HYDERABAD, INDIA—Three years ago, as part of it accession to the World Trade Organization (WTO), India passed laws to protect intellectual property rights. But as a current dispute shows, India still isn’t in full compliance with WTO rules.

The dispute concerns clinical trials. Testing drugs is an expensive and time-consuming process, costing an average of $10 million and taking 5 to 7 years per product. Failure rates are high. Recognizing that the data produced from clinical trials is of great commercial value, Article 39.3 of the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) obligates signatory countries to prevent disclosure of that data and to prevent its unfair commercial use.

While India does not allow disclosure of actual data, it does allow competitor companies to rely on the substance of the data. International standards vary, but the shortest period that other countries respect a company’s test and clinical trial data is 6 years—that’s the standard in Canada. The European standard is 10 years. India is considering adopting a period of 5 years during which the data of one company may not be used, referred to, or in any way relied upon by another company to obtain marketing authorization for a drug.

As it stands today, several Indian states—including Andra Pradesh and Maharastra—grant “copy-drug” companies immediate approval to market their copied drug, often relying solely on an originator company being granted a license by a reputable regulatory body, such as the Food and Drug Administration, based on evidence from clinical trials that the company has carried out. This undoubtedly allows commercial use to be made of the data—but is it “unfair” commercial use?

To Western firms, it is obviously unfair; but most Indian companies, so used to breaking patents, disagree. Members of the Indian Drug Manufacturers’ Association (IDMA), a coalition of local copycat companies, want to maintain the status quo, and they lobby for the right to continue using other companies’ data. Firms such as Natco, based Hyderabad, enjoy making copies of drugs using this data. Natco is currently in dispute over its copy of Pfizer’s renal cancer drug Sutent. Yusuf Hamied, head of Cipla, a prominent copy-drug firm, sees his own business being squeezed out of existence in 20 years by patent protection and believes there is no hope that legitimate research and development can ever succeed in India.

India must either establish a research-based drug industry and comply with international standards or else accept the proliferation of lower-quality copy products.

But the industry is divided. Dr. Reddy’s Laboratories led the field in India by setting up a separate R&D arm, Perlecan Pharma, in 2005, and it is allied with the Swiss firm Novartis in undertaking research into new chemical entities. Ranbaxy has allied with GlaxoSmithKline and will open a new stand-alone research plant this summer. Specialist clinical research organizations, such as Quintiles and GVKBIO, are winning contracts from multinationals such as Pfizer, Johnson & Johnson, Merck, and Astra-Zeneca, and from Indian companies like Piramal, Glenmark, and Sun Pharma (although the Indian firms are limited by a shortage of qualified staff and an inadequate regulatory system).

Yet there is good reason for Indian drug makers to resist WTO compliance. Relying on another company’s test data means that generic drug companies do not have to conduct expensive trials, even the most basic ones, for their own products. A generic drug in India can be licensed simply on the assumption that it has “bioequivalence” with the branded drug—in other words, that it is an exact copy and works in the same way (or has the same “bioavailability”). This situation presents a real danger to consumers. The World Health Organization actually withdrew its approvals of 18 Indian-made HIV drugs in 2004, after manufacturers could not produce the proof of original clinical trials.

Without generating those trials, there is an increased chance that drugs made in India could be lower-quality products contaminated with dangerous compounds (such as heavy metals and bacteria). It is unlikely that such flaws will be detected in the manufacturing process, because India suffers from inadequate factory inspections and a severe lack of laboratories capable of testing drug quality (indeed, it has only seven such labs in the whole country, according to a 2003 survey carried out by the Mashelkar Committee on behalf of India’s Department of Health). This is especially bad news for India’s sick patients. As foreign companies shy away from the country, they will spend less money developing drugs to combat the diseases that affect Indians specifically, such as Leishmaniasis and certain genetic disorders.

The stumbling block for fixing this problem is purely political. Individual Indian states license and regulate drugs, and they are loath to relinquish that power to the central government. The result is that, even though successive reform commissions have demanded that a national drug regulatory authority be established, no government has yet grasped the nettle. Draft legislative changes to the Drugs and Cosmetics Act of 1940, composed by the Ministry for Health and Family Welfare in 2005 and redrafted in 2007, have yet to be presented to the Indian parliament.

Indian officials are aware that their country may be in breach of WTO rules. An inter-ministerial committee has investigated the issue. Its “Report on Steps to be taken by Government of India in the context of Data Protection Provisions of Article 39.3 of the TRIPS Agreement” was released in May 2007. But the report was not conclusive, and the issue is still being debated. To the U.S. Trade Representative’s frustration, the committee has achieved little. Like the rest of the Indian government, it was uncertain about whether it should move forward and reward innovators properly, or whether it should step backward and reward those who copy products.

New Delhi must either persuade its states to help establish a research-based drug industry, and to comply with international quality and regulatory standards, or else it must accept the proliferation of lower-quality copy products. If the government chooses the latter, then it is patients—both Indian and foreign—who will suffer the most.

Roger Bate is a resident fellow at the American Enterprise Institute.

Image by Getty/Darren Wamboldt.