Shares of biotech Neurogen (NASDAQ:NRGN) jumped 64% to $10.47 yesterday on news the company struck a deal with Merck (NYSE:MRK) to develop pain treatments.

Under the deal, Merck will pay Neurogen a $15 million license fee, make a $15 million investment in Neurogen, and provide $12 million in development funding over the first two years of the agreement. Neurogen also stands to receive up to $118 million in research, development, and milestone payments, plus royalties if the collaboration brings a drug to market.

The agreement represents Merck's latest move to restock its pipeline. LikeSchering-Plough (NYSE:SGP), Merck has key drugs coming off patent, the next big hit coming when near-$6 billion drug Zocor loses patent protection sometime in 2006. Deals with smaller firms like Neurogen seek to add drugs to replace that lost revenue and answer the $6 billion question.

The situation is made that much more immediate by Merck's string of late-stage failures. Just last month, the company discontinued development of diabetes compound MK-767, which had been in Phase III testing. The week before, it cut off another drug in Phase III, depression drug MK-0869.

But those looking for a quick fix at Merck won't get it here. With its latest-stage prospect in Phase II testing, Neurogen's contribution to Merck is still several years off. That said, we can certainly appreciate a company laying the foundation for the long-term.

For Neurogen, the benefits are considerably more tangible. Through nine months this year, the company has burned through $26 million in cash, leaving a mere $53 million on hand at the end of September. If nothing else, while investors wait out the trials, Merck has given Neurogen a lifeline.

Talk drug alliances on the Merck discussion board -- only at! Jeff Hwang can be reached at