Sanofi-Aventis and Merck have abandoned plans for a joint animal health powerhouse with $5 billion in sales, citing the "increasing complexity" of disposals and regulatory reviews needed for the deal.

The move comes a month after the French and US drugmakers delayed the deal by six months and is a setback to their plans to achieve economies of scale in the consolidating animal care industry.

The news 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 announced a year ago that 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.

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

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 in 2010.

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.

Further consolidation could yet come in the animal health 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.

Reuters