Sanofi holds power in animal health auction

A logo of pharmaceutical company Sanofi-Aventis is seen in Ambares near Bordeaux, southwestern France, September 20, 2006.

PHILADELPHIA (Reuters) - As Merck & Co Inc (MRK.N) and Schering Plough Corp SGP.N try to sell some animal health assets, the power in the auction lies not with the sellers, but with one of the bidders -- Sanofi-Aventis SA (SASY.PA).

Merck and Schering must divest certain overlapping assets in animal health sector, which includes medicine for livestock and household pets, to win regulatory approval for their $41 billion merger.

The companies are running a dual-track auction -- asking for bids for both Schering's Intervet business and Merck's stake in its Merial joint venture. The companies will decide which business to divest once they review the bids, sources familiar with the talks said.

It makes more sense for Merck to sell its Merial business, which it co-owns with Sanofi, than the sprawling Intervet business, said the sources, who declined to be identified by name because they were not authorized to speak with the media.

Since Sanofi already owns half of Merial, it becomes the logical buyer of Merck's stake rather than complicating the joint venture with another partial owner, the sources said.

"Sanofi holds the upper hand. They are playing it smart and keeping their cards close to the vest but it all depends on what they decide," said one source familiar with the talks.

Merck and Sanofi could not be immediately reached for comment.

Merial's products include flea and tick treatments for dogs and a medication used to kill parasites in livestock. Sanofi has said it would be interested in boosting its animal health presence.

Animal health has recently become a coveted area after years of being dismissed as a secondary business.

As large pharmaceutical companies look for ways to diversify and defend against generic drug rivals, they are finding animal health offers consistent growth and limited competition.

"Sanofi knows they are the logical winner so they aren't going to pay more than the business is worth. The only way they lose (the auction) is if they decide to walk away or someone else is willing to substantially overpay," said a second source close to the talks.

The Intervet business drew scant bids by the July 15 deadline, fetching one bid from a large private equity firm and one from a large European pharmaceutical company, the sources said. Merial bids were due at the same time but it was unclear who had bid.

Intervet failed to attract many offers since the bidders believed that business ultimately will be kept by Merck and Schering, sources said.

"The Intervet auction was a farce. The bidders felt used even participating since the real auction is for Merial and there's only one logical winner there -- Sanofi," said the source familiar with the talks.

If Sanofi walks away or refuses to pay what Merck wants for the Merial stake, Merck and Schering could still look for another buyer or sell Intervet, sources cautioned. The auction is expected to be completed in the next several weeks, the sources said.

Separately, Pfizer Inc (PFE.N) and Wyeth WYE.N also are divesting animal health assets due to their pending $68 billion merger and that auction is expected to conclude within several weeks, said sources close to those negotiations.

Bayer AG BAYG.DE, Boehringer Ingelheim of Germany, and Novartis AG (NOVN.VX) and have been eyeing those assets, sources said. The companies could not be immediately reached for comment.

(Reporting by Jessica Hall; Editing by Tim Dobbyn)

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