Life On The Island

Dec. 21, 2004
The life sciences industry taps Puerto Rico for tax breaks, educated workforce.

Say the words, "Puerto Rico," and many people envision white sand and clear blue water. To be sure, Puerto Rico's location in the Caribbean and average temperature -- a balmy 82 degrees Fahrenheit -- make it an idyllic vacation spot. But executives at many life sciences companies think of business, not beaches, when they think of Puerto Rico, which is Spanish for "rich port." One example: In 2002, Abbott Laboratories, which has operated on the island since 1969, invested another $350 million to construct a plant that will produce a new treatment for rheumatoid arthritis. The investment is the largest in Abbott's history, says Harry Rodriguez, divisional vice president and general manager of Puerto Rican operations with the Abbott Park, Ill.-based company. "This drug is expected to be a blockbuster." Between 1990 and 2002, total pharmaceutical manufacturing employment on the island -- which is roughly the size of Long Island -- jumped from about 15,000 to 27,000, reports the Puerto Rico Industrial Development Company (PRIDCO). Exports of pharmaceutical and biotech products from Puerto Rico more than quadrupled during the same period, increasing from about $7 billion to $31 billion. Sixteen of the 20 top-selling drugs in the United States, as well as half of all pacemakers and defibrillators sold in America, are manufactured on the island, PRIDCO says. Several factors are driving corporate interest in Puerto Rico, including a variety of tax incentives, a pool of educated and experienced employees, and an established infrastructure. Tax Advantages Officially, Puerto Rico is a commonwealth in association with the United States, and Puerto Ricans hold many of the same rights and obligations as U.S. citizens. For instance, they can serve in the armed forces and must pay Social Security. However, they can't vote in federal elections and don't pay federal taxes. PRIDCO focuses on recruiting companies in five industry clusters, says Milton Segarra, secretary of Puerto Rico's Department of Economic Development and Commerce: life sciences, pharmaceuticals, medical instruments, information technology and health. One result has been some decidedly generous tax incentives. Puerto Rico's corporate tax rate tops out at 7% (compared with 35% to 40% in the States). What's more, the government can slash the rate to 2%, or eliminate it entirely for "pioneer corporations" that are introducing innovative technologies. Also, companies can deduct 200% of their investments in R&D performed within Puerto Rico and deduct in one year the entire cost of some investments in capital equipment and buildings, rather than depreciating the cost over several years. Some companies also are able to gain relief from U.S. federal income taxes under Section 901 of the Internal Revenue code. Profits earned by controlled foreign corporations -- essentially, subsidiaries of U.S. companies operating outside the U.S. -- are exempt from federal income tax until they are repatriated to the U.S. Section 901 applies to profits earned in Puerto Rico, as well. "An international company can use income from Puerto Rico anywhere in the world, and bring it back to the parent at an advantageous time," says Gary Bingham, director of economic research for new business development with PRIDCO. This is important because companies are losing the benefits they previously could claim under another section of the tax code. Section 936 allows companies to claim a credit against U.S. income taxes on certain income they earn in Puerto Rico, although they must have been operating in Puerto Rico before 1995. In 1996, Congress announced that Section 936 would expire at the end of 2005. There was some concern that companies might leave because of the announcement. That didn't happen, Lugo says. "In reality, the highest amounts of capital investments were done following the announcement in 1997." Consider this: In addition to Abbott's 2002 investment, Amgen Inc., Thousand Oaks, Calif., and Eli Lilly and Co., Indianapolis, invested $800 million and $450 million, respectively. Experts say that one reason companies have continued their investments is the Puerto Rican workforce, which consistently earns high marks. "Throughout the last 20 to 30 years, we've developed a local managerial labor force," says Segarra. "They can understand the objectives and vision of the corporation." More than 90% of managerial employees at the plants are Puerto Rican. Puerto Rico's experienced employee base is one key to the success of Edwards Lifescience's Puerto Rican operations, says Randel W. Woodgrift. He is corporate vice president of manufacturing operations with the Irvine, Calif.-based manufacturer of medical devices used to treat cardiovascular disease. Edwards opened a facility in Anasco, Puerto Rico, in 1972, where 1,000 employees produce several types of heart-care devices. "It's been very successful," Woodgrift says. "The labor force is very stable, with very low turnover." He adds that some life sciences companies have failed when they've set up operations overseas but weren't able to find employees who could learn their jobs quickly enough to get products out the door ahead of competitors. "If it takes too long to come up to speed on manufacturing processes, it can hurt you," Woodgrift adds. Salary levels are lower than in the U.S. The average hourly production wage of pharmaceutical workers in Puerto Rico in 2001 was $14.44. That compares with $18.38 in the U.S. Nearly 40% of the 25,000 college degrees awarded in 2000 went to science and engineering students. Finally, Puerto Rico's status as a U.S. commonwealth means that products manufactured on the island and shipped to the U.S. are not subject to duties or quotas. And, all U.S. Food and Drug Administration regulations apply. Making It Work Of course, locating somewhere strictly on the basis of a tax incentive doesn't make sense, given that tax policies can change when new administrations come into office. Plant-location decisions need to take into account numerous factors: proximity to customers, the general cost of doing business, and the availability of competent labor and support firms, among others. "If all the other points are not in favor, tax incentives won't tilt the balance," says Tom Heijmen, senior adviser with The Conference Board, New York . In Puerto Rico, executives also need to consider the possibility that it could someday become America's 51st state. If that occurs, all residents and corporations would pay federal income tax. So far, statehood referendums have failed to pass. Some say it will never happen, noting that many Latinos, including Puerto Ricans, take great pride in their national identity. On the other hand, members of the New Progressive Party, which supports full U.S. statehood for Puerto Rico, cast nearly 46% of the votes in the last election. They also hold 20 of 51 seats in Puerto Rico's House of Representatives. Executives considering a Puerto Rican location also need to partner with the local government, says Woodgrift of Edwards. "Work out what they can expect from you, and what you expect from them," he says. Abbott, for instance, worked closely with the local administration as it was developing plans for its new facility. As a result, all the permits were issued within six months, says Rodriguez.

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