Amgen to Open Puerto Rico Plant Despite Tax Credit Cut : Biotechnology: Analysts say the benefit reduction does not alter expectations of strong long-term growth for the Thousand Oaks giant.

The lush tropical island of Puerto Rico isn’t quite as inviting as it used to be, thanks to the narrow passage of President Clinton’s budget package.

Although the deficit-cutting measure sharply reduces the corporate tax credit for American companies with manufacturing operations in Puerto Rico, one local company, Amgen Inc. in Thousand Oaks, is forging ahead with plans to open its $100-million plant there next year. And analysts say that even though Amgen’s tax benefit won’t be as great as it would have been under the old law, the change doesn’t alter expectations of strong long-term growth for the giant biotechnology concern.

“They’ve been very careful planning their facilities and planning their cash,” said Joyce Lonergan, an analyst at the investment firm Cowen & Co. in Boston. “I don’t think they overspent in anticipation of a benefit they weren’t going to get.”

Under a section of U.S. tax law that dates back to 1921, companies that have Puerto Rican manufacturing operations have been allowed to exclude from federal tax the income generated by those plants. The law was aimed at inviting companies to create jobs in U. S. territories and possessions rather than in foreign countries. The pharmaceutical industry in particular has taken advantage of the tax break, and companies such as Johnson & Johnson and Merck & Co. also have operations in the Caribbean island.

But under the new budget bill, the Puerto Rico exemption would drop from 100% to 60% next year. For each year afterward it would shrink an additional five percentage points until the exemption is reduced to 40% in 1998. The change in the benefit is expected to produce a total of $3.75 billion in additional federal taxes in the next five years.

“It’s probably not such a bad thing because 40% is still pretty good, it’s just not the boondoggle that everyone had previously,” said John Borzilleri, an analyst at Sanford C. Bernstein & Co., a New York investment banking firm.

Under a second option included in the new law, companies could base their federal taxes on a formula reflecting wages, fringe benefits and depreciation deductions.

But the reduction in the tax benefit under either option is significant enough that some companies might consider relocating their Puerto Rican operations, and presumably not in the United States, said Chris Pimlott, partner in charge of the international tax and business advisory group at the accounting firm Arthur Andersen & Co. in Los Angeles.

Amgen is nevertheless proceeding with plans for its costly plant in the town of Juncos. The plant is completed and awaiting inspection by the Food and Drug Administration, said Joe Staines, Amgen’s director of tax. The company hopes to begin operations there next year, when about 300 employees at the plant will mix the active ingredients of Amgen’s two big-selling drugs: Epogen, which treats anemia in patients with kidney disease, and Neupogen, an infection-fighting drug for cancer patients.

The drugs will then be put in vials and packaged at the facility for shipment to distributors.

The future tax savings Amgen could have enjoyed under the old law were potentially enormous. According to some analysts’ estimates, Amgen could have saved $60 million a year in federal taxes starting in 1995 if the full exemption had remained intact. Staines would not confirm that figure, but he said it was “within a range” that could have been accurate.

Although Amgen is not altering its plans in light of the reduced tax benefit, Staines said, the company will consider carefully proposals for adding more operations in Puerto Rico. “We have to reconsider any future expansion in light of the change,” he said.

Analyst Lonergan predicts that Amgen’s 1993 earnings will fall slightly from last year’s $358 million on $1 billion in revenue. But even after discounting for the tax change, she expects Amgen’s earnings will reach $611 million in 1996.

Nonetheless, Amgen’s stock price, along with other pharmaceutical issues, has suffered during the past several months. Not only are those companies facing the increase in the corporate tax rate, to 35% from 34%, but they will figure into President Clinton’s health-care reform package expected to be unveiled next month. Among the possible proposals: price controls on drugs.

Amgen’s stock, which traded around $70 a share at the beginning of the year, has been trading recently in the mid-$30 range. On Aug. 9, the first day of trading after the passage of the budget accord, Amgen’s stock fell $2.875 a share to $32.125. It closed Monday at $33.50, up $2.

Staines said methods of controlling drug price increases that appear to be culling favor in the Administration wouldn’t necessarily be negative for Amgen. “We’re a little differently situated than other pharmaceutical companies,” he said. “Our drugs are currently priced below the world market. We never raised the price on Epogen, and Neupogen had only one slight increase below inflation levels.”

In fact, Staines argued, price controls could actually benefit Amgen if it does not have to reduce its prices while other pharmaceutical companies do.

But analyst Borzilleri said the biggest concern for pharmaceutical companies such as Amgen is how the reform package’s emphasis on managed health care will impact their earnings. Under managed care, health-care providers control costs by joining with a network of doctors and hospitals who agree to offer discounted fees and clear major treatments with payers.

To date, Amgen has sold only a small percentage of its high-priced drugs to managed care networks, Borzilleri said. But if managed care is implemented on a national level, it could mean discounted prices and decreased utilization of Amgen’s drugs.

“That’s the real threat to Amgen,” he said.