Novartis 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 percent 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 Growth
Novartis 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 percent of gross domestic product today (the U.S. by comparison spends about 16 percent) to 6 percent-7 percent 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." (continued...)
© 2009 Business Week Online under contract with MarketWatch. All rights reserved.
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