The Indian government was upset at Bayer and Onyx for not supplying Nexavar (sorafenib) in India at a "reasonably affordable price." India was also miffed that Nexavar was imported into India, rather than being manufactured there. Instead of just stewing, India took action. The government broke Nexavar's patent with a "compulsory license" and gave a new license to Natco Pharma, an Indian company, to manufacture and market a generic version of Nexavar in India until Bayer's patent expires in 2021.
What's really going on here?
Many governments have monopsony power when buying pharmaceuticals--that is, monopoly power on the buyer's side--and they use this power to get good deals. These governments are, in effect, saying that if they can't buy a medicine cheaply, their citizens won't have access to it. This ultimatum has two aspects. One, if the price is "too high," the pharmaceutical company won't sell a single bottle in that country. And two, if the government feels its citizens really need that medicine, it will break the drug company's patent. This threatened violation of intellectual property rights can bring a seemingly powerful drug company into quick compliance. When faced with a choice between making nothing or something, most drug companies choose the latter.
It is in everyone's interest to give drug companies an adequate incentive to invest in new drugs. To do so, drug companies must be able to price their drugs well above production costs to a large segment of customers to cover the expense of R&D. However, each individual government's narrow self-interest is to demand a low price on drugs--closer to the manufacturing cost--and let people in other countries pay the high prices that generate the return on R&D investments. Each government, in other words, has an incentive to be a free rider. And that's what many governments, like India, are doing.
Free riders are a problem with any "public good." We all desire to have a public good created but, as soon as it is, we have an incentive to become a free rider because our payments for that good are delinked from our enjoyment of it. Why pay if we get it anyway? National defense is a classic case. If I stop paying for the U.S. military, I doubt American soil will be any less protected. If everyone stops paying for the military, we will cease to have any national defense, at least in the usual sense.
The field of economics deals with ways to avoid the free rider problem. The patent system is one solution. India has acted selfishly and reduced the prospect of future returns to R&D and has thereby helped dissuade pharmaceutical companies from developing new drugs.
[Some of this posting is taken from The Concise Encyclopedia of Economics, Pharmaceuticals: Economics and Regulation.]