PL Stock Report: Zydus Lifesciences (ZYDUSLIF IN) - Q2FY24 Reuslt Update – Healthy margins despite lower gRevlimid sales - Accumulate

Zydus Lifesciences (ZYDUSLIF IN) - Param Desai - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Rating: ACCUMULATE | CMP: Rs599 | TP: Rs670

Q2FY24 Reuslt Update – Healthy margins despite lower gRevlimid sales

Quick Pointers:

§ US sales lower QoQ due to muted gRevlimid sales.

§ Aspires to achieve $100mn revenues from rare disease portfolio in 3-5yrs.

Zydus Lifesciences (ZYDUSLIF) Q2 EBITDA of Rs10.6bn (up 55% YoY) was largely in line with our estimate aided by healthy margins despite negligible gRevlimid sales. We believe that company’s steady domestic franchise, strong balance sheet and potential new launches in US will help negate pricing pressure and likely competition in some key products like gAsacol. Moreover, ZYDUSLIF is also working on robust pipeline of complex products including injectables, transdermals, NCE, biosimilars and vaccines which are expected to materialize over next 2–3 years. Our FY24/25E EPS stands increased by ~7%. We maintain our ‘Accumulate’ rating with revised TP of Rs670 (Rs650 earlier), valuing at 23x (unchanged) Sept 2025E earnings plus Rs25/share for gRevlimid.

§ Revenues growth aided by API and RoW mkts; US decline QoQ: ZYDUSLIF showed revenue growth of 9% YoY to Rs44bn vs our estimate of Rs45.5bn. Domestic formulation showed moderate jump of 5.5% YoY; against our estimate of 10% growth. Consumer business delivered growth of 3% YoY; below our est. US sales came in at $225mn (our est. of $250mn) vs USD 299mn in Q1FY24.The QoQ decline was on account of negligible gRevlimid sales. Emerging markets growth was by 17% YoY to Rs 4.5bn driven by most of its key markets. API markets also saw an improvement of 26% YoY.

§ Lower other expenses aided EBITDA: EBITDA including other operating income came in at Rs 10.6bn vs our estimate of Rs11.6bn. GMs were healthy at 65.5% (up 600bps YoY; down 140 bps QoQ) despite negligible sales from gRevlimid. Further other expenses also came in lower at Rs10.8bn; up mere 2.4% YoY. There was a forex gain of Rs822mn. R&D expenses stood at Rs 3.2bn (7.6% of revenue). The tax rate came in higher at 22.5%.

§ Key concall takeaways:(1) Branded business delivered moderate 5.5% YoY growth impacted by weak acute season. Guided for growth in line with IPM going forward (2) Successfully launched 8 new products in US in Q2. New launches included Indomethacin which had 180 days of CGT exclusivity and Plerixafor injection which was day1 launch. (3) Filed four ANDAs and got 9 approvals during Q2. Company filed one more combination of Sitagliptin and Metformin ER tablet to complete franchise of Sitagliptin combinations. Focus will be to tap retail markets in US through PBM contracts for Sitagliptin franchise (4) Its recent LiqMed acquisition has good pipeline of 505(b) 2 and FTF products. LigMed have important licensing arrangements with large specialty companies in UK and USA. (5) Saroglitazar trials for PBC and Nash for the developed markets remains on track (6) Launched Isotretinoin under REMS. Intends to launch 2 transdermal products by FY24 end. (7) Mgmt aspires to achieve $100mn revenues from Rare disease portfolio in 3-5years. (8) R&D towards differentiated and complex generics stood at 55% whereas it was 45% for NCE’s, biologics and vaccines (9) Received PLI incentives of Rs 400mn during the Q2 (10) MR strength for domestic formulation stood at 6500.

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