Is Ni Jian on something, or is he onto something? It's just that the mere mention of drugs research seems to bring a beatific smile to his face.

The reason for his broad grin becomes clearer when you know that Ni Jian is president and chief scientist of Suzhou Chen Jian Medical Co Ltd.

The company's drug research programs are proving to be a heady elixir that is working its magic on investors and that has left Ni's company in glowing health.

"It used to be that investment in the healthcare industry was stagnant and investors simply would not invest in new drug research," Ni says.

"There was more risk than there is with developing generic drugs, and now people are taking the initiative to search for feasible new drug research projects."

That change of mindset has been a boon to Suzhou Chen Jian Medical, Ni says. "Investors are more active in the sector, daring to take greater risks, driven by the booming healthcare industry."

For international private equity companies, too, China's healthcare industry can be as lucrative as the stock and real estate markets before the bubbles burst.

The industry is regarded by some as the next focus of investment in China because of healthcare reforms, the aging population, the falling birthrate and rising personal incomes.

Cai Dajian, the president of Shenzhen GTJA Investment Group Co Ltd, sees huge potential in healthcare. "Since 2003 our strategy has been to get ourselves into the healthcare investment industry at full tilt. We put money into three companies last year alone and now have a portfolio of seven companies.

But experts say the industry involves high risks and demands long waits for a return on investment, so those who are short on patience and who do not exercise due care risk getting their fingers burnt.

Zhao Jin, partner of Vivo Ventures, a United States private equity company that specializes in medical investment, says that as China's GDP has surged so has healthcare spending. The State Council, or Cabinet, has named healthcare, especially medicine, as one of the seven strategic industries that will prosper greatly over the next 10 years, as real estate has done in the past few years.

"But the high profits mean high risks," Zhao says. "Drug research, unlike healthcare services and medical devices, is a highly professional area that only a limited number of experts fully understand. It is a challenge for all fund managers.

"Obviously it is not about whether we should put our money in this area, but that we avoid any possible catch and find the really valuable companies we should invest in."

Investment in China's medical and healthcare industry reached a record $3.5 billion in the first nine months of this year, 2.7 times more than the total for the whole of last year, says a report by Zero2IPO Group.

Turnover in the medicine and medical devices industries reached 746.5 billion yuan ($117.6 billion, 87.4 billion euros) in the first half of this year, a year-on-year increase of 24.49 percent, the report says.

Turnover on medicines was almost 10 times that of turnover for medical devices, says Zhou Kui, partner of Sequoia Capital China Growth Fund.

The director of the China Pharmaceutical Enterprises Association, Yu Mingde, says that by 2015 China will be the world's second-largest medicine market, with industry turnover surpassing 3.6 trillion yuan and annual growth of 23 percent during the 12th Five-Year Plan (2011-2015).

But analysts are adding a few doses of caution to their optimistic prognosis, saying that risk - apart from the lack of specialized expertise that Zhao of Vivo Ventures cites - exists.

"We are especially wary when evaluating investment in new drug research," says Zhang Suyang, a partner with IDG VC, a private equity company that has already invested in 12 Chinese medical enterprises.

"It's not just that we fear being sorely disappointed by a few faddish ideas, the long wait for a return on investment is also a worry. The market is so competitive that if the return-on-investment period is too long, the investment is likely to turn out to be unsafe because of fluctuations in the policies and investment environment, and we will face a lot of pressure from our fund investors.

"There is a perception among investors in the US that the weakness of Chinese pharmaceutical companies on the issue of patents makes it difficult for them to sustain the growth of new drugs in the international market. That means they are more likely to be embroiled in legal problems in countries like the US or in Europe, where patent laws are strict. The value of US listed pharmaceutical companies has been underestimated, even more so than companies providing medical equipment and services in China."

Zhang adds: "What's more, because of the downturn in the US stock market and the fact that China concept stocks have been sold short by overseas sellers recently, this situation is getting worse, which makes the exit of private equity companies more difficult."

The chief executive officer of iDNA Inc, Zhou Huijun, agrees that investment in Chinese pharmaceutical companies needs to be considered extremely carefully, but says they enjoy advantages in new drug research.

"China has a more efficient new-drug approval system and is more cost-effective in undertaking experiments and recruiting volunteers, which is a huge plus."

In the US it often takes 10 to 15 years and $600 million before a new drug is approved. In China the comparable figures are five years and 50 million yuan, the China Pharmaceutical Enterprises Association says.

"Developing more advanced technologies usually takes a long time, on average five to 10 years, but once successful, the profits are very high," Zhou says.

Analysts also say that the involvement of private equity companies can help Chinese medicine grow in tandem with the country's booming healthcare market.

Chinese pharmaceutical companies are striving to expand, but often have to grapple with a shortage of investment, research and development capabilities and management experience.

"The involvement of private equity companies, which often bring with them expertise in management, financing and marketing, can help Chinese medicine companies to overcome these shortcomings," Yu says.