By Peter Loftus 

Drug maker Merck & Co. agreed to sell its over-the-counter medicine and consumer-product business to Bayer AG for $14.2 billion in cash, as Merck narrows its focus to prescription drugs and vaccines while Bayer bulks up its OTC unit.

The companies also formed a collaboration to co-develop and market certain prescription heart drugs, including Bayer's Adempas, a treatment for a form of high blood pressure. Merck will pay Bayer $1 billion upfront, plus potential additional milestone payments of up to $1.2 billion if sales goals are reached.

The deal will add nonprescription Merck products such as the Claritin allergy medicine and Coppertone sunscreen to Bayer's namesake aspirin and Aleve pain reliever, joining businesses that had combined sales of $7.4 billion in 2013.

The deal continues a recent surge in health-care industry mergers-and-acquisition activity that is reorganizing the market for OTC medicines and many other businesses. Last month, Novartis AG and GlaxoSmithKline PLC announced a deal to merge their OTC and consumer-products businesses into an operation with about $10 billion in yearly sales from such products as Excedrin pain medicine and Aquafresh toothpaste.

Merck said in January it was exploring options for its OTC business because it didn't have a strong presence outside North America. To gain global scale, Merck needed to either make hefty acquisitions outside North America or sell to another company with a stronger market share overseas, Merck Chief Executive Kenneth Frazier said in an interview Tuesday before a meeting with analysts and investors at a Merck research site in Boston.

"We're very strong in the U.S. Bayer is very strong outside the U.S.," Mr. Frazier said. "The brands we both have are complementary. We wanted a home for this business that was the right home for these brands. And we got a very good price for the business."

Merck, based in Whitehouse Station, N.J., received interest from several pharmaceutical and nonpharmaceutical companies, which helped drive up the price, Mr. Frazier said. Last week, consumer-goods company Reckitt Benckiser Group PLC said it was in talks with Merck for a potential deal, but subsequently said those talks had ended without a deal.

According to two people familiar with the matter, Bayer also outbid privately held rival Boehringer Ingelheim GmbH for the Merck assets.

Merck is slimming down after bulking up with its 2009 acquisition of Schering-Plough, which brought in the consumer business. The business had $1.9 billion in sales last year, down 3% from the year before, constituting about 4% of Merck's total revenue.

Merck had also said in January it was exploring options for its division that makes drugs and vaccines for pets and livestock, which had $3.4 billion in sales last year. But the company has decided to keep its animal-health unit, Mr. Frazier said Tuesday, because it already has a strong global presence and a leading market position, in contrast to the consumer business.

"We should be looking for opportunities to augment our already leading animal-health franchise," he said.

The Merck-Bayer deal will help Bayer expand its market share in the U.S. and give it an entry into the market for foot-care products such as shoe inserts, via Merck's Dr. Scholl's brand.

"We are adding significant scope and earnings power to a business that is already delivering strong margins and stable cash flows," said Bayer Chairman Marijn Dekkers.

The purchase is Bayer's second-biggest after buying Schering AG for $17 billion in 2006.

Merck has been slashing costs, including layoffs of thousands of employees, and narrowing its focus mainly to the parts of its prescription-drug business and research pipeline it sees as the most promising. These include an experimental cancer drug, MK-3475, which harnesses the body's immune system, and which analysts say has multibillion-dollar sales potential if it reaches the market.

Merck said Tuesday it completed an application for U.S. Food and Drug Administration approval of MK-3475 for the treatment of the skin-cancer melanoma, and expects an agency decision by late October.

Merck said it would use the $8 billion to $9 billion in after-tax proceeds from the Bayer deal to fund the development of MK-3475, to license or acquire other drugs, and to return capital to shareholders.

Michael Calia, Neetha Mahadevan and Jonathan D. Rockoff contributed to this article.

Write to Peter Loftus at peter.loftus@wsj.com

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