Apollo, Max Health, other hospital stocks rally up to 5% despite cancer drug price caps. Why Jefferies stays bullish
Hospital stocks rose up to 5% after the government capped trade margins on non-scheduled anti-cancer drugs at 30%, potentially reducing medicine prices by 70%. Jefferies and Emkay expect manageable earnings impacts, despite near-term margin pressures. Jefferies favours Fortis, Manipal, Apollo, Max Healthcare and Medanta, citing strong demand and attractive valuations.
Hospital stocks such as Fortis Healthcare, Dr Agarwal's, Manipal, Apollo Hospitals, and Medanta surged up to 5% on Friday after the government imposed a cap on trade margins for non-scheduled anti-cancer drugs at 30%. This regulation could potentially lower the cost of several cancer medicines by up to 70%, saving patients an estimated Rs 2,500 crore annually.
The policy aims to prevent excessive mark-ups in the distribution chain and boost the affordability of cancer treatment while ensuring the continued availability of these medicines. The cap extends the government's earlier restriction on select oncology drugs.
Fortis Healthcare's share price rose over 5% to Rs 805 per share, while Dr Agarwal's increased by 2% to Rs 478 on the BSE. Apollo Hospitals, Manipal, and Medanta climbed 4%, 3.5%, and 3.1% respectively. Max Health also saw a gain of over 4% to Rs 915 per share.
Jefferies, a global investment bank, remains bullish on hospital stocks despite the near-term impact on margins. They recommend a "Buy" rating, citing that concerns over consumable markup are manageable and that regulatory uncertainty will ease. The brokerage estimates that consumables account for 12-15% of a patient's hospital bill, but these margins are relatively low due to price caps on high-value items like stents and implants since 2017.
Jefferies believes that hospitals can offset the impact of price caps on margins by increasing procedure charges and implementing cost rationalisation measures over 12-15 months, similar to the approach taken for cardiac stents and orthopaedic knee implants around a decade ago. The impact of price caps on hospital margins may take 3-6 months to recover, as seen in previous regulatory developments.
Despite the short-term earnings impact, Jefferies remains optimistic about the hospital sector's fundamentals, driven by strong demand for quality tertiary-care beds. Hospital stocks are currently trading at 21x-25x FY28E EV/EBITDA, down from 25x-35x a year ago. The brokerage considers this a favorable entry point for companies capable of delivering sustainable EBITDA growth in the high teens.
Written by urgent.news from The Economic Times - Top News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
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