Zydus Lifesciences (ZYDUSLIF) has shown resilience in the face of recent stock price corrections and rising competition in the U.S. generics market. Prabhudas Lilladher has maintained its 'Accumulate' rating, highlighting Zydus’s steady domestic franchise, a robust U.S. pipeline, and healthy financials. The brokerage has set a revised target price (TP) of Rs 1,050, valuing the stock at 25x FY27E EPS.

Financial Performance and Stock Correction

In Q2FY25, Zydus Lifesciences posted an EBITDA of Rs 14.2 billion, a 33% year-over-year increase, aligning with analyst estimates. Despite the stock's nearly 25% decline over the last three months, largely due to product concentration concerns and competitive pressures, Prabhudas Lilladher notes that Zydus's strong balance sheet and potential new U.S. product launches will provide a buffer against ongoing market challenges.

Revenue Growth in Key Markets

Zydus achieved a 20% year-over-year revenue increase, reaching Rs 52.4 billion, driven by multiple segments:

Domestic formulations saw a 9% growth, with significant contributions from cardiology, oncology, and gastroenterology.
U.S. revenue rose by 28% YoY to $288 million, although down sequentially due to reduced contributions from gRevlimid.
Emerging markets demonstrated a robust 19.6% growth.
This well-diversified revenue mix emphasizes Zydus’s ability to navigate competitive pressures across markets.

Operational Margins and R&D Investments

Zydus’s Q2FY25 EBITDA margin stood at 27%, up 260 basis points year-over-year. The margin expansion was partly due to an improved product mix, even though R&D expenses increased by 49% YoY to Rs 4.8 billion, now constituting 9.2% of total revenue. Additionally, Zydus benefited from a forex gain of Rs 454 million.

Prabhudas Lilladher appreciates the company’s strategic investment in research, which is focused on complex products such as injectables and biosimilars. The firm anticipates that these efforts will bolster Zydus’s market position and long-term profitability.

Key Pipeline and Product Highlights

Zydus has been proactive in developing a robust U.S. pipeline with recent filings and approvals. Key product developments include:

gMyrbetriq: Expected to deliver sustainable growth through FY26.
gAsacol: Competition impact to be fully felt by Q3FY25, but market share losses have been contained.
gIbrance and gAdempas: High-value launches scheduled for FY27/28, offering first-to-file (FTF) exclusivity in partnership with another firm.
These new products are anticipated to offset pressures in established U.S. generics, bolstering Zydus’s top line and enabling it to retain a foothold in competitive markets.

Outlook and Strategic Initiatives

Looking ahead, Prabhudas Lilladher expects Zydus to introduce 2-3 high-value products by FY27/28, significantly strengthening its U.S. portfolio. The company is also investing in innovative platforms such as transdermal delivery and progressing Phase IIb/III trials of Saroglitazar Magnesium for a U.S. market launch. These initiatives are expected to enhance revenue diversity, enabling Zydus to maintain growth momentum and mitigate pricing pressures.

Revised Financial Estimates and Valuation

The brokerage revised down its FY26 and FY27 EPS estimates by approximately 10%, citing anticipated U.S. pricing pressures, lower margins, and higher tax obligations. Despite these adjustments, Prabhudas Lilladher maintains its 'Accumulate' recommendation, with a revised target price of Rs 1,050, attributing the valuation to Zydus’s strong domestic growth and promising U.S. pipeline.

Key Risks and Challenges

Several challenges could impact Zydus’s projections:

Product Concentration Risk: High dependency on a few key products in the U.S. market increases vulnerability to competition.
Regulatory Risks: Ongoing litigations could delay critical product launches, impacting revenue projections.
Foreign Exchange Volatility: Zydus is exposed to currency fluctuations, which could affect profitability given its significant international footprint.

Conclusion and Investor Takeaways

Prabhudas Lilladher’s recommendation to 'Accumulate' Zydus Lifesciences reflects confidence in the company’s diversified portfolio, robust domestic franchise, and strategic expansion in the U.S. With a target price of Rs 1,050, the brokerage foresees stable growth for Zydus despite near-term challenges.

Disclaimer: Investors are advised to conduct thorough due diligence and consider individual risk tolerance before making investment decisions.