What to do with Zydus Lifesciences - Amazing Adviser

Zydus Lifesciences has just released its quarterly numbers for Q4FY23, and I must say, I'm feeling quite emotional about it. The results were truly impressive, driven by the outstanding sales of Revlimid. 

It's yet another remarkable quarterly performance that leaves me in awe. However, I can't help but acknowledge that this sets a high benchmark for FY23, and the management is aiming for only single-digit growth in the US market for FY24. 

They plan to achieve this through launches from the Moraiya facility.

The domestic businesses have remained steady, thanks to the oncology and consumer brands. 

Moving forward, my main concern will be the progress in the NCE portfolio and the allocation of additional R&D spending. 

The anticipation of a slowdown in top-line growth, coupled with the significant market gains over the past year, has brought valuations to a fair level. 

While this is a positive development, it still stirs up mixed emotions.

In terms of the US business, sales for this quarter reached an impressive $275 million, compared to $235 million in Q3FY23 and $189 million in Q4FY22. 

The continuous success of Revlimid sales and the introduction of new products have contributed to this growth. 

Notably, the launch of Topiramate extended-release capsules, the first generic product of its kind, has been particularly noteworthy.

The domestic formulation business, which accounts for 26 percent of sales, has experienced a 12 percent YoY growth, excluding the impact of COVID-19. 

This growth can be attributed to the increasing demand in the oncology segment and the expanding reach of the Lipaglyn brand, which is used for diabetes and cholesterol management.

Looking ahead to Q1FY24, Zydus expects to maintain a similar momentum in the top line, primarily driven by Revlimid sales.

Although the management assures us that Revlimid will continue to contribute for the next two years, I believe its impact will gradually decline starting from Q2FY24. 

However, this decline is expected to be compensated by the launch of three transdermal products, the traction from newly approved drugs like Topiramate and Vascepa, and the two launches supported by REMS investments.

Zydus has focused its efforts on consolidating the domestic business of 13 products in the biosimilar front. Besides biosimilars, the company is also expected to benefit from the NCEs Desidustat (trade name: Oxemia) and Saroglitazar. Desidustat is a promising treatment for anaemia in patients with CKD, which strengthens the company's position in the nephrology market.

When it comes to the consumer wellness business, urban demand remains stable, but we must keep an eye on rural demand. 

While the management believes that rural demand has reached its lowest point, any delay in the upcoming monsoon season could affect demand in rural areas. 

Additionally, it's important to closely monitor the traction for the sugar-free brand, as recent studies have refuted its claimed benefits.

However, it's worth noting that the company continues to gain market share in other consumer brands, and the margin profile in this segment has improved thanks to recent price hikes.

 Nonetheless, the overall high-margin performance is expected to moderate due to the limited period benefits from new launches in the US market. Furthermore, R&D expenses are anticipated to remain elevated at around 8 percent of sales due to the company's focus on biosimilars and clinical trials for NCEs. In the near term, we have projected a little over 21 percent EBITDA margin.

Looking at the stock's performance, it has rallied by approximately 50 percent in the last year and is currently trading at 11.4x EV/EBITDA for FY25e. This significant rise in the stock price has stirred up a mix of emotions within me. 

While potential launches from the Moraiya plant could serve as catalysts for further re-rating, it's important to note that a portion of this potential has already been factored into the current price. As an investor, I believe it might be an opportune time to consider booking profits.

The journey of Zydus Lifesciences has been remarkable, but it's crucial to maintain a balanced perspective. 

The company has shown tremendous growth and resilience, but the road ahead presents challenges and uncertainties. 

The market dynamics are ever-changing, and maintaining steady growth becomes increasingly difficult as the company reaches its previous highs.

Emotionally, it's satisfying to witness Zydus' progress and achievements in the pharmaceutical industry. 

The strong quarterly performance, driven by Revlimid sales and the success of domestic businesses, instills a sense of pride and hope for the future. However, I can't help but feel a tinge of anxiety, knowing that sustaining this level of growth will be no easy task.

The stock market is a realm of constant fluctuations, influenced by a myriad of factors. While the company has made significant strides and continues to invest in research and development, there are risks and uncertainties that could impact its performance. 

The moderation in top-line growth and the expected decline in the contribution of Revlimid sales introduce an element of concern.

As an emotional investor, I'm torn between the sense of accomplishment for the company's achievements thus far and the cautious approach I should take when it comes to assessing future prospects.

 It's essential to weigh the current valuations against the potential for further growth and market volatility.

In conclusion, Zydus Lifesciences has showcased impressive results, driven by robust sales figures and a strong presence in both the US and domestic markets. 

However, as an emotional investor, I must be aware of the challenges ahead and the need to consider booking profits, given the recent stock rally. While there are promising factors, such as potential launches from the Moraiya plant, it's important to maintain a balanced outlook and carefully evaluate the company's performance in light of market conditions and evolving dynamics.

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