LawFlash

Federal Agencies Directed to Prioritize Purchase of Certain Essential Drugs Produced in the US

August 26, 2020

Citing national security concerns, the executive order seeks to maximize domestic production in procurement of certain Essential Medicines, Medical Countermeasures, and Critical Inputs deemed necessary for the United States.

President Donald Trump issued an Executive Order (EO) on August 6, 2020, to reduce dependency on foreign manufacturers of medicines and increase American production of medical supplies considered critical to the national health, by mandating certain considerations in federal purchasing of drugs and devices deemed “essential.”

Under the EO, the Commissioner of the Food and Drug Administration (FDA) is charged with creating a list of “Essential Medicines, Medical Countermeasures, and Critical Inputs” within 90 days (i.e., on or before November 4, 2020). This list will identify those items that are considered medically necessary to have available in the United States at all times, in an amount adequate to serve patient needs and in the appropriate dosage forms. Once the items are identified, agencies have been instructed to use existing sole-source authorities under the Competition in Contracting Act and the Federal Acquisition Regulations, Subpart 6.3, to limit competition for listed items to only items “produced in the United States.” Additionally, agencies are encouraged to divide procurement requirements for such items among two or more manufacturers located in the United States. As explained below, however, these requirements may not have significant impacts on government purchases of most drugs depending on the number of drugs deemed Essential Medicines and applicability of the broad discretionary carve outs set forth in the EO.

TYPES OF DRUGS, DEVICES, AND OTHER ITEMS TO BE INCLUDED ON THE LIST

The “Medical Countermeasures” to be considered for the list will be drugs, biological products, or devices that are qualified countermeasures,[1] qualified pandemic or epidemic products,[2] or security countermeasures.[3] Such items are generally used to diagnose, mitigate, prevent, and treat harm from biological, chemical, radiological, or nuclear agents, or from pandemics or epidemics. Medical Countermeasures may also include personal protective equipment described in Occupational Safety and Health Administration regulations.[4] By contrast, the EO broadly defines “Essential Medicines” as just “those [medicines] deemed [by FDA] necessary for the United States.” This means that any medicine used commercially in the United States potentially could be deemed an “Essential Medicine” covered by the EO, even if entirely unrelated to a qualified or security countermeasure, or any pandemic or epidemic. However, because the term “Essential Medicines” will only include products affirmatively selected by FDA, industry will watch closely FDA’s action in this area, and it is possible that most products will be unaffected.

The “Critical Inputs” that may be included on the FDA Commissioner’s list are a drug product’s Active Pharmaceutical Ingredient (API)[5], certain raw or intermediate material used in the manufacturing of an API that is incorporated as a significant structural fragment, and other ingredients of drugs and components of medical devices determined by the FDA Commissioner to be critical in assessing the safety and effectiveness of Essential Medicines and Medical Countermeasures. US pharmaceutical manufacturers frequently source API and other raw materials used in manufacturing prescription drug products from outside the United States. Again, however, with respect to API, “Critical Inputs” is defined to include only API used in the manufacture of Essential Medicines identified by FDA, which almost certainly will be only a subset of the whole.

CONTRAST TO PRIOR DETERMINATIONS OF DOMESTIC STATUS

Medicines and other pharmaceutical products offered to the federal government are already subject to domestic purchase restrictions under the Buy American Act, 41 U.S.C. § 10 et seq. (BAA) and the Trade Agreements Act, 19 U.S.C. §§ 2501–2581 (TAA), as applicable. The BAA, which applies to all US federal government agency purchases of goods valued over the micropurchase threshold of $10,000, creates a price preference that favors purchase of “domestic end products.” Domestic end products are those that are either unmanufactured and produced in the United States, or US-manufactured end products for which either the cost of components manufactured in the United States exceeds 50% of the cost of all components, or the item is a commercially-available off-the-shelf (COTS) item like most prescription drugs, in which case the source and cost of components is not considered.[6] Note: after the publication of this LawFlash, the FAR was amended to change the component cost threshold to 55%, except for products predominantly of iron or steel, which have a different, more stringent test, and to remove the COTS item exception for COTS items predominantly of iron or steel. 86 FR 6180.

The TAA waives the BAA price preference when the contract is valued at or above certain value thresholds and trade agreements apply, and instead provides for equal treatment of US-made end products and products originating in “designated” foreign countries (those with whom the United States has a free trade or other agreement according domestic treatment). For US-made end products, the TAA requires items to be mined, produced, or manufactured in the United States, or “substantially transformed” in the United States.[7] In the context of pharmaceutical products, the government’s interpretation of the TAA has historically prohibited the supply of drugs with an API sourced from a non-TAA compliant country, even where all of the manufacturing operations necessary to produce the prescription drug product take place in the United States, subject to an availability exception. Recently, however, the US Court of Appeals for the Federal Circuit found that pharmaceutical products manufactured in the United States with API sourced from a non-designated country (e.g., India), could still be offered for sale to the US government as “TAA-compliant” because the Federal Acquisition Regulation Trade Agreements Clause allows the government to purchase products “manufactured in the United States” and the prescription drug end products could not be deemed substantially transformed in India simply because the API was from that country.[8]

Here, under the EO, an Essential Medicine or Medical Countermeasure is only considered “produced in the United States” if both the Critical Inputs used to produce it (including API) are produced in the United States, and if the Finished Drug Product[9] or Finished Device[10] is “manufactured, prepared, propagated, compounded, or processed” in the United States (as defined in the Federal Food, Drug, and Cosmetic Act).[11] As a result, for those Finished Drug Products designated on the FDA Commissioner’s list, the EO requires agencies to maximize use of other than full and open competition to procure products for which both the API originates in the US and the end product is manufactured in the.”

One other important aspect of the EO is the requirement that the United States Trade Representative, to the extent permitted by law, take all appropriate action to modify United States Federal procurement product coverage under all relevant Free Trade Agreements and the World Trade Organization Agreement on Government Procurement to exclude coverage of Essential Medicines, Medical Countermeasures, and Critical Inputs. In such case, prescription drugs of designated countries such as Canada, France, Great Britain, Germany, Japan, and Israel would no longer be treated equal to US products in government procurements and again would be subject to price preferences imposed by the BAA. However, where other than full and open competition cannot be justified and offers of Essential Medicines are therefore accepted regardless of country of origin, government agencies could still purchase Essential Medicines of these countries if determined to be most advantageous to the government taking into account the price preference imposed by the BAA.

BROAD CARVEOUTS MITIGATE EFFECT OF THE EO

The impact of the domestic preference changes effected by the new EO may not be as large as the language of the EO might suggest, since agencies are granted broad discretion to take exception to the mandate, including specifically the Department of Veterans Affairs to ensure that service members, veterans, and their families continue to have full access to Essential Medicines at “reasonable and affordable” prices.

The EO also carves out from the procurement restriction those contracts and orders where:

(i)   application of the EO’s requirements would be inconsistent with the public interest;
(ii)   the relevant Essential Medicines, Medical Countermeasures, and Critical Inputs are not produced in the United States in sufficient and reasonably available commercial quantities and of a satisfactory quality;
(iii)   the EO’s requirements would cause the cost of procurement to increase by more than 25% (unless applicable law requires a higher percentage); or
(iv)   procurement of foreign-produced items on the FDA Commissioner’s list are necessary to respond to a declared public health emergency, major disaster, or national emergency (including the federal response to COVID-19).

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Dallas/Washington, DC
Sheila A. Armstrong

Washington, DC
Katelyn M. Hilferty



[1]           42 U.S.C. § 247d-6a(a)(2)(A).

[2]           Id. § 247d-6d(i)(7).

[3]           Id. § 247d-6b(c)(1)(B).

[4]           29 C.F.R. § 1910.

[5]           21 C.F.R. § 207.1.

[6]           48 C.F.R. § 52.225-1.

[7]           Id. § 52.225-5.

[8]           Acetris Health LLC v. United States, 949 F.3d 710, 730 (Fed. Cir. 2020).

[9]           21 C.F.R. § 207.1.

[10]          Id. § 820.3(l).

[11]          21 U.S.C. § 360(a)(1).