Hospital stocks fell up to 7% on Wednesday after the Supreme Court questioned a 10x markup on drug prices on September 29. Analysts now debate if this sell-off is a risk or a buying opportunity. While Jefferies suggests buying, HSBC says pricing control remains a key concern for the sector.
Hospital stocks sell-off a buying opportunity or a risk? Here is what analysts advice
The Supreme Court, on Tuesday, September 29, flagged how drugs cost 2,700 to a retailer and are billed at 27,000 to patients in hospitals. The top court questioned where the 10x markup on prices was going.
By Shloka Badkar
The sell-off in India's hospital chains on Wednesday has prompted analysts tracking these companies to answer whether these stocks will now face further regulatory hurdles, or whether the fall in these stocks is an opportunity to accumulate a long-term growth story.
Shares of hospital stocks Apollo hospitals, Max Healthcare, Fortis Healthcare, Global Health, Krishna Institute of Medical Sciences, Narayana Health, among others fell as much as 7% in the previous session after the Supreme Court's observation on price fixation on drugs.
Both Jefferies and HSBC have shared divergent views on this subject.
Jefferies
The brokerage said hospital stocks corrected sharply on regulatory fears around consumables and oncology drug pricing. These categories are likely to contribute between 15% to 20% of the revenue of these hospitals.
Under various price cap scenarios with no pass-through to the customers, Jefferies said that the potential impact of this on the hospitals' Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) is expected to be between 2% to 5%.
It said past regulatory overhangs typically led to consolidation in these stocks and went on to provide attractive entry points for the future.
The brokerage recommends buying these stocks after the sell-off as the sector fundamentals remain intact.
HSBC
HSBC said pricing control / intervention remains a key market concern for hospitals.
It said pricing control risk is a headline concern but the on-ground impact remains uncertain, adding that the current discussions are related to drug pricing in government channels only.
HSBC said further developments are to be monitored.
Why did hospital stocks decline in the previous session?
The Supreme Court, on Tuesday, September 29, flagged how drugs cost 2,700 to a retailer and are billed at 27,000 to patients in hospitals. The top court questioned where the 10x markup on prices was going.
It also questioned the pricing differential between essential and non-essential drugs and expressed concern that the devices and drugs under the 'essential' category are out of the scope of price control orders.
The SC was hearing a public interest litigation on price fixation of drugs, mandated for generics. The top court also questioned the Centre as to where there is no 16% mark up across all drugs and devices.
The petitioners claimed that the price control orders were not applicable on patented drugs and claimed that 82% drugs are outside the pricing orders, with prices of just 1,000 drugs being controlled by the National Pharmaceutical Pricing Authority (NPPA).
The Supreme Court also expressed concerns regarding hospitals forcing patients to purchase drugs only from in-house pharmacies.
The Supreme Court did not pass any order and has scheduled the next hearing for October 12.
Stock reactions
Shares of Krishna Institute of Medical Sciences and Global Health ended the previous session around 3% lower while shares of Max Healthcare closed 6% lower and shares of Apollo Hospitals and Fortis Healtchare ended 7% down each.