Patent challenges filed in the U.S.:17
WON
• 2001 Eli Lilly over anti-depressant Prozac
• 2002 Pfizer over blood pressure drug Norvasc
LOST
• 2002 Bayer over antibiotic Cipro
• Astra Zeneca over ulcer drug Prilosec

Last December, those lawyers earned their keep. At 2:30 in the morning in Hyderabad, chief executive G.V. Prasad got word that Dr. Reddy's had defeated Pfizer Inc., the biggest drug company in the world, in a New Jersey courtroom, opening up a lucrative market for one of its generic products. Cameron Reid, the firm's U.S. head, told Prasad over the phone, "We're in business."

A glass of champagne later, Prasad could savour the achievement. Indian pharmaceutical firms like Dr. Reddy's are some of the world's craftiest and cheapest makers of generic drugs, thanks to a relaxed patent regime at home that encouraged them to hone their skills at reverse engineering.
But when it came to approaching a thoroughly regulated market like the U.S., with its thicket of government filings and legal manoeuvring, they were in the dark. Finding a way in was critical: Over the next five years, patents worth some $60 billion in sales will expire, opening an unprecedented opportunity for generic drug firms.

Increasingly, companies like Dr. Reddy's and Ranbaxy Laboratories, India's biggest drug company, are cracking the puzzle. Their strategy: combine clever chemistry with aggressive litigation. Sales in the U.S. for both firms now roughly equal or even surpass those from their home base of India. In the 2001 financial year, Dr. Reddy's U.S. revenues outstripped those from India for the first time. Meanwhile, nearly 40% of Ranbaxy's sales last year came from the U.S.

It hasn't been easy. Dr. Reddy's went through years of investment with no revenue, court battles against opponents many times its size and spiralling legal costs to get a toehold in the U.S. "This is the only way the business is played in the U.S.," says Prasad. Suing and being sued are "a necessary cost of doing business."

December's court ruling paved the way for Dr. Reddy's to sell a drug that's nearly identical to Pfizer's blockbuster blood-pressure drug Norvasc in the U.S., worth $3.8 billion in annual sales. It also marks the firm's entry into the potentially lucrative "branded generic" segment of the U.S. market, where competition is scarcer and margins higher.
Pfizer is appealing against the ruling. Its chairman, Henry McKinnell, decried the suit and others like it as "a fool's errand" that undermines research efforts and wastes money on lawyers.

Being on the losing side of one of these battles is an unusual position for Pfizer. For more than a decade, huge branded-drug makers have prolonged their exclusive hold over big-selling drugs by filing a range of additional patents covering everything from a drug's colour to its coating. To have any chance of launching a competing pill, generics companies either had to wait for the patents to expire or tip-toe through these obstacles in federal court, often with under-funded legal teams. Dr. Reddy's, for example, started out with its U.S. headquarters in Reid's basement and for years used a skeleton staff to run its operations.

But generics are no longer timid. Now, instead of waiting for the branded companies to file more supporting patents on their ageing blockbusters, lawyers for the generic-drug makers are aggressively combing through patents of big-selling drugs--even those seemingly protected for years to come--in search of anomalies or loopholes to exploit. Then they're challenging them in court.
The legal manoeuvring and courtroom sparring couldn't be further from the world in which Prasad's father-in-law, a legendary figure in India's free-wheeling drug industry, founded Dr. Reddy's in 1984. Born to an affluent farmer in a small village surrounded by fields of turmeric, K. Anji Reddy, now 63, built the firm into the first Indian drug company to list on the New York Stock Exchange and to license an original medicinal molecule.

ENCOURAGED TO COPY
In the early 1970s, then-Prime Minister Indira Gandhi invited the wrath of major pharmaceutical companies by refusing to recognize product patents on drugs. The government encouraged companies to copy medicines patented abroad and sell them cheaply to Indian consumers. Dr. Reddy's became one of hundreds of companies that eventually knocked off everything from antibiotic Augmentin to anti-ulcer drug Zantac.

But Reddy also used his scientific acumen and India's low costs to turn the company into a leading exporter of bulk drugs, the basic ingredients for pills. At the same time, he never lost sight of his ambition to produce his own innovative medicines.

Something closer to home was also pushing Dr. Reddy's to innovate. Reddy and Prasad, along with other top Indian pharmaceutical executives, knew that their home market wouldn't always provide a haven from intellectual-property restrictions. Big drug companies complained to the Indian government, accusing the Indian companies of piracy. Under pressure from those firms and their countries, India has now agreed to uphold international drug patents from 2005. And that means Indian firms will no longer be able to duplicate the latest Western medicines, cutting off their main source of new products.

As a result, a handful of prominent Indian firms like Dr. Reddy's, Ranbaxy, Wockhardt, and Lupin Laboratories realized early on that they had to seek out new opportunities, such as doing their own drug-discovery research and carrying out clinical trials. In the mid-1990s, they started investing in research labs in the hopes of eventually concocting drugs worthy of patent protection in markets like the U.S.

Their biggest opportunity, however, was clear-cut: Go West. Halfway around the world, the way generic drugs arrive in the American market was changing to the potential advantage of Indian companies. In 1997, the U.S. Food and Drug Administration, the government body that regulates the pharmaceutical industry, created a strong incentive for generics companies to fight branded drug makers in court. In a bid to generate competition, the FDA granted the first company to sue a branded-drug maker and prevail in court the exclusive right to sell the generic version of the drug for six months. That exclusivity is a temporary bonanza. U.S.-based Barr Laboratories, for example, booked $366 million in revenues in six months of exclusive sales of a generic version of Eli Lilly's anti-depressant Prozac--an amount equal to almost three-quarters of the company's entire sales the previous year.

Dr. Reddy's first taste of success came with the same drug: In 2001, it won the right to market a special 40-milligram dose for six months after a successful court case against Eli Lilly. The case cost nearly $1 million but the firm raked in almost $70 million in a six-month period--nearly all of it profits, according to the firm's executives. With that kind of upside, generic companies are willing to gamble on litigation that can cost anywhere from $1 million-$4 million, depending on the length of the trial.

The showdown with Pfizer, meanwhile, began when Reid, Dr. Reddy's U.S. chief, and his staff started examining all the knock-off drugs the company sold in India, as well as drugs whose patents were set to expire in the U.S. One that drew their attention was Norvasc. At first, Dr. Reddy's New Jersey-based lawyers told him the two core patents would be difficult to breach. Then he noticed a wrinkle in one: The patent's term had been extended several years by a federal law compensating companies for drugs that endured especially long reviews at the FDA. Reid had his lawyers photocopy the law giving the extensions.

Paging through them, Reid and his staff found their loophole: Congress hadn't actually extended the original patents, just the exclusive rights to sell the drugs themselves. It was a crucial distinction, and one Reid knew Dr. Reddy's reverse-engineering expertise could exploit. As with many drugs, Norvasc's original patent protected more than the chemical structure of Norvasc itself; it also ruled out the use of a host of sister compounds, or salts, that are nearly identical and work equally well. But the patent extension didn't protect these versions.

Reid asked Dr. Reddy's scientists back in India if they could concoct a workable copy of Norvasc using sister salts. The scientists assured him that a Norvasc sister--one Pfizer itself had used in extensive testing--could be made. With that, Reid filed with the FDA to sell Norvasc's sister and was sued by Pfizer, which lost the case in December in the U.S. District Court in New Jersey.

Hungry for similar successes, generics makers last year filed 83 patent challenges, up from just seven in 1992. Dr. Reddy's itself has filed 17 patent challenges so far.
For some Indian drug companies, Dr. Reddy's litigious approach is too aggressive--and too risky. In addition to its two high-profile victories, the firm has suffered some expensive defeats. Bombay-based Cipla, which made headlines in 2001 with an offer to supply anti-HIV drugs at rock-bottom prices, says it isn't interested in selling finished pills in the U.S. Instead, it's content to supply raw ingredients to other generic companies.

Ranbaxy, on the other hand, also has weathered bruising court battles to tap the U.S. market. The company's best-selling drug--representing 40% of its American turnover--is a generic version of the antibiotic Ceftin. Getting that drug to market involved a lengthy lawsuit against GlaxoSmithKline, which challenged the effectiveness of Ranbaxy's generic version.

During the court case, Glaxo hired one of the world's leading chemists to testify on its behalf. Ranbaxy, in turn, had to hire its own U.S. expert. The costs of such legal tussles can't really be controlled, says Dipak Chattaraj, the head of the company's U.S. operations. "If they decide to depose 20 people [from India], you'd better present those 20 people," he says. Ranbaxy won a favourable verdict in federal court, which then passed it back down it to a lower court, where litigation continues (as do the legal fees).

Meanwhile, Dr. Reddy's is looking to translate its legal win against Pfizer into actual sales. The firm expects to receive final FDA approval to sell Norvasc's sister soon, but Reid won't say when he'll start selling. The launch will be part of Dr. Reddy's--and the entire generics industry's--push into the market for "branded generics." Dr. Reddy's has three more such specialty generics on the way. Because these drugs differ slightly from their existing counterparts, they in effect become their own brand--and often aren't priced much lower than the drugs of major pharmaceutical firms. That's exactly the idea: Generics makers like Dr. Reddy's are increasingly tailoring their legal stratagems to limit competition from other generic makers in order to increase their own profits.

It's also the complete opposite of what's happening at home. In India's fragmented pharmaceutical universe, thousands of drug manufacturers--most legitimate, others not--compete to provide medicines, driving down prices and profit margins. For one of the products Dr. Reddy's markets in India, for example, there are 120 competitors ("At that stage, you might as well give it away for free," jokes Raghu Cidambi, a technical adviser to Dr. Reddy's).

So back at its Hyderabad headquarters, Dr. Reddy's is training its employees to focus on where the profits are: the U.S. market. The firm recruited a local lawyer who, in addition to arguing cases for the state supreme court, had a passion for American patent law. He's conducting three-month long courses for the company's scientists who are volunteering to give up their weekends in order to learn about U.S. patents.

The hope is that as knowledge of how patents work percolates through the company, its scientists will be better equipped to challenge them--or, indeed, to file their own. Recently, Dr. Reddy's has learned the hit-and-miss nature of original research the hard way: While it has licensed several innovative molecules to global firms like Novartis for further tests, so far none have made it past the final phase of clinical testing.

In the U.S., meanwhile, the court cases will continue. "It's a numbers game--if you do enough of them you'll win them," says Reid. "We've learned the game well."