The Caribbean Tax Remedy : Biotechnology: Amgen Inc., based in Thousand Oaks, is building a plant in Puerto Rico that may save the firm $60 million a year.

Amgen Inc., the biotechnology giant based in Thousand Oaks, is building a production facility in Puerto Rico. And it’s not because Amgen likes the tropics.

The company is erecting the plant in the town of Juncos in order to seize a valuable--and controversial--corporate tax break, just as hundreds of other American companies are doing. The pharmaceutical industry in particular, including Johnson & Johnson and Merck & Co., is a big user of the Puerto Rican connection.

By some calculations, Amgen could be saving $60 million a year in federal taxes starting in 1995.

Under a section of U.S. tax law that dates back to 1921, companies that have Puerto Rican manufacturing operations are allowed to exclude from federal tax profits generated by those plants. The law is aimed at inviting companies to create jobs in U.S. territories and possessions rather than in foreign countries.

But the law is again being scrutinized by American politicians searching for ways to attack the federal budget deficit. Presidential candidates Bill Clinton and Ross Perot are said to be evaluating whether to scale back the provision.

The U.S. Treasury will lose about $3 billion a year in tax revenue between 1993 and 1997 due to the Puerto Rican exemption, according to an estimate by the Congressional Budget Office. And a report last May by the federal General Accounting Office said American drug companies alone saved $10.1 billion in taxes during the 1980s because of their Puerto Rican factories.

The GAO report also said that in 1987, the most recent year for which Treasury data is available, there were 516 companies using the Puerto Rican tax benefit, and 62 of those were in the drug industry.

Amgen’s $100-million plant, scheduled to open in 1994, is not initially expected to manufacture the two biotechnology-derived drugs the company now sells: Epogen, which treats anemia in patients with kidney disease, and Neupogen, an infection-fighting drug for cancer patients.

The drugs will continue to be produced in bulk form in the company’s Thousand Oaks plant. The new Puerto Rico plant will serve as Amgen’s “finish and fill” facility, meaning that it will put the drugs into containers and package them for shipment to distributors. That packaging role currently is handled by one of Amgen’s contractors, Parke-Davis, a unit of pharmaceuticals giant Warner-Lambert Co.

Nonetheless, Amgen’s plant will qualify for the tax exemption, said Lowell E. Sears, the firm’s chief financial officer, because the plant will employ at least 200 people and clearly add value to the raw drugs packaged there.

The resulting tax saving, Sears said, “is going to be significant, there’s no doubt about it.”

Also, Amgen is “looking to put additional manufacturing facilities down there” that could produce drugs that Amgen brings to market in the future, he said. Amgen is doing clinical research on various drugs, but even if any are approved for sale it will probably be several years before the company brings one to market.

Last year, Amgen earned $97.9 million on revenue of $682 million after paying income taxes of $60.1 million. Of that, about $37 million was in federal taxes. (Technically, Amgen’s stated federal tax liability would have been $85.9 million, but the bill was reduced by a $49.2-million tax benefit.)

But Amgen, whose sales exploded after its first drug, Epogen, was approved in 1989, is expected to maintain its dramatic growth. The company’s sales should reach $2.3 billion in 1995, and its pretax operating profit should be $870 million that year, said David Stone, an analyst with Cowen & Co. in Boston.

Nineteen ninety-five would also be the first full year of operation for the Puerto Rico facility. As a result, Amgen’s overall tax rate should drop to 28% that year from 35%, Stone estimated. Based on his prediction of Amgen’s pretax earnings in 1995, the company would save about $60 million.

That estimate “is in the ballpark,” said Amgen’s Sears.

“We’re looking at a 7 to 8 percentage-point drop in our effective tax rate, assuming no change in the tax laws.”

But that’s a tall assumption these days. As concern grows about the ever-widening federal deficit, there is speculation that the Puerto Rican exemption--known formally as Section 936 of the federal tax code--could be severely reduced.

“In the current environment, when everyone is looking for money” to alleviate the deficit, “any tax break of this sort is under scrutiny,” said Chris Pimlott, who heads Arthur Andersen & Co.’s international tax services group in Los Angeles. “The question is how much Congress feels these countries need this provision for economic development.”

Complaints about the tax break are not new. Critics have long asserted that the benefits granted to U.S. companies far outweigh the number of Puerto Rican employees those companies hire. One such critic was former President Ronald Reagan, who unsuccessfully tried to repeal Section 936 in 1985.

The GAO report said that tax breaks for drug companies averaged about $71,000 per Puerto Rican employee in 1987, while the Puerto Rican employees’ average wage was about $26,500 a year.

“We’re spending $3 in tax credits for every $1 they pay in wages,” said an aide to Sen. David H. Pryor (D-Ark.), who asked not to be identified. “From a tax policy standpoint, it’s highly inefficient.”

The drug industry disputes those figures, noting among other things that the study did not take into account jobs created at other Puerto Rican companies that provide supplies and services to the drug makers’ plants.

Regardless, Pryor, who heads the Senate Committee on Aging, is looking at Section 936 as a means to curb what he contends are exorbitant increases in drug prices. This year he introduced a bill that would reduce drug producers’ Puerto Rican tax benefits if the companies raise prices beyond the rate of inflation.

The bill made no headway this year, but the senator’s office promises to bring the issue back to Capitol Hill in 1993.

Drug companies are numerous in Puerto Rico because Section 936 allows them to shift certain “intangible assets” to their units on the island, which include a drug’s patented formula or trademark. Transferring those assets enables a company to shelter additional income beyond the profit attributable to the Puerto Rican operation itself.

The GAO report indicated that “17 of the 21 most-prescribed drugs in the United States in 1990 were authorized for manufacture in Puerto Rico.”

The rewards of transferring those intangible assets were even more generous before 1982, when Congress tightened the tax code because the savings were considered too big. But if companies qualify under the revised guidelines, they still can enjoy a significant tax break by making the transfer.

“You just don’t get as much credit for the intangible as you used to,” said one corporate tax accountant, who asked not to be identified.

Will Amgen try to exploit that opportunity? Not anytime soon, Sears said. Because the patents and other intangible assets related to Amgen’s two existing drugs already have substantial, established values in the marketplace, transferring them to Puerto Rico now would result in a taxable capital gain, thus offsetting the transfer’s tax benefit, Sears said. The transfer is more valuable when a drug is new, he said.

In any case, Amgen is aware that the entire tax benefit could change again under a new administration, perhaps just as Amgen’s new plant is coming on line.

“We don’t think anything will be done in rapid fashion, but clearly there is some exposure there to a change in the law,” Sears acknowledged. “It could have a light impact or a substantial impact. We’re certainly hopeful that the tax benefits will be maintained.”