Animal health offers growth for big pharma

By Jessica Hall

PHILADELPHIA (Reuters) - After years of being dismissed as a secondary business, animal healthcare has become a coveted niche for pharmaceutical companies looking for new growth markets.

Thanks to two mega-mergers -- Merck & Co's (MRK.N) planned purchase of Schering Plough Corp SGP.N and the pending merger of Pfizer Inc (PFE.N) and Wyeth WYE.N -- several animal health assets are currently up for sale. The merging companies must divest the assets to gain U.S. regulatory approval for their deals.

"Ten years ago, pharma companies looked down their noses at animal health. But as growth in human health has slowed, animal health has remained stable and is actually growing," said one healthcare investment banker.

"All of a sudden it looks like a crown jewel and not an after-thought," said the banker, who declined to be named because he was not authorized to speak to the press.

Even though the economic crisis has forced some animal owners to give up their pets or delay veterinary visits, the sector is still growing revenues in the low-teens range, the banker said.

The animal health sector, which also includes medication for livestock, remains attractive compared with the stagnant or shrinking sectors of the human health field, he said.

As large pharmaceutical companies have been hurt by the prevalence of generic drugs and few new drugs in their research pipeline, they have been looking for acquisitions in biotechnology and animal health.

"Animal health looks like a darling compared with human health. Patients don't complain. There's been a secular change as people spend more and more on their pets," said the investment banker.

A second round of bids for the animal health businesses being divested by Merck and Schering Plough are due this week with a final decision expected by the end of July, sources familiar with the situation previously told Reuters.

Merck is a partner in the Merial joint venture with French drugmaker Sanofi-Aventis SA. Merial's products include flea and tick treatments for dogs and a medication used to kill parasites in livestock.

Sanofi-Aventis (SASY.PA), Eli Lilly and Co (LLY.N), Bayer AG BAYG.DE, Novartis AG (NOVN.VX) and Boehringer Ingelheim of Germany submitted offers in the first round of bidding, sources previously told Reuters.

Private equity firms are also interested in the animal health businesses, sources familiar with the situation said.

The sector has predictable cash flow that makes it attractive to buyout firms. But the corporate buyers all have deep pockets and a keen interest to find new growth products.

"All roads point to Sanofi winning, but it's a matter of price," said one person close to the Merck talks, who declined to be named because he was not authorized to speak to the media.

Schering's largest animal health business, Intervet, generated $1.9 billion in revenue last year. One complication of the Merck-Schering auction is the structure of the sale, the source close to the Merck talks said.