Shares in AstraZeneca rose sharply after the pharmaceuticals group settled a legal battle against India's largest generic drugs maker over the rights to produce one of the world's most valuable medicines.

Under the terms of the out-of-court deal Ranbaxy Laboratories will scrap its plans to manufacture a cheap unauthorised copy of Nexium, the ulcer pill developed by AstraZeneca, in the United States. Instead, Ranbaxy will start producing a generic version of the blockbuster drug with AstraZeneca's blessing six years from now, when the earliest patents on Nexium expire.

Nexium, the second most lucrative prescription drug in the world, accounted for sales of $5.2 billion (£2.6 billion) last year, trailing only Pfizer's Lipitor, the cholesterol treatment that achieved revenues of about £6 billion, the patents for which have also been contested by Ranbaxy.

AstraZeneca will also outsource the production of part of its US supplies of Nexium to Ranbaxy from May 2010. The Indian group will manufacture supplies of the active ingredient in the drug, esomeprazole magnesium, from May 2009.

AstraZeneca said the deal would give it greater control over the transition its original drugs make into the generics markets and was in line with its strategy to outsource the manufacture of active pharmaceutical ingredients entirely by 2018.

Investors in both companies cheered a deal that analysts said sharply reduced the uncertainty surrounding a large chunk of AstraZeneca's revenues. Shares in the FTSE 100 group closed 7.93 per cent higher, at 2138 in late afternoon trading. Ranbaxy, which has been granted the right to produce a copy of Nexium on an exclusive basis from 2014 to 2019, gained 8.6 per cent on the Bombay Stock Exchange.

The relatively short life of patents is one of the greatest banes of companies that invent new drugs. In the US a patent confers protection for 20 years, a significant portion of which may be spent in clinical trials, and when it expires revenues tumble.

Generic drugs typically sell at a 97 per cent discount to their patented templates. Countries with ageing populations, such as Japan, where generics presently account for just 5 per cent of the market, are regarded as likely to encourage the cheap copies to reduce healthcare costs.

Drugs worth between $45 billion and $50 billion are set to fall out of patent in the US alone over the next two years, according to Motilal Oswal, the Indian stockbroker, and generics makers, many based in India and China, are pushing to open the floodgates to cheaper treatments.

AstraZeneca said its settlement with Ranbaxy would not effect the other litigation it is involved in – battles that the Anglo Swedish group's chief executive David Brennan yesterday complained are diverting time, energy and money to the courtroom and away from the laboratory.

The most important case involves Seroquel, the schizophrenia drug that was worth $4 billion in sales last year. The US patent for the medicine has been challenged by Teva/IVAX, another large Indian generics group. AstraZeneca recently filed a request for a summary judgement in the case.

Yesterday's deal settled a three year old patent infringement litigation filed by AstraZeneca following Ranbaxy's submission to the United States Food & Drug Administration for marketing approval of a low cost version of Nexium.

The USFDA had recently granted an approval to Ranbaxy, subject to patent expiry.

Ranbaxy also secured the right to distribute authorised generic versions of two other AstraZeneca products -- the heart drug Plendil, or felodipine, and the 40 mg version of ulcer pill Prilosec, or omeprazole.

Under the settlement agreement, Ranbaxy conceded that all six patents asserted by AstraZeneca in the patent litigation are valid and enforceable

Mr Brennan said the deal gave stability and would allow the company to continue investing substantially in its pipeline of new medicines.

"We continue to have confidence in the strength of our patents and will vigorously defend our intellectual property," he said.

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