Jan. 24 (Bloomberg) -- Pfizer Inc.’s potential purchase of Wyeth for more than $60 billion may set off a rush to consolidate in an industry buffeted by a thinner pipeline of new products and increasing generic competition.

Johnson & Johnson, Merck & Co., and Bristol-Myers Squibb Co. are among the companies that are most likely to strike a major deal, analysts said. The chief executives at these companies have said they are looking for acquisitions, and the three drugmakers have a combined $29 billion in cash and short- term investments to make purchases.

GlaxoSmithKline Plc, of London, and Bayer AG, based in Leverkusen, Germany, say they don’t see a large deal worth making or much value in getting bigger. Instead, they are focusing on smaller, targeted acquisitions to boost profits. Pfizer’s talks with Wyeth, along with Roche AG’s $43.7 billion bid last year for Genentech Inc., could change that as drug company executives watch their rivals grow, said Glaxo Chief Executive Officer Andrew Witty.

“If one big company makes a move, I can absolutely imagine that triggering off a series of moves,” Witty said in a Jan. 8 interview. “The industry has historically, habitually demonstrated its inability to sit on its hands when someone moves. The question is whether somebody big is going to finally pull the trigger.”

Replacing Lipitor

New York-based Pfizer, the world’s biggest drugmaker, and Wyeth, of Madison, New Jersey, have been negotiating for months, three people familiar with the talks said yesterday. The combined company would have annual sales of more than $70 billion, a 45 percent increase for Pfizer.

Pfizer Chief Executive Officer Jeffrey Kindler must replace more than $12 billion in revenue the company may lose within three years when its Lipitor cholesterol pill, the best-selling medicine in history, faces generic competition. With Wyeth in its fold, Pfizer’s earnings may fall as little as 10 percent, rather than the 23 percent expected drop when Lipitor loses patent protection in 2011, Deutsche Bank analyst Barbara Ryan said in a in a note to clients yesterday.

“Wyeth represents perhaps the best take-out play, if one assumes there will be at least some big pharma consolidation over the next one to three years,” said Tim Anderson, an analyst at Sanford Bernstein & Co., in a note. Wyeth could fetch $65 billion in such a deal, he wrote.

Securing Financing

In such a deal, Pfizer would gain Wyeth’s Prevnar vaccine, recommended by the U.S. government as a childhood shot against pneumonia, and dependable sales not threatened by generics. The goal for Pfizer would be to expand their revenue base with added products while trimming costs by cutting duplication among workers involved in sales and marketing.

Spokesmen from Pfizer and Wyeth declined to confirm the talks. Pfizer is close to securing $25 billion in financing for the deal, the Wall Street Journal reported today, citing unidentified people familiar with the matter. The company will pay two-thirds of the deal cost in cash and the remainder in stock, and an agreement could be reached by next week, the Journal wrote.

Pfizer had $25.5 billion in cash and short-term assets as of Sept. 30.

It will pay about $50 per Wyeth share, the Journal said.

Wyeth rose $4.91, or 12.7 percent, to $43.74 by 4:01 p.m. in New York Stock Exchange composite trading, the biggest gain since Jan. 20, 1998, giving it a market value of $58 billion. Pfizer rose 24 cents to $17.45, valuing it at $118 billion.

Another drugmaker seeking to pull the trigger on acquisitions may be Whitehouse Station, New Jersey-based Merck, the second biggest U.S. drugmaker.

Singulair Losses

Merck must offset more than $4 billion it will lose when generic copies of its Singulair asthma treatment come on the market by 2012. As a result, they may make a bid for Gilead Sciences Inc. of Forest City, California, said Deutsche Bank’s Ryan said in a research report last month.

Merck may also have an interest in Wyeth if the Pfizer deal doesn’t go through, Credit Suisse analyst Catherine Arnold said in a report today.

“There is no doubt many companies are looking at that deal that will transform their company,” Merck Chief Executive Officer Richard T. Clark said at an investor conference in New York Jan. 7. “I do think it can’t be business as usual, and certainly the consolidations aren’t over.”

Johnson & Johnson, the world’s largest health care company, also seems poised to be a buyer, given its need to replace revenue lost to generic competition for top-selling drugs such as Risperdal and Topamax, said Rick Wise, an analyst with Leerink Swann & Co., a New York investment bank.

J&J Deals

New Brunswick, New Jersey-based J&J, the world’s biggest health-products company, had $14.79 billion in cash and short- term securities as of Sept. 30 and announced two deals last month: the $438 million purchase of Omrix Biopharmaceuticals Inc., a manufacturer of bleeding control products, and a $1.07 billion agreement with breast implant-maker Mentor Corp.

“The sleeping M&A giant seems to be waking up,” Leerink Swann’s Wise said of Johnson & Johnson. “They have the means, the opportunity and the mindset.”

Abbott Laboratories Chief Executive Officer Miles White also said in a conference call with investors that he’s looking to buy companies beaten down by the recession.

“It’s a good time to be a buyer,” White said on Jan. 21. “A lot of values are depressed -- for good reasons in many cases and for not-good reasons in others. My priority is non- pharma, but I’m not going to pass up an attractive pharmaceutical deal if I see one.”

Access to Loans

Drug companies, rich in cash from medicines people still need in a recession, have access to loans while other companies struggle for financing, said Ryan.

“There are very few companies in the world that are going to get money in this environment, but these companies are going to get it,” Ryan, who is based in Greenwich, Connecticut, said in a conference call with clients Jan. 20. “When we have conversations in private with these CFOs, I am being told they have access to money.”

The health-care industry is proving a bright spot for mergers-and-acquisitions bankers whose fees are declining amid a 38 percent drop in transactions across all industries, from a record $4.06 trillion in 2007 to $2.5 trillion last year. Health- care deal making fell by only 19 percent over the same time frame, Bloomberg data show.

“Health care will probably have pockets of strength, because there are a lot of big pharma companies that have pipeline issues with [patent] cliffs in either 2011 or 2012, said Lee LeBrun, co- head of Americas M&A for UBS AG, who predicts that overall merger activity will continue to decline in 2009. “You’re already starting to see some deals being done to improve pipelines.”

Replacing Sales

LeBrun advised Osaka, Japan-based Takeda Pharmaceutical Co. on its $8.8 billion purchase of Cambridge, Massachusetts-based Millenium Pharmaceuticals Inc. last year, and his firm helped Eli Lilly & Co., of Indianapolis, win a bidding war with Bristol-Myers Squibb Co. to buy New York-based ImClone Systems Inc. for $6.5 billion. Both acquisitions helped the buyers replace sales from drugs whose patents are set to expire.

Wyeth ended regular trading on Jan. 23 with a market capitalization of about $58.2 billion and an enterprise value, which includes net debt, of $55.6 billion, according to Bloomberg data. A sale at that price would be the sixth-biggest health-care deal in history, according to Bloomberg data, and biggest since 2004, when Sanofi-Synthelabo SA bought Aventis SA for about $71 billion including net debt.

The transaction would also rank as the biggest transaction in any industry since InBev NV bought Anheuser-Busch Cos. last year for more than $60 billion including net debt.

To contact the reporters on this story: Tom Randall in New York at trandall6@bloomberg.net; Shannon Pettypiece in New York at spettypiece@bloomberg.net

Last Updated: January 24, 2009 04:35 EST