Hey! What The. . .? | No More Puerto Rico Tax-Haven Manufacturing — For Merck?

New Merck (in part via legacy Schering-Plough subsidiaries) operates at least SIX multibillion dollar direct or indirect subsidiaries focused on manufacturing (and some research) operations in the formertax haven” of Puerto Rico, as PR Law 154 has taken effect.

That’s right — former tax haven.

As Ed Silverman, at Pharmalot has mentioned this morning, legislation was passed over the weekend imposing taxes on multinationals operating in Puerto Rico. Multinationals like Merck.

This is bad, bad news for New Merck, and most other pharma manufacturers, like Abbott, Lilly and Baxter — all with very deep manufacturing footprints on the island. [Coupled to the law is a measure to vastly reduce taxes on truly local businesses, and residents of the island.]

Unlike, say any “ordinary” equipment manufacturer — one that could simply pick up and move to Costa Rica, for example (and Puerto Rican authorities know this), pharma manufacturers need FDA approval to switch production to new facilities. MSD has other tax haven manufacturing facilities, in Ireland, for example, but it will take time to get FDA approval to “port over” the drugs, biologics and vaccines presently made “on island“. This is plainly a multi-billion dollar problem, but I cannot say how many billions, at present, for New Merck. [Hopefully someone (an analyst) will ask after it, on Friday’s Q3 2010 earnings call. Hint. Hint.]

In any event, this is what the Puerto Rico Merck operating subsidiaries’ website lists as the footprint there:

. . . .Located toward the northwest of Puerto Rico are the plants of Merck Sharp & Dohme Química (MSDQ), contributing for over 30 years to the economic progress of the island. First located in Barceloneta, MSDQ manufactured the active ingredient in one of our earliest medications for the treatment of elevated blood pressure. Success in Barceloneta motivated the Company to enlarge its operations to the towns of Caguas in 1987 and Arecibo in 1991. In the last years, MSDQ has continued to expand its manufacturing facilities, strengthening its commitment to Puerto Rico. Many of the products destined for the North American market are manufactured in Puerto Rico.

MSD Caribbean has Marketing and Sales offices located in the Industrial Park, Carolina, Puerto Rico. This office markets all MSD products in Puerto Rico and the adjoining Caribbean Islands (Antigua & Barbuda, Aruba, Bahamas, Barbados,Bermuda, Cayman Islands, Curacao, Dominican Republic, French Guiana, Guadaloupe, Guyana, Haiti, Jamaica, Martinique, St. Maarten & Bonaire (Netherlands Antilles), Trinidad & Tobago).

For decades, Merck Sharp & Dohme has been an active part of the Puerto Rico community. Today, more than 2,000 employees proudly belong to one of the top pharmaceutical companies in Puerto Rico. Along with the more than 60,000 employees of Merck & Co., Inc. worldwide, we are dedicated to bringing the important discoveries of the Merck research pipeline to the people of Puerto Rico. . . .

[In addition as of 2006, MSD conducted the following research activities there:] 14 pharmaceutical products in 18 clinical studies protocols at 32 different sites, in 17 research centers spread across four countries (in addition to the possession of Puerto Rico), employing six clinical monitors with 996 randomized patients. . . .

We’ll keep you posted, but here is PhRMA’s statement on the weekend passage of PR Law 154. It would seem that this measure would also blunt any incentive — as a further stimulus measure — the Obama administration might have, at present, to allow tax-free repatriation (at least from the former haven of Puerto Rico). I suspect there will be amendments to the measure, as the longer-term incentive to “de-invest” on the island becomes clearer.

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