Q2FY24 Review: Zydus Lifesciences: Resilient margins despite nil Revlimid sales

8 Nov 2023 , 02:21 PM

Zydus’ Gross/Ebitda margins in Q2 at ~66/24% held up well (vs 67/30% QoQ), despite high-margin Revlimid sales declining QoQ from USD75m to ‘nil’ in Q2. Base business Ebitda margins (exRevlimid) at 23-24% in H1FY24 have been significantly higher than 18-19% run-rate in early FY23, with the entire improvement being driven by higher GMs on the back of new launches in the US business and better product/business mix. While Revlimid sales will be primarily booked only in Q1/Q4 every year, outlook for the US business remains fairly robust driven by ramp-up expected in recent launches (Indomethacin, Chantix and Plerixafor) and 30-40 new launches p.a. in the US. India business should also grow in-line with the IPM growth. Analysts of IIFL Capital Services upgrade FY24-26 Ebitda by 3-8% primarily led by 100-150bps higher margins for the base business. Maintain ADD rating with a TP of Rs690. 

Targeting 30-40 new launches p.a. in the US: 

QoQ decline in US sales from USD300m to USD225m was largely driven by Revlimid, as partial ramp-up in Indomethacin, Chantix and Plerixafor in Q2 would have been offset by the decline in Trokendi XR. With scale-up in these recent launches, Vascepa launch in Q3 and another REMS product launch in Q4/Q1, analysts of IIFL Capital Services expect Zydus’ US sales (ex-Revlimid) to grow 5% in FY24. Revlimid will likely contribute USD150m in FY24 (USD70m in FY23), thereby driving 14% growth in overall US sales for FY24. 

LiqMeds acquisition and Sitagliptin 505(b)2 opportunity will help to gradually scale-up the Specialty business. LiqMeds operates in the niche difficult-to-develop liquid orals segment, with a portfolio of 16/5 approved products in the UK/US, which Zydus will gradually commercialize over the next few quarters. Zydus also intends to launch its Sitagliptin 505(b)2 products in the US market in FY25, with an aspiration to garner 8- 10% market share. Zydus will have a head start of 2-2.5 years before entry of Sitagliptin generics in mid-CY26 and will focus on PBM contracts led retail Rx strategy (without setting up any field force). 

Analysts of IIFL Capital Services upgrade FY24-26 Ebitda by 3-8% primarily led by 100-150bps higher margins for the base business. Their base business Ebitda margin estimates (ex-Revlimid) at 20-22% over H2FY24-26 are still lower than 23-24% which Zydus delivered in H1FY24, as analysts of IIFL Capital Services have factored-in competition in Asacol HD from Q4FY24. Any delays in Asacol HD competition will provide upside risks to their