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Puerto Rico Takes Hit In FDA's Probes…Despite Troubling Questions, The Drug Industry Is Booming - Treasure Island

Puerto Rico Takes Hit In FDA's Drugmaker Probes

By Kristin Roberts

JULY 24, 2002
©Copyright 2002 Reuters Limited 2002. All world rights reserved.

MIAMI, July 24 (Reuters) - Probes into the pharmaceutical industry's manufacturing plants have put a spotlight on Puerto Rico, raising questions about the health of a business sector that is vital to the island's economic growth.

The investigations have driven Wall Street to ask for assurances from Puerto Rico's government about the strength of its industrial base.

They have also left some analysts concerned that if problems are uncovered by the Food and Drug Administration, lawmakers' stance on other U.S. policies toward Puerto Rico may be affected, namely the federal tax treatment of corporations doing business there.

"If something comes out of the FDA investigations that legislators latch onto, it may have some implications on other policy," said John Hallacy, head of state and local research at Merrill Lynch & Co.

"We have to see what it leads to," Hallacy said. "Is it a particular problem at a particular plant with a particular drug or is it something more endemic, something about operations down there? We don't know the answers to these questions yet."

Three drug makers have disclosed investigations by the FDA into operations in Puerto Rico, most recently Johnson & Johnson announcing an inquiry into the plant that makes one of its best-selling medicines.

Officials from the Commonwealth of Puerto Rico quickly note the investigations are not focused solely on the island.

Indeed, only in the case of Johnson & Johnson is the FDA focused completely on Puerto Rico. Regulators are investigating Eli Lilly & Co.'s plants in Puerto Rico and elsewhere.

The FDA also is investigating Schering-Plough Corp. , which earlier paid an unprecedented $500 million fine related to issues in both Puerto Rico and New Jersey.

"The FDA is cracking down," said Ken Gear, research director at Wall Street ratings agency Standard & Poor's. "I don't think they're targeting Puerto Rico, but a lot of pharmaceutical manufacturing takes place there so it's something that bears monitoring."


The FDA's scrutiny marks another blow for drugmakers in Puerto Rico who already face the phase-out of federal tax incentives that lured the industry there in the first place.

Puerto Rico has come to depend heavily on the pharmaceuticals sector for jobs and exports. More than 30 drugmakers now have operations there and of all pharmaceutical products made in the United States, 25 percent are shipped from Puerto Rico, according to the Commonwealth's data.

The island's government has floated new proposals to secure favorable treatment for American companies before the current incentives under Section 936 of the U.S. tax code are fully terminated in 2006. But the plan has not been formally discussed by Congress since it was referred to the House Ways and Means Committee more than a year ago.

"It is a critical time to see what's going to happen in Puerto Rico," said Tim Blake, analyst at Moody's Investors Service. "But so far, the industry looks as if it's been unaffected.

Officials within Puerto Rico's government say much the same, pointing to ongoing expansion plans as proof that the drug making business is still booming.

Just two weeks ago, Lilly broke ground on a new $450 million facility in Carolina, Puerto Rico, to manufacture Humalog, a biotechnology product used to treat diabetes.

Edwards Lifesciences Corp. recently announced plans as well to invest $7.5 million for improvements to its Anasco facility, the company's largest global manufacturing center.

"We are seeing companies expanding their manufacturing in Puerto Rico," said Ramon Cantero, secretary of economic development at Puerto Rico Industrial Development Co., a government-owned group that promotes Puerto Rico to investors.

Cantero added there was no reason for concern on Wall Street. "None whatsoever," he said.

Despite Troubling Questions, The Drug Industry Is Booming In Puerto Rico - Treasure Island


JULY 21, 2002
©Copyright 2002 The Star-Ledger Newark, NJ. All world rights reserved.

MANATI, Puerto Rico Alfonso Garcia knows where his bread is buttered.

The owner of Veronica's Bakery, a roadside eatery in this sleepy coastal town 40 miles west of San Juan, doesn't hesitate when asked about his best customers.

"The pharmaceuticals," said Garcia, who also owns a small shopping center across the way. "Thirty years ago, we had no industry at all. It was like a desert town. Now, just look up and down this road. Several plants are here. All that I have made, I owe to this industry."

All across this plush island, which is probably best known for its pristine beaches and resort hotels, 25,000 people make their living from 30 factories owned by many of the world's largest drug makers.

During the past quarter-century, New Jersey stalwarts such as Merck & Co., Bristol-Myers Squibb Inc., Schering-Plough Corp. and Johnson & Johnson have spent billions of dollars to construct the largest concentration of drug-making facilities in a single vicinity anywhere in the world.

The drugs made here reads like a Who's Who of blockbusters: Claritin, Prozac, the Vioxx and Celebrex painkillers, the Lipitor cholesterol treatment, the Prilosec ulcer medicine and Oxycontin, the controversial painkiller.

But now a pair of criminal investigations aimed at two drug makers are raising troubling questions about safety issues and manufacturing procedures at some plants.

The Food and Drug Administration and the Justice Department are probing charges by a former Johnson & Johnson boiler operator who filed a whistle-blower lawsuit. The worker claims he was pressed to falsify data to cover up lapses at a plant here that makes Eprex, an anemia drug linked to serious illness.

The FDA and the U.S. Attorney in New Jersey, meanwhile, are investigating a Schering-Plough plant here and another in Caguas, about an hour away, for allegedly using unapproved ingredients.

The pharmaceutical industry was lured to Puerto Rico about 30 years ago by low-cost energy, an abundant supply of pristine water and a sizeable workforce. Fueling the moves were federal tax incentives at encouraging companies to locate on the island.

But Puerto Rico's gain has been New Jersey's loss. Had the plants been built in New Jersey, where many drug makers keep their headquarters, the state's budget crisis may not be so severe. More jobs would generate taxes and pump money into the local economy.

The migration offers a lesson in how companies will gravitate to tax-friendly locales to boost profits.

"It's hard to quantify, because you don't know which plants would have been built in New Jersey or not," said Lee Evans, chief of office audits for the state's taxation division. "But clearly, there's been a loss. That's the indirect effect of the tax incentives."

Trenton has been successful over the years in creating incentives that lured corporate headquarters and research operations to New Jersey, but the state doesn't have a plan to do the same with manufacturing.

"I can't say there's anything specific in the works," said George Nagle, who heads research and planning for the state's commerce commission. "The cost of producing in New Jersey, the whole metropolitan region, isn't competitive with some other areas."

But for the thousands who work in this dusty town and others like it around the island, the pharmaceutical industry provides career opportunities that are hard to come by.

"I don't know what else I'd do," said Aventis employee Hector Lavreano, as he drank an after-work beer at a tiny outdoor bar adjacent to an Esso gas station, where roosters strut among the patrons and blaring music competes with the roar of passing cars.

"Maybe a government job," he said. "But it's hard to find something that pays as well." Three co-workers nodded in agreement.

The drug industry accounts for about 1 percent of the island's workforce, and the average wage paid in the plants is roughly $14 an hour, several dollars more than what Puerto Ricans can expect elsewhere.

Compared with other industries, drug-company employees also receive relatively generous health and vacation benefits. Between the wages, benefits and opportunities to move within the organization, jobs at these plants are highly desirable.

"Who doesn't want to work for the pharmaceuticals?" Lavreano asked.

The manufacturing activity also creates another 90,000 indirect jobs, according to the Pharmaceutical Industry Association of Puerto Rico, a trade group. As a result, drug makers contributed about 25 percent of the island's $63 billion gross domestic product in 2000.

Drug makers boost employment even in troubled times. Schering-Plough, for instance, has hired dozens of temporary office workers and consultants in the past year to cope with quality-control problems that prompted the criminal investigation by the U.S. Attorney's office in New Jersey.

A Johnson & Johnson spokesman, meanwhile, confirmed an FDA investigation is under way, but denied any wrongdoing involving falsifying manufacturing records. Unlike Schering-Plough, J&J said it hasn't increased employment as a result of the FDA probe.

"These companies have such enormous ramifications for the whole economy," said William Riefkohl, executive director of the Puerto Rico Industrial Development Co., the government's economic development agency.

"They pay high wages, which continue to go up. And the extra jobs they create -- the contractors, the companies that make labels for bottles -- are significant. The pharmaceutical industry is our best cluster of foreign-owned companies. And they hardly ever leave."

There's good reason.

Since 1976, U.S. companies that opened manufacturing plants in Puerto Rico have received generous tax breaks. Under Section 936 of the Internal Revenue Service code, profits from operations in Puerto Rico are repatriated at a prefenterial rate.

This incentive is the primary reason the drug industry flocked to Puerto Rico, where 16 of the 20 best-selling medicines in the U.S. are now made.

"Where we locate manufacturing is based on a number of issues, including availability of technical people, distribution, grants from local government -- and taxes," said Richard Kogan, Schering-Plough's chief executive, during a recent meeting with securities analysts.

Indeed, companies often locate facilities where taxes are low. But the industry's decision not to build in new plants in New Jersey hurts the state's coffers at a time when companies are already grumbling about changes in corporate tax laws.

"There are serious ramifcations," said Donald Scarry of New Jersey Economics, a consulting firm. "These are jobs and ratables lost to the state."

This isn't to say Puerto Rico has a monopoly on manufacturing. Ireland has also attracted drug makers with tax incentives. A newer rival is Singapore, where Wyeth and Merck, for instance, recently opened plants. Schering-Plough is building there, too.

"But there are different reasons to open or expand in those places," said Augustin Marquez of the Pharmaceutical Industry Association of Puerto Rico. "By having a plant in Singapore, for example, a company gets access to the Far East, not just tax benefits."

A more compelling challenge, however, is the looming expiration of the 936 tax break in three years. To compensate, a new incentive was created by Congress. Now, drug makers can transform their operations here into controlled foreign corporations, which defers taxes.

"These special tax treatments make a difference," said Luis Fortuno, an attorney who was Puerto Rico's economic development secretary between 1993 and 1996. "We've remained attractive."

Indeed, several drug makers are in the process of investing more here. Amgen Inc., for instance, is spending $200 million, while Abbott Laboratories Inc. recently invested $100 million to expand. Eli Lilly & Co. is shelling out $250 million.

For many companies, improving or expanding an existing facility is a compelling reason for continued investment. In other words, it would be hard to justify the cost of uprooting after spending hundreds of millions of dollars.

"We've already made a substantial investment over the years," said Chris Bona, a spokesman for Abbott, which employs 2,300 people in Barceloneta to make antibiotics and medicines that generate $1.7 billion in sales, more than 12 percent of company revenue.

Despite the economic lift, not everyone welcomes the pharmaceutical industry.

Residents from Barceloneta filed lawsuits against nine drug makers, alleging their production caused air pollution. One lawsuit seeks class-action status and $600 million in damages. One drug maker, Nycomed, settled but terms weren't disclosed.

"The stench is unbelievable," said Ana Toledo, an attorney who represents the residents. "This is the downside to having these large companies, which usually get attention only for the jobs they bring."

Along with the Puerto Rico Electric Power Authority, drug makers were among the 10 largest violators releasing toxic chemicals in 2000, according to the Environmental Protection Agency.

Last year, the EPA charged Schering-Plough's plant here with violating regulations aimed at preventing emissions of toxic chemicals into the air from its plant. The drug maker paid a $49,000 fine.

Marquez, vice president of the Pharmaceutical Industry Association of Puerto Rico, declined to comment on the litigation or discuss complaints about pollution.

Riefkohl, of the industrial development group, acknowledged there are "issues" involving the environment, such as water resources, but he stressed the drug makers also contribute to the island with donations to schools and highway improvements.

Despite environmental missteps, the government here is working hard to retain the pharmaceutical industry. One effort would establish incentives to attract or create companies that perform clinical testing on drugs under development, according to Riefkohl.

And while it may be true that drug makers occupy a critical place in the economy, he also contends the relationship is a two-way street.

"In the end," Riefkohl said, "the size of the investments by these companies is, perhaps, the best weapon to keep the facilities functioning properly."

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