Zydus Lifesciences India and emerging-market growth offsets US product erosion

Investment View and Valuation

Prabhudas Lilladher (PL) has retained its Accumulate rating on Zydus Lifesciences and raised its target price to Rs 1,200 from Rs 1,080. The target price is based on 25 times FY28E EPS, compared with the current market price of Rs 1,191.

The broker believes Zydus Lifesciences has managed the decline in gRevlimid sales well through new niche launches. It sees a robust pipeline of complex products, including injectables, 505(b)(2) products, transdermals, NCEs, biosimilars and vaccines, which could materialise over the next two to three years. PL expects US sales to grow at a 5 per cent CAGR over FY26-FY28E despite continued erosion in certain key products.

Q1FY27 Financial Performance

Zydus Lifesciences reported Q1FY27 revenue of Rs 80,170 million, up 22 per cent year on year and 7 per cent above PL's estimate. Domestic revenue was Rs 32,450 million, up 36.7 per cent year on year, supported by 19.5 per cent growth in domestic formulations and 67.2 per cent growth in consumer healthcare and other revenue following the consolidation of the Comfort Click business.

North America revenue declined 2.6 per cent year on year to Rs 30,979 million but increased 4.9 per cent quarter on quarter. US sales of US$327 million exceeded PL's estimate of US$320 million. EU and Latin America revenue rose 34 per cent year on year to Rs 9,735 million, while API revenue increased 14.5 per cent to Rs 1,804 million. MedTech revenue was Rs 2,828 million and declined quarter on quarter.

Q1FY27 EBITDA was broadly in line with PL's estimate. Other expenses excluding R&D rose 50 per cent year on year because of new-business consolidation. Reported PAT included a forex gain of Rs 569 million.

India and Consumer Healthcare Outlook

Management expects mid-teens growth in the India business in FY27, approximately 300 to 500 basis points ahead of market growth. Chronic and sub-chronic products accounted for 54.2 per cent of the India portfolio, an increase of 360 basis points over four years. Cardio, Diabetes, Pain, Oncology and Nephrology were the key outperforming segments.

Management also expects double-digit FY27 growth in Comfort Click and the broader consumer-health business. The MedTech business is operational and growing, with no major incremental margin drag expected beyond investments already included in FY27 guidance.

US Business and Product Pipeline

In the US, management cited volume-led market-share gains and new launches in the base business. During Q1FY27, the company filed five ANDAs, received nine approvals and launched 11 products. Branded products currently account for approximately 10 per cent of US revenue, and management is targeting more than 15 per cent by year-end following the Assertio consolidation.

Assertio/Rolvedon is expected to contribute a quarterly run rate of US$15 million to US$20 million from Q2FY27. Management has guided for two to three high-value launches across FY27E and FY28E, making timely launches important to sustaining US momentum. Saroglitazar, which has priority review for PBC, is viewed as an FY28E US launch opportunity, although related investment could temporarily pressure margins.

Management retained its approximately 24 per cent FY27 EBITDA-margin guidance. International markets are expected to grow at a single-digit rate in FY27, supported by emerging markets and improving traction in France, Spain and the UK.

Revised Estimates

PL raised its FY27E and FY28E sales estimates by 5.8 per cent and 9.6 per cent, respectively. FY27E EBITDA was raised by 2.9 per cent, while FY28E EBITDA was increased by 7.4 per cent. FY27E EPS was reduced by 3.0 per cent, whereas FY28E EPS was raised by 2.4 per cent.

Key Risks

• Continued erosion in important US products.
• Delays in the launch of high-value and complex products.
• Temporary margin pressure from Saroglitazar investment and consolidation-related costs.