Shares in multinational drug companies have risen on news that India is to relax its controls on drug pricing.

The government currently controls the prices of some 74 bulk drugs but this figure is expected to be halved under the new policy.

The move should help boost multinational drug companies' turnover and encourage investment in India.

The policy - to be unveiled in full before the Indian budget at the end of the month - is also expected to include measures to boost investment and improve the quality of drugs.

Relaxing prices

Bulk drugs are drugs mixed together in formulations to create medications such as tablets or capsules.

Currently, there are price controls on formulations that have a market share of 50% and an annual turnover of 40m rupees (�580,000; $821,000). This turnover figure is be relaxed to 250m rupees.

There are also price controls on formulations with a market share of 90% and a turnover of 10m rupees. This figure is also to be relaxed to 100m-125m rupees.

The final criteria may yet be tinkered with before the full policy is unveiled.

However, already, shares in Merck, GlaxoSmithKline and Pfizer have jumped.

The policy also aims to provide incentives for research.

Drugs patented in India are also expected to be exempted from price control for 15 years.

This should help Indian drug makers such as Ranbaxy and Cipla.

"This is a positive policy that addresses not just pricing but R&D, exports and regulatory infrastructure," said Dilip Shah, secretary general of the Indian Pharmaceutical Alliance.

Patent change

While the new policy will initially mainly benefit multinational companies, it will also provide more certainty for domestic drug makers, ABN Amro analyst Giridhar Iyengar told the BBC's World Business Report.

From 2005, Indian drug companies will have to observe international patent law - as part of a pact with the World Trade Organisation, which for some will mean taking away their main source of revenue.

Relaxing the price controls on drugs should encourage further investment by multinationals in the Indian pharmaceuticals sector.