AstraZeneca has settled a legal battle with 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 plans to market a cheap, unauthorised copy of Nexium, the ulcer pill developed by AstraZeneca, in the United States.

Instead, Ranbaxy will start to produce a generic version of the drug - with AstraZeneca's blessing - in six years' time, when patents on Nexium start to expire. The settlement pushed shares in Astra up 8 per cent to £21.41.

Nexium, the second-most lucrative prescription drug in the world, accounted for sales of $5.2 billion (£2.6 billion) last year, trailing only Lipitor, Pfizer's cholesterol treatment, which 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 that the deal would give it greater control over the transition of its original drugs 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 welcomed the deal, which analysts said sharply reduced the uncertainty surrounding a large proportion of AstraZeneca's revenues.

In America, a patent confers protection for 20 years, a significant portion of which may be spent in clinical trials. When the patent expires, revenues tumble because generic drugs often sell at a 97 per cent discount to their patented templates.

AstraZeneca said that the settlement would not affect other litigation in which it is involved. The most important involves Seroquel, the schizophrenia drug that produced sales of $4 billion last year. The US patent for the medicine has been challenged by the generics group Teva/IVAX.

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