Ranbaxy's pills cost a fraction of those in the developed world.

India's Drug War Is Good News

Dhiraj Nayyar is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of "Surviving the Storm: India and the Global Financial Crisis."
Read More.
a | A

The announcement earlier this week that U.S. pharmaceutical giant Gilead would allow seven Indian companies to make a cheap, generic version of Sovaldi -- its cure for the Hepatitis C virus and one of the world's best-selling drugs -- was rightfully hailed as a victory for patients in the developing world. Instead of paying $84,000 for a 12-week course of treatment as in the U.S., sufferers in India and 90 other nations will soon be able to obtain a 24-week course for lessthan $2,000.

So why are some of the loudest protests about the deal coming from the Indian pharmaceutical industry? The main industry lobby group, which represents the 19 biggest Indian pharmaceutical firms, has come out in opposition, despite the fact that three of its members signed the deal with Gilead. The Indian Pharmaceutical Alliance insists that the science behind Sovaldi is not new and hence not subject to patent -- the same argument that allowed Indian drugmakers to churn out some $24 billion worth of other generics last year. The Alliance wants dozens of India's 300 established pharmaceutical companies to be allowed to produce a version of Sovaldi, not just seven of them.

Ironically, Gilead's decision to choose Indian companies rather than those from other emerging economies, or even the U.S., was itself an acknowledgement of the competitiveness and skill of the local drug industry. It is the third largest in the world by volume and fourteenth by value (since generics are sold cheaply). Half of its revenues in 2013 were generated by exports to markets outside India. The country boasts the largest number of manufacturing facilitiesapproved by the Food and Drug Administration outside the U.S.

Originally, Indian law only recognized process, not product patents. That paved the way for an explosion of copycat manufacturing between the 1970s and 1990s. World Trade Organization rules later forced a change. But even now Indian law has a loophole disallowing patents if the science behind the discovery is not new, or if a new drug represents merely a minor modification of an older drug.

The biggest Indian pharmaceutical companies would normally have united behind this position. In recent years, however, the domestic market has grown brutally competitive. The top 10 firms now command only 37 percent of the market, with no single player in double digits. The government imposes severe price controls on over 300 drugs, dampening profits. And many foreign markets remain closed to Indian-made knockoffs because of stronger patent protections.

The seven companies that signed up with Gilead, which include such familiar names as Cipla and Ranbaxy Laboratories, have clearly decided that they need to adopt a different strategy to maintain profitability. Not that long ago, Cipla dramatically challenged multinational drug companies, supplying a copycat cocktail of anti-HIV drugs to sub-Saharan African countries for $350 when their international market price was $15,000. Now, the prospect of bigger margins is simply too attractive to pass up.

A split in the Indian pharmaceutical industry isn't necessarily a bad thing for India or for the rest of the world. Critics have a fair point when they argue that $2,000 is still too expensive for patients in emerging economies, many of whom don't have access to insurance; the agreement also leaves out several key middle-income countries like China. But top Indian companies have to find ways to remain profitable. Some have tried to venture into original research, but the costs are high and the results unpredictable. Partnering with drug majors in the West -- whether to produce cheaper versions of drugs or to conduct outsourced research and trials -- is one obvious solution.

For the global pharmaceutical industry, the fact that some Indian companies are willing to look beyond rip-off generics opens up a host of possibilities. Drug discovery is expensive, and the prospects for future cures depend on keeping the profit incentive intact. At the same time, the pressure to sell at a discount in poorer countries is not going to go away. If the Western majors can outsource this task to cost-competitive Indian companies, while cutting back the threat of indiscriminate copycat versions, they might just be able to strike a balance between profit and social responsibility. Most everyone should win -- or at least, more people than do under the current system.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Dhiraj Nayyar at dhiraj.nayyar@gmail.com

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net