHIRON CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)
CHIRON CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003

SCHEDULE II

CHIRON CORPORATION VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED DECEMBER 31, 2003, 2002 and 2001

EX-3.04

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Exhibit 3.04

CHIRON CORPORATION

AMENDED AND RESTATED BYLAWS

INDEX

ARTICLE I		OFFICES AND OTHER ARRANGEMENT	1
	1.1	Registered Office	1
	1.2	Other Offices	1
	1.3	Governance Agreement	1
ARTICLE II		MEETINGS OF STOCKHOLDERS	1
	2.1	Place	1
	2.2	Annual Meetings	1
	2.3	Annual Meeting Notice	1
	2.4	List of Stockholders Entitled to Vote	1
	2.5	Special Meetings	2
	2.6	Special Meeting Notice	2
	2.7	Special Meeting Business	2
	2.8	Quorum and Adjourned Meetings	2
	2.9	Votes Required	2
	2.10	Voting	2
	2.11	Consent to Shareholder Action	2
	2.12	Nomination of Directors	2
	2.13	Stockholder Proposals	3
ARTICLE III		BOARD OF DIRECTORS	3
	3.1	Number, Tenure and Qualification	3
	3.2	Vacancies	3
	3.3	Powers	3
	3.4	Place of Meetings	4
	3.5	First Meeting	4
	3.6	Regular Meetings	4
	3.7	Special Meetings	4
	3.8	Quorum	4
	3.9	Action without Meeting	4
	3.10	Participation by Telephone	4
	3.11	Committees	4
	3.12	Committee Minutes	5
	3.13	Compensation of Directors	5
	3.14	Removal of Directors	5
	3.15	Approval Required for Certain Actions	5
	3.16	Strategic Planning Process	5
	3.17	Operating Planning Process	5
	3.18	Measurement Standards	5
ARTICLE IV		NOTICES	5
	4.1	Delivery	5
	4.2	Waiver	6
ARTICLE V		OFFICERS	6
	5.1	Number	6
	5.2	Appointment	6

	5.3	Other Officers	6
	5.4	Salaries	6
	5.5	Term; Vacancies	6
	5.6	Chairman	6
	5.7	Vice Chairman	6
	5.8	President	6
	5.9	Execution of Documents	6
	5.10	Vice President	6
	5.11	Secretary	7
	5.12	Assistant Secretary	7
	5.13	Treasurer	7
	5.14	Disbursement of Funds; Reports	7
	5.15	Bond	7
	5.16	Assistant Treasurer	7
ARTICLE VI		CERTIFICATES OF STOCK	7
	6.1	Certificate of Stock	7
	6.2	Facsimile Signatures	8
	6.3	Lost Certificates	8
	6.4	Transfer of Stock	8
	6.5	Fixing Record Date	8
	6.6	Registered Stockholders	9
ARTICLE VII		GENERAL PROVISIONS	9
	7.1	Dividends	9
	7.2	Reserves	9
	7.3	Checks	9
	7.4	Fiscal Year	9
	7.5	Seal	9
	7.6	Indemnification	9
	7.7	Books and Records	10
ARTICLE VIII		AMENDMENTS	10

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AMENDED AND RESTATED BYLAWS

OF

CHIRON CORPORATION

ARTICLE I

OFFICES AND OTHER ARRANGEMENT

        1.1  Registered Office. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.

        1.2  Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require.

        1.3  Governance Agreement. The Corporation is party to that certain Governance Agreement dated as of November 20, 1994 (as the same shall be amended from time to time, the "Governance Agreement") among CIBA-GEIGY Limited, a corporation organized under the laws of Switzerland, Ciba-Geigy Corporation, a New York corporation, and the Corporation. The Governance Agreement contains certain provisions regarding the ongoing governance and operations of the Corporation, which are incorporated in these Bylaws as provided below. All capitalized terms used in these Bylaws and not otherwise defined herein shall have the meanings assigned to them in the Governance Agreement.

ARTICLE II

MEETINGS OF STOCKHOLDERS

        2.1  Place. All meetings of the stockholders for the election of directors shall be held in the City of Emeryville, State of California, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof.

        2.2  Annual Meetings. Annual meetings of stockholders shall be held on the third Thursday in May if not a legal holiday, and, if a legal holiday, then on the next secular day following, at 10:00 A.M., or such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which the stockholders shall elect by a plurality vote a board of directors, and transact such other business as may properly be brought before the meeting.

        2.3  Annual Meeting Notice. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting.

        2.4  List of Stockholders Entitled to Vote. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

        2.5  Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the President and shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors. Such request shall state the purpose or purposes of the proposed meeting.

        2.6  Special Meeting Notice. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting.

        2.7  Special Meeting Business. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

        2.8  Quorum and Adjourned Meetings. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat who are present in person or represented by proxy shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

        2.9  Votes Required. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, provided, however, that the vote of the holders of a majority of the stock having voting power present in person or represented by proxy and actually voting on the merits of the question and not abstaining or withholding authority to vote shall decide the election of any director and any question submitted for a vote by act of the Board of Directors, pursuant to Section 3.8 of the Bylaws provided, further, however, that if the question is one upon which by express provision of law or of the Certificate of Incorporation or these Bylaws, a different vote is required, such express provision shall govern and control the decision of such question.

        2.10  Voting. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three (3) years from its date, unless the proxy provides for a longer period.

        2.11  Consent to Shareholder Action. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

        2.12  Nomination of Directors. Nominations for election to the Board of Directors must be made by the Board of Directors or by any stockholder of any outstanding class of capital stock of the Corporation entitled to vote for the election of directors. Nominations, other than those made by the

2

Board of Directors of the Corporation, must be preceded by notification in writing in fact received by the Secretary of the Corporation not less than twenty (20) days prior to any meeting of stockholders called for the election of directors. Such notification shall contain the written consent of each proposed nominee to serve as a director if so elected and the following information as to each proposed nominee and as to each person, acting alone or in conjunction with one or more other persons as a partnership, limited partnership, syndicate or other group, who participates or is expected to participate in making such nomination or in organizing, directing or financing such nomination or solicitation of proxies to vote for the nominee.

        2.13  Stockholder Proposals. Proposals regarding matters other than nomination of directors and other than those made by the Board of Directors of the Corporation, must be preceded by notification in writing in fact received by the Secretary of the Corporation not less than twenty (20) days prior to any annual meeting of stockholders. Such notification shall contain the following information as to the proposed action:

(a)

a description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting,



(b)

the name and address as they appear on the corporation's books of the stockholder proposing such business,



(c)

the class and number of shares of the corporation which are beneficially owned by such stockholder, and



(d)

any material interest of such stockholder in such business.

        The presiding officer of the meeting shall have the authority to determine and declare to the meeting that a matter not preceded by notification made in accordance with the foregoing procedure shall be disregarded.

ARTICLE III

BOARD OF DIRECTORS

        3.1  Number, Tenure and Qualification. The number of directors which shall constitute the whole Board shall be eleven (11). [Amended May 14, 1999, May 25, 2000, February 16, 2001, September 24, 2002, February 10, March 14, May 16 and December 5, 2003]

        Section 2.01 of the Governance Agreement sets forth certain provisions regarding the number, tenure and qualification of directors, which provisions are incorporated herein and made a part of these Bylaws. Subject to said Section 2.01 and except as otherwise provided in Section 3.2 of this Article III, the number of directors shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting of the stockholders, and each director elected shall hold office until his or her successor is elected and qualified or until his earlier resignation, removal from office, death or incapacity. Directors need not be stockholders.

        3.2  Vacancies. Section 2.01 of the Governance Agreement sets forth certain provisions regarding filling vacancies and newly created directorships on the Board of Directors, which provisions are incorporated herein and made a part of these Bylaws. All vacancies and newly created directorships shall be filled in accordance with the terms of said Section 2.01.

        3.3  Powers. The business of the Corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders.

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        3.4  Place of Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware.

        3.5  First Meeting. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors.

        3.6  Regular Meetings. Regular meetings of the Board of Directors may be held without notice of such time and at such place as shall from time to time be determined by the Board.

        3.7  Special Meetings. Special meetings of the Board may be called by the President on four (4) days' notice to each director by mail or forty-eight (48) hours' notice to each director either personally or by telegram; special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of two (2) directors unless the Board consists of only one director, in which case special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of the sole director.

        3.8  Quorum. At all meetings of the Board a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.

        3.9  Action without Meeting. (a) Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

(b)

Section 2.03(d) of the Governance Agreement sets forth certain provisions regarding the requirement that action by the committees of the Board of Directors be taken at a meeting thereof, which provisions are incorporated herein and made a part of these Bylaws.

        3.10  Participation by Telephone. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.

        3.11  Committees. Section 2.03 of the Governance Agreement provides that the following committees of the Board of Directors shall be formed and administered: (i) an Audit Committee; (ii) a Nominating and Corporate Governance Committee; (iii) a Strategic Planning Committee; (iv) a Compensation Committee; (v) a Stock Option Plan Administration Committee; and (vi) a Finance Committee. Such committees of the Board of Directors shall be formed, maintained and administered in accordance with the terms of said Section 2.03 of the Governance Agreement, which provisions are incorporated herein and made a part of these Bylaws. All committees of the Board of Directors not

4

specifically provided for in said Section 2.03 shall be constituted in accordance with Section 2.03(c) of the Governance Agreement. [Amended October 21, 2002, February 21, May 16 and December 5, 2003]

        3.12  Committee Minutes. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

        3.13  Compensation of Directors. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

        3.14  Removal of Directors. Section 2.01 of the Governance Agreement sets forth certain provisions regarding the number, tenure and qualification of directors, which provisions are incorporated herein and made a part of these Bylaws. Subject to said Section 2.01 and unless otherwise restricted by the Certificate of Incorporation or by these Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors.

        3.15  Approval Required for Certain Actions. Section 2.04 of the Governance Agreement sets forth certain approval rights for Ciba and the Investor Directors with respect to certain actions proposed to be taken or affected by the Corporation or any of its Subsidiaries. Neither the Corporation nor any of its Subsidiaries shall take or effect any of such actions without having first obtained such approvals.

        3.16  Strategic Planning Process. Section 2.10 of the Governance Agreement sets forth certain provisions regarding the preparation from time to time of a three-year Strategic Plan by the management of the Corporation and the consideration and approval of such Strategic Plan by the Board of Directors, which provisions are incorporated herein and made a part of these Bylaws.

        3.17  Operating Planning Process. Section 2.11 of the Governance Agreement sets forth certain provisions regarding the preparation from time to time of an Operating Plan by the management of the Corporation and the consideration and approval of such Operating Plan by the Board of Directors, which provisions are incorporated herein and made a part of these Bylaws.

        3.18  Measurement Standards. Section 2.12 of the Governance Agreement sets forth certain provisions regarding the adoption of Measurement Standards by the Board of Directors for each fiscal year. In addition, such Section 2.12 sets forth certain provisions regarding approval rights and procedures to be followed in the event that Measurement Standards shall not have been approved by the Board of Directors in a timely manner or in the event that the Measurement Standards shall not have been met at any time by the Corporation. Said provisions are incorporated herein and made a part of these Bylaws.

ARTICLE IV

NOTICES

        4.1  Delivery. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail addressed to such director or stockholder at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram.

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        4.2  Waiver. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE V

OFFICERS

        5.1  Number. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President and a Secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also choose one or more Vice Presidents, Assistant Secretaries, Treasurers, and Assistant Treasurers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide.

        5.2  Appointment. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a President and a Secretary and may choose a Vice President and a Treasurer. Nothing in these Bylaws shall limit the authority of the Board of Directors to determine from time to time the powers and duties of any officer, employee or agent of the Corporation.

        5.3  Other Officers. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.

        5.4  Salaries. The salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors.

        5.5  Term; Vacancies. The officers of the Corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation may only be filled by the Board of Directors.

        5.6  Chairman. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors at which the Chairman shall be present. The Chairman shall have and may exercise such powers as are, from time to time, assigned to the Chairman by the Board of Directors and as may be provided by law.

        5.7  Vice Chairman. The Vice Chairman shall have and may exercise such powers as are from time to time assigned to the Vice Chairman by the Board of Directors. In the absence of the Chairman of the Board, the Vice Chairman of the Board shall preside at all meetings of the Board of Directors at which the Vice Chairman shall be present.

        5.8  President. The President shall be the Chief Executive Officer of the Corporation and may exercise such powers as are, from time to time, assigned to the President by the Board of Directors.

        5.9  Execution of Documents. The President shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the Corporation.

        5.10  Vice President. In the absence of the President or in the event that the President is unable or refuses to act, the Vice President, if any (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the Board of Directors, or in the absence of any designation, then in the order of their election), shall perform the duties of the President, and when so acting, shall have all of the powers of and be subject to all of the restrictions upon the President. The

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Vice President shall perform such other duties and shall have such other powers as the President may from time to time prescribe.

        5.11  Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under whose supervision the Secretary shall be. The Secretary shall have custody of the corporate seal of the Corporation and the Secretary, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the Secretary's signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by such officer's signature.

        5.12  Assistant Secretary. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in order of their election) shall, in the absence of the Secretary or in the event of the Secretary's inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the President may from time to time prescribe.

        5.13  Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors.

        5.14  Disbursements of Funds; Reports. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Treasurer and of the financial condition of the Corporation.

        5.15  Bond. If required by the Board of Directors, the Treasurer shall give the Corporation a bond (which shall be renewed every six years) in such sum and with sure surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of that office and for the restoration to the Corporation, in case of the Treasurer's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in possession or under control of the Treasurer belonging to the Corporation.

        5.16  Assistant Treasurer. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Treasurer or in the event of the Treasurer's inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other powers as the President may from time to time prescribe.

ARTICLE VI

CERTIFICATES OF STOCK

        6.1  Certificate of Stock. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President and the Treasurer or an Assistant Treasurer,

7

or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such stockholder in the Corporation.

        Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified.

        If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

        6.2  Facsimile Signatures. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar as of the date of issue.

        6.3  Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or such owner's legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

        6.4  Transfer of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

        6.5  Fixing Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. The record date for determining stockholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is given. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

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        6.6  Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE VII

GENERAL PROVISIONS

        7.1  Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation.

        7.2  Reserves. Before payments of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purposes as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.

        7.3  Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

        7.4  Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.

        7.5  Seal. The Board of Directors may adopt a corporate seal having inscribed thereon the name of the Corporation and the year of its organization. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

        7.6  Indemnification. The Corporation shall indemnify to the full extent permitted by, and in the manner permissible under, the laws of the State of Delaware any person made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that such person, his testator or intestate is or was a director of the Corporation or any predecessor of the Corporation or served any other enterprise as a director or officer at the request of the Corporation or any predecessor of the Corporation. Expenses incurred by a director of the Corporation in defending a civil or criminal action, suit or proceeding by reason of the fact that such director is or was a director of the Corporation (or was serving at the Corporation's request as a director or officer of another corporation) shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director to repay such amount if it shall ultimately be determined that such director is not entitled to be indemnified by the Corporation as authorized by relevant sections of the General Corporation Law of Delaware.

        The foregoing provisions of this Article VII shall be deemed to be a contract between the Corporation and each director who serves in such capacity at any time while this Bylaw is in effect, and any repeal or modification thereof shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought based in whole or in part upon any such state of facts.

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        The Board of Directors in its discretion shall have power on behalf of the Corporation to indemnify any person, other than a director, made a party to any action, suit or proceeding by reason of the fact that such person, his testator or intestate, is or was an officer or employee of the Corporation.

        The foregoing rights of indemnification shall not be deemed exclusive of any other right to which any director may be entitled apart from the provisions of this Article VII.

        7.7  Books and Records. Any stockholder or any director shall have the right to inspect the books and records of the Corporation to the full extent permitted by, and subject to the terms and conditions of, the General Corporation Law of Delaware.

ARTICLE VIII

AMENDMENTS

        8.1  These Bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the Certificate of Incorporation at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal bylaws is conferred upon the Board of Directors by the Certificate of Incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal bylaws. Notwithstanding any provision in these Bylaws to the contrary, in no event so long as the Governance Agreement shall be in effect shall any provision of these Bylaws be altered, amended or repealed or new bylaws adopted by the stockholders or by the Board of Directors in a manner that would be inconsistent with the terms and conditions of the Governance Agreement.

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Exhibit 3.04

CHIRON CORPORATION AMENDED AND RESTATED BYLAWS INDEX
AMENDED AND RESTATED BYLAWS OF CHIRON CORPORATION
ARTICLE I OFFICES AND OTHER ARRANGEMENT
ARTICLE II MEETINGS OF STOCKHOLDERS
ARTICLE III BOARD OF DIRECTORS
ARTICLE IV NOTICES
ARTICLE V OFFICERS
ARTICLE VI CERTIFICATES OF STOCK
ARTICLE VII GENERAL PROVISIONS
ARTICLE VIII AMENDMENTS

EX-10.005

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Exhibit 10.005

CONFIDENTIAL REDACTED VERSION

[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

DATED	23 DECEMBER 2003
INTERCITY PHARMA LIMITED	(1)
and
EVANS VACCINES LIMITED	(2)
AGREEMENT FOR LEASE relating to Unit 5A Boulevard Industry Park Halewood Merseyside

Hammonds Trinity Court    16 John Dalton Street    Manchester    M60 8HS DX 14347 Manchester 1 Telephone +44 (0)870 839 0000    Fax +44 (0)870 839 5001	www.hammonds.com
Reference SG2/INT.292-1

CONTENTS

1	INTERPRETATION	1
2	DEFINITIONS	1
3	BUILDING CONTRACT PROFESSIONAL APPOINTMENTS AND WARRANTIES	6
4	THE PROFESSIONAL TEAM	7
5	THE CONTRACTOR	7
6	EXECUTION OF THE BUILDING WORKS	9
7	DAMAGES	10
8	DEVELOPERS VARIATIONS	11
9	BIO WORKS	11
10	PERMITTED TENANT'S VARIATIONS	14
11	INSPECTION	15
12	ACCESS DATE AND PRACTICAL COMPLETION	16
13	MEASUREMENT AND RENT	17
14	TENANT'S WORKS	18
15	ACCESS FOR TENANT'S WORKS	19
16	RENT	21
17	THE GRANT OF THE LEASE AND LICENCE TO COMPLETE THE BIO WORKS	21
18	INSURANCE	22
19	NO ASSIGNMENT OF THIS AGREEMENT EXCEPT TO A FUND	23
20	OCCUPATION PRIOR TO COMPLETION OF THE LEASE	23
21	TITLE	24
22	REGISTRATION OF NOTICE	25
23	NON MERGER	25
24	DEFECTS LIABILITY PROVISIONS	25
25	PROVISO FOR RE-ENTRY	26
26	NOTICES	26
27	NO RESTRICTIONS ON ADJOINING LAND	27
28	VAT	27
29	DISPUTES	27
30	LIMITATION OF DEVELOPER'S LIABILITY	28
31	THE EMPLOYER'S REPRESENTATIVE AND THE TENANT'S SURVEYOR	28
32	LIMITATION OF SUCCESSORS IN TITLE'S LIABILITY	28

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33	INTEREST	28
34	NO REPRESENTATIONS	28
35	ENTIRE AGREEMENT	28
36	THIRD PARTIES	28
37	MUTUAL CO-OPERATION	29
38	CONFIDENTIALITY	29
39	STANDARD CONDITIONS	29
40	JURISDICTION	29
41	OPERATION OF THIS DEED	29
42	STAMP DUTY	29

SCHEDULE 1 ACCESS CRITERIA	30
SCHEDULE 2 PRE-CONDITIONS	31

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DATE OF AGREEMENT FOR LEASE 23 DECEMBER 2003

PARTIES

(1)

INTERCITY PHARMA LIMITED (Company Number 4703226) whose registered office is at The Customs House 7 Union Street Liverpool L3 9QX ("Developer")

(2)

EVANS VACCINES LIMITED (Company Number 03970089) whose registered office is at Florey House Robert Robinson Avenue Oxford Oxfordshire OX4 4GA ("Tenant")

IT IS AGREED THAT:

1

INTERPRETATION

In this Agreement unless the context otherwise requires:

1.1

words importing any gender include every gender;

1.2

words importing the singular number only include the plural number and vice versa;

1.3

words importing persons includes firms, companies and corporations and vice versa;

1.4

any reference to an Act of Parliament includes any statutory modification or re-enactment thereof for the time being in force and any instrument, order, plan, regulation, permission or direction for the time being made, issued or given thereunder or deriving validity therefrom;

1.5

unless expressly stated to the contrary the expression "this Agreement" includes any document supplemental to or collateral with this document;

1.6

the index to this Agreement and the clause headings in this Agreement are for ease of reference only and shall not affect the construction or interpretation of this Agreement;

1.7

where any obligation is undertaken by two or more persons jointly those persons shall be jointly and severally liable in respect of that obligation;

1.8

any reference to a clause or appendix is a reference to the relevant clause in or appendix to this Agreement;

2

DEFINITIONS

In this Agreement the following expressions shall have the following meanings:

"Access Criteria" means the criteria specified in Schedule 1.

"Access Date" means the date upon which the Employer's Representative shall certify that Zones 1, 2 and 3 have reached such a state of readiness as to enable the Tenant to have exclusive occupation thereof for the purpose of carrying out the Tenant's Works provided that the Employer's Representative shall not issue such certificate unless and until the Access Criteria in respect of the above are satisfied

and "Access Certificate" shall be construed accordingly.

"Access Drawings" means the drawings annexed hereto at Appendix F.

"Architect" means Austin Smith: Lord of 5-6 Bowood Court Calver Road Warrington Cheshire WA2 8QZ or such other architect as shall be appointed by the Developer for the Basebuild Works in accordance with the terms of this Agreement.

"Basebuild Works" means that part of the Building Works described in the Basebuild Specification.

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"Basebuild Specification" means the specification annexed hereto as part of Appendix B and labelled "Basebuild Specification".

"Bio Specification" means the outline specification annexed hereto as part of Appendix B and labelled "Bio Specification" and (in due course) the Bio Specification provided to the Developer pursuant to clause 9.3 or (if applicable) prepared by the Developer pursuant to clause 9.9.

"Bio Works" means that part of the Building Works described in the Bio Specification.

"Bio Programme" means the programme for the Bio Works to be provided by the Tenant with the Bio Specification and approved by the Developer in accordance with Clause 9.

"Bio Contract" means the contract for the Bio Works.

"Bio Contractor" means the contractor for the Bio Works appointed by the Developer pursuant to this Agreement.

"Bio Contractor's Price" means the Bio Contractor's price for carrying out the Bio Works provided by the Tenant to the Developer pursuant to clause 9.3.

"Building" means the building to be constructed on the Premises as part of the Building Works pursuant to this Agreement.

"Building Contract" means the building contract or contracts for the carrying out and completion of the Basebuild Works attached at Appendix G hereto.

"Building Works" means the works of constructing the Scheme as more particularly described in the Specification.

"Certificate of Practical Completion of the Basebuild Works" means the certificate to be issued by the Employer's Representative certifying that the Basebuild Works have been practically completed in accordance with the terms of the Building Contract.

"Certificate of Practical Completion of the Bio Works" means the certificate to be issued by the Employer's Representative in respect of the Bio Works certifying that the Bio Works have been practically completed in accordance with the Bio Contract.

"Certificate of Practical Completion of the Building Works" means the certificate to be issued by the Employer's Representative certifying that the Building Works have been practically completed in accordance with the terms of both the Building Contract and the Bio Contract as appropriate and "Practical Completion" shall be construed accordingly.

"Certificate of Sectional Completion" means the certificate to be issued by the Employer's Representative certifying that Zones 1 2 and 3 have been practically completed in accordance with the terms of the Building Contract.

"Certificate(s) of Making Good Defects" means a notice issued by the Employer's Representative pursuant to the Building Contract and/or the Bio Contract (as the case may be) that all defects in the Basebuild Works and/or Bio Works (as the case may be) (and any other works referred to in such notice) appearing during the defects liability period specified in the Building Contract and/or the Bio Contract (as the case may be) have been made good.

"CDM Regulations" means The Construction (Design and Management) Regulations 1994 (SI 1994 No 3140) and the Health and Safety Commission's "Approved Code of Practice" relating to the said regulations as each shall from time to time be amended modified supplemented or replaced and shall include any regulations directions or orders lawfully made thereunder and terms used in the CDM Regulations shall have the same meaning in this Agreement as they have in the CDM Regulations.

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"Compound" means the area coloured yellow on the Site Plan.

"Contractor" means Pochin (Contractors) Limited of Brooks Lane Middlewich Cheshire CW10 0JQ or such other such building contractor as the Developer may from time to time appoint in connection with the Basebuild Works in accordance with the terms of this Agreement.

"Date of Practical Completion" means the date of issue of the relevant Certificate of Practical Completion.

"Developer's Solicitors" means Hammonds Trinity Court 16 John Dalton Street Manchester M60 8HS (Ref: SG2/INT.292-1).

"Employer's Representative" means in relation to the Basebuild Works Davis Langdon & Everest of Princess House 39 Kingsway London WC2B 4TP or such other representative(s) as may be appointed by the Developer in his place from time to time to act as employer's representative under the Building Contract or in relation to the Bio Works E C Harris LLP of Lynton House 7-12 Tavistock Square London WC1H 9LX or such other representative(s) as may be appointed by the Developer in its place from time to time to act as Employer's Representative under the Bio Contract in each case in accordance with the terms of this Agreement.

"Environmental Consultants" means Environ UK Limited of 5 Stratford Place London WC1C 1BA

"Estate" means Boulevard Industry Park, Halewood, Merseyside shown for the purpose of identification only edged by a dotted blue line on the Site Plan.

"Event of Contractor's Insolvency" occurs:-

(a)

if the Contractor is unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986;



(b)

at any time after the Contractor submits any proposal, makes any application for or enters into any arrangement, scheme, compromise, moratorium or composition with any of its creditors;



(c)

at any time after the appointment of a receiver or an administrative receiver over all or any part of the Contractor's property; or



(d)

at any time after the Contractor is the subject of a petition presented, a resolution passed or an order made:



(i)

for the appointment of an administrator; or



(ii)

to have the company wound up (except for the purpose of the amalgamation or reconstruction of a solvent company).

"Event of Bio Contractor's Insolvency" occurs:-

(a)

if the Bio Contractor is unable to pay its debts within the meaning of section 123 of the Insolvency Act 1986;



(b)

at any time after the Bio Contractor submits any proposal, makes any application for or enters into any arrangement, scheme, compromise, moratorium or composition with any of its creditors;



(c)

at any time after the appointment of a receiver or an administrative receiver over all or any part of the Bio Contractor's property; or

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(d)

at any time after the Bio Contractor is the subject of a petition presented, a resolution passed or an order made:



(i)

for the appointment of an administrator; or



(ii)

to have the company wound up (except for the purpose of the amalgamation or reconstruction of a solvent company).

"Fund" means any party providing finance to the Developer to whom the benefit of this Agreement has been charged and/or assigned pursuant to clause 19 of this Agreement.

"Grant Funding Agreement" means an agreement dated 23 December 2003 and made between North West Development Agency (1) and the Developer (2) and UK Land and Property Limited (3)

"Gross Internal Area" means the total number of feet squared of gross internal area measured in accordance with the Code of Measuring Practice 5^th Edition issued by the Royal Institution of Chartered Surveyors and the Incorporated Society of Valuers and Auctioneers ("the Code").

"Initial Rent" means subject to clauses 13.6 and 13.7 [***] per annum or such lesser sum as shall be calculated in accordance with clause 13.6 hereof being the yearly rent to be first reserved by the Lease.

"Lease" means the lease of the Premises to be granted to the Tenant in accordance with this Agreement which shall be in the form set out in Appendix A.

"Mechanical and Electrical Engineer" means Faber Maunsell Limited of Marlborough House Upper Marlborough Road St Albans AL1 3UT or such other mechanical and electrical engineer as may be appointed by the Developer in accordance with the terms of the Agreement.

"Necessary Consents" means all consents, licences, permissions, building regulations and approvals of any local or other competent authority which may from time to time be necessary to carry out and complete the Building Works or the Permitted Tenant's Variations (as the case may be) in accordance with the terms of this Agreement.

"Permitted Tenant's Variation" means any variation or amendment requested by the Tenant (acting properly and reasonably) to any part of the Building Works and which:-

(a)

does not reduce the Gross Internal Area of the Building to less than 232,830 (two hundred and thirty two thousand, eight hundred and thirty) square feet or thereabouts; and/or



(b)

does not breach the Grant Funding Agreement; and/or



(c)

does not adversely affect the external appearance of the Premises; and/or



(d)

does not require the obtaining of a Necessary Consent which cannot be obtained either at all or within a reasonable time and at a reasonable cost; and/or



(e)

would result (if implemented) in the Developer being in breach of any of its obligations under clause 6; and/or



(f)

does not (when aggregated with the delay to the building contract period previously agreed by the parties or arising from any previous Permitted Tenant's Variations) cause delay to the building contract period of over one calendar month.

"Plan" means the Site Plan and the Zone Plan attached to this Agreement at Appendix E.

"Planning Acts" means the Town and Country Planning Acts 1990, the Planning (Hazardous Substances) Act 1990, the Planning (Consequential Provisions) Act 1990, the Local Government

4

Planning and Land Act 1980, the Planning and Compensation Act 1991 and any subsequent legislation of a similar nature.

"Planning Agreement" means any agreement entered into between the Developer and the local planning authority as a condition of the grant of Planning Permission or otherwise regulating the use or development of the Premises and whether entered into pursuant to section 106 of the Town and Country Planning Act 1990 or section 33 of the Local Government (Miscellaneous Provisions) Act 1982 or any agreement entered into between the Developer and any statutory authority under section 38 or section 278 of the Highways Act 1980 or section 104 of the Water Industry Act 1991 or otherwise.

"Planning Supervisor" means Faber Maunsell Limited of Marlborough House Upper Marlborough Road St Albans AL1 3UT or such other planning supervisor as shall be appointed by the Developer for the Building Works in accordance with the terms of this Agreement.

"Pre-Conditions" means the conditions specified in Schedule 2.

"Premises" means the land shown edged red on the Site Plan being Unit 5A Boulevard Industry Park Halewood Merseyside and all additions and improvements made to it and references to the Premises shall include reference to any part of them.

"Prescribed Rate" means the rate of interest which is [***] above Royal Bank of Scotland plc base rate for the time being.

"Professional Team" means the relevant Employer's Representative in respect of the Basebuild Works, the relevant Employer's Representative in respect of the Bio Works (if applicable), the Architect, the Environmental Consultants, the Quantity Surveyor, the Mechanical and Electrical Engineer, the Structural Engineer and the Planning Supervisor.

"Quantity Surveyor" means Davis Langdon & Everest of Boulton House aforesaid or such other quantity surveyor as shall be appointed by the Developer for the Building Works in accordance with the terms of this Agreement.

"Relevant Sub-Contractors" means the sub-contractors with a design responsibility appointed by the Contractor for the carrying out of the following parts of the Building Works being ground works steel frame cladding roofing curtain walling/windows louvres mechanical and electrical lifts and any other subcontractor with a responsibility for design and "Relevant Sub-Contracts" shall be construed accordingly.

"Rent Commencement Date" means 12 months after the Date of Practical Completion of the Basebuild Works.

"Scheme" means the construction on the Premises of a production building and an office building (including reception and welfare areas) having a Gross Internal Area of 238,800 square feet or thereabouts including car parking landscaping and infrastructure as described in the Specification.

"Site Plan" means one of the Plans annexed hereto at Appendix E and named "Site Plan".

"Snagging Items" means such minor omissions imperfections defects and faults listed in the snagging list issued with the Certificate of Sectional Completion and/or the Certificate(s) of Practical Completion (as the case may be).

"Specification" means the specification and plans relating to the Building Works annexed to this Agreement as appendix B and labelled respectively "Base Build Specification" and "Bio Specification" subject to such modifications, additions and variations as may be made thereto in accordance with this Agreement.

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"Start on Site Date" means the date that the Contractor enters the Premises to commence the Building Works.

"Step In Agreement" means the agreement required to be entered into by the Tenant and the Fund in the form of Appendix H.

"Structural Engineer" means Capita Property Consultancy Limited trading as Roscoe Capita of 61-71 Victoria Street, London SW1H OXA or other structural engineer as shall be appointed by the Developer for the Building Works in accordance with the terms of this Agreement.

"Superior Landlord" means North West Development Agency of Renaissance House PO Box 37 Centre Park Warrington Cheshire, WA1 1XB.

"Tenant's Solicitors" means DLA of 101 Barbirolli Square Manchester M2 3DL (Ref: AW).

"Tenant's Surveyor" means such firm(s) or individual(s) as shall be appointed by the Tenant from time to time for the purposes of this Agreement and whose identity is notified to the Developer.

"Tenant's Works" means the works which the Tenant proposes to carry out by way of fitting out of the Premises.

"Term Commencement Date" means the date calculated pursuant to clause 17.2 hereof.

"VAT" means value added tax or any similar tax for the time being in force as shall be legally payable whether as a result of any election or otherwise at the rate appropriate at the time of the relevant supply.

"Warranties" means the warranties in the forms of the drafts annexed to this Agreement as Appendix C from the Contractor the Bio Contractor the Professional Team and the Relevant Sub-Contractors.

"Working Day" means any day except Saturday, Sunday and bank or other public holidays in England.

"Zone 1" means that area of the Building shown edged yellow on the Plan

"Zone 2" means that area of the Building shown edged pink on the Plan

"Zone 3" means that area of the Building shown edged blue on the Plan

"Zone 4" means that area the Building shown edged orange on the Plan

"Zone 5" means that area of the Building shown edged green on the Plan

"Zone 6" means that area of the Building shown edged purple on the Plan

and "Zone" shall be construed as any one of the above (as appropriate) and "Zones" shall be construed accordingly.

"Zone Plan" means such of the Plans annexed hereto and titled "ground floor zone plan, ground mezzanine floor zone plan, first floor zone plan and first floor mezzanine zone plan" at Appendix E.

3

BUILDING CONTRACT PROFESSIONAL APPOINTMENTS AND WARRANTIES

3.1

Prior to the Start on Site Date the Developer shall enter into the Building Contract with the Contractor.

3.2

On or before the date upon which the Lease is granted the Developer shall deliver to the Tenant the completed Warranties duly executed as deeds.

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4

THE PROFESSIONAL TEAM

4.1

The Developer is responsible for the appointment of the Professional Team.

4.2

The appointment of a member of the Professional Team:

(a)

may be made only after due enquiry by the Developer as to its reputation, competence and suitability as to the Basebuild Works;

(b)

may only be made on terms which provide for:

(i)

the execution as a deed and delivery by such member of a warranty in favour of the Tenant in the form set out in appendix C at the time of its appointment; and

(ii)

the maintenance by such member of professional indemnity cover:

(A)

throughout the period that it retains liability for breach of the terms of its appointment;

(B)

with a reputable insurer; and

(C)

with a limit of indemnity of at least [***] for each claim that may be made save for the Planning Supervisor whose limit of indemnity shall not be less than [***] for each claim that may be made;

(c)

must not be made without the approval of the Tenant (such approval not to be unreasonably withheld or delayed) of its selection and the terms of its appointment.

4.3

This clause 4 applies also to the appointment of a member of the Professional Team by way of replacement of any member of or addition to the Professional Team (including a different Employer's Representative in respect of the Bio Works if so required by the Developer).

4.4

The Developer will supply the Tenant as soon as practicable with copies of each appointment of members of the Professional Team.

4.5

The Developer will:

(a)

use all reasonable endeavours to procure the due performance and observance of the obligations of each member of the Professional Team;

(b)

not waive, release, vary nor deny itself of any means (including by means of estoppel) from enforcing any such obligation without the consent of the Tenant (such consent not to be unreasonably withheld or delayed); and

(c)

not do nor omit to do any act or thing which (apart from the provisions of the warranty, a draft of which is set out in appendix C) would entitle a member of the Professional Team to terminate or treat as terminated by breach its appointment in connection with the Basebuild Works.

4.6

For the avoidance of doubt those members of the Professional Team named in this document shall be deemed to be approved by the Tenant.

5

THE CONTRACTOR

5.1

The Developer is responsible for the appointment of the Contractor.

5.2

The appointment of the Contractor:

(a)

May be made only after due enquiry by the Developer as to its reputation, competence and suitability as to the Basebuild Works and;

7

(b)

may only be made on the terms of the JCT 98 with Contractor's Design with such amendments as shall first have been approved by the Tenant (such approval not to be unreasonably withheld or delayed) which provide for:



(i)

the execution as a deed and delivery by the Contractor of a warranty in favour of the Tenant in the form set out in appendix C at the time of its apportionment;



(ii)

the maintenance by the Contractor of indemnity insurance cover:



(A)

throughout the period that it retains liability for breach of the terms of the Building Contract;



(B)

with a reputable insurer;



(C)

with a limit of at least [***] for each claim that may be made; and



(iii)

the prohibition of engagement by the Contractor of any Relevant Sub-Contractor without the approval of the Tenant (such approval not to be unreasonably withheld or delayed; and



(c)

must not be made without the approval of the Tenant (such approval not to be unreasonably withheld or delayed) of its selection and the terms of its appointment.

5.3

This clause 5 also applies to the appointment of a building contractor by way of replacement of the Contractor and/or an appointment of a Bio Contractor in the circumstances outlined in clause 9.9.

5.4

The Developer will supply the Tenant as soon as practicable with a copy of the Building Contract.

5.5

The Developer will:

(a)

enforce the obligations of the Contractor under the Building Contract and the Bio Contractor under the Bio Contract;

(b)

not waive, release, vary nor deny itself by any means (including by means of estoppel) from enforcing any such obligation without the consent of the Tenant (such consent not to be unreasonably withheld or delayed);

(c)

not to do nor omit to do any act or thing which (apart from the provisions of the warranty a draft of which is set out in appendix C) would entitle the Contractor to terminate or treat as terminated by breach the Building Contract or as the case may be the Bio Contractor to terminate or treat as terminated by breach the Bio Contract.

5.6

For the avoidance of doubt the Contractor named in this document shall be deemed to be approved by the Tenant.

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6

EXECUTION OF THE BUILDING WORKS

6.1

The Developer shall use all reasonable endeavours to obtain all Necessary Consents for the Basebuild Works and shall supply copies of all such Necessary Consents to the Tenant.

6.2

The Developer shall use all reasonable endeavours to procure that the Start on Site Date is on or before the date which is four weeks from the date of this Agreement and shall thereafter use all reasonable endeavours to procure that the Contractor and in due course the Bio Contractor execute and proceed diligently to complete the Basebuild Works and the Bio Works respectively in a good and workmanlike manner and in accordance with good building practice from time to time using good quality suitable materials of their several kinds in accordance with

(a)

all Necessary Consents

(b)

the CDM Regulations

(c)

the Specification

(d)

this Agreement; and

(e)

the Access Drawings.

6.3

The Developer shall use all reasonable endeavours to procure that there will not be used or specified for use in the Basebuild Works any goods materials substances or products not in accordance with relevant British and European Standards and Codes of Practice or otherwise generally known or suspected within the construction or engineering industries at the time of specification or use to be deleterious to health and safety or to the durability of the development in the particular circumstances in which they are used.

6.4

The Developer will use all reasonable endeavours to procure that:-

(a)

the Premises are at all times secured as fully as may reasonably be practicable against unauthorised entry;

(b)

the Premises are kept tidy and properly cleared of surplus materials, rubble, rubbish or waste and no goods or materials are deposited or stored on the Premises which are not required within a reasonable time for the carrying out of the Building Works;

(c)

hoardings are erected around the Premises in a secure manner and all reasonable safety and other measures are taken to prevent damage and injury;

(d)

inconvenience or disturbance to owners and occupiers of neighbouring properties and members of the public is kept to a minimum;

(e)

on the Date of Practical Completion of the Bio Works the Premises are left (subject to completion of the Tenant Works):

(i)

in good and clean condition; and

(ii)

cleared of unused building material for plant and equipment used in the building works and any temporary structures.

6.5

The Developer will assume the obligations as the client for the purposes of the CDM Regulations in relation to the Building Works and will ensure that the execution of the Building Works complies with the CDM Regulations and, in the course of carrying out those obligations, the Developer will:

(a)

make a declaration to the Health and Safety Executive in accordance with regulation 4(4) of the CDM Regulations that it is the only client in respect of the Building Works;

9

(b)

appoint a planning supervisor and a principal contractor in respect of the Building Works and take all steps as are in the circumstances reasonable to ensure that each is provided with the relevant information to enable him to perform its duties under the CDM Regulations;



(c)

allow sufficient time and resources to enable the planning supervisor and principal contractor to comply with their obligations under the CDM Regulations and to co-operate with them to that end;



(d)

notify the planning supervisor and principal contractor of any change in circumstances relating to the Building Works of which it is or ought reasonably to be aware which may affect the health and safety of persons involved, or likely to become involved, in the Building Works;



(e)

comply with the health and safety plan required to be established and maintained under the CDM Regulations;



(f)

include in the design of the Basebuild Works all information in relation to the design and material which might reasonably affect the health and safety of persons working on the Basebuild Works and its maintenance and repair; and



(g)

procure and deliver to the Tenant a copy of the health and safety file in accordance with clause 12.7(d).

6.6

All items in the nature of landlord's fixtures and fittings installed as part of the Building Works shall become landlord's fixtures and fittings and thereafter be and remain the property of the Developer.

7

DAMAGES

7.1

Subject to clause 7.3 hereof if the Certificate of Practical Completion for the Bio Works has not been issued within [***] of the Bio Contractor commencing the Bio Works in accordance with this Agreement, the Developer will in respect of any such delay pay liquidated and ascertained damages of [***] per week or part thereof until the issue of the Certificate of Practical Completion of the Bio Works Provided that if the Bio Programme is greater than [***] then the Developer will get an extension of time equivalent to the period by which the extended period exceeds [***].

7.2

Subject to clause 7.3 hereof if the Access Date has not occurred by [***] the Developer will pay liquidated and ascertained damages from [***] until the Access Date of [***] per week or part thereof.

7.3

In each of the above cases the Developer shall be allowed such extensions of time:-

(a)

as are granted to the Contractor under the Building Contract and/or the Bio Contractor under the Bio Contract and not arising from any act, omission or default of the Developer; and

(b)

as are reasonable in circumstances where the Contractor suffers an Event of Contractor's Insolvency and/or where the Building Contract has been properly terminated by the Developer with the prior written approval of the Tenant; and/or

(c)

as are reasonable in circumstances where the Bio Contractor suffers an Event of Bio Contractor's Insolvency and/or where the Bio Contract has been properly terminated by the Developer with the prior written approval of the Tenant; and/or

(d)

arising by virtue of Permitted Tenant's Variations (not exceeding the length of time notified to the Tenant by the Employer's Representative in accordance with clause 10.1(b) or (if different) the length of time agreed by the Tenant (in accordance with clause 10.1(c)); and/or

10

(e)

arise as a result of any discrepancy, inconsistency, omission and/or error within the Bio Specification and/or any discrepancy, inconsistency or error as between the Basebuild Specification and the Bio Specification;

and in the case of sub-clauses 7.3(a) and 7.3(b) above the Developer has taken all reasonable steps to minimise the effects of the cause of the delay.

8

DEVELOPERS VARIATIONS

8.1

Save as set out below in this clause 8 the Developer shall not make any variation or addition or omission from the Specification which reduces the Gross Internal Area of the Building to below 232,830 square feet or which materially affects the Building.

8.2

Subject to the provisions of Clause 8.5 in the event that it is necessary to make amendments or variations to the Basebuild Works in order to comply with the Necessary Consents and/or any Planning Agreement or otherwise to carry out and /or complete the Basebuild Works the Developer shall be entitled to carry out and complete the Basebuild Works with such amendment or variation with the consent in writing of the Tenant (such consent not to be unreasonably withheld or delayed) provided that where no response is received from the Tenant with 10 Working Days of being notified of such amendment or variation the Tenant's consent shall be deemed to have been given.

8.3

Subject to the provisions of clause 8.5 below in the event that any of the materials or equipment referred to in the Basebuild Specification shall not be obtainable within a reasonable time or although obtainable within a reasonable time shall not be obtainable at reasonable cost the Developer shall be at liberty to substitute other materials or equipment with the consent in writing of the Tenant (such consent not to be unreasonably withheld or delayed) PROVIDED THAT where no response is received from the Tenant within 10 Working Days of being notified of such amendment or variation the Tenant's consent shall be deemed to have been given.

8.4

Subject to the provisions of Clause 8.5 the Developer shall be entitled to make such variation as it shall require to the layout of any of the car parking spaces (but not so as to reduce the number of spaces below 281 spaces) accessways service roads service areas and landscape works comprising any part of the Building Works or to any other part of the Building Works (other than the Building) as a consequence of the Developer's proposals for the development of any parts of the Premises not comprised within the Building, provided always that the Developer shall obtain consent in writing from the Tenant to any such variation (such consent not to be unreasonably withheld or delayed) PROVIDED THAT where no response is received from the Tenant within 10 Working Days of being notified of such amendment or variation the Tenant's consent shall be deemed as being given.

8.5

Notwithstanding the generality of the foregoing clauses the Developer may make variations to the Specification without the Tenant's consent if such variations are de minimis or immaterial and of a routine nature and the Developer notifies the Tenant of such variations within a reasonable time.

8.6

Subject to the provisions of Clause 8.5 for the avoidance of doubt the Developer shall not make any amendments or variations to the Bio Works and/or the Bio Specification without the prior written consent of the Tenant (such consent not to be unreasonably withheld or delayed.)

9

BIO WORKS

9.1

The Tenant confirms that it has appointed or shall as soon as reasonably practicable appoint at its own cost the Bio Contractor to produce a fully detailed Bio Specification which shall be based on the outline Bio Specification in Appendix B.

11

9.2

Save to the extent that it is the responsibility of the Bio Contractor the Tenant shall use all reasonable endeavours to obtain all Necessary Consents for the Bio Works and shall provide copies of the same to the Developer.

9.3

The Tenant shall not later than the date which is [***] after the date of this Agreement provide the Developer a draft of the Bio Contract (incorporating liquidated and ascertained damages of [***] per week or part thereof) a draft detailed Bio Specification and the proposed Bio Contractor's Price together with a draft Bio Programme all of which will be in sufficient detail to enable the Developer to review and approve the same.

9.4

The Tenant confirms that (a) should the Bio Contractor's Price exceed [***] then the sum by which the Bio Contractor's Price exceeds [***] shall be paid to the Developer and (b) if the Bio Programme exceeds a period of [***] the Tenant shall pay to the Developer the sum of [***] for each additional month or part thereof and in each case such sum shall be paid within five Working Days of the agreement or determination of the Bio Contract and the Bio Programme pursuant to clause 9.5 or clause 9.7 as appropriate.

9.5

The Developer shall review the Bio Contract and the Bio Programme and notify the Tenant in writing ("Notification") within 10 Working Days of it receiving the last in time of such documents whether the Bio Contract and the Bio Programme are acceptable Provided that if no such Notification is received from the Developer within such period of 20 Working Days the Developer shall be deemed to have accepted the Bio Contract and the Bio Programme.

9.6

If the Developer properly notifies the Tenant that the Bio Contract and/or the Bio Programme are not acceptable as aforesaid the Developer shall provide with the Notification a written statement of the reasons why Provided that the only basis upon which the Developer is entitled to object to the Bio Contract and/or the Bio Programme is if the Bio Contract or the Bio Programme imposes any lesser and/or conflicting responsibilities on the Bio Contractor in respect of the Bio Works than the Developer has to the Tenant under this Agreement in respect of the Bio Works and/or the Bio Programme exceeds 12 months.

9.7

Following Notification which includes a written statement under clause 9.6 the Developer and the Tenant shall meet to agree the Bio Contract and/or the Bio Programme as appropriate within 20 Working Days of the Notification. If the Developer and the Tenant cannot agree a revised Bio Contract and/or Bio Programme within 20 Working Days of the Notification then either party may refer the Bio Contract and/or the Bio Programme to the Surveyor for determination under clause 29.1. The Surveyor shall determine whether the Bio Contract and/or the Bio Programme are reasonable and appropriate in terms of the Developer's obligations to the Tenant under this Agreement. The Surveyor may in its determination make revisions to each of the Bio Contract and/or the Bio Programme provided that the Surveyor shall not approve or recommend any Bio Contract and/or Bio Programme that imposes any lesser and/or conflicting responsibilities on the Bio Contractor in respect of the Bio Works than the Developer has to the Tenant under this Agreement in respect of the Bio Works.

9.8

The Tenant confirms that if the cost of carrying out the Bio Works increases as a result of:

(i)

any discrepancy, error and/or omission in the Bio Specification and/or any discrepancy and/or error between the Basebuild Specification and the Bio Specification; and/or



(ii)

the Bio Contractor suffering an Event of Bio Contractor Insolvency; and/or



(iii)

failure of the Tenant to supply information in relation to the Bio Works and/or the Bio Specification; and/or



(iv)

the design and/or the carrying out of the Tenant's Works;

12

but does not arise as a result of any act, omission, default or negligence by the Developer then

(A)

the amount of such increase; and



(B)

any reasonable and proper fees of the Contractor and/or any of the Professional Team attributable thereto; and



(C)

any increase in the cost of insuring the Building Works and in the costs of obtaining any Necessary Consents;

shall be certified by the Employer's Representative as due and payable by the Tenant either as a whole on the date of Practical Completion or by interim monthly certificates and the Tenant shall make payment to the Developer of the amount stated in any such certificate, either on the Date of Practical Completion or (in the case of interim monthly certificates) within 10 Working Days of the same being delivered to the Tenant whether before or after the grant of the Lease.

9.9

If the Bio Contract (as agreed or determined pursuant to clause 9.5 or 9.7 as appropriate) has not been signed by the Bio Contractor by the date which is seven months from the date hereof and/or any sums due to the Developer pursuant to clause 9.4 have not been paid in accordance with clause 9.4 then the Developer shall be entitled to prepare the Bio Specification itself and submit the same for tender (unless the Bio Specification had already been provided to the Developer by the Tenant pursuant to clause 9.2 in which event that Bio Specification shall be used) and if at the end of the tender process it is apparent that:-

(a)

the cost to the Developer of carrying out the Bio Works is equal to or less than [***] then the Tenant's approval of the Bio Specification shall not be required;

(b)

the cost to the Developer of carrying out the Bio Works will be greater than [***] then the Developer will submit the Bio Specification to the Tenant for prior written approval (such approval not to be unreasonably withheld or delayed) and if the Tenant (acting reasonably) has not provided detailed reasons in writing for withholding its approval to the same within one month of the date of receipt of the Bio Specification then the Bio Specification shall be deemed to be approved;

(c)

the cost of carrying out the Bio Works is less than [***] the Tenant shall be permitted to make Permitted Tenant's Variations pursuant to clause 10 increasing the cost of the Bio Works to a sum equal to [***].

9.10

Following the provision of the Bio Specification and the agreement or determination of the Bio Contract and the Bio Programme pursuant to clause 9.5 or 9.7 as appropriate the Bio Specification shall form part of the Specification.

9.11

The Tenant will use all reasonable endeavours to assist in procuring that the Bio Contractor enters into the Bio Contract with the Developer.

9.12

The Developer shall not be responsible to the Tenant for:-

(a)

the design of the Bio Works;

(b)

the selection of the kinds of materials and goods used in the Bio Works;

(c)

the satisfaction of any performance specification or requirement included or referred to in the Bio Specification and/or the Bio Contract.

13

9.13

The Bio Works form part of the Building Works and do not form part of the Tenant Works and for the avoidance of doubt the parties agree that the Tenant shall have no title to the Bio Works nor shall the Tenant be entitled to claim any capital allowances in respect of the same.

10

PERMITTED TENANT'S VARIATIONS

10.1

If the Tenant gives notice to the Developer that it requires a Permitted Tenant's Variation to be incorporated in the Building Works then the Developer shall as soon as reasonably practicable:

(a)

cause sufficient designs to be prepared to enable an estimate of the cost of incorporating such Permitted Tenant's Variation to be prepared by the Quantity Surveyor in accordance with clause 10.4 and shall procure that the Quantity Surveyor supplies a copy of such estimate as soon as reasonably practicable to the Tenant;

(b)

procure that the Employer's Representative notifies the Tenant in writing of the anticipated extension or reduction in the building contract period which will arise from such Permitted Tenant's Variations (if implemented);

(c)

enter into bona fide discussions with the Tenant with a view to agreeing the estimate and the anticipated extension or reduction of the building contract period referred to in clauses 10.1(a) and 10.1(b).

10.2

The Developer shall procure that any Permitted Tenant's Variation of which the Tenant gives notice to the Developer pursuant to clause 10.1 shall be incorporated into the Building Works unless either:

(a)

the Developer gives notice to the Tenant that it does not agree that the same is a Permitted Tenant's Variation in accordance with the terms of this Agreement; or

(b)

the Tenant gives notice to the Developer within 10 Working Days (in respect of which time shall be of the essence) after receipt of any estimate supplied pursuant to clause 10.1(a) and any notification of the anticipated extension or reduction of time under clause 10.1(b) (whichever shall be the later) that it does not approve such estimate and/or the anticipated extension/reduction of time (as the case may be).

10.3

Any dispute as to whether any proposed variation to the Building Works constitutes a Permitted Tenant's Variation shall be referred to an expert for determination in accordance with clause 29 but so that (for the avoidance of doubt) the Developer shall not be under any obligation to delay the progress of the Building Works and the Building Contract pending the resolution of any such dispute if the Developer has previously served a notice under clause 10.2(a).

10.4

In causing the estimate referred to in clause 10.1(a) to be prepared the Developer shall be entitled to take into account:

(a)

all anticipated construction and design costs to the Developer in procuring that any such Permitted Tenant's Variation is incorporated into the Building Works; and

(b)

any actual on-cost to the Developer as a result of any prolongation of the period that will be taken to construct the Building Works; and

(c)

any consequential professional fees and disbursements (reasonably and properly incurred) relating to the Permitted Tenant's Variation; and

(d)

the costs of obtaining all Necessary Consents for the Permitted Tenant's Variation (where necessary).

(e)

[***]% of the anticipated increase in construction costs (if any) to the Developer as a developer's profit margin on the Tenant's Permitted Variation.

14

10.5

The Tenant shall reimburse to the Developer the agreed costs of the Permitted Tenant's Variation (in accordance with the estimate approved under clause 10.1(a) or agreed under clause 10.1(c)) within 10 Working Days of receipt by the Tenant from the Employer's Representative of a certificate that the whole of the Permitted Tenant's Variation has been completed and that payment for the relevant Permitted Tenant's Variation is properly due from the Developer to the Contractor or other third party (it being agreed for the purposes of this clause 10.5 that the Developer's profit margin referred to in clause 10.4(e) will be treated as payment properly due from the Tenant simultaneously with the payment for the relevant Permitted Tenant's Variation or part thereof).

10.6

Without prejudice to the provisions of this clause 10 the Developer and the Tenant shall co-operate fully with each other in relation to all matters arising under this clause 10 so as to minimise any delays in the progress of the Building Works and in particular the Tenant shall supply to the Developer and the Professional Team as soon as practicable all drawings specifications calculations and other information reasonably required by the Developer and/or the Professional Team relating to the Permitted Tenant's Variation whether or not implemented and incorporated in the Building Works.

10.7

If the Tenant pursuant to Clause 10.2 decides not to proceed with a Permitted Tenant's Variation it will nevertheless be liable to the Developer for all costs that the Developer may have reasonably and properly incurred pursuant to Clause 10.4 and will reimburse such costs to the Developer within 10 working days of receipt by the Tenant from the Employer's Representative of a certificate that the costs have been reasonably and properly incurred in connection with the Permitted Tenant's Variation.

10.8

[***] and the Developer has agreed that this amendment shall be made to and be incorporated into the Basebuild Specification. In consideration for agreeing to this amendment the Tenant will pay to the Developer the increase in the cost of the steelwork (including all reasonable and proper associated costs and fees) to accommodate this variation up to a maximum sum of [***] together with VAT thereon such sum to be paid by the Tenant to the Developer within 10 Working Days of receipt by the Tenant from the Employer's Representative of a certificate that such costs have been reasonably and properly incurred in connection with this amendment. Any costs in excess of the [***] (together with VAT) shall be met by the Developer.

11

INSPECTION

11.1

The Tenant shall have the right for itself and the Tenant's Surveyor and its other professional advisers at all reasonable times after reasonable prior notice to enter onto the Premises:

(a)

to view the state and progress of the Building Works; and/or

(b)

to prepare plans, drawings, specifications and tenders for the Tenant's Works;

provided that any such inspection must not interrupt, interfere with or delay or impede the progress of the Building Works or any part thereof or any other works being undertaken by or on behalf of the Developer within or serving the Premises.

11.2

The Tenant and the Tenant's Surveyor shall (unless the Developer expressly waives such requirements) present themselves to the Developer or its representative on arriving on site to carry out such inspections and shall comply with all site safety requirements of the Developer and any regulations contained in the CDM Regulations and shall not make such inspections other than where accompanied by the Developer or its representative.

11.3

If as a result of any such inspection the Tenant shall wish to make representations regarding the Building Works or any part or parts thereof such representations must be made exclusively to the Developer or the Employer's Representative and the Tenant must procure that no representation

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made by it or on its behalf to the Building Works or any part thereof is made other than to the Developer or the Employer's Representative.

12

ACCESS DATE AND PRACTICAL COMPLETION

12.1

The Developer shall use all reasonable endeavours to procure that:-

(a)

The Access Date is (subject to permitted extensions pursuant to clause 7.3 only) certified no later than [***];

(b)

The Date of Practical Completion of the Basebuild Works occurs (subject to permitted extensions pursuant to clause 7.3 only) on or before [***]; and

(c)

The Date of Practical Completion of the Bio Works occurs (subject to permitted extensions pursuant to clause 7.3 only) in accordance with the Bio Programme.

12.2

The Developer shall procure that the Tenant is given not less than 10 Working Days notice in writing of the date upon which the Employer's Representative proposes to make its final inspections of the Building Works prior to issuing the Access Certificate the Certificate of Sectional Completion and the Certificate(s) of Practical Completion and the Tenant shall be entitled to attend such inspections (with if the Tenant so requires the Tenant's Surveyor) and the Developer shall procure that there is afforded to the Tenant (and the Tenant's Surveyor in the event that the Tenant's Surveyor is present at either such inspection) the opportunity of making reasonable representations to the Developer or to such person as the Developer may specify in a notice in writing to the Tenant in respect of the construction of the Building and the Developer shall procure that due regard is given to such representations but for the avoidance of doubt the Employer's Representative shall not be fettered from issuing the Access Certificate and/or the Certificate of Sectional Completion and/or the Certificate(s) of Practical Completion at such times as in its professional opinion it thinks fit provided that:

(a)

no Access Certificate shall be issued unless the Access Criteria have been satisfied; and

(b)

the Certificate of Sectional Completion and/or the Certificate(s) of Practical Completion shall not be issued unless the Pre-Conditions have been satisfied;

but provided further that the Employer's Representative may issue the Access Certificate and/or the Certificate of Sectional Completion and/or the Certificate(s) of Practical Completion notwithstanding that the landscaping works have not been completed.

12.3

In the event that the Access Certificate and/or the Certificate of Sectional Completion or the Certificate(s) of Practical Completion (as the case may be) is not issued following any inspection mentioned in clause 12.2 the provisions of clause 12.2 shall apply to any further inspection undertaken prior to issuing the relevant Certificate save that the amount of notice given need be only 2 Working Days in lieu of 10 Working Days.

12.4

Forthwith upon the issue of the Access Certificate and/or the Certificate of Sectional Completion and/or the Certificate(s) of Practical Completion the Developer shall in each case procure that a copy is delivered to the Tenant together with any accompanying schedule of Snagging Items.

12.5

The Developer shall use its reasonable endeavours to procure that the Building Works are practically completed in accordance with this Agreement and if the Building Works are not so practically completed within 48 months of the date hereof the Tenant shall be entitled to determine this Agreement by the service of written notice on the Developer and on service of any such notice this Agreement shall cease and determine and the Tenant shall have no further claim against the Developer in respect of any delays pursuant to clause 7 arising after the date of determination but without prejudice to any rights accrued by either party against the other under this Agreement as at the date of determination.

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12.6

It is hereby agreed that for the purposes of this Agreement:

(a)

the Developer shall not have failed to carry out and complete the Basebuild Works if the planting and/or seeding of any landscaped areas which comprises part of the Basebuild Works have not been completed or commenced provided the Developer hereby undertakes to use all reasonable endeavours to procure the completion of such planting and/or seeding within 12 months after the Date of Practical Completion of the Basebuild Works and

(b)

the Access Date, and the Dates of Practical Completion can occur and the Certificate of Sectional Completion can be issued notwithstanding that clause 12.6(a) shall apply

12.7

Within 1 month following each of the Dates of Practical Completion the Developer shall supply to the Tenant:-

(a)

two sets of the final drawings prepared prior to the Date of Practical Completion in relation to the relevant Building Works plus the CAD Disk containing all of them;

(b)

two copies of all manuals (written in English) in relation to any services, facilities or plant and machinery incorporated in the relevant Building Works within the Premises;

(c)

all manufacturers and suppliers guarantees for all materials comprised in the relevant Building Works (if necessary assigned to the Tenant);

(d)

a true full and accurate copy of the Health & Safety Plan (with modifications) and confirmation from the Planning Supervisor that the Health & Safety Plan and the requirements of the CDM Regulations have been complied with in full insofar as they relate to the relevant Building Works and Health & Safety file including its annexures;

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MEASUREMENT AND RENT

13.1

The Developer and the Tenant shall as soon as reasonably practicable after the steel frame of the Building has been erected consult and jointly measure the Gross Internal Area of the slab of the Premises to check that the Building is built within the tolerance permitted by this Agreement for the Gross Internal Area pursuant to clauses 13.2 to 13.7 hereof.

13.2

The Developer and the Tenant shall each use all reasonable endeavours to ensure an accurate joint measurement of the Gross Internal Area of the Building is carried out and agreed as soon as reasonably possible which they will endeavour to do not later than 4 weeks before the Date of Practical Completion of the Basebuild Works.

13.3

If the Developer and the Tenant are unable to reach agreement on the Gross Internal Area pursuant to clause 13.2 then either of them shall be entitled to refer the matter to determination by an independent expert in accordance with clause 29.

13.4

If the Gross Internal Area of the Premises as either agreed between the Developer and the Tenant or determined by the expert (as aforesaid) is less than 232,830 square feet then the Developer shall be entitled to amend the Building Works in order to achieve a Gross Internal Area for the Premises of not less than 232,830 square feet and the provisions of clauses 13.1, 13.2 and 13.3 shall apply to the amended works.

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13.5

If the Gross Internal Area of the Premises agreed or determined after amendment of the Building Works pursuant to clause 13.4 is still less than 232,830 square feet then the Tenant shall be entitled within one month after ascertainment of such Gross Internal Area (time to be of the essence) to serve written notice on the Developer to terminate this Agreement by service of written notice on the Developer with immediate effect (without prejudice to the rights or remedies of either party against the other in respect of any antecedent breach of covenant).

13.6

If the Gross Internal Area of the Premises is less than 236,412 square feet (and the Tenant has not served notice to terminate this Agreement having become entitled to do so in the circumstances and in the manner set out in clause 13.5) then the Initial Rent shall be equal to a sum calculated by multiplying the actual Gross Internal Area of the Premises by [***] per square foot and "B" in the definition of "Calculated Rent" in paragraph 1 of Schedule 4 of the Lease shall be the actual Gross Internal Area of the Premises.

13.7

In the event that the Gross Internal Area of the Premises agreed between the Developer and the Tenant or determined by the expert (as aforesaid) is equal to or greater than 236,412 square feet then the Initial Rent shall be [***] per annum and "B" in the definition of "Calculated Rent" in paragraph 1 of Schedule 4 shall be [***].

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TENANT'S WORKS

14.1

The Tenant shall as soon as reasonably practicable after the date of this Agreement but in any event at least 2 months prior to the Access Date at its own expense prepare and submit to the Developer for approval two copies of the drawings and specification of the Tenant's Works PROVIDED THAT where no response from the Developer is received by the Tenant within 20 working days of receipt of such drawings and specifications the Developer's approval shall be deemed to have been given.

14.2

In deciding whether to approve the Tenant's Works:

(a)

the Developer shall (subject to the proviso below) have absolute discretion to the extent that it would have absolute discretion under the Lease if the same had been granted;

(b)

the Developer shall (subject to the proviso below) not unreasonably withhold or delay its consent where it would not have been entitled to withhold or delay its consent unreasonably under the Lease if the same had been granted;

(c)

the Developer shall grant consent where its consent would not have been needed under the Lease.

PROVIDED THAT the Developer will not unreasonably withhold its consent to such external works as are reasonably required by the Tenant as part of the Tenant's Works including but not limited to the external services, building the tank farm and the fitting out of the gate houses.

14.3

The Developer shall in approving any of the Tenant's Works be entitled to impose a condition that the Tenant shall reinstate the same on the expiration or sooner determination of the Lease and if the Developer shall do so then the Tenant shall enter into such covenants with the Developer as the Developer may reasonably require in respect of such reinstatement.

14.4

Without prejudice to clause 14.3 the Developer's consent to the Tenant's Works shall be given by way of formal licence in the form set out in Appendix D subject to such amendments as the parties thereto may agree and the Tenant will execute a counterpart of such Licence and deliver it to the Developer in exchange for the original.

14.5

The Tenant shall also apply for and use all reasonable endeavours to obtain all Necessary Consents which may be necessary for the carrying out of the Tenant's Works.

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14.6

If the design of the Tenant's Works should cause any increase in the cost of carrying out the Basebuild Works then:-

(a)

the amount of such increase; and

(b)

any reasonable and proper fees of the Professional Team attributable thereto; and

(c)

an additional sum calculated at [***]% of the total of the sums payable under clauses 14.6(a) and 14.6(b) above

shall be certified by the Employer's Representative as due and payable either as to the whole on the Date of Practical Completion or by interim monthly certificate and the Tenant shall make payment to the Developer of the amount stated in any such certificate, either on the Date of Practical Completion or (in the case of interim monthly certificates) within 10 Working Days of the same being delivered to the Tenant whether before or after the grant of the Lease.

14.7

The Tenant shall not commence or carry out the Tenant's Works or any part thereof prior to the Access Date.

14.8

The Tenant shall indemnify the Developer against all damages, expenses, costs, claims and demands which the Developer may suffer or become liable for as a result of injuries to persons arising out of or incidental to the execution of the Tenant's Works.

14.9

The Tenant shall carry out and complete the Tenant's Works within 30 months of the Access Date.

14.10

The Tenant shall within one month after completion of the Tenant's Works cause to be prepared and delivered to the Developer two complete sets of working drawings and specifications showing the Tenant's Works as completed together with copies of any consents relating to the Tenant's Works.

14.11

The Tenant confirms that if the undertaking of the Tenant's Works interferes with and/or disrupts and/or delays the carrying out of the Basebuild Works and/or the Bio Works that the Tenant shall indemnify the Developer for any additional costs, losses and expenses properly due to be paid by the Developer to the Contractor under the Building Contract and/or the Bio Contractor under the Bio Contract insofar as such additional costs, losses and expenses are recoverable by the Tenant under the Tenant's contract with the contractor undertaking the Tenant's Works.

14.12

The Developer confirms that if the undertaking of the Bio Works and/or the Basebuild Works interferes with and/or disrupts and/or delays the carrying out of the Tenant's Works that the Developer shall indemnify the Tenant for any additional costs, losses and expenses properly due to be paid by the Tenant to the contractor undertaking the Tenant's Works insofar as such additional costs, losses and expenses are recoverable by the Developer under the Bio Contract and/or the Basebuild Contract.

14.13

On completion of the Tenant's Works the Tenant will do such works as are necessary to convert the Compound into a car park to no lesser standard than the remaining car park within the Premises to accommodate at least 85 motor cars in accordance with the Necessary Consents.

15

ACCESS FOR TENANT'S WORKS

15.1

Without prejudice to clause 20 hereof the Tenant shall not commence the Tenant's Works until the Access Date (or such earlier date as the parties may agree in writing) and from and including the Access Date (or such earlier date as agreed as aforesaid) the Tenant may carry out the Tenant's Works in which event:-

(a)

the Tenant shall comply with all reasonable regulations which the Developer and/or the Contractor may at any time in relation to the carrying out of the Tenant's Works and/or the

19

use of the Premises or any part thereof or in connection with the carrying out of the Tenant's Works

(b)

the Tenant shall not do or permit or suffer to be done any act or thing which may be or become or cause a nuisance, injury, damage or disturbance to any owner or occupier of any premises within the Estate



(c)

as between the Developer and the Tenant all materials goods plant machinery equipment and other items belonging to the Tenant or its agents employees or contractors shall be at the sole risk and responsibility of the Tenant



(d)

as between the Developer and the Tenant all such agents employees and contractors of the Tenant shall be persons for whom the Tenant is responsible



(e)

the Building Works and the Tenant's Works shall be carried out by the Developer and the Tenant respectively in such a manner as shall not prevent or materially interfere with the due execution of the Building Works and the Tenant's Works respectively



(f)

so far as reasonably practicable the Developer and the Tenant shall co-ordinate the design and execution of the Building Works and the Tenant's Works with the work of each others respective consultants contractors and workmen so as to minimise the length of any delays and the possibility of interference with each other's works and the Developer and the Tenant shall so far as practicable allow for the activities of each other's consultants contractors and workmen within their programme from time to time and their methods of working



(g)

the Developer and the Tenant shall use all reasonable endeavours following prior written notice of such requirement (except in emergency) to procure that each others respective consultants contractors and workmen have access to such parts of the Building Works and (on the basis of a permit system) the Tenant's Works as shall from time to time be reasonably requisite for the construction of part or parts of the Building Works or the Tenant's Works (but subject in any event to the reasonable requirements of either party as to site security and safety) but any such occupation (with or without machinery) shall be limited to such a period and areas as shall be reasonable for the carrying out of the operations in questions so as to avoid any material disruption to the programme of the Building Works and the Tenant's Works



(h)

the Landlord and the Tenant hereby agree that notwithstanding the foregoing the overall responsibility for co-ordination of the Building Works and the Tenants Works and all the other works carried out at the Premises prior to the Date of Practical Completion of the Building Works shall be the responsibility of the Developer and his decision acting reasonably in respect of such co-ordination shall be final



(i)

upon the removal of any hoarding or other temporary structure which has been erected or installed by or on behalf of the Tenant forthwith to make good to the Developer's reasonable satisfaction any damage done to any part or parts of the Premises caused as a result of the erection installation existence maintenance or removal of such hoarding or other temporary structure



(j)

upon completion of the Tenant's Works the Tenant shall immediately make good to the Developer's reasonable satisfaction any damage done to any part or parts of the Premises caused by or in the carrying out of the Tenant's Works.

15.2

The terms of the Lease shall apply to the carrying out of the Tenant's Works.

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15.3

Notwithstanding any other provision in the Agreement the Tenant shall:-

(a)

submit or procure that there is submitted to the Contractor no later than 21 days prior to obtaining access to the Premises a copy of its health and safety plan for the same and

(b)

ensure that any person firm or company involved in the design or in the implementation of the Tenant's Works takes due account of any comments of the Contractor in relation to the carrying out of the Tenant's Works so far as relevant to compliance with CDM Regulations and

(c)

comply or procure compliance by any person firm or company involved in the design or implementation of the Tenant's Works with all CDM Regulations and

(d)

ensure that any firm person or company involved in the design or implementation of the Tenant's Works complies with all reasonable instructions and directions of the Contractor relevant to the health and safety of persons concerned in the carrying out of completion of the same so far as relevant to compliance with the CDM Regulations.

16

RENT

16.1

The Initial Rent shall be payable from the Rent Commencement Date and any additional rents reserved by the Lease shall be payable from the Term Commencement Date.

17

THE GRANT OF THE LEASE AND LICENCE TO COMPLETE THE BIO WORKS

17.1

On the fifth Working Day after the Date of Practical Completion of the Building Works or if earlier two months before the Rent Commencement Date the Developer shall grant or procure the grant of the Lease to the Tenant and the Tenant itself (meaning Evans Vaccines Limited) shall accept the Lease and the Tenant shall execute the counterpart of the Lease.

17.2

The term of 25 years to be created by the Lease shall commence on the date required for completion of the Lease as referred to in clause 17.1 and the definition of Term Commencement Date in clause 1 of the Lease shall be completed accordingly.

17.3

The date to be inserted in clause 1 of the Lease for the definition of Rent Commencement Date shall be the Rent Commencement Date (as defined in clause 2 of this Agreement).

17.4

The date to be inserted in clause 1 of the Lease for the definition of "Review Dates" shall be the date being the fifth anniversary of the Term Commencement Date (as defined in the Lease).

17.5

The Tenant itself (meaning Evans Vaccines Limited) shall take possession of, occupy and use the Premises in accordance with the provisions of the Lease.

17.6

Completion of the grant of the Lease shall take place at the offices of the Developer's Solicitors or where they may reasonably direct and on completion the Tenant shall deliver to the Developer the counterpart of the Lease and any Licence referred to in Clause 14.4 duly executed by the Tenant and the Developer shall deliver to the Tenant the executed Lease together with any Licence as aforesaid.

17.7

On the grant of the Lease the Tenant shall grant the Developer and the Bio Contractor and those authorised by them licence to enter the Premises for the purpose of carrying out the Bio Works in accordance with its obligations hereunder and such licence will subsist so long as is necessary for the Developer to carry out and complete such obligations or until this Agreement is determined whichever is the earlier.

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17.8

During the subsistence of the licence referred to in clause 17.7 the Developer shall comply (and shall procure that the Bio Contractor also complies) with the following provisions:

(a)

the Developer shall comply with all reasonable regulations which the Tenant may at any time in relation to the carrying out of the Bio Works and/or the use of the Premises or any part thereof or in connection with the carrying out of the Bio Works provided the same would not cause any delay to completion of the Bio Works

(b)

the Developer shall not do or permit or suffer to be done any act or thing which may cause injury to the Tenant

(c)

as between the Tenant and the Developer all materials goods plant machinery equipment and other items belonging to the Developer or its agents employees or contractors shall be at the sole risk and responsibility of the Developer

(d)

the Bio Works and the Tenant's Works shall be carried out by the Developer and the Tenant respectively in such a manner as shall not prevent or materially interfere with the due execution of the Bio Works and the Tenant's Works respectively

(e)

so far as reasonably practicable the Developer and the Tenant shall co-ordinate the design and execution of the Bio Works and the Tenant's Works with the work of each others respective consultants contractors and workmen so as to minimise the length of any delays and the possibility of interference with each other's works and the Developer and the Tenant shall so far as practicable allow for the activities of each other's consultants contractors and workmen within their programme from time to time and their methods of working

(f)

upon completion of the Bio Works the Developer shall immediately make good to the Tenant's reasonable satisfaction any damage done to any part or parts of the Premises caused by or in the carrying out of the Bio Works.

18

INSURANCE

18.1

The Developer shall procure that from and including the date of the Building Contract up to the Date of Practical Completion of the Basebuild Works the Basebuild Works are insured against the usual contractor's comprehensive "all risks" in accordance with the provisions of the Building Contract.

18.2

The Developer shall procure that from and including the date of commencement of the Bio Works up to the Date of Practical Completion of the Bio Works the Bio Works are insured against the usual contractor's comprehensive "all risks" in accordance with the provisions of the Bio Contract.

18.3

The Developer shall procure that from and including the Date of Practical Completion of the Basebuild Works up to the date on which the Lease is granted the Premises are insured in accordance with the provisions contained in the Lease as if the same had been granted and the Tenant shall repay any insurance premiums payable for such period within 10 Working Days of written demand to the Developer.

18.4

If at any time the Premises or the Building Works shall be damaged or destroyed by any of the risks against which the Developer is hereunder obliged to insure or procure insurance the Developer shall subject to obtaining all Necessary Consents as soon as reasonably practicable rebuild and reinstate the Premises or the Building Works in accordance with the terms of this Agreement and the provisions of this clause 18.4 shall apply as often as necessary.

18.5

The Tenant shall procure that it shall insure and keep insured the Tenant's Works in the joint names of the Developer and the Tenant in the full reinstatement cost thereof such insurance to be effected in such terms and against the usual contractor's comprehensive "all risks".

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18.6

Upon request by the Developer the Tenant will produce to the Landlord a copy of the policy or policies of the insurance referred to in clause 18.5 and a copy of the receipt for payment of every premium payable in respect of such policy or policies.

18.7

If and whenever the Tenant makes default under clause 18.5 the Developer may effect and maintain such insurances and the Tenant shall pay all moneys paid by the Developer within 7 days of demand.

18.8

Immediately after the Tenant's Works have been completed the Tenant shall notify the Developer of such completion.

19

NO ASSIGNMENT OF THIS AGREEMENT EXCEPT TO A FUND

19.1

Neither party shall assign underlet mortgage charge or part with or share its interest under this Agreement or any part thereof or otherwise dispose of the same or any part thereof save that the Developer may charge and/or assign at any time the benefit of this Agreement to Matrix Speke Limited Partnership or such other Fund providing finance to the Developer which is fully applied towards the Building Works approved by the Tenant (such approval not to be unreasonably withheld or delayed) which may be given subject to reasonable conditions.

19.2

In the event that the Lease is granted by the Matrix Speke Limited Partnership the Lease will incorporate an acknowledgement that the Landlord constitutes a limited partnership established under the laws of England and that the Tenant shall have no right of action against the limited partners of such partnership in respect of any breach of the covenants and conditions on the part of the landlord contained in the Lease.

20

OCCUPATION PRIOR TO COMPLETION OF THE LEASE

20.1

As from the Access Date the Tenant shall be entitled to occupy that relevant part of the Premises for the purposes only of carrying out the Tenant's Works commissioning and validating the same but as a licensee only subject to the same terms exceptions reservations covenants and conditions and with the benefits of the rights as are contained in the Lease so far as they are applicable hereto and not inconsistent herewith and whether or not the Tenant takes up occupation as aforesaid provided that before any such entry is permitted the Tenant shall execute and deliver to the Developer a counterpart of the Lease which shall thenceforth be held in escrow by the Developer until the grant of the Lease to the Tenant pursuant to clause 17 whereupon the Developer shall be entitled to complete the counterpart Lease by dating it and the Tenant hereby irrevocably appoints the Developer as its attorney for the purpose of doing all such things necessary to complete the counterpart Lease and provided further that the Developer shall deliver an engrossment of the counterpart of the Lease to the Tenant's solicitors at least five Working Days prior to the Date of Practical Completion of the Building Works and if the Developer fails to do this the Tenant shall still be permitted entry as aforesaid subject always to the Tenant delivering an executed counterpart of the Lease to the Developer within five Working Days of the Tenant's solicitors receiving the same and the Tenant shall:

(a)

in respect of the period from and including the Date of Practical Completion of the Basebuild Works and thereafter until the Lease shall be granted:

(i)

pay to the Developer a licence fee equal in the aggregate to and payable on the same dates and in the same manner as the rents to be reserved by the Lease as if the Lease was granted on the Date of Practical Completion of the Basebuild Works (other than the Initial Rent) and any money paid by way of licence fee as aforesaid (but not any money paid in respect of interest thereon) shall be reckoned in part payment of any such rents which would otherwise be due under the Lease in respect of the same period; and

23

(ii)

perform and observe and be subject to the same covenants conditions liabilities obligations and other provisions as are contained in the Lease as if the same had been granted.



(b)

in respect of the period from and including the date on which the Tenant occupies the Premises pursuant to this clause 20 and thereafter until the Lease shall be granted pay to the Developer a licence fee equal to the Initial Rent and payable on the same dates and in the same manner as the rent to be first reserved by the Lease.

20.2

It is hereby expressly declared that neither anything herein contained nor entry by the Tenant nor payment of the said licence fee shall create or be deemed to create any demise or be deemed to give the Tenant any interest in the Premises greater than that of a licensee prior to the actual completion of the Lease.

21

TITLE

21.1

The Developer has already deduced its title to the Premises to the Tenant's Solicitors prior to the date hereof and the Tenant shall not raise any objection or requisition in relation to such title.

21.2

The Tenant shall not be entitled to require the Developer to deduce any further title but the Developer undertakes that at the same time that the Lease is granted:

(a)

The Developer will have good title to grant the Lease; and

(b)

It will have obtained all consents required by it for that purpose.

21.3

The Lease shall be granted subject to:

(a)

all matters registered or capable of registration in any register of local land charges and all matters otherwise registerable by any local or other competent authority or pursuant to legislation;

(b)

all charges notices orders restrictions agreements and other matters arising under or pursuant to the legislation relating to town and country planning and to the requirements of the local planning authority;

(c)

all notices served and orders demands proposals or requirements made by any local or other competent authority whether before or after the date of this Agreement;

(d)

all other matters whatsoever affecting the Premises which are capable of discovery usual searches or enquiries whether or not in writing made of any person or local or other competent authority or statutory body or by inspection or survey and whether or not searches or enquiries inspection or survey have in fact been made by or on behalf of the Tenant;

(e)

all matters in the nature of the overriding interests as defined in section 70 of the Land Registration Act 1925 and all unregistered interests which override first registration under Schedule 1 of the Land Registration Act 2002 and all unregistered interests which override a disposition under Schedule 3 of the Land Registration Act 2002 affecting the Premises;

(f)

the rights easements covenants restrictions and other matters (if any) referred to in the property proprietorship and charges registers of the title number under which the Premises is registered at HM Land Registry save any charges to secure money;

(g)

all matters revealed in any documents supplied to the Tenant's solicitors prior to the date hereof.

21.4

The statutory authorities not having notified the Developer prior to the date hereof of their precise requirements in connection with the supply of services to the Estate the Lease shall be granted subject to such estate rights easements and other matters as may be reasonably required

24

by the statutory authorities to be granted to them respectively in respect of such supply and upon terms no more onerous than they usually require including the right to erect an electricity substation and to lay service media under or adjacent to the Premises along such route or routes as shall be reasonably required by the statutory authorities and approved by the Developer and details of such matters when known shall be incorporated in Schedule 5 to the Lease. If for any reason details of such matters are not known prior to the date of completion of the Lease then there shall be reserved to the Developer in the Lease the right to grant in favour of the statutory authorities in respect of such substation and/or such supply and upon terms no more onerous than they usually and reasonably require including the right to lay service media under or adjacent to the Premises along such route or routes as shall reasonably be required by the statutory authorities and approved by the Developer.

22

REGISTRATION OF NOTICE

The Developer will forthwith use reasonable endeavours to procure that the Superior Landlord provides any necessary consent or authority to HM Land Registry to enable the Tenant to register a notice of this Agreement on the charges register of the title of the Developer / Superior Landlord to the Premises.

23

NON MERGER

Notwithstanding the grant and acceptance of the Lease all the provisions of this Agreement shall continue in full force and effect to the extent that the same then remain to be implemented.

24

DEFECTS LIABILITY PROVISIONS

24.1

The Developer shall subject always to the Tenant allowing the Developer the Professional Team and the Contractor and all persons authorised by them in writing sufficient access to the Premises for such purposes, make good or procure the making good at its own cost and to the reasonable satisfaction of the Tenant of all Snagging Items (which shall be completed to the extent that they relate to Zones 1 2 and 3 within three months from the date of the Certificate of Sectional Completion and to the extent that they relate to the remainder of the Premises within the period of 12 months from the Date of Practical Completion of the Basebuild Works) and any defects or other faults appearing in the Basebuild Works which are notified in writing to the Developer within the period of twelve months from the Date of Practical Completion of the Basebuild Works and which the Contractor is liable to remedy under the defects liability provisions of the Building Contract in accordance with a programme ("Basebuild Defects Programme") prepared by the Developer and approved by the Tenant (such approval not to be unreasonably withheld or delayed) with a view to minimising interruption to and/or interference with the Tenant's Works.

24.2

The Developer shall subject always to the Tenant allowing the Developer the Professional Team and the Bio Contractor and all persons authorised by them in writing sufficient access to the Premises for such purposes, make good or procure the making good at its own cost and to the reasonable satisfaction of the Tenant of all Snagging Items and any defects or other faults appearing in the Bio Works which are notified in writing to the Developer within the period of twelve months from the Date of Practical Completion of the Bio Works and which the Bio Contractor is liable to remedy under the defects liability provisions of the Bio Contract in accordance with a programme ("Bio Defects Programme") prepared by the Developer and approved by the Tenant (such approval not to be unreasonably withheld or delayed) with a view to minimising interruption to and/or interference with the Tenant's Works.

24.3

Notwithstanding completion of the Lease the Tenant shall permit the Developer, the Professional Team, the Contractor, the Bio Contractor and all persons authorised by them in writing to have access to the Premises at all reasonable times in accordance with the Basebuild Defects Programme and the Bio Defects Programme upon reasonable notice being given for the purpose

25

of inspecting and remedying any defects (including Snagging Items) which the Developer is liable to remedy in accordance with the Building Contract or the Bio Contract or this Agreement or which the Developer is liable to remedy pursuant to an obligation to the Fund but for the avoidance of doubt the Tenant shall not be obliged to permit any party to have access to Zones 1 2 and 3 for any of the aforementioned purposes after the expiry of the period of three months from the date of the Certificate of Sectional Completion as aforesaid Provided that if the Tenant so refuses the Developer such access then the Professional Team and the Contractor and the Bio Contractor and the Developer shall have no further liability to the Tenant in respect of such defects or any matters arising therefrom.

24.4

The Developer shall procure that the person or persons entering onto the Premises for the aforementioned purposes shall comply with all reasonable requirements of the Tenant during such entry and the Developer shall make good as soon as reasonably practicable and to the reasonable satisfaction of the Tenant all damage occasioned to the Premises by the exercise of the rights granted pursuant to clause 24.3.

25

PROVISO FOR RE-ENTRY

25.1

Subject to the provisions of this clause 25 the Developer may determine this Agreement at the expiry of 20 Working Days' notice in writing to the Tenant to that effect in the event that:

(a)

the Tenant fails to perform or observe any of the Tenant's obligations in this Agreement or an event occurs that would have given rise to the Landlord's right to forfeit under the Lease and which in each case (if capable of remedy) the Tenant has failed to remedy within a reasonable period of being given notice of the relevant breach; or

(b)

the Tenant fails to pay any instalment of the licence fee or any other amount payable by the Tenant hereunder within twenty Working Days after it shall have become due under the provisions of this Agreement and the sum payable or any part thereof remains unpaid at the expiry of such notice.

25.2

The determination of this Agreement in any such event shall be without prejudice to any other rights or remedies of either party against the other party for any antecedent breach of any of the obligations under this Agreement.

25.3

If this Agreement shall become null and void or is otherwise determined pursuant to any of its terms (whether contained in this clause 25 or not) the Tenant shall forthwith apply for the removal of any caution or notice it may have cause to be registered against the registers of title to the Property or at HM Land Charges Registry.

25.4

On and notwithstanding such determination of this Agreement and provided that relief therefrom is not applied for and obtained the Tenant if and to the extent so required by the Developer shall at its own expense forthwith remove the Tenant's Works and any other works carried out by the Tenant on the Premises and reinstate the Premises to the state and condition in which they were immediately prior to the commencement of the Tenant's Works without the Developer making any compensation or allowance whatsoever to the Tenant and if the Tenant shall default in carrying out such works of removal and reinstatement the Developer shall be entitled to carry out such works at the expense of the Tenant and all costs and expenses incurred by the Developer shall be repaid by the Tenant on demand.

26

NOTICES

26.1

Any notice or certificate to be given or served hereunder shall be sufficiently given or served by sending the same by pre-paid first class registered or recorded delivery post to the party to whom it is to be given or on whom it is to be served in the case of the Developer at its registered office for the attention of Simon Parker and in the case of the Tenant to Evans Vaccines Gaskell Road

26

Speke Liverpool L24 9GK for the attention of James Durkin provided that the party sending the same can produce evidence of posting.

26.2

The Tenant acknowledges that James Durkin or such other persons as are notified to the Developer in writing from time to time are empowered to act on behalf of the Tenant and that no other person(s) or organisations are empowered to bind the Tenant in relation to this Agreement.

27

NO RESTRICTIONS ON ADJOINING LAND

Nothing herein contained or implied shall impose or be deemed to impose any restrictions on the use of any land or buildings owned by parties other than the Developer situated outside the Premises or give the Tenant the benefit of or the right to enforce or to have enforced or to prevent the release or modification of any covenant agreement condition or stipulation entered into by any purchaser from the Developer or any lessee or tenant of the Developer in respect of property situated outside the Premises or to prevent or restrict in any way the development of any land situated outside the Premises.

28

VAT

All payments to be made pursuant to this Agreement shall (save where otherwise specifically stated) be taken to be exclusive of VAT (if applicable) and any VAT chargeable in respect of the matters giving rise to such payments shall be added to the amount thereof and paid in addition hereto.

29

DISPUTES

29.1

Any dispute or difference arising between the parties in relation to any matter arising out of or in connection with this Agreement (other than in respect of any disagreement as to the meaning or construction of this Agreement) shall be referred to and determined by an independent chartered surveyor (the "Surveyor") who has been professionally qualified for not less than 10 years such person to be agreed upon between the parties hereto or failing such agreement to be nominated by or on behalf of the President for the time being of the Royal Institution of Chartered Surveyors (the "President") on the application of either party. If the dispute or difference concerns the Bio Works or an interface with the Bio Works then the Surveyor may appoint an independent professionally qualified mechanical and electrical engineer with not less than 10 years experience with pharmaceutical construction projects to assist the Surveyor with the mechanical and electrical elements of the dispute or difference.

29.2

The Surveyor shall act as an expert and not as an arbitrator and his decision shall be final and binding upon the parties.

29.3

The Surveyor shall fully consider all written representations made by or on behalf of the parties (if made promptly) and shall thereafter afford to each party the right to make written counter-representations.

29.4

The parties shall use all reasonable endeavours to procure that the Surveyor shall give his decision as speedily as reasonably possible and (save in the case of manifest error) the Surveyor's decision shall be final and binding on the parties to this Agreement.

29.5

The cost of appointing the Surveyor and his costs and disbursements in connection with his duties under this Agreement shall be shared between the parties in such proportions as the Surveyor shall determine or in the absence of such determination equally between them.

29.6

If the Surveyor shall become unable or unwilling to act then another independent chartered surveyor shall be appointed by agreement between the parties or in the absence of such agreement by or on behalf of the President and this procedure may be repeated as often as necessary.

27

30

LIMITATION OF DEVELOPER'S LIABILITY

After the date of issue of the relevant Certificate of Making Good Defects the Developer shall have no further liability to the Tenant in respect of its obligations under this Agreement in respect of the Basebuild Works and/or the Bio Works as the case may be and the Tenant shall have no rights against the Developer save in relation to any proceedings commenced before that date and for the avoidance of doubt proceedings means service of a writ in the English Courts or referral to the Surveyor pursuant to Clause 29.

31

THE EMPLOYER'S REPRESENTATIVE AND THE TENANT'S SURVEYOR

Subject to the terms of the Step-in Agreement as between the Developer and the Tenant until informed in writing to the contrary by the other party each party shall be entitled to rely on any written confirmations approvals agreements or consents of the Employer's Representative or the Tenant's Surveyor (as the case may be) alone as being binding and on behalf of such party in relation to any matter contained in this Agreement and any information which either the Developer or the Tenant is bound to provide hereunder shall be properly provided if so provided by the Employer's Representative or the Tenant's Surveyor (as the case may be) alone.

32

LIMITATION OF SUCCESSORS IN TITLE'S LIABILITY

It is hereby agreed and declared that the obligations herein of the Developer in relation to the carrying out and completion of the Building Works (including without limitation its obligations under clause 7) shall be the obligations of Intercity Pharma Limited only and not any successor in title to the Developer notwithstanding that the Lease may be granted by such successor in title and the only obligation which shall bind any such successor in title shall be the obligation to grant the Lease contained in clause 17.1.

33

INTEREST

If either party hereto shall fail to pay to the other party any sums due to such party pursuant to any of the provisions of this Agreement on the due date the party in default shall in addition thereto pay interest at the Prescribed Rate from and including the date upon which the sum should have been paid up to and including the date of actual payment.

34

NO REPRESENTATIONS

The Tenant acknowledges that this Agreement is not being entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Developer save in so far as any such statement or representation is expressly set out in this Agreement or has been made in writing by the Developer's Solicitors in reply to enquiries raised by the Tenant's Solicitors.

35

ENTIRE AGREEMENT

Any additional conditions or variations of the conditions contained in this Agreement which are agreed in correspondence between the parties (or their respective solicitors with their authority) where the correspondence makes express reference to this Agreement are deemed to be incorporated in this Agreement and its is hereby acknowledged that this Agreement (with the incorporation of any such additional condition or variation) constitutes the entire contract between the parties.

36

THIRD PARTIES

Save as expressly provided, none of the provisions of this Agreement are intended to or will operate to confer any benefit (pursuant to the Contracts (Rights of Third Parties) Act 1999) on a person who is not named as a party to this Agreement.

28

37

MUTUAL CO-OPERATION

The Developer and the Tenant shall co-operate fully with each other in relation to the mutual provision of information and in so doing will act in good faith so as to minimise any delays in the progress of the Building Works and the Tenant's Works.

38

CONFIDENTIALITY

Except to the extent required by law (including any requirements of the Stock Exchange or any other regulatory requirements in force from time to time affecting the parties) and save where necessary to implement this Agreement the parties to this Agreement will not make any press or public announcement or divulge or communicate to any person any of the terms of this Agreement relating to the Premium or any other financial information and the parties will take all reasonable steps to bind their respective servants agents and advisers in this behalf PROVIDED THAT the Developer may disclose the terms of this Agreement for the purposes of securing finance for any proposed development of the Premises.

39

STANDARD CONDITIONS

This Agreement incorporates the Standard Commercial Property Conditions (1^st Edition) insofar as they are not inconsistent with or varied by this Agreement (the terms of which Agreement shall prevail in the event of a conflict).

40

JURISDICTION

This Agreement shall be governed by and construed in all respects in accordance with the laws of England to the non-exclusive jurisdiction of whose courts the Tenant shall be deemed (to the extent necessary) irrevocably to have submitted.

41

OPERATION OF THIS DEED

This document shall be treated as having been executed and delivered as a deed only upon being dated.

42

STAMP DUTY

The parties hereto certify that this is an instrument in respect of non-residential property on which stamp duty is not chargeable by virtue of the provisions of section 92 of the Finance Act 2001.

IN WITNESS whereof the parties hereto have signed this document the day and year first above written.

SIGNED by	/s/  SIMON PARKER	)
	for and on behalf of INTERCITY PHARMA LIMITED	) )
SIGNED by	/s/  JOHN LAMBERT	)
	for and on behalf of EVANS VACCINES LIMITED	) )

29

SCHEDULE 1

Access Criteria

1

The Certificate of Sectional Completion has been issued and a copy delivered to the Tenant together with any accompanying schedule listing Snagging Items.

2

The Tenant has been provided with copies (certified by the Developer's Solicitors as being true full and accurate excluding financial information) of the Building Contract and the appointments of the Professional Team and all Relevant Sub Contracts.

3

That Zones 1 2 and 3 (and adjacent fire corridor) are watertight weatherproof and secure (which for the avoidance of doubt means that all the windows and doors (including the glass therein) the walls, the first floor and the ceiling of Zones 1 2 and 3 have been properly completed in accordance with the provisions of this Agreement.

4

The fire detection system and emergency lighting shall be installed within Zones 1 2 and 3 but will not be commissioned.

5

All drainage from the relevant Zone is connected to the adopted sewers and all drainage works shall be operational and tested.

6

The relevant Zone is in good and clean condition cleared of all unused building materials plant and equipment used in or in connection with the Buildings Works and any temporary structures.

7

The Tenant is provided with full copies of the planning permission for the Building Works comprising the relevant Zone the application therefore the approved plans thereto any reserved matters approval and any variation of the approved plans.

8

The Compound will be levelled and reasonable access provided over the rear service yard area shown hatched black on the Access Drawing.

30

SCHEDULE 2

Pre-Conditions

1

That all of the Warranties properly executed have been delivered unconditionally to the Tenant's Solicitors.

2

Written confirmation from the Fire Officer that the Building Works comply in all respects with the Fire Regulations.

3

The Tenant is provided with a full copy of the building regulations approval of the Building Works the application therefore the approved plans and confirmation from the Building Control Officer in writing that the Building Works have been completed in accordance with the requirements of the Building Regulations and Building Regulations Approvals.

31

APPENDIX A

THE FORM OF THE LEASE

APPENDIX B

SPECIFICATION

APPENDIX C

THE FORM OF WARRANTIES

APPENDIX D

STANDARD FORM OF LICENCE FOR ALTERATIONS

APPENDIX E

PLAN

SITE PLAN

ZONE PLAN

APPENDIX F

ACCESS DRAWINGS

APPENDIX G

FORM OF BUILDING CONTRACT

QuickLinks

Exhibit 10.005

CONTENTS
SCHEDULE 1 Access Criteria
SCHEDULE 2 Pre-Conditions
APPENDIX A THE FORM OF THE LEASE
APPENDIX B SPECIFICATION
APPENDIX C THE FORM OF WARRANTIES
APPENDIX D STANDARD FORM OF LICENCE FOR ALTERATIONS
APPENDIX E PLAN SITE PLAN ZONE PLAN
APPENDIX F ACCESS DRAWINGS
APPENDIX G FORM OF BUILDING CONTRACT

EX-10.327

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Exhibit 10.327

AMENDMENT NO. 5 TO
AGREEMENT

        This Amendment No. 5 ("Amendment No. 5") is entered into effective as of January 1, 2004 (the "Amendment Effective Date"), pursuant to and amending that certain Agreement between Gen-Probe Incorporated, a Delaware corporation ("Gen-Probe") and Chiron Corporation, a Delaware corporation ("Chiron"). Capitalized terms used but not defined herein shall have the meanings set forth in the Agreement.

Recitals

        A.    The parties entered into the Agreement as of June 11, 1998 pursuant to which, among other things, the parties described their respective rights and obligations with respect to the development, manufacture, marketing and distribution of Products in the Blood Screening and Clinical Diagnostic Fields.

        B.    The Agreement was been previously amended and supplemented by further written agreements of the parties.

        C.    Subsequent to the execution of the Agreement, Chiron assigned its rights and obligations with respect to Clinical Diagnostic Products to Chiron Diagnostics Corporation ("CDC"), now wholly owned by Bayer Corporation (CDC and Bayer Corporation being collectively referred to as "Bayer"). Chiron retained all rights and obligations under the Agreement with respect to Blood Screening Products. This amendment is effective as between Chiron and Gen-Probe with respect to Blood Screening Products only, and nothing herein shall affect any rights or obligations of Gen-Probe or Bayer with respect to Clinical Diagnostic Products.

        D.    The parties have discussed a revision to and clarification of their respective rights and obligations with respect to Section 1.2.1, and have agreed to make certain changes to the Agreement in connection therewith, in accordance with the provisions of this Amendment No. 5.

Agreement

        NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this Amendment No. 5, the parties agree as follows:

        1.     Applicable Purchase Price. Section 1.2.1 of the Agreement shall be and is hereby amended to read as follows:

        1.2.1 With respect to each Initial Blood Screening Assay, and each Future Blood Screening Assay which includes as a constituent element an assay for HCV (other than those sold pursuant to Sections 3.1.4(b) or 3.6), and except as set forth in Section 1.2.2 below, an amount equal to Forty-five and Seventy-five one hundredths percent (45.75%) of Net Sales thereof.

        2.     Major Distributor. All references in the Agreement to the Major Distributor are hereby deleted. All licenses and rights granted, or to be granted, by Gen-Probe to the Major Distributor are hereby terminated.

        3.     No Other Amendment. Except as is expressly set forth in this Amendment No. 5, all other terms and conditions of the Agreement shall continue in full force and effect.

        4.     Counterparts. This Amendment No. 5 may be executed in counterparts, each of which shall be an original, and all of which together shall constitute one and the same instrument.

1

        IN WITNESS WHEREOF, the parties have caused this Amendment No. 5 to be executed and the persons signing below warrant that they are duly authorized to sign for and on behalf of the respective parties.

Gen-Probe:		Chiron:
GEN-PROBE INCORPORATED, a Delaware corporation		CHIRON CORPORATION, a Delaware corporation
By:	/s/  HANK NORDHOFF	By:	/s/  JACK GOLDSTEIN
Its: President & Chief Executive Officer Date: November 10, 2003		Its: President, Chiron Blood Testing Date: November 12, 2003

2

QuickLinks

Exhibit 10.327

AMENDMENT NO. 5 TO AGREEMENT
Recitals
Agreement

EX-10.328

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Exhibit 10.328

CONFIDENTIAL REDACTED VERSION

[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

***CONFIDENTIAL TREATMENT REQUESTED***

FUTURE BLOOD SCREENING ASSAY—

WEST NILE VIRUS ADDENDUM

AMENDING

AGREEMENT ENTERED INTO AS OF JUNE 11, 1998

BY AND BETWEEN

GEN-PROBE INCORPORATED, A DELAWARE CORPORATION

AND

CHIRON CORPORATION

TABLE OF CONTENTS

			Page
1.    Definitions			2
	1.1    Agreement		2
	1.2    Alternative NAT Clinical Diagnostic Product		2
	1.3    Binder		2
	1.4    Budget		2
	1.5    Completion Date		2
	1.6    FTE Labor Rate		2
	1.7    Interim Events		2
	1.8    Material Modification		2
	1.9    NIH Monies		2
	1.10    Non-material Modification		2
	1.11    Product Requirements Document		3
	1.12    Project Management		3
	1.13    Resource Plan		3
	1.14    Software Requirements Specifications		3
	1.15    Technical Plan		3
	1.16    Timeline		3
	1.17    WNV Assay Product		3
	1.18    WNV Development Costs		3
	1.19    WNV Development Program		3
	1.20    WNV Clinical Diagnostic Product		3
2.    WNV Development Program			3
	2.1    Objective		3
	2.2    General Conduct of Development		4
	2.3    No Guarantee		4
	2.4    Project Management		4
		2.4.1.    Principles of Project Management	4
		2.4.2.    Project Manager	5
		2.4.3.    Project Manager's Responsibilities	5
		2.4.4.    Project Leaders	6
		2.4.5.    Reports	6
		2.4.6.    Meetings of the Supervisory Board	6
	2.5    Development Responsibilities		6
		2.5.1.    Principal Responsibility; General Statement	6
		2.5.2.    Shared Responsibility	7
		2.5.3.    Principal and Shared Responsibility; Specific Allocation	7
		2.5.4.    Regulatory/Licensure	7
		2.5.5.    Project Leader Disagreements	7

i

3.    Modifications			8
	3.1    WNV Development Program Definition		8
	3.2    Modifications		8
		3.2.1.    Request for Modifications	8
		3.2.2.    Non-Material Modifications	8
	3.3    Material Modifications		9
		3.3.1.    Request for Material Modifications	9
		3.3.2.    Initial Analysis of Impact of Proposed Material Modification	9
		3.3.3.    Preparation of Modified WNV Development Program	9
		3.3.4.    Acceptance of Modified WNV Development Program	9
		3.3.5.    Effective Date of Modified WNV Development Program	10
	3.4    Notice of Significant Changes		10
4.    Changes to WNV Assay Product after Completion Date			10
	4.1    Process		10
	4.2    Additional Work under Addendum		11
5.    WNV Development Costs			11
	5.1    [***] WNV Development Costs		11
		5.1.1.    [***]	11
		5.1.2.    Prior to Material Modification	11
		5.1.3.    After Material Modification	12
	5.2    Definition and Calculation of WNV Development Costs		12
		5.2.1.    WNV Development Costs; FTE Labor Rate	12
		5.2.2.    Comparison with Resource Plan	14
		5.2.3.    Methodology	14
	5.3    Payment of WNV Development Costs		14
		5.3.1.    Accrued WNV Development Costs	14
		5.3.2.    [***] Budgeted Payments	14
		5.3.3.    [***] True-Up Payments	14
		5.3.4.    Invoices	15
	5.4    Additional Provisions regarding Shared Revenues		15
		5.4.1.    [***]	15
		5.4.2.    [***]	15
	5.5    Dispute		15
	5.6    Right to Audit and Verify		15
6.    Manufacturing and Commercialization			15
	6.1    Definitions Relevant to Manufacturing and Commercialization Obligation		15
		6.1.1.    Applicable Purchase Price	15
		6.1.2.    Transfer Price	16
		6.1.3.    Manufacturing Cost	16
		6.1.4.    Rare Reagents	16
	6.2    Right to Audit and Verify		16
	6.3    Non-Commercial Products		16
	6.4    Commercialization Budget		17
7.    License Grants			17

ii

8.    Addendum Effective Date; Term; Termination			18
		Term of West Nile Virus Addendum
	8.1    Termination for Breach		18
		8.1.1.    Default	19
		8.1.2.    Right to Cure Event of Default	19
		8.1.3.    Effect of Termination for Breach	19
	8.2    Termination by Both Parties		19
		8.2.1.    Vote to Terminate	19
		8.2.2.    Effect of Notice Period on Termination by Both Parties	19
		8.2.3.    Effect of Termination by Both Parties	20
	8.3    Termination by Either Party; Unilateral Withdrawal from WNV Development Program		20
	8.4    Continuance of WNV Development Program following Unilateral Withdrawal or Termination		20
		8.4.1.    Election	20
		8.4.2.    Funding and Conduct of Development	20
		8.4.3.    Reimbursement of Development Costs	21
		8.4.4.    Control of the Program upon Unilateral Funding	21
		8.4.5.    Rights under Agreement	21
9.    Escalation			22
	9.1    Escalation Process		22
	9.2    Remedies in Event of Default		22
	9.3    Survival		22
10.    No Other Amendment			22
11.    Counterparts			23

iii

Future Blood Screening Assay—

WEST NILE VIRUS ADDENDUM

        This Future Blood Screening Assay—West Nile Virus Addendum (the "West Nile Virus Addendum") is entered into, effective as of June 1, 2003 (the "Addendum Effective Date") pursuant to and amending that certain Agreement entered into as of June 11, 1998 (the "Agreement") by and between Gen-Probe Incorporated, a Delaware corporation ("Gen-Probe") with a principal place of business at 10210 Genetic Center Drive, San Diego CA 92121, and Chiron Corporation, a Delaware corporation ("Chiron;" collectively with Gen-Probe, the "parties") with a place of business at 4560 Horton Street, Emeryville, CA 94608.

Recitals

        A.    The parties entered into the Agreement as of June 11, 1998. The Agreement was amended by the following: (i) June 11, 1998 Supplemental letter agreement, (ii) June 26, 1998 Addendum to Collaboration Agreement, (iii) June 30, 1998 Supplemental letter agreement, (iv) June 30, 1998 Consent, (v) December 7, 1999 Amendment to Collaboration Agreement, (vi) February 1, 2000 Amendment No. 2 to Collaboration Agreement, (vii) June 7, 2001 Supplemental agreement no. 1 (Customer training and Support), (viii) October 30, 2001 Confidentiality and Joint Interest Agreement, and (ix) April 1, 2002 Amendment No. 3 (warehousing and shipping). In addition, the parties entered into certain settlements, described in Recital E below.

        B.    In the Agreement, the parties agreed to discuss, during the term thereof, the selection and establishment of one or more Development Programs for one or more Future Blood Screening Assays to be conducted by the Blood Screening Instruments.

        C.    The parties have discussed a proposed development of an assay for the detection of West Nile Virus (WNV), on a semi-automated instrument system, which assay would fall within the definition of a "Future Blood Screening Assay" set forth in Section 1.30 of the Agreement and does not include HCV as a constituent element.

        D.    Gen-Probe applied for and received a contract with the National Institutes of Health, Contract No. NO1-HB-07148, effective January 1, 2000, which contract as amended provides for, among other things, the partial funding of costs associated with the development of the WNV Assay Product.

        E.    The parties submitted a number of disputes under the Agreement to arbitration pursuant to Section 13 of the Agreement, and in resolution of those disputes, executed a Definitive Written Settlement Agreement, dated December 5, 2001, and a Short Form Agreement, dated November 16, 2001. All provisions of these settlement agreements which address the subject matter addressed in this Addendum are expressly superceded by this West Nile Virus Addendum, except as expressly described herein.

        F.     By this West Nile Virus Addendum, the parties desire to include the West Nile Virus Assay to be conducted by one or more of the Blood Screening Instruments within the scope of the provisions of the Agreement as clarified and amended by the terms and conditions more particularly described in this West Nile Virus Addendum.

        G.    The purpose of WNV development program is to meet an urgent need in the United States, as articulated by FDA and industry, to provide an IND WNV screening assay by July 1, 2003. The parties intend that, if a fully licensed product becomes required and commercially appropriate, the terms applicable to the development and distribution of that product will require a modification of this Agreement.

Agreement

        NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this West Nile Virus Addendum, the parties agree as follows:

        1.    Definitions.    All capitalized terms used but not defined in this West Nile Virus Addendum shall have the meanings set forth in the Agreement.

        1.1   Agreement shall have the meaning set forth in the first paragraph of this West Nile Virus Addendum.

        1.2   Alternative NAT Clinical Diagnostic Product means the alternative NAT product (reflected in the WNV Development Program shared responsibility described in Section 2.5.3 below) developed by Chiron and sold in the Clinical Diagnostic Field.

        1.3   Binder means that certain three-ring binder, with one or more volumes, entitled "WNV Development Program for the WNV Assay Product (Gen-Probe/Chiron WNV Development Addendum, dated as of            ) Binder," in which certain documents, materials or other items incorporated into this West Nile Virus Addendum by reference are kept. The original Binder and an additional volume of the Binder, labeled "Amendments to WNV Development Program" and reflecting any changes, modifications or amendments to the Binder, are maintained by and located at the premises of Gen-Probe. A copy of the original Binder, and a copy of the additional volume of the Binder, each signed by both parties, shall be maintained by and located at the premises of Chiron.

        1.4   Budget means the written, approved budget of WNV Development Costs for the WNV Development Program, including the estimated cost of the WNV Development Program on a monthly basis through the end of the WNV Development Program. The approved Budget is described in the Binder under the heading "Budget", and may be amended from time to time under the provisions of Section 3 below.

        1.5   Completion Date means the earlier of (i) [***], or (ii) [***].

        1.6   FTE Labor Rate is defined in Section 5.2.1.

        1.7   Interim Events means such events of material significance to the WNV Development Program as are mutually agreed to by both parties and set forth with specificity and identified as an "Interim Event" on the Timeline included within the Technical Plan, as such Interim Events may be modified, pursuant to the change procedures set forth in Section 3 of this West Nile Virus Addendum.

        1.8   Material Modification means a change or amendment to the WNV Development Program that materially affects the requirements set forth in the then-current Product Requirements Document, Software Requirement Specifications, Technical Plan, Resource Plan or Budget, or that materially modifies an Interim Event set forth in the Timeline included within the Technical Plan.

        1.9   NIH Monies means all monies actually paid to Gen-Probe by the NIH specifically to defray WNV Development Costs under (i) the NIH contract referenced in Recital C above (ii) any extensions or amendments to the NIH contract referenced in Recital C, and (iii) any other contract or grant under which Gen-Probe seeks reimbursement for WNV Development Costs. NIH Monies shall not include any monies paid to Gen-Probe by the NIH for any other purpose, even if paid pursuant to contracts which also provide for payment of WNV Development Costs so long as Gen-Probe can reasonably demonstrate that monies paid do not relate to the WNV Development Program.

        1.10   Non-material Modification means a change or amendment to the WNV Development Program other than a Material Modification. Written agreement among members of Project

2

Management that a modification is a "Non-material Modification" hereunder as described in Section 3.2 below shall be conclusive.

        1.11   Product Requirements Document (or "PRD") means the specifications for the WNV Assay Product, and includes as a component thereof the Software Requirements Specifications. The initial Product Requirements Document is described in the Binder, under the heading "Product Requirements Document (PRD, Revision C, dated 06/08/03)," and may be amended from time to time under the provisions of Section 3 below.

        1.12   Project Management is defined in Section 2.4.1.

        1.13   Resource Plan means the description of (i) a party's personnel to be allocated to the WNV Development Program, including the name of the specific personnel or the qualification or grade of unidentified personnel, and dedicated amount of time and periods for the commitment of such personnel required for the WNV Development Program, and (ii) equipment, tools, software, or other special items, the purchase, license or leasing of which is specifically required for use by such personnel to support the WNV Development Program. The initial Resource Plan is described in the Binder, under the heading "Resource Plan," and may be amended from time to time under the provisions of Section 3 below.

        1.14   Software Requirements Specifications (or "SRS") means the specifications for the software component of the WNV Development Program. The initial Software Requirements Specifications are described in the Binder, under the heading "Software Requirements Specifications (SRS, Revision F, dated 06/13/01)," and may be amended from time to time under the provisions of Section 3 below.

        1.15   Technical Plan means the statement of work prepared for the development of the WNV Assay Product, including the responsibilities to be performed by each party, the responsibilities to be performed jointly, the schedule for performance of those responsibilities, an overall development timeline and a Resource Plan. The initial Technical Plan is described in the Binder, under the heading "Technical Plan, Revision B, dated 06/09/03," and may be amended from time to time under the provisions of Section 3 below.

        1.16   Timeline means the overall development timeline included within the Technical Plan.

        1.17   WNV Assay Product is defined on Schedule 1.17 and expressly excludes any products or instruments in the Clinical Diagnostic Field.

        1.18   WNV Development Costs means, with respect to this West Nile Virus Addendum only, the development costs defined in Section 5 hereof.

        1.19   WNV Development Program means the statement of work for the development of the WNV Assay Product under the terms of this West Nile Virus Addendum, as such development program is described in the Binder, and consists of (i) the Product Requirements Document, (ii) the Software Requirements Specifications, (iii) the Technical Plan, (iv) the Resource Plan included within the Technical Plan, and (v) the Budget.

        1.20   WNV Clinical Diagnostic Product means a TMA assay product developed by Gen-Probe and sold in the Clinical Diagnostic Field to detect the presence of the West Nile Virus.

        2.    WNV Development Program.

        2.1    Objective.    Subject to the terms of the Agreement, as amended by this West Nile Virus Addendum, the parties each shall conduct their respective obligations under the WNV Development Program as established in accordance with the terms hereof. The parties acknowledge that, as of the Addendum Effective Date, the WNV Development Program is a development program limited to sales of the WNV Assay Product prior to marketing approval by

3

the FDA, and further acknowledge that the parties will be required to modify the WNV Development Program pursuant to Section 3 hereof in the event that the parties approve a modification to the WNV Development Program designed to result in marketing approval by the FDA of the WNV Assay Product.

        2.2    General Conduct of Development.    The parties shall conduct their respective obligations under the WNV Development Program in compliance in all material respects with all requirements of applicable laws and regulations and all applicable good laboratory, clinical and manufacturing practices. In addition, the parties each shall proceed diligently with their respective obligations under the WNV Development Program and shall use their respective Commercially Reasonable Efforts to achieve the objectives of the WNV Development Program efficiently and expeditiously. The parties each shall allocate such personnel, equipment, facilities and other resources to the WNV Development Program to carry out their respective obligations and to accomplish the objectives thereof, all as is more particularly described in the WNV Development Program, as amended from time to time during the term of this West Nile Virus Addendum (in accordance with the provisions of Section 3). Each party shall have the right to consult with the other party regarding the WNV Development Program and the obligation to reasonably consider the other party's advice.

        2.3    No Guarantee.    While each party agrees to use Commercially Reasonable Efforts to achieve the objectives described in the WNV Development Program (as amended from time to time during the term of this West Nile Virus Addendum (in accordance with the provisions of Section 3) efficiently and expeditiously, the parties understand that they have embarked on a development program whose outcome is uncertain. The parties further understand that the WNV Development Program is subject to a number of variables that are inherent to the development process and that there is a possibility that the parties may fail to successfully complete the development of the WNV Assay Product, even though each party exercises Commercially Reasonable Efforts and commits the resources described in the WNV Development Program. Neither party will be in breach of its obligations to the other hereunder and such party shall be deemed to have exercised Commercially Reasonable Efforts, so long as such party shall have committed the resources described in the WNV Development Program, even if such resources fail to successfully complete the development of the WNV Assay Product, or to complete the development of the WNV Assay Product in accordance with the Timeline or for the amounts described in the Budget or to the specifications set forth in the PRD or the SRS. The payment of WNV Development Costs between the parties shall be due and payable without respect to the achievement of any particular deliverable specified in the WNV Development Program.

        2.4    Project Management.

        2.4.1.    Principles of Project Management.    The parties agree that in the process of exercising their responsibilities, the Project Management (consisting of the Project Manager and Project Leaders, as set forth herein) should have routine access to such information needed to assess progress under and costs of the WNV Development Program. Specifically, the parties agree that the Project Leaders shall be invited to participate in all team meetings, and will have access to team meeting minutes, Timecards and other expense records, except to the extent the Project Leader for the party assigned principal responsibility under Section 2.5.3 of this West Nile Virus Addendum for an activity determines in its reasonable discretion that any such meetings or minutes contain confidential, proprietary information of the responsible party. In such cases, the Project Manager shall (i) determine whether the Project Leader for the party not having primary responsibility for the activity can attend all or a portion of such meeting, (ii) provide a copy of the meeting minutes to the Project Leader not having primary responsibility for the activity with such confidential, proprietary information redacted, and (iii) to the extent that such minutes had proprietary or confidential

4

information redacted, inform the Project Leader not having primary responsibility of the general nature of any decisions made at such meeting which affect the Timeline, Budget or Interim Events; provided, however that the Project Manager may only redact information comprising Gen-Probe intellectual property and know how or confidential business issues. Project Leaders will have access to non-confidential and non-proprietary information of the other party necessary to perform their responsibilities under the WNV Development Program, including those listed under Section 2.4.4. Project Leaders will inform and coordinate all activities, including meetings with personnel involved in the performance of the WNV Development Program, with the Project Manager. The primary point of contact for the WNV Development Program at Gen-Probe will be Gen-Probe's Project Manager, the primary point of contact at Chiron will be Chiron's Project Leader. In order to maintain an efficient and orderly development the parties will communicate through the primary points of contact as much as possible when requesting information concerning the progress of the WNV Development Program. Confidentiality will be maintained in accordance with Section 8.1 of the Agreement, and disclosure of any information under this Section 2.4.1 shall be governed by that certain Confidentiality and Joint Interest Agreement, by and between the parties, dated as of October 30, 2001.

        2.4.2.    Project Manager.    The project associated with development of the WNV Assay Product will be managed under a Project Manager, the responsibilities of which are described in Section 2.4.3. The WNV Development Program will be managed by a Project Manager appointed by Gen-Probe. As of the Addendum Effective Date, the Project Manager shall be [***]. Any change by Gen-Probe of the Project Manager must be approved by the Supervisory Board, which approval shall not be unreasonably withheld.

        2.4.3.    Project Manager's Responsibilities.    The Project Manager shall be responsible for the following activities, together with such other activities as the parties may agree:

        (a)   Managing all matters relating to the WNV Development Program under this West Nile Virus Addendum, including each party's respective responsibilities and contributions and receiving reports from the Project Leaders;

        (b)   Providing written monthly progress reports to the parties and presenting status reports to the Supervisory Board in accordance with Section 2.4.6 below;

        (c)   Submitting and receiving the reports, materials and documents required to be delivered under this West Nile Virus Addendum;

        (d)   Overseeing the process of proposing, and submitting to the parties, any proposed modifications to the Product Requirements Document, Software Requirement Specifications, Technical Plan, Resource Plan or Budget, and in the event the parties cannot agree, presenting the same to the Supervisory Board in an objective and neutral manner;

        (e)   Arranging any meetings to be held between the parties and participating, to the extent the Project Manager deems appropriate, in meetings of the Project Leaders;

        (f)    Maintaining, for record keeping purposes, a log book or notes containing summaries and dates of all material communications and deliveries between the parties of which the Project Manager is aware, consistent with the parties' protocol for such sharing of confidential information set forth in that certain Confidentiality and Joint Interest Agreement, by and between the parties, dated as of October 30, 2001;

        (g)   Implementing appropriate practices and procedures to manage the progress under this West Nile Virus Addendum;

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        (h)   Fostering good communication between the parties. It is intended by the parties that both parties share, through reports from the Project Leaders to the Project Manager, in the information concerning the progress made in the WNV Development Program and the cause of any delays. It is expected that the Project Leaders will make recommendations to the Project Manager for preferred paths when substantial delays are identified and multiple paths forward are identified. Understanding that it takes time for information to flow up the chain of command, the Project Manager will inform Chiron of delays and progress on resolution as soon as it becomes available to him; and

        (i)    It is understood that both companies hold proprietary trade secret know-how and processes regarding their respective technologies that are not necessarily shared as part of this Agreement. On occasion it may occur that a full understanding of difficulties in the progress of development may require a detailed understanding of this proprietary know-how and processes. Each party will endeavor to appraise the other of the outcomes and consequences of these difficulties, while protecting the confidentiality of the information.

        2.4.4.    Project Leaders.    Gen-Probe and Chiron will each appoint a project leader (each a "Project Leader") who is responsible for (a) assembling project teams for his or her respective party and (b) completing project responsibilities allocated to such party in Section 2.5. For the purposes of completing the WNV Development Program, these Project Leaders will report to the Project Manager. The Project Leader employed by a party shall be responsible for reporting to the employing party whether he or she believes the other party has proceeded diligently with its stated obligations under the WNV Development Program, has allocated sufficient personnel, equipment, facilities and other resources to achieve the objectives of the WNV Development Program and has exercised Commercially Reasonable Efforts to achieve its objectives efficiently and expeditiously.

        2.4.5.    Reports.    In addition to the records and reports required to be kept by the parties under Section 3.5 of the Agreement, each Project Leader will provide to the Project Manager, in writing, a progress report delivered on or before the 15th day of each calendar month during the term of the WNV Development Program. These reports will cover technical progress as well as financial expenditures and FTE Labor hour reconciliations. The Project Manager may rely on any such reports for the purpose of making his or her progress report to the Supervisory Board described in Section 2.4.6 below.

        2.4.6.    Meetings of the Supervisory Board.    The Supervisory Board shall meet from time to time during the term of this West Nile Virus Addendum, but not less frequently than once each calendar quarter during the term hereof. Not less frequently than quarterly, a regular agenda item at the regularly scheduled Supervisory Board meeting shall be to receive a report from the Project Manager and conduct a review of the WNV Development Program to assess progress of the development and the potential for commercialization of the WNV Assay Product.

        2.5    Development Responsibilities.

        2.5.1.    Principal Responsibility; General Statement.    The parties' intention is the smooth and efficient conduct of development, and the parties desire by this Section 2.5 to provide guiding principles by which day-to-day decisions may be made by the responsible party and by which the approval process more particularly described in Section 3 below shall be governed. The parties intend that portions of the WNV Assay Product development will be conducted primarily and principally by one or the other of the parties, after consultation and discussion with the other party, under the supervision of the Project Manager, as follows: (i) [***]; and (ii) [***]. The party to whom principal responsibility is allocated in this Section 2.5 has the power to make day-to-day decisions regarding matters within the area of such responsibility, consistent with the overall WNV Development Program. The parties' obligations with respect to certain warehousing and shipping are subject to Amendment No. 3.

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        2.5.2.    Shared Responsibility.    Gen-Probe and Chiron have entered into that certain Definitive Written Settlement Agreement, dated December 5, 2001. Section 2(a) of the Definitive Written Settlement Agreement incorporates by reference the provisions of the Short Form Agreement (attached as Exhibit A to the Definitive Written Settlement Agreement). The parties hereby expressly incorporate the provisions of Sections F.5 and F.6 of the Short Form Agreement between the parties, dated November 16, 2001, into this West Nile Virus Addendum, and agree that the provisions of Sections F.5 and F.6 of the Short Form Agreement will govern the relationship between the parties for the purpose of the WNV Assay Product in connection with the subject matters addressed in those provisions.

        2.5.3.    Principal and Shared Responsibility; Specific Allocation.    Without limiting the general statements set forth in Sections 2.5.1 and 2.5.2, the parties agree to allocate specific responsibility as follows:

Function	Principal Responsibility	Shared Responsibility
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]		[***]
[***]		[***]
[***]	[***]
[***]		[***]
[***]	[***]
[***]		[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]		[***]

*

Chiron shall have reasonable input into [***].

        2.5.4.    Regulatory/Licensure.    Pursuant to [***].

        2.5.5.    Project Leader Disagreements.    It is recognized that the Project Leaders may disagree on approaches. Even though one party has the principal responsibility for development in the functional area described in Section 2.5, disagreements that cannot be resolved by Project Management may be brought to the Supervisory Board. However, work will proceed in accordance with the choice of the principally responsible party, while being

7

discussed at the Supervisory Board. In the event that the parties do not agree at the Supervisory Board level, the party with principal responsibility may continue to proceed per its best judgment. If a disagreement arises in a functional area for which responsibility is shared and resolution cannot be achieved at the Supervisory Board, except as to Regulatory/Licensure Strategy which shall be governed by Section 2.5.4 above, work shall be suspended in such functional area until a resolution is reached through Article 13 of the Agreement, including arbitration.

        3.    Modifications.

        3.1    WNV Development Program Definition.    The parties have prepared and agreed upon a WNV Development Program, as described in the Binder. The WNV Development Program, as described in the Binder, will govern the rights and responsibilities of the parties until changed in accordance with the provisions hereof. The parties recognize and anticipate that additional clarification and refinement of the WNV Development Program, including changes, if any, necessary to reflect accepted delays in, or increases in costs of, development, will be required as development proceeds. The parties intend that this West Nile Virus Addendum establish a process by which the parties will amend the WNV Development Program, in accordance with the terms described in this Section 3.

        3.2    Modifications.

        3.2.1.    Request for Modifications.    Either party may propose either Material or Non-material Modifications to any part of the WNV Development Program from time to time during the term of this West Nile Virus Addendum, including without limitation a request for a change to the FTE Labor Rate, as defined in Section 5.2.1. The process applicable to any such proposed modifications shall be as described in this Section 3. Changes, modifications or improvements to the WNV Assay Product, after the Completion Date, are governed by the provisions of Section 4 below. The Project Manager, and under his or her supervision, the Project Leaders and their respective teams, will review any proposed modification to the WNV Development Program; if the two Project Leaders mutually agree in writing that a particular modification is a Material Modification or is a Non-material Modification, then such determination shall be conclusive. Unless the two Project Leaders determine to the contrary, any one or more of the following modifications shall be deemed to be a Material Modification: a modification that (i) reflects an increase in the actual WNV Development Costs incurred that, when aggregated with all previously authorized modifications, is greater than [***] over the Development Costs reflected in the original Budget approved as of the Addendum Effective Date, or (ii) contains a proposal to alter any Interim Event as compared to the most recently approved Timeline, or (iii) contains a proposal to submit a BLA in the United States for approval from the FDA, or (iv) increases the sales forecast of the WNV Assay Product to greater than [***] of the WNV Assay Product per month for [***]. If the Project Leaders are unable to agree whether a particular requested modification is a Material or Non-material Modification, then the Supervisory Board shall review the requested change and make a determination with respect to whether such requested modification is a Material or Non-material Modification. If the Supervisory Board has met and consulted without resolution, then either party may, in its discretion, determine that the parties have reached an impasse with respect thereto and implement the escalation procedure described in Article 13 of the Agreement to resolve such impasse.

        3.2.2.    Non-Material Modifications.    Unless changes to the specifications described in Section 3.2.1 constitute a Material Modification, any Non-Material Modifications shall be reported in the monthly summary progress reports pursuant to Section 2.4.4 and shall not be subject to the approval process described in Section 3.3.

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        3.3    Material Modifications.

        3.3.1.    Request for Material Modifications.    In the event that one party desires to request a Material Modification to the WNV Development Program from time to time during the term hereof, such party (the "requesting party") shall submit to the other party such request in writing, in sufficient detail to enable the other party (the "receiving party") to evaluate the request. Without limiting the foregoing, the requesting party shall prepare a revised draft version of the Budget, reflecting any changes necessary to fully implement the requested Material Modification to the WNV Development Program.

        3.3.2.    Initial Analysis of Impact of Proposed Material Modification.    Promptly upon receipt of such request, but in any event not more than [***] thereafter, the parties shall conduct a preliminary analysis of the impact that the requested Material Modification would have, including without limitation the impact any such proposed Material Modification would have on the Budget and/or the Timeline, and shall meet and conduct an analysis of the impact of such Material Modification on the potential profitability of the WNV Assay Product. Should either party conclude, in its reasonable discretion, that the potential for [***] by any proposed change to the WNV Development Program requested in accordance with this Section 3.3, such party may elect to terminate participation in the WNV Development Program under the provisions of Section 8.3.

        3.3.3.    Preparation of Modified WNV Development Program.    Unless the parties terminate the WNV Development Program for convenience under Section 8.2 below or a party terminates on unilateral withdrawal under Section 8.3 below, promptly upon completion of the review and analysis under Section 3.3.2, Gen-Probe and Chiron shall complete and deliver to the Supervisory Board revisions to the Product Requirements Document, Software Requirements Specification, Technical Plan, Resource Plan or Budget, as applicable, responsive to the request for acceptance by the parties under Section 3.3.4 below. Costs incurred by Gen-Probe and Chiron to prepare such response to the request shall be included in WNV Development Costs hereunder.

        3.3.4.    Acceptance of Modified WNV Development Program.

        (a)   Unless the parties terminate the WNV Development Program for convenience under Section 8.2 below or a party terminates on unilateral withdrawal under Section 8.3 below, the parties shall promptly, but not later than [***] after preparation by the parties of a modified WNV Development Program under Section 3.3.3 meet and consult with respect to the proposed modified WNV Development Program. Either party may elect to terminate participation in the WNV Development Program under the provisions of Section 8.3 below if the requested modification is a Material Modification, determined in accordance with Section 3.2.1. If neither party terminates under Sections 8.2 or 8.3 below, then neither party may unreasonably withhold approval of any request for modification of the WNV Development Program.

        (b)   If neither party terminates under Sections 8.2 or 8.3 below, then the parties shall thereafter finalize such modified WNV Development Program, using the provisions of this Section 3.3.4(b), as follows:

          (i)  Each party shall, within [***] following completion of the consultation and review under paragraph (a), deliver to the other party either a written approval of the proposed modified WNV Development Program or a detailed written statement specifying the basis for rejection. Approval shall not be unreasonably withheld. The requesting party may, in response to a rejection, revise the proposed modified WNV Development Program to reflect the discussions of the parties, and redeliver the

9

revised proposed modified WNV Development Program for further review, until the parties agree upon the Material Modification. Either party may, in its discretion and with notice to the other party, determine that the parties have reached an impasse with respect to any proposed Material Modification and deliver the request to the Supervisory Board for determination.

         (ii)  If a party delivers the request to the Supervisory Board for determination, the Supervisory Board shall promptly, but not later than the later of (i) [***] of a requested modified WNV Development Program, or (ii) the [***], meet and discuss the proposed Material Modification to WNV Development Program.

        (iii)  If the Supervisory Board has met and consulted without resolution, then either party may, in its discretion, determine that the parties have reached an impasse with respect to any proposed modification and implement the escalation procedure described in Article 13 of the Agreement to resolve such impasse. Notwithstanding anything to the contrary in this West Nile Virus Addendum or the Agreement, all Material Modifications, whether agreed or determined through arbitration, shall be finally determined and documented in accordance with this Section 3.3. Where one party has rejected a proposed modified WNV Development Program, the sole question to be presented in any arbitration is whether that party unreasonably withheld its approval.

        3.3.5.    Effective Date of Modified WNV Development Program.    At such time as the parties (or, if applicable, the Supervisory Board) shall have accepted a modified WNV Development Program incorporating a Material Modification, or any portion thereof, the parties shall evidence such agreement by initialing the revised Product Requirements Document, Software Requirements Specification, Technical Plan, Resource Plan or Budget, as applicable. The WNV Development Program as so modified and approved shall constitute the WNV Development Program hereunder and be incorporated by reference into this West Nile Virus Addendum, and shall supersede the preceding WNV Development Program, or applicable portions thereof, for all purposes. In order to evidence their agreement to the revised WNV Development Program, the parties shall include it in an additional volume of the Binder, labeled "Amendments to WNV Development Program," in which all amendments and modifications to the WNV Development Program will be kept.

        3.4    Notice of Significant Changes.    Each party will give [***] notice to the other party prior to any proposal of a significant reduction or increase in resources from the then-current Resource Plan in order to allow the parties time to divert resources either to or from the WNV Development Program. Any significant changes to the Budget or the Resource Plan shall be effective only upon the expiration of [***] from the delivery of such notice, unless the parties both agree to a shorter period of time in writing.

        4.    Changes to WNV Assay Product after Completion Date.

        4.1    Process.    Notwithstanding the provisions of Section 3, the parties recognize that from time to time during the term hereof the market may demand or regulatory changes may require that special enhancements or modifications be made to the WNV Assay Product, and that either party may desire to adopt such changes. From and after the Completion Date, each party will notify the Supervisory Board promptly upon receipt of a request from a customer, or upon identification of regulatory changes that may require the parties to implement any enhancement, modification or other change to the WNV Assay Product. The Supervisory Board shall promptly, but not later than the latter of (i) [***] for such changes to the WNV Assay Product, or (ii) [***], meet and consult with respect to such requested change. The Supervisory Board shall decide (i) whether the requested changes should be implemented; and (ii) whether the requested changes

10

can be implemented under the terms of this West Nile Virus Addendum or are significant enough to warrant a new Development Program under the terms of Article 3 of the Agreement, in which case the parties shall use the process more particularly described in Section 3.2 of the Agreement.

        4.2    Additional Work under Addendum.    If the Supervisory Board determines that the changes are sufficiently minor that they can be implemented under this West Nile Virus Addendum, then the parties shall implement the process more particularly described in Section 3.3 above, and the Supervisory Board may approve a new WNV Development Program, consisting of a new modified Product Requirements Document, Software Requirements Specifications, Technical Plan, Resource Plan and Budget, for the purpose of developing such changes. Notwithstanding the foregoing, nothing herein shall obligate either party to conduct development work after the Completion Date with respect to the WNV Assay Product, without regard to whether the other party indicates a willingness to pay some portion or the entire costs of such development.

        5.    WNV Development Costs.

        5.1    [***] WNV Development Costs.    Each party is responsible for and agrees to pay [***], which WNV Development Costs included within the original WNV Development Program Budget as of the Addendum Effective Date are attached as Schedule 1.4A and Schedule 1.4B. The Budget has been prepared for the purpose of permitting the parties to plan for WNV Development Program expenditures related to WNV Development Costs hereunder and represents the parties' best estimate of such WNV Development Costs, but does not represent a "fixed price maximum" or other guaranteed maximum cost of the development required for the WNV Development Program.

        5.1.1.    [***].    Gen-Probe shall be solely entitled to the benefit of, and be solely responsible for the application and accounting of, any [***]. Notwithstanding anything to the contrary herein, Gen-Probe shall not be obligated to pay to Chiron, or credit against WNV Development Costs, any [***] received by Gen-Probe relating to development of the WNV Assay Product or to the WNV Development Program.

        5.1.2.    Prior to Material Modification.    Before the effective date on which a Material Modification is approved in accordance with the provisions of Section 3, WNV Development Costs included within the original WNV Development Program Budget approved as of the Addendum Effective Date shall be reimbursed under this Section 5.1.2. In addition, this Section 5.1.2 is in lieu of the distribution of Net Sales as described under the Agreement, including the provisions of Section 3.2.7(a) and (b). Attached hereto as Schedule 1.4A and as Schedule 1.4B are the WNV Development Costs for Gen-Probe and Chiron, respectively, approved by the Supervisory Board as of the Addendum Effective Date. The reimbursement of WNV Development Costs under this Section 5.1.2 shall be solely from Net Sales. Neither party shall be obligated to reimburse the other for WNV Development Costs reflected on Schedule 1.4A and Schedule 1.4B from sources other than Net Sales under this Section 5.1.2. Based on the relative WNV Development Costs expended by each party, as reflected on Schedule 1.4A and Schedule 1.4B, and based on an amortization of such costs over a [***] period, the parties have agreed that Net Sales (as defined in this Section 5.1.2) from the sale of the WNV Assay Product before the effective date on which a Material Modification is approved shall be shared [***] to Gen-Probe and [***] to Chiron. Within [***] of receipt of revenue from the sale of the WNV Assay Product, Chiron shall calculate Net Sales (as defined in this Section 5.1.2), provide Gen-Probe with written notice of such calculation and pay Gen-Probe [***] of Net Sales (as defined in this Section 5.1.2). Notwithstanding Section 1.46 of the Agreement, and solely for the purpose of calculating Net Sales under this Section 5.1.2, Net Sales means [***], without any deduction or offset of any kind, other than

11

for [***] payments made to Gen-Probe previously for WNV Assay Product, if any, used to perform the testing.. (The parties agree that, as of the Addendum Effective Date, [***]).

        5.1.3.    After Material Modification.    From and after the effective date on which a Material Modification is approved in accordance with the provisions of Section 3, WNV Development Costs shall be paid as follows:

        (a)   The Supervisory Board may decide that WNV Development Costs (consisting of both the WNV Development Costs reflected on Schedule 1.4A and Schedule 1.4B and the additional WNV Development Costs approved in connection with the approval of the applicable Material Modification) shall continue to be reimbursed solely from Net Sales as defined in and using the methodology described in Section 5.1.2. In such event, the Suprevisory Board shall evaluate the relative additional WNV Development Costs expended by each party, as reflected in the Material Modification, and, based on an amortization of such costs over a [***] period, determine a new percentage reimbursement from the percentage reimbursement described in Section 5.1.2.

        (b)   If the Supervisory Board has not made the decision described in Section 5.1.3(a) above, then the additional WNV Development Costs approved in connection with the approval of the applicable Material Modification (in excess of the WNV Development Costs reflected on Schedule 1.4A and Schedule 1.4B) shall be paid using the process described in Sections 5.2 and 5.3 herein. The remaining provisions for the distribution of Net Sales as described under the Agreement, including the provisions of Section 3.2.7(a) and (b) shall apply to such sales.

        5.2    Definition and Calculation of WNV Development Costs.    WNV Development Cost" with respect to the WNV Development Program means the fully-burdened cost of conducting the research and development (including clinical trials and domestic and international regulatory submissions) of the WNV Assay Product, and shall include (i) the reasonable cost of all quantities of raw materials, intermediates and finished goods necessary for the manufacture of such quantities of the WNV Assay Product utilized during the WNV Development Program, and (ii) the reasonable cost of such quantities of the WNV Assay Product that are manufactured for, but not utilized during, the WNV Development Program, that are not sold nor retained for research and/or development or other internal purpose and are scrapped due to product expiration. Costs will be calculated in accordance with United States generally accepted accounting principles, consistently applied ("U.S. GAAP"), or as otherwise mutually agreed in writing between the parties.

        5.2.1.    WNV Development Costs; FTE Labor Rate.

        (a)   In lieu of accounting specifically for and receiving direct reimbursement for certain WNV Development Costs, the parties have agreed to include reimbursement for those certain categories of WNV Development Costs within an agreed-upon labor rate for full time equivalent personnel (the "FTE Labor Rate"). Those categories of "WNV Development Costs" included within the FTE Labor Rate are those costs more particularly described on Schedule 5, in paragraph 2 entitled "WNV Development Costs included within FTE Labor Rate". Neither party shall be reimbursed separately for WNV Development Costs included within FTE Labor Rate. Those categories of "WNV Development Costs" not included within the FTE Labor Rate are those costs more particularly described on Schedule 5, in paragraph 3 entitled "WNV Development Costs not included within FTE Labor Rate". Each party shall be reimbursed separately for WNV Development Costs not included within FTE Labor Rate.

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        (b)   The FTE Labor Rate in effect as of the Addendum Effective Date is set forth in paragraph 1 on the attached Schedule 5, and is included in the Resource Plan and reflected in the Budget. Each year the parties will evaluate and re-set a FTE Labor Rate for the Budget for the new calendar year based on the parties' budgets for the then-current calendar year and consistent with the requirements of Section 5.2.1(d) below. In the event the parties shall not have agreed upon a new FTE Labor Rate before commencement of a calendar year, the parties shall use the rate in effect during the immediately preceding calendar year for billing purposes, subject to "true-up" (using the same methodology as described in Section 5.2.1(e) below) at such time as the FTE Labor Rate for the then-current calendar year has been agreed.

        (c)   In addition to the annual reset described in Section 5.2.1(b) above, either party shall have the right to request a change in the FTE Labor Rate reflected on the attached Schedule 5 to be applied on a prospective basis under the approval process set forth in Section 3. Acceptance of such request for modification shall be governed by Section 3.3.4 of this West Nile Virus Addendum.

        (d)   In addition to the foregoing, throughout the term of this West Nile Virus Addendum:

          (i)  each party shall have the same FTE Labor Rate applicable to it as is applied to the other party, subject to any agreed modifications; and

         (ii)  in the event either party requests a modification to the FTE Labor Rate hereunder, the modified FTE Labor Rate shall be calculated using the same methodology as that used to calculate the FTE Labor Rate in effect as of the Addendum Effective Date. The methodology used to calculate the FTE Labor Rate in effect as of the Addendum Effective Date is described on the attached Schedule 5.2.3, entitled "WNV Development Costs Calculation Methodology".

        (e)   In the event aggregate actual WNV Development Costs that are reimbursed through the FTE Labor Rate exceeded, or fell short of, the agreed FTE Labor Rate reflected in the Budget (as agreed to in accordance with the provisions of Section 5.2.1(b) above) for such calendar year, the parties will "true-up" such reimbursement annually in accordance with this Section 5.2.1(e). [***] during the term hereof, each Gen-Probe will calculate and deliver to Chiron an accounting of the actual expenditures made by Gen-Probe for those costs more particularly described on Schedule 5, in paragraph 2 entitled "WNV Development Costs included within FTE Labor Rate" and compare them to the amounts reimbursed through the FTE Labor Rate in such year. Each party will have [***] in which to meet and agree upon a final FTE Labor Rate for such year (the "Final FTE Labor Rate") which more closely approximates the actual labor rate experienced by each party. If necessary Chiron will travel to Gen-Probe in order to complete the review in these timeframes. Each party shall have the same Final FTE Labor Rate applicable to it as is applied to the other party, subject to any agreed modifications. If the parties disagree on a Final FTE Labor Rate, such disagreement shall be addressed by the Supervisory Board and, if necessary, by implementation of the escalation procedure described in Article 13 of the Agreement, excluding arbitration. In the event that one party received less than the Final FTE Labor Rate, such party shall be entitled to receive from the other party an amount equal to [***] of the difference between the actual WNV Development Costs included within the FTE Labor Rate and the reimbursed WNV Development Costs included within the FTE Labor Rate; similarly, in the event that one party received more than the Final FTE Labor Rate, such party shall be required to reimburse the other party in an amount equal to [***] of the

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difference between the actual WNV Development Costs included within the FTE Labor Rate and the reimbursed WNV Development Costs included within the FTE Labor Rate.

        (f)    WNV Development Costs not included within the FTE Labor Rate shall be budgeted and trued-up under the same terms as the FTE Labor Rate.

        5.2.2.    Comparison with Resource Plan.    The planned resources, and the associated costs, will be broken out on a monthly basis and analyzed against the Resource Plan included within the Technical Plan, and reflected in the Budget.

        5.2.3.    Methodology.    Attached hereto as Schedule 5.2.3 is a detailed methodology for the calculation of the WNV Development Costs, including costs reimbursed through the FTE Labor rate and significant external costs, as defined in this Section 5.2. The parties shall use such methodology for the purpose of invoicing and payment more particularly described in Section 5.3 below.

        5.3    Payment of WNV Development Costs.    In addition to the provisions of Article 7 of the Agreement, the parties agree as follows:

        5.3.1.    Accrued WNV Development Costs.    Each party has already incurred, prior to the date of execution of this West Nile Virus Addendum, certain WNV Development Costs. To the extent that one party has paid more than its [***] share of the aggregate WNV Development Costs incurred prior to and until the date of execution of this West Nile Virus Addendum, the other party will reimburse such party for [***] the WNV Development Costs paid by that party and [***] of the aggregate WNV Development Costs incurred prior to and until the date of execution of this West Nile Virus Addendum. Attached to this West Nile Virus Addendum as Schedule 5.3.1 is a summary of the WNV Development Costs incurred by the parties prior to the execution of this West Nile Virus Addendum.

        5.3.2.    [***] Budgeted Payments.    Each party's respective [***] share of WNV Development Costs will be paid on a [***] in an amount equal to the amount reflected in Budget for that particular [***]. The Budget sets forth the parties' anticipated expenditures and FTE Labor amounts for WNV Development Costs for [***] during the term of the WNV Development Program in the line item entitled "Total Project GP" and "Total Project Chiron," respectively. The line items entitled "GP Payment to Chiron" and "Chiron Payment to GP" in the Budget identify (i) the amount by which Chiron and Gen-Probe, respectively, are anticipated to incur WNV Development Costs in excess of their respective [***] share (the "negative delta"), and (ii) the party who is required to make the reimbursement payment. [***] during the term of the WNV Development Program, Gen-Probe will invoice Chiron the amount of such negative delta net of any credits or additional charges against amounts previously paid that have been agreed to by the Project Management prior to the date on which Gen-Probe rendered the invoice. Attached hereto as Schedule 5.3.2 is an example of this payment methodology.

        5.3.3.    [***] True-Up Payments.    At the end of each [***], each party will calculate the actual FTE Labor hours expended on the WNV Development Program during such [***]. The Project Leaders will review these actual FTE Labor hours compare them to the Budget for the applicable [***]. In the event that one party expended more than [***] share of actual FTE Labor hours or WNV Development Costs not included in the FTE Labor hours during the [***] then ended, taking into account all payments made under Section 5.3.2, the parties shall calculate the cost of such negative delta using the agreed FTE Labor Rate and Gen-Probe will adjust the next invoice issued to Chiron in the amount of such credit or additional charge on or before the expiration of [***] after the end of the applicable [***]. Attached hereto as Schedule 5.3.3 is an example of this true-up methodology.

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        5.3.4.    Invoices.    Each party will invoice the other for the amounts described in this Section 5.3 and all invoices will be due and payable [***] from the date of the invoice. In the event payment is not received within such period, the delinquent party shall pay a service charge if billed, equal to the amount overdue multiplied by the [***], but not exceeding the maximum allowable rate.

        5.4    Additional Provisions regarding Shared Revenues.

        5.4.1.    [***].    In addition to the provisions of Section 5.3 of this Addendum to the Agreement, within [***] following the [***], Gen-Probe shall pay to Chiron [***]. Gen-Probe's obligation under this Section 5.4 shall be Gen-Probe's sole and exclusive obligation to Chiron with respect to sale of the [***].

        5.4.2.    [***].    In addition to the provisions of Section 5.3 of this Addendum to the Agreement, within [***] following the [***], Chiron shall pay to Gen-Probe [***]. Chiron's obligation under this Section 5.4 shall be Chiron's sole and exclusive obligation to Gen-Probe with respect to sale or licensing of the [***].

        5.5    Dispute.    Neither party shall unilaterally invoice the other in advance for more than the amount reflected in the then-current Budget in a given period nor withhold payments of the amount reflected in the then-current Budget. Either party may, in its discretion, determine that the parties have reached an impasse with respect to a particular Budget item, the invoicing or payment of same, and implement the escalation procedure described in Article 13 of the Agreement to resolve such impasse. Notwithstanding the foregoing, neither party may withhold payment of [***] budgeted payments under Section 5.3.2, cease development work or otherwise impede the progress of the WNV Development Program by reason of such dispute.

        5.6    Right to Audit and Verify.    Each party is entitled to review, evaluate, and in its discretion independently verify the basis of and actual expenditures incurred by the other party for which such party requests reimbursement as WNV Development Costs hereunder, in accordance with the provisions of Section 7.3 of the Agreement, including without limitation actual expenditures after the Addendum Effective Date but prior to the execution of this West Nile Virus Addendum, if applicable.

        6.    Manufacturing and Commercialization.

        6.1    Definitions Relevant to Manufacturing and Commercialization Obligation.    The parties intend that the WNV Assay Product falls within the following provisions of the Agreement:

        6.1.1.    Applicable Purchase Price.    As used in the Agreement, the "Applicable Purchase Price" applicable to the WNV Assay Product is as set forth in Section 1.2.3 of the Agreement. The parties acknowledge that the WNV Assay Product is a Future Blood Screening Assay which does not include as a constituent element an assay for HCV, for which the provisions of Section 1.2.3 of the Agreement describes the "Applicable Purchase Price", as determined from time to time during the term of the Agreement. Notwithstanding section 3.2.7(b) of the Agreement, the Applicable Purchase Price for the WNV Assay Product in the Territory will never be less than [***].

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        6.1.2.    Transfer Price.

        (a)   At each sale of the WNV Assay Product sold as an IUO product, the "Transfer Price "applicable to (i) so much of the WNV Assay Product as consists of the West Nile Virus assay specific reagents is [***] and (ii) so much of the WNV Assay Product as consists of the reagents in common with other approved Blood Screening Assays is the Transfer Price established in accordance with Section 1.58. of the Agreement. Where the Transfer Price is [***], Chiron will issue purchase orders at [***] to Gen-Probe for WNV specific assay reagents, and Gen-Probe will transfer them to Chiron.

        (b)   At such time as Section 5.1.3(b) applies, the "Transfer Price" applicable to the WNV Assay Product is set forth in Section 1.58.2 of the Agreement, except that the Transfer Price for WNV Assay Product from conformance or development lots that is transferred to Third Parties in the Territory for use in the Blood Screening Field shall reflect and be adjusted if and to the extent that the costs of manufacture of such conformance or development lots is included as part of the WNV Development Costs shared by the parties under Section 5.

        (c)   In any case, the commercial sale of an IVD-labelled WNV Assay Product will be governed by the terms of the April 1, 2002 Amendment No. 3 (warehousing and shipping), and the Transfer Price [***]. The second sentence of Section 1.58.2 is deleted in its entirety, and replaced with the following:

        "The Transfer Price, based on this objective, [***]."

        6.1.3.    Manufacturing Cost.    The "Manufacturing Cost" for the WNV Assay Product shall be as defined in the Agreement.

        6.1.4.    Rare Reagents.    The WNV Assay Product is a Future Blood Screening Assay which incorporates substantial Rare Reagents, as defined in Section 1.51 of the Agreement.

        6.2    Right to Audit and Verify.    Chiron is entitled to review, evaluate, and in its discretion independently verify the basis of Gen-Probe's Manufacturing Cost using an independent third party, in accordance with the provisions of Section 7.3 of the Agreement.

        6.3    Non-Commercial Products.

        6.3.1.   If any portion of the notebook, development, clinical or conformance lots of the WNV Assay Product manufactured for the WNV Development Program is sold to a Third Party for use outside the United States or utilized by Chiron or Gen-Probe in a research or development program other than the WNV Development Program, including without limitation research studies or marketing studies performed in support of commercialization of the WNV Assay Product, or the development and clinical trials for the Tigris instrument, the party selling or utilizing such WNV Assay Product shall reimburse the WNV Development Program to the extent that the program was charged for the materials.

        6.3.2.   Section 6.10 of the Original Agreement is amended to add the following as new subsection (b), applicable to the WNV Assay Product only:

"(b) Gen-Probe agrees to provide to Chiron reasonable quantities of the WNV Assay Product manufactured by Gen-Probe for uses other than sale to customers, including without limitation research studies, marketing studies, internal research and development, and troubleshooting (all for Chiron's use only in direct furtherance of the express purposes of this Agreement and without any implied license for any purpose other than such express purposes), to the extent such Products are specifically ordered by Chiron for such purposes ("Non-commercial WNV Assay Products"). The entire compensation to

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Gen-Probe for Non-commercial Products shall be not greater than [***], as determined by reference to Gen-Probe's customary and ordinary accounting practices. The quantities of Non-commercial WNV Assay Products ordered by Chiron as well as quantities of WNV Assay Products consumed by Gen-Probe for all purposes other than the West Nile Virus Assay Development Program shall be subject to review by the Supervisory Board."

        6.4    Commercialization Budget.

        (a)   For the purpose of determining "commercialization costs" (to be reimbursed to Chiron as permitted in Section 8.5 of the Agreement), Chiron shall submit to Gen-Probe a commercialization budget, promptly following any termination of this West Nile Virus Addendum for breach in accordance with Section 8.1 or an unilateral withdrawal by a party in accordance with Section 8.3, and the timely election by a Continuing Party to continue the WNV Development Program, as described in this Section 6.4.

        (b)   Chiron shall submit to Gen-Probe a commercialization budget, setting forth the programs and anticipated costs, including applicable costs and overhead for internal sales, marketing, distribution, training, technical support, instrument service and field service engineering, product support, quality assurance, regulatory affairs and clinical affairs all as required to commercialize the West Nile Virus Assay. Such commercialization budget shall also include out-of pocket costs associated with each such program and initiative plus costs associated with any third party support and allocated costs of instrumentation on a per unit or other reasonable allocation method applicable to the commercialization of the WNV Assay Product. The detail and basis provided in the proposed budget shall be commensurate with the information supplied by Gen-Probe to support Gen-Probe's calculation of Manufacturing Cost.

        (c)   Gen-Probe will deliver to Chiron either a written acceptance of the proposed commercialization budget or a detailed written statement specifying the basis for rejection. Chiron may, in response to a rejection, revise the proposed commercialization budget to reflect the discussions of the parties, and redeliver the revised commercialization budget for further review, until the parties agree upon the final commercialization budget. Either party may, in its discretion and with notice to the other party, determine that the parties have reached an impasse with respect to the proposed commercialization budget and deliver a request to the Supervisory Board for determination.

        (d)   If a party delivers the request to the Supervisory Board for determination of the commercialization budget, the Supervisory Board shall promptly, but not later than the later of (i) [***], or (ii) the [***], meet and discuss the proposed commercialization budget.

        (e)   If the Supervisory Board has met and consulted without resolution, then either party may, in its discretion, determine that the parties have reached an impasse with respect to the proposed commercialization budget and implement the escalation procedure described in Article 13 of the Agreement to resolve such impasse.

        (f)    Labeling: Labeling will indicate that the Product was "Developed by Gen-Probe, in collaboration with Chiron"

        7.    License Grants.

        The grant of licenses for the purpose of conducting the WNV Development Program shall be governed by Sections 3.2.6 and Section 9 of the Agreement. For the avoidance of doubt, Chiron confirms that Gen-Probe shall be [***].

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        8.    Addendum Effective Date; Term; Termination.

        Term of West Nile Virus Addendum.    This West Nile Virus Addendum shall become effective on the Addendum Effective Date and shall continue in effect through the Blood Screening Term, unless sooner terminated in accordance with the provisions hereof. For the avoidance of doubt, the parties reiterate that the WNV Assay Product to be developed under this Addendum constitutes a Future Blood Screening Assay pursuant to the Agreement. Termination of this West Nile Virus Addendum prior to the expiration of the Blood Screening Term shall be governed by the terms of this Section and termination of the Agreement shall be governed by Section 11.2 of the Agreement.

        8.1    Termination for Breach.

        8.1.1.    Default.    Either party (the "nondefaulting party") has the right, upon written notice to the other party (the "defaulting party"), to terminate the WNV Development Program, upon the occurrence of any of the following events of default and the expiration of any applicable period of time for cure:

        (a)   if a party fails to make a payment required under Sections 5.3.2 or 5.3.3 hereunder;

        (b)   if a party invoices for amounts using expenditures not falling within the definition of WNV Development Costs or not included within the Budget.

        (c)   if a party fails to exercise Commercially Reasonable Efforts to commit the resources described in the WNV Development Program or to exercise Commercially Reasonable Efforts achieve the objectives of the WNV Development Program; provided, however, that the failure to successfully complete the development of the WNV Assay Product, or to complete the development of the WNV Assay Product on the Timeline set forth in the Technical Plan or for the amounts described in the Budget or to the specifications set forth in the PRD or the SRS shall not be deemed to be a breach of this West Nile Virus Addendum; and

        (d)   if a party defaults under the Agreement which default results in the termination of the Agreement.

        8.1.2.    Right to Cure Event of Default.    Upon the occurrence of any event of default entitling a party to terminate this West Nile Virus Addendum, the non-defaulting party may send notice of event of default, specifying in reasonable detail the nature of the default, to the defaulting party. The defaulting party will have [***] following the date of receipt of such notice within which to cure the breach or event of default. Failure to cure the default within such time period will result in termination of the WNV Development Program without further notice by the non-defaulting party, unless such non-defaulting party extends the cure period by written notice or withdraws the default notice. (The expiration of the period for such right to cure without cure, extension or withdrawal of the default notice is referred to as the "effective date of termination".)

        8.1.3.    Effect of Termination for Breach.    Upon a termination of this West Nile Virus Addendum for default under this Section 8.1:

        (a)   Subject to the rights of the parties under Section 9.3, the WNV Development Program shall be terminated.

        (b)   The non-defaulting party's rights under the Agreement shall remain in full force and effect unchanged.

        (c)   The defaulting party's rights under the Agreement with respect to all Products, other than the WNV Assay Product, shall remain in full force and effect unchanged.

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        (d)   The defaulting party's rights under the Agreement with respect to the WNV Assay Product shall terminate and be of no further force and effect. The defaulting party may not undertake a development substantially similar to the WNV Development Program with any other party for a period of [***].

        (e)   The defaulting party shall pay, to the other party, in addition to any other rights or remedies available to the nondefaulting party at law or equity, promptly upon receipt of an invoice therefore, an amount equal to (i) [***], (ii) [***].

        8.2    Termination by Both Parties.

        8.2.1.    Vote to Terminate.    The Supervisory Board, by unanimous vote, has the right, upon three (3) months written notice to both parties, to terminate the WNV Development Program and by extension this West Nile Virus Addendum.

        8.2.2.    Effect of Notice Period on Termination by Both Parties.    During the notice period as set forth in Section 8.2.1, the provisions for reimbursement of a party's development efforts in accordance with the then-current Budget continue in force and effect, unless the party faced with reduction agrees that it can displace employees to other activities in a shorter time. The parties agree that each party shall attempt to minimize costs during the notice period. During the notice period, the parties shall continue to perform their respective obligations under the WNV Development Program, unless otherwise agreed by the parties in writing. Upon the expiration of the notice period (and the effective date of termination under Section 8.1 or the effective date of withdrawal under Section 8.3 of the WNV Development Program), each party shall pay, promptly upon receipt of an invoice therefor, to the other party an amount equal to (i) all WNV Development Costs accrued to date in the terminated WNV Development Program for which an invoice has been rendered and (ii) all WNV Development Costs not yet invoiced but incurred in the terminated WNV Development Program, whether or not disputed, as set forth in the approved Budget.

        8.2.3.    Effect of Termination by Both Parties.    Upon any termination of the WNV Development Program under this Section 8.2, the parties shall have such rights on termination as shall be unanimously agreed by the Supervisory Board as part of the decision to terminate for convenience.

        8.3    Termination by Either Party; Unilateral Withdrawal from WNV Development Program.    Either party (referred to for convenience as the "withdrawing party") may elect to terminate this West Nile Virus Addendum under this Section 8.3 on the following basis without further cause:

        (a)   The withdrawing party concludes in its reasonable discretion that the potential for [***] by any proposed change to the WNV Development Program requested in accordance with Section 3.3 above; or

        (b)   The withdrawing party receives a request for a Material Modification of the WNV Development Program as determined in accordance with Section 3.2.1; or

        (c)   The parties have failed to achieve one or more of the Interim Events.

        The withdrawing party may terminate this West Nile Virus Addendum under this Section 8.3 upon the provision to the other party (referred to for convenience as the "non-withdrawing party") of [***], specifying in reasonable detail the basis on which the withdrawing party is unilaterally terminating this West Nile Virus Addendum. (The notice of intent to withdraw described in this Section 8.3 is referred to for convenience as the "withdrawal notice"; and a date which [***] later is referred to for convenience as the "effective date of withdrawal").

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        8.4    Continuance of WNV Development Program following Unilateral Withdrawal or Termination.

        8.4.1.    Election.    Following any termination of this West Nile Virus Addendum for breach in accordance with Section 8.1 or an unilateral withdrawal by a party in accordance with Section 8.3, the non-defaulting party (under Section 8.1) or the non-withdrawing party (under Section 8.3) (referred to for convenience as the "Continuing Party") may elect to continue the WNV Development Program by providing written notice to the other party on or before the effective date of termination under Section 8.1 or the effective date of withdrawal under Section 8.3.

        8.4.2.    Funding and Conduct of Development.

        (a)   If a Continuing Party elects pursuant to this Section 8.4 to continue funding the WNV Development Program, such Continuing Party shall be solely responsible for the current funding of all WNV Development Costs from and after the effective date of termination under Section 8.1 or the effective date of withdrawal under Section 8.3, subject to the right to reimbursement more particularly described below.

        (b)   In addition to Section 8.4.2(a), if the Continuing Party is Chiron, Chiron shall pay Gen-Probe [***]. Such amount shall be payable in accordance with the provisions of [***]. Chiron shall be entitled to reimbursement of such amounts paid in accordance with the provisions of Section 8.4.3 below.

        8.4.3.    Reimbursement of Development Costs.    The party electing to continue development under the terms of Section 8.4 shall be deemed to be the party who "wishes to develop the Future Blood Screening Assay" described in Section 3.2.1(c) of the Agreement. The provisions of Section 3.2.1(c) and the provisions of Section 3.2.3(b)(i) of the Agreement shall govern the rights and obligations of the parties from and after the effective date of termination under Section 8.1 or the effective date of withdrawal under Section 8.3 of the WNV Development Program as a joint development program under this West Nile Virus Addendum, except Section 3.2.1(b) of the Agreement shall be deleted in its entirety, and replaced with the following.

        "b. In the case of a Future Blood Screening Product which is funded by one party pursuant to Section 3.2.1(c) of the Agreement and Section 8.4 of the West Nile Virus Addendum, such party shall be solely responsible for all Development Costs of such Future Blood Screening Assay and be entitled to reimbursement of the portion of the total Development Costs incurred after the effective date of termination under Section 8.1 or the effective date of withdrawal under Section 8.3, as the case may be (the "Post-Withdrawal Development Costs"), as follows:

            i.  If the funding party is Gen-Probe, Chiron shall [***]. Thereafter, Net Sales shall be paid as provided under Section 3.2.7 of the Agreement.

           ii.  If the funding party is Chiron, Chiron shall pay to Gen-Probe [***], then Chiron shall [***]. Thereafter, Net Sales shall be paid as provided under Section 3.2.7 of the Agreement.

          iii.  The parties agree that the funding party is entitled to a preferential return on the Post-Withdrawal Development Costs incurred by the funding party, as a reasonable return for the additional risk incurred by the funding party, in an amount equal to [***] on the Post-Withdrawal Development Costs actually incurred by the funding party from the date incurred until the date on which such Post-Withdrawal Development Costs are reimbursed from WNV Assay Product revenues pursuant to Section 3.2.1(b)(i) above or Section 3.2.1(b)(ii) above, as applicable."

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        8.4.4.    Control of the Program upon Unilateral Funding.    The Continuing Party shall have the right to appoint the Project Manager from and after the effective date of termination under Section 8.1 or the effective date of withdrawal under Section 8.3. The Continuing Party shall have the right to make such Material Modifications to the WNV Development Program that it deems necessary or prudent in its reasonable discretion, without the acceptance of the other party as otherwise required under Section 3.3.4 of this West Nile Virus Addendum. Notwithstanding the above, the Continuing Party shall remain obligated to provide the other party with a copy of the WNV Development Program, and all notice and reporting obligations set forth herein shall remain in full force and effect.

        8.4.5.    Rights under Agreement.    Except as expressly modified by this Section 8.4, the parties shall retain all rights and obligations allocated pursuant to Section 3.2 of the Agreement. Without limiting the foregoing, without respect to which party is the Continuing Party, Gen-Probe shall have the exclusive right and obligation to conduct the development work and to manufacture the WNV Assay Product; Chiron shall have the exclusive right to promote, market and sell the WNV Assay Product and the parties shall have their respective rights under Section 3.2.8 of the Agreement, all as is more particularly described in the Agreement unaffected in any way by the withdrawal from the WNV Development Program.

        9.    Escalation.

        9.1    Escalation Process.    Prior to implementing the arbitration process more particularly described in Article 13 of the Agreement, the parties agree to escalate any dispute first to a discussion between responsible managers, and if they cannot agree, then to the Supervisory Board. However the parties explicitly acknowledge that in the event of the need for an urgent decision the party with primary responsibility will proceed to make the decision, and implement. It is agreed that the party with primary responsibility will make all reasonable and timely efforts to inform the other party of the issue requiring decision, particularly where the issue is one of some consequence.

        9.2    Remedies in Event of Default.    Neither party shall be entitled to exercise any remedy otherwise available to it at law or in equity unless and until such party shall have provided the other party with notice of such event of default, reasonably specifying the nature of the default, and any applicable period of time for cure thereof shall have expired without cure, and the procedures defined in Article 13 of the Agreement shall have been first exhausted.

        9.3    Survival.    Upon a termination of this West Nile Virus Addendum, the following provisions of this West Nile Virus Addendum shall survive such termination: Sections 2.3, 2.4.1, 7, 8, 9, and 10 and all rights under Section 5.3.3 that have accrued as of the date of termination.

        10.    No Other Amendment.    Except as expressly set forth in this West Nile Virus Addendum, all other terms and conditions of the Agreement, the parties' Definitive Written Settlement Agreement, dated December 5, 2001, and the Short Form Agreement, dated November 16, 2001, are hereby ratified and shall continue in full force and effect. In the event of a conflict between the terms of this West Nile Virus Addendum and the Agreement, the terms of this West Nile Virus Addendum shall control. The provisions of this West Nile Virus Addendum are intended to, and hereby, supercede any provisions in the Definitive Written Settlement Agreement entered into by and between the parties, dated December 5, 2001, and the Short Form Agreement entered into by and between the parties, dated November 16, 2001, on the same subject matter.

        11.    Counterparts.    This West Nile Virus Addendum may be executed in counterparts, each of such shall be deemed an original, and all of which together shall constitute one and same instrument.

21

        IN WITNESS WHEREOF, the parties have caused this West Nile Virus Addendum to be executed and the persons signing below warrant that they are duly authorized to sign for and on behalf of the respective parties.

GEN-PROBE INCORPORATED, a Delaware corporation		CHIRON CORPORATION, a Delaware corporation
By:	/s/  HANK NORDHOFF	By:	/s/  JACK GOLDSTEIN
Its:	President; CEO	Its:	President, CBT
Date:	Oct. 21, 2003	Date:	Oct. 10, 2003

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Schedule 1.4A

WNV Development Cost—Gen-Probe

[***]

[***]

[***]

[***]

Schedule 1.4B

WNV Development Cost—Chiron

[***]

[***]

Schedule 1.17.

Description of WNV Assay Product

        The WNV Assay Product is an in vitro nucleic acid amplification test for the qualitative detection of West Nile Virus in human plasma for use in the Blood Screening Field. The WNV Assay Product is to be developed to run initially on the Procleix semi-automated instrument (eSAS).

Schedule 5

WNV Development Costs

        1.     Reimbursable FTE Rate. Budgets for future years will be based on $[***] per FTE per calendar until the budget for the year in question is finalized each year per Section 5.2.1(b). Until each years budget is agreed upon [***] budget payments per Section 5.3.2 will be based upon the previous years agreed rate per Section 5.2.1(b) subject to true-up once new rates have been agreed.

        2.     WNV Development Costs included within FTE Labor Rate. WNV Development Costs included within FTE Labor Rate consist of all attributable costs associated with the development of the WNV Assay Product and modifications to associated instrument system platforms (but excluding Tigris instruments) that may be required for such WNV Assay Product (calculated in accordance with United States generally accepted accounting principles, or as otherwise mutually agreed in writing between the parties) incurred prior to the Completion Date and includes pilot development; validation studies necessary for product and process licensure; clinical studies; licensing activities; and the manufacture and ultimate disposition of conformance lots of material, calculated as follows:

        (a)   Shared development costs include: research and development associated with the WNV Development Program; clinical studies; validation exclusively associated with the particular analyte; development lots; document preparation specific to the development;

        (b)   The planned resources, and the associated costs, will be broken out on a [***] basis and analyzed against the Resource Plan included within the Technical Plan, and reflected in the Budget;

        (c)   Salaried staff costs included within the Budget will be adjusted to reflect actual staff costs. Salary information may be aggregated to protect the identity of individuals. This salary information will be verifiable on a need to know basis to a select number of personnel from each company;

        (d)   Cost for wage laborers plus the applicable overhead charge for such labor (calculated at the rates and charges described in Section 5.2.1) paid to personnel described in the Resource Plan, including the WNV Development Program project manager and personnel engaged to perform QA testing for the WNV Development Program;

        (e)   Costs for engineering prototypes and manufacturing pilot modules required for the WNV Development Program;

        (f)    Costs of inventory consumed in the WNV Development Program, including raw material, intermediates and finished goods, and conformance lots, whether reject or not, that arise from the WNV Development Program or are necessary to support the WNV Development Program, and scrap material, including raw materials and development materials that arise from the WNV Development Program but excluding WNV Assay Product and scrap materials used strictly for internal research purposes or consumed in development programs other than the WNV Development Program;

        (g)   Costs for conformance product documentation;

        (h)   Costs for courier and mail service fees for delivery of items between Gen-Probe and Chiron;

        (i)    Costs of travel, lodging and reasonable per diem expenses for employee and consultants of Gen-Probe or Chiron incurred in furtherance of their activities hereunder, providing training or participating on the Supervisory Board to the extent such costs are not included within the overhead charge applicable to labor costs;

        (j)    Costs of foreign registration, marketing studies to support registration, and market research costs necessary to better define requirements or to support national decision-making;

        (k)   Such other categories as the parties may agree from time to time using the approval process described in Section 5.2.

        (l)    All budgeted expenses of Departments directly involved with the WNV Development Program

        (m)  Appropriate portions of budgeted costs of departments indirectly involved in the WNV Development Program.

        3.     WNV Development Costs not included within FTE Labor Rate.

        (a)   Cost of conformance lot materials consumed in performance of WNV Development Program or clinical trials.

        (b)   Significant Third Party consultant charges (i.e. CRO, regulatory expertise, etc.) to the extent not captured within the FTE rates in Item 2 above.

Schedule 5.2.3

WNV Development Costs Calculation Methodology

[***]

[***]

Schedule 5.3.1

Accrued WNV Development Costs

[***]

Schedule 5.3.2

[***] Budgeted Payments

        The party with the negative delta shall submit to the other party, on or before the end of the [***] during the term of the WNV Development Program, an invoice setting forth the amount of the delta. In addition, any party owed by other an excess adjustment shall submit to the other party, on or before the end of the [***] during the term of the WNV Development Program, an invoice setting forth the amount of the excess adjustment, providing reasonable detail for any WNV Development Costs not previously invoiced and requesting payment of [***] of the total amount. WNV Development Costs by the invoicing party incurred to date and not yet reimbursed as provided herein, providing reasonable detail for any WNV Development Costs not previously invoiced and requesting payment of [***] of the total amount. Each party shall pay on or before the date specified therefore on the Technical Plan an amount equal to the lesser of (i) the WNV Development Costs reflected on the invoice submitted to such party on account of such payment (together with amounts reflected on earlier invoices not previously reimbursed) or (ii) the amount of the payment described on the attached Technical Plan. To the extent that a reimbursement payment is inadequate to cover the total WNV Development Costs incurred to date by a party, then each party shall carry over the balance to the next subsequent payment(s) until finally reimbursed in full.

        By way of example, and using hypothetical dollars for actual expenditures, the calculation would operate as follows:

[***]	[***]	[***]	[***]
[***]	[***]		[***]
[***]	[***]	[***]	[***]

Schedule 5.3.3

[***] True-Up Payments
(sample methodology)

        By way of example, and using hypothetical dollars for actual expenditures, the calculation would operate as follows: (true-up payment due to Chiron in this case):

[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]		[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]		[***]

QuickLinks

FUTURE BLOOD SCREENING ASSAY— WEST NILE VIRUS ADDENDUM AMENDING AGREEMENT ENTERED INTO AS OF JUNE 11, 1998 BY AND BETWEEN GEN-PROBE INCORPORATED, A DELAWARE CORPORATION AND CHIRON CORPORATION
TABLE OF CONTENTS

EX-10.329

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Exhibit 10.329

CONFIDENTIAL REDACTED VERSION

[***] CERTAIN INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

FUTURE BLOOD SCREENING ASSAY—

ULTRIO ADDENDUM

AMENDING

AGREEMENT ENTERED INTO AS OF JUNE 11, 1998

BY AND BETWEEN

GEN-PROBE INCORPORATED, A DELAWARE CORPORATION

AND

CHIRON CORPORATION

1.	Definitions		2
	1.1	Agreement	2
	1.2	Binder	2
	1.3	Budget	2
	1.4	Completion Date	2
	1.5	FTE Labor Rate	2
	1.6	Interim Events	2
	1.7	Material Modification	2
	1.8	NIH Monies	2
	1.9	Non-material Modification	2
	1.10	Product Requirements Document	3
	1.11	Project Management	3
	1.12	Resource Plan	3
	1.13	Software Requirements Specifications	3
	1.14	Technical Plan	3
	1.15	Timeline	3
	1.16	Ultrio Assay Product	3
	1.17	Ultrio Development Costs	3
	1.18	Ultrio Development Program	3
2.	Ultrio Development Program		3
	2.1	Objective	3
	2.2	General Conduct of Development	3
	2.3	No Guarantee	4
	2.4	Project Management	4
		2.4.1    Principles of Project Management	4
		2.4.2    Project Manager	5
		2.4.3    Project Manager's Responsibilities	5
		2.4.4    Project Leaders	6
		2.4.5    Reports	6
		2.4.6    Meetings of the Supervisory Board	6
	2.5	Development Responsibilities	6
		2.5.1    Principal Responsibility; General Statement	6
		2.5.2    Shared Responsibility	6
		2.5.3    Principal and Shared Responsibility; Specific Allocation	7
		2.5.4    Regulatory/Licensure	7
		2.5.5    Project Leader Disagreements	8
3.	Modifications		8
	3.1	Ultrio Development Program Definition	8
	3.2	Modifications	8
		3.2.1    Request for Modifications	8
		3.2.2    Non-Material Modifications	8
	3.3	Material Modifications	9
		3.3.1    Request for Material Modifications	9
		3.3.2    Initial Analysis of Impact of Proposed Material Modification	9
		3.3.3    Preparation of Modified Ultrio Development Program	9
		3.3.4    Acceptance of Modified Ultrio Development Program	9
		3.3.5    Effective Date of Modified Ultrio Development Program	10
	3.4	Notice of Significant Changes	10
4.	Changes to Ultrio Assay Product after Completion Date		10
	4.1	Process	10
	4.2	Additional Work under Addendum	11

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5.	Ultrio Development Costs		11
	5.1	[***] Ultrio Development Costs and [***]	11
	5.2	Definition and Calculation of Ultrio Development Costs; [***]	11
		5.2.1    Ultrio Development Costs; FTE Labor Rate	11
		5.2.2    Comparison with Resource Plan	13
		5.2.3    Methodology	13
	5.3	Payment of Ultrio Development Costs	13
		5.3.1    Accrued Ultrio Development Costs	13
		5.3.2    [***] Budgeted Payments	13
		5.3.3    [***] True-Up Payments	13
		5.3.4    Invoices	13
	5.4	Dispute	14
	5.5	Right to Audit and Verify	14
6.	Manufacturing and Commercialization		14
	6.1	Definitions Relevant to Manufacturing and Commercialization Obligation	14
		6.1.1    Applicable Purchase Price	14
		6.1.2    Transfer Price	14
		6.1.3    Manufacturing Cost	14
		6.1.4    Rare Reagents	14
	6.2	Right to Audit and Verify	14
	6.3	Non-Commercial Products	15
	6.4	Commercialization Budget	15
7.	License Grants		16
8.	Addendum Effective Date; Term; Termination		16
	8.1	Term of Ultrio Addendum	16
	8.2	Termination for Breach	16
		8.2.1    Default	16
		8.2.2    Right to Cure Event of Default	16
		8.2.3    Effect of Termination for Breach	17
	8.3	Termination by Both Parties	17
		8.3.1    Vote to Terminate	17
		8.3.2    Effect of Notice Period on Termination by Both Parties	17
		8.3.3    Effect of Termination by Both Parties	17
	8.4	Termination by Either Party; Unilateral Withdrawal from Ultrio Development Program	18
	8.5	Continuance of Ultrio Development Program following Unilateral Withdrawal or Termination	18
		8.5.1    Election	18
		8.5.2    Funding and Conduct of Development	18
		8.5.3    Reimbursement of Development Costs	19
		8.5.4    Control of the Program upon Unilateral Funding	19
		8.5.5    Rights under Agreement	19
9.	Escalation		20
	9.1	Escalation Process	20
	9.2	Remedies in Event of Default	20
	9.3	Survival	20
10.	No Other Amendment		20
11.	Counterparts		20

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Future Blood Screening Assay—

ULTRIO ADDENDUM

        This Future Blood Screening Assay—Ultrio Addendum (the "Ultrio Addendum") is entered into, effective as of January 1, 2001 (the "Addendum Effective Date") pursuant to and amending that certain Agreement entered into as of June 11, 1998 (the "Agreement") by and between Gen-Probe Incorporated, a Delaware corporation ("Gen-Probe") with a principal place of business at 10210 Genetic Center Drive, San Diego CA 92121, and Chiron Corporation, a Delaware corporation ("Chiron;" collectively with Gen-Probe, the "parties") with a place of business at 4560 Horton Street, Emeryville, CA 94608.

Recitals

        A.    The parties entered into the Agreement as of June 11, 1998. The Agreement was amended by the following: (i) June 11, 1998 Supplemental letter agreement, (ii) June 26, 1998 Addendum to Collaboration Agreement, (iii) June 30, 1998 Supplemental letter agreement, (iv) June 30, 1998 Consent, (v)  December 7, 1999 Amendment to Collaboration Agreement, (vi) February 1, 2000 Amendment No. 2 to Collaboration Agreement, (vii) June 7, 2001 Supplemental agreement no. 1 (Customer training and Support), (vii) October 30, 2001 Confidentiality and Joint Interest Agreement, and (ix) April 1, 2002 Amendment No. 3 (warehousing and shipping). In addition, the parties entered into certain settlements, described in Recital E below.

        B.    In the Agreement, the parties agreed to discuss, during the term thereof, the selection and establishment of one or more Development Programs for one or more Future Blood Screening Assays to be conducted by the Blood Screening Instruments.

        C.    The parties have discussed the proposed development of a triplex TMA assay for the detection of human immunodeficiency virus (HIV), hepatitis C virus (HCV), and/or hepatitis B virus (HBV), on a semi-automated instrument system, which assay would fall within the definition of a "Future Blood Screening Assay" set forth in Section 1.30 of the Agreement (the "Ultrio Assay").

        D.    Gen-Probe applied for and received a contract with the National Institutes of Health, Contract N01-HB-07148, effective January 1, 2000, for which Chiron submitted a supporting letter, which contract as amended provides for, among other things, the partial funding of costs associated with the development of the Ultrio Assay.

        E.    The parties submitted a number of disputes under the Agreement to arbitration pursuant to Section 13 of the Agreement, and in resolution of those disputes, executed a Definitive Written Settlement Agreement, dated December 5, 2001, and a Short Form Agreement, dated November 16, 2001. These settlement agreements addressed certain aspects of the development of the Ultrio Assay, the funding of such development, and eventual sale of any developed Ultrio Assay. All provisions of these settlement agreements which address the subject matter addressed in this Addendum are expressly superceded by this Ultrio Addendum, except as expressly described herein.

        F.     By this Ultrio Addendum, the parties desire to include the Ultrio Assay to be conducted by one or more of the Blood Screening Instruments within the scope of the provisions of the Agreement, as clarified and amended by the terms and conditions more particularly described in this Ultrio Addendum.

Agreement

        NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this Ultrio Addendum, the parties agree as follows:

        1.    Definitions.    All capitalized terms used but not defined in this Ultrio Addendum shall have the meanings set forth in the Agreement.

        1.1   Agreement shall mean the June 11, 1998 Collaboration Agreement, as amended in the manner described in Recital A.

        1.2   Binder means that certain three-ring binder, with one or more volumes, entitled "Ultrio Development Program for the Ultrio Assay Product (Gen-Probe/Chiron Ultrio Development Addendum, dated as of January 1, 2001) Binder," in which certain documents, materials or other items incorporated into this Ultrio Addendum by reference are kept. The original Binder and an additional volume of the Binder, labeled "Amendments to Ultrio Development Program" and reflecting any changes, modifications or amendments to the Binder, are maintained by and located at the premises of Gen-Probe. A copy of the original Binder, and a copy of the additional volume of the Binder, each signed by both parties, shall be maintained by and located at the premises of Chiron.

        1.3   Budget means the budgeted Ultrio Development Costs of the Ultrio Development Program. The Budget shall include the estimated cost of the Ultrio Development Program on a monthly basis through the end of the Ultrio Development Program. The approved Budget is described in the Binder under the heading "Budget", and may be amended from time to time under the provisions of Section 3 below.

        1.4   Completion Date means a date which is [***].

        1.5   FTE Labor Rate is defined in Section 5.2.1.

        1.6   Interim Events means such events of material significance to the Ultrio Development Program as are mutually agreed to by both parties and set forth with specificity and identified as an "Interim Event" on the Timeline included within the Technical Plan, as such Interim Events may be modified, pursuant to the change procedures set forth in Section 3 of this Ultrio Addendum.

        1.7   Material Modification means a change or amendment to the Ultrio Development Program that materially affects the requirements set forth in the then-current Product Requirements Document, Software Requirement Specifications, Technical Plan, Resource Plan or Budget, or that materially modifies an Interim Event set forth in the Timeline included within the Technical Plan.

        1.8   NIH Monies means all monies actually paid to Gen-Probe by the NIH specifically to defray Ultrio Development Costs under (i) the NIH contract referenced in Recital D above (ii) any extensions or amendments to the NIH contract referenced in Recital D, and (iii) any other contract or grant under which Gen-Probe seeks reimbursement for Ultrio Development Costs. NIH Monies shall not include any monies paid to Gen-Probe by the NIH for any other purpose, even if paid pursuant to contracts which also provide for payment of Ultrio Development Costs. so long as Gen-Probe can reasonably demonstrate that monies paid do not relate to the Ultrio Development Program.

        1.9   Non-material Modification means a change or amendment to the Ultrio Development Program other than a Material Modification. Written agreement among members of Project Management that a modification is a "Non-material Modification" hereunder as described in Section 3.2 below shall be conclusive.

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        1.10   Product Requirements Document (or "PRD") means the specifications for the Ultrio Assay Product, and includes as a component thereof the Software Requirements Specifications. The initial Product Requirements Document is described in the Binder, under the heading "Product Requirements Document (PRD, Revision A, dated May 16, 2001)," and may be amended from time to time under the provisions of Section 3 below.

        1.11   Project Management is defined in Section 2.4.1.

        1.12   Resource Plan means the description of (i) a party's personnel to be allocated to the Ultrio Development Program, including the name of the specific personnel or the qualification or grade of unidentified personnel, and dedicated amount of time and periods for the commitment of such personnel required for the Ultrio Development Program, and (ii) equipment, tools, software, or other special items, the purchase, license or leasing of which is specifically required for use by such personnel to support the Ultrio Development Program. The initial Resource Plan is described in the Binder, under the heading "Resource Plan," and may be amended from time to time under the provisions of Section 3 below.

        1.13   Software Requirements Specifications (or "SRS") means the specifications for the software component of the Ultrio Development Program. The initial Software Requirements Specifications are described in the Binder, under the heading "Software Requirements Specifications (SRS, Revision C, dated October 1, 2002)," and may be amended from time to time under the provisions of Section 3 below.

        1.14   Technical Plan means the statement of work prepared for the development of the Ultrio Assay Product, including the responsibilities to be performed by each party, the responsibilities to be performed jointly, the schedule for performance of those responsibilities, an overall development timeline and a Resource Plan. The initial Technical Plan is described in the Binder, under the heading "Technical Plan, Revision A, dated June 27, 2001," and may be amended from time to time under the provisions of Section 3 below.

        1.15   Timeline means the overall development timeline included within the Technical Plan.

        1.16   Ultrio Assay Product is defined on Schedule 1.16 and expressly excludes any products or instruments in the Clinical Diagnostic Field.

        1.17   Ultrio Development Costs means, with respect to this Ultrio Addendum only, the development costs defined in Section 5 hereof.

        1.18   Ultrio Development Program means the statement of work for the development of the Ultrio Assay Product under the terms of this Ultrio Addendum, as such development program is described in the Binder, and consists of (i) the Product Requirements Document, (ii) the Software Requirements Specifications, (iii) the Technical Plan, (iv) the Resource Plan included within the Technical Plan, and (v) the Budget.

        2.    Ultrio Development Program.

        2.1    Objective.    Subject to the terms of the Agreement, as amended by this Ultrio Addendum, the parties each shall conduct their respective obligations under the Ultrio Development Program as established in accordance with the terms hereof, and shall conduct such clinical trials and apply for and endeavor to obtain such regulatory approvals as necessary or appropriate to make and sell the Ultrio Assay Product in the Territory for use in the Blood Screening Field.

        2.2    General Conduct of Development.    The parties shall conduct their respective obligations under the Ultrio Development Program in compliance in all material respects with all requirements of applicable laws and regulations and all applicable good laboratory, clinical and

3

manufacturing practices. In addition, the parties each shall proceed diligently with their respective obligations under the Ultrio Development Program and shall use their respective Commercially Reasonable Efforts to achieve the objectives of the Ultrio Development Program efficiently and expeditiously. The parties each shall allocate such personnel, equipment, facilities and other resources to the Ultrio Development Program to carry out their respective obligations and to accomplish the objectives thereof, all as is more particularly described in the Ultrio Development Program, as amended from time to time during the term of this Ultrio Addendum (in accordance with the provisions of Section 3). Each party shall have the right to consult with the other party regarding the Ultrio Development Program and the obligation to reasonably consider the other party's advice.

        2.3    No Guarantee.    While each party agrees to use Commercially Reasonable Efforts to achieve the objectives described in the Ultrio Development Program (as amended from time to time during the term of this Ultrio Addendum (in accordance with the provisions of Section 3) efficiently and expeditiously, the parties understand that they have embarked on a development program whose outcome is uncertain. The parties further understand that the Ultrio Development Program is subject to a number of variables that are inherent to the development process and that there is a possibility that the parties may fail to successfully complete the development of the Ultrio Assay Product, even though each party exercises Commercially Reasonable Efforts and commits the resources described in the Ultrio Development Program. Neither party will be in breach of its obligations to the other hereunder and such party shall be deemed to have exercised Commercially Reasonable Efforts, so long as such party shall have committed the resources described in the Ultrio Development Program, even if such resources fail to successfully complete the development of the Ultrio Assay Product, or to complete the development of the Ultrio Assay Product in accordance with the Timeline or for the amounts described in the Budget or to the specifications set forth in the PRD or the SRS. The payment of Ultrio Development Costs between the parties shall be due and payable without respect to the achievement of any particular deliverable specified in the Ultrio Development Program.

        2.4    Project Management.

        2.4.1    Principles of Project Management.    The parties agree that in the process of exercising their responsibilities, the Project Management (consisting of the Project Manager and Project Leaders, as set forth herein) should have routine access to such information needed to assess progress under and costs of the Ultrio Development Program. Specifically, the parties agree that the Project Leaders shall be invited to participate in all team meetings, and will have access to team meeting minutes, Timecards and other expense records, except to the extent the Project Leader for the party assigned principal responsibility under Section 2.5.3 of this Ultrio Addendum for an activity determines in its reasonable discretion that any such meetings or minutes contain confidential, proprietary information of the responsible party. In such cases, the Project Manager shall (i) determine whether the Project Leader for the party not having primary responsibility for the activity can attend all or a portion of such meeting, (ii) provide a copy of the meeting minutes to the Project Leader not having primary responsibility for the activity with such confidential, proprietary information redacted, and (iii) to the extent that such minutes had proprietary or confidential information redacted, inform the Project Leader not having primary responsibility of the general nature of any decisions made at such meeting which affect the Timeline, Budget or Interim Events; provided, however that the Project Manager may only redact information comprising Gen-Probe intellectual property and know how or confidential business issues. Project Leaders will have access to non-confidential and non-proprietary information of the other party necessary to perform their responsibilities under the Ultrio Development Program, including those listed under Section 2.4.4. Project Leaders will inform and coordinate all activities,

4

including meetings with personnel involved in the performance of the Ultrio Development Program, with the Project Manager. The primary point of contact for the Ultrio Development Program at Gen-Probe will be Gen-Probe's Project Manager, the primary point of contact at Chiron will be Chiron's Project Leader. In order to maintain an efficient and orderly development the parties will communicate through the primary points of contact as much as possible when requesting information concerning the progress of the Ultrio Development Program. Confidentiality will be maintained in accordance with Section 8.1 of the Agreement, and disclosure of any information under this Section 2.4.1 shall be governed by that certain Confidentiality and Joint Interest Agreement, by and between the parties, dated as of October 30, 2001.

        2.4.2    Project Manager.    The project associated with development of the Ultrio Assay Product will be managed under a Project Manager, the responsibilities of which are described in Section 2.4.3. The Ultrio Development Program will be managed by a Project Manager appointed by Gen-Probe. As of the Addendum Effective Date, the Project Manager shall be [***]. Any change by Gen-Probe of the Project Manager must be approved by the Supervisory Board, which approval shall not be unreasonably withheld.

        2.4.3    Project Manager's Responsibilities.    The Project Manager shall be responsible for the following activities, together with such other activities as the parties may agree:

        (a)   Managing all matters relating to the Ultrio Development Program under this Ultrio Addendum, including each party's respective responsibilities and contributions and receiving reports from the Project Leaders;

        (b)   Providing written monthly progress reports to the parties and presenting status reports to the Supervisory Board in accordance with Section 2.4.6 below;

        (c)   Submitting and receiving the reports, materials and documents required to be delivered under this Ultrio Addendum;

        (d)   Overseeing the process of proposing, and submitting to the parties, any proposed modifications to the Product Requirements Document, Software Requirement Specifications, Technical Plan, Resource Plan or Budget, and in the event the parties cannot agree, presenting the same to the Supervisory Board in an objective and neutral manner;

        (e)   Arranging any meetings to be held between the parties and participating, to the extent the Project Manager deems appropriate, in meetings of the Project Leaders;

        (f)    Maintaining, for record keeping purposes, a log book or notes containing summaries and dates of all material communications and deliveries between the parties of which the Project Manager is aware, consistent with the parties' protocol for such sharing of confidential information set forth in that certain Confidentiality and Joint Interest Agreement, by and between the parties, dated as of October 30, 2001;

        (g)   Implementing appropriate practices and procedures to manage the progress under this Ultrio Addendum;

        (h)   Fostering good communication between the parties. It is intended by the parties that both parties share, through reports from the Project Leaders to the Project Manager, in the information concerning the progress made in the Ultrio Development Program and the cause of any delays. It is expected that the Project Leaders will make recommendations to the Project Manager for preferred paths when substantial delays are identified and multiple paths forward are identified. Understanding that it takes time for

5

information to flow up the chain of command, the Project Manager will inform Chiron of delays and progress on resolution as soon as it becomes available to him; and

        (i)    It is understood that both companies hold proprietary trade secret know-how and processes regarding their respective technologies that are not necessarily shared as part of this Agreement. On occasion it may occur that a full understanding of difficulties in the progress of development may require a detailed understanding of this proprietary know-how and processes. Each party will endeavor to appraise the other of the outcomes and consequences of these difficulties, while protecting the confidentiality of the information.

        2.4.4    Project Leaders.    Gen-Probe and Chiron will each appoint a project leader (each a "Project Leader") who is responsible for (a) assembling project teams for his or her respective party and (b) completing project responsibilities allocated to such party in Section 2.5. For the purposes of completing the Ultrio Development Program, these Project Leaders will report to the Project Manager. The Project Leader employed by a party shall be responsible for reporting to the employing party whether he or she believes the other party has proceeded diligently with its stated obligations under the Ultrio Development Program, has allocated sufficient personnel, equipment, facilities and other resources to achieve the objectives of the Ultrio Development Program and has exercised Commercially Reasonable Efforts to achieve its objectives efficiently and expeditiously.

        2.4.5    Reports.    In addition to the records and reports required to be kept by the parties under Section 3.5 of the Agreement, each Project Leader will provide to the Project Manager, in writing, a progress report delivered on or before the 15th day of each calendar month during the term of the Ultrio Development Program. These reports will cover technical progress as well as financial expenditures and FTE Labor hour reconciliations. The Project Manager may rely on any such reports for the purpose of making his or her progress report to the Supervisory Board described in Section 2.4.6 below.

        2.4.6    Meetings of the Supervisory Board.    The Supervisory Board shall meet from time to time during the term of this Ultrio Addendum, but not less frequently than once each calendar quarter during the term hereof. Not less frequently than quarterly, a regular agenda item at the regularly scheduled Supervisory Board meeting shall be to receive a report from the Project Manager and conduct a review of the Ultrio Development Program to assess progress of the development and the potential for commercialization of the Ultrio Assay Product.

        2.5    Development Responsibilities.

        2.5.1    Principal Responsibility; General Statement.    The parties' intention is the smooth and efficient conduct of development, and the parties desire by this Section 2.5 to provide guiding principles by which day-to-day decisions may be made by the responsible party and by which the approval process more particularly described in Section 3 below shall be governed. The parties intend that portions of the Ultrio Assay Product development will be conducted primarily and principally by one or the other of the parties, after consultation and discussion with the other party, under the supervision of the Project Manager, as follows: [***]. The party to whom principal responsibility is allocated in this Section 2.5 has the power to make day-to-day decisions regarding matters within the area of such responsibility, consistent with the overall Ultrio Development Program. The parties' obligations with respect to certain warehousing and shipping are subject to Amendment No. 3.

        2.5.2    Shared Responsibility.    Gen-Probe and Chiron have entered into that certain Definitive Written Settlement Agreement, dated December 5, 2001. Section 2(a) of the

6

Definitive Written Settlement Agreement incorporates by reference the provisions of the Short Form Agreement (attached as Exhibit A to the Definitive Written Settlement Agreement). The parties hereby expressly incorporate the provisions of Sections F.5 and F.6 of the Short Form Agreement between the parties, dated November 16, 2001, into this Ultrio Addendum, and agree that the provisions of Sections F.5 and F.6 of the Short Form Agreement will govern the relationship between the parties for the purpose of the Ultrio Assay Product in connection with the subject matters addressed in those provisions.

        2.5.3    Principal and Shared Responsibility; Specific Allocation.    Without limiting the general statements set forth in Sections 2.5.1 and 2.5.2, the parties agree to allocate specific responsibility as follows:

Function	Principal Responsibility	Shared Responsibility
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]		[***]
[***]		[***]
[***]	[***]
[***]		[***]
[***]	[***]
[***]		[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]		[***]

*

Chiron shall have reasonable input into [***].

        2.5.4    Regulatory/Licensure.    Pursuant to [***].

7

        2.5.5    Project Leader Disagreements.    It is recognized that the Project Leaders may disagree on approaches. Even though one party has the principal responsibility for development in the functional area described in Section 2.5, disagreements that cannot be resolved by Project Management may be brought to the Supervisory Board. However, work will proceed in accordance with the choice of the principally responsible party, while being discussed at the Supervisory Board. In the event that the parties do not agree at the Supervisory Board level, the party with principal responsibility may continue to proceed per its best judgment. If a disagreement arises in a functional area for which responsibility is shared and resolution cannot be achieved at the Supervisory Board, except as to Regulatory/Licensure Strategy which shall be governed by Section 2.5.4 above, work shall be suspended in such functional area until a resolution is reached through Article 13 of the Agreement, including arbitration.

        3.    Modifications.

        3.1    Ultrio Development Program Definition.    The parties have prepared and agreed upon a Ultrio Development Program, as described in the Binder. The Ultrio Development Program, as described in the Binder, will govern the rights and responsibilities of the parties until changed in accordance with the provisions hereof. The parties recognize and anticipate that additional clarification and refinement of the Ultrio Development Program, including changes, if any, necessary to reflect accepted delays in, or increases in costs of, development, will be required as development proceeds. The parties intend that this Ultrio Addendum establish a process by which the parties will amend the Ultrio Development Program, in accordance with the terms described in this Section 3.

        3.2    Modifications.

        3.2.1    Request for Modifications.    Either party may propose either Material or Non-material Modifications to any part of the Ultrio Development Program from time to time during the term of this Ultrio Addendum, including without limitation a request for a change to the FTE Labor Rate, as defined in Section 5.2.1. The process applicable to any such proposed modifications shall be as described in this Section 3. Changes, modifications or improvements to the Ultrio Assay Product, after the Completion Date, are governed by the provisions of Section 4 below. The Project Manager, and under his or her supervision, the Project Leaders and their respective teams, will review any proposed modification to the Ultrio Development Program; if the two Project Leaders mutually agree in writing that a particular modification is a Material Modification or is a Non-material Modification, then such determination shall be conclusive. Unless the two Project Leaders determine to the contrary, any modification which (i) reflects an increase in the actual Ultrio Development Costs incurred that, when aggregated with all previously authorized modifications, of greater than [***] over the Development Costs reflected in the original Budget approved in effect as of the date this Ultrio Addendum was executed by the parties, or (ii) contains a proposal to alter any Interim Event as compared to the most recently approved Timeline shall be deemed to be a Material Modification. If the Project Leaders are unable to agree whether a particular requested modification is a Material or Non-material Modification, then the Supervisory Board shall review the requested change and make a determination with respect to whether such requested modification is a Material or Non-material Modification. If the Supervisory Board has met and consulted without resolution, then either party may, in its discretion, determine that the parties have reached an impasse with respect thereto and implement the escalation procedure described in Article 13 of the Agreement to resolve such impasse.

        3.2.2    Non-Material Modifications.    Unless changes to the specifications described in Section 3.2.1 constitute a Material Modification, any Non-Material Modifications shall be

8

reported in the monthly summary progress reports pursuant to Section 2.4.4 and shall not be subject to the approval process described in Section 3.3.

        3.3    Material Modifications.

        3.3.1    Request for Material Modifications.    In the event that one party desires to request a Material Modification to the Ultrio Development Program from time to time during the term hereof, such party (the "requesting party") shall submit to the other party such request in writing, in sufficient detail to enable the other party (the "receiving party") to evaluate the request. Without limiting the foregoing, the requesting party shall prepare a revised draft version of the Budget, reflecting any changes necessary to fully implement the requested Material Modification to the Ultrio Development Program.

        3.3.2    Initial Analysis of Impact of Proposed Material Modification.    Promptly upon receipt of such request, but in any event not more than [***] thereafter, the parties shall conduct a preliminary analysis of the impact that the requested Material Modification would have, including without limitation the impact any such proposed Material Modification would have on the Budget and/or the Timeline, and shall meet and conduct an analysis of the impact of such Material Modification on the potential profitability of the Ultrio Assay Product. Should either party conclude, in its reasonable discretion, that the potential for [***] by any proposed change to the Ultrio Development Program requested in accordance with this Section 3.3, such party may elect to terminate participation in the Ultrio Development Program under the provisions of Section 8.4.

        3.3.3    Preparation of Modified Ultrio Development Program.    Unless the parties terminate the Ultrio Development Program for convenience under Section 8.3 below or a party terminates on unilateral withdrawal under Section 8.4 below, promptly upon completion of the review and analysis under Section 3.3.2, Gen-Probe and Chiron shall complete and deliver to the Supervisory Board revisions to the Product Requirements Document, Software Requirements Specification, Technical Plan, Resource Plan or Budget, as applicable, responsive to the request for acceptance by the parties under Section 3.3.4 below. Costs incurred by Gen-Probe and Chiron to prepare such response to the request shall be included in Ultrio Development Costs hereunder.

        3.3.4    Acceptance of Modified Ultrio Development Program.

        (a)   Unless the parties terminate the Ultrio Development Program for convenience under Section 8.3 below or a party terminates on unilateral withdrawal under Section 8.4 below, the parties shall promptly, but not later than [***] after preparation by the parties of a modified Ultrio Development Program under Section 3.3.3 meet and consult with respect to the proposed modified Ultrio Development Program. Either party may elect to terminate participation in the Ultrio Development Program under the provisions of Section 8.4 below if the requested modification is a Material Modification, determined in accordance with Section 3.2.1. If neither party terminates under Sections 8.3 or 8.4 below, then neither party may unreasonably withhold approval of any request for modification of the Ultrio Development Program.

        (b)   If neither party terminates under Sections 8.3 or 8.4 below, then the parties shall thereafter finalize such modified Ultrio Development Program, using the provisions of this Section 3.3.4(b), as follows:

        (i)    Each party shall, within [***] following completion of the consultation and review under paragraph (a), deliver to the other party either a written approval of the proposed modified Ultrio Development Program or a detailed written statement specifying the basis for rejection. Approval shall not be unreasonably withheld. The

9

requesting party may, in response to a rejection, revise the proposed modified Ultrio Development Program to reflect the discussions of the parties, and redeliver the revised proposed modified Ultrio Development Program for further review, until the parties agree upon the Material Modification. Either party may, in its discretion and with notice to the other party, determine that the parties have reached an impasse with respect to any proposed Material Modification and deliver the request to the Supervisory Board for determination.

        (ii)   If a party delivers the request to the Supervisory Board for determination, the Supervisory Board shall promptly, but not later than the later of (i) [***] of a requested modified Ultrio Development Program, or (ii) [***], meet and discuss the proposed Material Modification to Ultrio Development Program.

        (iii)  If the Supervisory Board has met and consulted without resolution, then either party may, in its discretion, determine that the parties have reached an impasse with respect to any proposed modification and implement the escalation procedure described in Article 13 of the Agreement to resolve such impasse. Notwithstanding anything to the contrary in this Ultrio Addendum or the Agreement, all Material Modifications, whether agreed or determined through arbitration, shall be finally determined and documented in accordance with this Section 3.3. Where one party has rejected a proposed modified Ultrio Development Program, the sole question to be presented in any arbitration is whether that party unreasonably withheld its approval.

        3.3.5    Effective Date of Modified Ultrio Development Program.    At such time as the parties (or, if applicable, the Supervisory Board) shall have accepted a modified Ultrio Development Program incorporating a Material Modification, or any portion thereof, the parties shall evidence such agreement by initialing the revised Product Requirements Document, Software Requirements Specification, Technical Plan, Resource Plan or Budget, as applicable. The Ultrio Development Program as so modified and approved shall constitute the Ultrio Development Program hereunder and be incorporated by reference into this Ultrio Addendum, and shall supersede the preceding Ultrio Development Program, or applicable portions thereof, for all purposes. In order to evidence their agreement to the revised Ultrio Development Program, the parties shall include it in an additional volume of the Binder, labeled "Amendments to Ultrio Development Program," in which all amendments and modifications to the Ultrio Development Program will be kept.

        3.4    Notice of Significant Changes.    Each party will give [***] notice to the other party prior to any proposal of a significant reduction or increase in resources from the then-current Resource Plan in order to allow the parties time to divert resources either to or from the Ultrio Development Program. Any significant changes to the Budget or the Resource Plan shall be effective only upon the expiration of [***] from the delivery of such notice, unless the parties both agree to a shorter period of time in writing.

        4.    Changes to Ultrio Assay Product after Completion Date.

        4.1    Process.    Notwithstanding the provisions of Section 3, the parties recognize that from time to time during the term hereof the market may demand or regulatory changes may require that special enhancements or modifications be made to the Ultrio Assay Product, and that either party may desire to adopt such changes. From and after the Completion Date, each party will notify the Supervisory Board promptly upon receipt of a request from a customer, or upon identification of regulatory changes that may require the parties to implement any enhancement, modification or other change to the Ultrio Assay Product. The Supervisory Board shall promptly, but not later than the latter of (i) [***] for such changes to the Ultrio Assay Product, or (ii) [***],

10

meet and consult with respect to such requested change. The Supervisory Board shall decide (i) whether the requested changes should be implemented; and (ii) whether the requested changes can be implemented under the terms of this Ultrio Addendum or are significant enough to warrant a new Development Program under the terms of Article 3 of the Agreement, in which case the parties shall use the process more particularly described in Section 3.2 of the Agreement.

        4.2    Additional Work under Addendum.    If the Supervisory Board determines that the changes are sufficiently minor that they can be implemented under this Ultrio Addendum, then the parties shall implement the process more particularly described in Section 3.3 above, and the Supervisory Board may approve a new Ultrio Development Program, consisting of a new modified Product Requirements Document, Software Requirements Specifications, Technical Plan, Resource Plan and Budget, for the purpose of developing such changes. Notwithstanding the foregoing, nothing herein shall obligate either party to conduct development work after the Completion Date with respect to the Ultrio Assay Product, without regard to whether the other party indicates a willingness to pay some portion or the entire costs of such development.

        5.    Ultrio Development Costs.

        5.1    [***] Ultrio Development Costs and [***].    Each party is responsible for and agrees to pay [***], as defined in and subject to Section 5.2 below, [***]. Such costs shall be payable as described in Section 5.3 herein. The Budget has been prepared for the purpose of permitting the parties to plan for Ultrio Development Program expenditures related to Ultrio Development Costs hereunder and represents the parties' best estimate of such Ultrio Development Costs, but does not represent a "fixed price maximum" or other guaranteed maximum cost of the development required for the Ultrio Development Program.

        5.2    Definition and Calculation of Ultrio Development Costs; [***].    "Ultrio Development Cost" with respect to the Ultrio Development Program means the fully-burdened cost of conducting the research and development (including clinical trials and domestic and international regulatory submissions) of the Ultrio Assay Product, and shall include [***]. "Ultrio Development Costs" shall not include [***]. Costs will be calculated in accordance with United States generally accepted accounting principles, consistently applied ("U.S. GAAP"), or as otherwise mutually agreed in writing between the parties.

        5.2.1    Ultrio Development Costs; FTE Labor Rate.

        (a)   In lieu of accounting specifically for and receiving direct reimbursement for certain Ultrio Development Costs, the parties have agreed to include reimbursement for those certain categories of Ultrio Development Costs within an agreed-upon labor rate for full time equivalent personnel (the "FTE Labor Rate"). Those categories of "Ultrio Development Costs" included within the FTE Labor Rate are those costs more particularly described on Schedule 5, in paragraph 2 entitled "Ultrio Development Costs included within FTE Labor Rate". Neither party shall be reimbursed separately for Ultrio Development Costs included within FTE Labor Rate. Those categories of "Ultrio Development Costs" not included within the FTE Labor Rate are those costs more particularly described on Schedule 5, in paragraph 3 entitled "Ultrio Development Costs not included within FTE Labor Rate". Each party shall be reimbursed separately for Ultrio Development Costs not included within FTE Labor Rate.

        (b)   The FTE Labor Rate in effect as of the Addendum Effective Date is set forth in paragraph 1 on the attached Schedule 5, and is included in the Resource Plan and reflected in the Budget. Each year the parties will evaluate and re-set a FTE Labor Rate for the Budget for the new calendar year based on the parties' budgets for the then-current calendar year and consistent with the requirements of Section 5.2.1(d) below.

11

In the event the parties shall not have agreed upon a new FTE Labor Rate before commencement of a calendar year, the parties shall use the rate in effect during the immediately preceding calendar year for billing purposes, subject to "true-up" (using the same methodology as described in Section 5.2.1(e) below) at such time as the FTE Labor Rate for the then-current calendar year has been agreed.

        (c)   In addition to the annual reset described in Section 5.2.1(b) above, either party shall have the right to request a change in the FTE Labor Rate reflected on the attached Schedule 5 to be applied on a prospective basis under the approval process set forth in Section 3. Acceptance of such request for modification shall be governed by Section 3.3.4 of this Ultrio Addendum.

        (d)   In addition to the foregoing, throughout the term of this Ultrio Addendum:

        (i)    each party shall have the same FTE Labor Rate applicable to it as is applied to the other party, subject to any agreed modifications; and

        (ii)   in the event either party requests a modification to the FTE Labor Rate hereunder, the modified FTE Labor Rate shall be calculated using the same methodology as that used to calculate the FTE Labor Rate in effect as of the Addendum Effective Date. The methodology used to calculate the FTE Labor Rate in effect as of the Addendum Effective Date is described on the attached Schedule 5.2.3, entitled "Ultrio Development Costs Calculation Methodology".

        (e)   In the event aggregate actual Ultrio Development Costs that are reimbursed through the FTE Labor Rate exceeded, or fell short of, the agreed FTE Labor Rate reflected in the Budget (as agreed to in accordance with the provisions of Section 5.2.1(b) above) for such calendar year, the parties will "true-up" such reimbursement annually in accordance with this Section 5.2.1(e). [***] during the term hereof, each Gen-Probe will calculate and deliver to Chiron an accounting of the actual expenditures made by Gen-Probe for those costs more particularly described on Schedule 5, in paragraph 2 entitled "Ultrio Development Costs included within FTE Labor Rate" and compare them to the amounts reimbursed through the FTE Labor Rate in such year. Each party will have [***] in which to meet and agree upon a final FTE Labor Rate for such year (the "Final FTE Labor Rate") which more closely approximates the actual labor rate experienced by each party. If necessary Chiron will travel to Gen-Probe in order to complete the review in these timeframes. Each party shall have the same Final FTE Labor Rate applicable to it as is applied to the other party, subject to any agreed modifications. If the parties disagree on a Final FTE Labor Rate, such disagreement shall be addressed by the Supervisory Board and, if necessary, by implementation of the escalation procedure described in Article 13 of the Agreement, excluding arbitration. In the event that one party received less than the Final FTE Labor Rate, such party shall be entitled to receive from the other party an amount equal to [***] of the difference between the actual Ultrio Development Costs included within the FTE Labor Rate and the reimbursed Ultrio Development Costs included within the FTE Labor Rate; similarly, in the event that one party received more than the Final FTE Labor Rate, such party shall be required to reimburse the other party in an amount equal to [***] of the difference between the actual Ultrio Development Costs included within the FTE Labor Rate and the reimbursed Ultrio Development Costs included within the FTE Labor Rate.

        (f)    Ultrio Development Costs not included within the FTE Labor Rate shall be budgeted and trued-up under the same terms as the FTE Labor Rate.

12

        5.2.2    Comparison with Resource Plan.    The planned resources, and the associated costs, will be broken out on a monthly basis and analyzed against the Resource Plan included within the Technical Plan, and reflected in the Budget.

        5.2.3    Methodology.    Attached hereto as Schedule 5.2.3 is a detailed methodology for the calculation of the Ultrio Development Costs, including costs reimbursed through the FTE Labor rate and significant external costs, as defined in this Section 5.2. The parties shall use such methodology for the purpose of invoicing and payment more particularly described in Section 5.3 below.

        5.3    Payment of Ultrio Development Costs.    In addition to the provisions of Article 7 of the Agreement, the parties agree as follows:

        5.3.1    Accrued Ultrio Development Costs.    Each party has already incurred, prior to the date of execution of this Ultrio Addendum, certain Ultrio Development Costs. To the extent that one party has paid more than its [***] share of the aggregate Ultrio Development Costs incurred prior to and until the date of execution of this Ultrio Addendum, net of NIH Monies, the other party will reimburse such party for [***] the Ultrio Development Costs paid by that party and [***] of the aggregate Ultrio Development Costs incurred prior to and until the date of execution of this Ultrio Addendum. Attached to this Ultrio Addendum as Schedule 5.3.1 is a summary of the Ultrio Development Costs incurred by the parties prior to the execution of this Ultrio Addendum, which includes an itemized summary of the NIH Monies received prior to the execution of this Ultrio Addendum.

        5.3.2    [***] Budgeted Payments.    Each party's respective [***] share of Ultrio Development Costs (after NIH Monies are applied) will be paid on a [***] in an amount equal to the amount reflected in Budget for that [***]. The Budget sets forth the parties' anticipated expenditures and FTE Labor amounts for Ultrio Development Costs for [***] during the term of the Ultrio Development Program in the line item entitled "Total Project GP" and "Total Project Chiron," respectively. The line items entitled "GP Payment to Chiron" and "Chiron Payment to GP" in the Budget identify (i) the amount by which Chiron and Gen-Probe, respectively, are anticipated to incur Ultrio Development Costs in excess of their respective [***] share (the "negative delta"), and (ii) the party who is required to make the reimbursement payment. [***] during the term of the Ultrio Development Program, Gen-Probe will invoice Chiron the amount of such negative delta net of any credits or additional charges against amounts previously paid that have been agreed to by the Project Management prior to the date on which Gen-Probe rendered the invoice. Attached hereto as Schedule 5.3.2 is an example of this payment methodology.

        5.3.3    [***] True-Up Payments.    At the end of [***], each party will calculate the actual FTE Labor hours expended on the Ultrio development Program during [***]. The Project Leaders will review these actual FTE Labor hours compare them to the Budget for the applicable [***]. In the event that one party expended more than [***] share of actual FTE Labor hours or Ultrio Development Costs not included in the FTE Labor hours during the [***] then ended, taking into account all payments made under Section 5.3.2, the parties shall calculate the cost of such negative delta using the agreed FTE Labor Rate and Gen-Probe will adjust the next invoice issued to Chiron in the amount of such credit or additional charge on or before the expiration of [***] after the end of the applicable [***]. Attached hereto as Schedule 5.3.3 is an example of this true-up methodology.

        5.3.4    Invoices.    Each party will invoice the other for the amounts described in this Section 5.3 and all invoices will be due and payable [***] from the date of the invoice. In the event payment is not received within such period, the delinquent party shall pay a service

13

charge if billed, equal to the amount overdue multiplied by the [***], but not exceeding the maximum allowable rate.

        5.4    Dispute.    Neither party shall unilaterally invoice the other in advance for more than the amount reflected in the then-current Budget in a given period nor withhold payments of the amount reflected in the then-current Budget. Either party may, in its discretion, determine that the parties have reached an impasse with respect to a particular Budget item, the invoicing or payment of same, and implement the escalation procedure described in Article 13 of the Agreement to resolve such impasse. Notwithstanding the foregoing, neither party may withhold payment of [***] budgeted payments under Section 5.3.2, cease development work or otherwise impede the progress of the Ultrio Development Program by reason of such dispute.

        5.5    Right to Audit and Verify.    Each party is entitled to review, evaluate, and in its discretion independently verify the basis of and actual expenditures incurred by the other party for which such party requests reimbursement as Ultrio Development Costs hereunder, in accordance with the provisions of Section 7.3 of the Agreement, including without limitation actual expenditures and amounts received as NIH Monies after the Addendum Effective Date but prior to the execution of this Ultrio Addendum.

        6.    Manufacturing and Commercialization.

        6.1    Definitions Relevant to Manufacturing and Commercialization Obligation.    The parties intend that the Ultrio Assay Product falls within the following provisions of the Agreement:

        6.1.1    Applicable Purchase Price.    As used in the Agreement, the "Applicable Purchase Price" applicable to the Ultrio Assay Product is as set forth in Section 1.2.1 of the Agreement. The parties acknowledge that the Ultrio Assay Product is a Future Blood Screening Assay which includes as a constituent element an assay for HCV (other than those sold pursuant to Sections 3.1.4(b) or 3.6 of the Agreement), for which the provisions of Section 1.2.1 of the Agreement describes the "Applicable Purchase Price", as determined from time to time during the term of the Agreement. Notwithstanding section 3.2.7(b) of the Agreement, the Applicable Purchase Price for the Ultrio Assay Product in the Territory will never be less than [***].

        6.1.2    Transfer Price.    The "Transfer Price" applicable to the Ultrio Assay Product is set forth in Section 1.58.2 of the Agreement except that the Transfer Price for Ultrio Assay Product from conformance or development lots that is transferred to Third Parties in the Territory for use in the Blood Screening Field shall reflect and be adjusted if and to the extent that the costs of manufacture of such conformance or development lots is included as part of the Ultrio Development Costs. The Transfer Price [***]. The second sentence of Section 1.58.2 is deleted in its entirety, and replaced with the following:

        "The Transfer Price, based on this objective, [***]."

        6.1.3    Manufacturing Cost.    The "Manufacturing Cost" for the Ultrio Assay Product shall be as defined in the Agreement.

        6.1.4    Rare Reagents.    The Ultrio Assay Product is a Future Blood Screening Assay which incorporates substantial Rare Reagents, as defined in Section 1.51 of the Agreement.

        6.2    Right to Audit and Verify.    Chiron is entitled to review, evaluate, and in its discretion independently verify the basis of Gen-Probe's Manufacturing Cost using an independent third party, in accordance with the provisions of Section 7.3 of the Agreement.

14

        6.3    Non-Commercial Products.

        6.3.1   If any portion of the notebook, development, clinical or conformance lots of the Ultrio Assay Product manufactured for the Ultrio Development Program is sold to a Third Party for use outside the United States or utilized by Chiron or Gen-Probe in a research or development program other than the Ultrio Development Program, including without limitation research studies or marketing studies performed in support of commercialization of the Ultrio Assay Product, or the development and clinical trials for the Tigris instrument, the party selling or utilizing such Ultrio Assay Product shall reimburse the Ultrio Development Program to the extent that the program was charged for the materials.

        6.3.2   Section 6.10 of the Original Agreement is amended to add the following as new subsection (b), applicable to the Ultrio Assay Product only:

"(b) Gen-Probe agrees to provide to Chiron reasonable quantities of the Ultrio Assay Product manufactured by Gen-Probe for uses other than sale to customers, including without limitation research studies, marketing studies, internal research and development, and troubleshooting (all for Chiron's use only in direct furtherance of the express purposes of this Agreement and without any implied license for any purpose other than such express purposes), to the extent such Products are specifically ordered by Chiron for such purposes ("Non-commercial Ultrio Assay Products"). The entire compensation to Gen-Probe for Non-commercial Products shall be not greater than [***], as determined by reference to Gen-Probe's customary and ordinary accounting practices. The quantities of Non-commercial Ultrio Assay Products ordered by Chiron as well as quantities of Ultrio Assay Products consumed by Gen-Probe for all purposes other than the Ultrio Assay Development Program shall be subject to review by the Supervisory Board."

        6.4    Commercialization Budget.

        (a)   For the purpose of determining "commercialization costs" (to be reimbursed to Chiron as permitted in Section 8.5 of the Agreement), Chiron shall submit to Gen-Probe a commercialization budget, promptly following any termination of this Ultrio Addendum for breach in accordance with Section 8.2 or an unilateral withdrawal by a party in accordance with Section 8.4, and the timely election by a Continuing Party to continue the Ultrio Development Program, as described in this Section 6.4.

        (b)   Chiron shall submit to Gen-Probe a commercialization budget, setting forth the programs and anticipated costs, including applicable costs and overhead for internal sales, marketing, distribution, training, technical support, instrument service and field service engineering, product support, quality assurance, regulatory affairs and clinical affairs all as required to commercialize the Ultrio Assay. Such commercialization budget shall also include out-of pocket costs associated with each such program and initiative plus costs associated with any third party support and allocated costs of instrumentation on a per unit or other reasonable allocation method applicable to the commercialization of the Ultrio Assay Product.,The detail and basis provided in the proposed budget shall be commensurate with the information supplied by Gen-Probe to support Gen-Probe's calculation of Manufacturing Cost.

        (c)   Gen-Probe will deliver to Chiron either a written acceptance of the proposed commercialization budget or a detailed written statement specifying the basis for rejection. Chiron may, in response to a rejection, revise the proposed commercialization budget to reflect the discussions of the parties, and redeliver the revised commercialization budget for further review, until the parties agree upon the final commercialization budget. Either party may, in its discretion and with notice to the other party, determine that the parties have

15

reached an impasse with respect to the proposed commercialization budget and deliver a request to the Supervisory Board for determination.

        (d)   If a party delivers the request to the Supervisory Board for determination of the commercialization budget, the Supervisory Board shall promptly, but not later than the later of (i) [***], or (ii) the [***], meet and discuss the proposed commercialization budget.

        (e)   If the Supervisory Board has met and consulted without resolution, then either party may, in its discretion, determine that the parties have reached an impasse with respect to the proposed commercialization budget and implement the escalation procedure described in Article 13 of the Agreement to resolve such impasse.

        (f)    Labeling: Labeling will indicate that the Product was "Developed by Gen-Probe, in collaboration with Chiron"

        7.    License Grants.

        The grant of licenses for the purpose of conducting the Ultrio Development Program shall be governed by Sections 3.2.6 and Section 9 of the Agreement. Chiron agrees that Gen-Probe shall be [***].

        8.    Addendum Effective Date; Term; Termination.

        8.1    Term of Ultrio Addendum.    This Ultrio Addendum shall become effective on the Addendum Effective Date and shall continue in effect through the Blood Screening Term, unless sooner terminated in accordance with the provisions hereof. For the purpose of the Ultrio Assay Product, the "Blood Screening Term" shall mean the period commencing on the Addendum Effective Date and expiring on [***] after the First Commercial Sale of the Ultrio Assay Product. Termination of this Ultrio Addendum shall be governed by the terms of this Section 8 and termination of the Agreement is governed by Section 11.2 of the Agreement.

        8.2    Termination for Breach.

        8.2.1    Default.    Either party (the "nondefaulting party") has the right, upon written notice to the other party (the "defaulting party"), to terminate the Ultrio Development Program, upon the occurrence of any of the following events of default and the expiration of any applicable period of time for cure:

        (a)   if a party fails to make a payment required under Sections 5.3.2 or 5.3.3 hereunder;

        (b)   if a party invoices for amounts using expenditures not falling within the definition of Ultrio Development Costs or not included within the Budget.

        (c)   if a party fails to exercise Commercially Reasonable Efforts to commit the resources described in the Ultrio Development Program or to exercise Commercially Reasonable Efforts achieve the objectives of the Ultrio Development Program; provided, however, that the failure to successfully complete the development of the Ultrio Assay Product, or to complete the development of the Ultrio Assay Product on the Timeline set forth in the Technical Plan or for the amounts described in the Budget or to the specifications set forth in the PRD or the SRS shall not be deemed to be a breach of this Ultrio Addendum; and

        (d)   if a party defaults under the Agreement which default results in the termination of the Agreement.

        8.2.2    Right to Cure Event of Default.    Upon the occurrence of any event of default entitling a party to terminate this Ultrio Addendum, the non-defaulting party may send notice

16

of event of default, specifying in reasonable detail the nature of the default, to the defaulting party. The defaulting party will have [***] within which to cure the breach or event of default. Failure to cure the default within such time period will result in termination of the Ultrio Development Program without further notice by the non-defaulting party, unless such non-defaulting party extends the cure period by written notice or withdraws the default notice. (The expiration of the period for such right to cure without cure, extension or withdrawal of the default notice is referred to as the "effective date of termination".)

        8.2.3    Effect of Termination for Breach.    Upon a termination of this Ultrio Addendum for default under this Section 8.2:

        (a)   Subject to the rights of the parties under Section 9.3, the Ultrio Development Program shall be terminated.

        (b)   The non-defaulting party's rights under the Agreement shall remain in full force and effect unchanged.

        (c)   The defaulting party's rights under the Agreement with respect to all Products, other than the Ultrio Assay Product, shall remain in full force and effect unchanged.

        (d)   The defaulting party's rights under the Agreement with respect to the Ultrio Assay Product shall terminate and be of no further force and effect. The defaulting party may not undertake a development substantially similar to the Ultrio Development Program with any other party for a period of [***].

        (e)   The defaulting party shall pay, to the other party, in addition to any other rights or remedies available to the nondefaulting party at law or equity, promptly upon receipt of an invoice therefore, an amount equal to [***].

        8.3    Termination by Both Parties.

        8.3.1    Vote to Terminate.    The Supervisory Board, by unanimous vote, has the right, upon three (3) months written notice to both parties, to terminate the Ultrio Development Program and by extension this Ultrio Addendum.

        8.3.2    Effect of Notice Period on Termination by Both Parties.    During the notice period as set forth in Section 8.3.1, the provisions for reimbursement of a party's development efforts in accordance with the then-current Budget continue in force and effect, unless the party faced with reduction agrees that it can displace employees to other activities in a shorter time. The parties agree that each party shall attempt to minimize costs during the notice period. During the notice period, the parties shall continue to perform their respective obligations under the Ultrio Development Program, unless otherwise agreed by the parties in writing. Upon the expiration of the notice period (and the effective date of termination under Section 8.2 or the effective date of withdrawal under Section 8.4 of the Ultrio Development Program), each party shall pay, promptly upon receipt of an invoice therefor, to the other party an amount equal to (i) all Ultrio Development Costs accrued to date in the terminated Ultrio Development Program for which an invoice has been rendered and (ii) all Ultrio Development Costs not yet invoiced but incurred in the terminated Ultrio Development Program, whether or not disputed, as set forth in the approved Budget.

        8.3.3    Effect of Termination by Both Parties.    Upon any termination of the Ultrio Development Program under this Section 8.3, the parties shall have such rights on termination as shall be unanimously agreed by the Supervisory Board as part of the decision to terminate for convenience.

17

        8.4    Termination by Either Party; Unilateral Withdrawal from Ultrio Development Program.    Either party (referred to for convenience as the "withdrawing party") may elect to terminate this Ultrio Addendum under this Section 8.4 on the following basis without further cause:

        (a)   The withdrawing party concludes in its reasonable discretion that the potential for [***] by any proposed change to the Ultrio Development Program requested in accordance with Section 3.3 above; or

        (b)   The withdrawing party receives a request for a Material Modification of the Ultrio Development Program as determined in accordance with Section 3.2.1; or

        (c)   The parties have failed to achieve one or more of the Interim Events.

The withdrawing party may terminate this Ultrio Addendum under this Section 8.4 upon the provision to the other party (referred to for convenience as the "non-withdrawing party") of [***], specifying in reasonable detail the basis on which the withdrawing party is unilaterally terminating this Ultrio Addendum. (The notice of intent to withdraw described in this Section 8.4 is referred to for convenience as the "withdrawal notice"; and a date which is [***] is referred to for convenience as the "effective date of withdrawal").

        8.5    Continuance of Ultrio Development Program following Unilateral Withdrawal or Termination.

        8.5.1    Election.    Following any termination of this Ultrio Addendum for breach in accordance with Section 8.2 or an unilateral withdrawal by a party in accordance with Section 8.4, the non-defaulting party (under Section 8.2) or the non-withdrawing party (under Section 8.4) (referred to for convenience as the "Continuing Party") may elect to continue the Ultrio Development Program by providing written notice to the other party on or before the effective date of termination under Section 8.2 or the effective date of withdrawal under Section 8.4.

        8.5.2    Funding and Conduct of Development.

        (a)   If a Continuing Party elects pursuant to this Section 8.5 to continue funding the Ultrio Development Program, such Continuing Party shall be solely responsible for the current funding of all Ultrio Development Costs from and after the effective date of termination under Section 8.2 or the effective date of withdrawal under Section 8.4, subject to the right to reimbursement more particularly described below.

        (b)   In addition to Section 8.5.2(a), if the Continuing Party is Chiron, Chiron shall pay Gen-Probe [***]. Such amount shall be payable in accordance with the provisions of [***]. Chiron shall be entitled to reimbursement of such amounts paid in accordance with the provisions of Section 8.5.3 below. In the event, however, that Chiron shall elect to cease the development, marketing and sale of the Ultrio Assay Product prior to the effective commercialization thereof, then Chiron shall pay Gen-Probe [***] (meeting the definition and calculated as described in Section 5.2) incurred by Gen-Probe from and after the effective date of termination for breach under Section 8.2 or the date of receipt from Gen-Probe of the withdrawal notice delivered pursuant to Section 8.4 of the Ultrio Addendum, which additional amount the parties agree will compensate Gen-Probe for the resources committed by Gen-Probe to the Ultrio Development Program which did not result in an effectively commercialized Ultrio Assay Product. Chiron shall pay such additional amount promptly upon ceasing such development, as permitted under Section 3.2.1(c) of the Agreement.

        (c)   In addition to Section 8.5.2(a), if the Continuing Party is Gen-Probe, in the event that Gen-Probe shall elect to cease the development, marketing and sale of the

18

Ultrio Assay Product prior to the effective commercialization thereof, then Gen-Probe shall pay Chiron [***] as approved in the commercialization budget under Section 6.4 to be incurred prior to the effective commercialization of the Ultrio Assay Product. Gen-Probe shall pay such additional amount promptly upon ceasing such development, as permitted under Section 3.2.1(c) of the Agreement.

        8.5.3    Reimbursement of Development Costs.    The party electing to continue development under the terms of Section 8.5 shall be deemed to be the party who "wishes to develop the Future Blood Screening Assay" described in Section 3.2.1(c) of the Agreement. The provisions of Section 3.2.1(c) and the provisions of Section 3.2.3(b)(i) of the Agreement shall govern the rights and obligations of the parties from and after the effective date of termination under Section 8.2 or the effective date of withdrawal under Section 8.4 of the Ultrio Development Program as a joint development program under this Ultrio Addendum, except Section 3.2.1(b) of the Agreement shall be deleted in its entirety, and replaced with the following.

        "b.   In the case of a Future Blood Screening Product which is funded by one party pursuant to Section 3.2.1(c) of the Agreement and Section 8.5 of the Ultrio Addendum, such party shall be solely responsible for all Development Costs of such Future Blood Screening Assay and be entitled to reimbursement of the portion of the total Development Costs incurred after the effective date of termination under Section 8.2 or the effective date of withdrawal under Section 8.4, as the case may be (the "Post-Withdrawal Development Costs"), as follows:

        i.      If the funding party is Gen-Probe, Chiron shall [***]. Thereafter, Net Sales shall be paid as provided under Section 3.2.7 of the Agreement.

        ii.     If the funding party is Chiron, Chiron shall pay to Gen-Probe [***]. Thereafter, Net Sales shall be paid as provided under Section 3.2.7 of the Agreement.

        iii.    The parties agree that the funding party is entitled to a preferential return on the Post-Withdrawal Development Costs incurred by the funding party, as a reasonable return for the additional risk incurred by the funding party, in an amount equal to [***] on the Post-Withdrawal Development Costs actually incurred by the funding party from the date incurred until the date on which such Post-Withdrawal Development Costs are reimbursed from Ultrio Assay Product revenues pursuant to Section 3.2.1(b)(i) above or Section 3.2.1(b)(ii) above, as applicable."

        8.5.4    Control of the Program upon Unilateral Funding.    The Continuing Party shall have the right to appoint the Project Manager from and after the effective date of termination under Section 8.2 or the effective date of withdrawal under Section 8.4. The Continuing Party shall have the right to make such Material Modifications to the Ultrio Development Program that it deems necessary or prudent in its reasonable discretion, without the acceptance of the other party as otherwise required under Section 3.3.4 of this Ultrio Addendum. Notwithstanding the above, the Continuing Party shall remain obligated to provide the other party with a copy of the Ultrio Development Program, and all notice and reporting obligations set forth herein shall remain in full force and effect.

        8.5.5    Rights under Agreement.    Except as expressly modified by this Section 8.5, the parties shall retain all rights and obligations allocated pursuant to Section 3.2 of the Agreement. Without limiting the foregoing, without respect to which party is the Continuing Party, Gen-Probe shall have the exclusive right and obligation to conduct the development work and to manufacture the Ultrio Assay Product; Chiron shall have the exclusive right to promote, market and sell the Ultrio Assay Product and the parties shall have their respective

19

rights under Section 3.2.8 of the Agreement, all as is more particularly described in the Agreement unaffected in any way by the withdrawal from the Ultrio Development Program.

        9.    Escalation.

        9.1    Escalation Process.    Prior to implementing the arbitration process more particularly described in Article 13 of the Agreement, the parties agree to escalate any dispute first to a discussion between responsible managers, and if they cannot agree, then to the Supervisory Board. However the parties explicitly acknowledge that in the event of the need for an urgent decision the party with primary responsibility will proceed to make the decision, and implement. It is agreed that the party with primary responsibility will make all reasonable and timely efforts to inform the other party of the issue requiring decision, particularly where the issue is one of some consequence.

        9.2    Remedies in Event of Default.    Neither party shall be entitled to exercise any remedy otherwise available to it at law or in equity unless and until such party shall have provided the other party with notice of such event of default, reasonably specifying the nature of the default, and any applicable period of time for cure thereof shall have expired without cure, and the procedures defined in Article 13 of the Agreement shall have been first exhausted.

        9.3    Survival.    Upon a termination of this Ultrio Addendum, the following provisions of this Ultrio Addendum shall survive such termination: Sections 2.3, 2.4.1, 8, 9, and 10 and all rights under Section 5.3.3 that have accrued as of the date of termination.

        10.    No Other Amendment.    Except as expressly set forth in this Ultrio Addendum, all other terms and conditions of the Agreement, the parties' Definitive Written Settlement Agreement, dated December 5, 2001, and the Short Form Agreement, dated November 16, 2001, are hereby ratified and shall continue in full force and effect. In the event of a conflict between the terms of this Ultrio Addendum and the Agreement, the terms of this Ultrio Addendum shall control. The provisions of this Ultrio Addendum are intended to, and hereby, supercede any provisions in the Definitive Written Settlement Agreement entered into by and between the parties, dated December 5, 2001, and the Short Form Agreement entered into by and between the parties, dated November 16, 2001, on the same subject matter.

        11.    Counterparts.    This Ultrio Addendum may be executed in counterparts, each of such shall be deemed an original, and all of which together shall constitute one and same instrument.

        IN WITNESS WHEREOF, the parties have caused this Ultrio Addendum to be executed and the persons signing below warrant that they are duly authorized to sign for and on behalf of the respective parties.

GEN-PROBE INCORPORATED, a Delaware corporation		CHIRON CORPORATION, a Delaware corporation
By:	/s/  HANK NORDHOFF	By:	/s/  JACK GOLDSTEIN
Its:	CEO	Its:	President, Blood Testing
Date:	3-24-03	Date:	Feb. 28, 2003

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Schedule 1.16.

Description of Ultrio Assay Product

        The Ultrio triplex assay is an in -vitro nucleic acid amplification test for the qualitative detection of human immunodeficiency virus Type 1 (HIV-1) RNA, hepatitis B virus (HBV) DNA, and/or hepatitis C virus(HCV) RNA in human plasma for use in the Blood Screening Field. The Ultrio triplex assay will not discriminate between HIV-1, HBV and HCV infection. The Ultrio assay is to be developed to run initially on the Procleix semi-automated instrument (eSAS).

        HIV-1, HBV and HCV discriminatory Probe reagents are in -vitro nucleic acid amplification tests for the qualitative detection of the specified virus and are provided with the Ultrio triplex assay as part of the Ultrio Assay Product for use in discriminating between HIV-1, HBV and HCV in plasma following a positive result from the Ultrio triplex assay.

        For purposes of the foregoing Addendum, all of the Ultrio triplex assay and the associated discriminatory probe reagents are included within the definition of the "Ultrio Assay Product."

Schedule 5

Ultrio Development Costs

        1.     Reimbursable FTE Rate. Budget rates for future years will be based on [***] per FTE per calendar year until finalized each year per section 5.2.1. Future calendar year FTE billing rates will be agreed to based on future annual budgets. In the absence of agreement, the FTE billing rate will be the then current billing rate subject to true-up once new rates have been agreed.

        2.     Ultrio Development Costs included within FTE Labor Rate. Ultrio Development Costs included within FTE Labor Rate consist of all attributable costs associated with the development of the Ultrio Assay Product and modifications to associated instrument system platforms (but excluding Tigris instruments) that may be required for such Ultrio Assay Product (calculated in accordance with United States generally accepted accounting principles, or as otherwise mutually agreed in writing between the parties) incurred prior to the Completion Date and includes pilot development; validation studies necessary for product and process licensure; clinical studies; licensing activities; and the manufacture and ultimate disposition of conformance lots of material, calculated as follows:

        (a)   Shared development costs include: research and development associated with the Ultrio Development Program; clinical studies; validation exclusively associated with the particular analyte; development lots; document preparation specific to the development;

        (b)   The planned resources, and the associated costs, will be broken out on a [***] basis and analyzed against the Resource Plan included within the Technical Plan, and reflected in the Budget;

        (c)   Salaried staff costs included within the Budget will be adjusted to reflect actual staff costs. Salary information may be aggregated to protect the identity of individuals. This salary information will be verifiable on a need to know basis to a select number of personnel from each company;

        (d)   Cost for wage laborers plus the applicable overhead charge for such labor (calculated at the rates and charges described in Section 5.2.1) paid to personnel described in the Resource Plan, including the Ultrio Development Program project manager and personnel engaged to perform QA testing for the Ultrio Development Program;

        (e)   Costs for engineering prototypes and manufacturing pilot modules required for the Ultrio Development Program;

        (f)    Costs of inventory consumed in the Ultrio Development Program, including raw material, intermediates and finished goods, and conformance lots, whether reject or not, that arise from the Ultrio Development Program or are necessary to support the Ultrio Development Program, and scrap material, including raw materials and development materials that arise from the Ultrio Development Program but excluding Ultrio Assay Product and scrap materials used strictly for internal research purposes or consumed in development programs other than the Ultrio Development Program;

        (g)   Costs for conformance product documentation;

        (h)   Costs for courier and mail service fees for delivery of items between Gen-Probe and Chiron;

        (i)    Costs of travel, lodging and reasonable per diem expenses for employee and consultants of Gen-Probe or Chiron incurred in furtherance of their activities hereunder, providing training or participating on the Supervisory Board to the extent such costs are not included within the overhead charge applicable to labor costs;

        (j)    Costs of foreign registration, marketing studies to support registration, and market research costs necessary to better define requirements or to support national decision-making;

        (k)   Such other categories as the parties may agree from time to time using the approval process described in Section 0.

        (l)    All budgeted expenses of Departments directly involved with the Ultrio Development Program

        (m)  Appropriate portions of budgeted costs of departments indirectly involved in the Ultrio Development Program.

        3.     Ultrio Development Costs not included within FTE Labor Rate.

        (a)   Cost of conformance lot materials consumed in performance of Ultrio Development Program or clinical trials.

        (b)   Significant Third Party consultant charges (i.e. CRO, regulatory expertise, etc.) to the extent not captured within the FTE rates in Item 2 above.

Schedule 5.2.3

Ultrio Development Costs Calculation Methodology

[***]

Schedule 5.3.1

Accrued Ultrio Development Costs

[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]	[***]
[***]

Schedule 5.3.2

[***] Budgeted Payments

        The party with the negative delta shall submit to the other party, on or before the end of the [***] during the term of the Ultrio Development Program, an invoice setting forth the amount of the delta. In addition, any party owed by other an excess adjustment shall submit to the other party, on or before the end of the [***] during the term of the Ultrio Development Program, an invoice setting forth the amount of the excess adjustment, providing reasonable detail for any Ultrio Development Costs not previously invoiced and requesting payment of [***] of the total amount. Ultrio Development Costs by the invoicing party incurred to date and not yet reimbursed as provided herein, providing reasonable detail for any Ultrio Development Costs not previously invoiced and requesting payment of [***] of the total amount. Each party shall pay on or before the date specified therefore on the Technical Plan an amount equal to the lesser of (i) the Ultrio Development Costs reflected on the invoice submitted to such party on account of such payment (together with amounts reflected on earlier invoices not previously reimbursed) or (ii) the amount of the payment described on the attached Technical Plan. To the extent that a reimbursement payment is inadequate to cover the total Ultrio Development Costs incurred to date by a party, then each party shall carry over the balance to the next subsequent payment(s) until finally reimbursed in full.

        By way of example, and using hypothetical dollars for actual expenditures, the calculation would operate as follows:

[***]	[***]	[***]	[***]
[***]	[***]		[***]
[***]	[***]	[***]	[***]

Schedule 5.3.3

[***] True-Up Payments
(sample methodology)

        By way of example, and using hypothetical dollars for actual expenditures, the calculation would operate as follows: (true-up payment due to Chiron in this case):

[***]	[***]	[***]	[***]	[***]	[***]	[***]
[***]	[***]		[***]	[***]	[***]	[***]
[***]	[***]	[***]	[***]	[***]		[***]

QuickLinks

FUTURE BLOOD SCREENING ASSAY— ULTRIO ADDENDUM AMENDING AGREEMENT ENTERED INTO AS OF JUNE 11, 1998 BY AND BETWEEN GEN-PROBE INCORPORATED, A DELAWARE CORPORATION AND CHIRON CORPORATION
Agreement

EX-10.507

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Exhibit 10.507

CHIRON CORPORATION

EXECUTIVE OFFICER SEVERANCE PLAN

(Effective December 1, 2003)

        The purpose of this Chiron Corporation Executive Officer Severance Plan is to assist full-time executive employees who are in Salary Grades E3 and above, as may be adjusted from time to time (excluding the President and Chief Executive Officer) (the "Executive Employees"), who as a result of workforce reduction or job elimination, lose their positions with the Corporation or any of its subsidiaries (each referred to as a "Chiron Company") which is at the time of termination designated as a Participating Company in Exhibit A, as attached hereto from time to time (each referred to as a "Participating Company"). This plan applies only to U.S.-based Executive Employees.

        The plan is effective for terminations of employment that occur on or after December 1, 2003.

ELIGIBILITY

        If you are an Executive Employee of a Participating Company, you will be eligible for executive severance pay if your active employment is involuntarily terminated by your employer because of a workforce reduction or a job elimination on or after December 1, 2003 and before this plan is terminated. Except to the extent that severance is required by statute, this voluntary executive severance pay plan is in consideration of your signing a separation agreement and release which releases Chiron from any legal claims you may have against Chiron Companies, and their employees and agents.

        You are not eligible for Executive Employee severance pay under the plan if:

1.

You voluntarily terminate employment, unless you already received notice of a qualifying involuntary termination and Chiron determines in its sole discretion that earlier voluntary termination is in the best interests of Chiron;

2.

You are discharged for reason other than workforce reduction or job elimination (including, but not limited to, poor performance, gross negligence or cause (including, but not limited to, any act of dishonesty, willful misconduct, fraud or embezzlement or any unauthorized disclosure of confidential information or trade secrets or violation of company policy or rules), whether or not you had already received notice of a qualifying termination;

3.

You either continue employment or are offered and decline employment with a Chiron Company or any employer that acquires all or any portion of the assets or operations of a Chiron Company or ceases to be a Chiron Company;

4.

You are covered by any other severance pay plan or arrangement or by an employment agreement, unless and to the extent that Chiron agrees in writing; provided that in no event will benefits be payable under this Plan to the extent that they would duplicate benefits payable under such other plan, arrangement or agreement.

5.

You are on a leave of absence (including disability leave), except to the extent permitted by Chiron in its sole discretion, or you die before you receive a severance payment under the plan;

6.

You are not classified by a Participating Company as an Executive Employee (whether or not such classification is subsequently deemed proper by a government agency or court); or

7.

You are employed by a Chiron Company or a work unit that the Plan Administrator determines is not covered by the Plan.

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HOW THE PLAN WORKS

        Executive Employees covered under the plan will receive eight (8) weeks of paid advance notice of a qualifying termination. The notice may be working or non-working, at the discretion of the supervisor; however, at least 6 weeks must be non-working. Termination of employment occurs at the end of this advance notice period. Following termination, a qualifying participant who properly executes a release of claims against Chiron Companies and their employees and agents in the form provided by Chiron will receive the following benefits:

        1.    Cash Severance Amount.    Cash severance will be paid equal to 6 weeks base salary and bonus per year of service. However, the total period of advance notice and severance will not be less than 26 weeks and cannot be longer than 2 years. The rate of severance pay will be determined by dividing annual base salary by 52 to determine the amount of weekly salary and adding target bonus divided by 52.

Base salary is calculated at the annualized rate paid for the payroll period immediately before the Executive Employee's notice of termination, including any pre-tax amount the Executive Employee elected to have contributed to a 401(k) plan or to a Section 125 plan.

Bonus is the Executive Employee's target Annual Incentive Plan ("AIP") bonus applicable for the period immediately before the Executive Employee's notice of termination.

A year of service means each 12 month period of employment with a Participating Company, beginning with the Executive Employee's most recent hire date. Years of service will not include service with a company before it becomes a Participating Company unless otherwise specified by Chiron.

        2.    Election Between Lump Sum and Continuation of Salary and Benefits.    An Executive Employee who qualifies for severance benefits may elect to receive those benefits either in a lump sum following termination of employment or in the form of salary continuation pursuant to the Participating Company's normal payroll practice, beginning after termination of employment. If an Executive Employee elects to receive severance in the form of salary continuation then those Executive Employee benefits listed in Exhibit B will continue during the period of salary continuation, provided that the Executive Employee maintains his or her Executive Employee contributions and the Participating Company from which the Executive Employee terminates offers such benefits to its active Executive Employees. If an Executive Employee elects a lump sum severance payment, no benefits continue after termination of employment, except as may otherwise be provided under the relevant benefit plans for terminations of employment generally.

        3.    Reemployment Outside of Chiron.    Should an Executive Employee find other work outside of the Chiron Companies before any severance benefit has been paid under the plan then, in lieu of any other benefits under the plan, the Executive Employee will be paid a lump sum cash payment equal to one-half of the cash severance pay that would have been paid had the Executive Employee not begun such work. If the Executive Employee had elected and already started to receive salary continuation payments, then the Executive Employee's salary continuation and benefits will stop at the point this new work begins and the lump sum cash payment will equal one-half of the remaining salary continuation that would have been paid thereafter had the Executive Employee not begun such work. An Executive Employee who is re-employed with a non-Chiron company will not be required to return any amount already received under the plan.

        4.    Reemployment With a Chiron Company.    Should an Executive Employee find work with a Chiron Company before any severance benefit has been paid under the plan, then no benefit will be payable under the plan. If salary continuation had already begun under the plan, then salary

2

continuation and benefits will stop and no lump sum severance will be paid, but the Executive Employee will again be eligible for benefits under this plan in the event of any subsequent qualifying termination of employment while the plan is in effect. If an Executive Employee is reemployed by a Chiron Company after receiving a lump sum severance payment but before the end of the period for which the Executive Employee would have received salary continuation had he or she not elected a lump sum, Chiron will require repayment of that portion of the lump sum attributable to the remainder of that period as a condition of reemployment.

        5.    Tuition Reimbursement.    All Executive Employees who have classes in progress for which Chiron tuition reimbursement would normally apply will be provided the benefit in accordance with Chiron policy.

        6.    Stock Options.    The effect of termination of employment on an Executive Employee's stock option will be determined by the terms of the option agreement relating to that option. The following describes the effect of termination of employment under most Chiron stock options for most types of qualifying terminations: An Executive Employee who has unvested stock options when notice of termination is given will continue to vest in those options during the period of advance notice, but not during any subsequent salary continuation period. A stock option that is unvested at the end of the advance notice period will be cancelled. Executive Employees with vested stock options at the end of the advance notice period must exercise those options within three months after the end of the notice period or the options will be cancelled. Executive Employees with option grants that contain the retirement feature and who qualify for the retirement feature under the terms of those grants will have extended vesting and exerciseability according to the terms of each grant. Continued employment with a company that ceases to be a Chiron Company is not considered continued employment for purposes of stock option vesting or exercisability.

        7.    Bonuses and Commissions.    This plan will not affect any Executive Employee's right to bonuses or commissions fully earned before the end of the notice period in accordance with the terms of the applicable bonus or commission plan.

        8.    Job Search Assistance.    Executive Employees will be provided with the additional benefit of job search assistance. The job search assistance will be provided as follows:

        Full outplacement service including office space and clerical support for a period of six months.

FAILURE TO EXECUTE A RELEASE

        All benefits provided under the plan after the end of the notice period (including any lump sum severance payment, continuation of salary and\or benefits) are in consideration of your execution of a release of claims against all Chiron companies and their employees and agents in the form provided by Chiron. If you do not properly execute such a release, you will not be entitled to any of the benefits of this plan, other than the period of advance notice.

OTHER IMPORTANT INFORMATION

        1.    Plan Administrator's Discretion.    As the Plan Administrator, Chiron will have full discretionary authority to administer and interpret this plan, including, but not limited to discretionary authority to determine eligibility for benefits under the plan and the amount of benefit under the plan. Chiron may delegate administrative duties to Chiron personnel. Any such delegation will carry with it the full discretionary authority of the Administrator to carry out these duties. Any determination by the Administrator or its delegate will be final and conclusive upon all persons.

        2.    Non-Assignability.    Benefits under the plan are not assignable and will be paid when due from the general assets of Chiron or the Participating Company that employed the eligible Executive Employee.

3

        3.    Confidentiality Agreements.    Benefits under the plan are conditioned upon your compliance with any confidentiality agreement you have entered into with a Chiron Company.

        4.    Coordination With Mandated Benefits.    Any advance notice or benefits provided under this plan shall, to the fullest extent permitted by law, be considered to be in satisfaction of, rather than in addition to, any federal, state or local requirement to provide advance notice or severance-type benefits. To the extent that notice or benefits provided under this plan cannot be considered in satisfaction of any such requirement, the amount of notice and benefits otherwise payable under this plan shall be reduced by the amount of notice and benefits that are required to be given by federal, state or local law.

        5.    Claims Disputes.    If you believe you are entitled to a greater benefit under the plan, you may submit a signed, written application to the Plan Administrator within 90 days of your termination. You will generally be notified of the approval or denial of this application within 90 days of the date that the Plan Administrator receives the application. If your claim is denied, the notification will state specific reasons for the denial and you will have 60 days to file a signed, written request for a review of the denial with the Plan Administrator. This request should include the reasons you are requesting a review, facts supporting your request and any other relevant comments. The Plan Administrator will generally make a final, written determination of your eligibility for benefits within 60 days of receipt of your request for review.

        6.    Amendment and Termination.    Chiron reserves the right, in its sole and unlimited discretion, to amend or terminate the plan at any time and in any manner.

        7.    Withholding Taxes.    Chiron will withhold taxes and other payroll deductions from any severance payment.

        8.    No Right to Employment.    This plan does not provide you with any right to continue employment with any Chiron Company or affect the right of you or your Chiron Company employer to terminate your employment at any time, with or without cause; provided that nothing herein shall adversely affect any rights under a written employment agreement executed by the parties thereto.

        9.    ERISA Governs.    This plan is governed by the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and, to the extent applicable, the laws of the State of California. This Plan is not intended to be funded for purposes of ERISA.

        10.    Plan Year.    The Plan Year is the calendar year.

        11.    Agent for Service of Process.    The Agent for service of legal process for this plan is the General Counsel of Chiron Corporation. Process may also be served on Chiron. Chiron's employer identification number is 94-2754624. Chiron Corporation's address and telephone number are 4560 Horton Street, Emeryville, CA 94608, (510) 655-8729.

STATEMENT OF ERISA RIGHTS

        If you are eligible for benefits under the plan, you are entitled to certain rights and protections under ERISA. You may examine (without charge) all plan documents, including documents filed with the U.S. Department of Labor, at the Human Resources Department, Chiron Corporation, 4560 Horton Street, Emeryville, CA. You may obtain copies of all plan documents and other plan information upon written request to the Plan Administrator. (The document containing this statement constitutes both the plan document and the summary plan description.) A reasonable charge may be made for such copies.

        In addition to creating rights for certain employees under the plan, ERISA imposes duties upon the people who are responsible for the operation of the plan. The people who operate the plan (called "fiduciaries") have a duty to do so prudently and in the interest of Chiron Executive Employees who

4

are covered by the plan. No one, including Chiron or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a benefit to which you are entitled under the plan or from exercising your rights under ERISA. If your claim for a severance benefit is denied, in whole or in part, you must receive a written explanation of the reason for the denial and you have the right to a review of the denial.

        Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request materials and do not receive them within 30 days, you may file suit in a federal court. In such a case, the court may require the Administrator to provide the materials and to pay you up to $100 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Administrator. If you have a claim that is denied or ignored, in whole or in part, you may file suit in a state or federal court. If it should happen that plan fiduciaries misuse the plan's assets (if any), or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court.

        The court will decide who will pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds that your claim is frivolous.

        If you have any questions about the plan you may contact the Plan Administrator. If you have any questions about this statement or about your rights under ERISA, you may contact the nearest area office of the U.S. Labor-Management Services Administration, Department of Labor.

5

EXHIBIT A

PARTICIPATING COMPANIES

        Commencing December 1, 2003 (or as otherwise noted) and continuing thereafter until the Plan Administrator determines otherwise or the plan terminates, the following Chiron Companies shall be Participating Companies in the plan:

        All Chiron Companies with U.S.-based Executive Employees, except:

PowderJect Vaccines, Inc.

6

EXHIBIT B

Executive Employee Benefits Which Continue During Salary Continuation

•

Medical/Dental/Vision Coverage



•

Reimbursement accounts (i.e., medical care account, dependent care account)



•

Group Life Insurance Plans (i.e., life insurance, AD&D, dependent life insurance)



•

Prepaid Legal

Executive Employee Benefits Which Do Not Continue During Salary Continuation

•

Business Travel Accident



•

Workers Compensation



•

Vacation and Sick Leave Accruals



•

401(k) Plan



•

Employee Stock Purchase Plan



•

Stock Options



•

Short and Long Term Disability (including Supplemental Long Term Disability Insurance)



•

Other Benefits Not Listed Above

7

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Exhibit 10.507

CHIRON CORPORATION EXECUTIVE OFFICER SEVERANCE PLAN ( Effective December 1, 2003 )
ELIGIBILITY
HOW THE PLAN WORKS
FAILURE TO EXECUTE A RELEASE
OTHER IMPORTANT INFORMATION
STATEMENT OF ERISA RIGHTS
EXHIBIT A PARTICIPATING COMPANIES
EXHIBIT B

EX-10.509

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Exhibit 10.509

DESCRIPTION OF CHIRON CORPORATION'S
2003 EXECUTIVE OFFICERS VARIABLE COMPENSATION PROGRAM

Decisions on compensation (base salary and variable compensation) of Chiron Corporation's ('Chiron' or the 'Company') executive officers are made by the Compensation Committee of the Board of Directors.

For 2003, the Compensation Committee continued the Company's approach that base salaries for executive officers should be measured by reference to the median (50th percentile) of salaries for benchmark positions in comparator companies. Further, the Compensation Committee provided that a significant portion of total cash compensation (salary plus variable compensation) in the form of annual variable cash compensation potential should be 'at risk,' dependent upon individual, business unit and overall Company performance. Variable cash compensation for executive officers overall was targeted to yield total cash compensation at the 50% percentile, but with the opportunity to significantly exceed the 50% percentile of total cash compensation as shown by comparative data, in the case of outstanding Company, business unit, and individual performance.

The Compensation Committee based its decisions regarding variable compensation for executive officers upon its evaluation of performance against pre-established performance metrics developed at the Company, business unit and functional or corporate unit level.

Variable compensation for the Chairman and Chief Executive Officer is based on the performance of the Company as measured against the pre-established Company metrics composed of financial objectives and significant research and business milestones.

Executive officers responsible for business units or major functional or corporate units are eligible for variable compensation based on the pre-established Company metrics and on the achievement of their respective business, functional, or corporate unit metrics.

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Exhibit 10.509

DESCRIPTION OF CHIRON CORPORATION'S 2003 EXECUTIVE OFFICERS VARIABLE COMPENSATION PROGRAM

EX-10.623

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Exhibit 10.623

[CHIRON LETTERHEAD]

CONFIDENTIAL

Dear John,

        As you are aware, we are in the process of reorganizing our business in the United Kingdom, with the result that Chiron Corporation Limited will be transferring part of its U.K. business to an Italian company, Chiron Vaccines Holding s.r.l. (the "Company").

New Employer

        The practical consequence of this reorganization is that from 1 July 2003 you will be employed by Chiron Vaccines Holding s.r.l.—UK Branch. However, with the exception of the name and identity of your employer, your existing terms and conditions of employment will otherwise be unaffected, and your period of continuous employment with Chiron Corporation Limited will be preserved for employment law purposes.

        The principal effect to your personal affairs arising from this transfer is that you will become subject to taxation on your income under both the Italian tax regime and that of the U.K.

Tax Equalization

        Chiron intends to apply the following policy in respect of this transfer regarding your tax liabilities during your employment:

(i)

Hypothetical Tax.    An employee's hypothetical tax is the applicable income tax and National Insurance contributions that the employee would have paid in the normal course, with respect to his salary, bonus and any other benefits (including, without limitation, the value of share options granted) provided by the employer, if he had remained employed by a U.K. registered and resident company.



(ii)

General Procedure and Calculation of Hypothetical Tax.    The Company will bear your overall worldwide tax burden to the extent it exceeds your hypothetical tax liability upon advice of third party tax consultants, which tax consultants reserve the right to recommend that certain tax filing positions be taken and that various elections be made on your British and/or Italian individual income tax returns in order to reduce your tax burden. If you decide not to accept these tax filing recommendations, you will then bear the additional tax cost related to not taking the tax positions and/or elections recommended by Chiron.

Any U.K. and Italian tax liabilities incurred by you, with respect to your salary, bonus and any other benefits provided by the Company, in excess of the hypothetical tax liability, will be paid by Chiron.

(iii)

Tax Position Challenges.    It is our objective that any employee covered by the Company's tax equalization policy pay the least amount of tax legally possible. It is recognized that the tax laws of many jurisdictions (in this case, the U.K. and Italy) are not always straightforward. Accordingly, the amount of tax an employee owes to a jurisdiction may vary based upon how the relevant tax law is interpreted and applied to the employee's facts and circumstances. In such situations, it is our policy to engage professional tax advisers with the objective of paying the least amount of tax legally possible.

It is recognized that a taxing jurisdiction may challenge tax positions that achieve our policy of tax minimization. If a tax position taken with respect to an employee is challenged, we will pay all the professional costs involved with the examination and defence of the position, and any taxes, penalties or interest resulting from the position.

This tax equalization of any tax underpayments, penalties and interest also applies if it is attributable to a period of time during which the employee was employed by the Company, even if the employee is no longer employed by the Company when the investigation or tax deficiency arises.

Reimbursement and Indemnity

        In accordance with the tax equalisation policy outlined above, we would like to assure you that Chiron Vaccines Holding s.r.l. will:

(i)

at all times promptly reimburse you for any additional taxation or costs incurred by you or for which you may be held liable as a result of this change of employer, so that your net earned income and level of benefits are unchanged and will continue to be unaffected by the double taxation regime arising from your contract of employment with the Company. This reimbursement obligation applies equally to any final payment (e.g., redundancy payments) that may be made arising from the termination of your contract of employment;



(ii)

indemnify you on demand for any costs, fees or expenses reasonably incurred by you or which may be levied by any relevant authority in connection with such double taxation treatment, whether in the U.K. or Italy, and both during and after your employment; and



(iii)

meet the cost of all reasonably required professional advice and support for any additional administrative or legal obligations with which you may be required to comply (for example, the preparation and submission of tax returns), in the U.K. and in Italy, both during or after your employment, so far as these administrative and legal obligations are linked with or arise from your contract of employment. This provision applies also to necessary professional support in any audit by, or litigation with, any tax authority connected with or arising from your contract of employment, in the U.K. or in Italy, both during or after your employment.

        The obligation to reimburse and indemnify contained above is given by the companies below for and on behalf themselves and any successor or assignee group company to which either of them or their respective business and assets may at any time succeed or be assigned.

        If you have any questions in relation to this variation to your contract of employment, please contact Katrien Nachtergaele. To acknowledge your agreement to the change of employer outlined above, please sign and date the attached duplicate of this letter and return to Katrien.

Yours sincerely,

/s/  JOHN A. LAMBERT

John A. Lambert
For and on behalf of Chiron Corporation Limited

Giuseppe M. Marini
For and on behalf of Chiron Vaccines Holding s.r.l.

/s/  GIUSEPPE MARINI

I confirm that I have read the above letter and agree to the variation of my contract of employment as stated.

Signed:	/s/  JOHN A. LAMBERT	Dated:	1st July 2003.
John A. Lambert

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Exhibit 10.623

EX-10.625

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Exhibit 10.625

[CHIRON LETTERHEAD]

January 26, 2004

John A. Lambert
Vice President; President, Chiron Vaccines
Chiron Vaccines, Florey House
Robert Robinson Avenue,
The Oxford Science Park,
Oxford OX4 4GA
England, United Kingdom

Dear John,

        As we have discussed, this letter shall serve to amend your employment letter agreement dated July 1, 2003.

New Employer

        Effective immediately, in addition to being an employee of Chiron Vaccines Holding s.r.l., you are also an employee of Chiron Corporation Limited, PowderJect Technologies Limited, Chiron UK-1 Limited and Evans Vaccines Limited. All other existing terms and conditions of your employment will otherwise be unaffected, and your period of continuous employment with Chiron Corporation Limited will not change.

        There will be no principal effect to your personal financial affairs arising from this transfer.

        If you have any questions in relation to this amendment to your contract of employment, please contact me. To acknowledge your agreement to this change, as outlined above, please sign and date this letter where indicated below and return to me.

Very truly yours,

/s/  HOWARD PIEN

Howard Pien
Chief Executive Officer

        I confirm that I have read the above letter and agree to the amendment of my contract of employment as stated.

Signed: /s/  JOHN A. LAMBERT John A. Lambert Dated: 28th January 2004.

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Exhibit 10.625

EX-10.729

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Exhibit 10.729

NOVARTIS AG

WRITTEN CONSENT AND APPROVAL

Effective as of December 5, 2003

STOCK REPURCHASE PLAN

        WHEREAS, Section 2.04 (a)(iii) of that certain Governance Agreement dated as of November 20, 1994 between Chiron Corporation ("Chiron" or the "Company") and Novartis AG (the "Governance Agreement"), requires the consent of Novartis AG in connection with any reclassification, combination, split, subdivision, or redemption, purchase or other acquisition, directly or indirectly, of any debt or equity securities or other capital stock of the Company;

        WHEREAS, the Company currently has a stock repurchase plan (the "Stock Repurchase Plan") pursuant to which the Company is authorized from time to time to repurchase up to thirty million five hundred thousand (30,500,000) shares, to substantially offset dilution associated with the operation of its 1991 Stock Option and Employee Stock Purchase Plans; and

        WHEREAS, the Non-Novartis Directors and the Board of Directors of Chiron propose to authorize management to increase the total number of shares authorized for repurchase under the Stock Repurchase Plan from thirty million five hundred thousand (30,500,000) to thirty-five million five hundred thousand (35,500,000) shares of the Company's Common Stock in open market transactions through December 31, 2004, subject to approval by Novartis AG;

        NOW, THERFORE, BE IT RESOLVED, that the increase in the number of shares of Chiron Common Stock authorized for repurchase under the Stock Repurchase Plan of Chiron, thereby increasing the total number of shares of Chiron Common Stock authorized for repurchase under the Plan from thirty million five hundred thousand (30,500,000) to thirty-five million five hundred thousand (35,500,000) shares, in open market transactions through December 31, 2004, is hereby approved;

AMENDMENTS TO GOVERNANCE AGREEMENT AND BYLAWS

        WHEREAS, Sections 2.04 (b)(iv) and (vii) of that certain Governance Agreement dated as of November 20, 1994 between Chiron Corporation ("Chiron" or the "Company") and Novartis AG, requires the approval of a majority of the Investor Directors to amend the Bylaws of Chiron or to establish any committee of the Board of Directors of Chiron other than as provided in Section 2.03(b)(i) through (v) of the Governance Agreement;

        WHEREAS, Section 2.03(b)(vi) of the Governance Agreement provides that the Board of Directors of Chiron may establish such other committees of the Board as the Board deems necessary or desirable, provided that such committees are established in compliance with the terms of the Governance Agreement; and

        WHEREAS, Section 3.11 of Chiron's Bylaws currently provides for the establishment of five committees of the Board, and the Board has deemed it appropriate and in the best interests of Chiron to amend Section 3.11 of the Bylaws and Section 2.03 (b) of the Governance Agreement to establish an additional committee of the Board called the "Finance Committee," which committee shall be established and constituted with such powers and authority in accordance with Sections 2.03(a) and (c) of the Governance Agreement;

        NOW, THEREFORE, BE IT RESOLVED, that the amendments to Section 2.03(b) of the Governance Agreement and Section 3.11 of Chiron's Bylaws in substantially the form attached hereto as Annex 1 and Annex 2, are hereby approved;

        IN CONSIDERATION OF THE FOREGOING, Novartis AG hereby approves the (a) increase in the number of shares of Chiron Common Stock authorized for repurchase under the Stock Repurchase

Plan of Chiron, thereby increasing the total number of shares of Chiron Common Stock authorized for repurchase under the Plan from thirty million five hundred thousand (30,500,000) to thirty-five million five hundred thousand (35,500,000) shares, in open market transactions through December 31, 2004; and (b) establishment of the Finance Committee of Chiron's Board of Directors, and corresponding amendments to the Governance Agreement with Chiron and Chiron's Bylaws, effective as of December 5, 2003.

NOVARTIS AG
By:	/s/  PETER RUPPRECHT
Its: authorized signatory
By:	J.M. Manser
Its:

2

ANNEX 1

CHIRON CORPORATION
Governance Agreement Dated November 20, 1994 with Novartis AG

Section 2.03(b) of the Governance Agreement dated November 20, 1994 with Novartis AG (the "Governance Agreement") is hereby amended, effective as of December 5, 2003, to add a new subsection, 2.03(vi) to read in its entirety, as follows:

        "(vi) a Finance Committee, consisting of at least three members of the Board, which shall assist the Board in fulfilling its responsibility for oversight with respect to Chiron's capital structure, financing and investment strategies and financial management, subject to applicable law and limits imposed by the Governance Agreement, the Company's Restated Certificate of Incorporation, as amended from time to time, and by action of the Board; and"

Subsection 2.03(vi) is hereby re-designated as subsection 2.03(vii) to read in its entirety, as follows:

        "(vii) such other committees as the Board of Directors deems necessary or desirable; provided that such committees are established in compliance with the terms of this Agreement."

3

ANNEX 2

CHIRON CORPORATION
Bylaws, as amended

Section 3.11 of the Bylaws of Chiron Corporation is hereby amended, effective as of December 5, 2003, to read in its entirety, as follows:

        3.11    Committees.    Section 2.03 of the Governance Agreement provides that the following committees of the Board of Directors shall be formed and administered: (i) an Audit Committee; (ii) a Nominating and Corporate Governance Committee; (iii) a Strategic Planning Committee; (iv) a Compensation Committee; (v) a Stock Option Plan Administration Committee; and (vi) a Finance Committee. Such committees of the Board of Directors shall be formed, maintained and administered in accordance with the terms of said Section 2.03 of the Governance Agreement, which provisions are incorporated herein and made a part of these Bylaws. All committees of the Board of Directors not specifically provided for in said Section 2.03 shall be constituted in accordance with Section 2.03(c) of the Governance Agreement.

4

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Exhibit 10.729

NOVARTIS AG WRITTEN CONSENT AND APPROVAL Effective as of December 5, 2003

ANNEX 1

CHIRON CORPORATION Governance Agreement Dated November 20, 1994 with Novartis AG

ANNEX 2

CHIRON CORPORATION Bylaws, as amended

EX-21

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Exhibit 21

As of 12/31/03

LIST OF SUBSIDIARIES OF CHIRON CORPORATION

SUBSIDIARY						JURISDICTION OF INCORPORATION OR ORGANIZATION
Cetus Generic Corporation						Delaware, USA
Chiron Partners, Inc.						California, USA
Chiron Alpha Corporation						California, USA
Chiron/Cephalon JV (50%)						Delaware, USA
Chiron Properties, Inc.						California, USA
Chiron Delta Corporation						Delaware, USA
Chiron Investment Corporation						Nevada, USA
Chiron Mimotopes U.S.						California, USA
Chiron Redevelopment Corporation						Missouri, USA
Chiron Foreign Sales Corporation						U.S. Virgin Islands
Biocent Insurance Company, Inc.						Hawaii, USA
Chiron AB						Sweden
Chiron Vision Canada, Inc.						Canada
Chiron Behring Vaccines Private Limited (51%)						India
Chiron Technologies Pty. Ltd.						Australia
Chiron B-1 Limited1						Bermuda
Chiron Overseas Holding Co.						Nevada, USA
	Chiron B-2 Limited1					Bermuda
		Chiron Blood Testing (Bermuda) Ltd. (Originally formed as a limited liability company; converted into a partnership on 12/18/02)				Bermuda
		PathoGenesis Portugal—Produtos Farmacêuticos, Sociedade Unipessoal Lda.				Portugal
		Chiron Corporation Limited				United Kingdom
		Chiron B.V.				The Netherlands
			Cephalon Chiron B.V.			The Netherlands
			Chiron Blood Testing B.V.			The Netherlands
		Chiron Canada ULC/Chiron Canada SRI				Canada
		Chiron Italia S.r.l				Italy
		Chiron France S.A.S.				France
		Chiron Blood Testing S.a.r.l.				France
		Chiron Limited				Hong Kong
		Chiron UK-1 Limited (Formerly known as "Alnery No 2339 Limited", name changed effective May 9, 2003)				United Kingdom
			PowderJect Pharmaceuticals Limited (formerly plc)			United Kingdom
				Circassia Ltd.		United Kingdom
				Chiron Vaccines Australia Pty Ltd.		Australia
				Evans Vaccines Ltd.		United Kingdom
				EPS Vaccines Ltd.		United Kingdom
				PowderJect Pharmaceuticals Employees Share Scheme Trustees Ltd.		Jersey
				PowderJect Research Ltd.		United Kingdom
				PowderJect Technologies BV		The Netherlands
					AlgoRx Pharmaceuticals Inc. US (13%)	United States (Delaware)
					Bavarian Nordic AS (6%)	Denmark

					PowderChek Diagnostics Inc.	United States (Delaware)
				SBL Vaccin AB		Sweden
					Vitec AB	Sweden
				PowderJect Technologies Ltd.		United Kingdom
				PowderJect Therapeutics Inc.		United States (Delaware)
PowderJect Vaccines Inc.						United States (Delaware)
	Chiron Healthcare Ireland Limited dba "Chiron Ireland"					Ireland
		Chiron Blood Testing Pty Ltd				Australia
	Appold Consultadoria E Serviços Lda					Portugal
		Chiron Holding LLC (Formerly known as "Chiron LLC")				Delaware
		Chiron Hungary Üzleti Szolgáltató Korlátolt Felelösségü Társaság (aka Chiron Hungary Kft.) or Chiron Hungary Business Services Limited Liability Company (aka Chiron Hungary Ltd)2				Hungary
		Chiron Vaccines Holding Srl (formerly known as "Ami' Centro Srl")3				Italy
			Chiron Srl (formerly known as S.p.A.)			Italy
				Istituto Vaccinogeno Pozzi Srl (formerly known as S.p.A.).		Italy
			Chiron Funding LLC (0.01%)			Delaware, USA
			Chiron Corp. s.r.o. [75%; Chiron Vaccines International & Co KG, 25%]			Czech Republic
		Chiron Vacccines International Srl & Co KG (formerly known as "Chiron Redevelopment Corp. & Co. KG")				Germany
				31. Corsa Verwaltungsgesellschaft mbH		Germany
				Chiron Behring Verwaltungsgesellschaft mbH		Germany
				Chiron Behring GmbH & Co4		Germany
				Chiron GmbH		Germany
		Chiron Investment Company Spain, Srl (ETVE)				Spain
Chiron Iberia S.L.						Spain

¹

Chiron B-1 Limited and Chiron B-2 Limited entered into a partnership called Chiron Blood Testing (Bermuda) Ltd. on 12/18/2002; Chiron B-1 holds an 85% partnership interest, and Chiron B-2 holds a 15% partnership interest. Together, the 2 entities jointly own Chiron Blood Testing (Bermuda) Ltd. and the subsidiaries listed thereunder.

²

Appold holds a 99.4% interest and Chiron Holding LLC holds a 0.6% interest.

³

Appold holds a 94% interest and Chiron Holding LLC holds a 6% interest.

⁴

Chiron Redevelopment Corp & Co KG holds a 99% interest and Chiron Behring holds a 1% interest.

2

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Exhibit 21

LIST OF SUBSIDIARIES OF CHIRON CORPORATION

EX-23.1

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Exhibit 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

        We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-20181, 33-35182, 2-90595, 33-23899, 33-58305, 33-44477, 33-65024, 33-65177, 333-10419, 333-28257, 333-42469, 33-45822, 33-63297, 333-49229 and 333-81794 and Form S-3 Nos. 33-43574 and 333-109045) of Chiron Corporation and in the related prospectuses, as applicable, of our report dated January 26, 2004, with respect to the 2003 and 2002 consolidated financial statements and schedule of Chiron Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2003.

/s/ ERNST & YOUNG LLP

Palo Alto, California
March 1, 2004

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CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

EX-23.2

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Exhibit 23.2

CONSENT OF KPMG LLP, INDEPENDENT AUDITORS

        We consent to the incorporation by reference in the Registration Statements (File Numbers 33-20181, 33-35182, 2-90595, 33-23899, 33-58305, 33-44477, 33-65024, 33-65177, 333-10419, 333-28257, 333-42469, 33-45822, 33-63297, 333-49229, and 333-81794 on Forms S-8 and File Numbers 33-43574 and 333-109045 on Forms S-3) of Chiron Corporation of our report dated January 28, 2002, relating to the consolidated statements of operations, comprehensive income, stockholders' equity and cash flows of Chiron Corporation and subsidiaries for the year ended December 31, 2001 and the related consolidated 2001 financial statement schedule, included in the December 31, 2003 Annual Report on Form 10-K of Chiron Corporation.

/s/ KPMG LLP

San Francisco, California
March 1, 2004

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CONSENT OF KPMG LLP, INDEPENDENT AUDITORS

EX-31.1

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Exhibit 31.1

Form of Rule 13a-14(a) [Section 302] Certification

CERTIFICATIONS

I, Howard H. Pien, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Chiron Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

[Paragraph reserved pursuant to SEC Release 33-8238.]

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

DATE: March 3, 2004
	/s/ HOWARD H. PIEN Howard H. Pien President and Chief Executive Officer

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Exhibit 31.1

Form of Rule 13a-14(a) [Section 302] Certification

EX-31.2

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Exhibit 31.2

Form of Rule 13a-14(a) [Section 302] Certification

CERTIFICATIONS

I, David V. Smith, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Chiron Corporation;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

[Paragraph reserved pursuant to SEC Release 33-8238.]

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

DATE: March 3, 2004
	/s/ DAVID V. SMITH David V. Smith Vice President and Chief Financial Officer

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Exhibit 31.2

Form of Rule 13a-14(a) [Section 302] Certification

EX-32.1

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Exhibit 32.1

CHIRON CORPORATION

SECTION 1350 CERTIFICATION

In connection with the periodic report of CHIRON CORPORATION, a Delaware corporation (the "Company"), on Form 10-K for the period ended December 31, 2003, as filed with the Securities and Exchange Commission (the "Report"), I, HOWARD H. PIEN, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)

the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and



(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.

Date: March 3, 2004 By: /s/ HOWARD H. PIENHOWARD H. PIEN
President and Chief Executive Officer

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Exhibit 32.1

CHIRON CORPORATION SECTION 1350 CERTIFICATION

EX-32.2

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Exhibit 32.2

CHIRON CORPORATION

SECTION 1350 CERTIFICATION

In connection with the periodic report of CHIRON CORPORATION, a Delaware corporation (the "Company"), on Form 10-K for the period ended December 31, 2003, as filed with the Securities and Exchange Commission (the "Report"), I, DAVID V. SMITH, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:

(1)

the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and



(2)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.

Date: March 3, 2004 By: /s/ DAVID V. SMITHDAVID V. SMITH
Vice President and
Chief Financial Officer

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Exhibit 32.2

CHIRON CORPORATION SECTION 1350 CERTIFICATION