Lilly's $250 Million Biotech Plant Pick-Me-Up for Puerto Rican 'Revolution'

Week of May 14, 2001
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Lilly's $250 Million Biotech Plant
Pick-Me-Up for Puerto Rican 'Revolution'

By JACK LYNE • Site Selection Executive Editor of Interactive Publishing Mayaguez, P.R.

MAYAGUEZ, PUERTO RICO -- Puerto Rico's drive for "a second economic transformation" has gotten a major pick-me-up from Eli Lilly & Co.'s (www.lilly.com) decision to build a US$250 million biotechnology manufacturing facility in the U.S. commonwealth.
The new biotech plant will employ 300 high-skill workers in manufacturing Humalog, the first insulin analog developed from recombinant DNA. The 300 new scientists, manufacturing operations and support staff will increase Lilly's Puerto Rican work force by more than 30 percent. The company currently employs some 900 workers at three plants in Carolina and Mayaguez.
"When completed, the facility will be the first large-scale biotechnology plant in Puerto Rico and one of the largest biotechnology facilities in the world." said Maria Crowe, president of Lilly's Puerto Rico operations.

The Puerto Rican government is working to create a high-tech corridor along the West Coast centered
on Mayaguez, home of the respected engineering program at the University of Puerto Rico (pictured).

"For more than 35 years, Lilly has enjoyed a positive business presence in Puerto Rico," Crowe continued. "This project reaffirms our commitment to maintaining our presence in the commonwealth." ED Head: 'We Need Section 936 Incentives' In some ways, however, today's Puerto Rico is very different from the island that first attracted Indianapolis-based Lilly.
Most importantly from a business climate perspective, the incentives that Puerto Rico long provided through Section 936 of the U.S. Internal Revenue Code are seriously imperiled. Those IRS incentives have proved to have industrial-strength potency, particularly for manufacturers. Fifty-one of the Fortune 100 and 142 of Fortune 500 companies have set up Puerto Rican operations. The manufacturing sector makes up 40 percent of the commonwealth's GDP; and Puerto Rican operations produce nine of the 10 best-selling prescription drugs in the United States. By the early 1990s, though, the 936 incentives were coming under increasingly intense criticism. That spurred Puerto Rican officials to begin a major effort to diversify the economy, beginning in 1992 with what Gov. Pedro Rossello called "the New Economic Model."
Lilly's location decision is a major win for what some envision as a new economic revolution, one hoped to rival the legendary success of "Operation Bootstrap," created by the New Dealers of the 1940s. The biotech facility speaks directly to one of that revolution's pivotal goals: creating a much larger knowledge-work sector.
The remarks of Puerto Rican Industrial Development Co. (www.pridco.com) Secretary of Economic Development and Commerce Ramon Cantero Frau at the Lilly announcement, however, bespoke an island that, while looking toward its new revolution, still wanted to retain some of its old one.
"The investment Lilly is making with this project represents the type of technology and economic opportunity we are seeking for Puerto Rico," Cantero Frau said.
Then he added, "To attract this kind of investment, today more than ever, we need the Section 936 incentives we are currently negotiating in Washington, D.C. Today's activity encourages us and renews our energy to continue working to secure these incentives for Puerto Rico."

New Governor Changes Course

The remarks from the head of the widely respected PRIDCO reflected political issues - which, as always, reflected economic issues.
The troubles that Puerto Rican officials saw brewing for the Section 936 incentives materialized. The credits had a solid basis in controversy: Some companies tried to attribute inordinately inflated income to their Puerto Rican operations. In 1993, Congress plugged the loophole, restricting firms to credits based strictly on their actual spending on the island. Then in 1996 Congress repealed Section 936 altogether, scheduling it for a 10-year phase-out. The Clinton administration repeatedly tried, and repeatedly failed, to get a phase-out extension past the 2006 drop-dead date.

"The Section 936 incentives give us a competitive edge over foreign countries that offer lower wages and other attractive incentives to manufacturing companies," asserted newly installed Puerto Rican Gov. Sila Maria Calderon.

Now, new Puerto Rican Gov. Sila Maria Calderon, who assumed office on Jan. 2, has marshaled an effort to get the 936 incentives fully reinstated. That's a major policy shift from Rossello, Calderon's predecessor, who didn't push for 936 reinstatement. (Unlike Rossello, of Puerto Rico's New Progressive Party, Calderon, of the island's Democratic Party, doesn't favor statehood, but a continuation of commonwealth status.)
"The Section 936 incentives give us a competitive edge over foreign countries that offer lower wages and other attractive incentives to manufacturing companies," Calderon told a recent gathering of the Puerto Rico Manufacturers Association (www.prma.com). "During my recent visit to Washington, D.C., I discussed this measure with Sens. Trent Lott and Don Nickels and Reps. Richard A. Gephardt and Charles Rangel, who seemed responsive to the initiative."

Lilly: New 1998 Incentives Were Major Location Factor

With a new U.S. Congress and a new administration, Section 936's fate rests uncertainly in new hands.
In the meantime, though, the incentives that Puerto Rico put in place in 1998 were one of the reasons for Lilly's biotech decision, company officials said. Puerto Rico's 1998 Tax Incentive Act created tax breaks for a wide range of economic sectors (including a special R&D tax deduction), as well as initiating a flat corporate tax rate, ranging between 2 percent and 7 percent.
Lilly executives also cited "the proven results of our current employees" and "the availability of a skilled work force" as prime location considerations. Company officials said that construction on the biotech plant will begin later this year, with the facility becoming fully operational by 2005.

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