Regulatory pressure prompted Sanofi-Aventis and Merck & Co to abandon plans for a joint animal health powerhouse with $5 billion in sales.

The move sets back the French and U.S. drugmakers' plans to achieve economies of scale in the consolidating animal care industry, and comes a month after they delayed the long-running deal's closing by another six months.

It is also a blow to companies that had hoped to snap up assets with about $500 million in annual revenue that the pair would have had to sell to clear regulatory hurdles.

Merck and Sanofi said a year ago they planned to combine their veterinary drugs and vaccines businesses to create a joint venture with almost a third of the global market.

The duo were due to merge Sanofi's pet-focused Merial unit, which they once jointly owned, with Merck's bigger, livestock-oriented Intervet business, relegating Pfizer to second place in the animal health industry.

WestLB analyst Oliver Kaemmerer said the decision was an unpleasant surprise that would deprive the duo of synergies and a likely boost to earnings.

A person familiar with the matter said U.S. and European regulators had taken an increasingly tough stance, partly because of concerns that previous sell-offs, as in Pfizer's

tie-up with Wyeth, had struggled to safeguard competition.

The companies are discontinuing their agreement primarily because of the increasing complexity of implementing the proposed transaction, the companies said in a joint statement on Tuesday.

This is both in terms of the nature and extent of the anticipated divestitures and the length of time necessary for the worldwide regulatory review process, they said.

Both companies added that they remained committed to their animal health businesses, which generated annual sales of $2.6 billion for Sanofi and $2.9 billion for Merck & Co in 2010.

Last year Vetnosis, a consultancy, identified portfolio overlaps in vaccines for livestock, poultry, pets and horses; in products to kill parasites; and in specialty veterinary products, such as drugs to treat cardiovascular disorders.

In October, two people familiar with the matter said the disposals could fetch about 1.5 to 2.5 times sales -- or about $750 million to $1.25 billion.

BIDDERS

Germany's Bayer AG, unlisted domestic rival Boehringer Ingelheim and Switzerland's Novartis had previously made it through to the second round of bidding for Merck and Sanofi assets being sold as part of the venture, several sources close to the bidders had said.

Eli Lilly and Co, the sixth-biggest U.S. drugmaker by market value, was also preparing a bid, people familiar with the matter said. Last week Lilly's Elanco unit bought Johnson & Johnson's

animal health business, a deal that one person familiar with the matter said was worth about $300 million.

Further consolidation could yet come in the sector, where Pfizer is keen to grow and Novartis has not yet reached a critical size, Oddo Securities analyst Jean-Jacques Le Fur said. This leaves open the field of possibilities, he said.

Shares in Sanofi were 0.1 percent lower at 47.94 euros at 1051 GMT, while the French blue-chip CAC 40 index was up 0.2 percent.

Morgan Stanley advised on the disposals, people familiar with the matter have said. A quartet of law firms -- Linklaters; Cleary Gottlieb Steen & Hamilton; Howrey; and Weil, Gotshal & Manges provided legal advice, the first person familiar with the matter said.

(Reporting by James Regan; Additional reporting by Noelle Mennella in Paris, Ben Hirschler in London and Arup Roychoudhury in Bangalore; Editing by Mike Nesbit and Louise Heavens)

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