Zydus Lifesciences: Assessing Growth Potential Amid Recent Developments

In this article, we’ll explore Zydus Lifesciences’ recent developments. We’ll talk about its clinical trials, product approvals, and strategic partnerships. We also analyze the financial performance and market positioning of the company. The article will offer insights into its future growth potential and investment outlook within the pharmaceutical sector.Zydus Lifesciences is a prominent & established player in the pharma sector. It has a diverse product portfolio that includes generics, specialty drugs, and biologics (Biological Drugs). The company do focus on research and development (R&D). A strong R&D backed pharma company can be surely be in our watchlist.Recent developments underscore Zydus’s position for a decent growth in the coming years.Notably, the company has partnered with the Central Drug Research Institute (CDRI) to develop an oral treatment for osteoporosis linked to chronic kidney disease (CKD). It is addressing a critical healthcare need for millions worldwide.Additionally, Zydus has initiated a Phase 1 trial for the ZY19489-Ferroquine combination. It is targeting malaria treatment with an emphasis on safety and tolerability.Furthermore, the recent tentative approval from the USFDA for manufacturing Enzalutamide tablets enhances its market potential. It is likely to tap into a lucrative segment of prostate cancer treatment.These strategic initiatives, combined with a decent clinical pipeline and reasonably heathy financials, position Zydus Lifesciences favorably as a long term prospect.Recent Developments and Clinical TrialsZydus Lifesciences is making strides in its research initiatives. It recently launched the Phase 1 trial for the ZY19489-Ferroquine combination. The trial commenced on August 30, 2024, aims to evaluate the safety, tolerability, and pharmacokinetics of the treatment. The primary objective is to develop a simplified regimen for malaria treatment. Malaria continues to pose significant public health challenges, particularly in endemic regions.The expected completion date of the trials is February 1, 2025.There are other promising programs in its clinical pipeline. One of the key developments is ZYIL1, which is currently undergoing Phase 1 and Phase 2 trials for Amyotrophic Lateral Sclerosis (ALS). ALS is a progressive neurodegenerative disease. This trial aims to evaluate the drug’s efficacy and safety profile. These tests can potentially offer hope to patients afflicted by this debilitating condition.Moreover, ZYIL1 is also being tested in a Phase 2 trial for mild to moderately active ulcerative colitis. The target are those who are resistant or intolerant to traditional oral aminosalicylates.These active programs demonstrate Zydus Lifesciences’ research capabilities.These ongoing clinical trials position the company well to leverage future growth opportunities in the pharmaceutical market.Financial Performance and Market PotentialZydus Lifesciences recently received tentative approval from the USFDA to manufacture Enzalutamide tablets. It is a significant milestone for the company. Enzalutamide is a treatment for castration-resistant and metastatic castration-sensitive prostate cancer. This drug approval has a considerable market potential.As of July 2024, this drug generated approximately $1.42 billion in annual sales in the US. This data underscores the commercial viability of Enzalutamide tablets. The approval allows Zydus to enter a competitive market with established players. It will enhance its revenue streams and reinforcing its position in the oncology sector.P&L AccountFinancially, Zydus Lifesciences is well-positioned for growth. According to their projected earnings per share (EPS) of Rs. 48.75 in FY27 from Rs.18.67 in FY23. At the rate, the company’s EPS is expected to compound at 27.12% CAGR. This growth rate is surely going to reflect in its stock price.Digging deeper, the source of the above EPS growth is emanating out of the company’s projected sales growth and EBITDA margin expansions.Between FY23 and FY27, the company’s net sales is expected to grow at 13% per annum. The EBITDA margin is also expected to expand from 22% (in FY23) to 27% in FY27. These metrics will lead to a bigger fat growing at 26.89% p.a. between FY23 and FY27.Return and Price ValuationAs per the above charts, in the last 3 Years, the price of Zydus Lifesciences have risen from Rs.400 to Rs.1,200 levels. During the same period, the company is experiencing P/E contraction from PE30 to PE25 levels. This phenomenon, that the price is expanding and PE is contracting gives an excellent opportunity to value investors.The company is currently trading at PE25.25.Now, let’s extrapolate the above price & PE phenomenon with the expected EPS history as discussed above (CAGR growth of 27% per annum). At this rate, it is expected that there will be P/E contraction from PE25 to PE22.In the same period, the company might see a ROE expansion from 11% to 16%. It will come at a CAGR of 9.8% each year. Not many company can boast of such a ROE expansion.Return on Equity (ROE) scenario looks good. But while evaluating a business’s returns, Return on Capital (ROCE) becomes closer to reality. Business do resort of debt to manage its cash flow needs. ROCE takes into consideration the effect of debt in evaluating the return generated from business. So let’s take a look at debt levels of Zydus Lifesciences in the last five years.In the last 20-years, the average debt-to-equity (D/E) for Zydus Lifesciences has remained at 0.6 levels. For a company engaged in the Indian pharmaceutical sector, D/E ratio about 0.3 can be said to be large.But in the last 3-years, the D/E ratio has fallen and now the company is almost D/E ratio. But considering that the average D/E ratio of Zydus has remained at about 0.57, I assume that the company will maintain some debt (low debt) in its balance sheetPerhaps this is the reason why the expected ROCE of Zydus in FY27 is higher than ROE. Nevertheless, both ROE and ROCE is expected to expand in the next coming years.Generally, the stock market reacts very favourably to margin and return expansions. What I Think About Zydus LifesciencesShareholding PatternZydus Lifesciences has a robust shareholding structure. Promoters holding 75% of the equity. This type of stakeholding reflects strong confidence from the founding team’s perspective. But it also indicates stability in decision-making, which can be reassuring for the investors.Institutional investors, including foreign institutional investors (FIIs) at 5.6% and domestic institutional investors (DIIs) at 12.6%, further validate that the company’s is attracting institutional investors as well.The holding of retail investors is not so high in the company (6.9%). It is understandable, as the business model of a growing pharma company is not easy to decode.My PerceptionI like Pharma Companies: I personally like companies operating in the Healthcare Sector. I like pharma companies more than business operating under hospitals and testing-labs umbrella. Zydus Lifescience is a company which not only operates in the Pharma sector but also works in areas like chronic disease management. A lot of capital goes into R&D activities of such companies, but they also have more chances of hitting a jackpot. A well-managed pharma company can really grow fast in times to come.In India, there is a high demand for treatments and regulatory support. It creates a conducive environment for Zydus to grow, making it well-positioned in its industry.Quality of Management: In my view Zydus’s management is of high-quality. The company has a portfolio of innovative products. Its commitment to clinical trials and partnerships (e.g., with CDRI) suggests good governance and a focus on sustainable growth. This high quality in management and product development makes it attractive for investors.Valuation: The valuation component suggests that Zydus’s current share price is either aligned with its growth prospects or slightly undervalued. Given the ongoing trials and new product approvals, the company’s earnings growth potential is strong. The stock is likely trading at a reasonable multiple compared to peers in the pharmaceutical industry.ConclusionFor a long-term investor like me the company presents an opportunity. It has a robust pipeline of innovative products and strategic partnerships. I think, Zydus is on the course to become bigger in the pharmaceutical industry. The recent developments, such as the tentative USFDA approval for Enzalutamide tablets and active clinical trials, can give a boost to the company’s revenue and margins in the coming years.For people like me who adopt a buy-and-hold strategy (holding time 10 years) Zydus Lifesciences looks appealing. The company’s focus on critical healthcare, particularly in chronic conditions and emerging therapies, positions it as a decent player in the industry.The strong promoter has a very high stake in the company. Institutional investors are also supporting the company’s.Healthcare sector often requires patience to see returns. Zydus’s has been innovation and as a result, I think it will see a sustainable growth in times to come.The company expands its portfolio and enhances its market presence. I’m willing to invest today to reap benefits in the years to come. As the stock market is currently in a consolidation phase, I will wait for another 3-4% correction and will start accumulating.The company’s fundamentals looks strong. The Indian pharma industry is likely to grow fast considering the mix of population we have in India and in the US. The future looks bright for quality companies in this sector.