Q1FY24 Review: Zydus Lifesciences: Robust US outlook fairly priced in

14 Aug 2023 , 11:35 AM

Zydus reported a significant beat on Q1 numbers, equally driven by Revlimid sales (which increased USD35mn QoQ per IIFL Capital Services estimate) and resilient performance, both in the India business & base business Ebitda margins (ex-Revlimid at 22-23%). Outlook for the US business remains strong, given the recent launches of Chantix & Indomethacin (CGT exclusivity) and upcoming launch of Vascepa in Q3 & 2 REMS products in Q3/Q4. Despite Asacol competition expected in Q4, analysts of IIFL Capital Services expect Zydus’ US sales to grow 17% cc in FY24, aided by Revlimid and other limited-competition launches. Mgmt’s execution in the India business has also improved over the past 18 months driven by specialty and biosimilar launches. They upgrade FY24-26 Ebitda by 7-13% to bake-in higher Revlimid sales and beat on base business margins. However, robust outlook for the US business is fairly priced in the current valuations of ~28x FY25 EPS (ex-Revlimid). Maintain ADD. 

Revlimid sales would have increased QoQ from USD40mn to USD75mn: 

Zydus’ US sales was up QoQ from USD274mn to USD299mn with Revlimid likely contributing USD35mn sales QoQ, which implies that base US sales ex-Revlimid would have declined USD10mn QoQ. Although incremental competition in Trokendi would have driven decline in the base business, mgmt indicated that price erosion has been stable and Zydus saw volume growth in the base business including Revlimid. Analysts of IIFL Capital Services expect Revlimid sales of USD195-225mn over FY24-26 vs USD70mn in FY23. 

Busy pipeline of launches for US biz: 

Zydus has recently launched Chantix (USD300mn market size, which can contribute USD25-30mn annual sales to Zydus) and Indomethacin suppositories (USD95mn market size with 6-month exclusivity). Additionally, Zydus will launch Vascepa in Q3 and 2 meaningful REMS opportunities in Q3 & Q4 respectively. Factoring Asacol competition in Q4, analysts of IIFL Capital Services have assumed Zydus’ US sales to grow 4% cc in FY24, on which there could be upside risks. 

India and base biz margin performance also robust: 

Zydus’ India biz grew 9% YoY in Q1 and 12% YoY adjusted for the NLEM price cuts. While Zydus has historically underperformed market growth, execution has improved over the past 1.5-2 years following the launches of specialty products (e.g. Lipaglyn) and biosimilars. Analysts of IIFL Capital Services expect Zydus’ India sales to clock 10.5% Cagr over FY23-26. Base business Ebitda margins (exRevlimid) have also been strong at 22-23% over the past 2 quarters.