Drug plant closings leave Puerto Rico feeling sick
5 big manufacturing sites, 3,000 jobs lost; higher costs blamed
November 19, 2007
CIDRA, Puerto Rico (UPI) - First to go was a factory that produced generic drugs. Next, a pharmaceutical supply company said it would close. Then, GlaxoSmithKline PLC said last month that it would shut its plant in this central Puerto Rican city.

Many people in Cidra fear their hillside city, which has depended on pharmaceutical manufacturing for more than 30 years, is terminally ill.

"This is going to be pretty bad for a lot of people," said Frank Ortiz, a 42-year-old construction worker sitting in a cafe near the gated GlaxoSmithKline campus.

Cidra, a city of about 50,000, is not alone in its sense of looming dread. The pharmaceutical industry appears to be in retreat across Puerto Rico, long a global hub of drug manufacturing thanks to tax breaks and the territory's unfettered access to the U.S. market. Over the past 18 months, five major drug-manufacturing plants either have closed or announced plans to do so, eliminating 3,000 relatively high-paying jobs. The closures are largely a result of higher energy costs, changing tax rules and industry consolidation.

Industry experts predict Puerto Rico is in danger of losing its position as one of the top five global drugmaking centers unless the island offers better incentives and shifts more toward research, as companies seek more sophisticated production methods. "We are very good at manufacturing pills, but the pharmaceutical sector, in its own way, has been changing in the last few years," said Deepak Lamba-Nieves, research director for the Center for the New Economy, an independent think tank in Puerto Rico.

The island's pharmaceutical industry, which still produces 13 of the 20 best-selling drugs in the United States, gained dominance in the 1970s with the help of U.S. incentives. It accounts for a quarter of the island's gross domestic product, with $36.5 billion in annual exports.

Some of the losses have been offset by new investments in biotechnology, a related industry that Gov. Anibal Acevedo Vila has courted aggressively, marketing the territory as "Bio Island" and developing special tax breaks for research and development.

In addition to Cidra plants owned by Teva Pharmaceutical Industries Ltd. and GlaxoSmithKline, the other companies that have closed or announced plans to shut plants are Schering-Plough Corp., Watson Pharmaceuticals Inc. and Bristol-Myers Squibb Co.

As they look for slack in global supply chains, many companies find Puerto Rico is no longer a bargain because of changing tax structures and the cost of electricity supplied by oil-fired power plants. For Watson, which makes generic drugs, the cost of operating a factory it closed in Humacao this year was comparable with plants in Corona, Calif., and Carmel, N.Y.

A company spokeswoman, Patty Eisenhaur, said Watson would have had to expand its plant in Humacao, on Puerto Rico's southeastern coast, to make it financially viable. At least three of the plants that are closing also were facing pressure from the Food and Drug Administration to make investments to resolve quality-control problems.

In 2005, GlaxoSmithKline agreed to fix deficiencies that allowed tablets of Paxil, a treatment for depression, to split apart before reaching consumers. At the nearby Teva plant, acquired through a recent takeover of Ivax Corp., inspectors last year found drugs contaminated by manufacturing or cleaning equipment.

The U.S. tax breaks that transformed Puerto Rico from an impoverished, agrarian society to a manufacturing hub offered the best deals for companies that moved to depressed areas outside the capital. Wage credits gave companies incentives to create the maximum number of jobs under Section 936 of the Internal Revenue Service code, approved by Congress in 1976 to allow companies to send profits to the U.S. with minimal taxes.

Since Section 936 expired last year and companies are reducing the size of their workforces, a cloud of uncertainty has formed over small cities where pharmaceuticals have clustered, including Cidra, Manati and Barceloneta. "There is pain, sadness and even fear," said the mayor of Cidra, Angel Malave Zayas, whose city will lose $2.8 million in annual taxes and 900 jobs from the GlaxoSmithKline plant alone.

In many cases, the companies that run the remaining pharmaceutical manufacturing plants, which employ more than 20,000 people, have kept their taxes low by declaring their operations here as foreign corporations, allowing them to take advantage of local tax structures. But with a local law governing industrial tax breaks due to expire next year, some critics say lawmakers' inability to agree on a renewed version is making investors nervous and driving away business.

"We are losing time, we are losing momentum and we are being negatively hit," said Elizabeth Plaza, president of the local consulting firm Pharma Bio-Serve Inc., which recently opened a branch in Ireland.