India's pharmaceutical sector is heading into a challenging 2026, with brokerage analyses pointing to a year of contrasting halves marked by regulatory pressures, competitive dynamics, and varying recovery trajectories across different market segments.

Tale of Two Halves for 2026

Jefferies characterizes 2026 as "a tale of two halves" for the pharma sector. The first half is expected to be subdued, particularly affecting companies dependent on high-margin Revlimid generic opportunities, where competition is set to intensify from February.

Despite the challenging first half, Jefferies expects these players to return to double-digit earnings growth in the second half, with US price erosion projected to remain in the mid-single-digit range.

Domestic Market Stability and Growth Projections

While US-specific earnings face headwinds, the domestic pharma market is expected to maintain stability. Market growth is projected at high single digits, largely driven by pricing rather than volume expansion. A significant catalyst lies in India's impending GLP-1 (semaglutide) launches scheduled for March-April, which could trigger intense competitive dynamics. Consolidation trends are expected to continue, with Mankind emerging as Jefferies' preferred domestic pick.

Revenue Growth Forecasts Across FY26-28

Jefferies projects double-digit revenue growth for the sector across FY26-28, with varying growth rates based on company-specific factors:

Regulatory Challenges and FDA Observations

The sector faces increasing regulatory scrutiny, with Morgan Stanley highlighting multiple US FDA Form 483 observations across major companies. Cipla's partner Pharmathen International received nine observations at its Rodopi, Greece sterile facility, with the FDA identifying systemic cGMP issues including inadequacies in aseptic processes, environmental control, and data integrity lapses. While operations continue, this raises concerns about potential implications for Cipla's Lanreotide franchise in the US.

Sun Pharma's Baska sterile plant received a Form 483 with three observations now classified as OAI (Official Action Indicated). However, the company's strategic shift away from US generics—now representing 14.00% of revenue versus 60.00% in FY14—is expected to mitigate regulatory risks. Morgan Stanley maintains an Overweight stance with a base case price target of ₹2,026.00.

Dr. Reddy's received five observations at its Srikakulam site, primarily related to quality systems, validation, and OOS (Out of Specification) investigations rather than sterile operations. The brokerage considers this risk manageable, though remediation work remains necessary. A Complete Response Letter for Denosumab could delay approval by 3-6 months, while catalysts including GLP-1 approval in Canada and potential biosimilar launches remain in the pipeline.

Market Outlook and Key Uncertainties

A significant uncertainty facing the sector is the outcome of the US Section 232 investigation on pharma tariffs, with a decision expected in the first quarter. This regulatory development could impact the sector's US market dynamics and profitability structures. The combination of regulatory tightening, competitive pressures, and evolving market dynamics positions 2026 as a pivotal year for Indian pharmaceutical companies, with success dependent on effective navigation of first-half challenges and capitalization on second-half recovery opportunities.

The Indian pharmaceutical sector is navigating through a challenging period, with various factors impacting its performance. Industry analysts have provided insights into the sector's current state and near-term outlook.

Market Projections

Analysts forecast:

• Revenue growth: 7-10% year-on-year
• Earnings growth: 4-5% year-on-year

Key Challenges Facing the Sector

1. Declining gRevlimid Sales: Major players including Dr. Reddy's, Zydus, Aurobindo, and Cipla are experiencing reduced sales of generic Revlimid.

2. GST-Related Disruptions: Channel de-stocking linked to GST changes has affected billing for 15-20 days.

3. Weak Acute Therapy Season: The Indian market is experiencing a softer season for acute therapies.

Financial Outlook

The sector's financial health is under pressure, with EBITDA margins expected to remain between 20% and 25%. However, the impact varies across companies:

Company Highlights

Lupin is positioned as a potential outperformer, driven by:

• Launch of Tolvaptan
• No exposure to Revlimid, insulating it from the decline affecting competitors

Divi's Labs is showing promise in the CDMO (Contract Development and Manufacturing Organization) space, with growth primarily led by its custom synthesis business.

Market Dynamics

The pharmaceutical landscape in India is experiencing a shift, with different segments showing varied performance:

1. Generic Market: Facing challenges, particularly with the gRevlimid decline
2. Domestic Market: Showing resilience, especially for companies with a strong local focus
3. CDMO Segment: Mixed performance, with some players like Divi's Labs outperforming others

Industry Outlook

While the immediate outlook presents challenges, there are pockets of opportunity within the sector. Companies with diversified portfolios and those less dependent on specific generic drugs appear better positioned in the current market conditions.

Investors and industry watchers may want to monitor how companies adapt to these challenges, particularly in terms of product mix, market focus, and operational efficiency.