Recommendation: Add; Target Price: Rs 565
Analysts of IIFL Capital Services hosted Zydus Lifesciences at IIFL’s Investors’ Conference in Ahmedabad. Zydus’ US business outlook for FY24 remains encouraging, despite Asacol competition anticipated in H2FY24, given expected scale-up in Revlimid sales, recent launch of Chantix (USD300m market size) and other potential high value launches (including Vascepa’s launch expected in H2FY24, 2 REMS products and 1 transdermal). Hence, analysts of IIFL Capital Services expect 10% cc growth in Zydus’ US sales in FY24. Additionally, India business growth over the next 12- 18 months is expected to be in line with IPM growth. They expect Zydus’ Ebitda margins to expand ~100bps in FY24, driven by US launches, normalisation of API costs & improvement in India MR productivity and forecast the company to deliver 8/10% revenue/Ebitda Cagr over FY23-26. However, valuations leave limited scope for upside given the stock is trading at ~26x FY25 core EPS (ex-Revlimid). Maintain ADD (TP of Rs565).
Strong US business outlook for FY24:
Despite higher certainty of Asacol competition from H2FY24, mgmt expects US sales to grow mid-to-high single digits in FY24. Analysts of IIFL Capital Services expect Zydus’ US sales to grow 10% cc in FY24 driven by scale up in Revlimid from USD70m in FY23 to USD160m in FY24, USD25-30m contribution from Chantix (launched in Jun’23), Vascepa (launch expected in 2HFY24), 1-2 REMS products with limited competition and a meaningful transdermal launch expected in FY24. Trokendi XR revenue will moderate starting Q1FY24 given incremental competition.
India business expected to grow in line with IPM growth over the next 12-18 months and beyond that mgmt expects to outperform IPM growth driven by scale-up in specialty/novel and biosimilars portfolio. Analysts of IIFL Capital Services expect Zydus’ India business to clock 11% Cagr over FY23-26ii and improving rep productivity (currently Rs6.5-7 lakhs pm) will support overall margin profile as well. The current rep strength stands at 5,800 and there are no meaningful plans for rep expansion in FY24.
Increasing share of R&D to be spent towards novel products:
Mgmt expects 50-100bps increase in R&D spends in FY24, led by higher share of investments towards innovative products while generics R&D won’t grow beyond inflation rate. Saroglitazar clinical trial recruitment will be completed by end-CY23 and Zydus expects to file the product in US in CY24. As of now, it has 60 injectable filings and expects meaningful injectable product launches to begin in FY25.
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