Merck & Company said on Monday that it would acquire Schering-Plough Corp for $41.1 billion, uniting the makers of cholesterol drugs Zetia and Vytorin in the second megadeal for Big Pharma in weeks.

The two New Jersey-based drugmakers, which announced significant job cuts last fall, have been striving to become more efficient amid setbacks to Vytorin and Zetia, whose combined fourth-quarter sales slumped 26 percent.

The transaction offers a premium of 34 percent for Schering-Plough shareholders based on Friday's closing price and will generate savings of $3.5 billion annually after 2011.

It will also double the number of experimental medicines Merck has in late-stage development to 18, and diversify Merck's portfolio of medicines to include cardiovascular, respiratory, oncology, neuroscience and infectious disease.

Schering-Plough shares were up 12 percent at $19.75 before the market opened, while Merck fell 12 percent to $20. But the huge deal failed to instill confidence and ignite a rally in the broader market, which was set to open lower.

The Merck/Schering-Plough marriage follows on the heels of Pfizer's $68 billion purchase of Wyeth, another New Jersey-based pharmaceutical company.

It finally consummates a deal that has been speculated upon for years, given the marketing partnerships and cost savings opportunities between Merck and Schering-Plough.

"It seems somewhat inevitable," said analyst Jeffrey Holford of Jefferies in London, referring to an industry coming to grips with patent expirations on top-selling medicines as major cost cuts have run their course.

"The industry needs to shrink because there is just not the same market for branded pharmaceuticals going forward as there has been over the last 10 years," he said. "There is overcapacity, and (Merck and Schering-Plough) need to take each other's capacity out of the market."

Under the agreement, Schering-Plough shareholders will receive 0.5767 shares of Merck and $10.50 in cash for each of their shares. Each Merck share will automatically become a share of the combined company.

The deal will be financed with $9.8 billion in cash, $8.5 billion in debt and $22.8 billion in Merck stock.

Merck chief executive Richard Clark will lead the combined company, with Merck shareholders owning a stake of about 68 per cent.

Merck, which said it would maintain its dividend, expects the deal to add modestly to operating earnings in the first full year following completion and "significantly" after that.

The combined 2008 revenues of the two companies totaled $47 billion, and Merck believes it will maintain its current credit ratings.-Reuters