Dr Reddy’s Laboratories Ltd expects its fiscal 2012 performance to be driven by growth in North America, emerging markets, revenue from acquisitions and higher orders in its active ingredients business. It does not have a forecast for fiscal 2012, but has said it will cross $2.7 billion in revenue in fiscal 2013, lowering its earliest forecast by around $300 million. The main reason for its lower expectation is US market sales, which it says could get affected by delays caused by regulation and litigation.

Its cautious optimism seems at odds with its March quarter performance, which saw sales grow by a healthy 23% over the year-ago period, coming in better than market expectations. Its US market sales, too, were good, growing by 70% year-on-year (y-o-y) and 23% over the preceding quarter, aided by new launches and sales of products which had limited competition. The outlook for fiscal 2012 is also good (but for any delays caused by regulators or litigation). Fiscal 2011 sales, however, were up by a more sedate 13%.

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Growth would have been higher in the quarter but for a surprisingly low growth of 5% in the domestic market. Many pharmaceutical firms reported slower domestic growth in the quarter. Growing competition among Indian and multinational pharmaceutical companies for a pie of the domestic market for generics appears to be affecting growth, especially in value terms.

At the same time, costs are increasing because companies are investing in expanding their reach, by hiring more people, and by investing in marketing. Dr Reddy’s expects growth in fiscal 2012 to benefit from better productivity from its workforce and new product launches.

North America and India collectively contribute around 60% of its global generics’ business, and will continue to be key to growth in 2012. Russia and CIS (Commonwealth of Independent States) are emerging as strong growth drivers, with March quarter y-o-y sales growth of 37% driven by higher sales of over-the-counter products.

Dr Reddy’s European market revenue continues to be dragged down by Germany, with sales falling by 5% y-o-y due to a 25% drop in sales in the German market. Ex-Germany sales were up 27%. Dr Reddy’s expects some successful tender bids in Germany to result in a better performance in fiscal 2012.

Its pharmaceutical services business continues to be affected by lower order flows because global healthcare firms are going slow on investments. The active ingredients business—the basic inputs used to make drugs—did better, but the combined pharmaceutical services and active ingredients business saw sales decline by 13% y-o-y during the quarter. Profitability improved due to higher contribution from the US market during the quarter.

Dr Reddy’s appears to be on a stronger footing, but one concern is that the level of receivables has risen significantly. The company attributes this to preparation for launches. Investors would look out for a commensurate increase in sales growth in the coming quarters.

If the Indian market does not recover in fiscal 2012, as most firms are hoping it will, that could be a disappointment. But North America will still hold the key, as investors will await news of launch of products in the six-month exclusivity period. That will give its sales and profit growth a fillip that no other event can match.

Graphic by Yogesh Kumar/Mint

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