Challenge to How the Substantial Test is Applied to Pharmaceutical Products

Dear Friends,

We wanted to bring to your attention a recent development regarding an issue that has been a thorn in the sides of pharmaceutical companies for many years.  The development involves how the substantial transformation test is applied to pharmaceuticals for purposes of determining country of origin.

As you know, will generally be found to have occurred if the manufacturing or processing operation results in a change in (1) commercial designation or identity, (2) fundamental character, or (3) commercial use.  In the pharmaceutical context, U.S. Customs and Border Protection’s (CBP) long-standing position has been that, for single API products, formulation (i.e., mixing a bulk active with excipients and putting it up in dosage form) is generally not enough to work a substantial transformation.  As a result, if an active is produced in one country and shipped to another country for formulation, the formulating operations performed in the second country will not be sufficient to change the origin of the active ingredient.  In short, the origin of the API controls (of course, CBP in its wisdom gets a different result under the NAFTA Marking Rules, which is maddening). 

A pharmaceutical company is now challenging CBP’s long-standing position at the Court of International Trade (CIT).  The case stems from an adverse final determination issued in the government procurement context.  CBP determined that the pharmaceutical at issue is not substantially transformed in the United States because the API, sourced from India, retains its chemical and physical properties upon processing in the United States.  The determination is adverse because, as a result of not being considered to be substantially transformed in the United States, the company’s product is not eligible for procurement by the U.S. government (India is not a TAA country).   In response to this determination, the company filed suit at the CIT.  The company argues that the API is substantially transformed into a new and different product with a different use as a result of the processes performed in the United States.  A copy of the compliant is attached for your reference. 

The case is significant because it means that CBP’s long-standing position of what constitutes a substantially transformation will be reviewed by an independent, third party — the CIT.  A positive outcome for the company could impact how country of origin is determined for pharmaceutical products across the board.

If this issue has caused you heartburn (or if your company sources API from non-TAA countries like India, China, etc. but formulates the finished products in TAA countries, like the U.S., Canada, Ireland, etc.), then you may want to consider weighing in at the CIT.  We would be happy to discuss how best to do that with you further.  If such a discussion would be helpful, just let us know. 

Best regards,

Ted

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