The merger will allow Pfizer to diversify its product portfolio
US drugmaker Pfizer is to buy rival Wyeth in a deal worth $68bn (£50bn), the two companies have announced.
The merger will allow Pfizer to protect itself from a drop in revenues when its popular drug Lipitor and other products lose patent protection.
It will also help Pfizer diversify its product portfolio, thanks to Wyeth's presence in biotech drugs and vaccines.
The deal could wipe out nearly 20,000 jobs, adding to the wave of job cuts announced on Monday.
Pfizer also said it planned to shut some manufacturing sites.
It also reported a 90% drop in profit to $268m in the fourth quarter, because of a $2.3bn legal settlement.
Pfizer that there would be a total staff reduction of 15% of the combined firms' workforce of 130,000 - implying a total job loss of 19,500.
Pfizer, the world's biggest drugs firm, also makes Viagra, while Wyeth produces antidepressant Effexor XR.
World's largest pharmaceutical firm
Makes Lipitor and Viagra
Profit dropped 90% to $268m in fourth quarter on huge legal charges
Plans to cut 10% of its workforce and shut manufacturing sites
One of the largest drugmakers
Strong in vaccines and biotechnology
Makes Effexor XR and Prevnar
Will report its fourth-quarter results on 29 January
Pfizer has raised $22.5bn from banks to finance the deal and said it would reduce dividends "in connection with the proposed transaction between Pfizer and Wyeth".
"The merger will be financed through a combination of cash, debt and stock," the companies said.
"With our combined biopharmaceuticals business, it [the combined company] will lead in primary and specialty care as well as in small and large molecules," said Jeffrey Kindler, chairman and chief executive of Pfizer, who will run the new company.
The deal is the biggest merger announced on Wall Street since the credit crunch, and the largest merger in the pharmaceutical industry since Pfizer bought Warner-Lambert for $93.4bn in 2000.
Three years later, Pfizer also bought Pharmacia for $60bn.
Earlier on Monday, it was reported that Wyeth had withdrawn from talks to acquire Dutch biotechnology firm Crucell.
Diversification and cost-cutting
From 2011, Pfizer is expected to lose billions of dollars in sales to cheaper rival generics of its cholesterol treatment Lipitor.
GLOBAL JOB CUTS
Caterpillar - 20,000
ING - 7,000
Philips - 6,000
Corus - 3,500
Home Depot - 7,000
Pfizer/Wyeth - 20,000
General Motors - 2,000
Wyeth faces the same problem next year, as it will lose patent protection on its best-selling Effexor XR.
Wyeth also makes the popular Prevnar vaccine against childhood infections and rheumatoid arthritis treatment Enbrel.
The deal will also allow the two companies to cut cost by cutting jobs in overlapping areas.
"Deals of this quality and this magnitude will rekindle enthusiasm and hope about equity markets," said Andre Bakhos, Princeton Financial Group president.
"In the midst of a global recession, here is Pfizer, hopefully spending their dollars wisely."
Drug spending is also expected to come under pressure as governments attempt to reduce the cost of medical care.
Analysts disagreed on whether the deal might lead to other mergers in the sector.
"I wouldn't extrapolate this deal and say we're going to see a lot more deals because it's still a difficult financing environment," said Peter Boockvar, equity strategist at Miller Tabak & Co.
But pharmaceutical analyst David Moskowitz at Caris & Co said: "Consolidation is a necessary evil in Big Pharma. This sector must consolidate now, and Pfizer is the poster child."