Pfizer announced Monday it has agreed to buy rival Pharmacia for $51 billion in stock.

The merger of Pfizer and Pharmacia will create a new pharmaceutical giant with a global market share of 10 percent or more, nearly half as big again as its nearest rival, GlaxoSmithKline of Britain.

"It will be a very serious competitive threat to others," says Martin Hall, head of pharmaceuticals research at HSBC Securities in London. "The question now is whether companies like Glaxo, Merck and Bristol-Myers Squibb are forced to do something themselves because of the threat."

The enlarged company will boast annual sales of more than $48 billion and bring together several top-selling drugs, including Pfizer's Viagra and Lipitor, the popular cholesterol-lowering drug, along with Pharmacia's top-selling arthritis drugs, Celebrex and Bextra. It would also bolster Pfizer's already strong position as the top drugmaker in the United States, while vaulting it to top spots in Europe, Japan and Latin America.

"With Pharmacia, we will have the products, pipeline, scale, and financial flexibility to extend our leadership," says Pfizer chairman and chief executive officer Hank McKinnell. The joint venture company will have 12 products with annual sales in excess of $1 billion and nearly 120 experimental drugs in development.

Terms of the transaction call for New York-based Pfizer to exchange 1.4 of its shares for each Pharmacia shares. That would value the Peapack, N.J.-based Pharmacia at $45.08 per share, a 38 percent premium to the company's closing price Friday of $32.59 on the New York Stock Exchange.

Pfizer shareholders will own 77 percent of the combined company and McKinnell will retain the same titles after the merger. Pharmacia chairman and chief executive officer Fred Hassan will become vice-chairman of the company's board.

Shares in Pharmacia surged more than 30 percent and Pfizer fell nearly nine percent in Frankfurt Monday morning following initial newspaper reports of the merger.

Analysts said the hefty premium Pfizer was ready to pay reflected the value it was likely to extract from Celebrex, the top-selling arthritis drug which Pfizer and Pharmacia have collaborated in marketing since 1998.

Pfizer expects cost savings of $1.4 billion in 2003, rising to $2.5 billion by 2005. The deal is expected to close by the end of 2002.

CBS Marketwatch