Understanding the Rules Determining Country-of-Origin for Pharmaceutical Products Along with a ERP Based Solution
Abstract
This
article aims to understand the depths, complexities and some of the recent
trends involved in the rules as stated and interpreted by various customs
agencies around the world for determining the country-of-origin of finished/
semi-finished pharmaceutical products as they are traded across international
borders multiple times on their journey to the patient. It is imperative for
pharmaceutical manufacturers, distributors, freight forwarders and other supply
chain stakeholders to understand and implement these rules in their business
processes to be able present accurate information as expected by customs agencies
around the world. The article also dives into a proposed Enterprise resource
planning (ERP) based solution that may help a business automate the derivation
of the country-of-origin based on historical transactions that may take place
in the procurement, manufacturing and global trade business units.
Keywords: Active
Pharmaceutical ingredient (API), ERP, country-of-origin, contract manufacturing
organizations (CMOs), United States Customs and Border Protection (CBP), Food
and Drug Administration (FDA)
1. Introduction
Global
pharmaceutical supply chains are a complex ecosystem of suppliers,
manufacturers, logistics partners, and distributors from many countries. In the
modern pharmaceuticals supply chain, materials are sourced, processed and
transformed in multiple countries using both domestic and foreign materials and
equipment. The figure below captures a hypothetical high-level depiction of a
typical end to end supply chain for a product whose components/raw materials/
intermediate products traverse through multiple countries throughout the
manufacturing process.
Figure
1: Simplified example of a global pharmaceutical supply
chain.
The
pharmaceutical product starts its journey as an Active Pharmaceutical
Ingredient (API) which is the biologically active component mostly responsible
for the intended therapeutic effect of the drug. Multiple countries have
developed extensive manufacturing expertise and market share in this space led
by India, China, Italy, South Korea and Germany amongst others. Through the
process of Bulk production, APIs are formulated into the dosage form as
intended for the drug such as oral solid doses, injectables etc. through often complex
and specialized, environment-controlled processes by Bulk manufacturers. Due to
reasons of cost, expertise, availability of labor, capacity and equipment
amongst others, pharmaceuticals manufacturers must partner with multiple
suppliers and contract manufacturing organizations (CMOs) across the world to
optimize a product’s supply chain. It is often uncommon for a single
pharmaceutical manufacturer to have all the required expertise. Bulk material
is then transformed into Brite Stock material which refer to pharmaceutical
materials that have undergone primary packaging and exist in the forms of
bottles, vials, blisters and pouches. The origins of this term belong to the
food industry where filled and unlabeled canned products were stored in
inventory for future labeling, final packaging and distribution. Brite Stock
pharmaceutical material typically undergoes further packaging steps of
labeling, printing, carton inserts, cartons and finally placed into an
appropriate unit of measure such as cases, cartons, bundles or pallets [3]
before being distributed as finished product to 3rd party logistics
partners, affiliate organizations and specialty distributor on their way to
patients located in different countries.
As
can be seen, the interpretation of country-of-origin of a finished/ semi-finished
product by a customs agency importing/ exporting the product can get highly complicated
as it crosses multiple international borders along the way. Pharmaceutical
manufacturers are scrutinized on the accuracy of country-of-origin on a product
by various stakeholders involved at various milestones in the lifecycle of a finished/
semi-finished pharmaceutical product such as in the manufacturing process of
labeling a product or during the commercial process of importing or exporting a
product or selling it to the Federal Government in the US. Inaccurate representation
of the country-of-origin on a customs invoice can lead to heavy civil or
criminal penalties under the Trade Agreements Act (TAA) and False Claims Act
(FCA) [1]. To cite an instance from recent years, a global medical devices
manufacturers opted to an $8.3 million
settlement to resolve a lawsuit alleging it violated the FCA when it improperly
certified a certain batch of products as being of ‘US origin’ in process of
selling them to the Department of Veterans’ Affairs (VA) [2]
2. The
rules for Country-of-Origin Analysis for Pharmaceuticals
The
question of country-of-origin of a pharmaceutical product however has long been
in contention. It is a complicated question, and the answer often depends on a
myriad of factors including the customs agency in question. Regulatory agencies
from different countries may employ different standards for country-of-origin,
and hence the same product with the same supply chain nodes can often mean
different country-of-origin for different agencies [1]. As per the ‘VEIS and Intrastat
traders’ manual version 12’ provided by the Revenue office of Irish Tax and customs
department, ‘Goods whose production involved more than one country shall be
deemed to originate in the country where they underwent their last,
substantial, economically justified processing resulting in the manufacture of
a new product or representing an important stage of manufacture’ [4]. In this
context, the site of Bulk production site qualifies the last site of
substantial transformation where API material is further processed with
additional excipients and undergoes blending, granulation, compression, coating
steps to produce a transformed Bulk product. In the hypothetical supply chain
depicted above, the country-of-origin as interpreted by Irish customs would be
UK.
However,
the understanding and the precedence laid out by the United States Customs and
Border Protection (CBP) and the Food and Drug Administration (FDA) is a bit
more complex and looks a step deeper into the manufacturing process. As per the
day-to-day historical business transactions performed by CBP, the agency
determines that the process of Bulk manufacturing does not result in a
substantial transformation of the API product, unless there is a specific
change in the product’s chemical composition [5]. Therefore, in such a scenario
where the essential characteristics of the finished/ semi-finished batch
emulate those of the API batch, CBP would consider the country-of-origin to be
the site of API manufacturing i.e. India. However, a recent February 2020 ruling
in Acetris Health, LLC v. United States by the U.S. Court of Appeals for the
Federal Circuit (CAFC) creates a dichotomy by upholding a decision that the
finished pharmaceutical product (tablets) procured by the VA is not “wholly the
… manufacture” of India and is not “substantially transformed in India,”. The
court concluded that a U.S.-made end product may be maybe manufactured in the
United States even though it may be comprised of foreign made components and
that the source of the API was irrelevant when evaluating the country-of-origin
for the purposes of the Federal Acquisition Regulations (FAR) and TAA. Even
though a government request for a formal reconsideration of this decision is anticipated,
it remains to be seen which direction is taken by the CBP towards the broad interpretation
of the concept of ‘substantially transformed’ [6].
3. A
proposed solution towards the derivation of country-of-origin from an ERP
standpoint
Pharmaceutical
manufacturing firms use a single or a combination of integrated, feature-rich
and complex ERP systems to manage the day-to-day business operations of
procurement, manufacturing, regulatory compliance management, supply/demand
planning and many more. Through standard, out-of-the-box features or through
business specific enhancements, ERP systems can be setup to incorporate the aforementioned
rules to derive various data attributes including country of origin of a material,
or a batch of a material during the execution of a business process. The
following text covers only one of the many ways in which an ERP system such as
SAP can be setup to automatically derive the country of origin on a
finished/semi-finished pharmaceutical product.
3.1. Proposed
master data/ configuration setup
· All finished/ semi-finished materials in
the scope for country-of-origin determination require a flag for identifying if
they are comprised of a Single or Multiple API materials. This identification
flag may be built as a characteristic in the SAP material master classification
data of the respective materials.
· SAP Suite for Hana provides the ability to
store the country of origin in a standard field in the material master international
trade import or export views (table MARC, field HERKL). However, if the
business is not using the functionality associated with these views, then a
custom characteristic may be built in the classification data for the material
master for API materials to hold the country-of-origin of the API material.
This country will be the country of the approved supplier of the API material
as noted in the product specification of the respective API. If the business requires
multiple suppliers for the API product, then the placeholder for country-of-origin
may be placed at the batch master level of the respective API batch procured. For
the country-of-origin derivation logic to work, it is essential that this
master data for API supplier countries exists in the system.
· All batches of finished/ semi- finished
materials may have two placeholders for country-of-origin – one for
import/export from the United States (US COO), and another one for
import/export for Rest of the World (RoW COO). The standard field provided by SAP
in the batch master for the purposes of country-of-origin (table LOBM, field
HERKL) may be used as one placeholder while another custom field can be easily built
as a placeholder into the batch master classification data.
3.2. Use cases and
logic for derivation
Case 1: When
the batch for which country-of-origin being derived is a finished good/ Brite
material comprised of multiple API materials, the country-of-origin as inferred
by customs agencies both for United States and Rest of the World is the same
i.e. the country of Bulk production. The site of Bulk production, whether
internal or CMO, is where the finished material last underwent ‘substantiative
transformation’ and the respective country becomes the country of origin.
Case 2: When
the batch for which country-of-origin is being derived is a finished good/ Brite
material with a single API material in its genealogy, the country-of-origin as
inferred by RoW customs agencies is the country of Bulk production as detailed
in the previous case. However, US customs will go a step further in the
manufacturing genealogy to look at the country of API manufacturing as the true
country-of-origin. For this purpose, the system logic must drill down a step
further into the finished/semi- finished batch genealogy to derive the
respective API batch used in manufacturing. The procurement history of the API
batch will provide the details of the approved supplier and its respective
country.
Figure
2: Logic for derivation of country-of-origin.
4. Post
ERP implementation governance process
Any
changes in qualified API suppliers and contract/ internal manufacturing sites
for Drug product formulation require a change in product marking/labeling. Hence,
it is recommended that there is a strong change management and communication
protocol in place between various organizational units such as global trade and
tax which are consumers of data pertaining to country-of-origin and other units
such as procurement, supply planning, and manufacturing execution teams which
have relevant transactional details to accurately validate the derived country-of-origin
to prevent any fees and penalties associated with inaccurate country-of-origin
on global trade documents/reports such as customs invoice and Intrastat
reports.
5. Conclusion
Although
the country-of-origin associated pharmaceutical material/ batch may not be Good
Manufacturing Practice (GMP) relevant data, it is very critical that manufacturers
get it right lest they should risk paying heavy duties and fines to customs
agencies. With modern pharmaceutical supply chains being increasingly complex
with each supply chain node possibly located in a different country, manufacturers
must keep a track of the rules of determination as defined by customs agencies
around the world and establish development and governance processes to keep
their ERP systems solutions abreast of these requirements. Appropriate logic
must be developed in the ERP system to be able to print and report this data accurately
to customs agencies.
6. References
- https://www.lifescienceslegalupdate.com/2015/03/articles/international-life-sciences/erroneous-country-of-origin-determinations-may-result-in-significant-fca-penalties-for-medical-device-companies/
- https://www.reedsmith.com/en/perspectives/2015/03/medical-device-companies-face-severe-fca-penalties
- https://www.webpackaging.com/Up/Comp/977/11040254/11040277AXXMXWLJ/f/Pharmaceutical_Packaging_with_Brite_Stock_Manufacturing.pdf
- https://www.revenue.ie/en/customs/documents/vies/vies-intrastat-traders-manual.pdf
- https://www.lexology.com/library/detail.aspx?g=30655d5c-adf4-4557-b603-95446c2a5196
- https://www.faegredrinker.com/en/insights/publications/2020/2/appellate-court-rules-government-may-procure-us-manufactured-drug-products-despite-use-of-foreign-ac