The Supreme Court judgement on the Glivec drug patent has interesting long-term implications for the Indian pharmaceutical industry. In 2003, Novartis asked for exclusive marketing rights (EMR) to market the cancer drug, glivec. The EMR was challenged with claims that the drug was not original, since it was just an altered iteration of a known molecule, imatinib.
Novartis lost the case in Madras High Court in 2006, and lost an appeal to the Supreme Court last week. Glivec used to be priced at Rs 1.2 lakh for a month's dosage, versus Rs 8,000 / month for generic versions. However, Novartis was also offering Glivec free under its patient assistance programme to those who couldn't afford the drug.
According to Novartis, the judgement will make global pharma MNCs reluctant to release new blockbuster drugs in India. Indeed, the knee-jerk reaction from the global industry has been negative. It could also impact similar cases involving other drugs in Indian courts.
Indian pharma companies, which reverse engineer generics to produce drugs cheaper, can continue with their current business models. Drug R&D is a long, expensive process. Although there have been many advances in understanding genes and computerised number-crunching has shortened the task of finding and delivering drugs, it still takes years to create a new drug and test it. Getting legal clearances to bring a new drug to market also takes years.
There are few breakthrough drugs produced, so original R&D is a very high-risk, low-strike process. It is much easier and less expensive to take an existing drug apart, and work out cheaper ways to make it as generics companies do. India has a compulsory licensing regime for life-saving drugs, which encourages re-engineering.
The Indian pharma industry has turned re-engineering into an art. In key areas like AIDS, diabetes, anti-malarials and cancer, Indian companies produce generics much cheaper, often cutting prices by 90 per cent. In India itself, and in Africa in particular, cheap Indian generics have been key weapons in the battle against AIDS. Literally millions of poor HIV-positive Africans survive on Cipla's cheap AIDS drugs.
There are advantage and disadvantages to broad patent laws. If the law gives high degrees of protection to IP, companies invest in original R&D knowing that a breakthrough drug will generate returns for a long time. The disadvantage to broad patent protection is that "ever-greening" can be abusive. If a company may slightly tweak an existing drug and rebrand it, it can artificially lengthen the period of patent protection.
Obviously, Indian pharma exporters have to comply with specific patent laws in specific countries. The judgement makes no difference unless other nations tweak their patent laws and follow the Indian Supreme Court's lead in interpretation. The judgement does probably mean an additional layer of protection for Indian pharma companies operating in India. This may be good for them but not in immediately quantifiable fashion.
India has a complicated system of compulsory patent licensing for essential drugs as well as pricing controls of various kinds. Making sense of it will take more space than available here. The key sections of the Patent Act are also very technical. There are apparently plans to cap the prices of new drugs at the time of launch as well and this could be a disincentive.
The pharma industry is seen as a defensive investment haven. Pharma is seen as a "perennial", non-cyclical business. People always buy medicines. Easing domestic price controls has let Indian pharma companies hike drug prices at rates beating inflation. The export experience also indicates that Indian companies are very competitive abroad. However, the perception of a defensive perennial itself means that Indian pharma companies generally trade at high-PE. On average, these stocks are traded at 10-15 PE premium to the overall market.
There are two risks for Indian pharma. Neither of those risks are affected by the SC judgement. One is the risk of arbitrary drug policy changes in India itself. The other risk is that Indian drug exporters will have to fight IP-related cases in various jurisdictions every so often. Outcomes of such cases are tough to predict.
Does the Glivec judgement justify a surge in the prices of Indian listed pharma concerns as indeed occurred ? Probably not. The judgement offers continuity rather than change in favour of Indian pharma companies. It doesn't really lead to increased earnings estimates for Indian pharma and the PE discounts of this sector are pretty high as things stand.
