The drug and biotech sector is recovering in 2022, thanks to novel vaccines and effective antivirals, which have pushed the pandemic to the sidelines.

The Zacks Large Cap Pharmaceuticals industry is up 5.4% this year so far against the S&P 500’s decline of 21.0%.

Image Source: Zacks Investment Research

After clinical study failures, regulatory setbacks and a lull in M&A activity hurt the sector’s performance in early 2022, the drug and biotech sector is outperforming lately. The sector enjoys strong fundamentals. Innovation is picking up and is projected to remain a major driver of pharma revenues in the coming years. In 2022, the FDA has already approved 16 new drugs.

The balance sheets of big drugmakers are strong with huge cash to fund M&A, collaborations and partnerships, which are critical to achieving growth especially with upcoming patent expirations for some blockbuster drugs. We are likely to see increased M&A activity in the sector.

Here we have highlighted three drugmakers, Merck (MRK Quick QuoteMRK - Free Report) , Bayer (BAYRY Quick QuoteBAYRY - Free Report) and Jazz Pharmaceuticals (JAZZ Quick QuoteJAZZ - Free Report) , which are good stocks to add to your portfolio now, carrying a Zacks Rank #1 (Strong Buy) or 2 (Buy). These stocks have also seen their price and earnings estimates rise.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Merck

Merck’s stock has risen 22.1% this year so far. Earnings estimates for 2022 have gone up from $7.19 to $7.31 per share and from $7.13 to $7.16 per share for 2023 over the past 90 days Merck has a Zacks Rank #2.

Merck boasts more than six blockbuster drugs in its portfolio, with the PD-L1 inhibitor, Keytruda, approved for several types of cancer and alone accounting for around 40% of its pharmaceutical sales.

Keytruda sales are gaining from continued uptake in lung cancer and increasing usage in other cancer indications. Numerous recent approvals and the expected launch of many additional indications, including in earlier lines of therapy, can further boost sales. In Oncology, alliance revenues from Lynparza and Lenvima are also boosting Merck’s oncology sales.

Beyond oncology, which is expected to drive durable growth into the next decade, Merck has important products in its portfolio, including Gardasil vaccine to prevent HPV-related cancers. Sales of Gardasil vaccine grew 40% in 2021. Merck expects Gardasil growth to benefit from increased supply as it is investing in expanding manufacturing capacity. Merck expects Gardasil sales to potentially double by 2030.

Merck’s Animal Health business has been a key contributor to its top-line growth with the company recording above-market growth. The trend is expected to continue in the remainder of 2022.

Merck and partner Ridgeback Biotherapeutics’ COVID oral antiviral pill, Lagevrio will also be a key top-line driver in 2022. Merck has a number of supply and purchase agreements in place for providing approximately 10 million courses of COVID therapy, which is expected to generate $5 billion to $5.5 billion in revenues in 2022.

Bayer

Bayer is making steady progress, driven by the strong performance of the Crop Science, Pharmaceuticals and Consumer Health divisions. The company has an optimistic outlook for the year despite uncertainties like the instability of supply chains and energy supplies. Bayer is undertaking several initiatives to strengthen its position across portfolios while also increasing its efficiency and structural measures, including the divestiture of some of its businesses.

Bayer has made several acquisitions and entered into a number of deals to boost its portfolio in the past few quarters that have strengthened and diversified its portfolio.

Bayer announced a restructuring plan to streamline business and improve efficiency. The company divested its Animal Health business unit to Elanco Animal Health. The decision to exit this business helps the company focus on its core businesses of Pharmaceuticals, Consumer Health and Crop Science. Restructuring initiatives should help the bottom line.

Bayer’s stock has risen 5.2% this year so far. Earnings estimates for 2023 have gone up from $2.13 per share to $2.17 per share over the past 90 days. Bayer has a Zacks Rank of 2.

Jazz Pharma

Jazz stock is up 21.2% this year so far. Earnings estimates for 2022 have gone up from $16.50 per share to $17.06 per share over the past 90 days while those for 2023 have increased from $18.04 per share to $18.15 per share.

This #1 Ranked stock is seeing strong demand for newer drugs like Xywav and Epidolex. Xywav, a low sodium formulation of its key sleep disorder drug, Xyrem was approved by the FDA in July 2020 for excessive daytime sleepiness and cataplexy in narcolepsy patients. In August 2021, the drug’s label was expanded to include adults with idiopathic hypersomnia. Epidolex was added to Jazz’s portfolio with the acquisition of British cannabinoid drug company, GW Pharmaceuticals in 2021.  The acquisition marked the entry of Jazz into the promising new field of cannabidiol drugs.

The new cancer drugs, Zepzelca and Rylaze, are also demonstrating strong uptake, benefiting Jazz’s top line. The new drugs along with the recently-acquired drugs generated 59% of Jazz’s net product sales in 2021. The company expects these drugs to generate 65% of product revenues in 2022. It expects its total revenue to witness a CAGR of more than 17% till 2025 to reach $5 billion.