Back Together In Business

Sanofi-Aventis and Merck & Co. will re­establish an animal health joint venture just six months after going their separate ways. The parting was amicable, however, and the reunion, while unusual, was expected.

The deal came about last week when Sanofi exercised an option to combine its Merial unit with Intervet/Schering-Plough, a business Merck acquired with its recent takeover of Schering-Plough. To avoid antitrust issues in that acquisition, Merck had sold Sanofi its 50% share in Merial, their then-12-year-old joint venture. Sanofi paid $4 billion for the half and got the option to re-form a joint venture.

The new venture will have $5.3 billion in annual sales and a 29% market share, about one-and-a-half times the share of its closest competitor, Pfizer. Sanofi and Merck CEOs say they are combining complementary product lines that serve a $19 billion animal health market that is growing at 5% per year. To have equal ownership, Sanofi will pay Merck $250 million, as well as the $750 million required by the option agreement.

Stock analysts were unsurprised by the announcement. Those at Morgan Stanley said the deal makes sense for Merck because half the joint venture and $1 billion in cash is better than 100% of Intervet.

Although it’s easier to run a business alone, a successful history of working with Merck led Sanofi to exercise its option, Sanofi CEO Christopher A. Viehbacher said in a conference call. He also addressed the unusual strategy of re-creating an even larger version of a business that was split apart to avoid regulatory repercussions.

“We know this combination will be subject to scrutiny and evaluation by antitrust authorities in the U.S. and Europe,” he said. Potential divestitures will be likely but “very manageable,” he added. And although some cost cutting is expected, the CEOs said it was too early to offer details.

Meanwhile, to satisfy antitrust requirements after acquiring Wyeth, Pfizer has sold a biological manufacturing plant in Sligo, Ireland, and European rights to certain animal health products to Elanco, the animal health division of Eli Lilly & Co. Pfizer will receive an undisclosed payment. The two companies have signed manufacturing supply agreements.