Bain's sampling of 179 international executives with headquarters in North America, Europe, Asia and India also expressed concerns about intellectual property protection (56 percent), parallel trade (52 percent) and regulatory uncertainty (46 percent) affecting the Indian industry.

"The Indian pharmaceutical industry now stands at the crossroads," said Ashish Singh, managing director of Bain & Company India and leader of the consulting firm's Indian Pharma Survey. "If India is looking to be the international home for quality generic drugs, it needs to move beyond a low-cost mindset and accelerate its innovation efforts."

Despite current concerns with India's pharmaceutical industry, international executives increasingly expect greater collaboration there in the future. While only 38 percent of the respondents now consider doing business in India to be "extremely important", that number jumps to 62 percent when survey participants were asked to project the marketplace five years from now. Similarly, 35 percent characterized India as an "attractive" market in 2006 (as a domestic market for drug purchase and consumption) while 58 percent expect it will be "attractive" by 2011.

Six out of 10 respondents believe that Indian pharmacos will improve their capabilities through the end of the decade in such areas as risk-sharing, product depth, increased scale and expanded expertise. Ranbaxy Laboratories, Dr. Reddy's Laboratories, and Cipla are generally cited as best positioned for leadership in the Indian market in five years.

"If Indian pharma is effective in shoring up its operating and cost structure, promoting innovation and gaining more regulatory credibility, the challenges both from mature markets and from developing countries like China should substantially lessen," Singh added.

Bain recommends several immediate next steps for the key Indian pharma constituencies:

-- For Indian companies - strive for low cost leadership in their core generic drug businesses through a rigorous focus on operating efficiency, and begin to invest in innovation.

-- For the Indian government - create the right investment climate for both multinational corporations (MNCs) and Indian companies by addressing key concerns over intellectual property protection, parallel trade and regulatory uncertainty.

-- For MNCs - start investing now to take advantage of the Indian domestic market as well as capabilities that India offers, but do it in a measured way while pressing for regulatory reforms.