India Drops Patent Bomb on Novartis

The emerging market's Big Pharma promise just took a nosedive

   

The good news is, leukemia patients in India will continue to have access to low-cost treatment. But for Novartis AG (NYSE:NVS), it means a lost revenue opportunity.

India’s patent and intellectual property system seems to be a diametrical opposite of the United States’. Here in the U.S., patents are given out regularly, almost regardless of an idea’s merits or uniqueness.

In India — within India’s pharmaceutical industry, anyway — it’s going to be tough for a biopharma company to win patent protection for newly developed drugs. Swiss-based Novartis most recently put India’s patent system to the test, and ended up on the wrong side of the decision.

The drugmaker began its legal challenge in 2006, in response to a 2005 overhaul of India’s patent protection laws. Under the new law, and unlike patent standards in most other countries, minor changes to a drug are not considered deserving of renewed patent protection.

Undeterred by the new standard, Novartis requested the new version of its leukemia treatment Glivec be given a patent extension in India, as the new beta crystal form is said to be more potent than the prior formula. India’s patent office didn’t agree that the updated version of Glivec was significantly different. Neither did the country’s top court, even though the beta crystal version of Glivec has patent protection in most countries.

It took about two nanoseconds for the criticisms to start flowing. One of the most intensely voiced complaints pointed out (accurately) that India is one of the world’s biggest producers of generic drugs — which, lo and behold, stand to benefit from the fact that Glivec isn’t patent-protected … at least not in India.

Bigger Than Glivec

While the focus after Monday’s ruling was on Novartis’ Glivec, the issue is actually much bigger. All the major drug developers like Pfizer (NYSE:PFE), Bayer AG (PINK:BAYRY), Roche (PINK:RHHBY) and others were watching closely, as Novartis’ fate with Glivec is likely to be the same fate suffered by anyone attempting to introduce new drugs into the country.

In fact, some of those companies have already suffered that same fate.

Pfizer, for instance, lost its Indian patent protection on cancer drug Sutent last year, and Roche’s patent on the hepatitis C drug Pegasys also was negated in 2012. Both companies have appealed their respective decisions, but their arguments parallel those of Novartis AG’s, and are therefore likely to be shot down. AstraZeneca (NYSE:AZN) and Bristol-Myers Squibb (NYSE:BMY) also have had cancer treatment patents negated by the Indian courts.

Drugmakers are reasonably assuming this new patent law and philosophy will apply going forward, making it all but impossible for foreign companies to sell most newly developed pharmaceuticals in India. Many of these companies have already alluded to the likelihood they’ll give up on the market, as the costs of developing a drug for that market simply don’t make sense now.

That’s no easy decision, either.

India’s massive population and relatively recent modernization of medicine led some of these pharmaceutical companies to think up to a quarter of their future revenue would be driven by the growing country and its $26 billion annual drug market. Now, with India’s generic drug companies like Cipla and Natco having a path to profits paved for them by the country’s legal system, companies like Novartis and Pfizer have to be wondering why they should even bother trying.

Now What?

Both sides of the table have solid arguments. Pharmaceutical companies exist to make money, and have an obligation to shareholders to do so. On the flip side, everyone has a right to essential (and life-saving) medicine, and sometimes the highest-quality pharmaceutical choices are prohibitively expensive.

India’s generic-friendly law facilitates low-cost access to meds. Yet, without outsized revenues driven by new, patent-protected drugs, what’s the incentive to develop new medicines in the first place? It’s a vicious catch-22.

As far as investors are concerned, though, reality is somewhere in the middle. India’s patent law enforcement won’t mean the utter destruction of pharmaceutical companies, and India’s populace won’t get low-cost healthcare that’s “just as good as the rest of the world’s.”

The market has a way of finding a balance between money and compassion, and a way of finding a balance between the ideal and the sustainable.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/04/india-drops-patent-bomb-on-novartis/.

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