An international patent agreement that goes into effect on 1 January 2005 is compelling Indian drug companies to pump money into research and development (R&D), strike alliances with companies abroad and seek innovative ways to stay in business. The new law could have far-reaching consequences for many important medicines, including antiretroviral drugs for HIV/AIDS in developing countries.

According to the World Health Organization, India is the fourth largest producer of pharmaceuticals and 66.7% of its exports go to developing countries. India is also the world's leading supplier of generic medicines.

India has maintained low drug prices because of a law that allowed its companies to produce cheaper versions of patented products. But those days ended with the country's entry into the Trade-Related Aspects of Intellectual Property Rights (TRIPS). The treaty requires India and some other countries to recognize product patents and stop selling imitations.

An internal study by the Indian government estimates that, in the antibiotics sector alone, TRIPS will create a $713 million loss to the local economy and $57 million in profits to multinationals each year. Indian pharmaceutical companies are rushing to stave off loss by shifting from business-driven research to research-driven projects. “Indian drug firms can survive only if they have new drugs in their intellectual property pipeline,” says Sudhakar Bangera, head of clinical research of Hyderabad-based Asian Clinical Trials Pvt Ltd.

Indian drug firms can survive only if they have new drugs in their intellectual property pipeline., Sudhakar Bangera, Asian Clinical Trials Pvt Ltd.

In November, Nicholas Piramal India Limited launched a $25 million R&D facility. In September, Mumbai-based Wockhardt Limited commissioned a $50 million biopharmaceutical complex—India's largest—in Aurangabad. Sun Pharma and Lupin Limited have also expanded their R&D operations.

Some front-runners with financial muscle can afford to focus on R&D, but analysts predict that second-rung companies will have to struggle as contract manufacturers and distributors for multinationals.

One strategy is to invest in small US biotech startups that possess novel technologies in return for a share in their intellectual property. For instance, Bangalore-based Biocon has reached agreements with Nobex Corporation, which is developing oral insulin and Vaccinex, which has technology for monoclonal antibodies. Cadila Pharmaceuticals in Ahmedabad is set to sign a similar deal with a Japanese group developing a HIV vaccine.

Under TRIPS, drugs patented after 1 January 1995 will be eligible for patents in India. Experts say at least 15% of drugs in the market—including AIDS drugs—could be withdrawn, but the loss of even one generic drug could deal a fatal blow to its Indian manufacturer.

Organizations such as Médecins Sans Frontières, which rely on Indian generics in AIDS-hit developing countries, are “gravely concerned,” says the group's president Rowan Gillies. The Indian Drugs Manufacturers' Association, a group of about 500 pharmaceutical companies, has suggested paying four percent of the turnover to patent holders to avoid courtroom battles.

Meanwhile, Indian companies have not fared well with new drugs: of the three molecules licensed to multinationals, none has been successful; 18 others are reportedly in trials but the first home-grown drug is at least seven years away, Sudhakar says.

“We will not survive in the R&D game,” says Prasanta Kumar Ghosh, former adviser to the government's Department of Biotechnology. “We have to survive by making generics without infringing on patents.”

That is not likely to be easy. The US recently ruled to stop Ranbaxy Laboratories and Dr. Reddy's Laboratories from marketing copies of Pfizer's antifungal drug Diflucan and the blood pressure drug Norvasc in the US. In September, Dr. Reddy's Laboratories dropped its patent challenge against Novartis over Lamisil, a widely prescribed oral antifungal agent. Pfizer is also fighting Ranbaxy in a US court to prevent entry of the Indian company's version of Lipitor, the world's top-selling cholesterol-lowering drug.