Novartis in China: East Meets West in R&D

Lower costs, top talent, and access to the huge mainland market drive the Swiss drugmaker's plans for a $100 million research center in Shanghai

by Kerry Capell

On Nov. 6, Swiss drugmaker Novartis (NVS) unveiled plans to build a $100 million research and development center in Shanghai. The new facility will focus initially on the infectious causes of cancer endemic in China and Asia. It will also work to combine Western technology and drug-discovery approaches with those of traditional Chinese medicine.

This is Novartis' eighth and largest investment in China—underscoring how important the surging Asian giant is becoming for drugmakers. It's also the latest sign that China's efforts to transform itself from a low-cost manufacturing base into a global center of innovation are starting to reap dividends. With an estimated 1,000 small and midsize biotech firms, China has now seen the creation of 20 biotech parks around the country and continues to increase the government funds allocated to R&D.

"The Chinese government has made a concerted effort to promote life sciences," says Daniel Vasella, chairman and CEO of Novartis. "And the caliber of the science is extremely good and improving all the time."

Bountiful Market

China's emergence as a source of inexpensive yet topflight scientific talent isn't the only attraction. With a population of more than 1.3 billion, it's also one of the world's largest and fastest-growing markets for prescription drugs. China's domestic pharmaceutical market has grown more than 20% a year for the last three years, according to IMS Health, a market research firm in Fairfield, Conn. So although the country is not now among Novartis' top 10 markets, it is expected to be by 2010. By that time, China's annual drug sales are expected to nearly double, to $25 billion, according to Boston Consultancy, an independent consulting group.

As the Chinese become more affluent, spending on prescription drugs is set to rise. So too will the incidence of chronic disease, however. Increased wealth often leads to lifestyle changes—for instance, less healthy diets and reduced exercise—and a consequent rise in chronic illnesses such as diabetes, cancer, and heart disease. By 2025, China will have 38 million diabetes patients, almost double the number projected in the U.S., and about 13% of the global diabetic population, according to PricewaterhouseCoopers.

No wonder that in recent years Western pharmaceutical players have rushed to gain a foothold in China. All the major drugmakers have some sort of marketing or manufacturing presence in the country. One immediate advantage is lower costs. While the average expense of bringing a new drug to market in the U.S. is estimated to be $800 million, in China it's just $6.5 million, says PricewaterhouseCoopers. Moreover, the average salaries for Chinese scientists are just one-tenth those of their American counterparts.

Drugmakers Put Down Stakes

Lately, China's appeal to foreign investors is about much more than just cheap labor. The country's entry into the World Trade Organization in 2001 and the government's promise to expand intellectual-property rights have helped reassure foreign investors. So, too, has the establishment of a regulatory system similar to the U.S. Food & Drug Administration. China's regulator is called the State Food & Drug Administration (SFDA).

These changes have led Big Pharma to move beyond manufacturing into conducting clinical trials in China, where they cost roughly two-thirds less than in the U.S. Novartis, which began conducting clinical evaluations in China several years ago, now has 4,700 Chinese patients enrolled in a dozen trials.

It's only recently that foreign drugmakers have felt comfortable enough to expand into R&D. In May, Britain's AstraZeneca (AZN) announced its own $100 million R&D investment in the country. Switzerland's Roche also has an R&D center on the outskirts of Shanghai, and