The Reality of Puerto Rico after Maria

Big Pharma Provides Resilience and Hope

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Source: Carola Schropp

Puerto Rico (PR) has received a lot of press recently because of the two hurricanes which devastated the archipelago. Six months later, 20% of the island’s residents still don’t have electricity.

And that is not all. The Commonwealth of PR is $72 billion in debt, and past governments have been mismanaging its public funds for over 30 years. The U.S. Congress is partly to blame for this debacle but also local corruption. However, that’s now water under the bridge. The public sector is currently being restructured by U.S. House of Representatives—US Public Law 114-187, better known as PROMESA.

But I’d like to talk about the other—less publicized—side of the coin. There is a second economy at play here: the state of the private economy, and the importance of the biopharmaceutical industry in PR.

The pharma industry has a large manufacturing footprint in PR, representing 72% of its exports or $14.5 billion last year, according to the U.S. Bureau of Labor and Statistics. All told, there are more than 25 pharma plants on the island. AbbVie, Amgen, Eli Lilly, Johnson & Johnson, and Bristol Myers Squibb produce not only small-molecule drugs but also biologics on the island. AstraZeneca, Pfizer, Merck, and Baxter are solely focused on small-molecule manufacturing. Add contract manufacturers like Patheon and AVARA Pharmaceutical Services, and generic manufactures such as Teva, Mylan, and Neolpharma to the mix and you end up with 14 major producers in PR.

On the medical devices side, 15 of the top-20 manufacturers of class 3 medical devices manufacture in PR. Cooper Vision manufacturers over 290 million of its contact lenses in PR. Ninety percent of all pacemakers in the world are manufactured in PR by companies like St. Jude and Medtronic. Medtronic is the second-largest life science employer in PR, with over 1,000 employees between their Humacao and Juncos sites.

Very importantly for PR, Medtronic is sticking to its expansion schedule for PR. In June of last year, Peter Walsh, vice president, explained Medtronic’s significant expansion plans for PR at the annual meeting of PRMA, the PR Manufacturers Association. Those plans are still on the books. The company has created around 350 new jobs after the hurricane.

PR charges a 4% tax on exported goods and services being produced locally. For innovative products, this tax rate can be negotiated to 0%. There is no federal tax, but President Trump’s new tax reform categorized PR as a foreign territory. This may add around 10.5% GILTI tax on goods produced in PR and shipped to the US. GILTI is very complicated. It is based on a complex formula of revenue and assets held in a CFC (Controlled Foreign Corporation) and it would apply to any profits generated anywhere on the planet, not just in PR.

Research Tax Credits

Research tax credits up to 50% are available for R&D projects, including process development and clinical trials. Startup companies that do not owe any taxes can sell their tax credits for 90 cents on the dollar. Companies incorporated in PR are eligible for U.S. government grants. U.S. law applies. Puerto Ricans are U.S. citizens.

Additionally, new residents to PR are eligible for Act 20/22 tax status, paying 0% federal tax on capital gains from anywhere in the world. PR-sourced dividends and interest are tax-free as well. (See “Puerto Rico’s Investment Tax Benefits at a Glance” below for details.)

Fifty years of experience in pharmaceutical and device manufacturing has created a unique pool of expertise in PR. Over 22,000 STEM students are graduated every year in PR. Highly qualified people are often available for entry-level jobs. The professional population is bilingual, fluent in Spanish and English.

In addition to pharmaceutical and medical device manufacturing, PR has a significant base of aerospace companies. Honeywell runs a new $35 million electromagnetic-compatibility lab, supporting its global aerospace program. Lufthansa Technik is creating 500 jobs to maintain aircraft from all over the Americas.

In the technology services arena, Microsoft produces all their CDs in PR. Their operations in PR manufacture their DVD optical media and manage digital distribution, product releases, and security. Additionally, the company operates a sales, marketing, and service subsidiary in Guaynabo.

Google has launched, for the first time in the U.S., their balloons for “Project Loon” into the PR stratosphere. Those balloons enable texts, emails, and basic web access in remote areas after the hurricane. HP is also represented in PR with operations in Aguadilla, where they manufacture printers, latex ink, PCs, mobile devices, and solutions and services.

The business community in PR is much aware of the need for growth. Because of the difficulties of the public sector, the private sector is committed to going the extra mile. There are numerous efforts by individuals and newly minted “Think Action” organizations to move things ahead. The government has outsourced economic development to Invest in PR, an organization of private business people modelled after similar organizations elsewhere on the globe. The strategic orientation of this group and its cadre of successful business people from PR, as well as stateside, promises action.

Add to that many new groups that are springing up all over PR. Parallel 18 is one project initiated by the Puerto Rico Science, Technology and Research Trust (PRSCT). Its mission is to mentor technology startups from all over the world for six months by providing stipends and helping the young companies with infrastructure and business support. Now in its fifth cycle of recruiting new start-ups, the program attracts venture capitalists from places as far away as New York, Boston, and San Francisco.

Maria and its Aftermath

With the negative narrative enveloping the media regarding PR’s financial crises and hurricanes Irma and Maria, which hit the island in September of last year, I appreciate the opportunity to tell the other side of the story that’s gotten lost in the headlines. The story of a resilient PR, of companies and their employees working together to overcome the disaster caused by the worst hurricane in PR’s history.

The relationship between employers and employees in PR is different from the mainland and other industrial countries. There is an interdependence that is stronger than elsewhere. Both sides recognize that they need each other.

The aftermath to Maria bears witness to this special relationship. Given the challenges, industry in PR weathered the storm well. “We thrived as [an] industry,” commented Kerry Ingalls, vice president, site operations, Amgen, at a recent meeting of PIA, the Pharmaceutical Industry Association of Puerto Rico.

Keeping operations going after the storm was a logistics challenge. Roads were blocked by trees and anything else movable that Maria had strewn all over the place. Many people had lost their home or experienced property damage, either from the up to 165 mph winds which blew over PR for over eight hours, or the 22 inches of rainfall that María brought with her and that caused catastrophic flooding.

But the companies could count on their employees. Virtually everybody I spoke to reported how people helped each other and their companies.

Remember: All telephone lines, and other technological ways of communication were down. Companies used radio communication via satellite and microwave technologies to let their employees know that they were back in business: some as quickly as five days after the storm. At Amgen in Juncos, teams of voluntary workers, from line operators to the CEO, started working on cleaning up the 23-building site the day after Maria.

With over 2,000 direct employees, Amgen has the biggest operation of the pharma industry in PR. Since they started operations here in 1992, the company has invested $3.4 billion in their facilities. A whopping 90% of all Amgen goods come through PR. Twelve different drugs are manufactured in PR, from Enbrel to Neulasta, and their full range of manufacturing capabilities includes bulk drug substance manufacturing, formulation/filling, and packaging.

Amgen was lucky. Critical manufacturing areas were not significantly impacted by the storm. Clean-up and restoration efforts were underway right after the storm. Amgen was shipping finished goods within 10 days, initially by air. Their five factories were fully operational by October 26.

And all of this without power from the grid. While Amgen has generators that can provide 32 megawatts of power, those generators were meant for emergencies, not for continuous operation. Before Maria, the generators had only ever been used continuously for six days. And that was during the previous storm, Irma, which had hit the island on September 6.

Maria meant operating for four months on diesel. Amgen brought in certified drivers and trucks from Virginia to ensure diesel supply. That meant housing and feeding the truck driver; so, Amgen put up temporary housing. Trucks and drivers headed back home to the mainland in January.

They brought in gas as well. To keep their 2,000 employees from spending hours standing in line at the gas station, Amgen opened a temporary gas station onsite in Juncos. “The most expensive gas ever,” joked Ingalls.

AbbVie was fully back in business roughly six weeks after Maria hit on September 20. Their production of Humira had not been interrupted at all. Media fill lines were more affected, but even they were on-line by the end of October. The company had a very effective back-up system in place: They had so many layers of back-up planning that they ended up giving diesel to the community and other companies, so they could stay in business.

AbbVie’s energy strategy had been targeting self-sufficiency all along. Even before Maria, AbbVie had a co-generator system in place. They also helped power a nearby town to allow the people to operate essentials there.

Most companies also fed their employees for weeks on end. Bristol Myers Squibb (BMS)—with a facility located in Humacao and doing fill-and-finish in their biologics’ division—ended up feeding entire families. They started out providing meals for their employees, but it was brought to management’s attention that just giving them dinner would not help the rest of their families.

BMS reached out to the employees through WALO, the local radio station. Four hundred of their 600 employees showed up on the Monday following the storm. “Too many for the immediate need,” said one attendee with whom I spoke at the PIA meeting. “But it was great seeing so many people whose homes were destroyed and who’s future was uncertain show up. Maybe they just wanted to make sure they still had a job.”

It was worth their while to show up. Amgen employees received food, water, paper towels, batteries, eight liters of gas per week, bags of ice (to this day), hand sanitizer, diapers, and baby wipes for families. A make-shift laundromat allowed employees to drop off their laundry and have it washed during their shift. About half of the employees who needed generators got those as well. Employee with damage to their homes received $5,000 gifts from the company. No strings attached.

BMS and Amgen were not the only companies that provided a lot of help to their people. Virtually all life sciences companies provided humanitarian aid, gas, generators, etc. Pfizer installed portable cisterns. They brought in water by the truckloads and allowed people to take as much as they needed. Companies knew they needed to help the communities their people lived in. No questions asked.

One of the biggest challenges right after the storm was accounting for the employees. With virtually no telecommunication available, people had to resort to the old-fashioned ways of showing up at people’s doorsteps and asking neighbors for directions.

Many companies also donated to disaster relief causes all over the island. Amgen donated $3 million, BMS $2.1 million to help the communities their employees came from. And they are just the tip of the iceberg.

“We are part of this island. We receive a lot in terms of very loyal employees. We need to show corporate responsibility,” explained Ingalls.

Companies also donated medication to patients on the island. Lilly flew an emergency shipment of insulin and supplies to PR in response to requests from the Department of Health to treat 1,000 people for 30 days. Astra Zeneca, which manufactures Crestor in PR, distributed free drugs to local patients. In turn, the employees stepped up to the challenge of restoring manufacturing operations.

Joel Alvarado, a Merck engineer: “We did clean-up work, repairs, and inspections, and resumed manufacturing of key products in just 14 days.” Virtually every company reported overwhelming support from their employees in the aftermath of the storm.

PIA was instrumental in supporting the industry after the hurricane. The biggest issue the companies had was getting reliable energy from the grid. To their credit, the organization has been establishing an excellent communication process with PREPA (the local energy company) since 2014. After the storm, the members of the PIA Energy Team met with PREPA on a daily basis through the emergency to discuss how to best reestablish the electrical system and make it stable.

Given the relevance of this sector to PR’s economic development and to assure availability of medicines for patients around the world, providing power to the biopharmaceutical operations in PR became a priority after the hospitals, maritime ports, and airports. The companies provided resources to help PREPA to reestablish the grid. Roads were cleared of debris and workers erected electricity poles. Even those furthest away from the grid sent in electricians to help PREPA establish energy lines.

PIA credited the companies’ continency plans with the relative ease with which they survived the storm. The agency had been supporting businesses with their continuity plans to ensure smooth interaction with government agencies, ensured access to ports and airports so that companies could bring people in from the mainland to support local operations.

All things considered, the pharma and biotech industries in PR did well weathering these storms. Most companies had only minor interruptions to their productions processes. They were prepared for a disaster and their employees rose to the occasion. People came together and helped each other. There is a spirit about PR that is hard to explain.

Puerto Rico’s Investment Tax Benefits at a Glance

Puerto Rico (PR) is a territory of the United States.  U.S. Law applies and its people are American citizens. PR has its own tax code, separate from the federal tax code. Companies in PR are generally not subject to federal tax on income from sources outside of the United States.

If eligible under one of various incentive legislations, companies in PR pay between 1–4% tax on corporate profits. Companies do not have to be headquartered here. Certain so-called “pioneer activities” can be afforded tax rates lower than 4% under specific grants by the government. There is incentive legislation for specific industries, such as the film industry, private equity firms, and the international insurance industry. But for the biotech pharma industry, Acts 20 and 73 are the most important programs.

Companies that qualify for these special tax conditions are issued grants of tax exemption. These grants make sure that even if tax laws change, the terms remain the same for individual companies during the duration of the grant. This gives the companies the certainty to plan ahead.

Incentives are typically granted for 15 to 20 years and will not change unless companies request amendments. Act 20 guarantees tax benefits to businesses exporting services. There is no statutory minimum requirement for the number of employees to be hired.

Act 73 applies to companies manufacturing in PR.  In addition to the 1–4% income tax on manufactured goods, 12% withholding taxes are due on royalties paid to foreign companies for use of intangible properties. 100% tax exemption is granted on dividend distributions.

New residents to PR are eligible for Act 22 tax status, which means 0% capital gains and 0% on PR-sourced dividends and interest. For example: If an Act 22 resident owns shares in a PR company that is sold at a profit, all gains are tax free. Any dividends from this company are also tax free.

Additional Benefits for Life Sciences Firms

PR offers a research and development tax credit of 50% for eligible investments. Process development and clinical trials are considered R&D. Startup companies that do not owe any taxes can sell their tax credits for 85 to 90 cents on the dollar.

25% tax credits are available on purchases of products manufactured in PR; 35% if these purchases are made from recycled materials. Every job created receives a $1,000 to $2,500 tax exemption. The later for jobs created in areas of low-industrial development.

Companies incorporated in PR are eligible for U.S. government grants. Moreover, they have a better chance of being approved than if they were located in other states, because PR generally does not exhaust its allotment.

Companies awarded SBIR grants by the federal government get these funds matched 100% by the Puerto Rico Science, Technology, and Research Trust (PRSCT), up to $100,000. In addition, PRSCT offers grants up to $150,000 to startups and scientists at the universities.

PRSCT is part of Science City, a new development for innovation and science located just 10 minutes from the airport in San Juan. Companies located there can pay their lead scientist up to $250,000 a year, tax free to the employees. Goods and equipment used in Science City are not subject to sales tax (IVU =11.5%) on goods purchased in PR.

Salaries, in general, are about 30–40% lower than on the U.S. mainland. This applies to highly qualified people as well.

The latest U.S. tax reform passed in Nov 2017 has added the so called GILTI provision for companies in the United States affiliated with controlled foreign corporations (CFCs). Profits from operations in PR by companies with affiliates in the United States will likely be subject to an additional roughly 10% tax due to PR companies’ typical designation as a CFC. Under the U.S. Code, including the GILTI provision, PR is being treated like any other foreign country. There are efforts underway to negotiate an exemption for PR in Congress

This sidebar was developed based on information provided by speakers at the 2018 Puerto Rico Investment Summit, which was held at the Puerto Rico Conference Center in San Juan.

Carola Schropp (carolaschropp@hayimgroup.com), who initiated the concept of pre-arranging meetings in PR among life sciences companies with overlapping interests, founded EBD Group in 1993 and sold the company to Informa in 2013. Schropp believes in the power of partnering and is using it to help put PR on the map.

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