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2004 Looks Like A Knockout Year For Banking Industry Manufacturers Have Guarded Outlook
By All Accounts, 2004 Looks Like A Knockout Year For Banking Industry
Economic gains in 2003, continued low interest rates, and election-year public investments will support recovery trend
By LUIS A. RAMOS
January 29, 2004
Top executives in Puerto Ricos financial industry told CARIBBEAN BUSINESS that with the Iraq war settled and a steady growth curve highlighting continuous general-market improvements, increasing public confidence here and on the U.S. mainland will lead to a banner year in 2004. The potential collapse of the dollar and a change in monetary policy, however, remain areas of concern.
"The year 2003 and its developments have set the stage for general economic growth in 2004. A Dow Jones index of 10,000, a recent annualized U.S. gross domestic product growth over 5%, the Federal Reserves emphasis on no immediately foreseeable increase in short-term interest rates, and an election year expected to generate capital investments should be a well-earned recipe for growth in 2004," said Carlos Garcia, president of Santander Securities and senior vice president & chief operating officer of Santander BanCorp.
"The New Year has been ushered in by a host of good economic news on the U.S. mainland, which bodes well for Puerto Rico," said Antonio Uguina, president of Banco Bilbao Vizcaya Argentaria (BBVA) of Puerto Rico. "Stock markets are looking better than at any other time in the past three years; the U.S. labor market is finally firming up; and indicators of U.S. manufacturing activity posted record gains in December. These are all signs that the U.S. economic recovery is underway. A stronger economy in 2004 should yield faster growth in loans and deposits, contributing to the overall economic recovery."
Richard Carrion, chairman, president & CEO of Popular Inc., said, "The economy continues to experience a positive development. Yet it still isnt clear what kind of capital investments are being made by companies in areas such as telecommunications and personal computers, commonly considered economic locomotives."
"Puerto Rico should benefit from the strong U.S. mainland rebound in economic growth, since it has been proved that the Puerto Rico economy lags behind the stateside economy," said Angel Alvarez, chairman, president & CEO of First BanCorp. "Election-year events and the Federal Reserves commitment to keep monetary policy highly stimulated will ensure growth. The risk lies in strong oil prices, which act as a tax hike."
"The economic activity in the U.S. will be strong throughout 2004, but it wont equal the records posted in the last six month of 2003," said Victor Galan, chairman, president & CEO of R&G Financial Corp. Reasons include the potential onset of inflation because of the dollars depreciation against the euro, heavy government expenditures related to the Iraq war, and a high fiscal deficit. As a result, interest rates can be expected to move up by the middle of next year.
Galan added that Puerto Rico should expect growth in the areas of finances, construction, tourism, manufacturing, agriculture, and commerce in general.
"Election-year spending and a more productive manufacturing industry should keep the economy growing at about 4% in 2004, and Puerto Rico should keep pace," said Jose E. Fernandez, chairman, president & CEO of Oriental Financial Group. "With job growth lagging behind economic growth in the U.S. and no sign of significant inflation, the Federal Reserve isnt likely to raise interest rates for some time; a positive for the U.S. mainland and Puerto Rico economies."
"Puerto Ricos economy will continue to experience a dramatic improvement," said Miguel Ferrer, president & CEO of UBS of Puerto Rico Inc. "A large number of corporate and government [bond] issues are contemplated during this year. Consumer confidence and an already capital-rich system should provide the impetus to drive the security business and both the U.S. and Puerto Rico economies in 2004."
"It will be a banner year for small and midsize entrepreneurs," said Francisco Rodriguez, president of the Economic Development Bank. "There is a continuing trend of strong growth in areas such as tourism, agriculture, and commerce. There is also a significant number of companies applying for loans to expand their business or purchase existing operations."
"The New Year has the makings of a solid year, given the strength of the last two quarters in the U.S. economy," said Ramon Prats, president of R-G Premier Bank. "The stock market has appreciated and consumer confidence has improved greatly. Loan delinquencies should go down and an expansion in the consumer areas should finally materialize."
"Investors are more optimistic than they have been in four years," said Eduardo Colon, president of BBVA Capital Markets, referring to the Securities Industry Associations ninth annual Investor Survey. "Flows of new cash into the stock market should continue during 2004, as the returns on alternative competing investments continue to be relatively unattractive. BBVAs research department projects a 20% increase in the S&P 500 in 2004."
Local Manufacturers Have Guarded Outlook For 2004
Industry waiting for economy to restart
By MARIALBA MARTINEZ
January 22, 2004
Cautious optimism describes how most representatives of the islands manufacturing industry are facing 2004.
Industry analysts contacted by CARIBBEAN BUSINESS said economic growth hinges on controlling the costs of doing business on the island; accelerating and refining the permitting process; increasing pharmaceutical drugs research & development (R&D) approvals; and successfully integrating the private sector into marketing the island as a preferred economic-development spot for U.S. mainland and foreign companies to establish operations.
Puerto Rico Economic Development & Commerce (EDC) Secretary Milton Segarra recognized it will be practically impossible to get the U.S. Congress to approve an amendment to Internal Revenue Service Section 956. He said the administration would now concentrate on other efforts to revitalize the islands economy.
New Puerto Rico Industrial Development Co. (Pridco) Executive Director Hiram Ramirez Rangel said the agency would be following up on Pridcos economic development plan, which has proved successful so far.
"One of the areas I am most interested in is encouraging small businesses to take advantage of the 10% tax credit proffered by Law 169 on the purchase of locally manufactured products," Ramirez Rangel told CARIBBEAN BUSINESS. "I would also like to find ways to attract other areas of pharmaceutical manufacturing to the island, such as drug-dispensing development and biotechnology companies; the latter is one of the highest growth areas in Puerto Rico."
Ramirez Rangel will also be following up on the transfer of the administration of the governments Preference Policy Board from the General Services Administration to Pridco. He intends to preside over the board, which seeks to promote the participation of local government agencies and local businesses in the Puerto Rico governments purchasing process.
"During 2004, there will be more public-works activity as a result of what wasnt done in previous years," said Puerto Rico Manufacturers Association (PRMA) President Manuel Cidre. "In addition, as the U.S. economy improves, Puerto Ricos consumers will benefit.
"But there wont be any great surprises in the manufacturing industry," added Cidre. "The worst that could happen already did in 2001 and 2002, and now we have finally adjusted to [the new economic reality]. We still have to be alert, however, to events that can affect us negatively."
Cidre said Puerto Rico must create legislation that attracts new businesses to the island. He cited as an example the state of North Carolina, whose government officials met last year with pharmaceutical company Merck and made "an offer they couldnt refuse," resulting in a new operation that had originally been destined for the South Pacific.
"If Puerto Rico doesnt begin to look for ways to incentivize private corporations investment in Puerto Rico, we will lose business not only to competitors such as the Dominican Republic, Singapore, and Ireland," said Cidre. "Now our real competitors are U.S. states, which are looking for ways to strengthen their economies."
Agustin Marquez, executive director of the Pharmaceutical Industry Association (PIA) of Puerto Rico, is hopeful about the New Year because of the continuing expansions by the islands pharmaceutical companies, which account for 25% of the manufacturing industrys work force of approximately 120,000.
"We feel confident because of the number of expansion projects in the pharmaceutical sector," said Marquez. "PIA members are also looking forward to the new clinical-trials tax credit, which could turn into an opportunity to promote R&D as a new pharmaceutical-manufacturing sector in Puerto Rico and to strengthen the network between the islands scientists and the pharmaceutical manufacturing industry at the national and international levels."
Still, Marquez insists the island must keep its eye on the competitive process, a constant race for improvements. "We have overcome obstacles in the pharmaceutical sector, such as the permitting process," he said. "Now there are more opportunities to create alliances between the university and pharmaceutical sectors and to qualify for additional resources, particularly in biotechnology."
One of the biggest challenges for the pharmaceutical sector remains the cost of electricity. Said Marquez, "This is an area of constant concern for the industry. Another big challenge this year is harmonizing and taking advantage of the new technological opportunities that may replace traditional means of generating electricity."
Jorge Rodriguez, general manager of Solectron, which operates as a contract manufacturer for major corporations on the island such as Hewlett-Packard Inc., feels optimistic. "We already have some positive indicators for 2004," he said. "We are looking at more job contracts for the first quarter, which is usually a slow period in the electronics sector. And for our contract manufacturing projects, the work stands pretty much solid. None of us is out of the [economic] hole yet, but the tendency is for our clients to be losing less money, and that gives me some reassurance."
Expected results of expansions, new products in pharmaceutical sector
Several manufacturing companies have announced new expansions or will finish expansions and product transfers in 2004. In Juncos, Medtronic Med-Rel Inc. just announced a new $50 million expansion to its soon-to-be inaugurated $35 million plant, increasing the size of the operation from 102,000 square feet to 120,000 square feet and adding 200 jobs to its current work force of 400. Before the end of 2003, Amgen doubled its $400 million biotechnology-plant expansion, also in Juncos, adding another 500,000 square feet and 200 new jobs. By 2005, Amgen will provide more than 1,000 jobs.
Abbott Laboratories $350 million biotechnology plant is scheduled to be completed on time and on budget by October 2004, with a work force of 200. The new 310,000-square-foot operation will bring to Puerto Rico the production of Humira, a treatment for rheumatoid arthritis. A $20 million expansion to Abbotts Humacao contract manufacturing operations will create 20 to 25 jobs and round out Humiras start-to-end manufacturing process in Puerto Rico.
Gurabos Johnson & Johnson (J&J) Janssen-Ortho LLC pharmaceutical drug manufacturing facility will be working on a $250 million expansion that will create 125 jobs by the time it is ready in 2006. In addition, J&Js Ortho Pharmaceuticals plant in Manati is undergoing a $45 million expansion that will add 30 new jobs over the next two years and consolidate the companys oral-contraceptive manufacturing operations.
Construction on Eli Lillys $450 million biotechnology plant in Carolina is slated to be finished in late 2004 or early 2005, when the federal regulatory validation process could start; operations could then begin in 2006. The current pharmaceutical facility in Carolina is undergoing a $175 million expansion for a fill-and-finish facility, the final stage for pipeline products such as Symbyax, PKC, Cymbalta, and Yentreve, which are pending regulatory approval. Eli Lilly has also started building a new $125 million state-of-the-art bulk manufacturing facility in Mayaguez to produce Strattera, a new nonstimulant treatment for attention deficit disorder, expanding the complexs work force from 300 to 450.
Pharmaceutical industry analysts forecast that Mercks Emend, a new medicine that prevents chemotherapy-induced nausea and vomiting (CINV) and has been manufactured in Barceloneta since its launch in April, will reach annual sales of $500 million. The only oral-tablet treatment for CINV, Emend can be used with other antivomiting drugs and taken with or without food.
While pharmaceutical companies keep widely advertising new medicines, the fact is that drug pipelines are basically dry. Regulatory Compliance Services President Eric Olivieri said, "We will be seeing more product-line extensions submissions from pharmaceutical companies to protect their product patents and minimize the penetration of generic and bioequivalent drug products into their markets. The pressure of cost-containment is also huge and will be ever-present in the decision-making process for these companies, which may affect open communication channels with the FDA [U.S. Food & Drug Administration]."
Competition leads to increased production
Competition in the pharmaceutical drug arena will trigger manufacturing in Puerto Rico. Canovanas AstraZeneca IPR Pharmaceuticals has a strong contender in the so-called cholesterol drug-treatment war for 2004 with its new product, Crestor, which has sold approximately $140 million since its introduction in August 2003.
It still has a long way to go before catching up to giant competitor Lipitor, manufactured by Pfizer Inc. in Vega Baja, which was predicted to sell $9.1 billion in 2003. Given, however, that Crestors treatment costs less than Lipitors ($770 vs. $850 annually) and has been proved to lower bad cholesterol and raise good cholesterol more effectively, the company predicts sales could reach $3 billion of the $12.5 billion market.
Pfizers erectile dysfunction drug Viagra, which had already taken an enormous hit with competition from other treatments such as Glaxo SmithKlines Levitra, now faces Eli Lillys Cialis. While Viagras effects last a little over four hours, Cialis claims up to 36 hours. And though both drugs costs less than $10 and annual sales for Viagra are expected to reach $1.7 billion, Cialis expects a respectable $272 million during its first yearnot bad for a newcomer.
During a visit to Puerto Rico last year, J. Patrick Kelly, vice president of Pfizer Inc. and president of the companys U.S. Pharmaceuticals Group, said Pfizers six manufacturing operations on the island would probably produce the companys new products, upward of 10 new launches expected by 2005. While rumors persist that at least one pharmaceutical operation will be sold, the companys production output from the island will remain significant.
While Schering-Ploughs Zetia, a new cholesterol-lowering treatment, resulted in 40 new jobs and unspecified continuing investment in expansion and equipment at the companys Las Piedras operation, the products effectiveness depends on its shared use with Mercks Zocor, whose patent expires in 2006. Zetia also faces competition from several pharmaceutical drugs manufactured on the island, including Crestor, Lipitor, and Pravachol.
San Germans Baxter Healthcare / Fenwald Division, meanwhile, invested $90 million in equipment and machinery to produce the Intercept Blood System for platelets, which will double the plants work force of 600 as the operation reaches full production.
Other manufacturing sectors thrive
By the third quarter of 2004, a new Pennsylvania-based medical device contract manufacturer named Classic Industries Inc. should have finished construction of a plant in Ponce to produce precision tight-tolerance, high-quality components for the medical/dental instruments industries. The plant will provide complete manufacturing, assembly, and packaging services to customers in Puerto Rico and the Dominican Republic.
Mayaguezs E. R. Rule Co. of Puerto Rico, manufacturer of precision hardware tools for parent company L.S. Starrett Co. and for other private labels, begins 2004 by adding 50 employees to its work force of 175, thanks to the transfer of Starretts stateside operations to the island in response to greater product demand. The company has added a second shift to keep up with demand.
In 2003, water-treatment products manufacturer & distributor Gulbrandsen P.R. Inc. decided to invest approximately $5 million in a new plant in Dorado. The company will produce water-treatment products such as aluminum chloride solutions, which it sells to clients such as the Puerto Rico Aqueduct & Sewer Authority, engineering firms, suppliers, and contractors.
Apparel sector holding on thanks to government incentives
Trying to make up for the numerous apparel-company closings in recent years, which have left more than 5,000 jobless since 2001, the EDC sought the cooperation of other government agencies to develop new opportunities for job creation.
Caribbean Co-op in Hatillo inaugurated a new shoe-manufacturing operation after receiving a $750,000 loan from the Economic Development Bank and $81,240 in tax incentives from the Puerto Rico Industrial Development Co. (Pridco) late in 2003. Also at the end of last year, Arecibos North Central Consortium (known by its Spanish acronym Conoce) placed an additional 29 new employees with Caribbean Co-op in Hatillo, increasing the work force to more than 60 employees.
Military-apparel manufacturers are still successfully maintaining operations in Puerto Rico because of the war in Iraq. SNC Manufacturings operations in Orocovis were awarded $575,511 in special tax incentives from Pridco. In exchange, the company has a commitment to create 300 jobs in 18 months with an estimated payroll of $1.6 million and an estimated investment in equipment & machinery of $477,300. Rocky Shoes & Boots Inc.s Moca plant (known as Lifestyle Footwear Inc.) will produce an additional $6.1 million in footwear for the U.S. military through 2004.
Closings still expected
Two companies that announced closings for 2004 are Bristol-Myers Squibb and E-Z-EM Inc. Bristol-Myers Squibb (BMS) begins this year the process of transferring its bulk manufacturing operations in Humacao, thereby reducing the plants work force of 600 by half. Some of the bulk products could end up in BMS plants in Barceloneta. Some affected employees could be absorbed into other BMS Puerto Rico plants in Barceloneta, Humacao, Manati, and Mayaguez, or they could be transferred to the U.S. mainland.
E-Z-EM Inc., a medical device manufacturer in San Lorenzo, and its Westbury, N.Y., heat-sealing plant will close and outsource its operations to third-party manufacturers by February. Between both plants, approximately 100 employees, or 11% of the work force, will lose their jobs.
This Caribbean Business article appears courtesy of Casiano Communications.