ReedSmith
Country of Origin Challenges for the
Pharmaceutical Supply Chain
Lorraine Campos, Partner, Washington, D.C.
Jeffrey Orenstein, Senior Associate, Washington, D.C.
July 24, 2014
NEW YORK  LONDON  HONG KONG  CHICAGO  WASHINGTON, D.C.  BEIJING  PARIS  LOS ANGELES  SAN FRANCISCO  PHILADELPHIA  SHANGHAI  PITTSBURGH
HOUSTON  SINGAPORE  MUNICH  ABU DHABI  PRINCETON  N. VIRGINIA  WILMINGTON  SILICON VALLEY  DUBAI  CENTURY CITY  RICHMOND  GREECE  KAZAKHSTAN
ReedSmith
Presenters
Lorraine Campos
Partner, Global Regulatory Enforcement
Washington, D.C.
lcampos@reedsmith.com
202.414.9386
Jeffrey Orenstein
Senior Associate, Global Regulatory
Enforcement
Washington, D.C.
jorenstein@reedsmith.com
202.414.9217
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No One Country Can Make A Pencil
• Shaft
• US lumber
• Eraser
• Malaysian rubber, Italian pumice
• Lead
• Sri Lanka graphite, Mississippi clay
• Brass coupling
• Chilean copper, US zinc
• Yellow Lacquer
• Congo
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What Is Your Product’s “Country of Origin” (COO)?
• The answer depends on who is asking because different
agencies use different standards:
• FDA (place of manufacture on label)
• U.S. Customs (COO marking, duty calculation)
• Government Procurement (Buy USA preferences)
• FTC (consumer protection laws)
• Foreign Customs authorities (certificates of origin)
• What are the different standards?
• Risks of Noncompliance
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FDA Labeling Requirements
• Labeling: FDA requires drug labels to “bear conspicuously the
name and place of business of the manufacturer, packer, or
distributor”
• Don’t confuse “place of business of the manufacturer” with COO
• “Place of business” may be New Jersey HQ but COO may be France
• Misbranding: Incorrect markings may constitute “misbranding”
under FDA regulations
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U.S. Customs Marking Requirements
• Why does Customs ask for the COO?
• Marking: COO must appear on product or packaging if not U.S.-made
• Duties: COO impacts the customs duties owed
• What is their standard?
• “Substantial transformation” for marking
• Exception: NAFTA imports use special negotiated test
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Substantial Transformation
• An article is a product of a country only if it is either…
1.
wholly a product of that country, which is increasingly rare; or
2.
“substantially transformed” in that country
• Substantial transformation occurs when an article emerges
from processing as a new and different article of commerce
that possesses a new name, character, or use
•
National Juice Products Assoc. v. United States
•
Facts: Imported juice concentrate blended with water, orange
essences, orange oil, and U.S. juice concentrates
•
Held: No substantial transformation because the imported juice
concentrate was the "very essence" of the finished product
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Drugs: Substantial Transformation
• Drugs: The COO for most drugs is the COO of the active
pharmaceutical ingredient (API)
• Customs views imported API much like imported orange juice
concentrate—it is the “essence” of the finished product
• Unless the API is chemically altered or its properties enhanced,
the API is not substantially transformed
• Some Exceptions:
• Two APIs are combined
• Processing of API increases efficacy
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Customs Ruling HQ H073995 (Oct. 29, 2009)
• Issue: Whether the API metoprolol succinate was substantially transformed in Sweden
where it was processed to make Toprol-XL.
• Manufacturing Process Included:
• Creation of metoprolol succinate beads by spraying a solution of metoprolol onto cores
• Coating the metoprolol beads with a polymer solution
• Beads are mixed with excipients and compressed into tablets
• Tablets are coated with an additional polymer solution and polished prior to packaging
• This process was more complex and more costly than the process used to produce the API
• Decision: CBP held that, despite the complexity of the manufacturing process, the
metoprolol succinate did not undergo a substantial transformation.
• Reasoning:
• CBP noted the complexity of the manufacturing process is not the determining factor. Nor is it sufficient
that the process “alter[ed] the delivery rate of the drug or otherwise improv[ed] the delivery mechanism.”
• Although the API was “unusable, if not toxic” in its raw or bulk form, CBP noted that any substance can
be toxic if ingested improperly and that altering the dosage or delivery rate of a drug does not constitute
a substantial transformation. CBP emphasized that the process must change the character of the
API and that, in this case, the final product was merely metoprolol succinate in a measured dose.
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Substantial Transformation: One API
API from Italy is manufactured into a finished product in Ireland,
then imported into the USA. The API is typically not substantially
transformed in Ireland, so Italy is the COO.
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Substantial Transformation: Two different APIs
API from (1) Japan and (2) Italy is manufactured into a finished
product in Ireland, then imported into the USA.
A substantial transformation takes place in Ireland, making it the COO.
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Government Procurement
• Trade Agreements Act (“TAA”) of 1979
• Products sold to U.S. Govt. must be made in U.S. or designated
countries
• “Substantial Transformation” Test
• Applies to contracts worth more than $202,000
• See 48 C.F.R. § 25.400
• Buy American Act (“BAA”)
• Product must be (1) manufactured in U.S.; (2) with more than 50%
components made in the U.S.
• Applies to contracts worth between $3,000 and $202,000
• See 48 C.F.R. § 25.003 (2006), FAR 25.003
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Trade Agreements Act
• 48 C.F.R. § 25.400
• Designated Countries
• Countries that are members of the World Trade Organization (WTO),
Government Procurement Agreement (GPA), or have a bilateral Free
Trade Agreement (FTA) with the U.S.
• Includes: Armenia, Canada, EU, Hong Kong, Iceland, Israel, Japan, Korea,
Liechtenstein, Norway, Singapore, Switzerland, Chinese Taipei, Australia,
Chile, Mexico, Morocco.
• Non-Designated Countries
• Notable non-designated countries include China, India and Brazil
• Purchase of goods from Non-Designated Countries is prohibited, unless
the agency waives the TAA based on specified waiver grounds
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U.S. Government Contracts and Pharmaceutical
Companies
• Under the Veterans Healthcare Act,
pharmaceutical companies are
required to offer certain products to
the U.S. government through Federal
Supply Schedule (“FSS”) Contracts
• Covered drugs (innovator products)
• Authorized generics
• FSS Contract Holders must provide
the Country of Origin of their products
• Prime Vendor
• Certifications
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TAA Waiver . . . VA’s Problem
• May be waived by contracting
officer if offers of TAA compliant
products are not received or
insufficient to fulfill the agency’s
requirements
• GSA policy prohibits FSS contracting officers from making
such a determination
• India and China are major manufacturing sources for
pharmaceutical chemicals
• Under Customs rulings, many pharmaceuticals products are
non-TAA compliant because the API is made in China or India
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Potential Alternatives to FSS Contracts
• FSS Program is the primary procurement program for the
government to purchase pharmaceutical products. The
program is efficient and convenient. . . But there are other
contractual alternatives
• Stand alone contracts under the simplified acquisition threshold
• Blanket Purchase Agreements (“BPAs”)
• National Contracts
• Sole-Source Contracts
• Disadvantages
• Certifications
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Enforcement Mechanisms
• Audits and Investigations
• GAO, Agency IG and DOJ
• Civil/Criminal False Claims Act*
• Suspension/Debarment from government contracting
• Termination and Reprocurement
• Replacement
• Reimbursement of Cost
• Negative Past Performance
• Bid Protests
• Adverse publicity, damage to reputation
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False Claims Act Violations
• Historically Enforcement Tool of Choice
• Civil
• Knowingly presents or causes to be presented a false claim for payment
• Treble Damages
• Penalties from $5,500 - $11,000 per claim
• Qui Tam Suits
• Criminal
• False, fictitious or fraudulent claims
• Maximum fine of $500,000 (companies) and $250,000 individuals and up
to 5 years imprisonment
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FTC: “Made in the USA”
• The FTC has jurisdiction to regulate false advertising claims,
including claims on labels
• “Made in the USA” claims (or the like) are reserved for items
“all or virtually all made in the USA”
• Customs requires no marking if COO = USA, so only include
USA marking if all US-made
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Exports: Certificates of Origin
• Foreign Customs Authorities
may require a “certificate of
origin” when goods are
exported to their ports from the
USA
• Why? Usually to prove eligibility
for preferential tariffs.
Sometimes for statistics.
• COO standard used varies by
country. E.g….
• S.Korea: Free Trade Agreement
has tariff shift rule
• China: Use WTO rule (COO:
where input ≥ 50%)
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Penalties
• Mismarked Products (Customs):
• 10% value of all finished products mismarked
• Selling Government goods that are not TAA/BAA Compliant:
• Loss of a lucrative contract
• False Claims Act
• Suspension and debarment
• False/Misleading “Made in the USA” Claims:
• FTC fines and injunctions
• Lanham Act and state consumer protection law liability
• FDA Misbranding:
• Criminal fines and other penalties
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Questions?
Lorraine Campos
lcampos@reedsmith.com
202.414.9386
Jeffrey Orenstein
jorenstein@reedsmith.com
202.414.9217
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