Novartis fought a seven-year legal battle to gain patent protection for an updated version of its blockbuster cancer drug Glivec, arguing that the compound was a significant improvement because it is more easily absorbed by the body.
In a ruling that went to the heart of patent law in a country known as the "pharmacy to the world", the top court ruled that the compound "did not satisfy the test of novelty or inventiveness" required by Indian law.
This upheld the view of India's patent office which refused to grant protection on the grounds the amended form of Glivec was not vastly different from the earlier version.
India's law restricts pharmaceutical companies from seeking fresh patents for making only small modifications -- an industry practice known as "evergreening" -- and the ruling enables generic drugmakers to continue copying Glivec.
The case is the most high-profile of several battles being waged in India and was seen as having far-reaching implications in defining the extent of patent protection for multinational drug firms operating in the lucrative market.
Lawyer Anand Grover, representing the Cancer Patients Aid Association which opposed Novartis in the patent case, said he was "ecstatic with the ruling".
"This will go a long way in providing affordable medicine for the poor," Grover said outside the courtroom in New Delhi.
India's huge generic drug industry has been a major supplier of copycat medicines to treat diseases such as cancer, TB and AIDS for those who cannot afford expensive branded versions.
Pratibha Singh, a lawyer for Indian generics giant Cipla who was also outside the court, told AFP the "the ruling will have implications not just for India but also for other Asian, African and Latin American countries".
She added: "The ruling also makes it clear you cannot patent a drug by just making some minor modifications -- the key Section 3d of the patent law has been upheld by the court."
Novartis has threatened to halt supplies of new medicines to India if the court does not rule in its favour, London's Financial Times reported on Sunday.
"If the situation stays as now, all improvements on an original compound are not protectable and such drugs would probably not be rolled out in India. Why would we?" executive Paul Herrling, who is leading the company's handling of the case, told the newspaper.
Leena Menghaney, a lawyer with medical charity Medecins Sans Frontieres (MSF), had warned that a legal victory for Novartis would set a "dangerous precedent" and could "seriously curb access" to generic drugs.
MSF says Glivec -- often hailed as a "silver bullet" for its breakthrough in treating a deadly form of leukaemia -- costs $4,000 a month in its branded form while the generic version is available in India for around $73.
But Novartis and other global drugmakers say India's generics industry inhibits pharmaceutical innovation and reduces the commercial incentives to produce cutting-edge medicines.
The verdict could see other global drug firms restrict the sale of their branded medicines in India, a pharmaceutical market that is set to touch $74 billion in sales by 2020 from $11 billion in 2011.
India's copycat drugs industry, which supplies one-fifth of the world's generics, grew into a powerhouse because the country did not issue drug patents until 2005 when it began complying with World Trade Organization rules.
In another sign of competition between multinational pharmaceutical companies and Indian generic companies, local firm Glenmark has launched a cheaper form of US-based Merck's anti-diabetes medicine Januvia, the Times of India said Monday.
While up to now the turf war between the multinationals and Indian firms has been largely confined to life-saving drugs for acute conditions such as cancer, analysts say it is now spilling over to treatments for chronic illnesses such as diabetes.