Following in AstraZeneca’s footsteps, Novartis is investing $100 million in an R&D center in China. It’s a move I had alluded to in an earlier piece in this forum. Expect other big pharma companies to follow.

Those who look at a move like this as merely a cost-cutting measure are missing one of the more obvious reasons a drug company would go to China—it’s the largest potential market on the planet. China’s pharmaceuticals market grew 28.4% between 2003 and 2004 and is projected to grow another 18% this year, IMS Health estimates. In addition, the government has declared that biotechnology/life sciences make up one of China’s pillar industries.

Now is the perfect time to set up operations in China. The country adopted Good Clinical Practice in 1998 and became a member of the World Trade Organization in 2001, prompting it to tighten its intellectual property rights protection, which is still a concern. Most significantly, in 2003 China formed the State Food and Drug Administration (SFDA), a full cabinet-level agency, modeled after the U.S. Food and Drug Administration. That is when big pharma started taking a serious look at China for R&D.

What they found was a reservoir of Western-educated, English-speaking physicians eager to conduct clinical research. To be sure, there are cost savings when it comes to investigator fees and study conduct, but that is by no means the only reason drug companies are flocking to China now. This isn’t shoe manufacturing.

There are plenty of ancillary costs that make up some of the difference in salaries between China and the West—tests and screenings usually covered by insurance or the government in the West and training, quality assurance and shipping fees for laboratory samples are just some. Salaries for highly skilled clinical research personnel also have a way of rising when large companies compete for them.

Cost savings is never nearly as big a factor as time savings when it comes to setting up in an emerging region. Time savings come from conducting clinical research in a country with a large, treatment-naïve population seeking treatment at large hospitals that can see 10,000 patients in just one disease indication per day. Patient recruitment is one of the top bottlenecks in the drug development process in the West, which is not true of China.

Increasingly, large pharmaceutical companies are shifting the way they treat China in the context of their global drug development programs. Instead of an outsourcing opportunity, China has in the past five year become a place where the top pharmaceutical companies are establishing clinical research units. AstraZeneca is already shifting from an emerging market model in China to a developed market model. As young a system as China has, it has created a regulatory, legal and business landscape that make it a force to be dealt with.

Novartis is wise to start establishing operations in China now while it is still early days and there is a lot of opportunity. We will be hearing a lot more about other companies doing the same in the next few years. Getting to China sooner rather than later should be every drug company’s goal.