The first week of April produced two enormous setbacks for multinational pharmaceutical companies trying to make their mark in India. On April 1, the Indian Supreme Court denied patent protection for Glivec (spelled Gleevec in the U.S.), a cancer drug made by Novartis that is patented in nearly 40 other countries. On April 5, the Delhi High Court dismissed a claim by Merck’s Indian subsidiary, Merck Sharp and Dohme, that Mumbai-based Glenmark Pharmaceuticals should be barred from marketing generic versions of the hit diabetes drugs Januvia and Janumet.

By allowing generic versions of these three drugs to flood its market, India seems to be sending a strong message that pharmaceutical manufacturers outside its borders will not have unlimited pricing power over its market of 1.2 billion people. India’s denial of patent protection, therefore, raises questions about the pharmaceutical industry’s ability to make a profit in the world’s second-most populous country — and it adds fire to the debate over whether the industry’s obligation to provide access to life-saving drugs should outweigh its drive for profits.

Patricia Danzon, Wharton professor of health care management, predicts that the rulings will make drug companies think twice about their overseas strategies. “It certainly may impact their incentives to sell innovative drugs in India,” she says.

The Novartis decision was somewhat convoluted, because India’s Supreme Court ruled that Glivec isn’t actually a new invention that warrants patent protection under the country’s laws. Why? India did not start granting patents on drugs until 2005, and even then, its laws only applied to drugs discovered after 1995. Novartis patented an early version of Glivec in 1993 and then abandoned it in favor of the molecule that’s on the market today. The Supreme Court ruled that the two drugs were not different enough to warrant a patent in India on the marketed version.

The bottom line is that Novartis has never been granted a patent on Glivec in India. The drug hauled in nearly $5 billion in sales last year worldwide — a figure that would no doubt multiply if the company had some measure of protection against generic competition in India.

Novartis sees the ruling as an impediment to innovation. “We brought this case because we strongly believe patents safeguard innovation and encourage medical progress,” said Ranjit Shahani, vice chairman and managing director of Novartis India, in a statement after the ruling. “We strongly believe that original innovation should be recognized in patents to encourage investment in medical innovation, especially for unmet medical needs.”

The Framing Game

Critics of the pharmaceutical industry contend that drug makers focus too much on profits, and in so doing, they don’t fulfill their obligation to provide affordable access to their products. Novartis countered this notion by pointing out in its statement that it gives Glivec away for free to 95% of Indian patients who are prescribed the drug. The other 5% receive some sort of reimbursement, the company said. 

According to Danzon, such “differential pricing” is important in a country like India, where most patients are uninsured. “For both compassionate and commercial reasons, the multinationals would like to provide drugs at reduced prices, or potentially even free-of-charge, to lower-income people,” Danzon says. This isn’t necessarily a money-losing proposition for the drug industry. “Even if that middle- and upper-income group is only 10% or 20% of the population, in a country the size of India, that’s a significant market,” she notes. “But the key is to find a way to serve that market while still doing some differential pricing to serve the poorer segment of the population, and thereby meet the goal of the Indian government to make drugs accessible to lower-income people.”

Merck, which was also stung by a negative Indian patent ruling, has long talked up its “tiered pricing” plans for some drugs. In 2009, the company rolled out a tiered pricing strategy for some of its vaccines and HIV treatments in developing countries. A spokesman for Merck said in an e-mail that the company has a plan that includes “India-specific, responsible pricing” for its diabetes drugs. “We continue to believe our patents for Januvia and Janumet are valid and enforceable, and we are committed to exploring all legal options to defend them.”

Drug companies are under pressure to provide affordable drugs from groups such as Doctors Without Borders, a vocal critic of high drug pricing. This adds a wrinkle to the debate, says Richard (Erik) Gordon, clinical assistant professor at the University of Michigan Stephen M. Ross School of Business. “They frame it as access vs. profits,” Gordon says. “The drug companies like Novartis and Merck frame it as access vs. innovation.”

In India, the framing is more political, Gordon says. “The only reason India changed its laws to recognize drug patents was that it was important overall for India to be a member of the World Trade Organization. The Indian Supreme Court says [in the Glivec decision] that it’s clear parliament intended the least possible protection that would keep India within the World Trade Organization.”

It’s no surprise that India’s government wants to protect the country’s burgeoning drug business. PwC estimates that India’s domestic pharmaceutical industry will grow from $11 billion in annual sales in 2009 to $30 billion by 2020. Much of that growth will be driven by India’s famed generic drug manufacturers, such as Dr. Reddy’s Laboratories, Cipla and Aurobindo Pharma. “This is a matter of self interest for Indian industry,” Gordon says. “The determining factor was India’s generics industry — made up of big companies run by rich families — versus multinational companies. India frames this as ‘our companies versus the rest of the world’s companies.'”

Do Patents Spur Innovation?

The value of protecting intellectual property is as contentious an issue in this country as it is overseas. President Obama’s health reform law, for example, has kicked up a debate between biotechnology executives, who want maximum patent protection for their inventions, and those who advocate the introduction of low-cost alternatives to biotech drugs, or “biosimilars.” The Patient Protection and Affordable Care Act granted 12 years of market exclusivity to biotech drugs, but a couple of years after the law passed, Obama asked Congress to drop that period to seven years, in the hopes that biosimilars would save government-run insurance programs billions of dollars in drug costs. He lost the debate, and the 12-year period stands.

Still, the link between patent protection and innovation has never been definitely proven, says Mark V. Pauly, Wharton professor of health care management. “The drug companies say, ‘If you don’t allow us to reap the benefits of our R&D expenditure, we won’t put as much into it, and we won’t invent as many great things,'” Pauly says. “The problem is that nobody really knows how much less innovation there would be if there were less patent protection. We just don’t know what the numbers are.”

According to Pauly, the onus to prove that patent protection matters should be on the drug industry itself. “Rather than always just insisting you should never limit intellectual property protection, they really ought to develop some evidence [to show] that without that protection, there would be an impact on the rate of adoption of new products. Everybody has an opinion, but nobody knows the facts.”

Pauly also advocates an international reckoning of patent law. “If you’re going to have international intellectual property laws, they ought to be uniform. It’s untidy and unproductive for individual countries to offer their own idiosyncratic interpretations,” he says.

As the generic drug industry in India continues to expand, so does the country’s desire to participate in innovative drug discovery. Several of India’s leading drug companies have launched discovery units that are focused not on copying Western innovations, but rather improving them, and inventing entirely new remedies for widespread diseases.

With this move towards innovation, Danzon notes, there is a significant risk that the recent court decisions against Novartis and Merck could actually backfire on India’s own pharmaceutical industry. That’s because each court decision further narrows the definition of what counts as innovation — a precedent that will impact any company, domestic or foreign, that wants to sell drugs in India. “For the emerging Indian companies that are trying to develop innovative research and discovery capabilities,” she says, “not being able to get solid patents in their home market may be a significant hit.”