INDIA KICKS THE HABIT

When Anglo-Swedish drug giant AstraZeneca launched its anti-ulcer drug Losec in 1989 in Europe and the United States, it was an instant blockbuster. Before the company had a chance to sell the drug in India, however, local firms had already flooded the market with cheap generics. In 1990 Dr. Reddy's Laboratories (DRL) in Hyderabad, the country's second-largest drug company, introduced Omez, a Losec knockoff, for 13 cents a tablet, and soon other Indian companies had joined the race, driving the price down further. Today Omez is DRL's flagship drug, accounting for 3 percent of its $440 million turnover. AstraZeneca, which had invested millions in developing the drug, never bothered trying to compete.

There's hardly a multinational drug company in the world that couldn't tell a similar tale. The reason: India's patent system offers virtually no protection for new drugs, and its pharmaceutical companies are among the best in the world at producing knockoffs. But soon the free ride will be over. On Jan. 1, a new patent law is expected to bring India in line with other countries in the World Trade Organization. That will mark the end of three decades of market protection that has allowed Indian firms to concentrate on low-cost manufacturing without having to pay for new-drug research. The change is already forcing India's drug companies to bolster R&D to better compete with the big multinationals. And it spells an end to quick and cheap genetic drugs for consumers in India as well as its export markets in the Middle East, Asia and Latin America.

India's patent freeloading began back in 1972, when Parliament granted patent rights only to manufacturing processes, rather than to the end products themselves. Indian pharmaceutical firms were able to take new drugs developed abroad, reverse-engineer the manufacturing process and begin churning out generics. The drugmakers thrived. Local firms went from controlling 30 percent of the Indian drug market in 1972 to 75 percent today. Developing-world consumers, and even some in Western markets, enjoyed the benefits of low prices and the quick introduction of the latest wonder drugs, created and tested at others' expense. Today India exports generic drugs to 200 countries.

Drugmakers won't feel the pinch for about two years, thanks to a full pipeline of pilfered generics. But the change is already reverberating through boardrooms and research labs. Starting in January, if Glaxo-SmithKline, say, should come out with a new drug, it will be available in India only when Glaxo launches it--at a price set by Glaxo. Lawmakers reckon that $650 million worth of the local generics market will vaporize in a few years. "It's a big event," says Satish Reddy, DRL's managing director.

In anticipation of the Big Bang, the larger Indian drug companies have pushed hard to increase their share of the U.S. and European generics markets, challenging patent holders in the courts. At the same time they've sought alliances with many of the same firms they were suing. Indian firms bring to the table an expertise in low-cost manufacturing, distribution networks and low-wage labor; they seek drug licenses and research partnerships. Ranbaxy Laboratories, the largest Indian drugmaker, is now helping GlaxoSmithKline identify new drugs and perform clinical trials in India; in return, Glaxo handles late-stage drug development. DRL has forged similar alliances with Denmark's Novo Nordisk and Novartis. Cipla, which made headlines a few years ago for exporting cheap HIV/AIDS drugs to South Africa, now has tie-ups with five U.S. generic drugmakers, who are interested in Cipla's presence in 150 countries.

Indian firms have also had some success in beefing up R&D in anticipation of the patent changes. Wockhardt has developed two new potential antibacterial drugs, and is scouting for partners to develop and market them in Europe. And last month Glenmark Pharma licensed a potential asthma drug to Forest Labs in the United States for $190 million, the biggest licensing deal ever for an Indian drug company.

Indeed, some people argue that the new patent law will ultimately strengthen India's drug industry. The prospect of better patent protection has already attracted foreign drug firms looking to take advantage of research costs that by some estimates are one seventh those in the United States. Hoffman-LaRoche, Bayer, Aventis and Chiron have recently announced plans to make India a regional base for supplies, and several others, including Novartis, AstraZeneca, Eli Lilly and Glaxo-SmithKline, are opening clinical research labs. This new investment may help stem the flight of top talent in biotechnology. "Over 15 percent of the R&D scientists working in the U.S. pharmaceutical industry are from India. The new R&D environment can reverse this brain drain," says Dr. Ajit Dangi, director general of the Organization of Pharmaceutical Producers of India.

Still, the transition may be painful. Many of India's 20,000 drug firms are small- and medium-size companies that don't have abundant drugs in the pipeline. Analysts predict a spate of consolidation and bankruptcies. Foreign firms may also gain market share at the expense of local firms. Although drug majors may lower prices for some drugs in the Indian market, they may be reluctant to do so for others, particularly those used for rare conditions. The Indian government will be able to force down prices only in an emergency. Fears that the new laws will take India back to pre-1972 days, when multinational monopolies set high prices and neglected research on the diseases of the poor, are probably overblown. But consumers will feel a pinch in the next two or three years as prices start heading skyward. That's when the free ride will really be over.