NEW YORK (CNN/Money) - Drug maker Pfizer Inc. said Monday it agreed to buy rival and marketing partner Pharmacia Corp. in a $60 billion deal that combines the maker of Lipitor, Zoloft and Viagra with the developer of Rogaine and Celebrex.

The deal, the largest announced this year, would create a $48 billion company and expand the research and marketing muscle of Pfizer, the No. 1 drug maker.

But it also comes during a difficult time for the drug industry, which faces pressure to lower prices even as it fends off competition from generic drug makers. The announcement jolted the mergers and acquisitions business, which has ground to a near halt amid a slumping stock market.

Still, the proposed buyout of Pharmacia set off speculation about which drug maker will be acquired next in the fast-consolidating drug industry.

Executives said the combined company will produce big benefits of scale, fusing two research and development departments and joining sales forces to market 14 No. 1 drugs.

"We will be better able to leverage our worldwide R&D strength," Peter B. Corr, senior vice president of worldwide development at Pfizer, said during a conference call with investors. "We will also expand our presence in major therapeutic categories."

One of those categories is cancer drugs, one of Pfizer's few weaknesses. Pharmacia makes the chemotherapy treatment Camptosar.

Corr said the combined research and development budget of the two companies would total $7 billion this year.

Pharmacia shareholders will receive 1.4 shares of Pfizer for each of their own shares in a deal that values Pharmacia shares at $45.08 each, 40 percent above Friday's closing price.

The deal does not include Pharmacia's 84 percent stake in Monsanto, which is being spun off to Pharmacia shareholders.

Shares of Pfizer, the most actively traded company on the New York Stock Exchange Monday, fell 13 percent. Pharmacia shares gained 19 percent.

Pfizer also released second-quarter results Monday, earning $2.1 billion, or 33 cents a share, excluding special items and merger-related costs. That's up 10 percent from the $1.9 billion, or 30 cents a share, it earned on the same basis a year earlier.

The results topped the 32-cent consensus forecast of analysts surveyed by earnings tracker First Call. Revenue rose to $8 billion from $7.4 billion, missing the First Call forecast of $8.2 billion.

Looking ahead, Pfizer said it still expects to earn $1.58 a share this year and said that Pharmacia should add about 6 cents a share to 2004 earnings.

Pfizer makes several high-profile drugs, including Lipitor, for treating cholesterol; Viagra, the anti-impotence drug; and Zoloft, which treats depression.

Rogaine, for hair loss, and the arthritis drug Celebrex, are among Pharmacia's best-known products.

With little drug overlap, the company expects regulators will give the merger a green light. They said the deal should close by year's end.

But Lehman Brothers said scrutiny by the Federal Trade Commission could mean the merger won't go through until early next year.

The deal will give Pfizer an estimated 14 percent of the U.S. prescription drug market, according to Goldman Sachs analysts, and could prompt a new round of deals in the sector.

"With a remarkable amount of industry fragmentation (the top ten players control only 60 percent of the U.S. prescription drug market), depressed share values and slow revenue growth (boosting the value of merger synergies), we are in a potentially fertile environment for deals," the Goldman note to clients said.

With their "depressed" share values, Bristol-Myers Squibb and Schering-Plough are among likely acquisition targets, SG Cowen said.

Shares of drug companies have been falling this year as makers of generic pharmaceuticals take advantage of patent expirations. Schering-Plough's Claritin patent, for example, is set to expire in December and companies have filed applications to sell a generic version.

Executives at Pfizer and Pharmacia said these issues do not loom for them.

Lipitor is protected through 2010 and Viagra through 2011. Celebrex's patent extends through 2013. Pharmacia has partnered with Pfizer since 1998 on the marketing of Celebrex.

"Quite frankly, with the two companies together we can get more out of the pipeline than we could separately," Hank McKinnell, Pfizer's CEO, told CNNfn's Market Call.

Pharmacia said separately it is comfortable with the consensus earnings estimates for its pharmaceutical business of 39 cents per share in the second quarter and with its earlier full-year earnings guidance of $1.52 to $1.57 a share.

The companies estimate cost savings from the merger at $1.4 billion next year, $2.2 billion in 2004 and $2.5 billion by 2005. Details on potential staff cuts to produce the savings were not immediately released. Pfizer's current shareholders will own about 77 percent of the new company following the deal.

"The deal will buy Pfizer some additional breathing room, as we had expected sales and earnings per share growth to slow based on the maturing portfolio of drugs, patent expirations in 2004 through 2007, winding down on synergies from the Warner-Lambert merger and weak new product flow," CIBC World Markets analyst Mara Goldstein told clients.

Pfizer bought rival Warner Lambert in 2000 in a stock deal worth $114.7 billion.

The companies said the combined entity should have combined revenue of $48 billion, including $39 billion in prescription sales and 12 products with more than $1 billion each in annual sales.

The business of mergers and acquisitions, strong throughout the 1990s, has slowed. In the first six months of the year, transactions valued at $206.4 billion were announced in the United States, down 44 percent from a year earlier, according to Thomson Financial.

The Pfizer-Pharmacia deal is the biggest deal so far this year, according to Thomson Financial, easily surpassing the previous largest, National Grid Group PLC's $9.4 billion deal announced in April for Lattice Group PLC.

Pharmacia, which started as a Sweden-based company, merged with U.S. drugmaker Upjohn in 1995 to become Pharmacia & Upjohn. It moved its headquarters first to England and then to New Jersey in 1998. Monsanto merged with the combined company in 2000 and changed its name to Pharmacia. The spinoff of the company's non-pharmaceutical business began earlier this year.