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Thumbs up or down on megamergers? Depends on your point of view

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It doesn't take much to start an argument over megamergers in the pharmaceuticals industry. In a way, the argument never really stops. Since the birth of FiercePharma in 2007, we've watched a few of them: Pfizer ($PFE) plus Wyeth, Merck ($MRK) plus Schering-Plough, Roche ($RHHBY) plus Genentech, to name the most obvious. We've also quoted the anti-megamerger folks on their abstention. Eli Lilly's ($LLY) John Lechleiter, for instance, took the "no megamerger" pledge so many times, he should have recorded and distributed his own sound bite, to save his voice.

These days, "merger of equals" is the preferred term, and some companies are on the lookout: Valeant Pharmaceuticals ($VRX), for instance. Analysts and investors play matchmaker, figuring AstraZeneca ($AZN), for instance, as a candidate. Others, particularly R&D types who've lived through integrations they'd rather forget, decry the idea. The pro-and-con debate rages on.

Now, an article by McKinsey & Co. has the argument flaring again. The management consulting firm turned out a study showing that for pharma companies, megamergers work. The general measure: shareholder value.

There are plenty of questions about this analysis, as commenters at In the Pipeline point out. What about the impact of buybacks, for instance? What about the megamergers that weren't mentioned (and, in these commenters' opinions, failed)? What about the impact of the most recent recession, when investors tend to move toward pharma stocks as a defensive move, not in affirmation of megamerger value? And ex-Pfizer R&D chief John LaMattina wrote up his own rebuttal in Forbes, enumerating the many ways repeated megamergers sap the life out of research, as focus and energy go into logistical decisions, layoff worries, and the like--and away from science.

But the megamerger debate--like the McKinsey study--lumps all big mergers into one group (or two, in McKinsey's case). It's almost stereotypical; the R&D stagnation at Pfizer comes to stand for R&D stagnation after every big deal. The truth is more individualized. Think of Roche without Genentech. Its legacy R&D operations have turned out precious few prospects, while the Genentech labs pop out one big drug after another, their breast cancer treatments Perjeta and Kadcyla being only two. Where would Roche be without it? Novartis' ($NVS) Alcon buyout--which is really more of an add-on than a blend-in--was successful enough to put that division on the list of units Novartis intends to keep while it considers disposing of several others.

On the other hand, consider Pfizer and its own strategic review, or Merck and its plans to sell or otherwise dispose of underperforming businesses. They're partially unwinding the big deals made in the past. One of the units Merck wants to jettison is consumer healthcare, which it acquired along with Wyeth. And its R&D labs appear to have suffered from LaMattina's postmerger disease; few victories in recent years. Even McKinsey admits that the Pfizer-Wyeth deal didn't deliver as hoped. In both of these cases, layoffs and cost cuts are the most obvious payoffs.

The real problem with the McKinsey study, as Derek Lowe points out at In the Pipeline, is the focus on shareholder value rather than a more holistic view. Sure, some of these deals met investors' expectations for ROI. The graphics in McKinsey's article look good. Frankly, investors also like the unwinding that Merck, Pfizer and others are doing. But what might Pfizer, for instance, have achieved if its R&D folks weren't so distracted for years and years? "Things that don't happen, drugs that don't get discovered--they make no sound at all," Lowe writes. Analyzing silence isn't possible with a pocket calculator. -- Tracy Staton (email | Twitter)