Drug and biotech sales hold up during recessions, Morgan Stanley says. Here are the firm's top picks

Published Wed, May 25 20229:12 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

As recession fears gain traction with investors, drug stocks should look even more attractive as a defensive option, according to Morgan Stanley. Analyst Matthew Harrison examined the performance of pharmaceutical and biotech companies during previous recessions, finding that they're able to maintain margins and still grow sales during downturns. "Historical U.S. drug volume growth slowed by ~1%-3% during prior recessions, but remained positive. Revenue growth slowed slightly more from lower net prices ... We expect resilient biopharma revenues as economic activity slows," Harrison wrote. For example, Morgan Stanley's research showed that large cap biotech companies had positive year over year growth in every quarter during the recession that began in 2008. Major pharmaceutical firms' sales held up during the first half of that downturn before contracting slightly in the later stages. However, that slowdown was due in part to expiring patents and not just weakening demand, Morgan Stanley said. "Overall, the economic downturn contributed to revenue growth deceleration; however, large-cap Biopharma were able to maintain their operating margins and free cash flow," Harrison wrote. Morgan Stanley has an overweight rating on the health care sector, in part for its defensive qualities. The group has held up better than the broad market this year, with the Health Care Select Sector SPDR Fund (XLV) down 6.8% year to date vs an 18% drop in the S & P 500. When narrowing that focus to Big Pharma, the performance looks even better. In fact, Merck and Bristol-Myers Squibb have traded at all-time highs this month . Morgan Stanley's top pick in pharma is Eli Lilly , which has already been a winner in recent months. The stock is up more than 10% year to date, and pays a dividend yield of 1.3%. Other stocks in the pharma and biotech area with overweight ratings include Abbvie , Biomarin Pharmaceuticals and Seagen . Abbvie has performed similarly to Eli Lilly, but Biomarin and Seagen have both underperformed the health care sector year to date. — CNBC's Michael Bloom contributed to this report.