The world's biggest drug company, Pfizer, has agreed to pay $60bn (�39bn) for rival Pharmacia, in a deal that could herald a fresh wave of mergers in the sector.

Both firms' boards have agreed the deal, which will create a combined firm with revenues of $48bn and a $7bn annual budget for research and development.

We are going to see a new wave of consolidation

Philippe Guy, Boston Consulting Group

The two companies produce some of the best-known medicines and remedies on the market, including Pfizer's anti-impotence drug Viagra, and Pharmacia's Rogaine hair treatment.

It is not yet clear whether the deal will attract the attention of competition regulators, a possibility since it will give the merged firm a 10% global market share.

The deal comes as something of a surprise, since sluggish conditions in the financial markets have made mega-mergers considerably harder to pull off in recent months.

Blockbuster

Pfizer's coffers are currently bulging with cash: at the same time as the merger announcement, it revealed that profits had risen to $1.96bn in the second quarter of the year.

Pharmacia's anti-baldness product is a top seller

It is intending to fund the deal wholly with its shares, which have outperformed the sagging US market over the past year.

Shareholders in Pharmacia will receive 1.4 Pfizer shares for every one they own.

Crucially, the merger will produce a firm rich in blockbuster drugs: 12 of the two companies' products currently have annual revenues in excess of $1bn.

And at the same time, the two companies boast of "synergies", bringing in cost-savings of $1.4bn next year, rising to $2.5bn in 2005.

One side-effect of the deal is the spin-off of Monsanto, the controversial crop-sciences firm majority-owned by Pharmacia.

Urge to merge

After frenzied merger activity in the 1990s, deals in the pharmaceutical sector have slowed to a crawl in recent years.

But for some firms, buying industry rivals is a cheaper way of acquiring new blockbuster drugs than going through the expensive process of researching and developing them.

Pharmacia's Monsanto unit is due for independence

The Pfizer-Pharmacia merger is likely to increase the pressure on rivals such as GlaxoSmithKline, Merck and AstraZeneca.

"We are going to see a new wave of consolidation," said Philippe Guy, global head of healthcare with Boston Consulting Group.

"There are many conversations taking place right now, and this is going to accelerate some of those."

GlaxoSmithKline was recently reported to be in merger talks with Bristol-Myers Squibb, a deal that could create a firm to rival Pfizer-Pharmacia.