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Q3FY24 Review: Zydus Lifesciences: Near-term benefit of delayed Asacol competition

12 Feb 2024 , 02:37 PM

Recommendation: Buy; Target price: ₹885

Zydus’ Q3 performance was largely in-line with analysts of IIFL Securities estimates, with base business Ebitda margins (ex-Revlimid) sustaining at ~24%. While US revenue missed analysts of IIFL Securities estimates by 5%, India growth was strong at 16% YoY driven by MS gains in Diabetes/Anti-Infectives segments and robust traction in the Innovation portfolio in the domestic market. With Zydus targeting 1-2 sizeable launches in the US every year till 2027 and double-digit growth in India, analysts of IIFL Securities expect the company’s base business (ex-Revlimid) to clock 8/9% revenue/EPS Cagr over FY24-27. Analysts of IIFL Securities now factor-in Asacol HD competition from Q4FY25 vs their earlier assumption of Q4FY24, which along with 100-150bps higher margins p.a., has driven 4-7% Ebitda upgrades for FY25/26. Analysts of IIFL Securities maintain theur ADD rating and their TP of ₹885 (10% upside) is pegged at ~26x FY26 core EPS (exRevlimid) and Rs22 NPV/share for Revlimid.

 Zydus has 1-2 sizeable opportunities in the US every year till 2027, with majority of these being settled products. One example of this is the recent in-licensing deal for Ibrance (Palbociclib) on which Zydus will have FTF launch likely in Mar’27, with potential exclusivity revenue of USD80- 100m, assuming 25-30% revenue share for Zydus. In the near-term, Revlimid will contribute in Q4/Q1 every fiscal year, with increasing contribution in FY25. Sitagliptin 505(b)2 opportunity will scale-up gradually in FY25, while transdermals could become a USD50-60m portfolio for Zydus over the next 2-3 years. On the back of 15-20 launches p.a. and Revlimid scale-up, analysts of IIFL Securities expect US sales to increase +10/+3/-8% cc over FY25-27. Asacol and Revlimid erosion will be hurting growth in FY26/27 resp. 

Analysts of IIFL Securities expect 11% Cagr in Zydus’ India business over FY24-27, driven by further scale-up in the Chronic portfolio (currently 41% revenue share) and Specialty products. While Q3 growth for Zydus was strong, analysts of IIFL Securities note that as per secondary data Zydus’ India business has grown at 10% Cagr over CY20-23, slightly below IPM growth of 11.5% Cagr. Zydus’ India volumes have been flat over the past 3 years vs IPM volume growth of 3% Cagr and price increases have contributed ~57% to Zydus’ India growth. 

Analysts of IIFL Securities assume Zydus’ core Ebitda margins (ex-Revlimid) to moderate slightly to 22-22.5% over FY25-27 vs 23-24% currently, owing to incremental competition in Asacol HD and increasing R&D spends for the NCE innovation portfolio. However, Revlimid contribution will ensure that overall Ebitda margins sustain at ~27% over FY24-26.

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  • Zydus Lifesciences
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