Pills are paying off! Pharma stocks lead 2026 rally with up to 112% return

Pharmaceutical stocks have emerged as the best-performing sector in the Indian equity market in 2026, with the sectoral index rising 27% year-to-date (YTD), comfortably outperforming its peers. The rally has been led by Laurus Labs, Gland Pharma and Sai Life Sciences, which have delivered returns of up to 112%.

The outperformance is particularly pronounced against the broader sectoral landscape. Capital Goods/Defence and Transport & Logistics, the pharma sector’s closest competitors, have gained 14% and 13%, respectively. Power/Coal has advanced 8%, while Telecom has risen 7%. Healthcare Services and Internet/Media have gained 6% each, and Cement has delivered a 4% return.

Several sectors, meanwhile, have remained under pressure. Oil Marketing Companies (OMCs) have declined 25%, Oil & Gas has fallen 20%, and IT Services has shed 17%.

Analysts attribute the pharma sector’s strong performance to a combination of resilient domestic demand, a recovery in the US business, improving margins and fresh growth opportunities from new product launches, particularly semaglutide. The rally, they said, is increasingly being supported by an underlying earnings recovery rather than merely a temporary improvement in investor sentiment.

“Q2 FY27 results so far confirm that the sector has moved past its inflection point. Revenue has been largely in line with our estimates, while margins have surprised positively. The phase-out of gRevlimid and other high-margin drugs has been smoother than we and the Street had factored in. With that impact now visible in the numbers, earnings are far more predictable from here,” said Thomas V Abraham, Research Analyst, Mirae Asset Sharekhan.

ALSO READ:Aswath Damodaran trims his Anthropic IPO valuation to $1.45 trillion; Dean of valuation explains why

Domestic formulations provide earnings anchor

The domestic formulations business, analysts said, has emerged as a key growth driver across pharmaceutical companies, with several players reporting healthy double-digit growth.Sun Pharmaceutical Industries reported 17.3% growth in its India formulations business, supported by volume growth of 6.7%. Dr Reddy’s Laboratories‘ India revenue increased 17%, while Lupin reported growth of 14.7%.

New product launches, including semaglutide, are also creating opportunities for companies to gain market share.

In the US, the impact of the gRevlimid base reset is increasingly behind the sector, while underlying businesses are showing signs of improvement.

Abraham highlighted that Dr Reddy’s North America revenue grew 13% sequentially, with its base business excluding lenalidomide recording double-digit growth. Sun Pharma’s revenue excluding gRevlimid increased 15% year-on-year, while EBITDA rose 21%. At Lupin, the erosion in tolvaptan and mirabegron has been more gradual than anticipated, with US sales growing 9.3% year-on-year. Semaglutide is emerging as another potential growth driver. Dr Reddy’s has secured approvals across 10 countries, including Canada and India. For the company, resolving the API scale-up issue will be the next important trigger.

“These green shoots, together with structural tailwinds, support a positive view on the sector. In a phase of global uncertainty, pharma’s improved earnings visibility also makes it a more attractive defensive investment option. We believe Q2 forms a solid base for the next six to eight quarters, which makes the rally sustainable,” Abraham said.

Not all analysts, however, are convinced that the sector will continue to outperform the broader market.

V K Vijayakumar, Chief Investment Strategist at Geojit Investments, said the strong Q2 results reported by several pharmaceutical companies have strengthened expectations of earnings growth in the coming quarters. However, the sustainability of the sector’s performance will also depend on a broader recovery in the Indian equity market.

“The pharma sector has been doing well, and Q2 results have also been very encouraging for several stocks. Not all stocks, but many have reported strong numbers. Therefore, the market expects this good performance to continue going forward. A lot, however, will depend on the revival of the broader markets,” Vijayakumar said.

He pointed to the recent turnaround in Indian equities and a shift in foreign institutional investor (FII) flows as potential positives. FIIs have turned net buyers on six trading days, following a prolonged period of selling that had weighed on domestic markets.

With foreign investors showing signs of returning, the market could find a steadier footing. Investors are likely to favour sectors that can deliver consistent returns over the next several quarters, and pharmaceuticals could be among them, he said.

Valuations, however, remain a consideration.

Vijayakumar believes FIIs are likely to favour sectors available at more attractive valuations. From that perspective, pharmaceuticals are not as compelling as financials, capital goods or even telecom.

“Therefore, pharmaceuticals may deliver steady returns, but are unlikely to generate market-beating returns,” he said.

Laurus Labs, Gland Pharma lead stock-specific rally

The sectoral rally has translated into substantial gains for several pharmaceutical stocks, although returns have varied significantly across companies.

Laurus Labs has emerged as the biggest outperformer, with its shares surging 112% YTD. Gland Pharma follows with a 78.08% gain, while Sai Life Sciences has advanced 69.78%. Divi’s Laboratories has delivered a return of 55.58%, and Aurobindo Pharma has gained 42.33%.

The strong momentum has extended to Piramal Pharma, which has risen 39.32%, followed by Ipca Laboratories at 37.42%, Zydus Lifesciences at 35.67% and Wockhardt at 31.14%.

Ajanta Pharma and Torrent Pharmaceuticals have gained 22.66% and 19.35%, respectively. Glenmark Pharmaceuticals has advanced 17.04%, Mankind Pharma 12.96%, Dr Reddy’s Laboratories 5.55% and Sun Pharmaceutical Industries 2.92%.

A key driver of the outperformance has been the contract development and manufacturing organisation (CDMO) segment, which has benefited from strong growth and improving operating performance.

Laurus Labs exceeded expectations, reporting record revenue of Rs 2,206 crore, up 33% year-on-year. Its EBITDA margin expanded to 34.5%, while CDMO revenue surged 75% to Rs 904 crore.

Piramal Pharma also reported healthy growth, with its CDMO revenue increasing 36% to Rs 1,424 crore.

“CDMO has been the standout segment. The concall commentary on enquiries and the capex plans of CDMO firms are encouraging,” Abraham said.

However, following the sharp year-to-date rally, further upside in these stocks is likely to depend more on earnings growth than on additional valuation re-rating, he cautioned.

Investors should also be prepared for some volatility in quarterly performance, given the inherently lumpy nature of CDMO contracts. Nevertheless, the opportunity arising from $200-300 billion worth of drugs going off patent over the coming years provides a significant growth runway for the segment.

Where are the opportunities from here?

Despite the sharp rally, analysts believe select companies continue to offer opportunities for long-term investors.

Abraham said Sai Life Sciences offers a balanced risk-reward proposition. Cohance Lifesciences and Piramal Pharma, meanwhile, are in a turnaround phase, with the potential for valuation improvement as their financial performance becomes clearer.

“Investors with a long-term view can stay invested in these quality names and use dips to add, rather than chase near-term moves,” he said.

The rally, however, has not been broad-based. Several pharmaceutical stocks have underperformed, highlighting the growing divergence within the sector.

Lupin has declined 5.36% YTD, while Alkem Laboratories has fallen 6.38%. Cipla and Biocon have lost 8.22% and 9.95%, respectively. Abbott India has been the weakest performer among the stocks tracked, declining 11.04%.

Looking ahead, companies with a growing presence in biosimilars, specialty medicines and complex generics could be better positioned to build sustainable earnings growth, as new approvals and product launches provide opportunities beyond conventional generics.

“Lupin and Sun Pharma stand out here, and both suit a long-term view. Investors should, however, be willing to wait for these triggers to play out. As these roll-outs gain traction, the quality and predictability of earnings should improve further,” Abraham said.

Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective Sebi-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here