country of origin compliance for federal …...final pharmaceutical product • country of origin...

COUNTRY OF ORIGIN COMPLIANCE FOR FEDERAL

PHARMACEUTICAL CONTRACTS

ACI’s 10th Annual “Big Four” Pharmaceutical Pricing Boot Camp

May 25, 2015

Elizabeth F. Lindquist

[email protected]

King & Spalding LLP

mailto:[email protected]

WHAT IS THE TRADE AGREEMENTS ACT

AND HOW DOES IT INTERACT WITH VA FEDERAL SUPPLY SCHEDULE CONTRACTS

FOR PHARMACEUTICALS?

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What is the Trade Agreements Act and How Does It Interact With VA FSS Contracts for Pharmaceuticals?

• All VA FSS contracts contain the:

― Trade Agreements Clause (FAR § 52.225-5)

― Trade Agreements Certificate (FAR § 52.225-6)

• Together, the Trade Agreements Clause and Trade Agreements Certificate contractually obligate manufacturers to satisfy the TAA’s country of origin standards throughout the life of the manufacturer’s VA FSS contract

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• Buy American Act (1933):

― First of several modern statutes governing Federal procurement practices that incorporate domestic preference provisions

― Restricts Federal procurement of items that are not “Domestic End Products”

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• Trade Agreements Act:

― BAA country of origin requirements are replaced by TAA country of origin standards when certain thresholds are met

― That is, TAA country of origin standards apply to Federal government acquisitions above agreement specific-thresholds (currently, Federal contracts valued over $191,000)

― BAA applies to procurements valued less than the TAA threshold; therefore, the BAA is not applicable to FSS contracts

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― In general, provides that the U.S. Federal government may acquire only U.S.-made products, “designated country” end products, or end products from certain developing countries

― Prohibits Federal government procurement of end products from other, non-designated countries unless the particular Federal agency waives TAA requirements based on specified waiver grounds

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― “Designated Countries:” Certain countries with which the U.S. has an applicable trade agreement.

― Includes:

― World Trade Organization Government Procurement Agreement (“WTO GPA”) Countries

― Free Trade Agreement Countries

― Caribbean Basin Countries

― Sometimes Least Developed Countries

― NOT China; NOT India

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― The test to determine TAA country of origin is different from the test to determine the country of origin under the BAA

― Test = substantial transformation

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WHAT DOES “SUBSTANTIAL

TRANSFORMATION” MEAN?

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What Does “Substantial Transformation” Mean?

• VA’s position is that U.S. Customs and Border Protection (“CBP”) is responsible for determining whether the country of origin of an item sold in the U.S. is the U.S. or a designated country

• Definition of country of origin under CBP regulations:

― The country of manufacture, production, or growth of any article of foreign origin entering the U.S.

― Work or material in another country must effect a “substantial transformation” to render such other country the country of origin

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What Does “Substantial Transformation” Mean?

• The “substantial transformation” test turns on whether the product has been transformed into a “new and different article of commerce, with a name, character, or use distinct from the original article”

― This transformation must occur in the U.S. or a designated country

• Determination whether “substantial transformation” has occurred is fact-intensive, case-specific, and product-specific

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WHY ORIGIN OF API IS CRITICAL FOR

DETERMINING THE ORIGIN OF A FINAL

PHARMACEUTICAL PRODUCT

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Why Origin of API is Critical For Determining the Origin of A Final Pharmaceutical Product

• CBP Rulings – Transformation of Active Pharmaceutical Ingredients (“APIs”)

― CBP precedents provide helpful examples of the types of activities that CBP has/has not determined constitute substantial transformation. See www.cbp.gov/trade/rulings

• In determining whether a substantial transformation has occurred in the manufacture of pharmaceutical products, CBP has consistently examined:

― “The complexity of the processing” and

― “Whether the final article retains the essential identity and character of the raw materials”

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http://www.cbp.gov/trade/rulings


• Trends in CBP precedents:

― Processing pharmaceutical products from bulk form into measured doses generally does not constitute substantial transformation

― Merely altering the delivery mechanism of the drug generally does not constitute substantial transformation

― Substantial transformation often does occur when multiple APIs are combined or when processing causes chemical changes to the APIs that result in a product with a new character, name, or use

― Substantial transformation may occur when processing significantly increases the effectiveness of the final product

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• CBP has generally held that the following manufacturing processes do not result in substantial transformation

― Processing of pharmaceutical products from bulk form into measured doses (i.e., forming API into pills or capsules)

― Filtering

― Packaging

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• Country of Origin of Rybix ODT, HQ H215656 (January 11, 2013)

― API manufactured in India and shipped to a designated country (France)

― In France, the API was processed in 4 stages:

― 1. De-lumped and granulated with a suspension of inactive ingredients, then sieved and sized

― 2. Several inactive ingredients designed to assist in drug administration added to the API to make a flavor pre-blend

― 3. Tablets formed and collected into polyethylene-lined foil bags

― 4. Tablets packaged in child-resistant blister packs and prepped for shipment to the U.S.

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• Country of Origin of Rybix ODT, HQ H215656 (January 11, 2013)

― CBP found that the API manufactured in India did notundergo a substantial transformation in France, because the API retained its chemical and physical properties despite the 4 manufacturing processes that occurred in France

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• Country of Origin Marking of Bengay® Ultra Pain Relieving Patch, HQ H218797 (October 10, 2012)

― Bulk API manufactured in a non-designated country (China) as a solid

― Non-woven cloth for the patch was manufactured in a designated country (Japan)

― The bulk API and non-woven cloth were manufactured into a medicated patch in a designated country (Taiwan)

― CBP found that substantial transformation occurred in Taiwan, because the character of the API changed in final manufacturing

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• Country of Origin Marking Requirements for Vancomycin Hydrochloride, HQ H731731 (February 23, 1989)

― CBP found that substantial transformation occurred when a substance, as imported, was unfit for medical use, and the importer performed several processing steps on the imported substance to yield a finished product – a sterile antibiotic capable of intravenous injection – fit for medical use in humans

― In this case, CBP noted that the use of “United States Pharmacopeia” in the product name was also important in the analysis, because it indicated that the finished product adhered to a “standardized composition”

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• What about combination products or medical kits containing a drug?

― Per VA guidance, all components of a combination product or a medical kit must be manufactured in the U.S. or other designated country to be allowed on the manufacturer’s FSS contract

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VA NON-AVAILABILITY DECISIONS

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VA Non-Availability Decisions

• In U.S. Government procurements of products which exceed TAA dollar thresholds, and are not included in certain TAA exceptions articulated at FAR § 25.401, a Contracting Officer may not make award on an item from a non-TAA-compliant country, unless:

― No acceptable bids/offers were received for TAA-compliant products; or

― The offers of such TAA-compliant offers are insufficient to fill the Government’s requirements

• A Contracting Officer can make award on non-TAA-compliant items where sufficient TAA-compliant items are unavailable

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• GSA guidance to its Contracting Officers and to VA FSS Contracting Officers states that there can never be a non-availability determination made by an FSS Contracting Officer regarding non-TAA-compliant goods offered to an FSS Multiple Award Schedule (“MAS”)

― This guidance reflects GSA’s belief that the open and continuous nature of FSS MAS solicitations allows a TAA-compliant product to be offered to the FSS Program and awarded at any future time, thus undermining or nullifying a previous non-availability determination for the same item

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• GSA’s guidance ignores the fact that a branded covered drug (as well as certain other types of medical supplies) is available only from the patent holder, NDA, or BLA holder (or their licensee) during a length period of exclusivity

• It also ignores Congress’ intent that, under 38 U.S.C. §8126, all covered drugs should be made available to the Big Four Federal agencies, as well as other FSS-eligible purchasers

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• History

― The VA Master Agreement requires that “covered drugs” be “made available for procurement” on the FSS

― The VA has recognized that API manufacturing, as well as the final manufacturing of innovators drugs (i.e., VHCA “covered drugs”) is increasingly occurring in non-designated countries such as India and China

― In 2012, the VA tried unsuccessfully to obtain a waiver from GSA of their policy on MAS non-availability determinations for patented covered drugs

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• History

― Prior to July 2013, the VA permitted some non-TAA-compliant SIN 42-2A covered drugs that were already on a Schedule 65IB contract to stay on contract

― In a letter dated July 15, 2013, however, the VA advised manufacturers of its decision to remove all SIN 42-2A covered drugs manufactured in non-designated countries from Schedule 65IB contracts

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• Policy shift in April 2016 – VA OAL “Important Notice”― As of April 2016, the VA is now requiring that all

covered drugs, regardless of county of substantial transformation, be available on a 65IB FSS contract

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• Policy shift in April 2016 – VA OAL “Important Notice”― “In accordance with FAR 25.403(c) & 25.103(b)(2), the

decision has been made that the Contracting Officer may make an individual non-availability determination pursuant to 1) information provided by the offeror that neither the offered 42-2A product items nor similar or like items are mined, produced, or manufactured in the United States or a designated country in sufficient quantity to fulfill the requirements, and 2) in light of the requirement set forth in 38 U.S.C. Section 8126(a)(1) that manufacturers shall make available for procurement on the Federal Supply Schedule of the General Services Administration each covered drug of the manufacturer.”

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• Policy shift in April 2016 – Authority Cited by the VA― Section 603 of the Veterans Healthcare Act of 1992, 38

U.S.C. Section 8126 (P.L. 102-585).

― The Trade Agreements Act (TAA), 19 U.S.C. 2501 et seq.

― Federal Acquisition Regulation Part 25.4

― GSA Procurement Information Bulletin (PIB) 05-5, May 27, 2005 – Trade Agreements and the GSA Schedules Program FAR Part 25

― VA’s Nonavailability Determination

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• Implementation of Policy Change

― April 20, 2016 – Solicitation Amended / Mass Modifications Made Available

― April 21, 2016 – constant contact notice sent to all 65IB 42-2A contract holders

― April 26, 2016 – covered drug manufacturers had to submit any missing NFAMP data to PBM to establish FCPs for covered drug items not already reported

― May 6, 2016 – deadline for 65IB contractors to sign and return Mass Modification 0004

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• Implementation of Policy Change

― May 6, 2016 – deadline for RFM submittal

― June 6, 2016 – date by which non-TAA covered drug NDC 11s must be on Schedule (either contract or IA) (exceptions only for legitimate business reasons)

― In addition to requiring the inclusion of non-TAA covered drugs on Schedule, the Solicitation Amendment / Mass Modifications require contractors to update their record in the System for Award Management (SAM.gov): ― These non-TAA covered drug product items being added to

Schedule now need to be listed as other end products as required by 52.212-3(g)(5)(ii)

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• Implications of policy change:

― Reconciles the long-standing legal conflict between the TAA’s country of origin requirements and the VHCA’srequirement to make all covered drugs available for purchase under the 65 I B Schedule program

― Opportunity for manufacturers to increase sales through FSS contracts – but, also introduces previously excluded competitor products

― VA purchasers only

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• Open issues:

― How will non-availability determinations will be made?

― Non-availability determinations by other agencies?

― Penalties for non-compliance?

― SIN 42-2B products in the future?

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PENALTIES FOR TAA NON-COMPLIANCE

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Penalties for TAA Non-Compliance

• Potential penalties for TAA non-compliance include:

― Liability under the Federal False Claims Act

― Failure to comply with applicable statutory or regulatory requirements may render claims for payment submitted by manufacturers for products purchased by the Federal government “false”

― Treble damages

― Government-initiated

― Qui tam relator actions

― Termination of VA FSS contract

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Penalties for TAA Non-Compliance

• False Claims Act violations can carry severe damages and/or civil monetary penalties, even when a Government contractor discloses its own TAA non-compliance to the VA OIG and ceases to deliver the TAA non-compliant product to FSS purchasers

• The VA considers certain factors in determining whether to refer a voluntary disclosure of TAA non-compliance to the Department of Justice:

― The volume of sales of non-compliant products

― Harm to the Federal government from the sales

― How the violation(s) occurred (e.g., inadvertent?)

― Remedial actions taken, if any

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QUESTIONS?

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