Although some industry executives say that the fancy for India's pharmaceutical stocks is overdone, analysts are still optimistic over the sector's outlook. "I expect the sector to post a 14 per cent sales growth, year-on-year, in the next five years and similar growth in profits," said Shahina Mukadam, analyst with Birla Sun Life Securities Ltd.

"The prospects for the pharma sector are very good, because the business as such is more or less protected from economic downturn and there are so many structural changes taking place which will benefit the companies," she said.

The changes, from the government led by Prime Minister Atal Behari Vajpayee's Bharatiya Janata Party (BJP), are expected to benefit the Indian offshoots of multinationalsespecially. "The BJP government has definitely given focus to drug policy," said Vivek Jain, pharmaceuticals analyst at ICICI Securities and Finance Company.

"Policy changes have been in the pipeline for some time but events have moved much faster in the past year," he said. Vajpayee's government, which was reduced to caretaker status in April after barely 13 months in office, pushed through legislation amending patent laws ahead of an eventual change to product patents by 2005.

Local drug firms have thrived using drug re-engineering techniques to copy products patented overseas as Indian patent law does not recognise product patents, only process patents. This allows enterprising firms to use different processes to make virtually the same products. That will stop once product patents are recognised.

But the Indian firms connected to multinationals will benefit, since their parents will own the protected patents. Some of the India's major pharmaceuticals firms are such offshoots: Glaxo India, PfizerLtd, SmithKline Beecham Pharmaceuticals (India), Rhone-Poulenc (India), E. Merck (India) and Novartis India. Dr Reddy's Laboratories and Ranbaxy Laboratories are major Indian-owned firms.

Finance Minister Yashwant Sinha in his February budget announced the setting up of two key committees: one to review drug price control policy and the other to examine ways to enhance R&D Initiatives. The committees are expected to prune the Drug Price Control Order (DPCO), which lists about 74 drugs whose prices are fixed by the government to make them affordable for the poor.

Analysts say by setting up the two committees, the government has acted to equip domestic industry to face the challenges of freer world trade. "The trigger has been the external pressure to overhaul patent law to recognise intellectual property rights," said an analyst with a local research house.

"Basically to support R&D, the industry needs return on business and a whole lot of drugs are under price control," she said. H R Khushrokhan,managing director of Glaxo India said: "I personally think DPCO is redundant because the market is so competitive."

"We have given empirical statistical evidence to the government to show over the last five years that the increase in the price of formulations...has barely moved by four to five per cent year-on-year," he said. "It is really less than the general level of inflation in the country."