July 30 (Bloomberg) -- Sanofi-Aventis SA agreed to buy Merck & Co.’s half of their Merial animal-health venture for $4 billion and said the two companies may again work together to form the world’s biggest maker of pet and livestock treatments.

Sanofi will pay cash for the 50 percent it doesn’t own of Merial, which makes a bird flu vaccine for poultry and Frontline, the best-selling flea spray for pets. Sanofi can also combine Merial with the veterinary unit Merck gets when it buys Schering-Plough Corp., the companies said in a statement today.

Merck and Sanofi, which compete in making drugs for people, have worked together for more than a decade to build Merial into a company with $2.6 billion in annual sales. Sanofi now gets control of the veterinary business in an industry that’s growing five times faster than the human health one, and Merck Chief Executive Officer Richard Clark resolves an antitrust obstacle to the Schering-Plough purchase.

“Dick and I both believe that animal health is a business we want to be in for the long term,” Sanofi Chief Executive Officer Chris Viehbacher said on a conference call with analysts. “We saw an opportunity to create an even stronger and more successful animal-health business.”

Sanofi fell 7.5 cents to 47.045 euros at the close of trading in Paris.

Antitrust Concerns

Merck, of Whitehouse Station, New Jersey, formed Merial by merging its animal-health unit in 1997 with a division of Rhone Merieux, a predecessor of Paris-based Sanofi. Merck is selling animal-health assets after regulators said its purchase of Schering-Plough would make it too dominant in the market. It also had the option to divest Schering-Plough’s Intervet animal- health unit, the company said on July 13.

Sanofi has about 100 days after Merck finishes buying Schering-Plough to exercise an option to combine Merial with Intervet in a new 50-50 joint venture. Merial would be valued at $8 billion, while Intervet would be valued at $8.5 billion.

Sanofi would pay $750 million in cash to Merck to reflect the value Intervet would have fetched in a sale, Viehbacher said. Merck had offers from other companies interested in buying Intervet as a standalone business, he said. There will then be a second payment by Sanofi to make each company’s contribution to the venture equal to 50 percent, according to Viehbacher.

The new venture would face antitrust reviews in the U.S. and Europe, he said. The combined businesses would surpass the merged animal-health units of Pfizer Inc. and Wyeth as the industry’s largest company.

Credit Suisse Group AG and Fried Frank Harris Shriver & Jacobson LLP are advising Merck on the transaction, and Evercore Partners Inc. and Linklaters LLP are counseling Sanofi.

Meat, Milk and Eggs

Some pharmaceutical companies are turning to animal health to diversify their business. Sales of drugs for humans grew 1.3 percent to $291 billion last year, according to IMS Health Inc. That compares with a 7.2 percent increase to $19.2 billion for animal medicines, according to Vetnosis Ltd., a U.K.-based research company.

Medicines added to animal feed, vaccines to prevent livestock disease and treatments for parasites make up the bulk of animal-health products. Sales are benefiting from demand for meat, milk and eggs, which is estimated to rise 50 percent by 2020 as populations grow and people in emerging economies become wealthier, according to the International Federation of Animal Health, based in Brussels.

‘New Engine’

Sanofi’s Viehbacher has been focusing on acquisitions in countries such as the U.S. and Brazil to help replenish Sanofi’s pipeline since he took over eight months ago. Drugs accounting for about 20 percent of the French company’s sales face competition from generic products by 2012.

“Merial is a jewel,” said Jerome Forneris, who helps manage $11 billion at Banque Martin Maurel in Marseille and owns Sanofi shares. “Sanofi absolutely needs a new engine of growth other than traditional drugs. The company is back on track ever since the change of management.”

Merial is Viehbacher’s biggest acquisition so far and the second one this week. The drugmaker will probably announce more transactions in coming months, Viehbacher said in an interview yesterday. Sanofi is considering opportunities “anywhere in Asia and the U.S.” as well as Europe. A large acquisition isn’t a priority, though it can’t be ruled out, he said.

“You are going to see pearls of different sizes,” Viehbacher said, referring to Sanofi’s purchases. “It’s not going to be a nice, even necklace.”

Pfizer has also been seeking a buyer for part of its animal-health unit to resolve antitrust concerns over its purchase of Wyeth. Bayer AG, Eli Lilly & Co., Novartis AG, and Boehringer Ingelheim GmbH are among those companies seen as potential bidders for animal units, said Bill Kridel, a managing director at Ferghana Partners Group, in an interview this month.

To contact the reporter on this story: Albertina Torsoli in Paris at atorsoli@bloomberg.net

Last Updated: July 30, 2009 12:27 EDT