India Kicks the Habit; Local drugmakers have built a thriving industry on pilfering patents. The party ends in January.

Byline: Seema Singh

When Anglo-Swedish drug giant AstraZeneca launched its anti-ulcer drug Losec in 1989 in Europe and the United States, it was an instant blockbuster. Before the company had a chance to sell the drug in India, however, local firms had already flooded the market with cheap generics. In 1990 Dr. Reddy's Laboratories (DRL) in Hyderabad, the country's second-largest drug company, introduced Omez, a Losec knockoff, for 13 cents a tablet, and soon other Indian companies had joined the race, driving the price down further. Today Omez is DRL's flagship drug, accounting for 3 percent of its $440 million turnover. AstraZeneca, which had invested millions in developing the drug, never bothered trying to compete.

There's hardly a multinational drug company in the world that couldn't tell a similar tale. The reason: India's patent system offers virtually no protection for new drugs, and its pharmaceutical companies are among the best in the world at producing knockoffs. But soon the free ride will be over. On Jan. 1, a new patent law is expected to bring India in line with other countries in the World Trade Organization. That will mark the end of three decades of market protection that has allowed Indian firms to concentrate on low-cost manufacturing without having to pay for new-drug research. The change is already forcing India's drug companies to bolster R&D to better compete with the big multinationals. And it spells an end to quick and cheap genetic drugs for consumers in India as well as its export markets in the Middle East, Asia and Latin America.

India's patent freeloading began back in 1972, when Parliament granted patent rights only to manufacturing processes, rather than to the end products themselves. Indian pharmaceutical firms were able to take new drugs developed abroad, reverse-engineer the manufacturing process and begin churning out generics. The drugmakers thrived. Local firms went from controlling 30 percent of the Indian drug market in 1972 to 75 percent today. Developing-world consumers, and even some in Western markets, enjoyed the benefits of low prices and the quick introduction of the latest wonder drugs, created and tested at others' expense. Today India exports generic drugs to 200 countries.

Drugmakers won't feel the pinch for about two years, thanks to a full pipeline of pilfered generics. But the change is already reverberating through boardrooms and research labs. Starting in January, if Glaxo-SmithKline, say, should come out with a new drug, it will be available in India only when Glaxo launches it--at a price set by Glaxo. Lawmakers reckon that $650 million worth of the local generics market will vaporize in a few years. "It's a big event," says Satish Reddy, DRL's managing director.

In anticipation of the Big Bang, the larger Indian drug companies have pushed hard to increase their share of the U.S. and European generics markets, challenging patent holders in the courts. At the same time they've sought alliances with many of the same firms they ...