The animal-health business is like a pony ride; the players just keep going around and around. Merck (NYSE: MRK ) and sanofi-aventis (NYSE: SNY ) are the latest to make the rounds. The only question is how much baggage the antitrust regulators will make them shed.
The two used to be partners in a joint venture called Merial, but Merck sold its half to sanofi in order to buy Schering-Plough, which came with an animal-health business of its own, called Intervet. That was confusing enough.
Now, however, Sanofi is taking Merck back, remaking their 50/50 joint venture. Was it puppy love that brought the two back together? No, it seems this is simply a matter of scale; joining Merial and Intervet will help cut costs on both sides.
Because Intervet is more valuable, Sanofi will pay Merck $250 million to re-establish the joint venture on top of the $750 million it agreed to when this game of musical chairs was originally set up. The new joint venture will have 29% of the animal-health market, surpassing Pfizer's (NYSE: PFE ) 20%.
That's before antitrust regulators get their hands on it, of course. Merial and Intervet don't have much overlap; most of Merial's sales come from companion animals -- it sells Frontline flea and tick treatment, for instance -- while Intervet is more into selling products for livestock. Still, there will be some overlap that's likely to have antitrust regulators whipping out their red pens.
Forced sales, especially when the buyer knows you've got to sell, aren't the best way to get the highest value for your assets. But there's plenty of competition among other pharmaceutical companies -- Bayer, Novartis (NYSE: NVS ) , Eli Lilly (NYSE: LLY ) , and others all have animal-health divisions -- so Merck and Sanofi probably won't have to offload assets at fire-sale prices.
The potential for blockbusters in animal-health products isn't as high as in their human counterparts, of course, but the diversification offers a bit of stability for drugmakers. For investors, they provide a little exposure to agriculture and the increasing need for food for a growing population without buying a strictly ag-facing company like Monsanto (NYSE: MON ) or PotashCorp (NYSE: POT ) .
Overall, investors should be happy with the lovebirds.