Novartis Unveils $1.25 Billion China Investment

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"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 Work

Shanghai 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.

With Huang Zhe in Beijing.

Roberts is BusinessWeek's Asia News Editor and China bureau chief.

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