Domestic Volume Leads Market Recovery
The Indian pharmaceutical sector is entering the second quarter earnings season with a distinct bifurcation in performance. While domestic market fundamentals remain robust, a sharp contraction in high-margin US generic revenues is expected to weigh heavily on overall profitability. Brokerage previews indicate that while revenue growth will be healthy, earnings growth will lag significantly as companies absorb the impact of falling overseas sales.
The domestic market, known as the Indian Pharmaceutical Market (IPM), has shown surprising strength. September recorded the strongest monthly performance in three years, with sales rising 17.1 percent year-on-year. Notably, this growth is increasingly volume-led rather than price-driven. Unit growth accelerated to 5.4 percent, with volume contributing 4.9 percentage points to moving annual total (MAT) growth, slightly ahead of price growth at 4.8 percent. This shift suggests a healthier underlying demand rather than inflationary pricing.
Chronic Therapies Drive Growth
Chronic care segments continue to be the primary engine of domestic expansion. In September, anti-diabetic therapies expanded by 21.2 percent, while cardiac therapies grew by 20.4 percent. Vitamins and minerals also performed well, posting a 22.2 percent increase. Oncology, though a smaller segment, delivered robust growth of 29.4 percent.
Respiratory therapies were the notable exception, growing only 3.1 percent. This weakness is expected to weigh on companies with significant exposure to this segment, such as Cipla and Lupin. Among large-cap players, Dr Reddy’s led domestic market growth in Q2 with a 21 percent increase, followed by Torrent Pharma, Zydus Life, Lupin, Mankind, and Sun Pharma, all of which outperformed the broader market. Cipla and Alkem lagged due to weakness in respiratory and anti-infective categories.
US Generic Headwinds Hit Profits
Despite strong domestic numbers, the sector faces a significant challenge from overseas markets. Analysts project that the loss of blockbuster US generics will severely impact earnings. Dr Reddy’s earnings could decline by more than 50 percent as the one-time windfall from generic Revlimid fades. Cipla’s profit is expected to fall by approximately 26 percent due to the loss of generic Revlimid and Lanreotide opportunities. Lupin also faces pressure from heightened competition in Tolvaptan and Mirabegron.
Systematix estimates that while cumulative revenue growth for its healthcare coverage universe will be 12 percent, net earnings are expected to fall 10 percent year-on-year. Axis Securities offers a similar outlook, projecting aggregate pharma sector revenue to rise 7 percent year-on-year, but operating profit to decline 10 percent and adjusted net profit nearly 20 percent. This decline is attributed to lower high-margin generic sales, persistent pricing pressure, and increased spending on R&D and GLP-1 launches.
Divergence in Company Performance
The sector is witnessing a clear divide between domestic-focused and export-heavy companies. Firms with larger domestic exposure, including Mankind Pharma and Ajanta Pharma, are positioned to report healthy earnings growth. In contrast, export-dependent players such as Cipla, Dr Reddy’s, Lupin, and Zydus Life are likely to see profits decline despite stable or growing top-line revenues.
Investors will be closely monitoring management commentary on emerging growth drivers. GLP-1 therapies, biosimilars, speciality products, and new US launches are increasingly viewed as the next leg of growth as the industry transitions away from reliance on one-time generic opportunities. Additionally, updates on geopolitical risks, supply-chain disruptions, and raw material inflation will be key focus areas during earnings calls.