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The US Court of Appeals for the Federal Circuit’s February 10 decision in Acetris Health, LLC v. United States provides important guidance regarding the determination of a product’s country of origin, which is a gating issue for prescription drug products the US government is permitted to buy.

As companies that have or intend to commercialize products, including drugs and biologics, for sale to the US government are aware, the Trade Agreements Act (TAA) generally prohibits government purchases of certain foreign products. The Trade Agreements clause and related Trade Agreements certification, which are prescribed by regulation, are the principal clauses in government contracts—such as the VA Federal Supply Schedule (FSS) contract from which all government agencies purchase drugs—that effectuate this requirement. The clauses require companies to certify that products delivered under the government contract will be either manufactured in the United States or “substantially transformed” in the United States or a designated country, e.g., countries with which the United States has entered into trade agreements.

Products Manufactured in the United States

Although the place of manufacture should be somewhat intuitive, until recently, the US Department of Veterans Affairs (VA) claimed that (1) it could not buy, or place on an FSS contract, a US-manufactured product, including a drug or biologic, unless the product was also substantially transformed in the United States or a designated country; and (2) based on decisions of the US Customs and Border Protection (CBP), for drugs and biologics, the source of the active pharmaceutical ingredient (API) determined the product’s country of origin. The Federal Circuit’s decision in Acetris, however, unequivocally rejected those claims.

The court held that the procurement regulations and associated clauses permit companies to offer drug products to the government if the products are manufactured in the United States regardless of the source of the ingredients, including the API. The court further stated that if the executive branch wanted a different result, it would need to change the underlying regulation.

Products Manufactured in Designated Countries

Companies that do not manufacture products in the United States have faced a different problem. The substantial transformation test for products not manufactured in the United States, including drugs and biologics, requires a determination that the product purchased by the government is a “new and different article of commerce” from the product’s underlying components with a different “name, character or use.”

Many pharmaceutical products are made with API from countries such as India and China, which are not designated countries. Thus, if a drug product is manufactured in a designated country using such API, the product must be substantially transformed in the designated country in order to be eligible for purchase by the US government.

In recent years, CBP, which has jurisdiction to decide country of origin under the TAA, frequently applied the substantial transformation test to determine that finished drug products were “Products of China” or “Products of India” based on the source of the API, even if the manufacturing processes necessary to formulate an approved drug took place in a designated country. Accordingly, the drug products were ineligible for government purchases.

The pharmaceutical industry has largely taken issue with CBP’s determination that FDA-approved prescription drug products manufactured in the United States or a designated country are not new and different articles of commerce distinct from the foreign manufactured API. In the case of an oral solid dosage form product, the Acetris decision agreed with industry’s position.

Specifically the court held that the company’s Entecavir tablet, manufactured in the United States using Indian API, was neither wholly manufactured in India nor substantially transformed in India and therefore was not a product of India for purposes of government procurement—effectively overruling CBP, which had determined the product to be a product of India.

While it is too early to tell how this decision will impact CBP country of origin decisions in the short term, the Federal Circuit expressly directed the lower court to broadly declare as a matter of law that “under the TAA, a pharmaceutical product using API made in India does not, because of that fact, thereby become the ‘product of’ India.”

Morgan, Lewis & Bockius LLP lawyers were lead counsel on the Acetris case.