Lookback: How Pharma Wore Two Masks Between December 2023 and June 2025

The eighteen months when Nifty Pharma stopped being a sleepy hedge and started behaving like a momentum trade, then quietly went back to being a hedge again.

The pharma index spent most of the previous decade as the trade that nobody wanted to talk about at parties. It compounded, slowly, while IT and private banks ran the room. Then between the last week of December 2023 and the second week of June 2025, the sector did something that did not fit either of its old templates. It rallied like a high-beta cyclical when global liquidity was generous, defended capital like a utility when foreign flows reversed, and finished the window with valuations that no longer apologised for the sector. The cycle was not a single move. It was two distinct phases stitched together by a leadership rotation that most generalist desks missed in real time.

I sat with the brief on the morning of 11 June 2025 and the simplest way I could describe what had happened was this. Pharma had become the sector that worked when nothing else did, and also when everything did. That is a rare property in Indian equities. It usually belongs to private banks during a credit upcycle, or to FMCG during a rural recovery. Pharma earning it for eighteen consecutive months deserved a closer look than the sector got in the noise of the AI capex story and the small cap unwind.

The setup going into late December 2023

The starting line of this cycle was not glamorous. Nifty Pharma had been a relative underperformer through most of 2022 and the first three quarters of 2023. The reasons were the usual ones. The US generics market had spent years being squeezed by consolidated buying groups. Price erosion in the oral solids book ran at high single digits annually. Indian generic players had been forced to either move up the value chain into specialty and complex generics, or accept that their US business would be a margin drag indefinitely.

By late 2023, several things had quietly shifted under the surface. The price erosion curve in the US had started flattening, helped along by drug shortages and by the FDA being more aggressive on remediating warning letters that had clogged plants since 2019 and 2020. Sun Pharma's specialty book, anchored by Ilumya and Cequa and Winlevi, was finally throwing off margin. Cipla had rebuilt its US respiratory pipeline. Dr Reddy's had monetised gRevlimid in a way that, while one-off in nature, padded the balance sheet handsomely. Lupin had returned to operating margins that the street had stopped modelling. Aurobindo's plants had cleared FDA inspections that had been hanging over the stock for years.

None of this was hidden information. It was simply boring information that did not fit the AI infrastructure narrative the market wanted to obsess over. The setup, in classic Howard Marks fashion, was an asset class where the price was lower than the underlying business deserved and the consensus was apathetic rather than negative. That is the most underrated entry point in markets.

Caption: Weekly structure shows the December 2023 base, the breakout shelf around mid-2024, and the second leg that ran into the final session of the window.

Phase one: the aggressive bid, January to September 2024

The first leg of the cycle was the part that, in hindsight, looked obvious. From the closing prints of 19 December 2023 through to the early autumn of 2024, Nifty Pharma compounded in a way that most generalists associated with capex plays rather than defensives. The index broke out of a multi-year consolidation around the middle of the first quarter of 2024, and the breakout held on multiple retests. The internal action was even more striking than the index print, because the breadth was wide. It was not one or two names dragging the index higher. The top five constituents all participated, and the mid-cap pharma names in the broader Nifty Pharma 200 universe ran harder than the index itself.

The aggressive label fits this phase for three reasons. The first was that delivery volumes on the leading names expanded rather than contracted as prices rose. Bhavcopy delivery percentages on Sun Pharma and Cipla through the April to August window read like accumulation prints, not distribution prints. That is the behaviour of money that wanted to own the sector, not money that was hedging into it.

The second reason was that the move coincided with a clear earnings beat cycle. The three earnings seasons that bookended this phase, the March 2024 quarter, the June 2024 quarter, and the September 2024 quarter, all delivered aggregate sector EBITDA growth ahead of the consensus that brokerages had built into models in October 2023. That is the kind of fundamental tailwind that lets a sector re-rate without looking expensive on forward multiples even as the absolute level keeps climbing. The re-rating was real, but it was not a multiple-only move. It rode on earnings revisions that arrived in print, quarter after quarter.

The third reason was the brokerage sentiment shift. Through the first half of 2024, the upgrade-to-downgrade ratio on the sector flipped clearly positive. Domestic brokerages that had spent two years writing apologetic pharma sector notes began publishing thematic upgrades on the specialty pipeline story and on the complex generics shift. Foreign brokerages with global generics coverage followed, and by mid-2024 the sector had earned the unofficial blessing of being a structural overweight rather than a tactical trade.

The September 2024 inflection

If the cycle had ended in September 2024, it would have been a respectable but unremarkable defensive rally. What made the eighteen-month window genuinely interesting was what happened after the September 2024 peak in global risk appetite. The benchmark indices, the Nifty 50 and the Nifty Bank, peaked in late September and early October 2024 and then entered a corrective phase that ran through to roughly mid-February 2025. The proximate causes were familiar. Foreign portfolio investor outflows accelerated as Chinese equities staged a stimulus-driven rally that pulled emerging market allocations away from India. The rupee weakened against the dollar. Domestic consumption prints disappointed. The small and mid cap indices, which had run extraordinarily hard in 2024, gave back gains in a way that hurt retail conviction.

In any other pharma cycle from the last decade, the sector would have correlated tightly with the broader market and given back a meaningful portion of its gains during this drawdown. That is the pattern that pharma had followed during the 2018 correction, during the early 2020 pandemic crash, during the 2022 inflation panic, and during numerous smaller wobbles in between. Pharma was a high-beta sector in down markets even when it was a low-beta one in up markets. That asymmetry had haunted long-only investors for years.

This time the pattern broke. Between October 2024 and February 2025, while the broader market corrected sharply and the small cap index gave back roughly a third of its prior year gains, Nifty Pharma drew down by a noticeably smaller amount and then began rebuilding before the benchmark indices had finished bottoming. The sector did not just defend, it actively led on bounces and lagged on sell-downs. That is the behavioural signature of a sector being treated as a hiding place by domestic institutional money.

Caption: Daily price action through the corrective window shows pharma's drawdown was shallower than the benchmark, with the recovery starting earlier and finishing higher.

Phase two: the defensive bid, October 2024 to June 2025

The second leg of the cycle was the part that confused commentary. By the autumn of 2024, the consensus had moved to overweight pharma. When consensus moves to overweight a sector, the textbook expectation is that the next leg either fizzles or unwinds painfully. Instead, the sector found a second wind that had different fuel than the first leg.

The fuel for phase two was rotation, not re-rating. Domestic institutional investors, who had been net sellers of small caps and overweight banks for most of 2024, rebalanced into defensives as the benchmark indices corrected. NSDL flow data through this window showed a clear pattern. FII outflows from Indian equities were concentrated in financials, IT, and large cap consumer names. DII inflows were concentrated in pharma, FMCG staples, and select capital goods. The net effect was that pharma absorbed domestic money even as the foreign book was being trimmed across the rest of the market.

Two macro factors amplified this rotation. The first was that the Reserve Bank of India through this window had been on a cautious easing path, with the policy rate trajectory pointing to lower domestic yields over the medium term. Lower yields are mechanically positive for sectors with long-duration earnings streams, and within Indian equities the pharma sector qualifies. The specialty pipelines, the complex generics annuities, the chronic therapy franchises all have long-tail cashflows that benefit from a falling discount rate environment more than a cyclical capex play does.

The second was the global pharmaceutical tariff scare in the first quarter of 2025. The US administration that took office in January 2025 made periodic noises about pharmaceutical tariffs as part of a broader trade posture. Indian generics, which supplied roughly four out of every ten generic prescriptions filled in the US, were squarely in the line of fire. The interesting market reaction was that after an initial knee-jerk selloff on the headline tariff threats, the sector recovered remarkably quickly. The street, correctly in hindsight, concluded that meaningful tariffs on essential generic medicines were politically untenable in the US, given the inflationary pass-through to retail drug prices. The sector traded the tariff scare as a buying opportunity rather than a structural risk, which itself was a tell that institutional conviction had hardened.

Leadership rotation within the sector

The internal leadership of the sector shifted twice across the eighteen months, and reading the rotation correctly was the difference between owning the index and owning the alpha. Through the first half of 2024, the leadership was clearly with the specialty-heavy large caps. Sun Pharma led on the strength of its specialty book and its emerging market franchises. Cipla led on US respiratory and on domestic chronic therapies. Dr Reddy's was a participant rather than a leader, weighed down by the eventual cliff of its gRevlimid contribution.

Through the late 2024 correction, the leadership rotated towards the names with the cleanest US compliance status and the lowest perceived regulatory tail risk. Plants without warning letters got premium multiples. Companies with diversified geographic exposure outside the US, particularly to Europe and to emerging markets, held up better. The hospital chains, technically pharma-adjacent rather than pharma proper but often clubbed in sector ETFs, became their own leadership cluster as domestic healthcare demand stayed resilient.

Through the first half of 2025, the leadership rotated again, this time towards the CDMO and contract manufacturing names that benefited from the China-plus-one supply chain narrative. The Biosecure Act discourse in the US, which targeted Chinese biotech and pharmaceutical service providers, was a tailwind that arrived on schedule. Indian CDMO names that had spent years building capacity finally got the orderbook visibility that justified their forward multiples. Within the index, this rotation was less obvious because the index weighting was tilted towards the larger generic-heavy names, but the alpha generation through the final phase of the window was concentrated in CDMO exposure.

Cross-sector comparison

The eighteen-month window was not a tide that lifted all defensives. Pharma led the defensive complex by a meaningful margin. FMCG staples, which had been the traditional defensive hiding place during 2018 and 2020 drawdowns, delivered roughly half the index-level total return that pharma did through the same window, and lagged sharply during the late 2024 correction because rural consumption disappointed. IT, which is often grouped with pharma as a dollar-earner defensive, ran into a softer client spending environment and delivered a flat to modestly positive total return through the window, well behind pharma.

The pro-cyclical sectors had a more mixed scorecard. Capital goods and defence delivered strong returns through the first half of the window, then corrected sharply during the October 2024 to February 2025 drawdown and recovered only partially by June 2025. Private banks delivered respectable returns but were hostage to FII flows, which limited their ability to lead. Auto delivered uneven returns, with two-wheelers and tractors outperforming and passenger vehicles underperforming. Real estate ran hard through the first phase and then gave back meaningful gains in the second phase.

The sector that came closest to matching pharma's two-mode behaviour through the window was, interestingly, the power utility complex. Utilities defended capital well during the correction and participated in the recovery, although their absolute leadership was less convincing than pharma's. The honest comparison is that pharma was the cleanest one-decision sector for the window. Buy the index in December 2023, hold it through to June 2025, and underperformance versus the benchmark was structurally hard to engineer.

Historical analog

The closest historical analog to this cycle was not the 2014 to 2016 pharma run, which is the comparison the street often reached for. That earlier cycle was a pure US generics tailwind story that ended in a regulatory crackdown and a multi-year derating. The better analog was the 2003 to 2006 pharma cycle, which combined a domestic chronic therapy growth story with a US generics scale-up and an emerging market franchise build-out. That earlier window also featured a sector that defended capital during the May 2004 correction and then led the recovery, and it ended not in a regulatory blow-up but in a slow grind sideways as valuations caught up to the earnings trajectory.

The 2003 to 2006 cycle ended with pharma trading at multiples that took the better part of a decade to digest. The lesson from that earlier cycle, applied to the 2023 to 2025 window, was that the danger at the end was not a sharp drawdown but a long flat. A sector that has earned its re-rating tends to spend the subsequent eighteen to twenty-four months digesting that re-rating through earnings growth rather than giving back the multiple. The investors who sold pharma in early 2007 looked smart for six months and looked silly over the next five years.

Caption: The intraday session on 11 June 2025 closed with an orderly grind rather than a euphoric blowoff, and the closing half-hour saw volumes consistent with continued accumulation rather than distribution.

Where the cycle stood on 11 June 2025

The eighteen-month window closed with Nifty Pharma at levels that fully reflected the earnings normalisation and the defensive premium. Forward multiples on the large cap names sat in the upper half of their ten-year ranges, although they were not at the kind of bubble levels that the 2015 peak had reached. The earnings growth visibility for the next four quarters looked credible based on the consensus build, and the regulatory backdrop, while never quiet in pharma, was as benign as it had been in years. The macro context, with domestic rates pointing lower and global pharmaceutical tariff risks looking more rhetorical than substantive, supported the sector continuing to absorb defensive flows.

The risk to the constructive view was not a single event but a basket of slow ones. A meaningful escalation of US tariff posture from rhetoric to enforcement would have been disruptive. A reversal of the FDA's recent leniency on plant remediation timelines would have removed a tailwind. A sharper-than-expected pickup in domestic cyclical growth that pulled flows out of defensives back into financials and capital goods would have capped the sector's relative performance. None of these risks looked imminent in early June 2025, but at this point in the cycle they were the things to watch rather than the regulatory blow-ups and the price erosion fears that had haunted the sector through 2018 to 2022.

Verdict

Stance: NEUTRAL Horizon: 3mo Rationale: The eighteen-month re-rating was earned through earnings and through behavioural shift to defensive bid, but at the close of the window the easy alpha had been collected. The sector deserved a hold for those already in it. New entries needed to be selective, with a tilt towards CDMO and complex generics exposure rather than the broader oral solids book.

The pharma cycle from late December 2023 through to the middle of June 2025 was the rare sector move that delivered for both styles of investor. The momentum traders got their breakout and their trend in the first phase. The defensive allocators got their capital preservation and their rotation in the second phase. Both styles had reasons to be satisfied at the close of the window, which is itself a tell. When a sector has satisfied everyone, the next eighteen months are usually less generous, although the absence of an obvious bubble setup argued for digestion rather than reversal.

The honest summary, with the benefit of hindsight on 11 June 2025, was that pharma had spent a decade being underestimated and an eighteen-month window being correctly appreciated. The correct appreciation had been earned. The next chapter would be about whether the earnings could keep pace with the multiple, which was the question this sector had not had to answer convincingly since the previous cycle.