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

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

Total revenues across pharma, hospital and diagnostics are expected to grow 9%, 15% and 16% year over year, respectively, in the third quarter of fiscal 2026. However, profitability trends vary sharply. While hospitals are likely to see a 25% increase in EBITDA and a 17% increase in diagnostics, pharma sector profits are expected to decline marginally, with gross profit after tax down 1%, BNP Paribas said.

Pharmaceutical companies face price-eroding headwinds

The pressure on pharmaceutical profits is largely related to sharp price erosion in the US generic drug market, especially for Revlimid, as companies rush to exhaust remaining quotas before patent expiration. BNP Paribas expects EBITDA margins for companies such as Dr Reddy’s Laboratories, Cipla and Zydus Lifesciences to shrink as price competition intensifies.

“The sharp erosion in gRevlimid prices is likely to impact margins as companies look to offload remaining stakes before the patent expires,” said Tauseef Shaikh, healthcare analyst at BNP Paribas Securities India.

Lupine is also expected to see pressure from the loss of exclusivity to tolvaptan, although the absence of new competitors so far has delayed the full impact. Meanwhile, Sun Pharma is expected to achieve steady revenue growth, but margins may decline due to higher marketing spend associated with launching specialty products, the report noted.

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

Hospitals benefit from bed additions

In contrast, hospitals are expected to deliver a stronger performance despite the December quarter being seasonally weaker. Revenue growth is primarily driven 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 record year-on-year revenue growth of 11%, 14% and 18%, respectively, largely due to capacity expansion across key markets.

However, margins are expected to remain largely flat for Apollo and Aster DM as newly commissioned new hospitals continue to incur cash loss during the ramp-up phase. BNP Paribas said Fortis is an exception, as profit margins are likely to improve due to recovery in recently added built-up hospitals.

The brokerage has lowered its margin assumptions for Apollo Hospitals business to take into account delays in commercialization and the near-term impact of multiple new domain launches, which are expected to impact profitability during FY27 and parts of FY28.

Diagnostics shows uneven recovery

The diagnostics sector is expected to post mixed results. Dr Lal PathLabs is expected to achieve revenue growth of 11% year-on-year, but margins may decline due to higher costs associated with 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.

Although 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, BNP Paribas said.

Reset ratings, select promotions

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

“The recent valuation correction appears to be overstated, with headwinds now largely accounted for,” the report said, adding that FY26 to FY28 EBITDA growth expectations remain sound.