A clearer picture is emerging of which major drug companies might follow the lead of Pfizer Inc. (PFE) and Roche Holding AG (RHHBY) in pursuing huge acquisitions - and which might sit on the sidelines.

Those that appear open to large combinations include Merck & Co. (MRK) and Sanofi-Aventis (SNY), although not necessarily with each other. Merck Chief Executive Richard Clark said Tuesday that he was open to "the entire spectrum" of transactions, including a large-scale deal. Clark previously expressed interest in acquiring a biotechnology company, but his comments Tuesday seemed to leave room for a tie-up with a traditional Big Pharma peer.

Meanwhile, Sanofi-Aventis is lining up bank financing for potential deals, the Financial Times reported Sunday, partly in response to Pfizer's agreement last week to buy Wyeth (WYE) for more than $60 billion. Speculation that Sanofi would go after Bristol-Myers Squibb Co. (BMY) drove up Bristol shares Monday; however, some analysts have since expressed doubts that Sanofi would make such a large purchase.

In contrast, other big drug makers have clearly stated they don't intend to pursue large-scale combinations, including Eli Lilly & Co. (LLY) and AstraZeneca PLC (AZN). Lilly Chief Executive John Lechleiter said last week that large-scale combinations haven't been kind to shareholders, and that Lilly planned to invest in its research pipeline and make small and medium-sized acquisitions. AstraZeneca CEO David Brennan told investors last week that "large acquisitions" weren't part of the company's strategy.

So who's right? "We're only going to know in hindsight which was the right answer and which was the wrong answer," said Edward Jones analyst Linda Bannister. "It's so dependent upon each company's unique set of circumstances."

Large-scale combinations run the risk of messy integrations, which have plagued such deals in the past. But avoiding such deals runs the risk of becoming out-muscled in an increasingly globalized industry.

Several big drug stocks were rising Tuesday, with Schering-Plough Corp. (SGP) up 9.3% to $19, Merck up 7.5% to $31, Lilly up 4% to around $39, and Novartis AG (NVS) up 4.3% to $42.65. Both Merck and Schering-Plough reported better-than-expected fourth-quarter earnings, although sales of their jointly marketed cholesterol drugs were down.

One of the driving forces for industry consolidation is that many large pharmaceutical companies are facing intensifying competition from generic drugs, and their internal efforts to replace lost revenue with successful new products have been insufficient.

So the question becomes whether to buy big, medium or small. Pfizer has chosen the big route, concluding that Wyeth's assets will help cushion the loss of market exclusivity for its biggest drug, cholesterol pill Lipitor, in 2011, and for other drugs in ensuing years. Pfizer also plans to generate significant cost savings partly by reducing the companies' combined work force by 15%, or more than 19,000 employees.

 
   Merck's Challenges

Merck and Sanofi-Aventis face similar challenges. Merck faces the loss of patent protection for its best-selling drugs over the next three years. Hypertension drugs Cozaar and Hyzaar face patent expirations next year, while the Singulair allergy and asthma medication is set to lose protection in 2012. Together, the drugs accounted for about one-third of Merck's 2008 revenue.

Merck has hit setbacks finding newer drugs to replace revenue lost to generic competition. An experimental cholesterol drug, Cordaptive, was rejected by the U.S. Food and Drug Administration last year, and sales for cervical-cancer vaccine Gardasil are expected to continue to erode because of Merck's failure so far to significantly widen its approved uses.

Clark said Tuesday that any deal would have to create value for shareholders, and that Merck intended to support its dividend. He didn't identify any potential acquisition targets.

A Merck purchase of Schering-Plough could alleviate some of Merck's pain. Schering has less exposure to generic competition, and it has a rich late-stage pipeline of experimental drugs. Some analysts have cited Schering-Plough as a possible takeover target.

Spokespeople for Merck and Schering-Plough declined to comment.

Another possibility, however, is that Johnson & Johnson (JNJ) would buy most of Schering-Plough, with Merck buying out Schering's share of the cholesterol joint venture, said Bernstein analyst Tim Anderson. The cholesterol agreement has certain provisions governing each company's rights in the event of mergers and acquisitions.

J&J Chief Executive William Weldon told analysts last month the company would consider the right pharmaceutical acquisition, but he indicated that high prices have kept J&J away from big drug-industry deals.

It's also possible that Merck's Clark could stick with his previous preference for a biotech deal, and some analysts have suggested Gilead Sciences Inc. (GILD) or Biogen Idec Inc. (BIIB) as fits. Another biotech that's been cited as a potential takeover target is Amgen Inc. (AMGN), but its market capitalization of $59.5 billion might make it too pricey.

 
   Sanofi's Possibilities

Sanofi also faces loss of market exclusivity for top drugs in coming years, including anti-clotting drug Plavix in 2011. Sanofi co-markets Plavix with Bristol-Myers. It also has had setbacks bringing new drugs to market, such as the anti-obesity drug Acomplia.

A possible Sanofi purchase of Bristol-Myers has been rumored in the past. Whether such a deal makes sense is less clear. Bristol faces its own wave of loss of exclusivity for top drugs in coming years, and Bernstein's Anderson said Sanofi's recent change in leadership may make a large deal less likely for now. Still, Anderson considers Bristol-Myers a takeover candidate.

Roche recently went hostile with its pursuit of the stake in Genentech Inc. (DNA) that it doesn't already own, a deal it's been pursuing since last summer.

Abbott Laboratories (ABT) Chief Executive Miles White said last month that he's focusing on acquisitions that build up the company's non-pharmaceutical divisions, but he didn't rule out a pharmaceutical purchase if the right opportunity came along.

GlaxoSmithKline PLC (GSK) CEO Andrew Witty previously has said the company's not interested in a mega-merger. Investors may learn Thursday - when Glaxo reports quarterly results - whether Witty's thinking has changed after the Pfizer-Wyeth deal.

-By Peter Loftus, Dow Jones Newswires; 215-656-8289; peter.loftus@dowjones.com

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