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Novartis Unveils $1.25 Billion China Investment

Novartis (NVS) is betting big on China. On Nov. 3, the Swiss pharmaceutical giant announced it plans to invest $1.25 billion in a pair of Chinese R&D centers over the next five years. Novartis will put $250 million into a new R&D center and manufacturing facility in Changshu, a city near Shanghai, and another $1 billion to add 1,000 researchers at an existing center in Shanghai, opened two years ago, that now employs 160 people. That investment will make Shanghai one of its three top global research bases, along with those in Basel, Switzerland, and Cambridge, Mass. It's all part of Novartis' push to tap one of the world's fastest-growing major health-care markets, says Chairman and CEO Daniel Vasella, in Shanghai to announce the big China push. The world's third-largest pharmaceutical company, with $41.5 billion in revenues and income of $8.2 billion last year, has invested more than $300 million in China and has more than 4,100 employees in the country working on vaccines, generic drugs, and animal health. Sales in China have been growing at 30% annually, making it one of Novartis' top 10 markets. "It is gaining in the ranks year after year," says Vasella in an interview on the 39th floor of the Shanghai J.W. Marriott overlooking the offices of the city government, with which Novartis signed the investment agreement. In five to seven years, he adds, "China will be among the top three markets." (The company declines to break out China revenues and profits.) Double-Digit GrowthNovartis is attracted by health-care reform, Chinese style. Beijing earlier this year outlined plans for a massive expansion of its health-care coverage. On Apr. 7, the State Council announced China will spend $124 billion over the next three years widening insurance coverage to include many more of China's hundreds of millions of rural residents, as well as building thousands of community health-care centers to provide a range of basic services, including expanded access to drugs and vaccinations. With China's health-care industry already growing by double digits, Beijing expects to lift expenditure on health care from a low 4.7% of gross domestic product today (the U.S. by comparison spends about 16%) to 6%-7% in the next few years. It's no coincidence that the big Novartis investment comes at the same time lawmakers in Washington are debating health-care reform in the U.S., including ways to reduce American spending on drugs. Unlike the U.S., China's health-care system is in growth mode, Vasella says, and that will provide huge opportunities for pharmaceutical companies like Novartis. "Look at the big picture: The U.S. is overly indebted, has invested a high percentage in health care, and has an aging population, so the health bill will increase. So a counter movement will be cost containment," explains Vasella. But "China has a dynamically growing economy, and they have lots of money and no debt. And then you have the willingness of the government to cover many more of its citizens. There will be growth." Also driving Chinese expansion is an explosion of health problems related to a longer life expectancy—81 years now in Shanghai, Vasella points out—plus a shift to chronic diseases like respiratory illnesses, cancer, and diabetes due to China's rising standards combined with new environmental and pollution problems. "There is a shift from infectious disease to chronic disease with changes in lifestyles," Vasella says, noting that China today has 40 million diabetic patients and is adding 1.2 million new patients every year. While the huge potential of China's health-care market (and declining business and profits in mature markets with aging populations like those in the U.S. and Europe) helped persuade Novartis to choose Shanghai, Novartis was also encouraged by the government's willingness to cooperate on issues important to the company. For instance, Shanghai has promised to simplify the process of importing and exporting the drug substances necessary for research. And while China still has major problems with knockoff products, including rampant pharmaceutical piracy that has long bedeviled companies like Pfizer (PFE), Chinese officials are becoming more willing to quickly crack down, the Novartis CEO says. "You point out the problem, and they go after it," says Vasella. "China and Shanghai have made tremendous progress in intellectual-property protection." Good Place to WorkShanghai makes sense for Novartis because of China's huge population of affordable scientists, Vasella says, many of whom like the living and working environment of the city. Many Chinese scientists working at the company's Cambridge and Basel centers have made the decision to relocate back to China in part to take advantage of Shanghai's good schools, housing, and restaurants, he adds. "We wouldn't invest here unless there is a talent base we can really tap—unless we have the scientists we can attract and retain," says Vasella. "And if you want to transfer people to Timbuktu—people say: 'Where is that?' Shanghai has a booming environment and the quality of life has improved a lot here." The $1 billion investment further solidifies Shanghai's status as China's pharmaceutical R&D hub. Five years ago, Swiss competitor Roche opened its R&D center in Shanghai's Zhangjiang High-Tech Park. Since then, scores of foreign-invested pharma companies including Johnson & Johnson (JNJ) and Pfizer have opened centers. In 2006, AstraZeneca (AZN) announced a $100 million investment and in February this year Bayer Healthcare unveiled plans for a $148 million center. Novartis has had a "good performance in recent years," notes Gordon Liu, an economist and executive director of the Health Economics & Management Institute at Peking University. "But the market competition is fierce and the market environment itself in China is fast-changing," he warns.
Roberts is Bloomberg Businessweek's Asia News Editor and China bureau chief. Follow him on Twitter @dtiffroberts.

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