Puerto Rico Pharmaceuticals and Healthcare Report Q4 2012

BMI View: Slow economic recovery and the continued need for fiscal austerity means the development ofPuerto Rico’s overall healthcare spending will fall below its historic levels, as the government also looksto unload some of the costs to the private sector. While the territory will continue to be a major exporterof pharmaceuticals, its status will increasingly be challenged by emerging manufacturing locations inAsia and Latin America. Additionally, high-profile criticism of several plants in Puerto Rico by the USFood and Drug Administration (FDA) will not help the island’s image, with the authorities expected tolook to improve the situation in this area.

Headline Expenditure Projections

Pharmaceuticals: US$2.81bn in 2011 to US$2.88bn in 2012; +2.5% in local currency terms.Forecast broadly unchanged from Q312.

Healthcare: US$11.27bn in 2011 to US$11.67bn in 2012; +3.6% in local currency terms.Forecast broadly unchanged from Q312.

Medical devices: US$536mn in 2011 to US$541mn in 2012; +0.9% in local currency terms.Forecast broadly unchanged from Q312.

Risk/Reward Rating: Puerto Rico again remains third in our proprietary Pharmaceutical Risk/RewardRatings (RRRs) matrix for the Americas in Q412, ranking behind the US and Canada. Its composite scoreis an unchanged 65.6 out of the maximum 100, comprising evenly balanced risks and rewardscomponents. In the medium to longer term, Puerto Rico’s high matrix placement will come underincreased pressure due to its small population, uneasy economic prospects and competition fromemerging markets in Latin America.

Key Trends And Developments

In July 2012, US-based pharmaceutical company, Bristol-Myers Squibb (BMS), announced aUS$165mn investment in its local plant in Humacao. The Humacao investment is BMS's secondmajor investment in Puerto Rico after the company’s US$200mn project to expand its site inManati to manufacture biologic medicines in 2009.

Similarly, around the same time, Merck Puerto Rico, which is part of Merck Sharp &Dohme (Merck & Co), reported plans to invest US$80mn in Las Piedras to manufacture a newproduct for type 2 diabetes. The expansion will include the introduction of new technologies andproduction equipment to support the global sales of its product. It is the company's secondexpansion announcement in Puerto Rico in recent years. In October 2011, the drugmaker said itwould invest US$43mn in novel production technology to manufacture new drugs.

Also in July 2012, US-based technology firm Sartorius Stedim opened a new facility tomanufacture filters and single-use bags for biopharmaceutical applications at its site in Yauco,Puerto Rico. The 5,000m2 facility, which includes two clean rooms for filter and bag manufacture,labs and offices, was established with an investment of EUR16mn (US$19.9mn). The firm willmove its bag manufacturing operations from Concord, California, to Yauco, by the end of 2012,when it will close the US site. The expansion will add about 120 employees at the new facility.

Puerto Rico's fight against HIV/AIDS has received a major boost as it will be granted more thanUS$2mn in federal funds. The funds, announced in August 2012, will target those patients wholack health insurance and are waiting for their medication. The announcement follows PuertoRico's recent US$17mn grant to boost prevention and treatment programmes in metropolitan areas.

In August 2012, Caribbean Business reported that a new research centre was inaugurated in PuertoRico. The Diabetes Center for Research, Education & Medical Services (CIESMS), which willwork in tandem with the private sector, the University of Puerto Rico (UPR) and local healthdepartments, was originally approved by the Law 166 of 2000. The centre will receive somefunding from federal programmes, such as ‘Diabetes Endocrinology & Metabolism Research’,which is run under the auspices of the National Institutes of Health (NIH).

BMI Economic View: While we forecast Puerto Rico to return to positive economic growth in 2012, ourlong-term growth outlook for the commonwealth remains bleak. The ongoing deterioration of globaleconomic conditions and high structural unemployment will keep real GDP growth at under 2.0% over thecoming years.

BMI Political View: Puerto Rico's general elections are scheduled for November 2012 and as things stand,we believe Alejandro García Padilla from the opposition has a slight advantage to take the governorship.His position on the island's political status, opting to maintain Puerto Rico as a commonwealth of the US,combined with the high levels of unemployment experienced during the current administration could giveGarcía an edge in the elections.