Puerto Rico, Pharmaceuticals, and Airequipo Inc.

Good afternoon. How are things in Puerto Rico?

Good afternoon. Puerto Rico is the most wonderful place in the world (I’m definitely biased)! The island is 100 miles long by 37 miles wide. We belonged to Spain from 1493 to 1898 when we became a territory of the United States. We have a mix of cultures and a unique political situation as we are neither an independent nation nor a state of the union. This is why they say “that PR is the best of both worlds.”

What is the current business climate?

Unfortunately our economy is a reflection of the economy in the USA with a six-month lag. It has worsened these past four years, among other things, because our government (Executive, House of Representatives (HR) and Senate) is divided between two parties and we have had little legislative action. This has created tremendous problems to legislate and move our own economy, not to mention the other indirect result of slow down in the USA economy. But with regards to our particular situation, it got to a point that our government was actually closed for two weeks.

What kind of industry exists in Puerto Rico?

In the 1940’s agriculture was the market driver in Puerto Rico. The crop industries of pineapple, coffee, and sugar supported the economy. In the 1970’s we saw the strong entrance of the pharmaceutical industry. Today we have a diverse industrial manufacturing base including pharmaceuticals, electronics, rum, beverage concentrates, and medical equipment. Consolidation has occurred here - just like in the U.S.

What drove the growth of the pharmaceutical industry in Puerto Rico?

In the 1976, a US government incentive was created called the “936” after the U.S. Internal Revenue Code, Section 936. The “936 incentive” made it possible for any company manufacturing in Puerto Rico to repatriate profits without paying any taxes on their income. This is what brought the pharmaceutical industry here. When

The Top 20 Prescription Drugs Sold  in the U.S. are Produced in Puerto Rico.

Bill Clinton won the election, there were concerns that U.S. jobs were being lost to Puerto Rico and they cut the “936 incentive” by forty percent. The remaining sixty percent benefits were phased out over the next ten years ending in 2005. In order to maintain its benefits and make their operations competitive, some companies where able to convert to “controlled foreign corporations” (CFC) another section of the IRS Tax Code, under section 956.

Today, as we speak, the Puerto Rican government is holding hearings at the Senate and the HR to approve what will constitute the driving force of our economic development, our new industrial incentives law. Our current local incentives are due to expire this summer. That is why this is such a critical time politically in Puerto Rico.

The Top 20 prescription drugs sold in the U.S. are manufactured in Puerto Rico. The pharmaceutical industry grew here under a “twin plant concept” with the idea to also develop the Caribbean market from here. We compete globally for the pharmaceutical industry with the Dominican Republic, Ireland, and Singapore.

What type of compressed air systems are used in the pharmaceutical industry?

The typical installation involves oil-free air compressors. Highly regulated by the FDA, pharmaceuticals will not allow anything but oil-free air compressors. We can offer both Atlas Copco oil-free rotary screws, lobe or scroll compressors. Airequipo has worked hard over the years to demonstrate the benefits of oil-free air compressors and today we can say we have 90 to 95 percent of the pharmaceutical industry. We currently have above 500 oil-free air compressors installed.

Atlas Copco Oil-free water-cooled rotary tooth compressor with integrated refrigerated dryer and Variable Speed Drive

Air treatment specifications are flexible depending upon the application. They may use a refrigerated air dryer or a drum (desiccant) air dryer. If they want to avoid the growth of bacteria, then they will use from -40 to -100 F dewpoint desiccant air dryer. Stainless steel filters for sterile filtration are still very common as are coalescing filters for other industrial applications. Since the introduction of the MD dryer, we have been identifying applications to fulfill. Today, a combination of energy savings and not extreme dewpoints has been ideal for it.

What is the cost of power in Puerto Rico?

We have few natural resources in Puerto Rico and an issue for our industry has been the ever-increasing cost of electricity. The Puerto Rico Electric Power Authority (PREPA) is the only producer of electricity. With oil as its mean of production and over $120 per barrel you can imagine the problems we face. The cost per kW/h in Puerto Rico for a manufacturing plant, depending on contracted volume, can fluctuate between 19 and 21 cents. This cost of power does not help Puerto Rico compete globally. We can not forget that in the Dominican Republic their electric costs can go as high as 24 cents, but our minimum wage as opposed to them is the minimum wage paid in the USA, creating an incredible issue in cost reductions.

The Puerto Rico Electric Power Authority (PREPA) does not offer any energy rebate programs. Some companies, like Abbott Labs, generate some of their own power and actually resell some of it to the city of Barceloneta. Probably this summer too, a “net metering” legislation will be effective in Puerto Rico and renewable energy projects will arise from this opportunity. There is still some legal issues pertaining the use of PREPA’s infrastructure for distribution (distribution wheeling), but ample debate is taking place to make this happen.

Are there many compressed air audits being done?

Airequipo does do some audits. Customers like Pfizer and HP, has been able to access some DOE funding and they have trained their own people on how to do ultrasound compressed air leak detection. We are becoming more and more of an outsourced solutions consultant for our customers. Puerto Rico is still getting accustomed to audits-some simply want you to do it for free or credit the audit work against equipment purchases. This is hard to do for free because obviously in order to understand compressed air demand a lot of hours must be spent measuring the system. Acceptable payback ROI periods vary significantly from customer to customer. I attended a seminar, where Hewlett Packard will prioritize projects with ROI’s of less than nine months while Pepsico will do projects with 24 month ROI’s. We are making progress though and we are training our customers to study their electric bills and figure out the cost of their compressed air system. We are also working with them to help them avoid peak usage periods.

The Island of Puerto Rico

Airequipo offers strong training programs right?

Yes. Airequipo has been a leader in conducting paid training seminars at the customers’ site. We do a specialized seminar on their air compressors and spend some time in their parts books identifying maintenance items. We have professionalized this training and the operators come away with the ability to operate the controls of the machines and to do some maintenance functions. The maintenance staffs are interested in doing this in Puerto Rico. Right now we are trying to get certified as a resource in the curriculum of continuing education for engineers. The International Society for Pharmaceutical Engineering (ISPE) has approached us to do some training for their student chapter, some of which are working already at internships at pharmaceutical plants.

What is the history of Airequipo?

The company was started in 1961 so we have a long history! Our roots were in supporting the agricultural and construction industries through equipment rental and service. Since 1989, Airequipo Inc. has focused on being an industrial equipment distributor for compressed air system products to the manufacturing plants of Puerto Rico. The pharmaceutical industry here, which accounts for the majority of those plants, has been our primary focus. Airequipo Inc. has worked very hard to standardize the pharmaceutical plants with OIL FREE air compressors.

Today we have 90 to 95 percent market share. This doesn’t mean that we don’t have competition. Nothing is farther from the truth. Puerto Rico’s relationship with the USA makes it possible for other companies in the mainland to compete against us. The fact that some of these pharmaceuticals have headquarters in the USA makes it natural for them to contact their local distributors. But the fact that we are celebrating this year our 47th anniversary speaks of why we are still offering our services. We focus on being competitive and servicing our customers with the utmost professionalism.

What is the size of Airequipo?

Airequipo employs 17 people of whom seven are compressor technicians. We have a full time auditor on staff and a full staff of sales and customer service personnel. Our shop is a full service and compressor rebuild facility and we carry an inventory of spare parts and smaller machines to provide fast service to our customers through our rental fleet operation.

How is Airequipo changing?

We watch the market closely for technological advances and for changes. I remember telling you that your magazine was displaying on each cover something we were doing on our company or recently incorporating. One of those instances was the September 2007 issue where you covered the Results of a Tire Inflation with Nitrogen Study. We were signing up to represent the Parker TireSaver at the same time. Recently your magazine expanded to include vacuum products, which we did also about eight months ago. We are looking for products that we can service with the same business structure and with service as our focus. This is why we have targeted hospitals as well. The revisions of the NFPA99 specification give us the opportunity to promote the oil-free technology we have been offering to manufacturing facilities. The standards before suggested or implied reciprocating compressors, now those specifications include rotary compressors as well.

How is the nitrogen generator business going?

Being an island and with the necessity of importing the majority of our nitrogen needs (with the exception of some small cryogenic plants) it makes all the sense in the world to produce your own nitrogen and produce it as needed without the hassle of coordinating deliveries and encountering shortages. We sold our first nitrogen generator to Lilly del Caribe in Guayama. Nitrogen generators are picking up speed. Praxair, Linde and Air Products were here for years. We can compete when the application is liquid nitrogen, which is then converted to gas. If you are using nitrogen for blanketing and pipe purging, our system is very competitive. We have quotations into many of the big pharmaceuticals. We also are receiving great technical support from Parker-NNI Division. We have also sold some nitrogen generators for tire inflation including one to a Lexus dealer.

What lies ahead for Puerto Rico?

The leadership on the Island is saying that we have to do what we do best - and that is to manufacture prescription drugs, but we must concentrate on knowledge management as well. We have learned to produce these drugs, but in order to compete in the Global Market we must come to the forefront and develop (R&D) them. Our current Governor declared PR the BioIsland and he is working hard on brining research to PR. Pharmaceutical and Biotechnology manufacturing must lead our future. Our skill workers are ready to handle the “high tech” prescription drugs. This is an important moment in Puerto Rico as the corporations are waiting to see what the new tax incentives will be – before they make their investment decisions.

Thank you Airequipo for your insights.

For more information please contact Douglas Garrote-Arango, Airequipo, tel: 787-720-9531, email: macar@airequipo.com, www.airequipo.com