The development of lucrative biologic medicines is being highlighted as a selling point of Merck & Co.'s (MRK) $41.1 billion deal for Schering-Plough Corp. (SGP), but the biotech challenge is considerable.

Selling such drugs is attractive because they don't face threats of generic competition, as of yet, and they command high prices. But Big Pharma is yet to prove that it can develop these drugs on its own, and Merck isn't planning to step outside of its traditional methods of development in the wake of Monday's massive deal.

"I think the entire large pharma culture has pretty much been an anathema to the biotech model," said WBB Securities analyst Stephen Brozak, who believes that the size of the new company may raise hurdles to the innovative development found at smaller biotechs.

Pharmaceutical companies have long talked about wanting to increase their presence in selling biotech drugs, which are derived from biologic material, because they are difficult to copy and there is no regulatory pathway for generic competition, although President Barack Obama is proposing to change that.

Furthermore, the prices of complex biologic drugs are well above those charged for the small-molecule therapies traditionally sold by pharmaceutical companies.

On Monday, Merck and Schering-Plough touted how their combination will provide strength in developing biologics. Pfizer Inc. (PFE) made similar claims in its $68 billion acquisition of Wyeth (WYE) in late January.

Indeed, before the deal, Merck had only two biologics in its development pipeline, but it is adding five from buying Schering-Plough.

A spokesman for Schering-Plough noted that the company has experience in developing biologics, which was boosted by the 2007 acquisition of Organon BioSciences for about $17 billion.

Merck pointed to its push to develop generic biologics, announced in December, and its 2006 purchase of GlycoFi for $400 million.

The two companies already have some experience in the biotechnology realm with Merck being a prominent player in selling vaccines, one of the earliest forms of biotechnology, and Schering-Plough sells anti-inflammatory drug Remicade with Johnson & Johnson (JNJ).

But the development of new biotechnology drugs is seen as being a challenge for the large pharmaceutical companies.

"Big pharma markets products very well, but as far of innovation is concerned, that has been the province of biotechnology and specialty pharma," said Brozak.

He said the recent deals are likely to insure that biotech companies will continue to stay ahead of their more traditional competitors in drug development.

"It all depends on the structure of the company - pharma traditionally is big with a long decision-making process," said Citigroup analyst Yaron Werber. "Biotechs are smaller, more entrepreneurial, and more focused."

Structure has proved to be key in developing biotech drugs. The most successful venture has been Roche Holding AG's (RHHBY) 56% ownership of Genentech Inc. (DNA) that has yielded enormous returns in product sales for the Swiss drug maker, which is now pursuing full ownership of the smaller company.

In the wake of Genentech's success, some larger companies have looked to implement a more "hands off" model of biotech development, including Pfizer and GlaxoSmithkline Plc. (GSK).

But Merck plans to use a more traditional approach in integrating the newly acquired biotech expertise, said Peter Kim, president of Merck Research Laboratories.

Given the challenges that are involved in developing complex biologics, and their inexperience, many expected large companies like Merck and Pfizer to spend their cash piles on buying biotechnology companies as an easy way to enter the field.

That disappointment may be contributing to some of the pressure on Merck - recently down $2.42, or 11%, to $20.32 - and the 27% drop seen in Pfizer shares since it announced the Wyeth deal.

But those deals could have another effect on the biotechnology industry, because the acquisition of a large biotechnology company by Merck or Pfizer is now unlikely as they digest their sizable mergers.

Furthermore, the newly created companies will probably make fewer deals with cash-strapped small biotechs that are trying to survive in the currently difficult funding environment.

Those tiny companies may have a harder time finding a partner, or face a less-competitive bidding process, now that Wyeth and Schering-Plough have been eliminated as potential partners.

-Thomas Gryta; Dow Jones Newswires; 201-938-2053; thomas.gryta@dowjones.com