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Earlier this week, the Indian Supreme Court ruled against Novartis AG (NVS - Snapshot Report) in a patents case involving its cancer drug Glivec. The impact of the judgment is seen as far reaching for it and could determine the future of patent protection in India.

Novartis first received a patent for Glivec in 1993, a version which was later discarded during development. Later it discovered a new “beta crystal” form of the drug which it claims is more effective than the earlier formula. In 2006, it applied for a patent of this version in India. This move was taken despite the fact that Indian patent law does not recognize such minor modifications.

This practice known as “evergreening” by patient groups and “life cycle management” by the pharmaceutical industry is fairly common in the U.S. In fact the U.S. FDA approved 1,035 new drug applications from 1989 to 2000. Only 15% were treated as a “highly innovative drug.”

The pharma industry believes that the problem may be essentially India centric. For instance, the new kind of Glivec has been granted patents in around 40 countries, which includes U.S., Russia and China.

The U.S. industry trade group Pharmaceutical Research and Manufacturers of America has said that the Supreme Court ruling indicates that the atmosphere for innovation in India is poor. An industry analyst was quoted as saying that the future of branded drugs in India is uncertain.

But the Indian market’s potential is difficult to ignore. Even though it is at number 14 globally in terms of size, it is growing at an annual rate of 13 to 14%. Additionally, India is the second largest country in terms of population. At a time when mature economies are sluggish at best, it is a market which offers great promise for the pharma sector.

Meanwhile, India has become a major producer of cheap generic drugs. Not only does it cater to a country where drug sales amount to $13 billion a year, it has also emerged as a major supplier to emerging markets. But the Indian judicial system and patent legislations continue to make things tough for patented drugs.

The latest addition to such measures is compulsory licensing. Last month, the controller general of patents authorized an Indian pharma company to produce and sell a patented cancer drug from Bayer AG. A low priced version of the drug called Nexavar will be produced by Natco Pharma Ltd.

In Nov 2006, Natco and GM Pharma Ltd successfully contested a patent held by AstraZeneca PLC (AZN - Analyst Report) on its lung cancer drug Iressa. This ruling was upheld in Nov 2012 by India’s Intellectual Property Appellate Board.

Additionally, Roche Holding AG (RHHBY - Analyst Report) lost patent protection on hepatitis C drug Pegasys during the same month. And Pfizer Inc.’s (PFE - Analyst Report) patent on cancer drug Sutent was revoked last year. Sutent was being sold by the company in India since 2007.

Following these developments, Pfizer urged the U.S. government to take additional measures to protect patents in India. Jon Lechleiter, CEO of Eli Lilly and Company (LLY - Analyst Report) expressed concern not only about compulsory licensing but also about the Indian patent regime itself.

The status of patents in India has meant that the likes of Novartis are diverting investments to other markets such as China. However, even China is now taking steps to change its laws to enable domestic manufacturers to produce cheaper versions of patented drugs. Meanwhile, the pharma sector will need to address further challenges to patent protection in other nations like Argentina, the Philippines, Brazil and Thailand.

Gilead Sciences Inc. (GILD - Analyst Report) has already adapted to the situation. It has granted Indian generics manufacturers licenses to produce its cutting edge drugs. They will now be made available to the Indian market at far lower prices. Whether others follow suit or reduce research and development activities in India will determine the future of pharma majors in that country.

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