H332371

HQ H332371 February 28, 2024 OT:RR:CTF:VS H332371 ACC CATEGORY: Valuation Kirti Jadeja, Senior Manager Kristine Dozier, Partner Deloitte Tax LLP, Global Tax Advisory 555 Mission St. San Francisco, California RE: Clinical Trial Stage Pharmaceutical Products and Materials; Fallback Method Dear Ms. Jadeja, Ms. Dozier: This is in response to your request for a ruling, dated May 15, 2023, on behalf of your company, [X] (“Company A”), part of the pharmaceutical group in the [X] (“Company B”) family of companies, regarding the proper appraisement of certain clinical trial stage pharmaceutical products and materials. The importer has asked that certain information submitted in connection with this ruling be treated as confidential. Inasmuch as this request conforms to the requirements of 19 C.F.R. § 177.2(b)(7), the request for confidentiality is approved. The information contained within brackets in italics in this ruling or in the attachments to the ruling request, forwarded to our office, will not be released to the public and will be withheld from published versions of this ruling. FACTS: Company A [X] is a large global, research-driven pharmaceutical company that engages in the development, clinical trial testing, manufacture, and commercial distribution of pharmaceutical products. Company A [X] also administers clinical trials in the United States for related Company A [X] pharmaceutical companies that are engaged in the development of different pharmaceutical drugs pursuant to service agreements. Company A [X] states that drug development is an extensive process that includes various stages including research and development, clinical trial testing and finally, achieving government regulatory approval for the commercial sale of a drug in a local market. Company A [X]’s drug development involves the following products, which are the subject of this ruling request: Clinical Active Pharmaceutical Ingredients (“API”): API is the key component in pharmaceutical drugs. The Food and Drug Administration (“FDA”) defines it as the substance incorporated in a finished drug which furnishes pharmacological activity or other direct effect in the diagnosis, cure, mitigation, treatment, or prevention of disease, or to affect the structure or any function of the body. API formulation is a significant factor in the drug development process and determines to a large extent whether it will progress to win regulatory approval. Company A [X] produces and imports API or drug substance in sample and bulk form for development testing and/or further manufacture into finished drugs. API does not include excipients that will be used to make finished drugs. Excipients are substances added to an API to, for example, facilitate drug absorption, reduce viscosity, enhance solubility, or support long-term stabilization, bulk up solid formulations, prevent denaturing or improve shelf-life. Clinical Drug Products (“DP”): DP is produced by combining API with excipients. Compared to FDP, DP may not be in dosage form at the time of import for administration to patients or may not have undergone final packaging/labelling into the form that will reach the end patient as the finished drug. Clinical Finished Drug Products (“FDP”): FDP is DP that is formulated in dosage form, with final packaging and labelling in the form in which it will be provided to a patient. Comparators: Comparators are products produced by other drug companies that target similar disease indications and are purchased and included in clinical trials for comparison testing purposes. Comparators may be included in clinical trials in their original form which identifies what they are or could be subject to processing by Company A [X] to hide their identity. This additional processing may take the form of adding a simple label that states, “for clinical trial”, over-encapsulation or over-labelling of original labels and additional packaging. Company A [X] engages in clinical trials as part of their drug development process to test the therapeutic benefit of investigational drugs against specific disease indications in target patient groups. As part of this effort, “Company A [X] imports clinical stage API, DP, and comparators for use in manufacturing clinical drugs and trial kits to support clinical trials as well as FDP in finished form for use in ongoing active trials where it or a related Company A [X] pharmaceutical company is the sponsor.” This ruling specifically involves the following clinical trial stage pharmaceutical products: (1) Clinical stage API, whether imported in bulk or as samples; (2) Clinical stage DP, whether imported in bulk or as samples; (3) FDP for clinical trial; and (4) Comparators. The above-mentioned products are involved in Phase I to Phase IV of clinical trial stages (i.e., before commercial approval and launch) in the drug development process. Company A [X]’s Clinical Product Supply Chain and Financial Accounting for Pharmaceutical Products Involved in Clinical Trials The clinical FDP, DP, and API in question are produced at internal Company B [X]-owned manufacturing sites globally and, increasingly, by external third-party manufacturers (also known as “assemblers”) who perform work under long-term Service Level Agreements (“SLAs”) and other contracts in several countries. Under these SLAs, Company B [X] companies contract external third parties for services to manufacture their products, but the specific Company B [X] companies retain ownership of the products and the third-party manufacturers have no interest in the product other than as the assembler. For clinical products produced at internal Company B [X]-owned manufacturing sites, the production and trial costs are recorded or expensed to project and cost centers in financial records by project code, clinical study, or other designation in a variety of Company A [X] financial enterprise resource planning (“ERP”) systems. Production costs will vary and are typically not inventoried because products are going through continuous changes during the testing process. According to Company A [X], this means “standard costs” of production are not readily available and it would be operationally complex to track the volume of output of individual batches to costs for clinical products because of variability, commingling, and [X] of Company A [X]’s global supply chain. For clinical products manufactured by external third-party manufacturers or assemblers, the manufacturing invoices are booked to targeted external cost centers and can be readily traced in reports in several ways, including by vendor, product category (e.g., large, or small molecule-based drugs, gene therapy drug products, vaccine-based drug products), and drug stage (e.g., API, DP, FDP). Invoices from these external third-party assemblers will include transport costs if they move their production output to another processing site but will not include costs, of materials or API, or DP, etc. if these are provided free of charge by [X]. These external third-party assemblers typically source their own raw materials, supplies, and equipment to produce products and invoice Company A [X] companies for their service fees to manufacture specific volumes of output or as agreed. As Company A [X] explains, charges related to tracing services for externally manufactured products are more readily available because product acquisition and assemblers service billing is done in a more standardized way. C. Company A [X]’s Proposed Valuation Methodologies Clinical FDP, DP, and API The clinical FDP, DP, API at issue will not be sold after importation. Instead, Company A [X] will use clinical FDP and DP in manufacturing clinical drugs and trial kits to support clinical trials as well as FDP in finished form for the use in ongoing active trials. The clinical FDP, DP, and API are either (1) products which already have commercial approval to treat one or more disease indications other than the one for whic

The preferred method of appraising merchandise imported into the United States is the transaction value method as set forth in section 402(b) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), codified at 19 U.S.C. § 1401a. The transaction value of imported merchandise is the “price actually paid or payable for the merchandise when sold for exportation to the United States” plus amounts for five enumerated statutory additions. 19 U.S.C. § 1401a(b). In order for imported merchandise to be appraised using the transaction value method, it must be the subject of a bona fide sale between a buyer and a seller, and the sale must be for exportation to the United States.I. Clinical FDP, DP, and API lacking any approval for commercial sale to treat any disease indication and commercial prices are not available.Company A [X] will import FDP, DP, and API for clinical trial manufacturing and testing for drugs that lack any intercompany price for a product because some drugs imported by Company A [X] may have not achieved regulatory approval for commercial sale to treat any disease indication. For such products, Company A [X] proposes to use a modified computed value under the fallback method. Company A [X] states that the clinical API, DP, and FDP are manufactured at foreign Company B [X]-owned manufacturing sites or by unrelated third-party manufacturers who have no ownership of the products they produce for Company B [X]. After their foreign manufacture, the products are imported into the United States without a sale such that ownership of the products remains with a Company A [X]-related entity throughout the production and trial stages. Since the clinical API, DP, and FDP are not the subject of a sale, the transaction value method set forth in 19 U.S.C. § 1401a(b) is not applicable. When imported merchandise cannot be appraised on the basis of transaction value, it is to be appraised in accordance with the remaining methods of valuation, applie