Hospital stocks rallied on Friday after the government decided to limit trade margins on non-scheduled anti-cancer drugs to 30%, a move expected to lower the prices of several cancer medicines by 20-70% and save patients an estimated ₹2,500 crore annually. The decision lifted investor sentiment, although brokerages flagged potential margin pressure and said the full impact on hospital earnings would depend on further details.
Fortis Healthcare shares surged 5.3% to ₹805.15, followed by Manipal Health Enterprises, which gained 4.3% to ₹715.50. Krishna Institute of Medical Sciences advanced 4.2% to ₹716.35, while Max Healthcare Institute rose 4.4% to ₹915. Apollo Hospitals Enterprise shares climbed 4% to ₹7,977.70, and Global Health gained 3.2% to ₹1,317.25.
However, the hospital stocks had fallen over the preceding two weeks after the Supreme Court raised concerns about the disparity between price-to-retailer (PTR) and maximum retail prices (MRP) of essential medicines. It cited an example of a cancer drug carrying an MRP of ₹27,000 against a PTR of ₹2,700.
What is the government’s 30% cancer drug margin cap?
The National Pharmaceutical Pricing Authority (NPPA), the drug pricing regulator, said the intervention could bring down MRPs by approximately 20-70%, depending on the existing distribution structure and mark-up for individual medicines.
The policy extends the government’s earlier trade-margin restrictions, which covered only select oncology drugs, to non-scheduled anti-cancer medicines that do not fall under the existing list of drugs with government-set ceiling prices.
NPPA’s analysis found that non-scheduled cancer medicines carried an average price mark-up of around 170%, with some cases involving mark-ups of 700% or more. Medicine prices also vary depending on whether patients buy them through retail pharmacies, hospital pharmacies or online platforms.
State authorities, including those in Maharashtra, Rajasthan and Karnataka, along with patients and civil society groups, have raised concerns about high medicine prices.
An expert committee under the Directorate General of Health Services will finalise the list of medicines covered by the measure. The NPPA will subsequently decide on the list and issue the notification. The government aims to curb excessive mark-ups, improve affordability and ensure that the medicines remain available.
Should you buy hospital stocks? What brokerages say
Hospital stocks rallied as the government’s decision on medicine pricing eased some regulatory concerns. However, brokerages cautioned that the impact on hospital margins and earnings will depend on the final scope of the regulation and its implementation.
ICICI Securities said the regulation’s impact across the pharmaceutical and medicine supply chain would largely be felt through retailer margins. Hospital consumables account for 35% of the overall bill and carry average EBITDA margins of 30-35%, the brokerage noted.
It had earlier expected a margin cap of around 16%, which had weighed on sentiment towards hospital stocks. ICICI Securities estimated that the new regulation could affect hospital EBITDA margins by 2-4%, although it said further clarity was needed because the matter remained sub judice and the final list of covered drugs was yet to be released.
“As far as the impacts on pharma margins are concerned we will need further details from management interactions,” the brokerage said.
Jefferies, meanwhile, expects any near-term margin pressure arising from the government’s decision to be temporary. It also believes the move could ease regulatory uncertainty for now, although mark-ups on hospital consumables remain a concern.
According to the brokerage, the impact on EBITDA should be manageable, suggesting that the overall earnings effect may not be substantial. However, the eventual impact will depend on the final scope of the regulation and how it affects pricing and margins across the supply chain.
For investors, Friday’s rally reflects relief following a period of regulatory uncertainty, but it does not eliminate the risks. The potential reduction in medicine prices could affect parts of the hospital supply chain, while the extent of any earnings impact remains uncertain.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
