Pfizer may pay about $50 per share for Wyeth, but the price may change as negotiations continue throughout the weekend, the source said. At $50 per share, Wyeth would fetch roughly $66.6 billion.
Such an acquisition, which sources said could come within days, would help Pfizer cope with a major gap in revenue in 2011 when its blockbuster Lipitor cholesterol treatment will begin to face US generic competition.
Spokesmen for Pfizer and Wyeth declined to comment.
It would diversify Pfizer into vaccines and injectable biologic medicines by adding Wyeth's big-selling Prevnar vaccine for childhood infections and Enbrel rheumatoid arthritis treatment. Pfizer would realise major cost savings by streamlining areas that overlap.
But the deal also raises questions about whether another huge acquisition is the right medicine for Pfizer, which has struggled after digesting two huge deals in the past decade. And it threatens to spark another round of layoffs in the drug industry at a time the US economy is already on its knees.
"I think it's eminently doable," said Barbara Ryan, an analyst with Deutsche Bank. "The question is whether others enter the fray. It's going to come down to price. The deal is attractive at this price, it's not attractive at any price."
Ryan said Pfizer could pursue Bristol-Myers Squibb or biotech giant Amgen Inc if a Wyeth deal falls through. Biogen Idec has also been mentioned as a possible Pfizer target, Credit Suisse analyst Catherine Arnold said.
Pfizer has secured roughly $25 billion in funding for the Wyeth deal, one source close to the talks said. Getting financing for the deal helps Pfizer surpass one of the biggest hurdles amid tight credit markets. Pfizer would pay more cash than stock in the deal, but final details have yet to be nailed down, the source said.
Pfizer would pay two-thirds of the cost in cash and a third in stock for Madison, New Jersey-based Wyeth, The Wall Street Journal reported.
Talks were accelerating on Friday and a deal could be announced in the near term, one source said, while cautioning that negotiations could still fall apart.
New York-based Pfizer had $26 billion in cash and cash equivalents and short-term investments on its balance sheet, as of its latest quarterly filing. It had $16.3 billion in short-term borrowings and long-term debt.
One complication to the financing is that some of the cash on Pfizer's balance sheet is overseas and it would have to repatriate those funds to purchase Wyeth, one source explained.
Pfizer may be able to purchase Wyeth's international assets separately and thus avoid the tax and foreign-exchange complications of repatriating funds, the source said.
Wyeth shares closed up $4.91, or 12.6 per cent, at $43.74 on the New York Stock Exchange. Pfizer rose 24 cents, or 1.4 per cent, to close at $17.45.
Wyeth has been in talks to buy Dutch vaccine firm Crucell, whose shares fell 9.6 per cent on Friday on fears that deal might now be in doubt.
But sources told Reuters the Pfizer-Wyeth talks will not necessarily scuttle Wyeth's Crucell deal. Wyeth has been holding talks with both Pfizer and Crucell in recent weeks, sources said.
ANOTHER DEAL FOR PFIZER?
Pfizer became the world's largest drugmaker with its purchase in 2000 of Warner-Lambert and the $60 billion acquisition three years later of Pharmacia.
The question for investors, many of whom continue to hold the stock largely because of its industry-topping dividend, is whether another acquisition of that scale will revive Pfizer over the long term, or only temporarily boost results.
Ultimately, a huge acquisition could make it harder for the merged company to grow from its larger revenue base and to prevent bureaucracy from stifling innovation.
Pfizer exemplifies the overriding problem for many large drugmakers, which have struggled to produce new blockbusters to replace those on which they lose exclusivity.
"We have, for many quarters now, said that Pfizer essentially has no realistic way of replacing the many drugs that are scheduled to go generic apart from doing a mega-merger," Sanford C. Bernstein analyst Tim Anderson said in a research note.
The global economic downturn has created a buyer's market for cash-rich drugmakers, prompting several deals.
Wyeth's market capitalisation as of Thursday was about $52 billion, so at $60 billion, the deal would represent a 15 per cent premium. Pfizer was valued at about $118 billion.
Aside from Enbrel, for which Wyeth shares rights with Amgen, and Prevnar, Wyeth also is developing experimental Alzheimer's disease drugs, which could be a major opportunity although some believe such drugs are a longshot.
Pfizer would also gain Wyeth's large consumer health division that includes Advil painkillers more than two years after it sold off its own consumer health business to Johnson & Johnson.
Pfizer's fortunes rose initially after its Warner-Lambert and Pharmacia deals thanks to huge merger-related cost savings, and outright ownership of Lipitor from Warner-Lambert.
Recently its performance flagged and shares dropped to more than 10-year lows in late 2008, after savings dried up and its $7 billion-a-year research budget failed to bear much fruit.
Pfizer, which reports fourth-quarter earnings next week, has said it expects 2008 revenue to be roughly similar to its 2007 revenue of $48 billion. It expects decent profit growth thanks to deep cost cuts.