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The Associated Press

Puerto Rico's Powerhouse Pharmaceutical Industry Confronts Change With Phase-Out Of U.S. Tax Incentives


August 23, 2004
Copyright © 2004 The Associated Press. All rights reserved.

BARCELONETA, Puerto Rico (AP) - This small coastal town once was known as "Pineapple City." Now, it's the Western Hemisphere's biggest producer of Viagra, a pill that fights impotence.

However, the tax incentives that transformed the U.S. Caribbean territory from an impoverished agrarian society to a hi-tech pharmaceutical powerhouse are ending Dec. 31, 2005.

"This is the first time since the early 20th century that Puerto Rico does not have a tax incentive geared to Puerto Rico," lamented Hiram Ramirez Rangel, executive director of the Puerto Rico Industrial Development Co. or PRIDCO, a government agency to attract business.

For many small Puerto Rican towns, pharmaceutical plants are a lifeline.

Barceloneta is a case in point. The Puerto Rican town of 22,322 residents has become a pharmaceutical manufacturing hub with four companies employing 7,870 people, making it Barceloneta's No. 1 industry. Pharmaceuticals pay about US$10 million in taxes annually to the municipal government, nearly half the town's US$24.1 million budget.

Freddie Melendez, 63, remembers the poverty here before the pharmaceutical companies arrived. "I would walk to school barefoot with my shoes over my shoulder," he said, sipping slowly on a Coors Light at a bar whose walls were covered with drawings depicting the bygone sugarcane and pineapple industries.

Melendez cut cane for 50 cents an hour after school and would throw it on an ox-drawn cart. Things changed when Illinois-based Abbott Laboratories arrived. He turned to construction and helped build the plant's foundation, making 10 times more money than cane cutting.

Barceloneta now pumps out 100 million Viagra pills a year, exporting virility to bedrooms in the United States and farther abroad.

On the edge of town, Viagra signs line a motocross track. At the Pfizer Inc. plant on the other side of town, hordes of workers dressed in white sanitary gowns and masks tend machines that spit pills into a bucket. Outside the plant is a bustling crossroads that connects Barceloneta with three nearby towns. American fast-food chains and a string of other businesses have sprouted up here in a sign of the sustained economic development.

In 1976, the U.S. Congress passed section 936 of the U.S. Internal Revenue Service tax code, allowing companies operating on the island to send all profits tax-free to the U.S. mainland.

A budget-cutting Congress scaled back the credit in the 1990s and repealed it entirely in 1996, when some legislators vilified it as corporate welfare. Then Sen. David Pryor, an Arkansas Democrat, called it the "mother of all tax breaks."

But the incentives brought wealth to Puerto Rico, which today manufactures 19 of the 25 top-selling prescription drugs in the world, according to the trade publication IMS World Review.

Some 80 pharmaceutical plants here employ nearly 30,000 people, and the industry has provided thousands of indirect jobs. Pharmaceutical exports increased to US$36.8 billion in 2003 from US$28 billion in 2001, said PRIDCO spokeswoman Eloisa Cruz.

With the loss of the incentives, some fear companies could relocate to competing foreign countries like neighboring Dominican Republic, or Ireland and Switzerland, though industry analysts downplay the risk of flight.

"I don't foresee an immediate large exodus," said tax lawyer Brian Andreoli, who worked in Puerto Rico for 16 years before moving to New York City.

"Puerto Rico makes business sense for a lot of these companies because of the attributes of the island including the work force, education system and the assets these firms already have."

In addition, he said, "Puerto Rico's unique status (as a U.S. commonwealth) allows them to import and export as if it's part of the United States from a customs point of view."

To pull the plug and move to another country would cost each company tens of millions of dollars and at least two years in constructing new facilities, said Andreoli, who recently co-wrote an article in the World Trade Magazine headlined "Puerto Rico Remains Strong."

Ramirez said tax incentives still exist, pointing to controlled foreign corporation protection that allows U.S. companies to send dividends through foreign affiliates, but not to parent companies on the U.S. mainland.

Large pharmaceuticals will be able to weather the change, officials said.

"It was a hard blow," said Jorge Gonzalez Monclova, a Pfizer spokesman. But he said that New York-based Pfizer is able to remain profitable in Puerto Rico by producing cutting edge pharmaceuticals like cholesterol-reducing Lipitor -- the best-selling pharmaceutical in the world.

Small pharmaceuticals will suffer the most and it would be less attractive for them to establish themselves in Puerto Rico, Ramirez said. But he predicts the overall effects will be minimal.

Even since the announcement of the tax credit phase-out, the industry has grown, adding 4,000 jobs since 2001, Ramirez said. But he acknowledges the challenges ahead.

"It's making us work harder on our business fundamentals," he said. "We have to do a better job of targeting companies in Europe and elsewhere."

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