Hospital stocks in the eye of the storm: Buy the dip or stay cautious? Experts weigh in

A sector that had largely been driven by rising healthcare demand is now in the limelight with a bigger question, that is, how much of hospital profitability could be affected if medicine mark-ups come under tighter scrutiny?

Drug pricing: SC questions steep mark-ups

The apex court has questioned steep mark-ups on cancer drugs and also asked the government to examine allegations that patients are sometimes required to purchase medicines from hospital-owned or designated pharmacies.

For investors, the concern is not simply about the price of one particular medicine. The bigger question is whether any future regulatory framework could affect the pharmacy-related income of hospitals and, in turn, their overall profitability.

Financialexpress.com spoke to analysts to understand how they are viewing the latest developments, the potential impact of any regulatory changes on hospital profitability, and whether the recent sell-off offers an opportunity for investors or warrants caution.

Why are hospital stocks under pressure?

The recent selling was triggered after the Supreme Court raised concerns over the difference between the price at which certain medicines are bought and the price at which they are sold to patients.

The observations have prompted investors to reassess the potential earnings impact if medicine margins at hospitals are eventually regulated.

However, there is an important distinction. The Supreme Court’s comments are observations at this stage and not a final regulatory order. 

Hospital sector stocks: How big could the impact be?

Hospital pharmacies are not necessarily a small part of the business. According to Sunny Agrawal, Deputy Vice President- Fundamental Research at SBI Securities, pharmacy operations can contribute around 10-25% of a hospital’s revenue and profitability.

That makes any possible restriction on pharmacy margins an important issue for the sector. Agrawal said, “On the proposed regulatory changes, I believe it is prudent to remain on the sidelines for now. Hospital pharmacies can contribute around 10–25% of a hospital’s revenue and profitability. Any clampdown on the margins that can be charged on pharmacy business could therefore put pressure on hospital profitability. So, it would be better to wait for greater clarity on the regulatory framework before taking a view.”

Is the sell-off in hospital stocks a buy-the-dip opportunity?

The answer may depend largely on what medicines eventually come under any possible price restrictions.

Thomas V Abraham, Research Analyst at Mirae Asset Sharekhan, said the Supreme Court’s questions so far have primarily focused on critical and life-saving medicines. He also pointed out that the court’s comments should not yet be treated as a final decision.

Abraham added, “The questions raised by the Supreme Court so far relate largely to critical, life-saving drugs. These are observations rather than a verdict, and the matter will be deliberated further. We expect any capping, if imposed, to be limited to critical drugs in the current scenario. For other drugs, we expect further deliberations to strike a balance between affordability, operational efficiency, and the expansion plans needed to support growth in an under-penetrated sector. As hospitals generally do not disclose pharmacy revenue separately, the impact cannot be sized precisely.”

He further noted, “In the base case, the market expects a 2–4% reduction in EBITDA from current estimates. However, if MRPs were capped at 16% above the price to retailer (PTR) more broadly, in line with the questions raised by the bench, the impact could be more significant. In the current scenario, the matter is likely to remain an overhang on hospital valuations in the near term.”

What should investors watch now?

The immediate focus is likely to remain on the scope of any eventual regulation. A framework covering only selected critical drugs could have a different financial impact compared with a broader cap on medicine margins across hospital pharmacies.

This distinction is particularly important because the market does not have complete visibility into the contribution of pharmacy operations at individual hospitals. As Abraham pointed out, hospitals generally do not report pharmacy revenue as a separate business segment, making it difficult to calculate the exact impact on earnings.

The 2-4% potential reduction in earnings before interest, taxes, depreciation and amortisation (EBITDA) in the base case provides one indication of what the market may currently be factoring in. But a broader 16% cap over the price to retailer could lead to a substantially larger impact.

Hospital stocks: Wait for clarity or buy the fall?

For now, the key debate is not how much the hospital stocks have fallen, but whether the decline has fully priced in the potential regulatory risk.

Abraham expects the issue to remain an overhang on hospital valuations in the near-term, while also highlighting that the eventual impact will depend heavily on the final scope of any regulation.

For investors tracking hospital stocks, the next phase could therefore be less about short-term price movements and more about regulatory developments. Until the government and the courts provide greater clarity on how medicine pricing and hospital pharmacy margins could be treated, estimating the impact on individual companies remains difficult.

Disclaimer: This article is based on analysts’ outlook and is for informational purposes only. The views and recommendations expressed are those of the respective brokerage firms and do not reflect the official policy or position of Financial Express. This should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor before making any investment decisions.