Morgan Stanley likes biopharma as a defensive play — giving one stock 119% upside

Published Sun, Jan 21 20246:31 PM EST

The biopharmaceutical sector is expected to offer a safe haven from macroeconomic and earnings concerns ahead of final quarterly results from companies, according to Morgan Stanley. The Wall Street bank said European biopharma stock prices should be supported in the near term, owing to "undemanding valuations and a backdrop of challenging macro conditions and cyclical earnings risk." "We continue to favour European large-cap pharma stocks with relative earnings growth momentum and supportive innovation narratives," said Morgan Stanley analysts led by Mark D Purcell in a note to clients on Jan. 16. The investment bank's message to investors comes as equity analysts sharply reduce their estimates before next week's European earnings season. The negative sentiment has led equity strategists at Barclays to say it's "hard to get excited" about fourth-quarter earnings next week. At the same time, their peers at Bank of America have forecast a 15% decline in the pan-European Stoxx 600 index by the end of the year. Morgan Stanley, however, cautioned that the outlook for drug pricing reform in the U.S. poses risks for the sector. But it said that in the near term, the defensive nature of pharma stocks will give them an edge. The bank named the following buy-rated stocks in its latest research note. Shares of Indivior , argenx , AstraZeneca , Merck , Lonza, Sweden's Sobi, Novo Nordisk and Sandoz Group were among those listed by Morgan Stanley with a "buy" rating. All stocks are also traded on U.S. stock exchanges. Indivior The bank is particularly bullish on Indivior , a specialty pharmaceutical company focused on addiction treatments, with a price target implying a 119.3% upside. The analysts cited Sublocade, a monthly injection for opioid addiction, reaching $1.5 billion in sales by 2027 as their base case scenario. In a bull case where Sublocade hits $2.2 billion in sales by 2030, Morgan Stanley sees shares rising further to 3,500 British pence. "We see Indivior as deeply undervalued considering the de-risked growth profile and the margin expansion potential resulting in strong cash generation over 2024-2030," said Morgan Stanley analyst Thibault Boutherin in a separate note to clients on Dec. 8. AstraZeneca AstraZeneca is Morgan Stanley's top large-cap pick. The bank sees a 26% upside for the British pharma giant and singles out its "smart chemotherapy" platform targeting cancer stem cells as a key driver of long-term growth. Novo Nordisk Shares of Novo Nordisk , a leader in diabetes and obesity drugs, offer a 9.4% upside, according to Morgan Stanley. "We believe that Novo has among the strongest earnings growth momentum across the EU biopharma majors," the analysts wrote, citing the continued expansion of the anti-obesity market, which makes up 90% of Novo's growth outlook. — CNBC's Michael Bloom contributed reporting.