Multiple triggers likely to help Zydus to continue with its outperformance

New launches in the US, market share gains and steady domestic growth are positives

Even as most of its large-cap pharmaceutical peers have struggled to stay above water on the returns front, Zydus Lifesciences has been one of the big outperformers within the sector over the past year with a return of over 30 per cent.

The gains have come on the back of multiple triggers such as the scaling up of new product launches in the US market, clearance for its Moraiya (Gujarat) facility and steady performance in the domestic market. Though it has been the top pharma gainer in the 2022-23 financial year (FY23), brokerages continue to maintain their ‘buy’ stance, given the strong visibility in the US market.

At 43 per cent of sales (in nine months of FY23), revenue contribution from the US for Zydus is the second-highest in the larger pharma companies after Aurobindo.

During this period, the company generated $640 million of sales from the US market. If analyst estimates of $900 million for the year play out, then sales could equal or cross the FY18 high of $906 million.

Axis Capital highlights that the US market is on a steady growth path with improving visibility, led by scale up of key products such as generic version of Trokendi (migraine medication) which has a market size of $488 million. Then, there could be traction for generic version of cancer drug Revlimid, with market share gains in the 2023 calendar year, adds the brokerage. As of February, it has 6 per cent share.

Delayed competition in ulcerative colitis drug mesalamine (Asacol), transdermal launches in the second half of FY24 and volume share gain through supply opportunities are the other triggers for its US business, say analysts led by Prakash Agarwal of the brokerage. While peers continue to grapple with compliance issues, the US FDA (Food and Drug Administration) approval for the Moraiya plant, near Ahmedabad opens up opportunities for the company.

While price erosion continues in the US market and is a key risk, there could be some relief for larger companies. In a note last month, Jefferies Research pointed out that smaller companies are curtailing their investments in the US market.

Say Alok Dalal and Dhawal Khut of the brokerage, “Commentary from small companies, alongside certain large Indian companies like Lupin exiting low margin products, and ongoing supply-chain disruptions from companies like Sun, Intas and Glenmark -- who are facing US compliance issues at their flagship plants -- may improve the overall pricing scenario in the market.” This could prove to be an upside risk for companies such as Zydus which have a higher exposure to the US market.

The company’s growth in the Indian market has been steady, in double digits in February. Growth in its top ten brands was led by anti-diabetic medication, Lipaglyn.

Motilal Oswal Research expects the company to post 15 per cent annual growth in domestic formulations over FY23-25 led by new launches, superior execution driving outperformance in chronic/sub-chronic therapies and by price hikes across key products.

At the current price, the stock is trading at 20 times its FY24 earnings estimates, which is in line or slightly lower than most of its peers.