Domestic biz, US launches to drive gains for Zydus

Q3 results better than estimates on the back of higher gross margins

The stock of pharma major Zydus Lifesciences hit lifetime highs this week and has gained 40 per cent over the last three months. More than half the gains for the stock came in the last one month.

The company’s December quarter results earlier this month were better than Street estimates on the back of higher gross margins and a strong showing in the domestic formulations segment. This, coupled with a strong US pipeline and investments in multiple medium-term opportunities, has kept investor sentiment positive for the stock.

Consolidated revenues for the company were up by 6 per cent and was led by India, emerging markets and Europe. The major push to revenues came from the India business which rose 16 per cent year-on-year (Y-O-Y) led by an innovation portfolio, higher volumes and chronic share of the portfolio. The domestic consumer wellness franchise declined 3.5 per cent Y-O-Y due to subdued demand as the rural segment is yet to pick up.

Sales in the US disappointed, falling 4 per cent Y-O-Y to $221 million, and were lower than the $226 million achieved in second quarter of financial year

2023-24 (Q2FY24). The decline was on account of inventory restocking in the quarter and had negligible sales of the generic version of cancer drug, Revlimid. The base business in the US, however, was steady as volume expansion and new product launches improved profitability. Active pharmaceutical ingredient sales too, saw a decline of 24 per cent Y-O-Y while emerging markets growth grew by a healthy 30 per cent as most key markets posted strong sales. Gross margins were up 80 basis points and were aided by a better product mix while operating profit margins were higher by 40 basis points as lower raw material costs and other expenses were offset partially by higher employee costs.

Post the results, brokerages have a mixed view on the stock.

JM Financial Research, has a ‘buy’ rating as analysts led by Amey Chalke believe that US launches, domestic market outperformance, and highmargin sustenance places the company on a sustainable growth path ahead.

Prabhudas Lilladher Research has increased its earnings per share (EPS) of the company by 12 per cent for FY25 and FY26. Param Desai and Kushal Shah of the brokerage believe that the company’s steady domestic franchise, strong balance sheet, and potential new launches in the US will help negate pricing pressure and likely competition in some key products like the generic version of ulcerative colitis drug Asacol. Further, the company is also working on a robust pipeline of complex products including injectables, transdermals, new chemical entities, biosimilars, and vaccines which are expected to materialise over the next three years.

While Nuvama Research has also raised its FY24 and FY25 EPS by 14 per

Concerns persist about the firm’s consumer wellness business in the domestic market due to slow rural demand

cent each to factor in the delay in competition and India recovery, they are cautious as they await consistent India performance and early competition for Asacol. The brokerage has a ‘reduce’ rating, given limited cost levers and the fact that earnings are unlikely to surprise.

Nirmal Bang Research also remains cautious on Zydus. This is on the back of its substantial investment in biosimilars, complex generics, vaccines, and specialty businesses in the US, where financial visibility is low. Additionally, concerns persist about the consumer wellness business in the domestic market due to slow rural demand.