Mixed bag seen for PR pharma in 2011

By: By CB Online Staff /CARIBBEAN BUSINESS

January 3, 2011

Analysts are presenting a mixed picture of Puerto Rico’s potent pharmaceutical industry heading into the new year.

Globally, Puerto Rico ranked ninth out of 83 countries surveyed by Business Monitor International’s pharmaceutical industry team. It tagged the value of the pharmaceutical market of Puerto Rico in 2009 at $2.71 billion at consumer prices.

The market research firm’s “Puerto Rico Pharmaceuticals & Healthcare Report Q1 2011” cites a recent rash of recalls involving island manufacturing plants and the Fortuño administration’s new excise tax on goods and services sold by companies on the island to overseas affiliates.

“Although Puerto Rico has established itself as one of the leading pharmaceutical manufacturing hub globally, its attractiveness has been marred by recent issues with the quality of output from some of the plants on the island,” Business Monitor International reported.

“Additionally, pharmaceutical and biotechnology firms operating in Puerto Rico are now facing increases in operating costs, following the October 2010 passage of a new tax law that imposes a discriminatory 4% tax on non-resident companies operating in the territory,” the report said.

Law 154 of Oct. 25, 2010, as amended by Law 157 of Oct. 28, 2010, amended Section 1123 of Subtitle A and added a new Chapter 7 to Subtitle B of the Puerto Rico Internal Revenue Code of 1994. The income source rule in Section 1123 was revised to include additional rules to determine when nonresidential individual or a foreign corporation or partnership is engaged in trade or business in Puerto Rico and deriving income from island sources — the income source rule. The new Chapter 7 of Subtitle B includes a new temporary excise tax on the acquisition of certain personal property and services.

After the 4% excise tax takes effect Jan. 1, it will be progressively cut to 3.75% in 2012, 2.75% in 2013, 2.5% in 2014, 2.25% in 2015 and a 1% tax in 2016, the final year the tax will apply. The Fortuño administration projects that next year the excise tax will represent net income to the local Treasury ranging from $1.4 billion to $2 billion. Those revenues are expected to decline in the following five years to $360 million in 2016.

The Fortuño administration has been meeting with manufacturing executives to try to smooth over the rough patches left by the approval of the temporary excise tax.

Local and U.S. industry trade groups have warned that the law, approved by the Legislature without hearings over one weekend in late October and which the governor signed into law shortly thereafter, has prompted companies to postpone or freeze investments on the island pending a study of the implications of the tax.

Business Monitor International appears to squarely accept those claims.

“The law not only goes against the government’s attempt to foster scientific innovation, but may also lead to further plant closures, thus negatively impacting the island’s export potential. Puerto Rico is already in danger of losing medicine manufacturing plants to Latin America, which is investing heavily in developing its exporting industry and, most importantly, has the bonus of massive domestic demand,” the report reads.

The Business Monitor International reported noted the island government’s budget crisis, the Fortuño administration’s “crucial” belt-tightening efforts to address it and the “civil unrest” that has resulted.

“Against this back drop, the government is also battling deep recession and decades-old fiscal deficit, which currently stands at $3.2 billion. Given that implementation of crucial austerity measures are being hampered by the outbreaks of civil unrest and elevated unemployment levels, the government has been forced to look for alternative sources of revenue, although those strategies are likely to prove counterproductive in the longer run. We still expect only slight economic expansion over the medium term, and are forecasting real GDP growth of 0.9% year-over-year for 2010 and 0.7% year-over-year for 2011,” the report reads.

The research firm said weak domestic demand is set to keep inflation under wraps well into next year, and held its forecasts for consumer price index (CPI) of just 1.5% in 2010 and 2.5% by end-2011. This is also expected to have an impact on the development of the pharmaceutical market values, which are expected to post a compound annual growth rate (CAGR) of just 2.44% over the 2009-2014, largely due to pending patent expirations on a number of leading products, some of which are manufactured locally, the firm reported.

“Nevertheless, Puerto Rico still remains one of the highest-ranked markets in our latest Business Environment Rankings (BER) for the Americas region, trailing only the United States and Canada,” Business Monitor International reported.

Still, the firm sees the island losing standing in the face of competition from much larger Latin American countries.

“The territory is likely to slip further down the matrix over the coming years, as Brazil and Mexico’s attractiveness increases, given their more attractive operating costs and domestic market potential,” Business Monitor International reported.

The report sees a big upside to federal funding gains to Puerto Rico under the national health care reform passed by President Barack Obama.

“The March 2010 U.S. health care reform should boost public finances in Puerto Rico, with the commonwealth’s Medicaid funding set to jump 182% to $8.62 billion over the next nine years, which should preserve some of the territory’s attractiveness to pharmaceutical players,” Business Monitor International said.