Pfizer Inc.'s (PFE) $68 billion takeover of Wyeth (WYE) could start the ball rolling toward more deal-making in the pharmaceutical sector - either through traditional consolidation or purchases of biotechnology companies - as the sector battles the threat of expiring drug patents.

This is a common issue that pipelines of new products have generally been unable to offset. The Wyeth deal helps Pfizer dilute the looming 2011 loss of patent protection for its cholesterol blockbuster Lipitor, for example, while adding new products and creating cost-cutting opportunities through massive planned layoffs.

Big mergers are still tough to organize and finance, and may be something only the largest can do in the current economic environment.

Nonetheless, if the market is open to such deals, observers suggested Bristol-Myers Squibb Co. (BMY), which is also facing pressures from generics, could be a prime target, and that it may make sense for Merck & Co. (MRK) and Schering-Plough Corp. (SGP) to consolidate around their marketing joint venture for cholesterol drugs Vytorin and Zetia.

Natixis Bleichroeder analyst Jon LeCroy said he had been skeptical about "mega-mergers" in pharmaceuticals. But after Monday's announced deal, "we now view additional mergers as entirely possible and think Bristol-Myers is the most likely candidate for the next acquisition," he said in a note to clients.

"Mega-mergers appear to be the move of last resort, and we believe the industry's fundamentals are broadly weak enough that desperate measures will continue," he added.

LeCroy raised his rating on Bristol-Myers to hold from sell while suggesting the company could fetch $38 per share in a deal. Bristol-Myers shares were recently down 28 cents, or 1.3%, to $22.11.

Shares of Merck were down 60 cents, or 2.1% to $27.60 while those of Schering-Plough were recently down 95 cents, or 4.9%, to $18.49.

Monday's deal "speeds what was going to happen anyway," said Erik Gordon, professor at University of Michigan's business school who studies mergers and the drug industry. "Companies had to merge anyway in order to get their cost structures right. Now they have to do it sooner rather than later."

This kind of deal makes sense with today's market pressures, said Jay Ferguson, portfolio manager at Ferguson, Andrews Investment Advisers, which owns shares of medical companies. It otherwise looks hard - as big pharmaceutical companies thin the ranks of research and development and marketing staff - for them to develop or sell their way out from under the threat of expiring patents.

"How do you deal with the patent cliff? You fire a lot of people," Ferguson said.

Indeed, Pfizer plans to cut more than 19,000 jobs from the combined staff and Ferguson suggested more could come. "That's the only way this deal makes any sense," he said.

 
   Mega-Mergers Not Easy

To be sure, Pfizer is uniquely positioned as the largest drug maker by sales to pull off this kind of deal, and paying for mega-deals could prove daunting to other companies. Depressed stock prices make paying with stock tougher - the Wyeth purchase will be a cash and stock deal - and financing isn't easy to find.

Even in this case, in which five banks are chipping in $22.5 billion in debt to supplement Pfizer's cash war chest, there may be heightened regulatory risk.

There are billions of taxpayer dollars tied up in banks right now due to contributions from the federal government's Troubled Assets Relief Program rescue plan. Those tethers, plus the huge loss of jobs this deal will trigger, could arouse political interest, said Tim Nelson, a senior health-care analyst with FAF Advisors in Minnesota.

Such concerns may have helped keep Wyeth shares from floating closer to the proposed take-out price on Monday. The deal, partially pegged to where Pfizer trades, would value Wyeth at about $48.54 a share. Shares of Wyeth recently traded at $43.39, about a 10% discount.

Pfizer shares recently fell $1.96, or 11.2% to $15.50.

"How's the government going to look at this deal when it's done with bank financing that they're providing?" Nelson said.

He doesn't foresee many big mergers in the pharmaceutical space, and continues to believe purchases of biotechnology companies make more sense for drug makers. Biotech drugs are derived from biologic material, are difficult to copy and there is no regulatory pathway - so far - for generic competition. Such attributes have made biotech companies a common parlor topic when the theory of pharmaceutical purchases is discussed.

Shares of biotech firm Biogen Idec Inc. (BIIB) recently traded up 1.9% to $48.33 while Celgene Corp. (CELG) traded up 1.3% to $50.21.

There is already a big potential biotech purchase in the works, as Roche Holding AG (RHHBY) wants to buy the 44% of Genentech Inc. (DNA) that it doesn't already own. But the asking price - Genentech has rebuffed Roche's $89 a share offer - has been the sticking point. Important study data on Genentech's marquee product, the cancer drug Avastin, could change the equation in a few months if it's positive, perhaps giving Roche a reason to consider acting sooner.

The companies declined on Friday to discuss the acquisition offer.

While biotech deals would freshen up tired product portfolios at traditional drug makers, Ferguson, the portfolio manager, questioned how much help they'll bring. The smaller biotech companies often have one main product, which may not be enough to offset the damage of expiring patents on blockbuster drugs, he said.

-By Jon Kamp, Dow Jones Newswires; 617-654-6728; jon.kamp@dowjones.com

(Peter Loftus and Thomas Gryta contributed to this report.)

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary. You can use this link on the day this article is published and the following day.