BNP Paribas flags margin pressure in pharma as hospitals hold up Q3

India’s pharmaceuticals and healthcare sector is set for a mixed December quarter, with price erosion in key US generics weighing on drugmakers even as hospital chains post steady growth driven by capacity additions, according to a sector preview by BNP Paribas.

Aggregate revenues across pharmaceuticals, hospitals and diagnostics are expected to grow 9%, 15% and 16% year-on-year, respectively, in the third quarter of FY26. Profitability trends, however, are diverging sharply. While hospitals are likely to see a 25% rise in EBITDA and diagnostics a 17% increase, pharma sector profits are expected to decline marginally, with aggregate profit after tax down 1%, BNP Paribas said.

Pharma faces price erosion headwinds

The pressure on pharmaceutical earnings is largely linked to sharp price erosion in the US generics market, particularly for Revlimid, as companies rush to exhaust remaining quotas ahead of patent expiry. BNP Paribas expects EBITDA margins to contract for players such as Dr Reddy’s Laboratories, Cipla and Zydus Lifesciences as price competition intensifies.

“Sharp erosion in gRevlimid prices is likely to weigh on margins as companies look to offload remaining quotas before patent expiry,” said Tausif Shaikh, healthcare analyst at BNP Paribas Securities India.

Lupin is also expected to see pressure from the loss of exclusivity of Tolvaptan, although the absence of new competitors so far has delayed the full impact. Sun Pharma, meanwhile, is expected to post steady revenue growth, but margins could soften due to higher marketing spends linked to specialty product launches, the report noted.

Domestic formulations continue to provide some support, but analysts expect growth to broadly track the Indian pharmaceutical market rather than meaningfully outperform it during the quarter.

Hospitals gain on bed additions

In contrast, hospitals are expected to deliver stronger performance despite the December quarter being seasonally weaker. Revenue growth is being driven primarily by new bed additions rather than pricing gains or higher occupancy, according to BNP Paribas.

Apollo Hospitals, Aster DM Healthcare and Fortis Healthcare are expected to report year-on-year revenue growth of 11%, 14% and 18% respectively, largely on account of capacity expansion across key markets.

Margins, however, are expected to remain largely flat for Apollo and Aster DM as newly commissioned greenfield hospitals continue to incur cash burn during the ramp-up phase. Fortis is an exception, with margins likely to improve due to recovery in recently added brownfield hospitals, BNP Paribas said.

The brokerage has lowered its margin assumptions for Apollo Hospitals’ hospital business to factor in delays in commercialisation and the near-term impact of multiple greenfield launches, which are expected to weigh on profitability over FY27 and parts of FY28.

Diagnostics show uneven recovery

The diagnostics segment is expected to post mixed results. Dr Lal PathLabs is projected to deliver 11% revenue growth year-on-year, but margins may soften due to higher costs linked to new initiatives. Metropolis Healthcare, which reported 26% revenue growth in its recent business update, is expected to see margin expansion driven by improvement in its core diagnostics business.

BNP Paribas said that while demand trends remain stable, cost structures and execution of expansion plans will play a key role in determining profitability across diagnostic chains in the coming quarters.

Valuations reset, select upgrades

The brokerage has rolled forward its valuation base to March 2028 estimates and upgraded Mankind Pharma to ‘outperform’ from ‘neutral’, citing a sharp correction in valuations following its acquisition of Bharat Serum Vaccines.

“The recent valuation correction appears overdone, with headwinds now largely priced in,” the report said, adding that Mankind’s EBITDA growth outlook for FY26 to FY28 remains intact.