The new safe haven is...

...drugs? Biotechs, pharma companies and medical equipment firms have outperformed the broader market during the past few weeks. Here's why they may stay healthy.

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By Paul R. La Monica, CNNMoney.com editor at large

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Shares of Big Pharma firms and biotechs have rallied sharply in what has been a volatile month on Wall Street.

NEW YORK (CNNMoney.com) -- Wall Street has been obsessing over financial stocks, sending the whole market on a wild ride.

But one sector has quietly avoided most of the turmoil: drugs. While many Big Pharma stocks have been poor performers this year, they've bounced back in the past few weeks.

The Pharmaceutical HOLDRs, an exchange-traded fund that consists of 21 top drug stocks, is up more than 4%this month. And beaten down Big Pharma firms Abbott Laboratories (ABT, Fortune 500), Bristol-Myers Squibb (BMY, Fortune 500) and Schering-Plough (SGP, Fortune 500) have each gained about 10% so far during this wacky July.

By way of comparison, the S&P 500, even with the rally of the past two days, is still down 1.5% during the same period.

Biotechnology companies, not usually considered investments for the risk averse, have performed even better. The Biotech HOLDRs ETF is up nearly 8% this month. What's more, biotechs have been on fire all year, up 13% in 2008 while the Dow, S&P 500 and Nasdaq are all nursing losses of more than 10%.

And companies that make stents, pacemakers and other medical devices are also doing extremely well. Shares of three of the largest medical-equipment firms, St. Jude Medical (STJ), Boston Scientific (BSX, Fortune 500) and Baxter International (BAX, Fortune 500) are all up more than 15% this year.

Can drugs continue to be a safe haven during these volatile times?

For starters, healthcare stocks have typically been expected to hold up well during an economic slowdown - better than financials, tech and consumer stocks. So money may finally be starting to flow into this more defensive group.

"What all these stocks have in common is a relative lack of cyclicality. Drug stocks are relatively protected from a housing crisis and global economic slowdown," said Mark Bussard, an analyst with money manager T. Rowe Price Group.

Merger activity is also helping the drug sector.

Generic drug maker Teva Pharmaceutical (TEVA) announced this morning that it is buying rival Barr Pharmaceuticals (BARR) for nearly $7.5 billion, a 42% premium to where Barr's stock closed on Wednesday. Barr shares shot up more than 20% Thursday on speculation that a deal was imminent.

There have been other big deals in the industry this year, including ones where pharmaceutical companies have targeted biotechs. Japan's Takeda announced in April that it was buying biotech Millennium Pharmaceuticals for $8.8 billion, a 53% premium.

And more deals are likely as big drug firms increasingly face the risk of losing patent protection on some of their current blockbuster medications.

"Biotechs are in an interesting spot because large pharmas are interested in them to pump up their pipeline. All these companies are focused on getting new drugs into the marketplace and that's leading to more consolidation," said Kevin Hrusovsky, CEO of Caliper Life Sciences (CALP), a company that sells diagnostic technology tools to pharma firms and biotechs.

Earnings are also boosting the group. Johnson & Jonhson (JNJ, Fortune 500) reported an 8% increase in profits earlier this week, better than expected. St. Jude reported a more than 50% rise in profits.

And even many biotechs are generating strong earnings. Gone are the days when biotechs were perennial money-losers weighed down by heavy research and development costs.

Biotech Celgene (CELG), for example, one of the top performers in the S&P 500 this year, is expect to report a 35% percent increase in quarterly profits next week.

Hrusovsky added that he thinks even smaller biotechs should continue do well since many already have the cash they need to keep developing new drugs.

"Smaller biotechs seem to be fairly well funded. Many got funding in place prior to this recent round of liquidity concerns," he said.

T. Rowe Price's Bussard said almost all of the top drug, biotech and medical device firms do big business overseas as well. So a weak dollar is providing a lift to results. He adds that many of the stocks were beaten down earlier this year on concerns about growth.

Add all that up and you have a, dare I say it, prescription for more success, especially if the overall market remains turbulent.

"All of a sudden you have these stocks that looked pretty cheap, are benefiting from currency and are also actually showing growth, not a contraction in earnings," Bussard said. "This group looks pretty good compared to a bank, retailer or restaurant."

Issue #1 - America's Money: All this week at noon ET, CNN explains how the weakening economy affects you. Full coverage.

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