mid-December search of the comprehensive industrial facilities database maintained by the Puerto Rico Industrial Development Corp. (PRIDCO) showed approximately 57 pharmaceutical-related plants, from such major names as BD, Bristol-Myers Squibb, Novartis, Pfizer, API, Baxter and Eli Lilly. The island has built up a reputation in the industry ever since Congress approved incentives in 1976.
How those facilities grow, and whether more will join them, may be dramatically influenced by a sudden tax imposed by the administration of Gov. Luis Fortuño in October, without a public hearing process. Known as Law 154, the measure imposes a 4-percent excise tax on goods and services sold by companies on the island to overseas affiliates, with the rate scheduled to decrease to 1 percent by 2016, the final year it will apply. It goes into effect January 1, 2011. A period for public comment ends today at 5 p.m. EST, but a second period for comment will occur in January.
The law is the latest blow in the retreat from the island by the industry that began in 2006-07, when those 1976 incentives, known as Section 936 of The Tax Reform Act of 1976, expired, and when several companies, including GlaxoSmithKline, Teva and Watson, chose to close plants.
Companies are on alert, if not overtly panicking.
"We are surprised and disappointed with tax legislation in Puerto Rico that was recently announced," wrote Mary Klem, director of corporate communications for Amgen, in response to an inquiry. "We understand that any tax imposed by this new legislation on U.S. taxpayers would be creditable against U.S. income taxes, thereby minimizing the impact to U.S. companies. However, the legislation is complex and we will be evaluating its impact on our Puerto Rico activities."
In 2006 Amgen embarked on a $1-billion expansion of its complex in Juncos, Puerto Rico. According to Pharmaceutical Research and Manufacturers of America (PhRMA), the biopharmaceutical research sector had supported a total of 94,217 jobs and $3.6 billion in output in Puerto Rico as of the latest survey conducted in 2006. The National Association of Manufacturers says U.S. company jobs in the chemical, pharmaceutical and biotechnology industries represent approximately 80 percent of all the manufacturing jobs in Puerto Rico and nearly 26 percent of Puerto Rico's GDP.
"Last year, America's biopharmaceutical companies invested more than $65.3 billion into the research and development of innovative life-saving and life-enhancing new treatments. Many of those treatments were researched or manufactured within the Commonwealth," said PhRMA President John Castellani in late October. "Law 154 will dramatically hinder these companies' positive efforts within Puerto Rico. The measure imposes special taxes on certain activities and transactions conducted by non-resident individuals and companies in Puerto Rico. This could significantly reduce the ability of PhRMA's members to operate in the Commonwealth and to continue to make significant investments in researching and developing innovative new medicines for patients. In addition, we are concerned that this significant new tax increase was developed and enacted without the opportunity for public input and comment. Transparent and predictable tax policies are critical to helping foster innovation in Puerto Rico. These policies should be developed and vetted through a public process involving all relevant stakeholders, including PhRMA member companies."
Clinical studies on the island are important too. According to PhRMA, 425 of 21,795 trials conducted by U.S. scientists and researchers in 2008 were conducted in Puerto Rico.
Several companies contacted by Site Selection declined to comment, deferring to the official statement from PhRMA.
A recently published white paper on surplus property issues from the Health & Science Companies Industry Group of the Industrial Asset Management Council included a case study on changes already afoot in Puerto Rico's pharmaceutical industry. Among its findings, as of the first quarter of 2010, "20 PHARMA manufacturing sites have been closed on the Island and have either been sold, are for sale or are awaiting action. This does not include portions of plants which have been permanently idled or any fallout from the recent mergers of Merck/Schering or Pfizer/Wyeth. These mergers may increase the sector contraction and broaden the impact on the Island."
"As a result of tax changes on the Island, the broader restructuring of the pharma business globally and a distinct change in technology, selling the highly specialized, surplus pharmaceutical production plants has become more difficult," says the white paper. "According to market data, only two to three of the 20 plants closed have been sold to pharma users of any sort. The highest reported price obtained is $13 million; but for this facility, only $3 million in cash has been paid and the debt is rumored to be in default."
According to the white paper, the major pharma plant sales for uses other than pharma were converted to uses as a window and door manufacturer, an alternative energy company, a grocery distributor/entrepreneur and a speculative development. However, this pre-Law 154 statement in the white paper still saw promise:
"Despite the broad, global restructuring of the pharmaceutical business, the industry will remain as a pillar of the Island's manufacturing sector. Section 901 of the IRS Code provides a tax position that encourages Controlled Foreign Corporations (CFCs) to remain on the Island. The Sec. 901 benefits are not as robust as Sec. 936 but have the potential to benefit existing investment and new investment on the Island."
"The Island still holds benefits for the global PHARMA business. It is a dollar-based economy. It permits a 'Made in the USA' label — very important given the strong U.S. inspection regimen covering PHARMA products. Education levels are still strong and employee applicants graduating are well qualified to train and work in the industry. Even with plant closures and repositioning, PHARMA retains a major presence on the island and many companies continue to invest in their modern and long-term assets there. But the value of the initial infrastructure investment has been severely diminished by: (1) changes in the U.S. Tax Code; (2) industry-wide consolidation; (3) changes in technology; and (4) changes in product development. There is no anticipated improvement expected for the foreseeable future."
"Biopharmaceutical research companies play a vital role in Puerto Rico's economic recovery and global economic competitiveness," said PhRMA's Castellani in October. "The innovative work that supports jobs also provides hope to millions of patients. However, this work depends on a national plan and policies that support innovation, fostering growth among our companies and providing the promise of tomorrow's groundbreaking new medicines. This new law may have significant consequences that could impact innovation and the Island economy."