Puerto Rico: A lure for life sciences, contamination control

11/01/2003

Island provides off-shore advantages with comforts of home

By Mark A. DeSorbo

OLD SAN JUAN, Puerto Rico—A visitor strolling through the narrow, cobblestone streets between the colorful, colonial buildings of this historic paradise may have a hard time imagining that 16 of the top 20 drugs sold in the United States are manufactured on this Caribbean island.

Even from the white sandy beaches or high atop the mountains of the Cordillera Central, one may never realize that Puerto Rico also produces 50 percent of all defibrillators and pacemakers, including the one that keeps Vice President Dick Cheney's heart ticking timely.

Pharmaceutical and biotechnology giants, such as Abbott Laboratories (Abbott Park, Ill.) and Pfizer (New York City), are not the only industries booming on the island. In fact, last year, 21 electronics manufacturing companies, including Palo Alto, Calif.-based Hewlett Packard Co., expanded operations in Puerto Rico.

While the U.S. Colony has long been considered a hot spot for big drug makers, many supporting industries, including the supplier networks for cleanroom and contamination-control products, are also taking advantage of Puerto Rico's offshore yet comfort-of-home advantages.

Many firms have established strong footholds in Puerto Rico, with support from PRIDCO (Puerto Rico Industrial Development Co.), which works with government, industry and academia to bolster the economy by attracting big business—like pharmaceutical and biotech companies—to the island.

According to a PRIDCO study, Puerto Rico brings in a gross domestic product of more than $71 million a year, and more than 40 percent of that figure is fueled by manufacturing industries.

Manufacturing has increased by 40 percent since 1997, with 56 of the Fortune 100 and 175 of the Fortune 500 companies operating on the island. This has boosted outbound shipments by 96 percent, from $23.9 to $46.9 billion, while inbound shipments rose 36 percent to $29.1 billion since 1997.

Total exports for fiscal 2002 were $47.1 million, with pharmaceuticals grossing more than $31 million. A distant second was electronics, computers and machinery with $5.6 million. Food was third with $3.7 million. Instruments, including medical devices, accounted for $2.2 million, while other chemicals, aside from pharmaceuticals, roped in $2.1 million.

The proverbial feather in Puerto Rico's cap, which has allowed its pharma-biotech sector to grow 33 manufacturers strong over the last three decades, has been Section 936 of the Internal Revenue Service tax code.

In 1996, the IRS dissolved incentives under that section, causing major concerns that Puerto Rico had lost an edge and life science industries would move operations to other targeted growth areas, such as Europe and Asia. But Puerto Rico remained a strong contender because Section 936 has been somewhat offset by a new set of laws that allows the island to maintain a tax rate of seven percent or less. In addition, "pioneer industries" may be eligible for a 0 to 2 percent rate.

"What they found was that by the time 1996 rolled around, such an infrastructure had been built that it made no sense to leave the island," says Rob DeRocker, executive vice president of Development Counsellors International, a New York City-based economic development and tourism-marketing firm.

There are deduction and exemption incentives as well. For example, Puerto Rico offers a 200 percent deduction for research and development and job training investments. There is also a 90 percent exemption on personal and real property taxes, as well as a 60 percent exemption on municipal taxes.

Other incentives include cash grants for training, building improvements and other start-up costs. There are wage incentives if companies hire welfare recipients, low-interest industrial revenue bonds, and loans and guarantees by the Economic Development Bank and the Government Development Bank of Puerto Rico.

That's why, DeRocker says, drug makers like Abbott Labs are spending more than $350 million to build a biologics plant in Barceloneta that will house more than 170,000 square feet of cleanroom space. The new facility will create 200 jobs and allow Abbott to ramp up production of Humira, a recently approved medication for rheumatoid arthritis.

In addition, Amgen (Thousand Oaks, Calif.) is investing $800 million to build a plant in Juncos, creating 600 jobs, while Eli Lilly (Indianapolis) will create 450 jobs with a $450 million facility to ramp up production of Humalog, a treatment for diabetes.

The workforce to fill those jobs is skilled and highly educated, with more than 22,000 people receiving higher education degrees per year. Nearly half of those degrees are earned through science and engineering programs.

Nearly 132,000 islanders hold manufacturing jobs—11 percent of Puerto Rico's total employment. More than 28,000 of those jobs are provided by the pharmaceutical industry. Just under 17,000 work in electronics fabs, while more than 10,700 manufacture medical instruments.

"Having a job at a pharmaceutical or biotechnology company is something that is very prestigious for people in Puerto Rico," says William Riefkohl, executive vice president of the Puerto Rico Manufacturers Association.

The environment in which life science industries and cleanroom end-users thrive seems to differ greatly from those that silently coexist on "the mainland."

Many pharmaceutical and biotechnology professionals attribute to the "cluster" effect, a paradigm that PRIDCO strives to cultivate.

"The whole idea is to integrate academia with government and industry to promote effective communication that sustains and helps industry get to the next level," says Carlos A. Tollinche, director of scientific affairs for INDUNIV, PRIDCO's research consortium.

Harry Rodriquez, divisional vice president and general manager of Abbott Health Products (Barceloneta, Puerto Rico) agrees, acknowledging an ongoing dialogue between competing pharmaceutical and biotech companies. If a plant manager or an engineer needs advice or feedback, he says, they have no problem calling on colleagues in the Pfizer plant across the street.

The relationship, Rodriquez adds, is the same as someone knocking on a neighbor's door to borrow a cup of sugar. In this case, drug makers are poised to share bulk chemicals if a rival should come up short.

"We collaborate with each other," Rodriquez says. "Even though we are competitors, we are all working for what I like to call Puerto Rico Inc."