Big drugmakers are clinching smaller deals

After shelling out tens of billions of dollars for single biotech companies, pharmaceutical giants such as AbbVie, AstraZeneca and Merck & Co. have shifted to smaller targets costing $5 billion or less. Many of the companies getting taken out are private.

The reason, according to executives, bankers and lawyers: Smaller deals are just easier to do in the current regulatory environment, and the sector is looking pretty picked over.

All 17 deals announced by big pharmaceutical companies during the first six months of the year were valued at $5 billion or less, according to research firm DealForma. During the same period last year, big drugmakers agreed to nine deals, including two that were $10 billion or larger.

Nine of the 17 deals were for privately held companies, compared with one during the same period last year, DealForma said. Its data was for deals with disclosed values and upfront cash and equity amounts. Large drugmakers were defined as having a market value of more than $50 billion.

Last year’s big acquisitions were led by Pfizer’s $43 billion purchase of cancer biotech Seagen. By contrast, the biggest pharmaceutical deal so far this year was Vertex Pharmaceuticals’ $4.9 billion purchase of Alpine Immune Sciences and its experimental kidney drug.

“The size of this deal was just about perfect for Vertex. It was easy to afford and left us with a balance sheet to do more deals," said Vertex Chairman Jeffrey Leiden.

Vertex Chief Executive Reshma Kewalramani said the company had been watching for some time the kidney disorder targeted by Alpine’s lead drug because there isn’t a treatment of the underlying cause, and Vertex didn’t have a medicine of its own in the works.

Dealmaking remains a crucial way for big drugmakers to supplement the work of their own laboratories and fill in their product lineups. A reason for the shift to smaller acquisitions, lawyers and bankers say, is that big companies see fewer larger targets worth buying after many were taken out.

“A lot of the late-stage or near-term, needle-moving opportunities have either been bought" or passed over, said Andrew Weisenfeld, managing partner at MTS Health Partners, who advises biotech and pharmaceutical companies on deals.

Also behind the shift is the Federal Trade Commission’s tighter scrutiny of merger-and-acquisition activity, including larger pharmaceutical deals. Smaller transactions present fewer hurdles to gaining approval from antitrust regulators, according to lawyers and bankers who advise companies on deals.

Smaller deals can also help plug pipeline holes if big drugmakers lost out in negotiations for more expensive deals. And the deals are often easier for buyers to negotiate than large ones, and then to integrate.

For buyers, the small deals come with risks. Littler targets often have drugs that are in early development, so it isn’t certain they work safely and will be able to hit the market.

The uncertainty is, however, also an opportunity for smart shoppers. “Big pharma is identifying a diamond in the rough early on," said Bill Roegge, M&A partner at law firm Cooley. “This is to try and buy them before they are a big $10 billion company."

Roegge advised AstraZeneca on its $1 billion acquisition of rare-disease drug company Amolyt Pharma, among a string of $1 billion to $2.5 billion deals that the British drugmaker has done in recent months to bolster its pipeline.

Closely held Amolyt appealed to AstraZeneca because its lead endocrine drug is in the last stage of testing and could provide a new source of sales relatively soon, helping the pharmaceutical company achieve its goal of $80 billion in revenue by 2030, said Marc Dunoyer, AstraZeneca’s chief strategy officer.

Dunoyer also said Amolyt would be easy to integrate, with only 50 employees.

Private companies with drugs in earlier stages of development have been more willing to sell themselves in recent months because of the challenges of going public and because their prospects for raising cash to fund the next phase of development are uncertain, Roegge said.

Buyers see value because negotiations don’t involve a public valuation, said Punit Mehta, a senior managing director in healthcare investment banking for Guggenheim Securities.

Johnson & Johnson bought two privately held companies developing immune-disease drugs, Proteologix and a subsidiary of Numab Therapeutics now called Yellow Jersey. They come after the drug giant lost out on some expensive deals in recent years, according to people familiar with the matter.

“If you think about larger acquisitions, those are pretty difficult to make work," said J&J Chief Financial Officer Joseph Wolk. He said J&J is “perfectly comfortable" skipping large deals, especially if there is a disconnect on price. The company has also focused on stringing together deals for small companies.

After spending big in 2023, Merck toned down its dealmaking this year with four small acquisitions. They include a $1.3 billion deal for closely held eye-drug company EyeBio and a $680 million tie-up for publicly traded cancer drugmaker Harpoon Therapeutics.

The experimental drugs that Merck acquired through the deals would help Merck diversify and deepen the company’s pipeline, said Sunil Patel, the company’s head of business development. Merck’s scale and expertise could help further the drugs’ development.

“When we see science that we think we can translate into a medicine and have a direct impact for patients, we act on that," Patel said.

Merck faces a potentially significant drop in sales after its top-selling cancer treatment, Keytruda, loses U.S. patent protection in 2028.

AbbVie is contending with lower-price competition for its longtime top seller Humira since it lost patent protection last year. The company has done small deals this year to fill in its pipeline of immune-disease drugs after spending more than $18 billion last year on acquiring approved and late-stage drugs.

AbbVie bought publicly traded Landos Biopharma for $137.5 million in May and privately held Celsius Therapeutics for $250 million in June.

If their experimental immune-disease drugs win approval, they could help drive growth and help succeed AbbVie’s current slate of products, said Nicholas Donoghoe, AbbVie’s chief business and strategy officer.

Write to Jared S. Hopkins at jared.hopkins@wsj.com and Laura Cooper at laura.cooper@wsj.com