India’s highest court ruled this week that Swiss pharmaceutical giant Novartis AG cannot patent its cancer drug Glivec, allowing drug-makers in India the freedom to continue producing generic versions of the highly effective drug.
While insignificant in isolation, the decision could have huge ramifications in the long-standing and often highly contentious issue over global drug pricing.
This week’s court decision not only allows generic drug-makers to continue providing generic versions of Glivec, but it also offers a legal precedence for production of other generic drugs particularly ones treating HIV/AIDS.
A Patent Issue
India is the world’s biggest maker of generic drugs, and with a population of over 1.2 billion, it is also one of the world’s biggest markets for drugs.
Indian drug-makers have been making a copy of the cancer drug Glivec (Gleevec in some markets) sold by Novartis in developed markets. It is highly effective in treating certain rare forms of leukemia.
For emerging markets, access to cheap medicine is imperative. An annual supply of Glivec normally costs upward of $70,000 per year. The generic version will run about only $2,500 per year, according to a New York Times report.
India has a very strict drug patent law—one that favors generic drug-makers, one could argue—enacted in 2005, which does not allow drugs invented prior to 1995 to be patented in the country. In addition, the court argued that Glivec, which was first made in 1993, did not differentiate itself enough from other similar drugs in the marketplace.
“Patents will be given only for genuine inventions, and repetitive patents will not be given for minor tweaks to an existing drug,” Pratibha Singh, a lawyer for the Indian generic drug manufacturer Cipla, said outside the courthouse Monday, according to an Associated Press report.
Novartis disagrees with the ruling. “We strongly believe that original innovation should be recognized in patents to encourage investment in medical innovation especially for unmet medical needs,” said Ranjit Shahani, managing director of Novartis India Limited, in a statement.
“We brought this case because we strongly believe patents safeguard innovation and encourage medical progress, particularly for unmet medical needs. This ruling is a setback for patients that will hinder medical progress for diseases without effective treatment options,” Shahani said.
Obligation versus Innovation
At issue is a long-standing struggle between developed and developing nations on intellectual property rights, which has seen its share of international contention in the software and entertainment sectors.
But the problem is further magnified in the pharmaceutical industry, given the exorbitant cost of R&D, capital investments, testing, and marketing. Companies argue that court rulings such as this one will hurt innovation and limit the ability to fund large research projects to discover new drugs (growing organically).
Some pundits argue that pharmaceutical firms should operate one and two-tier pricing structure, the foundations of which are already in place for certain drugs such as HIV/AIDS medications. That means companies will sell the drug for cheap in places of need—such as developing nations—and mark up the drug to its regular price in developed economies.
Due to the above reasons, all eyes will be on Indian courts going forward. The Novartis decision is a relatively minor one, as it involves a drug, which has already been selling for decades. The real test will come when a major pharmaceutical firm tries to patent a new drug. The decision won’t just affect the Indian market, but all emerging markets.
Growth Pressure
Novartis’s assertion that the decision will impact innovation is already playing out globally. At large pharmaceutical firms, new drugs and pipelines are running short, and firms are opting to use their free cash flows to acquire smaller rivals with intriguing drugs in the pipeline, instead of pouring them directly into R&D.
Mergers and Acquisitions (M&A) in the industry has been feverish over the last year. In 2012, pharmaceutical M&A deals reached $146 billion, according to research from pharmaphorum.com. The deal activity has increasingly been focused in emerging markets, for two reasons: higher innovation efficiency and lower buyout valuations given the current constrained financial markets.
“While the dynamics of the pharma industry remain fluid, the deal environment in 2013 and beyond will be more complex and competitive,” says Glen Giovannetti, Ernst & Young’s Global Life Sciences leader. “However, the finite resources of many big pharma companies, and the need to make prudent acquisitions to address the immediate growth gap, mean they will likely be even more selective about the targets they pursue.”
Exacerbating the problem, current balance sheets of pharmaceutical companies are inflexible. Due to acquisitions from the last five years, many large pharmaceutical firms have taken on more debt. Debt-to-equity ratios across the industry, according to Ernst & Young, have risen from 9 percent to more than 18 percent in the last five years. In addition, debt service (for example interest payment) is a huge drain on cash, which otherwise could be used in R&D.
For these reasons, major firms—such as Johnson & Johnson—have resorted to divesting non-core and nonpharmaceutical subsidiaries to raise cash. But if this week’s development is any indication, where to invest that money going forward will present a challenge.
