Customs And FDA At Odds On Pharmaceutical Labeling

A recent U.S. Customs Headquarters ruling regarding the place of origin of an API processed into dosage form highlights the divide between Customs and FDA regarding the place of origin of pharmaceutical products.  FDA’s view is that a pharmaceutical’s place of origin is generally set by where it is milled, granulated, tableted, or encapsulated; however, Customs takes the position that the place where the API is produced, rather than the place where it is processed into dosage form, is the finished drug’s country of origin.  Pharmaceutical manufacturers should carefully consider these dueling views when labeling their goods for importation to the United States.

Customs’ Perspective: Substantial Transformation

Customs’ perspective arises from the “substantial transformation” test used in Custom’s marking (labeling) requirements and a variety of other areas of Customs law.  Where a good has been processed in more than one country (for example, an API is manufactured in one country and then sent to another country to be processed into dosage form), that good is considered to be a product of the country in which it was last “substantially transformed” into a “new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was so transformed.”  See, e.g., 19 U.S.C. § 2518(4)(B) (emphasis added).

The key question for pharmaceuticals is whether the various steps necessary to process an API into final dosage form – which can often be substantially more expensive than the costs to manufacture the API itself – substantially transform the API, thereby making it into a product of the country in which that processing took place.  Absent a change in the chemical structure of the API, Customs has generally taken the position that they do not.

The most recent example of this rule is HQ 267177 (Nov. 5, 2015), in which Customs considered whether the country of origin for Acyclovir produced by Carlsbad Technology, Inc. was China or India (where the API was manufactured) or the United States (where the API was processed into dosage form).  The processing in the United States was quite extensive: first, corn starch, microcrystalline cellulose, magnesium stearate, and sodium starch glycolate were added.  The API and its added excipients were then subjected to five highly complex manufacturing steps.

The importer argued that the processing of the API into tablet form in the United States substantially transformed it into a product of the United States.  Customs disagreed.  Noting that under U.S. court precedent, a substantial transformation “will not result from a minor manufacturing or combining process that leaves the identity of the article intact,” Customs stated that its general view is that “the processing of pharmaceutical products from bulk form into measured doses does not result in a substantial transformation of the product.”  This is because in Customs’ view, processing a raw API into dosage form does not change its chemical structure or its medicinal effect, and therefore the dosage processing “leaves the identity of the article intact.”

Customs followed its general rule in the Acyclovir ruling, because the processing performed in the United States did not result in a change in the medicinal use or chemical and physical properties of the API.  Therefore, Customs ruled that the Acyclovir was not substantially transformed in the United States, and its country of origin remained China and India.

This result is consistent with a number of other rulings in which Customs held that pharmaceutical products are not substantially transformed by what would be considered quite extensive processing under an FDA rubric.  In multiple cases, Customs has ruled that APIs which undergo granulation, sieving, sizing, blending with inactive ingredients, forming into tablets or beads within further tablets, coating with other substances, filtering, purification, sterilization, or packaging are not considered substantially transformed by these operations.

Nonetheless, Customs has found processing of an API to be a substantial transformation in certain limited instances.  First, Customs has repeatedly held that combining two or more APIs in a pharmaceutical product substantially transforms them.  Customs has also ruled that processing which significantly increases an APIs’ effectiveness is a substantial transformation.

FDA’s Perspective: Last Manufacture

By contrast, FDA’s view on the place of origin of pharmaceutical products directly conflicts with almost all of the rulings discussed above.  Unlike Customs, FDA generally considers the country of origin of a pharmaceutical product to be the place in which it is last manufactured (including milling, granulating, molding, tableting, encapsulation, coating, sterilization, and filling drugs into dispensing containers).

As a practical matter, the area in which the differing views of FDA and Customs as to origin raise the greatest problems for importers is in the area of product marking (labeling).  Customs requires goods sold in the United States to be clearly marked with their country of origin; for example, if the API for a pharmaceutical is manufactured in India but processed into dosage form in France, Customs would consider the country of origin to be India.  Also, if the name of a locality (other than the one in which the article was manufactured) appears on the article or its container, Customs will generally require the words “made in (country)” or other words to that effect to appear close to, and in comparable size to, the other locality to avoid possible confusion.

FDA has its own labeling requirements.  FDA requires pharmaceuticals’ packaging to clearly identify the name and place of business of the manufacturer, packer, or distributor; FDA’s rules define the “manufacturer” as the entity which mills, granulates, mixes, molds, lyophilizes, tablets, encapsulates, coats, or sterilizes the pharmaceutical, and/or fills it into dispensing containers – often, not the same as the “manufacturer” in Customs’ eyes.  To make the water muddier, FDA must approve every word that appears on a finished drug product label and insert (when the finished drug is subject to FDA’s new drug approval requirements), but is not ordinarily inclined to perform the sophisticated substantial transformation analysis. So, when Customs challenges the origin of a finished drug product subject to FDA’s approval requirements, the corrective action is not so simple as “just label over the origin declaration.” Because FDA approves all the wording on the labels and labeling, an overlabeling process could very well result in a misbranding of the finished drug. This observation has been used to hold Customs at bay in disputes regarding origin labeling of finished drugs – but this recent Headquarters ruling makes it more difficult to determine whether that approach remains viable.

Over-the-counter drugs, homeopathic drugs, DESI drugs and pre-1938 drugs (those not subject to FDA’s new drug approval process) are reasonably good targets for Customs to evaluate origin claims and enforce the origin labeling rules – because the API now carries so much more weight in determining the correct declaration.

Other “Country of Origin” Issues

Finally, the problems outlined above are not limited to the drug and pharmaceutical arena, but spill over into other FDA-regulated areas as well.  One primary example is the importation of foods.  For food in its “natural state,” (i.e. unprocessed), the FDA “country of production” would be where the food was grown or harvested, which would generally be the same as its “country of origin” for Customs’ purposes.  However, Customs has held that the country of origin for beans which were grown and dried in the United States but canned in the Dominican Republic was the United States, not the Dominican Republic.  In guidance issued to the food industry, however, FDA has specifically noted that the “country of production” for these same beans for FDA purposes would be the Dominican Republic, not the United States.  Importers of food articles must be prepared to provide information about both where their imported foods were grown and where they were produced.

FDA’s and Customs’ differing views also come into play in food labeling requirements.  Like with drug labeling, FDA requires the name and place of business of the manufacturer, packer, or distributor to be placed on an imported food’s package.  Once again, FDA’s idea of where the food was “manufactured” may be different than Customs’ – and again, if the name or place of business of the manufacturer, packer, or distributor includes the name of a locality other than the one where the article was manufactured, Customs will generally require the words “made in (country)” (or other words to that effect) to appear near, and in comparable size to, the other locality.

Customs’ and FDA’s marking and labeling requirements can be confusing, and the right solution depends upon the facts and circumstances of each individual case.  Experienced counsel or consultants can help importers find the way through these conflicting requirements.

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