The new bosses at Sanofi-Aventis and GlaxoSmithKline are playing a cautious acquisition game, 13 and seven months respectively after taking control of the two big European drugmakers.

Back in 2007, Chris Viehbacher and Andrew Witty were rivals in a race for the top job at Glaxo, which Witty won.

Now the former colleagues are competing to strike the smartest pharmaceutical deals. It is a battle that doesn't necessarily mean writing the biggest checks, according to analysts, bankers and fund managers.

Around them the industry landscape is changing fast. Pfizer (PFE.N), Merck & Co (MRK.N) and Roche (ROG.VX) all clinched mega-deals in the first quarter of 2009. Novartis (NOVN.VX), meanwhile, is committed to buying eyecare giant Alcon (ACL.N).

With strong cash positions, Sanofi and Glaxo could both contemplate similar large-scale transactions as a tactic to deal with stalling sales growth, looming U.S. healthcare reform and loss of patent protection on many blockbuster medicines.

Yet Witty has flatly ruled out a mega-deal and Viehbacher, while not closing the door on the idea completely, wants to focus on small and mid-sized deals up to around 15 billion euros in generics, emerging markets, vaccines, consumer health and biotech.

Sanofi is looking at everything but Viehbacher will be very cautious. He doesn't want to repeat the mistake of (AstraZeneca CEO David) Brennan when he overpaid for MedImmune, said one healthcare banker familiar with the group.

Is he going to bid a big premium on a $50-billion-plus asset? I don't think so.

BUYING TIME

Viehbacher knows Sanofi needs to change and he has been holding its feet to the fire, shaping the French drugmaker from an introverted company into one with a more open and diversified approach that should secure better long-term growth.

He estimates Sanofi is about half way through the transformation process. The next step will come with a restructuring of drug research, due in weeks.

For 2009 Sanofi has suggested, and analysts expect, that EPS could beat its 7 percent growth goal at constant exchange rates. Beyond, many analysts see EPS declining until 2013, as more than a fifth of its current drug sales face patent loss, unless it cuts spending aggressively or makes a major takeover.

They need to fix the mismatch between pipeline potential and generic overhang in pharmaceuticals. To buy time they need to acquire and do as many biotech partnerships as they can to rebuild their pipeline, said Helvea analyst Karl Heinz Koch.

So far, Viehbacher has picked up two Latin American generic businesses to boost Sanofi's emerging markets presence, as well a promising privately owned cancer company, BiPar Sciences.

One large and obvious bid target is Bristol-Myers Squibb (BMY.N), Sanofi's long-time U.S. partner on blood thinner Plavix, but Viehbacher said in March he was happy with existing partnership arrangements.

Another could be Amgen (AMGN.O), although recent speculation in the French media that Sanofi had been working on such a large deal, only to have it turned down by its largest shareholders, was formally denied by Sanofi two weeks ago.

The latest rumor is Anglo-Swedish drugmaker AstraZeneca (AZN.L) -- an even bigger bite than Bristol or Amgen, with a market value of around $65 billion -- which Kepler analyst Tero Weckroth said looked very unlikely.

CREDIT RATING

Bankers said a desire at Sanofi to retain its investment-grade credit rating was a factor behind the cautious approach for the time being.

One smaller-scale deal, however, may be a no-brainer. Sanofi could well snatch the other half of animal health company Merial from its joint-venture partner Merck, which must reduce its vet business to win clearance to buy Schering-Plough (SGP.N).

Over at Glaxo, Witty is ready to get his wallet out when necessary, agreeing to pay up to $3.6 billion for dermatology company Stiefel in an auction that, ironically, was initiated by interest from Sanofi, according to banking sources.

Many of Witty's more recent deals, however, have been collaborations, often involving no upfront cash. Examples include an unusual tie-up with Pfizer on HIV medicine, a assets-for-equity swap with South Africa's Aspen (APNJ.J) and an emerging markets distribution deal with Dr Reddy's (REDY.BO).

Those more creative options have become the order of the day, Witty told a healthcare conference last week.

The approach is winning support from investors like Liontrust fund manager Anthony Cross, who is skeptical about traditional large-scale acquisitions and believes Witty has found a better way to leverage Glaxo's distribution network.

A lot of the previous mega-mergers have not necessarily been huge value creators and this is a lower risk way, he said.

(Editing by Sitaraman Shankar)

Pfizer Glaxosmithkline Merck & Co.