The new company will be called AmericanWarner Inc. Under the terms of the transaction, which was unanimously approved by both boards of directors, American Home will use its shares to acquire the shares of Warner-Lambert.

Each share of Warner-Lambert will be exchanged for 1.4919 of a share of American Home, or about $83.54 a share, based on Wednesday's closing price for American Home stock. American Home shareholders will receive AmericanWarner shares on a one-for-one basis. Both companies' shareholders will own approximately 50 per cent of the combined company.

American Home and Warner-Lambert expect the combined company will have pro forma sales of $26 billion, market capitalisation of about $145 billion and a research and development budget of about $3 billion. The companies also expect the merger will boost earnings growth and the merged company will save about $1.2 billion annually beginning in the third year.

American Home's 62-year-old John Stafford will serve as chairman for 18 months after the deal closes, after which he will be chairman of the executive committee and a director. Warner-Lambert's chairman, Lodewijk JR de Vink, 54, will become chief executive officer of the new company. Each side will get 10 board seats.

Though drug companies have been merging periodically for about a decade, and some of the highly touted deals have collapsed, conditions are ripe for a new wave of consolidation.

The prevailing mantra among the biggest players is that drug development and world-wide marketing have become so expensive that only the goliaths can succeed. The future may well bring a global drug industry with only a half dozen giants.

Even the biggest drug makers control only 4 per cent to 6 per cent of the world's $134 billion pharmaceuticals business. That fragmentation, and all of its inefficiencies, suggests to some industry leaders that more consolidation is simply inevitable.

One likely combination -- The long-anticipated merger of Britain's SmithKline Beecham PLC and Glaxo Wellcome PLC. Would-be buyers are eyeing Monsanto Co, which owns the GD Searle drug firm and is under pressure to break itself up. Switzerland's Novartis AG and Germany's Bayer AG are also understood to be sniffing around for deals. Even the US firms Merck & Co, Bristol-Myers Squibb Co, and Pfizer Inc, which have all long maintained that they want to stay independent, may soon be forced to consider linking up with a competitor.

An explosion of biological discoveries is expected to produce an array of innovative new medicines in the next five to 10 years. But right now, the world-wide pharmaceutical industry is looking down the barrel of unprecedented problems.

Patents protecting many hot-selling products are expiring. The pickings are slim inside research pipelines. The corporate chiefs at the largest firms are aging and eager to make one last splash before they retire. And things could become even more difficult if efforts to expand prescription-drug coverage to Medicare recipients result in price controls.

To weather the bumpy road ahead and keep Wall Street happy with consistently high profit growth, drug makers must produce a steady flow of truly innovative medicines to command premium prices and quickly generate mammoth sales results. But because the process of discovering and marketing breakthrough medicines is so expensive and serendipitous, product-hungry drug makers such as American Home and Warner-Lambert feel pressure to solve their short-term revenue needs by joining forces.

Shares of every major pharmaceutical company in Europe and in the U.S. climbed Wednesday on news of the talks between American Home and Warner-Lambert. Sares of American Home jumped to $55.9375, up $5.5625, or 11%, while Warner-Lambert jumped to $83.8125, up $5.625. Other drug stocks jumped as well, with Pharmacia & Upjohn Inc. rising to $55.625, up $1.4375. Shares of Swiss giants Novartis and Roche Holding AG also jumped in European trading.

In recent years, mergers occurred among the industry's weaker players. They were crippled by plummeting revenue as big-selling drugs lost their patent protection, or as small R&D programs failed to produce enough new drugs to sustain growth. Through mergers, companies including Burroughs Wellcome, Marion Merrell Dow, Upjohn and Sandoz often generated quick short-term profit gains for their newly combined companies. They jettisoned employees and shut down administrative, sales and manufacturing operations.

Now, many companies are seeking a revenue-producing bridge to get them through the next few years when new genetic science is expected to yield a trove of important medicines against heart disease, cancer, diabetes, and infectious diseases.

Merck, for one, is in a particularly difficult place right now, with four major medicines due to lose patent protection in the next two years, including its heart drug Vasotec and Pepcid for ulcers. Raymond Gilmartin, Merck's chairman, says he's confident the company will come through those patent expirations just fine.