Buy Zydus Lifesciences Ltd For Target Rs.570 - JM Financial Institutional Securities
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ZYDUSLIF reported a stellar quarter with 30%YoY revenue growth and ~21% EBITDAM (exRevlimid) driven by US business increased contribution from gRevlimid and gTrokendi. Reported PAT was impacted by goodwill impairment pertaining to Sentynl Therapeutics’ legacy business. ZYDUSLIF’s 4Q US sales at USD 275mn improved QoQ and the near-term launch pipeline remains strong with 3 trans-dermal launches from Moraiya, 2-REMS products, gTrokendi ramp-up, gVascepa and gRevlimid. These launches will be cumulatively offsetting base erosion (mid-single digit) and Asacol competition. ZYDUSLIF expects to grow its US business in high single digits with 30-35 launches planned in FY24. India business beat JMFe by 15% growing 11%YoY (13% ex-Covid) and we expect it to grow in early double digits. Consumer Wellness delivered on expectations in their seasonally strong 4Q despite slowdown in rural demand, which is expected to recover going forward. EMs and Europe reported exceptional growth of 30%YoY driven by robust growth momentum across markets. FY23 EBITDA margin of 22.9% has surpassed management guidance of 21-22%. We upgrade our earnings by 7%/8% for FY24/25 to factor in higher US sales and better margins. We believe domestic earnings momentum, near-term US launches and margin sustenance will facilitate ZYDUSLIF to continue on a sustainable growth path. We maintain BUY with a Mar’24 Price Target of INR 570 (including gRevlimid NPV of INR 20).
gRevlimid and gTrokendi drive US beat: US revenues grew 58% YoY/18% QoQ (18% beat) to USD 275mn driven by gTrokendi (competition expected next quarter) and higher gRevlimid contribution. ZYDUSLIF received 28 approvals (incl. 5 tentative) and launched 8 new products in 4Q. The company received EIR for its Moraiya facility after the USFDA conducted a PAI for its transdermal patch; they also inspected Ahmedabad facility (SEZ-1) and ZYDUSLIF has responded to the 3 observations received. Near-term prospects are encouraging with 2-3 meaningful launches (2 REMS), 3 trans-dermal launches (limited competition with long-term visibility), gVascepa, gTrokendi ramp-up and high gRevlimid contribution. This will offset base erosion (mid-single digit) and loss of share from Asacol HD competition (no competition over next 2 quarters). We believe gRevlimid contribution to be c.USD 54mn in 4Q adjusted for which, EBITDAM was ~21%. ZYDUSLIF has a robust pipeline of 78 ANDAs pending approval. The management guided for ~30 ANDA filings and launches (35 launches in FY24) each year while maintaining R&D spends at c.8-8.5% of revenues in FY24. The incremental R&D growth will be for innovative products as they continue to make progress on its pipeline (CUTX-101, Saroglitazar, vaccines etc.).
Domestic, EM & Europe surprise postively: Domestic formulations outpaced market growth with revenue growing at 11%YoY (15% beat) and 12%YoY (ex-Covid). Their Consumer Wellness franchise grew c. 12%YoY (3% beat) and gross margins improved with the company taking price increases to counter inflation over the past few quarters. The healthy growth in their consumer business was despite weak rural demand which is expected to improve going forward. EM & EU formulations revenue grew 30%YoY (24% beat) and grew 34% YoY ex-Covid. API revenue declined 8%YoY (in-line with JMFe).
Key Financials: Zydus’s Revenue/EBITDA/Adj. PAT of INR 50.1bn/ 12.6bn/ 9bn grew +30%/+75%/+126% YoY and were +11%/+32%/+52% vs. our estimates and were +8%/+20%/+33% vs. consensus estimates. During the quarter there was a INR 5.9bn charge for impairment of goodwill of Sentynl Therapeutics pertaining to legacy business (and not Nulibry and CUTX-101). EBITDA margin improved c.650bps YoY to 25.1% (JMFe: 21.2%). R&D expenses of INR 3.5bn were 7.3% of sales (vs. 7-8% guidance for FY23). Capex for the quarter was INR 2bn. Net working capital increasing to INR 57 bn (vs. INR 56.3bn QoQ), Net Debt/EBITDA for the quarter is -0.14. Net cash was INR 5.5bn (vs. 632mn YoY).
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