To many Americans, Puerto Rico is known for a variety of tourist attractions: nice beaches, swank hotels, smooth rum, a lush countryside, and maybe a little cockfighting now and then. Drug makers, though, treasure the island for something entirely different - a low-cost haven for pharmaceutical manufacturing. Puerto Rico is dotted with facilities that churn out all manner of prescription medicines for such big names as Abbott, Pfizer, Merck, AstraZeneca, Amgen, Eli Lilly, Johnson & Johnson and GlaxoSmithKline, among several others.
Drug making, however, may become a less notable activity, given the outcry over plans to raise the tax on companies that conduct manufacturing in PR, but are headquartered elsewhere. That's because the government recently drafted, introduced and passed a bill - in just 72 hours and without public comment - that will establish a 4% tax on manufacturers with $75 million or more in gross receipts from products shipped elsewhere. Between 40 and 50 multi-national companies are targeted and, no surprise, most are active in biopharmaceuticals, which employ about 94,000 people.
Why was this done? The government hopes to compensate for the long-term employment implications stemming from the Pfizer acquisition of Wyeth. In other words, consolidation is a scary thing for many parties. The bill was passed to "benefit the workers and employees," declared senate president Thomas Rivera Schatz. The legislation, added senator Migdalia Padilla, "fulfills the promise of tax justice for all Puerto Ricans" and is "fundamental to the economic future of Puerto Rico." The goal is to generate about $5.8 billion over six years. The tax rate declines to 3.75% in 2012, 2.75% in 2013, 2.5% in 2014, 2.25% in 2015, and 1% in 2016 before expiring at the end of that year.
Not surprisingly, the reaction from drug makers and biotechs has been negative and harsh. For instance, John Murphy, BIO's director for state government relations, wrote what was a thinly veiled threat to Puerto Rico's Governor Luis Fortuno that the island's ability to attract further investment might not only be constrained, but drug makers already located there might take some of their "high-quality and high-wage jobs" elsewhere. But where would they go and how soon? That's not exactly clear. After all, making threats is easy, but acting on them takes time.
Keep in mind, Puerto Rico is a convenient location for shipping goods to the mainland as well as other destinations. Replacing such facilities is not an overnight proposition, regardless of the frustration caused by out-of-the-blue legislation. But that doesn't mean drug makers or biotechs couldn't or shouldn't consider another venue if it were to make sense. Despite overwhelming financial troubles and a bailout from the European Union, Ireland held its corporate tax rates steady to retain multi-national companies, including drug makers. Whether relocating to Ireland would make sense when industry wants to increase the flow of goods to Latin America - can you say, "emerging markets"? - is another story.
Interestingly, one competitor is wasting no time in trying to take advantage of the situation. Just three weeks after Puerto Rico made its stealthy legislative move, the Metro Denver Economic Development Corporation began advertising its attributes in hopes of luring the industry to Colorado. To some, such an idea may sound counter-intuitive at a time when manufacturing, generally, is leaving the mainland or new facilities are more likely to pop up in Asia. But Tom Clark, the organization's executive director and dedicated cheerleader, believes Puerto Rico committed a blunder than can turn the tide.
"There are a lot of advantages we have over Puerto Rico," he says. "There's the University of Colorado Life Sciences center, a major research park, a 3.8% income tax credit against salaries paid to employees. We already have many companies here, led by Roche and Amgen, that employ more than 5,600 people, and the 4.63% corporate tax rate is constitutionally mandated - it won't change. How they choose to handle the reduction (in Puerto Rico) will be pivotal. Maybe it won't decline every year. So if you're angry enough that taxes will be raised, our state has a more stable tax picture."
There is nothing like a brazen pitch, is there? The real issue, though, is desirability. Recently, another issue emerged that may add another dimension to the discussion � regulatory scrutiny. For months now, Johnson & Johnson has made headlines by recalling tens of millions of bottles of various over-the-counter medicines, many of which were made in its Las Piedras facility in PR. The scandal extends beyond the island, most notably to its facility in Fort Washington, PA, but internal memos released by a congressional committee called into question the extent to which the FDA is satisfactorily monitoring manufacturing on the island.
Also, GlaxoSmithKline recently agreed to pay a $750 million fine and a subsidiary pleaded guilty to a felony for manufacturing fraud at a now-shuttered plant in Cidra, PR that led to untold bottles of contaminated meds, mislabeled packaging and incorrect dosages. There were also allegations of black-market dealings among employees who were skimming product from the facility at least eight years ago, according to a whistleblower lawsuit filed by a former Glaxo quality assurance manager, whose actions led to a consent decree and the fine.
These episodes recently prompted the House Committee on Oversight & Government Reform to question whether the FDA has sufficient oversight in PR and write a letter to FDA commissioner Margaret Hamburg in search of all sorts of documents. Granted, the Glaxo episode happened years ago, but given that the FDA has suffered embarrassing difficulties monitoring overseas manufacturing (heparin, anyone?), the committee appears determined to hold the agency accountable. "It appears that FDA's Puerto Rico district office," the Democratic and Republican committee leaders wrote, "may be having difficulty exercising oversight on the numerous manufacturing facilities on the island."
What might this have to do with the tax issue? On the surface, there may be little or no connection. After all, there will always be manufacturing problems cropping up here or there, regardless of where medications are made. But it remains possible that manufacturing in PR may receive more scrutiny than in the past. The J&J episode, in particular, raised questions about the ability of the FDA's District Office to remain impartial and attentive. Documents released in recent months by the House committee seemed to underscore that the FDA office in San Juan was either too close to some J&J plant personnel or were simply unable to properly monitor activities.
To what extent the FDA responds to the House committee remains unclear, but Rep. Darrell Issa (R-CA), who was the ranking Republican, is now the chair and has expressed a great deal of interest in monitoring the agency still more closely. So if the FDA the decides to overhaul oversight or simply throw more Resources on the island, the implications for manufacturers are rather straightforward: they will likely have to spend more money over the next couple of years to maintain cGMPs. Not that drug makers should fail to invest otherwise, but the possibility now exists that Puerto Rico may become more expensive for a couple of very different reasons.
Nonetheless, it would appear unlikely that many biopharma companies are going to suddenly shutter their operations anytime soon. More plausible is the possibility of putting a halt to building or expanding facilities unless, of course, forecasts for specific goods and destinations simply make more economic sense. Despite their anger over taxes and any possible concerns about regulators, mainland managers will probably continue to have opportunities to enjoy the beaches, the rum and, yes, even a cockfight for another few years.
Ed Silverman is a prize-winning journalist who has covered the pharmaceutical industry for The Star-Ledger of New Jersey, one of the nation's largest daily newspapers, for more than 12 years. Prior tojoining The Star-Ledger, Ed spent six years at New York Newsday
and previously worked at Investor's Business Daily. Ed blogs about the drug industry at Pharmalot, at www.pharmalot.com. He can be reached at firstname.lastname@example.org.