Healthcare and pharmaceutical companies extended their decline for the third consecutive session on Monday, with the Nifty Healthcare index declining over 4 percent and the Nifty Pharma index losing more than 3 percent during the period. Nifty healthcare constituents Sun Pharmaceutical Industries, Apollo Hospitals Enterprise and Dr Reddy's Laboratories were down around 1 percent each, while Max Healthcare Institute fell nearly 3 percent. The continued selloff reflects ongoing investor concerns over regulatory pressures and pricing transparency issues in the healthcare sector.
Drug regulators in Maharashtra, Karnataka and Uttar Pradesh are gathering data on price mark-ups, potentially strengthening the case for a review of trade margin rationalisation (TMR) policy. The Maharashtra Food and Drug Administration (FDA) had last month indicated an almost 1,000 percent mark-up in the maximum retail prices (MRPs) of certain medical consumables sold at hospital pharmacies, compared with their procurement costs. The Department of Pharmaceuticals (DoP) and the National Pharmaceutical Pricing Authority (NPPA) held consultations with private healthcare providers and industry bodies on the high price mark-ups on surgical consumables sold in hospitals. According to industry executives, "Since studies are being initiated by state regulators and not patient groups or non-governmental organisations (NGOs), there may be a good chance of policy review this time".
Healthcare companies' revenue and earnings before interest, taxes, depreciation and amortisation (EBITDA) are likely to rise around 13 percent year-on-year in the September quarter, according to latest brokerage reports. However, net profit is expected to remain under pressure, with growth estimated at 5.8 percent year-on-year due to higher financial costs and increased depreciation following acquisitions. Among healthcare services, hospitals are likely to maintain their outperformance, with around 25 percent YoY revenue growth, driven by ongoing capacity additions and healthy improvement in ARPOB (average revenue per occupied bed). However, margins may remain under pressure for select hospitals owing to the ramp-up of newly commissioned facilities.
The DoP told the Department-related Parliamentary Standing Committee on Chemicals and Fertilisers that it is examining a proposal to incorporate TMR in the Drug Price Control Order (DPCO), 2013. Under the DPCO, a 16 percent retailer margin is used while calculating the ceiling price of scheduled essential medicines, but scheduled medicines account for only 18 percent of the domestic pharmaceutical market by value. Non-scheduled formulations, which are not subject to price ceilings, account for around 82 percent of the 82,000 stock-keeping units (SKUs) covered in the Pharmarack data. Pharmarack data showed that around 87 percent of the non-scheduled market had a weighted average mark-up of up to 45 percent, while only around 4 percent had a weighted average mark-up exceeding 100 percent.
Pharmaceutical industry associations and consumer groups have supported the proposed TMR framework, while making recommendations on the method of calculating margins, the percentage at which margins should be capped, phased implementation and the period of sales data to be considered. However, associations representing micro, small and medium enterprises (MSMEs) have warned that applying TMR to non-scheduled formulations could disproportionately affect smaller companies, lead to employment losses and disrupt the availability of medicines in remote areas. The DoP said it would take into account stakeholder suggestions and do a detailed analysis of the market data before formulating a policy on appropriate trade margins across therapeutic categories.
