Updated from 11:47 a.m. EST

If someone is going to buy Bristol-Myers Squibb ( BMY), then Sanofi-Aventis ( SNY) would appear to be the most logical choice.

The French drugmaker has the size and the ambition to make a deal, and these companies know each other well because Sanofi-Aventis licenses the U.S. marketing rights for several big products to Bristol-Myers.

The most notable of those is the anticoagulant Plavix, the New York drugmaker's biggest product, but Sanofi-Aventis also licenses the blood pressure drugs Avapro and Avalide, fourth in sales for Bristol-Myers.

In fact, Sanofi-Aventis probably knows more about its partner than anyone except the Securities and Exchange Commission, the U.S. Justice Department and patent attorneys.

And therein lies the key to the report, from French financial newsletter La Lettre de l'Expansion, that the companies might announce a merger in the next few weeks.

If the report is accurate, then Sanofi-Aventis is betting that Bristol-Myers' newer drugs and potential R&D stars will offset many concerns on Wall Street. Generic competition, past problems with U.S. regulators, uncertainty over a Plavix patent challenge and possible future actions by the DOJ have been dark clouds hanging over Bristol-Myers for some time.

Representatives of both companies declined to comment. Shares of Bristol-Myers were up $1.44, or 5.5%, to $27.65, a 52-week high, on trading volume that was much heavier than normal. Sanofi-Aventis declined 69 cents, or 1.5%, to $44.65.

Both are already among the biggest drug sellers in the world, and their combined market cap on Jan. 26 would have been $173 billion -- about $122 billion of that being Sanofi-Aventis.

A joined Bristol-Myers and Sanofi-Aventis would only narrowly trail Pfizer ( PFE) and Johnson & Johnson ( JNJ) in terms of valuations of major pharmaceutical concerns.

However, if the Plavix sellers lose the U.S. patent challenge, in which they're taking on generic-drug maker Apotex of Canada, and if the Justice Department files criminal charges over their behavior, Sanofi-Aventis would be buying a lot of grief.

Although many analysts believe Bristol-Myers and Sanofi-Aventis will prevail in their patent-infringement lawsuit against Apotex, they know that U.S. patent law can be unpredictable. If the big drugmakers win, the U.S. patent on Plavix remains in force until mid-2011.

If the companies have signed a preliminary merger agreement, it's likely filled with stipulations relating to the economic and legal problems emanating from the Plavix case.

Analysts say there are benefits to a tie-up. Sanofi-Aventis would assume full control of Plavix, it would take over several promising drugs, including the schizophrenia drug Abilify, and it would gain a greater presence in the U.S.

Meanwhile, Bristol-Myers gets stable leadership. The company has been operating under an interim CEO, James Cornelius, ever since former chief Peter Dolan was pushed out due to the Apotex controversy.

As much as Bristol-Myers investors might crave a buyout, some analysts say a Sanofi-Aventis bid isn't a sure thing -- even if the French company is the most suitable acquirer and even if all legal, patent and regulatory issues are resolved favorably.

"Financing would be challenging," says UBS analyst Michael Leuchten in a research report. He assumes Sanofi-Aventis would pay at least a 20% premium. Given the debt capacity of both companies, he predicts approximately half of any buyout must be backed by equity financing, making the deal dilutive into 2008.

He also wonders why Sanofi-Aventis, if it likes Bristol-Myers so much, didn't outbid AstraZeneca ( AZN) on a marketing and development deal for two Bristol-Myers experimental diabetes drugs.

Bristol-Myers "may have sent a message to Sanofi-Aventis by auctioning the asset," says Leuchten, who is neutral on Sanofi-Aventis.

If the French company was involved in the bidding, the AstraZeneca victory indicates Sanofi-Aventis isn't interested in a takeover, says Leuchten. His firm has an investment banking relationship with Sanofi-Aventis.

The impact of generic Plavix was fortified by Bristol-Myers' recent fourth-quarter and full-year financial results. Due to a complex series of events, Canada's Apotex shipped generic Plavix in the U.S. for three weeks in August before being stopped by a court order.

Even though Bristol-Myers beat analysts' estimates for the quarter, Plavix took a beating as sales dropped to $496 million, down 53% from the same period in 2005. For the third quarter last year, Plavix sales were $630 million, down 36% from the same quarter in 2005.

Earlier this month, Bristol-Myers and Sanofi-Aventis asked a federal court judge to rule that Apotex had infringed on the U.S. Plavix patent. It's doubtful that a ruling would come before mid-year at the earliest.

Meanwhile, the Justice Department continues its criminal investigation of their behavior in making a deal with Apotex to discourage its selling of generic Plavix. The agreement, which included for payments to the Canadian company in return for staying out of the U.S. for four more years, was rejected by state attorneys' general.

Bristol-Myers Squibb also is operating under a deferred prosecution agreement with the U.S. Attorney's Office for the District of New Jersey over the company's practice in 2000 and 2001 of "channel stuffing," or encouraging wholesalers to buy more drugs to inflate sales figures.

The company eventually paid a civil penalty, as well as compensation to shareholders, and it agreed that its practices would be reviewed by an outside monitor. The U.S. Attorney's Office said it wouldn't prosecute the company for conspiracy to commit securities fraud if Bristol-Myers met the terms of the agreement for two years and behaved properly.

The question now is whether the Apotex affair and the findings of the Justice Department investigation constitute a violation of the deferred prosecution agreement.

"It is not possible at this time reasonably to assess the impact, if any, of the pending criminal investigation by the Department of Justice may have on the company's compliance" with the deferred prosecution agreement, Bristol-Myers said in a Nov. 2 filing with the SEC.

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