First to go was a factory that made generics. Next, a pharmaceutical supply company said it would close. Then, Glaxo last month announced plans to shut its plant in Cidra, a central Puerto Rican city, the Associated Press reports. Many people in Cidra now 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,” Frank Ortiz, a 42-year-old construction worker sitting in a cafe near the Glaxo campus, tells the AP.

Cidra, a city of about 50,000, is not alone 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 US market. Over the past 18 months, five major plants have either closed or announced plans to do so, eliminating 3,000 relatively high paying jobs. The closures are a largely a result of higher energy costs, changing tax rules and industry consolidation. In addition to Glaxo, plants owned by Teva Pharmaceutical, Schering-Plough, Watson Pharmaceuticals and Bristol-Myers Squibb have closed or will be closed.

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,” Deepak Lamba-Nieves, research director for the Center for the New Economy, an independent think tank in Puerto Rico, tells the AP.

The island’s pharmaceutical industry, which still produces 13 of the 20 best-selling drugs in the US, gained dominance in the 1970s with the help of US incentives. It accounts for a quarter of the island’s gross domestic product, with $36.5 billion in annual exports. But as they look for slack in global supply chains, many companies find Puerto Rico is no longer a bargain due to changing tax structures and the cost of electricity supplied by oil-fired power plants.

For Watson, which makes generics, 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, tells the AP that 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 were also facing pressure from the FDA to make investments to resolve quality control problems. In 2005, Glaxo 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, inspectors last year found drugs contaminated by manufacturing or cleaning equipment.

The US 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 U.S. Internal Revenue 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 work forces, 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,” says the mayor of Cidra, Angel Malave Zayas, whose city will lose $2.8 million in annual taxes and 900 jobs from the Glaxo plant alone.

The companies that run the remaining plants, which employ more than 20,000 people, have kept their taxes low in many cases 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 so far is making investors nervous and driving away business.

“We are losing time, we are losing momentum and we are being negatively hit,” Elizabeth Plaza, president of the local consulting company Pharma Bio-Serve Inc., which recently opened a branch in Ireland, tells the AP. Some of the losses, however, 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.

Source: The Associated Press