The sector has been affected over the past one year or so by limited new growth opportunities, booming capital expenditure resulting in excess supply and a slew of new competitors eager to establish presence in the US market, analysts feel. In fact, the sector has under-performed the Sensex by nearly 26% till October.

Analysts expect the trend to continue next year in the wake of growing competition, pricing pressure and sub-optimal size. The global generics industry has continued to witness pricing erosion as competition has grown. Citigroup feels that pricing pressure on the Indian pharmaceutical industry will be accentuated in 2006 in the wake of rapidly rising global capacity, low entry barriers and commodity-like products.

Citigroup expects one of the leading companies, Ranbaxy's earnings to fall by 37% in full year 2005 {first half (Jan-June) earnings fell by 50%. The earnings will recover in 2006-07 from this year's low base, but this depends on the competitive environment in Europe and US. Ranbaxy faces serious headwinds in the key markets of US and Europe, and sustaining a premium valuation with slowing earnings and sales growth will be difficult, analysts said.

Nimish Mehta, assistant V-P (research) of Edelweiss Capital said the next year should be a good year for generic companies in general, globally. But for Indian companies, it will be a mixed bag due to pricing pressures that they face in key markets.

Also in case of Sun Pharma, Citigroup says that competitive pressures and limited pricing power imply a two-way hit, one of growth and the other on profitability. The pricing pressures is not restricted to just new products that are going off patent; it has also spread to older products, thus hitting at the core of incumbents businesses and profitability, experts feel. The gross margin profile for pure generic companies has declined significantly as a result.