Healthcare sector to see modest revenue growth in Q4, margin pressure from us generics cliff: Systematix

NEW DELHI: India’s healthcare sector is poised for high single-digit year-on-year revenue growth in Q4FY26, but EBITDA margins are set to “materially correct” as the loss of exclusivity in gRevlimid and rising cost pressures weigh on profitability, according to a research report by brokerage firm Systematix.

“For 4QFY26, companies within our healthcare universe are expected to deliver high single-digit YoY revenue growth. However, EBITDA margins will materially correct”, the report said. Median growth is estimated at 12 per cent for revenue and 3.6 per cent for EBITDA, with net earnings likely witnessing a 14 per cent decline.

The loss of exclusivity in gRevlimid is the single largest drag on earnings this quarter. “The primary driver of this year on year decline in net earnings is loss of exclusivity in gRevlimid”, Systematix noted, adding that the impact is most pronounced for companies with significant exposure to the product. Supply disruptions in key products like Lanreotide and margin pressure from mirabegron-related royalty payment settlements are also expected to impact the sector.

The ongoing US-Iran conflict is creating a mixed macro backdrop for pharma. “The quarter is likely to reflect mixed implications from the US-Iran conflict, as higher freight and raw material (RM) costs could partially offset the favorable impact of USD/INR appreciation,” the report said. While a weaker rupee typically aids exporters, elevated logistics and input costs are eroding that benefit. “If the conflict persists, these cost pressures could intensify in the coming quarters,” it warned.

Raw material inflation is becoming a key variable across the value chain. “API manufacturers are likely to pass on the RM inflation and may even raise prices, as formulation manufacturers look to expand their RM inventories,” according to the report. That suggests cost pass-through is underway, but with a lag, and formulation players are preemptively building inventory buffers as a hedge against further disruption.

Domestic formulations are providing a relative cushion. Growth in the India business remains “modest” but steady, with chronic therapies and new launches supporting momentum. However, the US generics segment is expected to correct sharply. The erosion of high-margin gRevlimid sales is resetting the base for several large exporters, and compliance challenges continue to pressure the US business for some players.

Despite the near-term margin squeeze, pockets of strength remain. Companies with continued exclusivity in products like Tolvaptan are expected to post strong earnings growth, as competition remains delayed. Conversely, those with disproportionate earnings contribution from gRevlimid are set to see the steepest declines. “Any potential shelf stock adjustments related to gRevlimid could further dent the company’s earnings,” the report flagged.

The sector is navigating a transition quarter where top-line growth holds up in high single digits, but the quality of earnings weakens. Margin compression is being driven by three forces: loss of high-margin US exclusivities, cost inflation linked to geopolitics, and higher investments in R&D and specialty portfolios.

The key sectoral monitorables heading into Q4FY26 results include the pace of RM cost pass-through by API players, freight cost trends if Middle East tensions persist, new product approval timelines in the US, and the ability of domestic and emerging markets to sustain double-digit growth. Until the gRevlimid base resets and input cost inflation moderates, margin recovery is likely to lag revenue growth. (ANI)