Hospital stocks rally on anti-cancer drug price cap

Hospital stocks rebounded sharply on Friday, shaking off earlier regulatory concerns after the government moved to cap trade margins on anti-cancer drugs. Investors reacted with relief, sending shares of major hospital chains higher as analysts pointed to a historically manageable impact from such price controls. The rally followed a two-week decline triggered by Supreme Court scrutiny of medicine pricing disparities.

Fortis Healthcare shares surged 5.3% to ₹805.15 on the BSE. Other key players also posted significant gains.

This positive movement mirrors a pattern from earlier this year. When an NGO filed a public interest litigation in February 2024 seeking regulation of hospital procedure charges, stocks initially fell but generated positive returns over the subsequent six months.

Brokerage outlook on hospital stocks

Jefferies maintains a Buy rating on hospital stocks, citing past recovery from price caps and expecting near-term pressure to be temporary. The brokerage points to the historical precedent of price caps on cardiac stents and orthopaedic knee implants nearly a decade ago, where prices were reduced by 70-85%. Hospitals offset that impact through staggered increases in procedure charges and cost rationalisation over 12 to 15 months. Apollo Hospitals adopted comparable measures in 2017-18 and restored its EBITDA margins to previous levels within a few quarters.

Jefferies expects a similar approach this time to limit the EBITDA impact. The brokerage notes that regulatory developments around price caps have historically weighed on hospital stocks for 3-6 months before recovery begins. Apollo Hospitals, for instance, delivered 3% returns in 2018-19 following the earlier caps. Jefferies believes the latest move could ease regulatory uncertainty for now, though concerns around mark-ups on hospital consumables remain. According to the brokerage, the impact on EBITDA should be manageable, suggesting that the overall earnings effect may not be substantial.

Jefferies estimates consumables account for 12-15% of a patient's hospital bill, with margins in that segment being relatively low. High-value items like stents and implants have been subject to price caps since 2017. The eventual impact depends on the final scope of regulation and its effect on pricing and margins across the supply chain.

Details of the anti-cancer drug price cap

The government decided to cap trade margins at 30% of the maximum retail price for all non-scheduled anti-cancer drugs. This policy extends earlier trade-margin restrictions from select oncology drugs to a broader range of non-scheduled cancer medicines. An expert committee under the Directorate General of Health Services will finalise the list of medicines to be covered, and the National Pharmaceutical Pricing Authority will issue the notification.

The intervention is expected to lower prices of several cancer medicines by 20-70%, generating estimated annual patient savings of ₹2,500 crore. An NPPA analysis found non-scheduled cancer medicines carried an average price mark-up of around 170%, with some cases involving mark-ups of 700% or more. The government aims to curb excessive mark-ups, improve affordability, and ensure medicine availability. This follows concerns about high medicine prices raised by state authorities in Maharashtra, Rajasthan, and Karnataka, as well as by patients and civil society groups.

Brokerages have flagged potential margin pressure, noting the full impact on hospital earnings depends on further details. ICICI Securities said the regulation's impact across the pharma supply chain would largely be felt through retailer margins. The brokerage had earlier expected a margin cap of around 16%, which weighed on sentiment, and estimates the new regulation could affect hospital EBITDA margins by 2-4%. ICICI Securities said further clarity is needed as the matter remains sub judice and the final list of covered drugs is not yet released. "As far as the impacts on pharma margins are concerned we will need further details from management interactions," ICICI Securities said.

Jefferies' preferred hospital stock picks

Jefferies ranks its preferred hospital stock picks in the following order: Fortis, Manipal, Apollo Hospitals, Max Healthcare and Medanta. The brokerage remains constructive on the hospital sector despite expecting near-term earnings to be affected.

The extent of any earnings impact remains uncertain. The potential reduction in medicine prices could affect parts of the hospital supply chain. The NPPA will finalise the list of medicines and issue the notification for the trade-margin cap on non-scheduled anti-cancer drugs.