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Puerto Rico is struggling to retain its reputation as a pharmaceutical manufacturing hub, with a number of plants found to be in breach of regulations and standards over recent years. Additionally, the flagging economy is expected to push skilled staff to emigrate, leaving fewer candidates to fill existing jobs. Indeed, despite signs that some multinational pharmaceutical companies are expanding manufacturing facilities in Puerto Rico, we believe the outlook for the islands crucial pharmaceutical sector is bleak.

Headline Expenditure Projections

- Pharmaceuticals: US$2.81bn in 2011 to US$2.88bn in 2012; +2.6% in local currency terms. Forecast unchanged from Q112.

- Healthcare: US$11.27bn in 2011 to US$11.69bn in 2012; +3.7% in local currency terms. Forecast unchanged from Q112.

- Medical devices: US$536mn in 2011 to US$542mn in 2012; +1.0% in local currency terms. Forecast unchanged from Q112.

Risk/Reward Rating

Puerto Rico remains third in our Q212 proprietary Pharmaceutical Risk/Reward Ratings (RRRs) matrix for the Americas, ranking behind the US and Canada, but still ahead of the much larger Brazil. Its composite score stands at a lower 65.6 (down by three points in relation to Q112), on account of the perceived worsening industry rewards outlook. In the medium to longer term, Puerto Ricos high matrix placement will come under increased pressure due to its small population, uneasy economic prospects, and competition from emerging markets in Latin America.

Key Trends & Developments

- In January 2012, workers at Pfizers Puerto Rico-based operations filed a lawsuit against the company in a federal court. The employees have said the company is unable to accurately manage its retirement plans and has caused losses equivalent to hundreds of millions of dollars over the past decade. The workers also included allegations that Pfizer withheld information that affected workers as shareholders. Pfizer spokesperson Christopher Loder said the allegations appear to be similar to ones filed in a case in New York in 2009. They were later dismissed by the judge.

- In December 2011, Puerto Rico Industrial Development Company submitted an application for Temporary/Interim Manufacturing Authority at two sites at Baxter Healthcares facilities in FTZ 7. Baxter could be granted the authority to produce duty-free filled pharmaceutical and nutritional intravenous (IV) bags, IV administration sets and their components for the next two years. Foreign materials used in production, which account for 9% of the value of the finished product, will be charged at duty rates ranging between 3.0 and 6.5%.

- In November 2011, a US Food and Drug Administration (FDA) inspection of a facility in Caguas, Puerto Rico, belonging to generic pharmaceutical company Mylan, found significant violations of manufacturing regulations. The FDA warned the company it had failed to complete a necessary test intended to ensure uniformity of medicine content and that it failed to thoroughly investigate or explain why a batch of drugs and components did not meet specifications. Mylan spokesperson Nina Devilin said production and shipments from the Caguas facility have not been interrupted.

BMI Economic View

Puerto Ricos unemployment rate declined slightly to 15.2% year-on-year (y-o-y) in November 2011, though the participation rate also declined to 40.5%. We do not see unemployment moderating significantly in 2012, as the tourism and pharmaceuticals industries continue to face headwinds. In the meantime, while the island has recently clawed itself out of a five-year recession, we believe the possibility of a double-dip is growing, and the domestic economy still appears to be highly vulnerable to external shocks. Furthermore, we highlight the potential for negative net migration flows to continue eroding domestic output.

BMI Political View

Despite Puerto Rican Governor Luis Fortuños recent approval of a two-part referendum to decide the islands political status, we do not expect the issue to be resolved in the near term. Alongside the uncertain outcome of the referendum, the need for approval by both the US Congress and President is likely to further stall proceedings, particularly in a US presidential election year. With the Puerto Rican electorate having already failed to provide a majority vote in all three previous referendums (1967, 1993 and 1998), we question whether things will be different this time round. Similarly, while Fortuños pro-statehood National Progressive Party (NPP) has sought to promote the option of statehood in recent years, looking to capitalise on the high 46.5% support in the 1998 vote, we have doubts that his party can muster the backing to win the upcoming referendum.

Click for Report details:Puerto Rico Pharmaceuticals and Healthcare Report Q2 2012