cancer drug price cap: Hospital and pharma stocks in focus; analysts see limited earnings impact

Hospital stocks are expected to open flat to mildly higher on Friday, while pharmaceutical stocks may see mild selling pressure following the government's decision to cap trade margins on all non-scheduled anti-cancer drugs at 30% of the maximum retail price (MRP).

The impact on hospital earnings is expected to be limited, according to brokerage commentary, although the implications for pharmaceutical companies will be closely monitored.

The government has announced a 30% cap on trade margins for all non-scheduled anti-cancer drugs, with the objective of improving affordability and reducing the financial burden on patients.

The measure will cover branded and generic drugs, as well as domestic and imported medicines, irrespective of whether they are patented.

The average trade mark-up on non-scheduled anti-cancer drugs is approximately 170% and can go as high as 700%, according to the information provided. The proposed cap is expected to bring down prices by as much as 70% in some cases.

The anti-cancer drug market comprises approximately 225 drugs and 500 formulations, with an estimated turnover of ₹12,500 crore. Scheduled medicines account for around ₹2,250 crore of this market.

The government estimates that the 30% trade-margin cap could generate annual savings of approximately ₹2,500 crore for patients.

In 2019, the National Pharmaceutical Pricing Authority (NPPA) had capped trade margins on 42 selected non-scheduled anti-cancer drugs. That exercise reportedly resulted in a 91% reduction in MRP and annual savings of ₹984 crore across 526 brands.

An expert committee under the Directorate General of Health Services (DGHS) will finalise the list of drugs covered by the latest measure. Manufacturers will also be required to maintain existing production levels to ensure adequate availability.

The government has clarified that the measure targets trade margins and is not intended to directly affect manufacturers' selling prices or revenues.

Potential impact on hospital and pharma cos

The impact on hospital chains is expected to be limited, according to Goldman Sachs, which said discussions with hospitals and industry participants suggest that most multi-specialty hospital chains are unlikely to face a significant earnings impact.

Oncology medicines account for less than 5% of hospital revenues and less than 2-2.5% of earnings before interest, taxes, depreciation and amortisation (EBITDA), according to the brokerage. Max Healthcare Institute and Fortis Healthcare could have slightly higher exposure.

Goldman Sachs estimates that hospitals typically earn margins of 30-50% on oncology medicines. Even under a bearish scenario, its analysis points to a potential EBITDA impact of less than 2%.

Hospitals could also partly offset any loss of margins through marginal repricing of other services, including drug administration charges.

Another brokerage assessment suggests that the impact on hospital EBITDA could range from 1-4%, depending on the exposure to medical oncology and the margins earned on medicines.

For pharmaceutical companies, the impact remains uncertain. Drugmakers may continue selling medicines at existing prices if their margins permit, although some could face pressure to lower prices. The extent of any reduction will depend on the economics of individual products.

The issue is also sub judice, with the next court hearing scheduled for October 12. The court's consideration of targeted trade-margin rationalisation versus broader, uniform price controls remains a key monitorable.

Separately, Bernstein said the market reaction to the Supreme Court's October 8 direction on pharmaceutical marketing practices appeared to reflect concerns about the eventual regulatory framework rather than any immediate change in operating conditions.

The Supreme Court directed the government to constitute a committee to examine whether pharmaceutical marketing practices should move from the existing self-regulatory framework to a statutory regime.

The announcement triggered a broad-based sell-off in pharmaceutical stocks. However, Bernstein's discussions with medical affairs leaders, medico-legal heads, commercial executives, field managers and other industry participants indicated limited concern about any near-term disruption to business practices.

The existing Uniform Code for Pharmaceutical Marketing Practices (UCPMP) 2024 remains in force, while the committee is expected to submit its recommendations before the next hearing, scheduled for January 2027.

Bernstein's assessment suggests that investors are weighing the potential implications of future regulation rather than an immediate change in the industry's operating environment.