(Reuters) – The Supreme Court dismissed Swiss drugmaker Novartis AG’s (NOVN.VX) attempt to win patent protection for its cancer drug Glivec, a blow to Western pharmaceutical firms targeting India to drive sales and a victory for local makers of cheap generics.

The decision sets a benchmark for intellectual property cases in India, where many patented drugs are unaffordable for most of its 1.2 billion people, and does not bode well for foreign firms engaged in ongoing disputes in India, including Pfizer Inc (PFE.N) and Roche Holding AG (ROG.VX), analysts said. It cements the role of local companies as big suppliers of inexpensive generics to India’s rapidly growing $13 billion-a-year drugs market and also across the developing world.

Among the chief beneficiaries of Monday’s Supreme Court ruling will be India’s Cipla Ltd (CIPL.NS) and Natco Pharma Ltd (NATP.NS), which already sell generic Glivec in India at around one-tenth of the price of the branded drug. “The multinational companies will have to find new ways of doing business in India,” said Deepak Malik, healthcare analyst at brokerage Emkay Global, suggesting they may consider licensing agreements with local firms to offer cheap versions of branded drugs like Glivec.

Ranjit Shahani, managing director of Novartis India Ltd (NOIN.BO), the firm’s locally listed unit, said it would be cautious about investing in India, especially over introducing new drugs, and seek patent protection before launching any new products. It will continue to refrain from research and development activities there. “The intellectual property ecosystem in India is not very encouraging,” Shahani told reporters in Mumbai after the ruling.

Healthcare activists have asked the government to make medicines cheaper in a country where many patented drugs are too costly for most people, 40 percent of whom earn less than $1.25 a day, and where patented drugs account for under 10 percent of total drug sales. “This appears to be the best outcome for patients in developing countries as fewer patents will be granted on existing medicines,” said Leena Menghaney, Medecins Sans Frontieres’ Access Campaign manager for India.

Over 16,000 patients in India use Glivec and the vast majority of those get it free of charge, Novartis says. By contrast, generic Glivec is used by more than 300,000 patients, according to industry reports.

The U.S. industry trade group Pharmaceutical Research and Manufacturers of America, or PhRMA, said the decision reflected a deteriorating environment for innovation in India. “Protecting intellectual property is fundamental to the discovery of new medicines,” the group said in a statement. “To solve the real health challenges of India’s patients, it is critically important that India promote a policy environment that supports continued research and development of new medicines.”

U.S. pharmaceutical industry analysts said the ruling was in line with lower court decisions and therefore largely expected. “For other firms, rulings like this, and just the overall environment in India for branded drugs, make it less appealing. However, you are talking about a major geography,” said Morningstar analyst Damien Conover.

The Supreme Court’s decision comes after a legal battle that began when Novartis was denied a patent for Glivec in 2006. Novartis had argued it was entitled to a patent for the amended version of Glivec because the original patented compound was never suitable for making into a pill. Developing the final chemically stable form took years of extra work and it was this effort that marked the real breakthrough in developing Glivec as a life-saving cancer medicine, the Swiss company said.

Glivec is used to treat certain forms of leukemia and gastrointestinal cancer, as well as some other rare tumors.

Shares in Novartis’ Indian unit ended 1.8 percent lower after falling as much as 6.8 percent after the verdict. Natco Pharma stock ended 5.4 percent higher after earlier gaining nearly 11 percent and Cipla gained 1.3 percent, beating the benchmark index .BSESN which ticked up 0.15 percent.

India’s domestic drugs market is the 14th-largest globally, but with annual growth of 13 to 14 percent and the world’s second-biggest population, international pharmaceutical firms say India has massive potential at a time when traditional developed markets have slowed down.

The ruling may dampen enthusiasm from foreign pharmaceutical firms in the short term, said S. Majumdar, head of law firm S. Majumdar & Co based in the eastern city of Kolkata. “They will have to get used to it and learn to live with the law,” he said.

Pfizer’s cancer drug Sutent and Roche’s hepatitis C treatment Pegasys lost their patented status in India last year, decisions the companies are fighting to have reversed. The Supreme Court’s latest ruling will make it tougher for them to win back patent protection.

“Henceforth, multinational pharma companies are likely to want that their patents are first recognized in India before launch of a patented product,” said Ameet Hariani, managing partner at Mumbai-based law firm Hariani & Co. India has refused protection for Glivec on the grounds that it is not a new medicine, but an amended version of a known compound. By contrast, the newer form of Glivec has been patented in nearly 40 countries including the United States, Russia and China.

Indian law bans firms from extending patents on their products by making slight changes to a compound, a practice known as “evergreening”. The Supreme Court said Glivec does not satisfy a patent’s “novelty” requirement, Pravin Anand, lawyer for Novartis, told reporters. Novartis can file a review petition within 90 days. Indian Trade Minister Anand Sharma called the ruling “a historic judgment” that reaffirmed legal provisions mandating the need for substantial innovation before new patents are issued on medicines.

(Additional reporting by Ben Hirschler in LONDON and Susan Kelly in CHICAGO; Editing by Daniel Magnowski, Matthew Tostevin and Richard Chang)