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Jefferies Favors Hospital Stocks Despite Cancer Drug Price Cap Concerns
The government is considering limits on how much hospitals and sellers can mark up some cancer medicines.
The Supreme Court is due to hear petitions about high medicine mark-ups on October 12.
Jefferies says new limits could put some pressure on hospital earnings at first.
It thinks hospitals may be able to respond by managing costs or adjusting procedure prices.
The brokerage says earlier price cuts on some medical products were followed by changes that helped hospitals recover their margins.
It also says hospital shares are cheaper than they were a year ago.
Jefferies expects demand for quality hospital care to support the sector.
It prefers Fortis Healthcare, Manipal Hospitals and Apollo Hospitals among the listed hospital companies it follows.
The article also notes that rules on medical devices and consumables could change in the future.
The Supreme Court of India is set to hear petitions on October 12 challenging steep mark-ups on cancer medicines.
A proposed government measure would cap trade margins at 30% of MRP for non-scheduled cancer medicines, according to reports cited by Jefferies.
Jefferies previously estimated a 2–5% EBITDA reduction under a more conservative scenario involving caps on cancer drugs and consumables.
The brokerage expects any near-term impact to be manageable, citing possible pricing adjustments and cost controls.
Jefferies lists Fortis Healthcare, Manipal Hospitals and Apollo Hospitals as its top three preferred hospital stocks, followed by Max Healthcare Institute and Medanta.
- Who
- The Supreme Court of India, the government, Jefferies and hospital companies including Fortis Healthcare, Manipal Hospitals and Apollo Hospitals.
- What
- A proposed cap on trade margins for certain cancer medicines has raised questions about hospital earnings and valuations.
- Where
- India.
- When
- The Supreme Court is set to hear the petitions on October 12; an earlier hearing took place on September 29.
- Why
- The proposal follows concerns about large differences between prices charged to retailers and prices paid by patients.
Regulatory concerns
Jefferies' investment view
Impact of price controls
Regulatory concerns
The Supreme Court has raised concern about sharp gaps between retailer prices and the prices patients pay; proposed caps could also pressure hospital earnings.
Jefferies' investment view
Jefferies expects the near-term impact on hospital earnings to be temporary and manageable through pricing adjustments and cost controls.
Hospital stocks
Regulatory concerns
Further regulation of medical devices and consumables remains possible, leaving additional uncertainty for hospitals.
Jefferies' investment view
Jefferies says hospital shares have corrected and now trade at lower valuations than a year ago, potentially creating an opportunity in companies able to sustain high-teen EBITDA growth.
Key facts
- Proposed margin cap
- 30% of MRP for non-scheduled cancer medicines, according to media reports cited by Jefferies.
- Earlier Jefferies scenario
- A 16% margin cap on cancer drugs and a 5% cap on consumables.
- Estimated earnings effect
- Jefferies estimated a 2–5% EBITDA reduction under its earlier scenario.
- Consumables share
- Jefferies says consumables account for around 12–15% of a patient's hospital bill.
- Hospital stock valuations
- The article says stocks traded at around 21–25 times estimated FY28 EV/EBITDA, compared with 25–35 times a year earlier.
- Jefferies' preferred order
- Fortis Healthcare, Manipal Hospitals, Apollo Hospitals, Max Healthcare Institute and Medanta.
- Next court hearing
- October 12.
Sources
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