Fortis, Apollo, Others See Hospital Stocks Drop After SC Raises Drug Pricing Issues

Shares of leading hospital chains such as Fortis Healthcare, Apollo Hospitals, Dr Agarwal’s, Manipal, and Medanta experienced further declines on Thursday, continuing a downward trend that began the previous day. Fortis Healthcare saw its stock fall by 10% over two sessions, while Apollo Hospitals dropped 9%. Max Healthcare and Dr Agarwal’s also faced losses, with Max down 8% and Dr Agarwal’s slipping over 1%. Meanwhile, Global Health, the operator of Medanta, showed little change on Friday.

The selloff comes after the Supreme Court of India expressed concern over steep price markups on cancer medicines and instructed the government to investigate reports that some hospitals require patients to buy drugs exclusively from their own or affiliated pharmacies. This scrutiny follows reports highlighting a wide gap between the trade price hospitals pay and the maximum retail price (MRP) charged to patients.

The government has initiated discussions with stakeholders in the medical sector to regulate trade margins on medical devices and consumables. Several hospital items, including disposable syringes, IV sets, cardiac catheters, intraocular lenses, pacemakers, and heart valves, have been reported to carry markups of 10 to 20 times their trade prices. The Food and Drug Administration (FDA) Commissioner has urged the government to set clear guidelines defining the acceptable margin between procurement cost and MRP.

In addition to consumables, oncology drugs have come under the spotlight. These drugs contribute roughly 4 to 6% of hospital revenues but have displayed exceptionally high price markups. The Supreme Court recently pointed out a troubling example where a cancer medication’s price to retailer was Rs 2,700, while the MRP charged to consumers was Rs 27,000, indicating a tenfold increase. At a recent hearing, the court questioned why a uniform margin cap of 16% could not apply across all pharmaceutical products.

Despite these regulatory challenges, some investment analysts see potential buying opportunities in hospital stocks following the recent price corrections. International brokerage Jefferies maintains a positive outlook, reiterating ‘Buy’ recommendations for six major hospital chains. Their target prices include Rs 1,125 for Fortis Healthcare, Rs 600 for Dr Agarwal’s, Rs 870 for Manipal, Rs 1,260 for Max Healthcare, Rs 10,350 for Apollo Hospitals, and Rs 1,660 for Medanta.

Jefferies points out that hospitals have experience managing similar regulatory shocks. Nearly ten years ago, prices of cardiac stents and orthopedic knee implants were slashed by as much as 70 to 85%. Hospitals offset the revenue impact by gradually increasing procedure charges and implementing cost efficiency measures over a year or more. Apollo Hospitals, for example, restored its EBITDA margins to previous levels within a few quarters after adopting these strategies in 2017-18.

The brokerage highlights that the underlying demand for quality tertiary care remains strong, supporting the sector’s fundamentals. Following the recent stock declines, hospital companies currently trade at an enterprise value to EBITDA (EV/EBITDA) ratio of 20 to 27 times for fiscal year 2028, down from 25 to 35 times a year ago. Firms able to sustain high-teens EBITDA growth might find this correction a favorable entry point.

Similarly, Emkay Research has indicated that discussions with hospital operators suggest the earnings impact from margin regulation could be limited. Pharmacy revenues represent 15 to 20% of total income for these chains, with margins between 20 and 25%. The brokerage also notes that any margin caps would mostly affect patients paying out of pocket, while those covered by insurance or public health schemes usually benefit from pre-negotiated rates that are discounted from official MRPs. This dynamic could further reduce the financial impact on hospitals.

Emkay does not foresee a blanket cap on drug margins, pointing to the operational difficulties of applying such rules across a wide range of non-scheduled drugs and the complex supply chains involving pharmaceutical companies, distributors, and retailers. They caution that regulatory oversight will persist given the socio-economic significance of the sector. The brokerage maintains buy ratings and target prices on several healthcare stocks including KIMS, Park, Medanta, Max, and Rainbow.

Hospital chains play a vital role in India’s healthcare system, especially as demand for advanced medical treatments grows with an aging population and rising chronic diseases. The government’s focus on price regulation aims to make healthcare more affordable but also introduces challenges for hospital operators balancing cost management with quality care.

Investors should watch how these regulatory developments unfold, as well as how hospitals adjust their pricing and operational strategies. While short-term volatility may continue, the sector’s fundamental growth potential remains supported by increasing patient volumes and expanding healthcare infrastructure.