Bayer has not given up on deals to boost its veterinary unit despite its absence so far in the shake-up of the animal health industry, three sources told Reuters. Bayer, Germany's largest drugmaker, would not consider selling the unit until it has exhausted its remaining acquisition options in the $19 billion market, the people said. A number of options are likely to emerge from a pact between Merck & Co and Sanofi-Aventis to combine their animal health operations, which is expected to trigger divestments to address antitrust concerns.

Bayer is not the only potential buyer; others such as Eli Lilly with its $1.2 billion veterinary business are also likely to look closely at Merck/Sanofi divestments. Bayer's veterinary drugs unit had €977 million in revenue last year, selling treatments against fleas, worms and infections for pets and livestock.

"There's a strong sense of pride and assertiveness at Bayer that will make them want to play an active role in the animal health industry," a financial industry source said. Bayer — the inventor of Aspirin and synthetic rubber which counted a Nobel Prize winner among its staff — said on Feb. 26 it was analysing its options for the animal health unit, having recently failed to strike a takeover deal.

"What would be the point of giving up a decent flow of operating income in return for a pile of cash?" a source at Bayer said. A spokesman for the company declined comment.

Drug majors, grappling with generic drug competition, view animal health as an attractive diversification option. The sector promises growth as people spend more money on pets, partly an effect of ageing western societies. In addition, global livestock farming is expected to grow as Asian consumers' appetite for meat rises with their incomes.

"I would expect Bayer to make acquisitions rather than to divest animal health," said LBBW analyst Karl-Heinz Scheunemann. "It's a stable business with good margins and leading brands in the companion animal segment. It is not affected by government intervention and adds stability to Bayer's overall healthcare division."

Eye On Novartis Business?

Bayer last year tried to bolster the unit but failed to snatch up animal health businesses that were offered as part of Wyeth's merger with Pfizer and the tie-up between Merck & Co and Schering-Plough. Instead, Pfizer last September picked Bayer's national rival Boehringer Ingelheim when it sold about half of Wyeth's U.S. animal health business to win antitrust approval for the Wyeth deal.

Merck & Co, in turn, agreed this month to reforge ties in animal health with Sanofi-Aventis, combining the French drugmaker's Merial unit and Merck's Intervet/Schering Plough to take the top spot in the veterinary market. The joint venture will surpass Pfizer Animal Health, if it wins cartel clearance from regulators across the globe.

In its current shape, it would have an estimated 29% market share compared with Pfizer's 20%. Bayer would be the industry's distant number three. Last year's announcement that former Thermo Fisher CEO Marijn Dekkers would take the top job at Bayer sparked speculation he might bring sweeping change, but several people familiar with Bayer stressed he would not pursue transformational deals this year.

Asked about a possible sale of Bayer's vet business, finance chief Klaus Kuehn said in February: "There's a wide range of options we have to look into ... We're facing fewer competitors ... and also bigger ones. There will be disposals due to antitrust concerns. We'll have to look into that."

One financial industry source said Bayer might train its sights in the longer term on Novartis' animal health business, which had $1.1 billion in sales last year, if it were put up for sale. Novartis declined comment. Depending on how much Novartis has to stump up to buy the remaining shares in U.S. eyecare company Alcon, the Swiss group could decide a sale of its animal health operations could make for a more solid balance sheet, the person said.