Hospital stocks including Fortis Healthcare, Dr Agarwal’s, Manipal, Apollo Hospitals and Medanta extended their losses for a second straight session on Thursday, after falling as much as 10% in the previous session, as the Supreme Court questioned steep markups on cancer drugs and asked the government to examine allegations that hospitals require patients to purchase medicines from their own or designated pharmacies.
Fortis Healthcare shares have fallen 10% over the past two sessions, while Apollo Hospitals Enterprises has declined 9% during the same period. Max Healthcare is down 8%, while Dr Agarwal’s has slipped over 1%. Global Health, which operates the Medanta brand, was little changed on Friday.
Why are hospital stocks falling?
The Government of India has started discussions with the medical sector and hospitals on rationalising trade margins for medical devices and consumables. This follows reports of steep 10-20x markups on hospital consumables after the FDA Commissioner highlighted the gap between trade prices and Maximum Retail Prices (MRPs) for hospital items.
The key consumables identified include disposable syringes, IV sets, cardiac catheters, intraocular lenses, pacemakers and heart valves. The FDA Commissioner has urged the Centre to frame guidelines to address the "permissible gap between trade procurement price and declared MRP".
The second regulatory concern relates to high markups on oncology drugs, which account for 4-6% of hospital revenue. Last week, the Supreme Court of India flagged a 10x price difference in a cancer drug, where the Price to Retailer (PTR) was Rs 2,700 compared with an MRP of Rs 27,000. At yesterday's hearing, the Bench asked why a uniform 16% margin cap could not be enforced across all pharma products.
Time to hospital stocks
International brokerage Jefferies has retained a ‘Buy’ call on six hospital stocks following sharp corrections triggered by regulatory concerns around consumable and oncology drug pricing.
Its picks include Fortis Healthcare with a target price of Rs 1,125, Dr Agarwal’s Healthcare at Rs 600, Manipal at Rs 870, Max Health at Rs 1,260, Apollo Hospitals at Rs 10,350 and Medanta at Rs 1,660.
Jefferies said hospitals have multiple levers to offset the impact of potential price cuts. Nearly a decade ago, prices of cardiac stents and orthopaedic knee implants were reduced by 70-85%. Hospitals were able to mitigate the impact through staggered increases in procedure prices and cost-rationalisation measures over 12-15 months.
The brokerage believes a similar approach could help limit the EBITDA impact this time as well. Apollo Hospitals adopted comparable measures in 2017-18 and was able to bring EBITDA margins back to prior levels within a few quarters.
Jefferies said sector fundamentals remain strong, supported by robust demand for quality tertiary care beds. Following the recent correction, hospital stocks trade at an implied 20x-27x FY28 EV/EBITDA valuation, compared with 25x-35x a year ago. The brokerage said companies capable of delivering sustainable high-teens EBITDA growth could see the correction as an entry point.
Emkay said discussions with hospital chains indicate a limited earnings impact for its healthcare coverage universe. Pharmacies account for 15-20% of overall revenue and carry a margin profile of 20-25%. The brokerage also noted that any margin cap is likely to primarily affect cash-paying patients, while those covered by insurance and public health schemes generally use pre-negotiated package rates, which are discounted from rack rates and tariffs rather than based on headline MRPs. This could further limit the impact on hospital chains' earnings, in Emkay's view.
Emkay does not expect a blanket cap on drug margins, citing executional and operational challenges involved in covering non-scheduled drugs across the broader ecosystem, including pharma companies, distributors and supply-chain players. However, it said regulatory overhang on the sector remains in some form, given the socio-economic impact to which the sector is inherently exposed. The brokerage retained its ratings and target prices on KIMS (Buy at Rs 850), Park (Buy at Rs 375), Medanta (Add at Rs 1,500), Max (Add at Rs 1,150) and Rainbow (Add at Rs 1,550).
Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his ‘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.
