04/03/2013 03:58 pm ET Updated Jun 03, 2013

Strong Medicine: Why India's Rejection of Drug Monopoly is a Lesson for America

The recent ruling by the Indian Supreme Court - which rejected the renewal of a patent for the leukemia drug Gleevec (manufactured by Novartis), and which will allow local drug makers to continue providing a low-cost generic version - is being met by anger on the part of big pharma, which is predicting doom for India's healthcare system, accusing the country of anti-capitalism, and threatening a freeze on new drug development for the region.

They are wrong on all counts.

Indian Healthcare vs. US Healthcare
India is actually at the forefront of providing affordable medicine to its citizens, which is a vast improvement over the healthcare system in the US. In this case, while Gleevec can cost a patient $70,000 a year in the US, its generic version in India costs only $2,500. For perspective, the per capita income in India is around $1,000.

India is a highly populated country with crippling poverty and highly uneven distribution of wealth. As a result, the majority of people cannot afford drugs like Gleevec. Novartis and other big pharmaceutical companies tout the immense benefits of their drugs to people's lives but what good are those benefits if the closest that most Indians can come to the drugs is to see them on pharmacy shelves? Allowing generic medicine in India is not a question of legal philosophy but a matter of necessity and survival.

It is also smart, for it rejects the philosophy behind our own dysfunctional healthcare system. The American system owes most of its problems to the skyrocketing cost of healthcare, including drugs, which is the result of business monopolies protected by ironclad patents and lobbying. Republicans and businesses criticize Obamacare for being anti-capitalist in spirit, yet Obamacare is necessary precisely because of these monopolies. In the drug arena specifically, big pharma's legal stranglehold on the market stifles low-cost alternatives and forces Americans to either pay astronomical insurance premiums or forego treatment altogether.

That is hardly a model that any country in the world should strive to emulate.

The Capitalism of Patents
Another relevant consideration is that this ruling does not reject the notion of drug patents but prevents companies from simply making small tweaks to existing drugs to extend their patents into perpetuity. Imagine if Apple's patent on the pinch-and-zoom motion (which the US Patent Office has so far rejected) lasted forever, making it cost-prohibitive for any company to utilize that technology as long as humanity survives. Sounds extreme, doesn't it? The gambit by Western drug companies to make minor modifications to their existing drugs as a way to keep renewing their patents and exploiting them forever is pretty much the same thing.

No one is disputing that the development of new drugs is expensive or that drug companies deserve to make money from their labor. However, these same companies get a substantial tax credit (20%) for research and experimentation - even though some of those expenditures are actually for marketing and advertising conducted under the guise of "post-approval trials", and once that R&D is recouped, the actual cost of manufacturing each pill goes down dramatically.

Gleevec, for instance, was approved by the FDA more than a decade ago and, according to the company's filings, has generated more than $4 billion in sales for Novartis every year since 2010 alone. Given that the average cost of developing a new drug is $1.3 billion, in all probability the company recouped its money years ago and is now making a killing on the drug.

My point is that the pharmaceutical industry, at least after a period, can afford to lower its prices for life-saving drugs if it wants to.

Also for Novartis, which makes most of its money from the US and Europe and apparently subsidizes 95% of Gleevec sales in India, going on the warpath over the Supreme Court ruling is petty and illogical. If the company really wants to compete in the Indian market, the sensible play would be to lower its prices to a level that is sustainable for that market - instead of charging unaffordable rates and then having to subsidize the drugs because people cannot afford them!

Future R&D
Finally, Novartis and other drug companies do not develop drugs exclusively for Indians. Most major drugs, including Gleevec, are developed for the highly lucrative Western markets and are then sold globally to expand profits.

R&D will not die because of lower prices in emerging markets any more than drug companies will not sell to those markets if they cannot sell at inflated prices. If Novartis can sell one more pill profitably in India, even at a lower profit margin than in the US, it will do so. The company may throw a tantrum for a while but you can bet that it will not be able to ignore India's billion-plus consumer base indefinitely.

Pharmaceutical innovations are important but medicine is useless if it is not affordable by the patient. India's pragmatic solution of disallowing the indefinite renewal of drug patents is not anti-capitalist but a reasonable model that balances the needs of drug companies and patients. It also makes the point that blind adherence to strict capitalist principles and profit maximization in the face of human suffering is not justified or acceptable in a civilized society.

The US healthcare system could learn something from this.

SANJAY SANGHOEE has worked at leading investment banks Lazard Freres and Dresdner Kleinwort Wasserstein as well as at a multi-billion dollar hedge fund. He has an MBA from Columbia Business School and is the author of the financial thriller "Merger" (available below) which Chicago Tribune called "Timely, Gripping, and Original". Please follow him on Twitter and Facebook (Candid Politics & Business Blogs).