Eli Lilly and Co. is interested in animal-health assets that may be offered for sale as a result of Sanofi-Aventis SA and Merck & Co.’s plan to combine their veterinary units.

Indianapolis-based Lilly wants to expand in the $19 billion market for pet and farm animal medicines, as well as make smaller acquisitions in human health as it seeks to replace top-selling drugs that face generic competition beginning next year, said CEO John Lechleiter in an interview in Frankfurt on Thursday.

“If there are future divestitures that we could acquire, we’re going to be looking at those carefully,” said Lechleiter. “We’re watching carefully. We know what our strategy is for our business.”

Lilly’s Elanco veterinary unit agreed this month to buy European rights to a portfolio of Pfizer Inc. products. Sanofi, based in Paris, is likely to have to sell some assets to satisfy regulators over its planned veterinary medicine combination with Merck, CEO Christopher Viehbacher told French daily Les Echos in a March 10 interview.
Elanco is the fastest-growing companion-animal business in the industry, said Lechleiter. Asked specifically about possible Sanofi assets that may come up for sale, he said: “If there’s anything that comes out of that, yes.”

Lechleiter has shunned large takeovers or expansion into markets other than branded pharmaceuticals. Larger competitors chose mergers or acquisitions in generics as a way to compensate for the loss of patent protection on their medicines.

“We believe the key in this industry is innovation,” he said. “We see no correlation between size and the degree of innovation that any one company manifests.”

Lilly spends more than $4 billion a year on research and development. The maker of the Zyprexa antipsychotic medicine is also prepared to use its cash for small acquisitions and to buy rights to new drug candidates, Lechleiter said.

“We think we can fund our pipeline and be productive, introduce new products and grow the business from the base that we have today,” he said. “We have a strong balance sheet. We’ll use the cash that we accumulate to do smaller deals.”

Elanco’s revenue has been growing about 10 percent each year, reaching $1.2 billion in 2009, or about 5.5 percent of Lilly’s nearly $22 billion in annual revenue.

But the drug maker is counting on its animal health division to grow even more to help fill the revenue gap that will begin to widen in October 2011. That’s when Lilly’s bestselling drug, the antipsychotic Zyprexa, will lose its patent protection and face competition from generic versions. Zyprexa is the company’s best-selling product with $4.9 billion of sales last year.

In the ensuing three years, the patents on four more Lilly drugs will expire, which could cause the company to lose half of its current revenue.

Meanwhile, Lilly has few drugs in its late-stage pipeline to try to offset the sales shortfall. So growth in animal health becomes increasingly important.

Lilly began making animal health acquisitions in 2007, when it bought Ivy Animal Health, a Kansas-based developer of pharmaceuticals for animals. And, in 2008, Lilly paid $300 million to acquire Posilac, a controversial hormone, also known as rBGH, given to cows to increase their milk production.

“We have the wherewithal to do those kinds of deals if they can help us generate revenue through this period we call years YZ, where we’re going to be losing patents, or if they can complement our existing therapeutic areas,” the Lilly chief said. “We’re well positioned to do those, but we’re not interested in the large combinations.”