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.
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