Pharmaceutical giants American Home Products Corp. and Warner-Lambert Co. have agreed to a merger that would create by some measures the largest drug manufacturer in the world.

The Associated Press, confirming early today that a deal had been reached, said the new company will be called AmericanWarner Inc. A formal announcement of the merger was expected today.

Prospects of such a deal, valued at as much as $65 billion, touched off brisk trading in pharmaceutical stocks yesterday, which have been weak this year as companies struggle to find new breakthrough drugs as patents run out on existing products.

Analysts said they believe the AHP-Warner-Lambert deal will trigger a number of mergers in the highly fragmented drug industry.

A merger between AHP and Warner "makes a lot of sense," said Herman Saftlas, senior pharmaceutical analyst at Standard & Poor's in New York.

In a merged company "we [would] really have a major powerhouse here in terms of pharmaceutical sales," Saftlas said. ". . . They'd be neck and neck with Merck."

If merged, American Home and Warner-Lambert would have sales of $23.7 billion. Including over-the-counter medicines and other health care products, their total would rank third behind No. 1 Merck & Co. and No. 2 Johnson & Johnson.

Both companies produce many items that are household names. AHL's lines include Advil, Anacin, Chap Stick and the osteoporosis and menopause drug Premarin.

Warner-Lambert produces Listerine, Sudafed, Trident gum, Benadryl and Certs. It also owns the hot-selling cholesterol drug Lipitor.

AHP has been looking for a merger partner for some time, but earlier talks with Monsanto Co. and SmithKline Beecham PLC failed to produce a deal. Since then, AHP reached a settlement of litigation over its Redux and Pondimin diet drugs. The company took a $4.75 billion charge related to that settlement.

AHP has a new sleeping aid, called Sonata, that is expected to begin generating profits this year, while Warner-Lambert needs to find a successor to Lipitor, which racked up $2.2 billion in sales last year. Sonata, if it lives up to its early billing, could be reaching peak sales as Lipitor began to slow.

Analysts also said they expect a wave of other mergers, or at least attempts, across the industry. Pharmaceutical manufacturers need increased efficiencies in what is shaping up as a period of difficult conditions for them.

The likely scenario would be for AHP Chairman John R. Stafford, 62, to become chairman of the merged firm initially, with Warner-Lambert Chairman Lodewijk J. R. de Vink, 54, becoming chief executive. After a short time, Stafford would step aside, giving the top spot to de Vink.

The merger agreement would be subject to antitrust review by the Federal Trade Commission, which would check for areas that might be anti-competitive and could require changes such as the spin-off of certain lines of business.

IN PROFILE:

AMERICAN HOME PRODUCTS

Business: Develops, makes and sells drugs, consumer health-care products and agricultural products.

Brands: Advil, Preparation H, Premarin, Robitussin

Based: Madison, N.J.

Employees: 53,000

1998 sales: $13.42 billion

1998 net income: $2.47 billion

Yesterday's closing stock price: $56, up $5.621/2

Ticker symbol: AHP on the NYSE

Web address: www.ahp.com

WARNER-LAMBERT

Business: Develops, makes and sells drugs, consumer health-care and confectionary products.

Brands: Listerine, Neosporin, Schick razors, Sudafed, Trident gum

Based: Morris Plains, N.J.

Employees: 41,000

1998 sales: $10.21 billion

1998 net income: $1.25 billion

Yesterday's closing stock price: $83.811/4, up $5.371/2

Ticker symbol: WLA on the NYSE

Web address: www.warner-lambert.com

SOURCES: Hoover's, Bloomberg News