The drug and biotech sector has been in a recovery mode since mid-2025, after going through a difficult period between 2021 and 2023 backed by strong quarterly results, surging mergers and acquisitions (M&A) activity and pipeline and regulatory successes. This rebound has continued into 2026.

Innovation remains a key growth driver, with high-interest areas such as obesity treatments, gene therapy, inflammation and neuroscience drawing strong investor focus. However, the sector continues to face challenges, including pipeline setbacks, looming patent expirations, regulatory uncertainty and unpredictability of policy changes around drug pricing and trade policies.
Despite these headwinds, accelerating innovation, the expanding use of artificial intelligence in drug discovery and development, encouraging regulatory and clinical pipeline updates, and sustained M&A activity point to a constructive growth outlook for 2026.

Amid the improving macro backdrop, the Zacks Medical-Drugs industry is showing promising trends backed by a focus on innovation and positive pipeline/regulatory developments. In this scenario, Indivior Pharmaceuticals (INDV Quick QuoteINDV - Free Report) , Catalyst Pharmaceuticals (CPRX Quick QuoteCPRX - Free Report) , Theravance Biopharma (TBPH Quick QuoteTBPH - Free Report) , Relmada Therapeutics (RLMD Quick QuoteRLMD - Free Report) and Avalo Therapeutics (AVTX Quick QuoteAVTX - Free Report) may prove to be good additions to one’s portfolio. 

Industry Description

The Zacks Medical-Drugs industry comprises small and some medium-sized drug companies that make medicines. We have a separate industry outlook discussion on big drugmakers. Small drugmakers have a limited portfolio of marketed drugs or no commercial drugs at all. Some drugmakers are dependent on just one marketed drug or pipeline candidate. For such companies, upfront or milestone payments from collaboration partners — in most cases, their larger counterparts — are the main sources of revenues. These companies need ample free cash flow to fund their R&D costs.

Factors Shaping the Future of the Medical-Drugs Industry

Pipeline Success: The success or failure of key pipeline candidates in clinical studies can significantly drive the stock price of industry players. Successful innovation and product line extensions in important therapeutic areas and strong clinical study results may act as important catalysts for the stocks.

Innovation is at its peak with key spaces like rare diseases, next-generation oncology treatments, obesity, immunology and neuroscience attracting investor attention.

Strong M&A Activity: These companies regularly seek external partners and collaborators for complementary strengths. A partnership deal with a popular drugmaker is a good sign about the potential of small pharma companies, especially when an equity investment is included in the deal. M&A deals are in full swing in the sector, signaling growth. This year has already seen multiple multi-billion-dollar deals. The trend is shifting more toward smaller and mid-size “bolt-on” strategic acquisitions rather than mega-mergers.

Investment in Technology for Innovation: For smaller companies, succeeding in a shifting global market and evolving healthcare landscape requires adopting innovative business models, investing in new technologies and increasing investments in personalized medicines. Over the past few years, scientific and technological advancements have made it possible to develop personalized therapies. Other than that, adoption and information exchange through the meaningful use of health IT, development of therapies that improve overall patient outcomes and investment in developing and emerging markets are some of the key priorities for drug companies. Artificial intelligence and machine learning techniques are being used for the rapid advancement of drug discovery and target identification processes.

Pipeline Setbacks: The smaller companies have their share of risk in the form of unstable cash flows. Also, the failure of key pipeline candidates in pivotal studies and regulatory and pipeline delays can be huge setbacks for these smaller companies and significantly hurt their share prices.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank is basically the average of the Zacks Rank of all the member stocks.

The Zacks Medical-Drugs industry currently carries a Zacks Industry Rank #90, which places it in the top 37% of the 243 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present you with a few top-ranked stocks to capitalize on the thriving prospects of the small and medium-sized drugmakers’ space, let’s take a look at the industry’s recent stock-market performance and the valuation picture.

Industry Versus S&P 500 and Sector

The Zacks Medical-Drugs industry is a huge 133-stock group within the broader Medical sector. The industry has outperformed the Zacks Medical sector but underperformed the S&P 500 in the past year.

Stocks in this industry have collectively risen 4.2% in the past year compared with the Zacks Medical sector’s breakeven. The Zacks S&P 500 composite has risen 18.6% in the said time frame.

TTM Price Performance

Industry's Current Valuation

Based on the trailing 12 months price-to-sales ratio (P/S TTM), which is a commonly used multiple for valuing these small drugmakers, the industry is currently trading at 2.55, compared with the S&P 500’s 5.50 and the Zacks Medical sector's 2.53.

Over the last five years, the industry has traded as high as 3.37, as low as 2.03 and at the median of 2.46, as the chart below shows. 

Trailing 12-Month Price-to-Sales (P/S) Ratio

5 Drug Stocks to Bet On

Catalyst Pharmaceuticals: Coral Gables, FL-based Catalyst Pharmaceuticals’ lead drug, Firdapse, is approved for treating Lambert-Eaton Myasthenic Syndrome (LEMS), an ultra-rare disease. The drug has seen encouraging uptake since launch and benefits from Breakthrough Therapy and Orphan Drug designations. The company has multiple U.S. patents that support its long-term commercial potential. Firdapse’s label has been expanded in the United States for treating LEMS in pediatric patients. This has been contributing to the increasing sales trend of the drug. In 2025, Catalyst settled Firdapse patent litigation with Teva and Lupin, protecting the drug’s exclusivity in the United States till Feb. 25, 2035. These are huge wins for Catalyst as it protects the company’s Firdapse sales from generic erosion in the U.S. market for LEMS treatment.

Agamree, its newest acquired muscle disorder drug, launched in the U.S. market, has created another revenue stream for the company. Catalyst enjoys a strong foothold in the underserved LEMS market, where Firdapse has room for global expansion amid limited effective alternatives.

The stock of Catalyst Pharmaceuticals has risen 19.1% in the past six months. The consensus estimate for 2026 earnings has risen from $2.55 per share to $2.87 per share over the past 60 days. The company has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. .

Price and Consensus: CPRX

Indivior Pharmaceuticals: North Chesterfield, VA-based Indivior’s commercial portfolio is anchored by its flagship product, Sublocade, a first-in-class long-acting injectable treatment for moderate-to-severe opioid use disorder (OUD), alongside Suboxone film and tablets, a daily buprenorphine/naloxone formulation for opioid dependence. Sublocade accounts for the majority of Indivior’s revenues.

Over the past few quarters, Sublocade sales have experienced significant growth, driven by an acceleration in dispense units.  Total Sublocade net revenues rose 13% in 2025 to $856 million, with further growth expected in 2026. However, higher Sublocade revenue growth is being partially offset by lower sales of Suboxone films due to price stabilization in the U.S. generic buprenorphine/naloxone market and generic competition

Indivior has several ongoing research programs, including INDV-2000 (orexin-1 receptor antagonist) and INDV-6001 (long-acting injectable buprenorphine). These pipeline assets are being evaluated in mid-stage studies for the treatment of OUD patients.

Recent S&P SmallCap 600 inclusion (December 2025) and imminent U.S. re-domiciliation enhance investor visibility and institutional ownership.

The stock of Indivior has risen 32.3% in the past six months. The consensus estimate for 2026 earnings has risen from $2.89 per share to $3.08 per share over the past 60 days. The company has a Zacks Rank #1.

Price and Consensus: INDV

Theravance Biopharma: Cayman Islands-based Theravance Biopharma’s top line primarily consists of profit-sharing revenues tied to Viatris’ COPD treatment, Yupelri. The product has been witnessing strong sales and is generating higher profit-sharing revenues for Theravance. The momentum is likely to continue in the future quarters. Theravance’s organizational restructuring and cost optimization efforts are primarily driven by the need to realign its operating model following pipeline setbacks, including the discontinuation of its late-stage ampreloxetine program.

With limited near-term development catalysts and a high dependence on a single revenue stream, the company announced a major organizational restructuring aimed at optimizing its cost structure and sharpening its focus on its commercial product, Yupelri. Theravance anticipates reducing its workforce by approximately 50% by shutting down the entire research and development division and cutting roughly 50% of general and administrative staff. The restructuring is expected to cut operating costs by approximately 60% relative to the company’s 2025 operating costs of $111.1 million. The company anticipates realizing full annualized cost savings of approximately $70 million by the third quarter of 2026.

Combined with continued sales of Yupelri, these savings are projected to drive approximately $60 million to $70 million in annualized cash flow beginning in the third quarter of 2026.

The stock has risen 9.9% in the past six months. The consensus estimate for 2026 earnings has risen from 32 cents per share to 82 cents per share over the past 60 days. The company has a Zacks Rank #1.

Price and Consensus: TBPH

 

Relmada Therapeutics: Coral Gables, FL-based Relmada Therapeutics recently announced positive 12-month interim data from a phase II study evaluating its lead pipeline candidate, NDV-01, in patients with high-risk non-muscle invasive bladder cancer (NMIBC). RLMD’s NDV-01 is a sustained-release, intravesical formulation of gemcitabine and docetaxel.

In the study, NDV-01 demonstrated high response rates and durable clinical benefit observed through 12 months, along with a favorable safety profile. Relmada Therapeutics plans to advance the candidate into the phase III RESCUE registrational program in mid-2026.  NDV-01 has the potential to become a best-in-class therapy for patients with NMIBC.

Relmada’s pipeline also includes sepranolone, a phase IIb-ready neurosteroid with the potential for treating Prader-Willi syndrome (PWS), Tourette Syndrome, essential tremor and other diseases related to excessive GABAergic activity. Relmada plans to initiate a phase IIb study in PWS by mid-2026.

The stock of Relmada Therapeutics has risen 206% in the past six months. The consensus estimate for 2026 loss per share has narrowed from 81 cents to 72 cents over the past 60 days. The company has a Zacks Rank #2 (Buy). 

Price and Consensus: RLMD

Avalo Therapeutics: Wayne, PA-based Avalo Therapeutics is a clinical-stage precision medicine company that makes IL-1β-based treatments for immune-mediated inflammatory diseases. Its lead pipeline candidate is abdakibart (AVTX-009), being developed in phase II for hidradenitis suppurativa, a chronic, progressive, often debilitating inflammatory skin disease. Top-line data from the study is expected in the second quarter of 2026, which should be an important catalyst for the stock.

The stock of Avalo Therapeutics has risen 24.6% in the past six months. The consensus estimate for 2026 loss per share has narrowed from $5.56 to $4.10 per share over the past 60 days. The company has a Zacks Rank #2. 

Price and Consensus: AVTX