Animal Health offers growth for Big PharmaAfter 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.
During the first round, bidders were able to submit offers for various assets since the sellers had not yet decided which businesses would be sold, that source said.

The decision would be made on whether to divest Merck or Schering's animal health assets once the companies reviewed the bids, that source said.

Pfizer and Wyeth also are divesting animal health assets due to their pending $68 billion merger and that auction is expected to conclude by the end of the month, as well, said two sources close to those negotiations.

"For the bidders, buying an animal health business to add to their existing business makes a lot of sense — you can take out tons of costs because the same sales people can now sell more products," said a second healthcare investment banker.

"It's a reasonably good growth area — there's the average flea and tick prevention, but there's now more and more vaccines vets are adding to the list of what you can give your pet. People are just spending more," the second investment banker said. (Additional reporting by Megan Davies in New York, editing by Leslie Gevirtz)