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Animal Health: The Profits Hidden Inside the Barn

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Merck and Sanofi team up again to keep animals healthy.

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The cows have come home to Merck (MRK).

The Big Pharma's former animal health joint-venture with Sanofi-Aventis (SNY) is once again in its corral. The two companies are venturing down the road to animal health sales just as one of its biggest rivals continues to divest its non-human interests.

Merck and the French drugmaker announced Tuesday that they are teaming up in animal health through the combination of Sanofi's Merial and Merck's animal health business, Intervet/Schering-Plough. Merial used to be a 50-50 joint venture between Merck and Sanofi until 2009, when Merck sold its half of the business to its partner for $4 billion as a means of making the Schering Plough acquisition pass through anti-trust regulation more smoothly. Merck will receive a $250 million payment from Sanofi in addition to an already agreed upon $750 million.

Merial is predominantly a maker of medications for pets with its biggest product being the tick and flea repellent, Frontline. The division had sales of $2.6 billion in 2009. Meanwhile, Intervet/Schering Plough is focused on pharmaceuticals for farm animals and had sales of $2.9 billion in 2009. Analysts estimate that the joint venture would generate $300 million to $400 million in cost benefits as well as combined sales of $5.3 billion.

"Merck has been in the animal health business for well over six decades and through this new joint venture, we will bolster our diverse portfolio and create a new global competitor poised for growth," said Merck Chairman Richard Clark.

The companies said Tuesday morning that it is unclear what parts of the business may overlap and could need to be divested.

The deal, which is expected to close sometime in late 2010 or early 2011, would make the joint venture the largest animal health business in the world, surpassing Pfizer (PFE) -- the current leader in the space, which had sales of $2.7 billion in 2009. Pfizer currently has 20% market share; the new joint venture will have 29% of the market.

Yet, Pfizer is making it easy for the competition to takeover the profitable sector. The pharma giant has been selling off pieces of its animal health business since acquiring Wyeth last year as a means of appeasing government anti-trust regulators. It sold off parts of Wyeth's animal health business to Boehringer Ingelheim (BI) in 2009. The most recent sale came on Monday when Pfizer sold the European rights of its animal health business to Elanco, the animal health division of Eli Lilly (LLY), for an undisclosed amount. Elanco brought in $1.2 billion for Lilly last year.

While animal health may not be quite as sexy as pharmaceuticals for the human set, the business does allow the major pharmaceutical companies to bring in added profits while trying to pad dwindling human drug pipelines. Sanofi, in particular, has been looking to diversify its business as it faces generic competition for the anticoagulant Plavix in 2011. The animal health industry was worth $19 billion in 2008, with 40% of sales coming from products for pets. The rest comes from production animal products.

The two companies will also be competing with major animal health units at Bayer and Novartis (NVS).
No positions in stocks mentioned.

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