Failure of Sanofi, Merck Animal-Health Merger May Trigger Deals

Sanofi Chief Executive Officer Chris Viehbacher
Sanofi Chief Executive Officer Chris Viehbacher sought to expand in veterinary products in part because the business wasn’t as vulnerable as prescription drugs to competition from generic products. Photographer: Michael Fein/Bloomberg

Sanofi-Aventis SA and Merck & Co.’s decision to drop a planned joint venture in veterinary products may spur deals in the industry, including sales of the animal-health units owned by Novartis AG and Bayer AG, analysts said.

Sanofi and Merck may seek acquisitions such as the Novartis and Bayer units, said Alistair Campbell, an analyst at Berenberg Bank in London. In the U.S., Pfizer Inc., the world’s largest drugmaker, is reviewing the future of its veterinary unit.

Novartis and Bayer were among potential bidders for the assets that Sanofi and Merck planned to sell to satisfy antitrust requirements for the joint venture, two people with knowledge of the matter said in October. Now that those sales won’t happen, Novartis and Bayer may decide to sell their veterinary units because they’re not big enough, analysts said.

“Novartis, which does not have critical mass, will have to decide what to do with its division -- either strengthen it or divest it -- and Pfizer seems ready to sell its own in order to focus on human health,” Jean-Jacques Le Fur, an analyst at Oddo & Cie. in Paris, wrote yesterday in a report. “In any case, we think a number of transactions will be announced in the next few months.” He has a “neutral” rating on Sanofi shares.

Merck and Sanofi abandoned plans to combine their animal-health businesses “because of the increasing complexity of implementing the proposed transaction,” the companies said yesterday in a joint statement. They cited “the nature and extent of the anticipated divestitures and the length of time necessary for the worldwide regulatory review process.”

Asset Sale

The companies had hired Morgan Stanley to help sell assets valued at $1 billion to get antitrust approval for the deal, the people with knowledge of the matter said in October.

The merger of Merck’s Intervet unit and Sanofi’s Merial operation would have created a company with $5.5 billion of annual sales, making it the largest animal-health company. Both companies said they’re committed to operating the businesses separately.

Sanofi might seek another partner, said Philippe Lanone, an analyst at Natixis in Paris who noted that Bayer and Novartis “operate on a regional scale.” Jean-Marc Podvin, a spokesman for Sanofi, didn’t respond to a request for comment.

Sanofi Chief Executive Officer Chris Viehbacher sought to expand in veterinary products in part because the business wasn’t as vulnerable as prescription drugs to competition from generic products. Growing demand for food also helped lift sales of products for farm animals, and rising incomes were leading to increased pet ownership, he said on a Feb. 9 conference call.

‘Pleased’ With Animal Unit

“We are pleased with the animal-health business and what it brings to the table,” Steven Campanini, a spokesman for Whitehouse Station, New Jersey-based Merck, said yesterday in a telephone interview. “What happens now is both companies go back to where they were.”

The animal-health market is likely to experience mid-single digit growth rates for the next five years, he said. “The combination of the expected growth rate of animal health in the next five years combined with the somewhat smoother transition with the loss of exclusivity makes animal health a very desirable segment,” said Campanini. Merck probably will keep the animal-health business, said Jon LeCroy, an analyst with Hapoalim Securities in New York, in a telephone interview.

Sanofi fell 34 cents to 47.65 euros yesterday in Paris trading. Merck gained 14 cents to $32.53 on the New York Stock Exchange.

Pfizer Strategic Review

Pfizer is conducting a strategic review of each of its units, said Joan Campion, a spokeswoman for the New York-based company. No decision has been made about the future of the animal-health business, she said. Pfizer had $3.58 billion of veterinary sales last year.

Combining Pfizer’s and Merck’s animal-health units might raise regulatory issues, said LeCroy. “It would bring up the overlap thing,” he said.

Novartis and Bayer may look for other veterinary assets to buy, Tero Weckroth, an analyst at Kepler Capital Markets, wrote in a report.

While Novartis doesn’t need to sell the animal-health unit or expand it, the company would consider acquisitions, said Chief Executive Officer Joe Jimenez on a Nov. 17 conference call. “Obviously we would like to gain scale in animal health and if that opportunity arose” the company would consider acquisitions of $1 billion to $2 billion, he said.

Eric Althoff, a spokesman for Basel, Switzerland-based Novartis, didn’t respond to a call seeking comment. Novartis doesn’t break out the sales of its animal-health unit.

Bayer Animal Health

Bayer Chief Executive Officer Marijn Dekkers said Sept. 27 that the company needed to decide the future of its animal-health unit in 12 to 18 months. The unit is now “relatively small” compared with competitors, he said at a dinner with journalists in Cologne. Bayer had veterinary sales of 1.2 billion euros ($1.7 billion) last year.

Bayer can “clearly afford” deals bigger than 1 billion euros, Dekkers said. The company bid unsuccessfully for the Intervet unit in 2009, according to people familiar with the situation.

Christian Hartel, a spokesman for Bayer, said yesterday the company doesn’t comment on market speculation.


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