The government’s proposed 30% cap on mark-ups for certain cancer drugs could significantly hurt the earnings of Max Healthcare Institute and Apollo Hospitals Enterprise, unless the hospitals pass on some of the impact to customers, according to Kunal Dhamesha, pharma and healthcare research analyst at Macquarie Capital.
Dhamesha estimates that the proposed cap could reduce Max Healthcare’s earnings before interest, taxes, depreciation and amortisation (EBITDA) by the mid-teens and Apollo Hospitals’ EBITDA by a high single-digit percentage, assuming neither hospital passes on the impact to patients.
The National Pharmaceutical Pricing Authority (NPPA) has said the average mark-up on oncology drugs is around 170%. Cutting it to 30% could put pressure on hospital profitability because cancer medicines account for a significant share of pharmacy revenue, Dhamesha said.
Investors should watch the Supreme Court hearing scheduled for October 12, as the court’s position could influence the extent of government intervention in drug pricing, he said.
An earlier proposal involving a 16% trade margin would translate into a mark-up of around 20%, compared with the 30% mark-up now proposed. However, Dhamesha said the more important question for investors is how the proposed cap would affect hospital earnings.
He also warned that the move could set a precedent for government intervention in other categories of medicines and medical consumables.
“If this kind of precedent is set that some form of complaint happens in the Supreme Court for a particular oncology drug, and then there is some intervention from government. This sets a big precedent,” Dhamesha said.
The potential impact could extend beyond cancer medicines and weigh on hospital valuations, particularly because Indian hospital stocks trade at relatively high valuations compared with their emerging-market peers, he added.
UCPMP enforcement could benefit larger drugmakers
Separately, Dhamesha said stricter enforcement of the Uniform Code for Pharmaceutical Marketing Practices (UCPMP) could benefit larger drugmakers such as Sun Pharmaceutical Industries and Torrent Pharmaceuticals.
He said these companies already comply with the marketing code, while smaller players that do not follow it could face greater regulatory risks. This could allow larger pharmaceutical companies to gain market share.
However, the extent of the impact will depend on any changes recommended by the panel examining the code and the subsequent regulatory response, Dhamesha said.
Why doctors may prefer branded medicines
Dhamesha said doctors’ preference for branded medicines is largely driven by confidence in drug quality, rather than incentives linked to medicine prices.
With numerous drug manufacturers operating in India, doctors may find it difficult to independently assess whether a medicine from an unfamiliar company is as effective as one from an established manufacturer. This makes regulatory oversight and consistent quality standards important, he said.
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Cancer drug price cap may hurt Apollo Hospitals, Max Healthcare earnings; Macquarie flags wider risk
“The ability of a doctor to predict that an unknown company’s drug is as efficacious as the larger pharma company is limited because doctors cannot go and check the manufacturing facility,” he said.
Wider adoption of generic prescriptions will depend on greater confidence in India’s drug regulatory system and assurances that manufacturers consistently meet quality standards, Dhamesha added.
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