In the pharmaceuticals industry, bigger doesn’t always mean better: the largest companies haven’t necessarily produced the highest long-term returns, and pharma remains one of the least concentrated of major global industries. Nonetheless, its largest players recently initiated a spate of mergers that created a new class of heavyweight with annual drug revenues of more than $20 billion. Despite the claims of the executives who cited the benefits of size as part of the rationale for making these deals, financial markets frowned on many of the combinations when they were first announced.

Yet for the largest drug companies—"Big Pharma"—size could bring advantages in several critical areas. Size provides an edge in launching blockbuster drugs, which can individually generate $1 billion or more in annual revenues; increases the number of bets a company can place on new technologies; helps it complete clinical trials more quickly; and increases its desirability as a licensing partner. Moreover, the biggest companies tend to back the most promising products, to enter key markets most quickly, and to deploy large sales forces to launch and market products most effectively.

Although becoming the next giant isn’t a pharma company’s only possible strategic path, remaining competitive will increasingly mean...