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1 ReedSmith 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 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

2 ReedSmith Presenters 2 Lorraine Campos Partner, Global Regulatory Enforcement Washington, D.C. 202.414.9386 Jeffrey Orenstein Senior Associate, Global Regulatory Enforcement Washington, D.C. 202.414.9217

3 ReedSmith 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 3

4 ReedSmith 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 4

5 ReedSmith 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 5

6 ReedSmith 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 6

7 ReedSmith 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 7

8 ReedSmith 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 8

9 ReedSmith 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. 9

10 ReedSmith Substantial Transformation: One API 10 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.

11 ReedSmith Substantial Transformation: Two different APIs 11 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.

12 ReedSmith 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 12

13 ReedSmith 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 13

14 ReedSmith 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 14

15 ReedSmith 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 15

16 ReedSmith 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 16

17 ReedSmith 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 17

18 ReedSmith 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 18

19 ReedSmith 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 19

20 ReedSmith 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%) 20

21 ReedSmith 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 21

22 ReedSmith Questions? 22 Lorraine Campos 202.414.9386 Jeffrey Orenstein 202.414.9217


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