SHANGHAI—Novartis AG will expand its research and sales force in China with its own employees, its chief executive officer said in an interview Wednesday, despite a trend in the industry trend[a trend in the trend?!?]toward outsourcing in China that was highlighted by a major U.S. investment this week.
"It should be a strategy owned by Novartis and directed by Novartis," said Joe Jimenez, who became the Swiss drug maker's chief executive in a sweeping February restructuring. Mr. Jimenez reiterated the company's four-year, $1 billion plan for a six-building research campus in Shanghai that could ultimately employ 500 scientists.
As pharmaceutical makers struggle with slow-growing Western markets, tough regulators, falling prices and a lack of blockbuster drugs, China is emerging as their newest center for research, partly at the urging of local regulators. Often working in collaboration with local companies and universities to outsource basic research, global drug makers hope a combination of cheaper talent and fresh discoveries in the country might buoy their operations.
This week, Massachusetts-based pharmaceutical-research company Charles River Laboratories International Inc. moved to capitalize on the outsourcing trend, saying it would pay about $1.6 billion for one of China's largest drug-research contractors, WuXi AppTec Co[#msg-49416197].
The proposed deal—among the largest foreign buyouts of a Chinese company—is significant because Shanghai-based Wuxi AppTec is a primary beneficiary of the outsourcing boom. It does research work in collaboration with several global pharmaceutical groups, including Novartis.
Mr. Jimenez said the Charles River-AppTec looks like "a good deal," but it won't affect "at all" the limited relationship Novartis has with the Chinese company.
But Mr. Jimenez is wary about the trend. "Many of our competitors are starting to seriously outsource [research and development]," he said, adding that it is sometimes a mask for investment cuts. "We are keeping R&D spending high," he said, at around 20% of pharmaceutical sales.
AppTec's two largest customers are Merck & Co. and Pfizer Inc., which combined accounted for about 25% of its $249.9 million net revenue in 2009. Ge Li, AppTec's CEO, said at a conference last month that if his 2,000 chemists can help the pharmaceutical industry improve the success rate of drug discovery to 0.2% from the current 0.1%, it could halve its estimate of a $1.3 billion cost for developing a new drug.[LOL—this is an example of the derogatory term known as “Chinese math.”]
In recent interviews, top executives at both Merck and Pfizer have said China offers fresh ways to do research and that neither was relying solely on their AppTec relationships, while emphasizing quality standards will remain high.
"There's an opportunity to think differently about our drug discovery model," Merv Turner, Merck's global head of research, said in an interview last month. Martin Mackay, a top Pfizer research executive, said his company is "much more open to our approach to science" now than in the past. Partly due to Chinese opportunities, he said, this could be the "golden age of drug discovery."
Mr. Jimenez, in his previous post as head of the Novartis pharmaceutical division, restructured the company's $500 million-plus drug-sales business in China late last year along regional lines. Now, he said, the plan is to expand the China sales team. He also recently announced a 20% cut in employees at Novartis's U.S. headquarters.
Mr. Jimenez said China offers a promising mix of economic growth and expanding health-care requirements. He called on Beijing to deliver on plans to expand the population's access to primary care, noting that today many patients turn first to major urban hospitals.
Mr. Jimenez reiterated that investors should anticipate "mid-single digit" sales growth for Novartis globally in 2010.‹
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