Drug Patents and Puerto Rico

Humira is the world’s best selling drug. It provides more than 60% of the revenue collected by its manufacturer, AbbVie. It’s made in Puerto Rico. And its patent is about to run out. Expiring drug patents have more to do with the changes in the Island’s pharmaceutical manufacturing than changes in tax laws, and Humira is the latest example.

Humira’s patent

Humira’s patent will officially expire in 2034. Its core patent expired in 2016, and more patents are scheduled to expire in 2023, but AbbVie has managed to extend its control over the arthritis drug market. In a series of messy court cases, the manufacturer has succeeded in staving off the possibility of generic competition for at least another year. European users have dozens of biosimilar options, which keeps the cost lower. In the U.S., Humira can cost as much as $72,000 a year, in light of a large price jump earlier this year.

The FDA has approved five biosimilars — that is, generic alternatives — to Humira for use in the United States. However, AbbVie has been able to defend 250 supplementary patents that are keeping generics off the market even though the core patent expired in 2016. Consumers have filed class action lawsuits against AbbVie, but they realistically have no competitors in the United States, and are apparently raising prices steadily to offset losses of profits and market share in Europe.

The court battles included settlements with a number of other pharmaceutical companies which will be able to bring their Humira alternatives to market in 2023. The patents are set to expire completely in 2034, when generic versions of the arthritis medication will become freely available.

Effects on Puerto Rico

Humira has been manufactured primarily in Puerto Rico since 2017, when AbbiVie opened a facility in Barceloneta. The patent resides in Bermuda. This allows transfer payments to reduce AbbVie’s tax burden significantly. Even though Humira’s sales and distribution take place primarily in the States (and no production takes place in Bermuda), AbbVie can claim the profits originate in Bermuda and Puerto Rico and take advantage of the low tax rates.

Senate Finance Committee Chairman Ron Wyden (D-OR) has been questioning the use by AbbVie and similar companies of these tax tricks.

Wyden wrote, “The lack of transparency into this arrangement raises important questions related to where income associated with the U.S. Humira net revenues is being recognized for tax purposes,” in a letter to AbbVie.

The pharmaceutical industry is economically very important in Puerto Rico. According to Invest PR, pharmaceuticals provide 30% of all Puerto Rico’s manufacturing jobs, employing more than 78,000 people. However, the Island ships more than double the number of pharmaceuticals exported by any state, totaling more than $44 billion in 2019.

This comes to $5,692,307.69 in production for each job in Puerto Rico’s pharmaceuticals manufacturing plants.

While some industries claim much higher profits per person employed (companies must have only one employee in Puerto Rico to benefit from the tax incentives), it is still clear that the amount of profit is out of proportion to the investment made in the Island.

936 or patents?

It is easy to find claims that Puerto Rico lost much of its pharmaceutical manufacturing after 2006 because of the end of Section 936, a tax law that saved pharmaceutical companies $2.67 in taxes they would have paid to the federal government for every $1.00 paid to workers in Puerto Rico.

Section 936 was revoked after government analyses found it to be ineffective, and certainly not cost effective. However, expiring drug patents were the cause of a significant number of pharmaceutical plants’ closings. Once generic alternatives become available, the profitability of patent medicines shrinks quickly. Many pharmaceutical companies quit manufacturing their medications when their patents expire.

Generic drugs used in the U.S. are mostly manufactured in China and India, where extremely low labor costs make lower-priced products more profitable without tax incentives.

Eli Lilly explicitly announced that it was closing its plants in 2015 because of expired patents. This was well after the end of Section 936. Viatris, makers of Viagra, and Lipitor are other examples. Many of the closures took place around 2010, when a wave of patent expirations shook the pharmaceutical industry.

While patent expirations are just one factor in the economics of the industry, they have certainly affected Puerto Rico.

Going forward

Senator Wyden’s concerns about pharma companies’ use of Puerto Rico as a tax haven are reasonable, as simple arithmetic shows. Companies prefer to claim profits in Puerto Rico, where they pay just 4% corporate taxes, and to claim deductions for buildings and workers in States, where the deductions are more valuable.

However, companies that are currently manufacturing medications on the Island have more of a local investment than those that were established under Section 936. AbbVie has already announced their intention to stay in Puerto Rico and produce new medications after Humira’s patents expire. As Puerto Rico’s infrastructure, including the power grid and roads, are rebuilt, the Island will be in a stronger position to compete with offshore manufacturers.

This may be particularly true in the pharmaceuticals space, where Puerto Rico already has a history as a production powerhouse.

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