Foe Turned Friend; Indian generic-drug makers once bedeviled Big Pharma; now they may be its best hope for success.

Byline: Jason Overdorf (With Silvia Spring in London)

India used to be big pharma's worst nightmare. Loose patent laws and a glut of talented scientists made that country the world capital for generics. As quickly as companies like GlaxoSmithKline, Merck, Novatis, Pfizer and others could develop innovative new drugs, nimble Indian companies could copy them--and sell them for a fraction of the price. The practice led to a tangle of litigation. But now, the legal battles are giving way to new partnerships.

Earlier this month, GlaxoSmithKline signed a groundbreaking deal to develop new drugs with India's Ranbaxy--the same company it is fighting over a copycat herpes treatment. In January, Eli Lilly began working with Mumbai-based Nicholas Piramal on a number of new drugs. Several similar partnerships are in the works, and they aren't just outsourcing deals. Rather than simply sending bits and pieces of lab work over to India, the Big Pharma companies are increasingly giving their Indian counterparts the rights to develop specific drug targets, and to share in the profits. Industry sources estimate that there are 500 new drugs in development on the Subcontinent today. The end result could be the first-ever Indian "blockbuster" drug.

The new friendships reflect two separate changes in the pharmaceutical industry. First and most important is the drying up of Big Pharma's pipeline. Western companies have historically depended on sales of "blockbuster" drugs (mass treatments for big ailments like cancer or heart diseases, which typically generate more than $1 billion in annual sales). But the low-hanging fruit has been picked, and the cost of discovering big new drugs has increased from an average of $100 million in the '80s to more than $800 million today, even as the output of novel drugs has fallen. Meanwhile, many existing blockbusters are due to go off patent this year.

That will certainly open up new copycat targets for drug makers in India. But at the same time, there's been a recent tightening of patent laws there. This second shift is pushing scientists toward more profitable original research. Indian firms believe they can make new drugs much more cheaply than Big Pharma--the head of Nicholas ...