‘Country of Origin’ Compliance: The Top 10 Things Pharmaceutical Companies Need to Know

by Reed Smith
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What is the “country of origin” for the drugs you manufacture? This question arises every time a pharmaceutical company labels a drug, imports it, exports it, markets it, or sells it to the U.S. government. Unfortunately, the answer to this question is more complicated than many think. In fact, the correct answer often changes, depending on which government agency is asking.

Here are the Top 10 things pharmaceutical companies need to know before determining their products’ country of origin (hereinafter “COO”):

1. A drug’s COO often varies under different agencies’ COO standards

U.S. Customs law requires all drugs to be marked with their COO (unless they are U.S.-made). For this purpose, a product’s COO is the country where its various components are “substantially transformed” into a new product with a different character and use. But, as discussed below, a different COO standard may apply when determining a product’s eligibility for government procurement. A higher standard applies for “Made in the USA” claims. And, when foreign trading partners request a “certificate of origin” for goods exported to their country, COO standards vary by country of export and category of goods.

2. A drug’s COO for Customs-marking purposes is usually the COO of its API

Customs views the active pharmaceutical ingredient (“API”) as the “essence” of any pharmaceutical product and, even though raw API must often undergo costly processing before it is suitable for human consumption, Customs does not consider such processing to result in a “substantial transformation” unless it changes the character of the API. The necessary analysis is very fact-sensitive,
requiring the advice of counsel in collaboration with personnel who understand the specifics of the drug’s manufacture.

3. Changes in API suppliers often require a change in product marking

Pharmaceutical companies sometimes change API suppliers to take advantage of lower prices and other business benefits. However, if the country of the API supplier changes, the proper COO marking for the finished product usually changes as well (see No. 2 above). Manufacturers also occasionally purchase the same API from multiple suppliers in different countries. As a result, the correct marking for a drug may vary over time, or from batch to batch. Despite the substantial logistical challenges involved, Customs requires each product, in the form it arrives to the “ultimate purchaser,” to be marked with its actual COO.

4. NAFTA employs its own COO marking standard

For goods from NAFTA countries (United States, Canada and Mexico), the COO for Customs-marking purposes is determined under special NAFTA Marking Rules—not the substantial transformation test. Application of the NAFTA Marking Rules can be complex, but generally, where a drug is manufactured with materials from various countries, the COO will be a NAFTA country if all of the “foreign materials” incorporated in the drug (i.e., materials from non-NAFTA countries) undergo an applicable change in tariff classification. For example, if the tariff classification for API made in Germany emerges from processing in Mexico as a finished product with a different classification, a tariff shift has occurred that may render the drug a product of Mexico, assuming other applicable requirements are met.

5. Manufacturers of mismarked products are subject to high penalties

Customs can penalize a company that fails to mark its products with the correct COO, with duties equal to 10 percent of the appraised value of the finished products. Unlike penalties for most Customs violations, these penalties cannot be mitigated by filing a “prior disclosure” of the violation to Customs. It is crucial, therefore, that manufacturers ensure their products are properly marked.

6. The FDA requirement to label drugs with the manufacturer’s place of business is not a requirement to list the product’s COO

The FDA requires each drug label to “bear conspicuously the name and place of business of the manufacturer, packer, or distributor.” The “place” identified for this purpose may or may not be in the same country as the COO marked for Customs purposes. For example, the FDA defines a “manufacturer” as one who performs mixing, granulating, milling, molding, lyophilizing, tableting, encapsulating, coating, or sterilizing, as well as filling dispensing containers with aerosol or gas drugs. Thus, if a drug is manufactured into tablets in the United States, using API from India that is not substantially transformed in the United States, the label may include a “Product of India” marking for Customs purposes and a U.S. “principal place of business” for FDA purposes. It is important to note that a drug may be deemed “misbranded” if “its labeling is false or misleading in any particular,” and this includes representations about the product’s COO.

7. When selling drugs to the U.S. government, a different COO standard may apply

The substantial transformation test is used under the Trade Agreements Act (“TAA”) to determine whether a product is eligible for government procurement by virtue of being either U.S.-made or made in certain designated countries (China and India, for example, are not designated countries). However, the substantial transformation test does not apply to supply contracts for drugs valued below $202,000. Such contracts are subject to the Buy American Act (“BAA”), which gives preferences to products manufactured in the United States, using its own COO standard. Specifically, a drug is BAA-compliant when the cost of the components manufactured in the United States exceeds 50 percent of the cost of all its components.

8. Failure to comply with the TAA and BAA carries severe consequences

If a pharmaceutical company supplies drugs to the federal government and falsely represents them as TAA- or BAA-compliant, it faces not only the loss of a lucrative supply contract, but also the troubling prospect of penalties under the False Claims Act, suspension and debarment, and even criminal charges.

9. Drugs should not be marked “Made in USA” unless they are entirely U.S.-made

When a drug is U.S.-made under the substantial transformation test, the manufacturer may be eager to emphasize the drug’s U.S. origin on the packaging or marketing materials. However, a higher standard applies for “Made in the USA” claims and similar statements. Under U.S. consumer protection laws administered by the FTC, only a product that is “all or virtually all” made in the United States may be accompanied by express or implied representations that the product is U.S.-made. CBP only requires a drug to be marked with its COO when it is foreign-made. Therefore, drugs that are substantially transformed in the United States, but that are not “all or virtually all” U.S.-made, can comply with both standards if they simply omit a COO marking.

10. When exporting drugs, “certificates of origin” requested by foreign trading partners are subject to various COO standards

When pharmaceutical companies export their drugs, they often receive requests from foreign importers and customs authorities to provide a “certificate of origin”—usually to prove eligibility for preferential tariff treatment under a free trade agreement (“FTA”). Unfortunately, there is no uniform COO standard in this context. Where an FTA controls, different standards for various category of goods have been negotiated by the signatory countries. Where no FTA applies, the country of export may have its own COO standard. For example, many countries will accept a “U.S. certificate of origin” if at least 50 percent of the product’s production costs originate in the United States.

Pharmaceutical companies are especially vulnerable to making non-compliant COO determinations for several reasons. First, drug manufacturers are typically subject to the full range of regulatory regimes discussed above, creating a greater risk of error in applying the numerous divergent standards. Second, it is common for pharmaceutical manufacturers to purchase API from multiple sources in different countries, or to switch API suppliers with some frequency, which can make the COO something of a “moving target.” It is vitally important, therefore, that pharmaceutical companies take a fresh look at the COO determinations they have made in the past and verify that their current determinations are correct and accurately reflected in the labeling, packaging, and marketing materials. Finally, companies must ensure that their compliance programs incorporate procedures that ensure the appropriate standards are applied, that they are applied correctly, and that they are applied on an ongoing basis to account for changes in the supply chain.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

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