Drugmaker Novartis (search) has agreed to buy the remainder of U.S. vaccine maker Chiron Corp. (CHIR) that it does not already own for $5.1 billion, or about $600 million more than an original bid rejected as inadequate.

The Swiss company, which already owns 42 percent of Chiron, raised its cash bid on Monday for the remaining 58 percent to $45 a share, $5 a share more than its original bid in September.

Plagued by production problems that affected its ability to deliver flu vaccines to the U.S. market last year, Chiron has been struggling to increase sales and profits this year. It said last week it would not reach its full-year earnings forecasts.

Novartis' sweetened bid raises its valuation of California-based Chiron by around $1 billion to $8.8 billion, a multiple of around 4.2 times estimated 2006 sales, according to one analyst.

Novartis' proposal was unanimously approved by Chiron's independent directors, who had rejected the earlier bid as inadequate. It represents a premium of 23 percent to Chiron's share price before the first merger proposal was made.

Chiron shares gained around 2.5 percent to $44.47 on the Inet electronic brokerage system (search). Shares in Novartis were up 0.9 percent at 68.45 Swiss francs.

Analysts said the valuation of Chiron was exactly in line with the sector average, compared with previously when some said the price offered by Novartis, the world's fourth-biggest drug maker by market value, appeared unfavorable to Chiron shareholders.

"It goes from being an attractive price [for Novartis] to being fair value," Denise Anderson of Kepler Equities (search) said. "Before I couldn't really see the strategy but thought they were getting a bargain."

Lombard Odier Darier Hentsch analyst Karl-Heinz Koch said he still thought the deal was relatively good for Novartis, but added: "You can argue about the strategic fit as Chiron has a number of challenges which have to be addressed."

However, he said Novartis had shown willing to invest in Chiron to build up its pipeline of development projects.

Turnaround Planned

Novartis intends to turn around Chiron, the world's fifth-largest maker of vaccines, which has been plagued by production problems at a plant in Britain, hampering its ability to supply flu jabs to the United States.

"Our plan is to turn around the Chiron vaccines business, which will require investments in R&D and manufacturing to increase quality and capacity," Novartis Chairman and Chief Executive Daniel Vasella said in a statement.

Novartis, which has made a series of acquisitions this year, expects the takeover to generate cost savings of $200 million within the first three years of closing the deal, half of which will be realized in the first 18 months.

Novartis originally bid $4.5 billion for the U.S. firm, which had sales of $1.7 billion in 2004 and pro forma net profit of $152 million.

Chiron operates three business segments — the fast-growing vaccines division, blood testing and BioPharmaceuticals, which makes drugs for infectious diseases and cancer.

Analysts noted the deal gives Novartis access to a range of vaccines at a time when interest in vaccination is growing amid fears of a bird flu pandemic and hopes the technique could prevent more diseases.

Vaccines have traditionally been viewed as a low-growth, low-price business by comparison with mainstream therapeutic pharmaceuticals.

But the arrival of new technologies and a shake-out in the sector, which has seen a number of vaccine players quit the business, is changing that perspective and many industry experts now expect vaccines to show accelerated growth in coming years.

Britain's GlaxoSmithKline Plc (GSK), one of the world's leading suppliers, forecast in June the total vaccine market could quadruple by 2015 to between 17 billion and 24 billion pounds, from 5.2 billion today.

After missing out to Sanofi in the running for Aventis last year, Novartis has been busy consolidating its position in each of its three divisions — pharmaceuticals, generics and consumer health.

Novartis has already splashed out $8 billion this year on two generic drugmakers and spent a further $660 million in cash on Bristol-Myers Squibb's (BMY) portfolio of non-prescription drugs, bolstering two of the three units.

"They have around $5 billion in free cash flow every year, so they can pay for this and more," Koch said.