By Neetha Mahadevan And Joseph Walker 

FRANKFURT--German pharmaceutical company Merck KGaA is paying $17 billion to acquire Sigma-Aldrich Corp., a U.S. supplier of laboratory testing materials, as Merck looks to reduce its reliance on finding blockbuster drugs.

Merck will acquire all of Sigma-Aldrich for $140 a share in cash, a 37% premium to Sigma's closing share price on Friday, which industry experts note is a high price for Sigma.

St. Louis-based Sigma-Aldrich is one of the largest makers of chemicals and biological materials used in scientific laboratories. Sigma-Aldrich had sales of $2.7 billion last year, and about half of its revenue comes from academic labs, drug companies and industrial manufacturers conducting research and development.

The merger would be the latest instance of consolidation among makers of laboratory testing materials. Last year, Thermo Fisher Scientific Inc. agreed to pay $13.6 billion to acquire Life Technologies Corp., a primary competitor of Sigma-Aldrich's. Analysts said the combination of Merck and Sigma-Aldrich would enable the new company to better compete for business from pharmaceutical companies, which have sought to cut costs by limiting the number of suppliers they use.

"By merging, we are securing for us stable growth and profitability in our life science business and benefiting from trends like increasing globalization of research and pharmaceutical production," Merck Chief Executive Karl-Ludwig Kley said.

If the deal closes as planned, it will leave Merck with more predictable earnings, and the company will be less reliant on its largest division, pharmaceutical business Merck Serono. That is a relief, since sales at Merck Serono are dominated by just two prescription drugs: Rebif for multiple sclerosis and cancer treatment Erbitux. Rebif is facing stiff competition from cheaper, generic drugs, and saw sales slide 2.8% in the second quarter. Analysts fret that Erbitux could also face generic competition from 2018.

The deal also takes the pressure off the Merck Serono business to deliver on new pipeline drugs, a decision analysts at Citigroup noted was positive given the company's "long standing poor track record in pharmaceutical R&D." Merck has focused on rebuilding its pipeline in recent years, but the bulk of its experimental drugs are still early stage, meaning revenues are many years away, if the drugs make it through clinical trials at all.

"Sigma helps fill in a lot of the missing pieces" for Merck, said Ross Muken, a life sciences industry analyst with ISI Group LLC in New York. Many of Merck's products are used to manufacture pharmaceuticals, whereas Sigma-Aldrich's products are commonly used in the earlier stages of drug discovery and development. The combined company would be able to offer customers products that span the drug development life-cycle, from discovery to production, Mr. Muken said.

Pharmaceutical companies have been increasingly shedding noncore activities to strengthen core businesses, leading to shopping trips on both sides of the Atlantic. However, Merck's decision to become more diversified flies in the face of these recent deals.

"The U.S. has many attractive targets and the prices that are being paid are rather high, but German companies wouldn't mind paying that if the target fits their strategy," Ernst & Young's sector leader for life sciences and chemicals transactions, Stefan Rösch-Rütsche, said. He cited the timing of Bayer AG's acquisition of Merck & Co.'s consumer-product business for $14.2 billion earlier this year.

Bayer later went on to shed its noncore plastics business to focus on life science. Merck KGaA isn't affiliated with Merck & Co. of the U.S.

Sigma-Aldrich executives also stand to personally benefit from the transaction, regulatory filings show. Chief Executive Rakesh Sachdev is eligible for a payment of $17.52 million in accelerated stock options, severance pay and retirement benefits, if his employment is terminated following a change in control at the company. The company's other top four executives, including Chief Financial Officer Jan A. Bertsch, stand to receive a combined $17.5 million upon a change-in-control, filings show.

Jenny Gore, a spokeswoman for Sigma-Aldrich, declined to comment on executives' severance packages. The company declined to make executives available for interviews.

Merck expects annual synergies of about 260 million euros ($334 million), it said should be fully achieved within three years after closing. It also expects integration costs of about 400 million euros spread over 2015 to 2018.

The acquisition has been unanimously approved by Sigma-Aldrich's board of directors and will be presented to the company's shareholders for approval at a special meeting.

Michael Calia and Hester Plumridge contributed to this article.

Corrections & Amplifications

Ernst & Young section leader Stefan Rösch-Rötsche's surname was misspelled as Rösch-Rötschje in an earlier version of this article.

Write to Neetha Mahadevan at neetha.mahadevan@wsj.com

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