Biotech Values

[jbog]

Novartis to Establish
Drug R&D Center in China
By NICHOLAS ZAMISKA
November 6, 2006

SHANGHAI -- Novartis AG plans to announce today that it will build a pharmaceutical research-and-development center in China, as the global drug industry strives to harness the country's talent pool to replenish its product pipeline at lower cost, while also hoping to tap the Chinese market.

The Swiss drug giant will invest about $100 million, the same amount that AstraZeneca PLC of Britain announced in May it would invest in R&D in China.

The pharmaceuticals division of Novartis spent $3.97 billion on R&D last year. While that dwarfs the size of the company's coming China investment, the planned center -- which Novartis says will involve at least 400 scientists -- shows one way the industry is responding to a pair of long-term problems: Blockbuster products are going off patent; and the cost of developing drugs is soaring.

The investment also signals China's transformation from the world's factory floor to a venue for projects higher up the value chain, including sophisticated laboratory services. The R&D facility will help position China as an emerging competitor to India, long the most-popular destination for outsourcing chemistry research and drug development. "China is going to be the next India.

Estimates of the cost to develop and market a new drug run as high as $1.2 billion, much of which goes to the costly process of slowly sifting through thousands of compounds in hopes of finding one that works against the disease being targeted. In the U.S., for instance, the overall cost of a chemist to do drug development work can be around $250,000 a year. In China, chemists with similar educational backgrounds sometimes cost as little as $25,000 a year.

So a host of multinational pharmaceutical companies have begun outsourcing drug research to China. The largest laboratory that a major multinational operates in China -- run by Roche Holding AG -- has about 60 scientists. Roche's lab, which opened in 2004 with an emphasis on designing compounds for cancer, pays scientists up to about 200,000 yuan ($25,400) a year.

If Chinese chemists are cheaper to hire, some industry analysts note that these researchers need training to work for global companies. Roche has been sending project leaders to its research centers in Switzerland and California to work alongside other scientists.

"Psychologically, [the Chinese researchers] are the best people in China. They are the best guys from the universities when they came up," Chen Li, chief scientific officer at Roche's Shanghai laboratory, said recently. "The challenge for them is to see the global standard," Dr. Chen said.

Building research centers in China not only lowers costs, but also helps foreign companies establish relationships with Chinese physicians and government officials -- which can be pivotal when drug makers try to launch products and seek regulatory approval.

Novartis says its researchers will begin work in a temporary facility in May while construction of its 38,000-square-meter center is slated to begin in July.

Multinational drug companies are out to capture a slice of China's booming pharmaceutical market, which grew 20% to $11.7 billion last year, the third consecutive year of 20% growth or higher, according to IMS Health, a drug marketing-research firm in Fairfield, Conn. China will become the world's seventh-largest pharmaceutical market by 2009, according to IMS.

"The whole biotech pharmaceutical effort here could become the world's leading research effort within a decade," says Mark C. Fishman, president of the Novartis Institutes for BioMedical Research. "The reason we came here is primarily for talent," Dr. Fishman adds, playing down the cost savings from lower Chinese salaries.