The Intellectual Property Appellate Board, India's patent appeals office, has rejected Bayer AG's plea to stop Natco Pharma from producing a cheaper generic version of its patented cancer drug.
Last year, the patent office allowed Natco Pharma to produce a generic version of Bayer's kidney and liver cancer drug Nexavar on the grounds that it would make the drug available to the public at a reasonably affordable price.
It was the first use of compulsory licensing under Indian patent laws passed in 2005.
The appellate board rejected the German drug maker's appeal of the 2012 ruling on Monday. It also ruled that under the licence, Natco must pay 7 per cent in royalties on net sales to Bayer.
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Bayer sells a one month supply of the drug for about $5,600. Natco's version would cost Indian patients $175 a month, less than 1/30th as much.
Bayer on Tuesday said it "strongly" disagreed with the appeal panel's decision and would pursue the case in the Bombay High Court.
"Bayer is committed to protecting its patents for Nexavar and will rigorously continue to defend our intellectual property rights within the Indian legal system," the company said in a statement.
It said one of the main barriers to access to medicines in developing countries such as India is the "lack of adequate healthcare services and infrastructure ensuring that drugs will effectively bring treatment to those who most need it."
Health groups welcomed the panel's ruling, saying it would check the abuse of patents and open up access to affordable versions of patented medicines.
"The decision means that the way has been paved for compulsory licenses to be issued on other drugs, now patented in India and priced out of affordable reach, to be produced by generic companies and sold at a fraction of the price," said Leena Menghaney of medical humanitarian aid organization Medecins Sans Frontieres.
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The decision might encourage Indian drug makers to explore the compulsory license route to manufacturing drugs that are critical in the treatment of HIV patients.
"We have started to switch people we treat for HIV who develop drug resistance on to newer medicines. But these are expensive, which means not everyone who needs the medicine can afford it," said Menghaney.
She said a World Health Organization-recommended drug such as Raltegravir costs nearly $1,800 per person per year, an unaffordable sum for most HIV patients in India.
"We are waiting to see if drug manufacturers will take up the challenge," Menghaney said.
Under World Trade Organization rules, governments have the right to issue compulsory licenses to overcome barriers to access to cheaper versions of a patented drug without the consent of the company that invented the drug.
Several Western pharmaceutical giants say India's 2005 Patent Act fails to guarantee the rights of investors who finance drug research and development.
Bayer said the patent panel's order weakens the international patent system and endangers pharmaceutical research.
"The limited period of marketing exclusivity made possible by patents ensures that the costs associated with the research and development of innovative medicines can be recovered," the company said.
Meanwhile, Swiss drug maker Novartis AG is awaiting a decision by the Supreme Court on the rejection of patents for its cancer drug Gleevec.
That case revolves around a different legal provision allowing India to block "evergreening" - extensions of patents based on minor changes to existing treatments. The Supreme Court's ruling on the case is expected soon.