Summary: 
The API Innovation Center (APIIC) recommends that Congress consider the uncertainties caused by the Acetris ruling. The unintended consequences created by the “Acetris loophole” significantly undermine the Administration’s and Congress’ efforts to promote U.S.-based active pharmaceutical ingredient (API) manufacturing and reduce the country’s dependency on foreign drug products.

Rebuilding domestic manufacturing infrastructure, in the interest of national health security, is a long-term proposition and will take several years before the U.S. API industry is able to return to full utilization. However, where possible, finished drug products with domestic content (i.e., U.S.-sourced API) and of high quality should be prioritized for federal procurement before non-U.S.-sourced pharmaceuticals. 

Background: Acetris Health, LLC v United States Ruling Impact on Current Law

In February 2020, the Federal Court of Appeals rejected the U.S. government’s longstanding position that the origin of a pharmaceutical under U.S. procurement is determined by where the API is made unless a ‘substantial transformation’ occurs.[1] This ruling challenges and broadens the previous interpretation of what qualifies as “manufactured”[2] in the U.S. under the Trade Agreement Act (TAA), leading to a significant reinterpretation of the definition. The U.S. Court of Appeals for the Federal Circuit’s ruling suggests that a U.S.-made end product may be partially, not “wholly”, manufactured in the United States to be TAA-compliant. This results in unintended consequences that significantly undermine efforts to promote U.S.-based active pharmaceutical ingredient manufacturing. 

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[1] Substantial transformation is achieved when the processing of a pharmaceutical causes a change in name, character, and use of components during the manufacturing process.

[2] The term “manufacture” was traditionally understood to coincide with “substantially transformation” standard. The Acetris case concluded that reference to “manufacture” in the U.S. is set apart from “substantially transformation.”

Reinterpretation Under Trade Agreement Act (TAA):

Two statutes restrict the government’s ability to procure foreign-origin products, the Buy American Act of 1933 (“BAA”), and the Trade Agreement Act of 1979 (TAA). The TAA generally prohibits government procurement of “products of a foreign country” unless the country is a “designated country” under the World Trade Agreement’s Government Procurement Agreement (WTO GPA), which is enforced domestically through the TAA. Countries, including China and India, are not signatories to the WTO GPA. 

The TAA and implementing regulations (see 48 C.F.R. § 25.402) provide that to qualify as a “U.S.-made” end product, it must be “mined, produced, or manufactured in the United States or substantially transformed in the United States.” Therefore, adopting the plain meaning of “manufacture,” separate from the “substantially transformed” standard, the Court concluded that the “manufacture” standard can be met by showing compounding, mixing, weighing, and/or measuring steps. This is far less than what had been previously required to show a substantial transformation, and thus, the “Acetris loophole” was created. Accordingly, under the TAA, a pharmaceutical product offered on a federal procurement is treated as U.S.-made if it meets this new standard and could qualify even if it was made of 100% foreign content.

Considerations for Congress:

Companies have transferred API manufacturing overseas mainly for economic considerations. While that should be addressed, closing the “Acetris loophole” is a necessary initial step toward establishing the proper incentives in Federal procurement to support the onshoring effort in the pharmaceuticals industry. 

Congress may consider the following to close the “Acetris loophole”: 

  • Statutory or regulatory action (or the Federal Acquisition Regulatory (FAR) Council as mandated by Congress) to revise the U.S.-made end product definition to clarify that “manufacture” as a term requires meeting the “substantial transformation” standard of showing processes that cause a change in name, character, and use of components during the manufacturing process. 
  • Gradually decrease the application of exceptions to the TAA that allow products of non-designated countries, such as India and China, to be procured by the U.S. Government (e.g., the blanket innovator/Veterans Health Care Act of 1992 “covered drug” TAA waiver).  

These actions could encourage the pharmaceutical industry to work toward manufacturing API and other critical components in the U.S., and/or procuring these components from other local manufacturers. Developing and investing in U.S. API manufacturing capabilities will result in an increase in manufacturing, management, regulatory, and a host of other U.S. jobs. This will also increase U.S. oversight capacity to ensure quality pharmaceuticals are produced.

Additional References: 

https://crsreports.congress.gov/product/pdf/IF/IF11580

https://cafc.uscourts.gov/sites/default/files/opinions-orders/18-2399.Opinion.2-10-2020_1529718.pdf

https://www.trade.gov/rules-origin-substantial-transformation