French drugmaker Sanofi-Aventis expanded its animal health business by buying the other half of Merial from its U.S. partner Merck for $4 billion in cash while opening the door for a bigger deal.
They agreed to explore a new pet and livestock joint venture that could be a leader in the $19 billion animal health market, linking Merial with similar activities at the combined entity to be formed by the $41 billion merger of Merck and Schering-Plough Corp.
The Merial deal was widely expected as Sanofi is looking to diversify its business to become less dependent on classical pharmaceutical drugs, which are vulnerable to patent challenges and cheaper generic competition.
Some analysts said Sanofi seemed to have paid a hefty price to win control of Merial, which mainly focuses on pet care. Its main rival in that area is Fort Dodge, part of U.S. drugmaker Wyeth (WYE.N), which is being bought by Pfizer.
Considering they'd be the only likely buyer, they would be in strong negotiating position, but appear to have paid the price of a non-partner, Nomura analyst Amit Roy said.
They should have been able to get a much better price, especially because Merck was forced to sell Merial.
Morgan Stanley analysts also said the price was above their expectations, though they said there were no good comparables against which to benchmark it.
Merck's takeover of Schering-Plough, owner of Intervet, would create a dominant position in animal health, requiring the companies to sell part of that business. Merck aims to complete the merger with Schering-Plought in the last quarter of 2009.
The buy-out values Merial on the basis of 3 times 2008 sales and 10.2 times 2008 earnings before interest and taxes, Sanofi said. Merial sales last year rose to $2.7 billion and operating profit rose to $785 million, giving a margin of 29.5 percent.
It's not cheap, a Frankfurt-based analyst said. But the price raises the value of the 50 percent Sanofi plans to bring into the new joint venture, so it becomes relative.
Shares in Sanofi, which raised its full-year earnings growth target on Wednesday after better-than-expected second quarter results, were down 1.02 percent after a gain of some 4 percent this year.
NEW AND BIGGER JOINT VENTURE
If Sanofi and the new Merck agree to join Merial and Intervet/Schering-Plough (ISP), the value of Merial would be $8 billion and $9.25 billion for ISP. Any such joint venture would be subject to antitrust approval, however.
Sanofi Chief Executive Chris Viehbacher said at a conference call he saw little duplication in the wider alliance as Merial focuses on pet animals and ISP focuses on livestock. Merial's prime brands include flea and tick product Frontline and dog heartworm prevention Heartgard.
There is a little bit of overlap, but not very significant, said Viehbacher. If we get the opportunity ... we could end up with a business that is better balanced between production animals and companion animals, he added.
The $19.2 billion animal health market, two thirds of which is generated in Europe and the U.S., is expected to grow about 4 percent a year to 2013. Companion animals account for 40 percent of sales.
Sanofi and Merck are also partners in their Sanofi Pasteur MSD human vaccine business in Europe.
Pfizer and Wyeth are selling their animal health businesses, and analysts said likely buyers included Germany's Bayer AG (BAYG.DE) and Boehringer Ingelheim and Switzerland's Novartis (NOVN.VX).
(Editing by James Regan, Marcel Michelson and Will Waterman)