By James Regan and Quentin Webb
PARIS/LONDON (Reuters) - Sanofi-Aventis SA
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The move sets back the French and U.S. drugmakers' plans to achieve economies of scale in the consolidating animal care industry and comes a month after they delayed the long-running deal's closing by another six months.
It is also a blow to companies that had hoped to snap up assets with about $500 million in annual revenue that the pair would have had to sell to clear regulatory hurdles.
Merck, which has the world's largest animal health company, and No. 3 Sanofi said a year ago they planned to combine their veterinary drugs and vaccines businesses to create a joint venture with almost a third of the global market.
The duo were due to merge Sanofi's pet-focused Merial unit, which they once jointly owned, with Merck's bigger, livestock-oriented Intervet business.
WestLB analyst Oliver Kaemmerer said the decision was an "unpleasant surprise" that would deprive the duo of synergies and a likely boost to earnings.
A person familiar with the matter said U.S. and European regulators had taken an increasingly tough stance, partly because of concerns that previous sell-offs, as in Pfizer Inc's
"The companies are discontinuing their agreement primarily because of the increasing complexity of implementing the proposed transaction," the companies said in a joint statement on Tuesday.
This is "both in terms of the nature and extent of the anticipated divestitures and the length of time necessary for the worldwide regulatory review process."
Both companies added that they remained committed to their animal health businesses, which generated annual 2010 sales of $2.6 billion for Sanofi and $2.94 billion for Merck.
Although that represents only about 6 percent of each company's overall revenue last year, animal health products are attractive because of the increasing number of farm animals needed to feed the world's growing population, an upsurge of pets in developing countries and fewer patent concerns than prescription medicines.
Pfizer's animal health business, with 2010 sales of almost $2.9 billion, trails Merck's by just a whisker. Eli Lilly and Co
Last year Vetnosis, a consultancy, identified portfolio overlaps in vaccines for livestock, poultry, pets and horses; in products to kill parasites and in specialty veterinary products, such as drugs to treat cardiovascular disorders.
In October, two people familiar with the matter said the disposals could fetch about 1.5 to 2.5 times sales -- or about $750 million to $1.25 billion.
Germany's Bayer AG
Indianapolis-based Lilly was also preparing a bid, people familiar with the matter said.
Further consolidation could yet come in the sector, where Pfizer is keen to grow and Novartis has not yet reached a critical size, Oddo Securities analyst Jean-Jacques Le Fur said.
"This leaves open the field of possibilities," he said.
Sanofi shares closed down 0.7 percent in Paris at 47.66 euros, while the French blue-chip CAC 40 index <.FCHI> slipped 0.3 percent.
Morgan Stanley advised on the disposals, people familiar with the matter have said. A quartet of law firms -- Linklaters; Cleary Gottlieb Steen & Hamilton; Howrey; and Weil, Gotshal & Manges, provided legal advice, the first person familiar with the matter said.
(Reporting by James Regan; Additional reporting by Noelle Mennella in Paris, Ben Hirschler in London, Ransdell Pierson in New York and Arup Roychoudhury in Bangalore; Editing by Mike Nesbit and Louise Heavens)