A recent order from President Joe Biden may rejuvenate the pharmaceutical industry in Puerto Rico, thereby improving the island’s ability to shore up revenues and pay off its bonds over the long-term.
On Feb. 24 Biden signed “Executive Order on America’s Supply Chain,” which among other things ordered the Secretary of Health and Human Services to provide a report within 100 days on risks to the supply chains for pharmaceuticals and pharmaceutical ingredients and policy recommendations to address the risks.
Many economists believe the current downturn of Puerto Rico’s economy was partially triggered in 2006 by a federal policy shift that led to the loss of much of the island’s pharmaceutical industry. Accordingly, a new federal policy toward the industry could have a major impact on the island’s economy.
During his administration, President Donald Trump and members of his government talked about the importance of gaining independence from imports from China. He took some steps toward restricting them. The breakdown of supply chains for some imported goods during the first months of the COVID-19 crisis reinforced some government officials' inclination to increase some goods’ domestic production.
Biden is continuing to put pressure on China, albeit using a somewhat different approach.
“The products that the U.S. wants to re-shore are produced at a lower cost in Asian countries, particularly China," said Puerto Rico-based Advantage Business Consulting President Vicente Feliciano. "However, a disruption of the supply chain would bring hardship and even national security risk to the U.S. I would expect public policy that puts in place mechanisms to enhance the competitiveness of U.S. production for the sake of reducing the risk of supply disruption.”
Participants and observers of Puerto Rico have stated their support for the pharmaceutical industry there and policies to promote it.
According to the Pharmaceutical Industry Association of Puerto Rico, the island’s pharmaceutical industry accounts for 33% of Puerto Rico government revenues and 30% of the island’s gross domestic product.
Puerto Rico’s non-voting representative to Congress Jenniffer González Colón sent a letter to Biden in late January in which she said the island had the infrastructure and workforce to counter the COVID-19 pandemic and bring manufacturing to the United States. She advocated incentives for pharmaceutical and medical supply production companies on the island.
In response to a Bond Buyer inquiry to the board, on March 17 Board Member Antonio Medina said, “The Oversight Board supports all actions by the president and the federal government overall that will encourage the re-shoring of medtech and pharma companies to Puerto Rico. Puerto Rico is in a unique position to take advantage of all possible opportunities because of its strong and competitive pharma and healthcare manufacturing footprint.”
On Wednesday, Biden unveiled the American Jobs Plan, widely dubbed an infrastructure plan though it covers other areas as well. There was no explicit reference to either Puerto Rico or the pharmaceutical industry in his announcement. However, as part of the plan he called for Congress to invest $50 billion to create a new office at the Department of Commerce dedicated to monitoring domestic industrial capacity and funding investment to support production of critical goods.
This may aid Puerto Rico's pharmaceutical industry. The other parts of this plan may impact it indirectly or directly but until further details of Biden's plan are released it will not be clear.
A report from the Boston Consulting Group in 2020 that the Puerto Rico Oversight Board commissioned said in 2019 Puerto Rico exported $45 billion to $50 billion in “biopharma products.” The group said the island also exported about $7.5 billion in medical technical goods. This compares to a total island GDP of $105 billion in 2019, according to the World Bank.
Puerto Rico business consultant Heidie Calero, President of H Calero Consulting Group, said Biden's order "would certainly assist increasing production and hence GNP growth of the Puerto Rico economy, instead of increasing consumption, which is one of the adverse impacts of the Biden rescue plan. Consumption in an open economy like Puerto Rico increases imports and production from those destinations, including the U.S. Most of the aid that comes to Puerto Rico returns to the U.S. in the form of imports.”
While there is funding for pharmaceutical production in the American Rescue Plan Act of 2021, there is nothing focused on Puerto Rico specifically.
The Oversight Board has been aware for some time of the potential for the island’s pharmaceutical industry to play a role in reviving the economy. In its May 2020 fiscal plan the board said, “if concerns over global supply chains [during the COVID-19 pandemic] result in increased domestic pharmaceutical and medical supply manufacturing, and Puerto Rico is able to play a leading role in the national portfolio of locations where this manufacturing relocates, the island could experience positive growth as a result. However, given their uncertain nature, the 2020 fiscal plan does not account for these potential scenarios.”
Puerto Rico Secretary of Economic Development and Commerce Manuel Cidre Miranda told The Bond Buyer that despite Puerto Rico’s comparative advantages in pharmaceutical manufacturing compared to other locations in the U.S., “federal funding is disproportionately lower than other states with similar population. In 2019 Connecticut, which has approximately the same size and population [as] Puerto Rico, received over $600 million in National Institute of Health funding, while Puerto Rico received $60 million.”
Cidre Miranda urged the federal government to create a federal drug depository to stockpile and manage drug manufacturing goods on the island, change the cabotage laws that increase the costs of shipping goods to and from Puerto Rico, and compel the U.S. Treasury Department to keep corporate creditability of Act 154 deductions.
In September 2019 U.S. Treasury Secretary Steve Mnuchin told Puerto Rico Gov. Wanda Vázquez the federal government would take steps to end the tax credit that supports Puerto Rico’s Act 154 tax on foreign corporations. Passed in 2010, Act 154 is a 4% excise tax on the revenues of foreign corporate subsidiaries based in Puerto Rico.
The Puerto Rico government received 18% of its net revenues in fiscal 2019 from the tax. Currently U.S. corporations can credit their payments to Puerto Rico toward their federal tax payments. Mnuchin has said the creditability will be phased out. Some are worried that without this some U.S. factories in Puerto Rico will be relocated.
The Oversight Board’s Boston Consulting Group report suggested efforts to attract industry to Puerto Rico be focused on multinational biopharma companies with existing footprint in Puerto Rico and contract development and manufacturing organizations in both biopharma and the medical technical areas.
BCG said it believed the best approach to promote the pharmaceutical and medical technical industries on the island would be federal tax legislation to support economically distressed zones.
The group estimated that a moderate level of federal effort could lead directly to a 3% to 10% increase in Puerto Rico’s total export value. Including the indirect value would roughly double the impact to Puerto Rico’s economy.
The Pharmaceutical Research and Manufacturers of America group released a general statement on national policy.
“Geographic diversity in the pharmaceutical supply chain … enables manufacturers to quickly make adjustments as needed to avert major supply chain disruptions, which is especially important during national disasters and global pandemics,” PhRMA spokeswoman Nicole Longo said.
“At the same time, there are ways to increase the industry’s already robust domestic manufacturing of medicines," Longo said. "Making investments in advanced manufacturing and related technologies here in the United States, as well as investing in a 21st century workforce, are both critical steps that the [Biden] Administration should consider.”
