Zydus Lifesciences (Zydus) is one of the leading pharmaceutical companies in India. The company is present across the pharmaceutical value chain of research, development, manufacturing, marketing, and selling of finished dosage human formulations (generics, branded generics, and specialty formulations, including biosimilars and vaccines), active pharmaceutical ingredients (APIs), animal healthcare products, and consumer wellness products. The company has a global presence and sells its products in the US, India, Europe, and emerging markets, including countries in Latin America, Asia Pacific region, and Africa. The company is also engaged in research and development activities focused across the value chain of API process development, generics development for simple as well as differentiated dosage forms such as modified release oral solids, transdermal, topicals and nasals, biologics, vaccines, and new chemical entities (NCE).
Strong market position
The Zydus group is one of the top five players in the domestic formulations market, and domestic sales formed 32% of consolidated revenue in fiscal 2022. The group is ranked among the top 3 players in the high-growth segments such as respiratory, pain management, gynaecology, and dermatology, which account for about 11%, 10%, 6% and 5%, respectively, of its domestic formulation sales. It has strengthened its marketing team over the past few years, putting greater thrust on market strategies such as growth in the categories, integration of channel partners, supply chain and procurement to improve revenue and cost synergies. The group also has established presence in rest-of-the-world markets of Brazil, Mexico, Sri Lanka, and South Africa where it reported healthy revenue growth despite geopolitical challenges and adverse macro environment. Rest-of-the world segment (including Latin America) formed 8% of the consolidated revenue in fiscal 2022. The company also has a healthy pipeline of complex molecules and biosimilars in the domestic and emerging markets, which will be the growth drivers over the medium term.
Healthy growth outlook on the back of new product launches in US
The US business is on a strong footing, helped by a sturdy new product pipeline and ramp-up in recent product launches, which would be growth drivers for the company. However, in the near term, high price erosion would act as dampeners. Zydus expects 35-40 new product approvals/launches in the US, likely consisting of 25 plain-vanilla products and 8-10 niche complex generic products. We expect new products will offset price erosionin the US and also drive growth in the US business. The efforts to build up presence in the injectables space would also add to growth albeit over the medium to long term.
Chronic portfolio and biosimilars will drive growth in India business
The India business has a robust growth outlook, backed by pickup in chronic as well as acute therapies and a few substantial high-value launches lined up. Over the long term, product launches such as Saroglitazar, gRevlimid, and Desidustat offer substantial growth potential. Zydus will continue to scale-up key therapies of Respiratory, Cardiac, Gastro and Gynec to
drive growth in the India business. The growth will also be aided by novel
products (such as Lipaglyn) and biosimilars.
Transdermals, Trokendi XR and Revlimid are growth drivers for the company: Zydus’ filed 9 transdermals filed in the US. While the company will likely launch 2 approved transdermals over the next 12 months, 1 product (fentanyl patch) will not be commercialized. Mgmt indicated that recently approved transdermals have an aggregate TAM of less than USD100mn. It became the first player to launch Topiramate ER capsules (gTrokendi) in the US in January 2023. Revlimid pricing environment for the US will remain favourable till FY26, given that the innovator’s settlements have capped volume MS for generic players.
Biosimilar filings in emerging markets
Zydus has the largest portfolio of biosimilar drugs approved in Indian markets, which is being leveraged for emerging markets. So far, the company has commercialised biosimilars in 9 emerging market countries, with Russia, Latin America and South East Asian countries as key targeted markets.
Q3 Financial Performance Analysis
Zydus Lifesciences delivered good set of earnings in Q3FY23, which exceeded street expectations.
Consolidated Revenues grew 19.8% YoY to Rs.4362 crore. Growth was driven by the US followed by India business. Segmental mix includes India sales, which increased 14.2% YoY to Rs.1231.6 crore on the back of market share gains and improved ranking in gynaecology, anti-diabetic and nutraceutical portfolio.
US formulations revenues increased 29.3% YoY to Rs.1925 crore, aided by volume expansion in base portfolio and some impact of seasonality. Emerging markets revenues increased 5.6% YoY to Rs.307.8 crore, on the back of robust performance across key markets.
On operational front, EBITDA grew at a good pace of 27.2% YoY to Rs.956 crore whereas EBITDA margins improved 127 bps YoY to 21.9% despite higher R&D and US related risk evolution and mitigation study (REMS) programme cost. Adjusted PAT improved 22.8% YoY to Rs.622.5 crore.
Outlook & Valuation
Zydus Lifesciences has been witnessing strong sales growth in India and the US on the back of strong product launches. Strong portfolio of existing products as well as a new launch product pipeline in the US, which provides a revenue visibility. We believe that company is well paced to deliver steady earnings growth in the coming quarters owing to consistency from US business in terms of continued traction in base business and new launches momentum (post Moraiya EIR), continued traction in Wellness and India formulations, Strong earnings prospects, healthy return ratios and strengthening balance sheet. At CMP of Rs.466, the stock is trading at 13x FY25 (EPS – Rs.35.5) which appears reasonable. Therefore, we recommend a BUY on the stock.