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Drug GMP Report
Puerto Rico Incentives Luring Drugmakers
by Rick Bird
September 1, 2004
Drug GMP Report
Puerto Rico's unique combination of tax, financial and operational incentives continue to make it an attractive offshoring destination for U.S. drugmakers looking to rein in manufacturing costs.
While the U.S. territory has been home to a number of U.S. pharmaceutical firms for more than three decades, it has been making a strong push in recent years to attract more life science companies, particularly in the biomedical field, which has seen operating costs skyrocket in traditional hotbeds such as California.
California biotech giant Amgen, for example, announced last year that it planned to build a $450 million biotech plant in Juncos, Puerto Rico. Baxter Healthcare initiated a similar expansion project last year, announcing plans to spend $90 million on a new plant in San German, Puerto Rico. Other U.S. drug firms with a presence in the territory include Abbott Laboratories, Bristol Myers Squibb, GlaxoSmithKline, Aventis, Johnson & Johnson and Pfizer.
According to a recent report published by the California Healthcare Institute (CHI), Puerto Rico currently manufactures 16 of the 20 top-selling drugs in the U.S. and approximately 50 percent of the pacemakers and defibrillators sold in the U.S.
Tax Incentives Galore
One reason California and other states have been losing so many of their pharmaceutical and biotech manufacturing jobs to Puerto Rico is because the territory offers such attractive tax incentives. The maximum corporate tax rate for companies located in Puerto Rico is 7 percent, but it can drop to as low as 2 percent if manufacturers qualify for "pioneer" status, which is based on the amount of investment and the number of jobs created by the project.
California, meanwhile, has a corporate tax rate of nearly 9 percent and offers little in the way of tax incentives for manufacturers. California used to make available a 6 percent manufacturing investment tax credit to companies that build manufacturing facilities in the state, but that credit has expired, and CHI said the state currently has no plans to reinstate it.
A low corporate tax rate isn't the only incentive Puerto Rico has to offer, according to Gary Bingham, director of economic research for the Puerto Rico Industrial Development Company (PRIDCO), the territory's economic development authority. Bingham noted that Puerto Rico-based companies can also take advantage of numerous tax exemptions, including 100 percent exemption from:
* Excise taxes on raw materials, machinery and equipment for manufacturing, fuels for power cogeneration, chemicals used to treat wastewater and equipment for call centers;
* Municipal license taxes during plant construction and for the next three quarters, with 60 percent thereafter;
* Real and personal property taxes during initial construction and the first year of operation, with 90 percent thereafter;
* Taxes on passive income derived from eligible Puerto Rican investments; and
* Any property tax on intangible assets, such as patents, production licenses and trademarks.
Another tax advantage that Puerto Rico offers, said Bingham, is that companies that convert to Controlled Foreign Corporation (CFC) status can avoid paying federal taxes on income generated in Puerto Rico as long as that income isn't repatriated into the U.S.
"Companies can reinvest the income in Puerto Rico, or use it for any international purposes, such as R&D or marketing, and then bring it back to the parent company at the most tax-advantaged time," said Bingham.
Infrastructure grants are yet another financial incentive offered by the Puerto Rican government, said Bingham, who noted that companies can qualify for grants by either developing new sites or making improvement to existing facilities.
PRIDCO, for example, awarded Baxter Healthcare approximately $6.3 million in infrastructure grants, based on the estimated creation of 453 new jobs at its new manufacturing facility is San German. The plant is scheduled to open by 2006.
Puerto Rico also offers a wealth of operational advantages to U.S. firms, including infrastructure, transportation, utilities, telecommunications and financial systems that are typically much more advanced than those offered by common offshoring destinations in Asia and Latin America.
Merck spokesman Art Kaufman said Puerto Rico's operational benefits were among the main reasons the company decided to expand its presence on the island. Merck built its first plant in Puerto Rico in 1969 and later added two other locations in 1987 and 1991.
"The same advantages that motivated Merck to invest in Puerto Rico three decades ago still exist," Kaufman told DGR. "These include its strategic location, excellent workforce, well-developed transportation and telecommunications infrastructures, and a responsive regulatory environment as well as other significant benefits."
Bingham noted that Puerto Rico has a highly productive workforce that is bolstered by an educational system that that awards more than 9,000 science and engineering degrees each year. The work force also comes are a much cheaper price than in the U.S., with salaries typically 20 percent to 30 percent lower than on the mainland.
Puerto Rico's growing research community is yet another positive, said Bingham, who noted that the territory is becoming especially strong in biomedical research. For example, the University of Puerto Rico is currently planning to develop a 280,000 square-foot molecular sciences complex that is expected to be a boon to U.S. biotech firms.