By Louis Garguilo, Chief Editor, Outsourced Pharma
There were many options (and precious time) for a journalist at BIO 2014 in San Diego: pharmaceuticals, biotechs, academia, countries, regions, consortiums and the like. One place I just had to find: Puerto Rico. Where had the Commonwealth gone? Was it still on the map of pharmaceutical development, manufacturing and outsourcing?
There was a time when most discussions of pharmaceutical manufacturing and outsourcing included Puerto Rico. Chances are you’ve heard much less about that Caribbean island the past few years. To find out why, I met with the Secretary of Economic Development & Commerce, Commonwealth of Puerto Rico, Alberto Bacó Bagué. He was accompanied at the impressive Puerto Rico pavilion by Antonio Medina Comas, Executive Director, Puerto Rico Industrial Development Company (PRIDCO).
As if anticipating the metaphor, the pavilion was centered on a large, colorful map of pharmaceutical and life-science companies operating in Puerto Rico. The names are many, familiar and impressive. They include: AbbVie, Abbott, Amgen, BASF, BMS, Baxtor, Bayer-Cropscience, Janssen-Ortho, Merck, Novartis, Pfizer. (Click here and then on the map to see them all for yourself.)
Throughout our discussion, Secretary Bacó is refreshingly open and candid. He confirms the premise that Puerto Rico had been left out of the conversation in past years. While we will subsequently learn how Puerto Rico is coming back – as Executive Director Medina mentioned later in our conversation, “there is a silver lining” – first Secretary Bacó explains what transpired over the past decade or so.
“I will be honest with you,” Bacó starts, “I agree that we kind of disappeared from the map. It came about basically because we lost a section of the U.S. Internal Revenue Code (Section 936) that provided for profits to be repatriated to the U.S. without paying federal taxes. The law was repealed in 1996, with a transitional period of 10 years to full implementation in 2006. Before this, we were accustomed to having companies come to Puerto Rico by word of mouth. It was so good for them that they literally just came. We failed to adequately prepare ourselves for this change and explain why we are still a destination for the pharmaceutical industry. That is why we disappeared; we got lost in that process and it has taken us too much time to get back on track.”
Outsourced Pharma readers are all too familiar with the topic of pharma location decisions based substantially on taxation policy, the repatriation of profit and reincorporation (recent example). But here we are again, starting our discussion with taxes. I ask Secretary Bacó how this particular tax change came about. “Looking back, we feel we should have fought against this more aggressively in the U.S. Congress,” he replies. “It was not well explained that it was an important tool of economic development for the Commonwealth.” The biggest consequence of the change in tax policy? “We used to have a combined workforce of about 160,000 employees in manufacturing, and now in 2014 we have about 75,000.”
Silver Lining: It’s Still About The Workforce And Tax Advantages
Fast forward to the present. PRIDCO’s Executive Director Medina, who during the interview was a verbatim catalogue of names, facts and figures, provided the current view from the ground.
“Let me tell you the good news. After some years, Puerto Rico is getting back its swagger. Over the last year and a half we have seen significant deals,” he says quickly. “Companies like CooperVision, who invested over $250 million in contact lenses manufacturing starting in the second quarter of last year, are active again. We have seen a trend in expansions, for instance in medical devices, companies like Covidien, Medtronics and Saint Jude all have started growing. Eli Lilly, in the fourth quarter of last year, announced an investment of $200 million in their insulin biotechnology program.”
Medina is not ready to slow down. “We have companies like Amgen that have been in Puerto Rico for a long time and continue to grow and drive technology development. Amgen has over $4 billion of assets here. Fifteen percent of Amgen employees are in the Commonwealth, with some in the higher echelons of the company. Amgen has located its largest manufacturing site in the world in Puerto Rico. Between 80% and 90% of its products have some stage of production here.”
How did Puerto Rico get from point A – the blow of a tax change they did not prepare for, to point B – a once again invigorated pharma-related industry?
Remember all those workers Secretary Bacó talked about? Puerto Rico is leading with its workforce. “In the last 18 months we have really developed our promotional model,” says Bacó. “We still have major tax advantages, but we also realized that we have a lot more to offer. Particularly, we have a well-trained labor force in the bio-pharma area. Our cost of labor is very reasonable, and a lot less than what that same employee would cost in the US. This trained workforce also helps us in promoting newer areas like generics, as well as other expanded opportunities for the pharma, bio and med device industries.”
It makes sense that an available and trained workforce, which historically has complied with pharmaceutical regulations required by the FDA, EMEA in Europe as well as the PMDA in Japan, remains a key factor in Puerto Rico’s turnaround. Medina adds, “If you have a strong STEM-degree-based workforce, you can provide the engineers and scientists, whether for pharmaceutical on the synthetic side, or biotech on the large molecule side. Puerto Rico is very competitive with states in the US; we provide a stable, well-regulated environment with significant STEM-degree-based human capital.” He wants to add another comment. “Of course the big advantage is you are operating within the US regulatory environment while having a significant taxation benefit.”
Which brings us back to taxes. Not withstanding the difficulties described above, Puerto Rico still has a sizeable tax incentive to offer pharma. Because the Commonwealth is an independent tax jurisdiction, U.S. companies are not required to file U.S. federal tax returns. Medina provides an example: “If a biotech goes to North Carolina, and they negotiate a 4% tax rate there, it also has to file U.S. federal tax returns. This makes the combined rate 40%, 36% federal and 4% state. If you set yourself up in Puerto Rico, and you negotiate a 4% local tax, you pay 4%. Period.” (Editor’s note: apologies to North Carolina, a great state for the biotechnology and life science industries.)
I asked Secretary Bacó how they engineered the turnaround, reinvigorated the collective island energy, so to speak, and brought forth a new marketing strategy. Did they hire a famous public relations and marketing firm?
“We simply reinvented ourselves,” replies Bacó. “We said let’s look around the world right now. It is most important to have the right human resources, the right facilities, and the right infrastructure to provide a go-to-market offering. We are establishing personal relationships with top management at pharma companies. This is an industry where everybody talks to each other. Once again, word of mouth is spreading that we really are committed to serving the industry. And I think this is most important,” he adds.
To prove his point, Bacó says his economic development board of directors met at Amgen’s facilities in Puerto Rico earlier in the week. “We had a very good discussion with the head of research and development, the head of operations,” he says. “They gave us their feedback on what we are doing, and even provided us leads of companies that might be interested in coming to Puerto Rico. We are replicating this dialogue with other major companies.”
Building(s) For The Future
It all sounds good. However, one vision kept clouding the picture for me. As someone with years of experience in economic development, I worried about the remnants of closings, shut-downs and demolitions: buildings in disrepair, empty lots or facilities that once held modern equipment and housed over double the number of employees now employed in the industry. Medina, though, was ready with his cornucopia of analysis and examples to wipe away this image.
The analysis first: “What you saw is an evolution in the industrial markets, not just pharma, and similar to what happened to areas in the US, and globally. We were impacted by the oil shocks of the 1970s. Particularly in the ‘90s, you saw a significant trend to go to Asian jurisdictions. But that trend is reversing,” Medina said, moving to his example. “Actavis recently acquired Warner Chilcott. We proactively met with Actavis right after the announcement to make sure they understood how to set themselves up to take advantage of Puerto Rico. As a result, not only did they increase production at the Fajardo facility where WC was already producing product, but they actually re-activated production at a facility that had been reduced to warehouse use.” Medina adds: “We’ve seen this type of trend for renewed growth in companies such as BMS and Lilly as well.”
Secretary Bacó, ever steady and grounded, faces the negative and provides the positive. “We have implemented a very focused strategy. We are looking first of all at preserving our existing industrial base. That process has stabilized the situation and moved us back to growth in the numbers of employees involved in manufacturing. We are not seeing any big closings of plants, where we had some in the past. We really are over that type of activity.” Bacó has his own anecdote on this important point. “Our focus now is to search for strategic opportunities, for example in generics and serving emerging markets. An example of that is Neolpharma (a manufacturing outsourcing and pharma service provider) buying an older Pfizer facility to strategically manufacture in Puerto Rico under an FDA environment.”
Regarding the outsourcing industry, Bacó reminds us “Puerto Rico has a long and successful history.” He starts us back in the 1980s. “If you recall,” he says,” a company called Mova Pharmaceuticals became a big player, especially in the US market. They manufactured for Merck and Pfizer for decades, and became a rival to Patheon, who eventually acquired them (the end of 2004). Our outsourcing industry has evolved like this over the years. Now you see larger companies like AbbVie who are outsourcing from a Puerto Rico base. Neolpharma is another who really takes advantage of the outsourcing infrastructure, using Puerto Rico as entrée to the U.S.”
The Secretary makes a final comment to sum things up for us. He says that even with the island’s overall economic development strategy for industrial diversity, and some transitioning of the economy (for example, to aerospace technology), “The pharma industry is our biggest provider of income, and so it remains our most important.”
This quest to find Puerto Rico provided more than a map. It revealed a larger cosmography of the pharmaceutical and outsourcing industry played out over the last decades and relevant right up to today. It includes the high degree of global mobility of the industry; the relentless search for economic development, market and particularly tax advantages; the serious repercussions from tax policies; and the drive for the lowest-cost, best-trained human capital that can reliably provide quality products.
Finally, I could not end an analysis of the Commonwealth of Puerto Rico without at least mentioning its most famous product. We’ll leave it to Mr. Medina: “Rum, interestingly, is a fermentation process, and you can trace the beginning of the biotechnology industry in Puerto Rico centuries back to its production on the island.”