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Novartis to Open $1 Billion Research Center in China

June 2, 2016
Companies are investing in China due to high demand for medicines for cancer, heart disease and diabetes. Plus the government has provided incentives to encourage more investment in innovation.

Novartis AG employees in Shanghai have a new $1 billion home.

The seven-building campus on the outskirts of Shanghai is accented by bamboo staircases and tree-lined courtyards. The company said the 1,300-person facility will be its third major research center, after Basel, Switzerland, and Cambridge, Mass.

Foreign drugmakers are investing in China because of surging demand for medicines as the incidence of chronic conditions like cancer, heart disease and diabetes rise. The government has provided incentives to encourage more investment in innovation, while Chinese consumers are spending more on health care as their incomes rise.

“The commitment that Novartis is making in China is bigger than anybody else in the industry,” Chief Executive Officer Joe Jimenez said in an interview. “We expect Shanghai to ramp up relatively quickly” in terms of drug discovery.

The Novartis research center will further focus on diseases more prevalent in China, such as lung, liver and gastric cancer. Having new medicines in those areas in coming years will help the Basel-based company to secure a toehold in the world’s second-largest pharmaceutical market after the U.S.

Looking for Acquisitions

Speaking more broadly about Novartis’s growth, Jimenez sees potential in acquisitions around the globe -- anywhere between $1 billion to $5 billion -- for its four business units: pharmaceuticals, oncology, eye care and generics. Such opportunities may arise amid the flurry of deal activity in the industry, as companies are forced to sell off assets to appease antitrust regulators, he said.

“If there were biosimilars, we could potentially acquire those to complement the pipeline in Sandoz,” Jimenez added, saying that while he hasn’t seen biosimilar assets in China to acquire there “definitely are in other parts of Asia.”

Novartis would consider bigger deals in situations where the rationale was “immediately evident to our shareholders,” he said.

Jimenez said the biggest advantage of the new Shanghai campus -- which was announced in 2009 and includes a fitness center and on-site restaurants -- will be for recruiting. He declined to comment on how many employees the company would add in the world’s most populous country, saying it was correlated to the growth of its China business, which was increasing “nicely.”

Pricing Pressure

Using the heart failure drug Entresto as an example, Jimenez commented on the squeezing of drug prices in the U.S. and China, saying that “as long as you’re innovative and not making me-too drugs, you’re going to be fine because those drugs will always be reimbursed.” That forms the central strategy of Novartis in China, he added, since it would be making innovative drugs that specifically address Chinese patients.

In March, Novartis said it agreed to pay $25 million to settle a U.S. Securities and Exchange Commission case that claimed it paid bribes to health professionals in China to increase sales from 2009 to 2013.

Novartis’s SEC settlement came at a time when China’s own crackdown on corruption has ensnared the health-care industry, with GlaxoSmithKline Plc’s sales in the country falling 17 percent last year after a government probe crippled its growth since 2013. A state-led campaign to slash drug prices has triggered a further slowdown in China sales growth for global drugmakers.

Jimenez said the company had reduced the amount of pay that is variable and increased the amount of fixed pay, which “better balances the incentives for the field sales representatives.” It has done this in a number of countries but China in particular, he added.

“We’re here for the long term,” Jimenez said. “We’re committed because we’re doing great science here in Shanghai, no matter what buildings we’re in.”

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