Novartis is making a multipronged push into China

Ever since China loosened its trade restrictions with the West, companies have jumped head-first into the Communist-run state, hoping to capitalize on selling products to the planet's most populous nation. Pharmaceutical companies have been no different, but at a somewhat more subdued rate because China's health-care system has been less developed.

Now, though, just when reform is looming for the U.S. health-care system, which could potentially slow pharmaceutical sales (at least in the short term), China is starting to push health care into growth mode. And Swiss-based Novartis (NVS) is one drugmaker that intends to capitalize on it.

Novartis announced on Tuesday that it will invest $1 billion over the next five years, increasing R&D in China. The investment will include a significant expansion of The Novartis Institute of BioMedical Research in Shanghai, which the company set up in 2006. It now plans to increase R&D positions from 160 now to 1,000 over the five-year period. Novartis also announced that it has invested $250 million in a new global technical center opening in Changshu, a city near Shanghai.

"We are confident that our expanded investment in R&D will result in innovative therapies for patients in China and other countries nurtured by the growing scientific excellence in China," said Novartis Chairman and CEO Dr. Daniel Vasella.

The drugmaker followed that announcement with another one on Wednesday, saying it has reached an agreement to acquire an 85 percent stake in privately owned Chinese vaccines company Zhejiang Tianyuan Bio-Pharmaceutical for $125 million in cash. The deal is part of a strategic initiative to build a vaccines industry leader in China and expand its own limited presence in the fast-growing market for vaccines aimed at preventable viral and bacterial diseases. Of course, the deal is conditional on Chinese government and regulatory approvals.

While a $125 million stake really isn't much for Novartis, it gains access to the world's third-largest vaccines market, with annual sales of more than $1 billion and expectations for sustained double-digit growth in the future.

In a 2000 report on health systems, the World Health Organization found that of the 191 member states, reported on health systems. Of the 191 member states, China ranked 144 in overall health system performance, the U.S. ranked 37th and France was first. Health spending per capita China ranked 139, the U.S. spent the most and France was fourth. Understandably, Novartis wants as large a piece of China's business as climbs up in the ranks of such studies.

And it's likely to do so soon: In April, China announced it would invest $124 billion on health care over the next three years.

Beijing expects to lift health-care spending from a low 4.7 percent of GDP today to 6 percent to 7 percent in the next few years (the U.S. spends about 16 percent). Novartis also notes the government's increased spending on "chronic diseases associated with lifestyle choices" such as diabetis and that it "aims to support the government's health reform by sharing knowledge and best practices."

Novartis didn't break down its Chinese sales in its last earnings report, but it did say that net sales in the top six emerging markets rose 16 percent to $2.8 billion in the first nine months of 2009. These six markets -- Brazil, China, India, Russia, South Korea and Turkey -- represented 9 percent of Novartis's net sales for the period. BusinessWeek writes that "Sales in China have been growing at 30% annually, making it one of Novartis' top 10 markets."

If Novartis is looking for places to grow, China seems like a promising bet. Of course, Novartis isn't alone in seeing that potential. Rivals including AstraZeneca (AZN), Roche and GlaxoSmithKline (GSK), have slowly increased their presence on the mainland, and competition is likely to grow. Chances are they'll be plenty of business to go around, but whichever companies get out in front early may be best-positioned in this burgeoning market.

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