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Moraiya cleared; Revlimid launched

Zydus Lifesciences (Zydus) reported Q2FY23 performance is broadly in line with our estimates. Revenue grew 7.3% YoY to Rs40.0bn (I-Sec: Rs40.0bn) on the back of India and US markets. US sales was up 5.9% QoQ to US$214mn led by new launches including Revlimid offsetting the base price erosion. Consumer business reported healthy growth of 12.0% YoY driven by demand for its key products. Adjusted EBITDA margin contracted 450bps YoY (+140bps QoQ) to 19.9%. Adjusted PAT declined 7.0% YoY (+37.1% QoQ) to Rs6.0bn, ahead of our estimate of Rs4bn, led by forex gain of ~Rs1.5bn. Successful launch of Revlimid and clearance of Moraiya plant provide near-term growth impetus. However, the recent run-up in stock price (~12% in past 3 months) has limited the upside potential. Downgrade to HOLD (from Add) with a revised target price of Rs448/share (earlier: Rs411).

* Business review: India revenue grew 4.2% YoY on a reported basis, but was up 11% (ex-covid portfolio) mainly driven by market share gains in key therapies and launch of new products. US sales was up 5.9% QoQ (+7.5% YoY) to US$214mn led by new launches including Revlimid offsetting the impact of continued price erosion in the base business. Clearance of Moraiya plant paves the way for approval and launch of transdermal products as well as injectables and other high-value products providing impetus to near-term growth. Consumer wellness sales grew 12.0% YoY driven by demand in key products. API sales declined 16.6% YoY. Gross margin shrank 150bps YoY (+70bps QoQ) to 62.4% due to elevated costs, which have started to ease. Subsequently, adjusted EBITDA margin contracted by 450bs YoY, but improved by 140bps QoQ to 19.9%. We expect margins to remain stable at ~20% over FY23E-FY25E.

* Key concall highlights: 1) US: i) Company maintains its guidance of >30 product launches annually; ii) price erosion was in mid-single digit during the quarter; iii) Trokendi XR is set to be launched in Q4FY23. 2) R&D: Two-thirds of the spend is currently into generics and biosimilars, while the rest is into NCE. Going forward, the mix is expected to be driven more towards NCE.

* Outlook: We introduce FY25E estimates and expect revenue/PAT CAGRs of 6.9/(0.7)% over FY22-FY25E on a high base and elevated costs, which would restrict margins. Company has reduced its debt through divestment of its animal health business and will further strengthen the balance sheet with ~Rs61bn of FCF generation over FY23E-FY25E.

* Valuations and risks: We marginally increase our estimates over FY23E-FY24E to factor-in the Q2FY23 performance. Recent run-up in the stock price (~12% in past 3 months) has limited the upside potential, hence we downgrade it to HOLD (from Add) with a revised SoTP-based target price of Rs448/share (20x Sep’24E EPS and Rs16/share for Revlimid). Key downside risks: Competition in the US and regulatory hurdles. Key upside risk: Earlier than expected high-value launches.

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