The two companies make a good fit, analysts say
Merck is to buy rival Schering-Plough in a $41.1bn (£29.4bn) deal, creating one of the world's biggest pharmaceutical companies.
The merger unites the makers of cholesterol drugs Zetia and Vytorin at a time of falling sales.
The deal follows Pfizer's $68bn takeover of Wyeth, unveiled in January.
Shares in Merck and other drug firms fell after the announcement, dragging US markets lower. The Dow Jones, the S&P 500 and the Nasdaq all fell.
Shares in Schering-Plough rose 14.4% to $20.13, while Merck shares fell 7.7% to $20.99.
Other drug companies that saw falls included Johnson & Johnson and Pfizer, down 2.9% and 0.8% respectively.
The Dow Jones index and the broader S&P both finished 1% lower, while the technology-based Nasdaq closed at its lowest level since October 2002.
Shareholders in Schering Plough will get $10.50 in cash, and just over half of one Merck share, for each Schering-Plough share they own.
Richard Clark, Merck's chief executive, will lead the new company. It will be called Merck.
The two companies had a combined $47bn of revenues in 2008, and the merger should result in $3.5bn of cost savings annually beyond 2011, a statement said.
Both Merck and Schering-Plough - which also makes Dr Scholl foot products and the Coppertone suntan line - announced big job cuts last year. It is unclear if the merger will lead to more redundancies.
"We are creating a strong, global healthcare leader built for sustainable growth and success," Mr Clark said in a statement announcing the deal.
He added that the combined company will have an expanded presence "in key international markets, particularly in high-growth emerging markets".
"The efficiencies we gain will allow us to invest in strategic opportunities, while creating meaningful value for shareholders."
Analysts welcomed the deal, which comes at a time of falling sales; many drugs are losing their patent protection, with hardly any major new drugs coming onto the market.
Vytorin and Zetia between them are worth $4.5bn in annual sales, which are stabilising after a period of decline.
The combined revenues of the two companies was $47bn in 2008
The new company will be known as Merck
The deal will lead to $3.5bn of cost savings annually after 2011
Merck will maintain dividend at current level of $1.52 per share
"That's a lot of cash flow, even if drugs [sales] are not growing, which will fund R&D [research and development] and the deal," said David Moskowitz, an analyst at Caris.
"It seems somewhat inevitable," said Jeremy Holford, analyst at Jefferies in London.
"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 ten years.
"There is over-capacity and they [Merck and Schering-Plough] need to take each others' capacity out of the market."
At the same time as it announced the deal, Merck reaffirmed its expectations for full-year 2009 revenues to be in the range of $23.7bn to $24.2bn.