Updated from 7:47 a.m. EDT

Pfizer

(PFE) - Get Report

has agreed to buy

Pharmacia

(PHA)

in a stock transaction valued at $60billion.

The deal creates a pharmaceutical giant with revenue topping $48billion annually, bolstered by a dozen blockbuster drugs that eachgenerate more than $1 billion in sales annually. Pfizer and Pharmaciaalready conduct business together, as marketing partners for the arthritisdrugs Celebrex and Bextra, which are expected to ring up $3.75 billion insales this year.

The Pfizer-Pharmacia merger comes at a time when drug makers are underattack, seemingly from all fronts. Lawmakers, managed care companies andconsumer groups are seeking lower drug prices. Patents are expiring on keydrugs, forcing drug companies to lose billions of dollars in revenue, whileat the same time, their research labs are slow to develop lucrativereplacements.

And of course, investors, reacting to the anemic growth that has spreadacross the drug sector like some sort of pandemic, have kicked drug stocksdown to multi-year lows.

Wall Street has been expecting some mergers and acquisition activity inthe drug sector, but most of the attention has been centered on who mightbuy foundering

Bristol-Myers Squibb

(BMY) - Get Report

. Monday's deal could turn the heatup on

GlaxoSmithKline

(GSK) - Get Report

, which has said publicly that it is eyeballing Bristol-Myers. Glaxo was the world's largest drugmaker until thePfizer-Pharmacia deal was announced.

Under terms of the deal, Pfizer will exchange 1.4 of its shares forevery share of Pharmacia, which values it at $45.08 per share, or a 38%premium over its Friday close of $32.59. Pfizer shareholders will own 77%of the combined company, while Pharmacia shareholders will hold 23%. Pfizerclosed Friday at $32.20 per share.

In pre-market trading Monday, Pfizer was down $3.65, or 11%, to $28.55,while Pharmacia was up $7.56, or 24%, to $40.45.

Pfizer CEO Henry McKinnell will keep that title and will chair the board of the combined firm, which will retain the Pfizer name. Pharmacia Chairman and CEO Fred Hassanwill become vice chairman and a director on the board.

Pfizer, already the No. 1 drugmaker in the U.S., sells thecholesterol-lowering drug Lipitor, the erectile dysfunction drug Viagra,the anti-depressant Zoloft, as well as Celebrex. It will now become aplayer in the cancer market by gaining access to Pharmacia's Camptosar.Pharmacia also sells a glaucoma medicine, Xalatan, the bladder controlmedicine Detrol and Rogaine for baldness.

The purchase of Pharmacia is expected to boost Pfizer's spending ondrug research and development to $7 billion, up from about $5 billion. Thecombined companies' drug pipeline contains nearly 120 new chemical entitiesin development, as well as 80 projects for product enhancements. Pfizersays the combined company plans on filing 20 new drug applications withglobal regulatory authorities over the next five years.

Pfizer also expects the merger to help it reduce costs -- about $1.4billion in 2003, $2.2 billion in 2004 and $2.5 billion by 2006.

In a separate statement, Pfizer refined its estimate for 2002 dilutedearnings, net of special charges, to $1.58 per share, or 21% growth, withinthe range of earlier guidance. From 2002 to 2004 on a standalone basis, thecompany expects growth in net income of 14% and growth in diluted earningsper share of 16%.

For the second quarter, Pfizer reported earnings of $1.96 billion, or32 cents per share, compared to $1.83 billion, or 29 cents per share in thesecond quarter last year. Earnings match Wall Street estimates, accordingto Thomson Financial/First Call.

Last April, Pfizer reported first-quarter earnings growth of 22%, butwarned that higher spending would drag down second-quarter earnings intothe single digits.

Also in a separate statement, Pharmacia said it was comfortable withconsensus estimates of second-quarter adjusted earnings of 39 cents pershare. It reaffirmed earnings guidance of $1.52-$1.57 per share for 2002.Pharmacia also said it is proceeding with plans to spin off its Monsantounit to its shareholders before the Pfizer merger deal closes.

On a pro forma basis, the combined Pfizer-Pharmacia entity will have$11.9 billion in adjusted earnings and $47.9 billion in revenue in 2002,the companies said. It is forecast to have a compounded annual adjustedearnings growth of 19%, and 10% revenue growth, from 2002 to 2004.

The Pharamcia purchase is expected to close by year's end and beneutral to Pfizer's adjusted net income in 2003, while increasing adjusted,diluted earnings to $2.18 per share, or 6 cents more than Pfizer'sstandalone guidance.

Pfizer also said it will increase a previously announced stock buybackprogram to $16 billion, from $10 billion, completing the program in 2003.

The merger will require regulatory approval. Combined, the two companies are expected to control about 11% of the pharmaceutical market.