Why have so many legitimate smaller biotechs sprung up and thrived?
I would prefer to take a broader tact with this: Why aren't all firms bought at a smaller size? Why are there any small R&amp;D firms?
One answer is related to uncertainty.

Some firms look like they will be profitable, but they are not. Perhaps their research fails: they cannot get approval, the drug doesn't work, or it has severe undesirable side effects. This uncertainty is part of the business.
Firms produce signals of their quality. The signals reduce uncertainty and it becomes clearer which startups will be profitable, increasing their prices. Owners will be less willing to sell, and other buyers will make competing offers.
The increased price of the firm leads to a larger asking price, so any net profit of purchasing the new firm is reduced.
Since the profit margins are reduced, the remaining uncertainty leads to continued hesitation in purchasing.
This process continues until the small startup is no longer small enough to buy.

Sometimes, a profitable firm can be identified with sufficient certainty before the final step 5, and that is where you see purchases.