OT:RR:CTF:VS H125103 BGK
Port Director
U.S. Customs and Border Protection
Port of Philadelphia
200 Chestnut Street
Philadelphia, PA 19106
RE: Pharmaceutical research and development materials as well as other related articles; Valuation under 19 U.S.C. § 1401a
Dear Port Director:
This is in response to a letter from your office, dated September 20, 2010, requesting internal advice on behalf of Merck Sharp & Dohme Corp. (Merck), regarding the proper valuation methods for certain pharmaceutical research and development materials and other related articles. In issuing our response, we have given consideration to submissions on behalf of Merck, dated November 2, 2009, September 2, 2010, and September 16, 2010, as well as a submission dated, November 24, 2010 submitted in response to a request for more information from our office.
Merck requested confidential treatment of sensitive business information. The business confidential information appears in double brackets “[[ ]]” in Merck’s submissions. We are granting this request for confidentiality. Business confidential information, which appears in brackets in this letter, has been redacted from the public version of this letter.
FACTS:
This internal advice request arises from a prior disclosure made by Merck to U.S. Customs and Border Protection (CBP) on November 2, 2009, concerning the valuation of research and development (R&D) materials and other related articles entered from October 1, 2004 through the present. Merck requested that CBP suspend liquidation of all entries of the covered imports pending the determination of an appropriate valuation methodology for the materials and other articles. On November 17, 2009, Merck requested, and was granted, a nine-month extension in which to complete their prior disclosure and develop a set of proposed fallback methodologies.
Merck is a global pharmaceutical company extensively involved in R&D. As such, Merck imports a wide-range of chemical, pharmaceutical and biological materials for testing and research purposes. These materials (“no sale” R&D materials) are not purchased by Merck, and are rather provided free of charge from other Merck facilities, partners, and vendors for further research, development and testing. The no sale R&D materials are imported for research and development purposes only, sometimes as part of a larger collaboration or other R&D service agreement, and are not sold in the United States. Merck also imports other articles in which no sale occurs, such as production samples, customer complaint samples, free samples from vendors, equipment, and instruments.
On September 2, 2010, Merck submitted a detailed Appendix describing their R&D cycle, financial accounting systems and proposed valuation methodologies. Merck is composed of three primary divisions: Merck Research Laboratories (MRL), Merck Manufacturing Division (MMD), and Global Human Health (GHH). MRL is the primary R&D division. MMD is responsible for manufacturing Merck’s commercial products, and GHH is responsible for the marketing of Merck’s commercial products.
A. Merck’s R&D Cycle
Merck manages its organization and expenses in the following hierarchical order: Divisions (MRL, MMD, and GHH), Subdivisions, Department Groups, and Departments. Departments are specific to a physical location, although a specific location may have more than one Department.
The Discovery and Preclinical Sciences (DPS) Subdivision is responsible for the production and shipment of R&D materials within MRL. The five Departments within DPS are Discovery (which produces and ships chemical compounds), Biologics and Vaccines (bioprocess and discovery biologic and vaccine materials), Process Chemistry (small-scale Active Pharmaceutical ingredients (API), intermediate materials, and sample thereof), Global Safety Assessment (animal tissue and fluids), and Global Clinical Supplies (clinical trial kits and containers).
Merck’s R&D cycle is completed through both MRL and the Global Pharmaceutical Commercialization (GPC) Departments within MMD. GPC produces and ships API, intermediate materials, and samples thereof, to be tested or formulated into finished drug products for use in clinical trials.
Merck’s R&D cycle is divided into the following stages: Basic Research/Discovery, Pre-Clinical Candidate (PCC), Phase I, Phase IIA and Phase IIB, Phase III, Phase IV, and Phase V.
Pre-Clinical Candidate (PCC) covers the years, anywhere from three to six, of pre-clinical testing that a drug candidate goes through before human testing begins, or after human testing begins to determine if there are any long-term adverse effects. These tests include pharmacokinetics, biological tests, manufacturing tests and pharmaceutical development studies.
Phase I studies are the beginning of clinical testing. These tests are designed to assess safety, tolerability, pharmacokinetics, and preliminary pharmacodynamic activity of the compound or biologic agent in humans. These studies involve a small group of people (20-80).
Phase IIA and IIB are larger studies (100-300 people with the disease) to determine the efficacy of the compound or biologic agent in the affected population, define the appropriate dosing, and identify adverse effects that could limit the usefulness. If Phase II trials produce satisfactory data, large-scale Phase III trials (1,000-10,000+ people with the disease) are initiated. These trials further test the effectiveness and monitor for side effects. These trials may also compare existing treatment standards, if any are available.
Once a drug or treatment has been approved by the appropriate regulatory and government agencies, Merck may commence Phase IV studies of the drug’s safety and effectiveness over a long period of time in a large number of people (usually thousands). In Phase V Merck provides a long-term supply of the commercial drug to the public and continues to study the marketed products.
This cycle begins with the Discovery Department. The Discovery Department and the Discovery team within Biologics & Vaccines study disease processes and identify diseases or conditions to be targeted. Once identified, the departments conduct research to identify the chemical compounds or biologic agents that are to be screened. The compounds or agents are chosen because they have properties which impact the disease or condition. Basic Research/Discovery involves screening thousands of compounds and/or developing new compounds to generate and identify “lead compounds.” Lead Compounds are chemical compounds believed to have promising interactions with the identified disease or condition. Only a small percent of the compounds that are screened are accepted for further testing. These molecules undergo “lead optimization,” which yields hundreds of potential drugs.
The “lead compounds” that result from the screening are produced into an API by the Process Chemistry Department. Similarly, the Biologics & Vaccine’s Bioprocess team develops the biologic agents into R&D materials for clinical trials.
Potential lead compounds and biologic agents close to achieving Pre-Clinical Candidate (PCC) status are sent to the Global Safety Assessment Department Group to explore their safety and efficacy. The compounds and agents are then sent to GPC and Bioprocess to be formulated into finished drugs. GPC maintains API pilot plants and
formulation pilot plants. API pilot plants produce and ship API and intermediate materials to be tested or formulated into finished drug products for clinical trials. Formulation pilot plants formulate API into finished drugs for inclusion in clinical trial kits. GPC has oversight of product development from late Phase IIB through the commercial launch.
Merck has stated that “[d]rug products tested within Phases IV and V are typically manufactured by Merck’s commercial MMD sites, and will therefore have an invoice price which will be used as the Customs value. Therefore such drug products are not subject to this prior disclosure.”
B. Merck’s Financial Accounting Systems for R&D Activities
Under Merck’s accounting system, the R&D materials, and materials used in their production, are not accounted for in such a manner that the standard cost per product can be determined. These materials are not inventoried; instead, these materials are expensed as part of the R&D process. Within MRL and GPC there are no systems or processes for tracking the labor, material and overhead components to output as is done for MMD’s commercial operations.
Merck does, however, track and record expenses for budgeting and financial purposes in an Enterprise Resource Planning (ERP) system. Actual expenses are recorded in the ERP system, and ultimately in Merck’s general ledger. All expenses associated with the creation of the R&D materials are recorded in Merck’s financial and related systems. It is asserted by Merck that the data recorded in the ERP system provides auditable data in support of the valuation methodologies proposed. All expenses related to the production of these materials are recorded in the “Operating Expense” section of Merck’s common chart of accounts, and are attributed to the appropriate account.
Each Department has a specific account identifier. The data is recorded at the most specific level (Division, Subdivision, Department Group, Department) that is appropriate, and then rolled up to a Department Group, Subdivision, or Division level as needed for financial reporting and/or planning purposes.
Direct expenses (labor and materials) are attributed to the account of the Department responsible for the expense. Labor expenses are recorded through a two-step process. First, headcount data is calculated on a monthly basis. Then, this data rolls into the ERP system, where salary and benefit data is stored. Materials are recorded by the account level responsible for the purchase. According to Merck, this is done in accordance with Statement of Financial Accounting Standards No. 2 (SFAS 2). The direct expenses capture all the materials and supplies necessary to produce the R&D materials. Indirect costs may also be recorded at the individual Department account level or may be allocated.
The labor and indirect production costs will be captured in a full-time equivalent (FTE) rate calculated for all of MRL. The FTE will also include indirect costs allocated to the individual R&D sites by the Global Support Function (GSF) Division. The MRL wide FTE rate will be calculated on an annual basis, based on the previous year’s actual data.
C. Merck’s Proposed Valuation Methodologies
Merck proposes to value the no-sale R&D materials under the fallback method, 19 U.S.C. § 1401a(f). Merck believes this is appropriate because there is no sale for export, there are no identical or similar goods exported at or about the same time as Merck’s materials, the materials are not put up for sale in the U.S., and cost of production elements are not available because the materials are not manufactured for commercial purposes and the materials are not costed. Merck has proposed what it believes is the most appropriate appraisement method for each R&D material category. It also notes that such methodologies are subject to change in the event that Merck undergoes restructuring. Therefore, Merck states that they will monitor such restructuring and will modify the methodologies as necessary to ensure compliance.
1. Discovery
The Discovery and Preclinical Sciences (DPS) Subdivision identifies, screens, analyzes, and develops chemical compounds, API, and other R&D materials that could be developed into drug products. Medicinal Chemistry, an area in the Discovery Department, has the responsibility of producing chemical compounds for testing. Some personnel are tasked with “blue sky” research, while others are directly responsible for creating new compounds.
a. “Blue Sky” Research
Some of the Medicinal Chemistry employees’ responsibilities include “blue sky” research. This is conceptual research not necessary for the production of chemical compounds. Their research is limited to the theoretical design/theory of compounds and the intricacies of what compounds may interact with the biology of the target.
Merck proposes to exclude the costs of this “blue sky”, conceptual research. This is due in part to the fact that this research is segregated out in Merck’s accounting system, and is not necessary for the production of chemical compounds. Merck notes that these costs are still captured with the intent to ensure that all R&D costs are recovered when a drug product is launched for commercial sale.
b. Chemical Compounds
As stated above, in addition to “blue sky” research, some Medicinal Chemistry employees are tasked with creating new chemical compounds. Every compound created by Medicinal Chemistry is assigned an “L-number”. These chemicals may be imported into the U.S. in well plates containing many compounds or by single, one-off compounds.
Merck proposes to value L-number chemical compounds according to a modified computed value. Generally this would involve using the previous year’s actual data for labor, overhead, and materials and dividing this number by the previous year’s output. This would equal an average cost per milligram of chemical compounds for the previous year.
Specifically, Merck proposes to multiply the total headcount of the specific Medicinal Chemistry site, excluding administrative and conceptual research employees, for the previous year by the FTE for MRL (equaling the annual labor and overhead at that site), add the annual material costs for total compound production at that site for the previous year divided by the total compound output for that site for the previous year (in milligrams), all equaling the cost of compound production (in milligrams). Merck proposes to then add the cost of packing and preparing the compound for shipping.
Compound output will be determined by the number of new L numbers recorded on an annual basis. Output volume will be estimated by an annual survey of the Medicinal Chemistry group leaders. The cost of packing will be determined in a consistent manner across all R&D material categories. An average annual cost per unit for each type of packing container/material will be determined based on the previous year’s purchases.
2. Process Chemistry
Process Chemistry, under DPS, prepares small-scale batches of API and related chemical intermediate materials to support all programs through the Phase IIB clinical trials. Campaign plans forecast the quantity and cost of the R&D materials necessary to produce the R&D material in question, and may be developed for an API or specifically for an intermediate material as the end product. Chemical intermediates represent the majority of the R&D materials cost for a typical API production campaign.
Employees in Process Chemistry spend their time engaged in both the preparation of API and related chemical intermediaries and research on methods for synthesizing a compound into API. The production of API and related chemical intermediates is documented in “batch records”. Batch records record data on the quantity of the material produced, the amount of time necessary for production, and the number of steps necessary to synthesize the material in question.
Merck proposes to value API and chemical intermediates produced by Process Chemistry according to modified computed value methodologies. Generally, this would use the previous year’s actual data for labor and overhead divided by the previous year’s output to equal an average manufacturing cost per kilogram. Campaign-specific costs are forecasted in campaign plans and can be added to the annual average costs to achieve campaign-specific values.
a. Active Pharmaceutical Ingredients (API)
Typically, a small batch of API is made up at one site with a second batch at a higher volume being made up at another site. API production typically continues in the GPC environment, discussed later. Each API is assigned a unique “MK number”, specific to the underlying chemical compound. U.S. imports of API typically occur when the synthesized API is moved from the site abroad to the U.S. site.
Merck proposes to value API produced by Process Chemistry according to a modified computed value method. Specifically, Merck proposes multiplying the FTE for MRL by the total FTE hours for the production of API for that site from the previous year and dividing by the total API output for the previous year for that site (in kilograms). This would equal the annual labor and overhead per kilogram of API for that site. Merck proposes to then add the forecasted R&D material cost per kilogram of API production at the site and the cost of packing to equal a campaign-specific cost per kilogram.
The total FTE hours for production of API and the API output from the previous year will be gathered from the batch records. This is because the batch records capture the time needed for the production of API, but not the time the employees spend on other research endeavors. Each batch of API is staffed by two people, and therefore, the total duration of API production over the course of a year will be multiplied by two to obtain the total FTE hours.
b. Chemical Intermediates
Intermediate stage API may be moved between sites for testing and analysis. Also, a campaign plan may be developed for a specific intermediate material. Chemical intermediates are precursors to the final API, and as such must progress through a certain number of steps before becoming an API. Each step provides an increase in value. These steps are identified on a facility schedule by chemical name. As Process Chemistry does not track inventory or costs to output, Merck proposes to use a modified computed value methodology for chemical intermediates. This method is based on the preceding computed value method for API adjusted pro-rata by the ratio of the number of steps completed to the number of steps necessary to create the API.
Specifically, Merck proposes to multiply the average annual total manufacturing cost per kilogram of API (as determined above) by the ratio of the number of completed steps to the total number of steps required to produce the finished API. This equals the pro-rata manufacturing cost of the chemical intermediate, per kilogram. Merck would then add the forecasted R&D material cost per kilogram for the API campaign multiplied by the ratio of steps completed to the number of steps required to produce the finished API. This equals the campaign-specific intermediate material cost per kilogram, to which Merck would add packing costs.
If a campaign is developed for the chemical intermediate itself, the R&D material costs will already be specific to the chemical intermediate, and it would therefore not be necessary to figure out the pro-rata formula for the campaign-specific costs when adding them to the manufacturing costs of the chemical intermediate.
c. Third Party Samples – API and Chemical Intermediates
Global third party vendors send Process Chemistry no-sale samples of intermediate API materials for R&D purposes. These are used to validate the quality of the material being produced. A purchase price is available for the final product, but a sample value is not available from the vendor. Merck proposes using a modified transaction value of similar merchandise.
Specifically, Merck proposes to use the actual purchase price of the final API per kilogram multiplied by the sample size (in kilograms), multiplied by the ratio of the steps completed to produce the sample to the total steps needed to produce the final API. This would equal the value of the sample intermediate material or API, to which Merck proposes to add the cost of packing.
3. Global Pharmaceutical Commercialization (GPC)
GPC is the Department Group under MMD that produces API at Pilot Plants in the U.S. Finished drug products for R&D activities and clinical trials are then produced at GPC’s Formulation Pilot Plants.
An API is often produced first by Process Chemistry, then in larger volumes by GPC. The production process, including the use of campaigns, is similar to that used by Process Chemistry. The Pilot Plants may ship chemical intermediaries between sites for testing and analysis purposes. Campaign plans may be developed for an API or specifically for an intermediate material. GPC’s Formulation Pilot Plants formulate API into finished drug products for use in clinical trials.
Imports of R&D materials by GPC occur when an API is utilized in R&D materials that may be imported into the U.S., chemical intermediates are imported for testing and analysis purposes, and when products produced by the Formulation Pilot Plants are exported to Merck and third party entities that package them into clinical trial kits that are subsequently imported into the U.S.
GPC does not track inventory or costs to output, and is therefore unable to tie R&D material costs to a specific batch of R&D material. However, all manufacturing costs are tracked to the Departmental accounts for the specific sites. Additionally, material costs associated with specific production campaigns are forecasted in campaign plans. Therefore, Merck proposes to use modified computed value methodologies.
a. Active Pharmaceutical Ingredients (API)
The modified computed value methodology for API will be based on an average annual manufacturing cost per kilogram of API by site. Campaign-specific costs will then be added to the site specific cost.
Specifically, Merck proposes to add the average annual direct and indirect manufacturing cost per kilogram of API (together equaling the average annual manufacturing cost per kilogram of API) and forecasted R&D material cost per kilogram per campaign to equal the campaign-specific API cost per kilogram, to which the cost of packing will be added.
The per-kilogram value will be recalculated on an annual basis, with the previous year’s actual data being used for the current year’s activity. Direct manufacturing costs will be determined by dividing the previous year’s actual expenses by the actual output of API from the previous year in kilograms. Indirect manufacturing costs include overhead, utilities, depreciation, and property taxes. Merck proposes to ensure that only depreciation expenses necessary to produce the API are captured by allocating the machinery and equipment depreciation expenses based on the percentage of capacity actually utilized to produce the API.
b. Chemical Intermediate Materials
Merck proposes to use a modified computed value method for chemical intermediates imported into the U.S. based on the preceding method for API. Specifically, Merck proposes multiplying the average annual cost per kilogram of API (as derived above) by the ratio of the steps completed to the total number of steps required to produce the finished API. This would equal the pro-rated manufacturing cost of chemical intermediate material per kilogram, to which Merck proposes to add the forecasted R&D material cost per kilogram multiplied by the ratio of steps completed to total number of steps required to produce the finished API. This would equal the campaign-specific intermediate material cost per kilogram, to which Merck proposes to add packing costs.
c. Third Party Samples – API and Intermediates
Third party vendors may send GPC no-sale samples used to validate the quality of the materials being produced, like in Process Chemistry. A purchase price would be available for the final product, but not for the sample. The methodology proposed is the same as that for third party samples imported by Process Chemistry.
d. Finished Drug Products
As GPC does not track inventory or costs to output, it is unable to tie R&D material costs to any specific batch of production. Therefore, Merck proposes to use a modified computed value method. Specifically, Merck proposes to add the direct and indirect manufacturing costs by site divided by the total annual output by site to equal the average annual formulation cost per unit. To this, Merck proposes to add the per unit API cost by MK number (from the API valuation methodology) to equal the finished drug cost per dose form. Packing would also be added.
Direct manufacturing costs, indirect manufacturing costs, and total output would be recalculated on an annual basis, using the previous year’s data for the current year’s activity. Annual output data would be calculated from spreadsheets kept for each plant to capture operating metrics.
e. Placebos
The cost of a placebo is, in essence, the cost to produce a finished drug product, less the cost of the API. As a result, Merck proposes to use the average annual formulation cost per dose form, from the above formula for finished drug products, without the cost of the API, and add the cost of packing.
f. Comparators
Comparators represent finished drug products produced by other pharmaceutical companies that are used for comparison purposes in clinical trials. The comparators are purchased in the form of finished drug products. The actual purchase price will be provided by GCS and will be specific to each comparator item. However, once purchased, Merck must “blank” the product. “Blanking” can be done by one of three ways: over-encapsulation, de-printing, or over-coating.
Merck proposes to use a modified transaction value for comparators processed in house or by a third party. Specifically, Merck proposes to add the actual per unit purchase price, the annual average per item labor and overhead cost for “blanking” (by method), the cost of the capsule, and the packing.
The average per item cost of over-coating would be calculated on an annual basis, using the previous year’s data for current year activity. The actual per item cost of de-printing [xxx] would be calculated on annual basis, [xxx].
4. Global Clinical Supplies: Clinical Trial Kits and Primary Containers
The Global Clinical Supplies (GCS) Department Group is responsible for planning, producing, and supporting clinical trials. The group is responsible for ensuring clinics are supplied with all the necessary drug products and laboratory materials for specific protocols, and one of its main responsibilities is to prepare and distribute clinical kits or containers.
GCS is responsible for anticipating clinical demand. They create a bill of materials to identify and gather all materials and components needed for a specific protocol. These may include, among other things: the drug product, placebos, comparators, packaging, booklets, vials, containers, bottles, desiccants, instructions and labels. The bill of materials contains the types and quantities needed, but is not costed. The resulting package is referred to as the finished good clinical supply item, and is assigned an “item” number.
The assembly of the kits occurs in “lots”, and each lot may be sent to multiple countries based on the needs of the trial. As the kits may be blinded at the lot level, Merck asserts that it is not possible to know the specific makeup or any clinical trial kit once assembled (except by designated personnel granted access to the unblinding information in the case of medical emergencies). GCS may also assemble and ship primary containers, blinded or labeled, that contain a finished drug product, placebo, or comparator for testing.
As Merck asserts that, due to blinding, it is not operationally feasible to identify the exact materials in a kit, the company proposes to use a modified computed value method to appraise blinded kits and containers. This would be computed by adding the average cost of assembly per unit and the product cost per unit (finished drug products, placebos, and comparators). The information used in calculating the average cost of assembly per unit will be based on the previous year’s actual data and recalculated on an annual basis. The average cost of assembly per unit will be the same for all kits and containers; however, the end value of the kits will be different because the product cost per unit is based on each specific item.
Merck proposes to determine the average cost of assembly per unit by adding the annual labor, payroll, and benefits; annual [xxx] packaging, labeling, and distribution costs; annual expenditure on packaging components, and annual overhead allocated to GCS and dividing that amount by the number of kits and containers produced annually. Merck proposes to determine the per unit product cost (specific to an item number) by adding the value of the finished drug product per item (using the methodology above if produced by GPC or the invoice price if produced by a commercial MMD site), the value of comparators per item (as described above), and the value of the placebos per item (as described above); then dividing that amount by the number of clinical kits and containers in the item number.
Merck proposes to value labeled primary containers in the same manner, except the value of the finished drug product, comparator, or placebo will be specific to the container, rather than based on an average of all three.
5. Biologics and Vaccines Research: Biologic and Vaccine Materials – Bioprocess
The Biologics and Vaccines Department Group is responsible for conducting research related to materials derived from living organisms or excreta from living organisms. Bioprocess, the only Department in the Group that imports biologic and vaccine materials, works with the following types of materials: bulk drug substances and associated samples, buffers/diluents, cell banks, and plasmids. The Group does not maintain costed inventory and is not able to track its expenses to its output. Therefore, Merck proposes to use a modified computed value method for its Biologics and Vaccines materials. The following standard inputs will be determined annually: MRL wide FTE (incorporating labor and overhead), representative R&D material cost per batch (per liter), and representative time required. The labor and overhead cost per batch would be determined by multiplying the annual estimated man hours per representative process and the FTE. The R&D material cost per batch would be determined by multiplying the annual estimated cost per liter of a representative process by the process scale.
Specifically, Merck proposes to add the labor and overhead cost per batch and the R&D material cost per batch to equal the total cost per batch. This amount would be divided by the total estimated output per batch, multiplied by the targeted concentration factor of the final product to equal a batch-specific value (by volume). The cost of packing would also be added.
Biologic and Vaccines will also ship samples, representative of in-process or final bulk drug substances. Merck proposes to value these samples according to the methodology for the other imports, but pro-rata to reflect the volume of the sample.
6. Global Safety Assessment: Animal Tissue and Fluids
Global Safety Assessment conducts studies on lead compounds that are near achieving PCC status. Capacity dictates where studies are conducted and where materials need to be shipped. Imported materials may include animal tissue and/or animal fluids.
Merck proposes to value the tissue and fluids based on the cost of extraction. Specifically, Merck proposes to multiply the total extraction effort for a prepared animal tissue or an animal fluid (based on a labor assessment analysis) by the total labor and overhead (FTE rate), and add the costs of slides and/or shipping container(s) and packing to arrive at the value of the cost of extraction.
7. Movements of Third Party and Affiliate Purchases
All groups within MRL and GPC may move R&D materials between sites. Merck asserts that for some materials purchased from third parties and commercial MMD sites, groups within MRL and GPC can track specific R&D materials to the purchase order an invoice associated with the purchase, but that this is not possible for other types of inventory, such as stock chemicals, bottles, and labels. Merck proposes to use a modified transaction value or modified transaction value of identical or similar merchandise for inventory purchased from third parties and subsequently moved between Merck facilities in their original condition.
Specifically, Merck proposes to use a modified transaction value arrived at by adding the actual purchase price and the cost of packing. Merck asserts that this method would be used for purchased finished drug products, comparators, and excipients.
Merck also proposes to use a modified transaction value of identical or similar merchandise by arriving at an average annual per unit cost by material type plus the cost of packing. The average annual per unit cost by material type would be computed by dividing the “total annual purchase cost by material or component type” by the “annual quantity purchased by material or component type.” Merck asserts that this method would be used for purchased API and intermediate materials, kit components, clinical booklet labels, and R&D materials and stock chemicals. The data would be based on the previous year’s actual purchases.
8. Non-R&D Related Imports
Merck has classified their non-R&D, “no sale” imports as “U.S. Goods Returned”, “Production Samples Sent to Merck for Testing”, “Customer Complaint Samples”, and “Free Samples Provided by Vendors”. These are articles passed between Merck facilities globally (or from a global vendor) without a sale and that are not later put up for sale.
a. U.S. Goods Returned
“U.S. Goods Returned” is used by Merck to refer to those imports for which Merck will be claiming Chapter 98 treatment. The applicability of Chapter 98 to these goods is not at issue in this ruling. Merck has two categories of imports in this classification: equipment, instruments, raw materials and supplies purchased in the U.S. from third parties being returned to the U.S. and R&D materials produced within Merck being returned to the U.S. Merck is proposing to value the R&D materials in the same way as other like R&D materials, as discussed above, and these will therefore not be discussed in this section. Merck is proposing to value the remainder of this merchandise on the original commercial invoice price.
b. Production Samples Sent to Merck for Testing
Merck may import samples of finished commercial products from third party manufactures contracted to produce goods on behalf of Merck or from commercial Merck manufacturing facilities. The applicability of Chapter 98 to these goods is not at issue in this ruling. These are imported for testing and evaluation so that finished commercial products may be released. Merck is proposing to value these samples based on the invoice price for the finished commercial product.
c. Customer Complaint Samples
Imports of customer complaint samples represent ad hoc returns of commercial drug products from overseas customers via overseas Merck entities. The original sale of the drug product typically occurs between the overseas entity and the customer. The drugs are returned to Merck due to a potentially quality-related issue. Merck proposes to value these based on the original commercial invoice price for the drug when sold to the consumer.
d. Free Samples Provided by Merck Vendors
Third party vendors may ship samples of finished commercial products for free to Merck commercial manufacturing facilities for testing and evaluation in the hope of generating future sales. As these are samples of finished commercial products, Merck proposes to value these based on the commercial invoice had they been purchased.
ISSUE:
I. Whether the R&D materials described above may be appraised pursuant to 19 U.S.C. § 1401a(f) in the manners requested. If not, what are the appropriate methods of appraisement for the above described materials?
II. Whether the non-R&D imports described above may be appraised pursuant to 19 U.S.C. § 1401a(f) in the manners requested. If not, what are the appropriate methods of appraisement for the above described imports?
LAW AND ANALYSIS:
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. See 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.
When imported merchandise cannot be appraised on the basis of transaction value, it is appraised in accordance with the remaining methods of valuation, applied in sequential order. See 19 U.S.C. § 1401a(a)(1). The alternative bases of appraisement, in order of precedence, are: the transaction value of identical or similar merchandise (19 U.S.C. § 1401a(c)); deductive value (19 U.S.C. § 1401a(d)); computed value (19 U.S.C. § 1401a(e)); and the “fallback” method (19 U.S.C. § 1401a(f)).
I. R&D Materials
As indicated above, the R&D materials are not sold by Merck or third party vendors to the U.S. facilities, rather the materials are provided free of charge from other Merck facilities, partners, and vendors for further research, development and testing. Therefore, the transaction value method may not be used to determine the value of the imported materials. This is true even for the materials in Section 7, above, which are originally purchased by Merck. These materials are not sold for exportation to the U.S.; rather, the materials are purchased as part of Merck’s inventory which is then moved around between Merck sites, and may go to places besides the U.S.
The second method of appraisement is the transaction value of identical or similar merchandise. See 19 U.S.C. § 1401a(c). The transaction value of identical or similar merchandise refers to a previously accepted transaction value of identical or similar merchandise that was exported to the United States from the same country and at or about the same time as the merchandise being valued. This is inapplicable because there are no transaction values of identical or similar merchandise available to appraise the imported materials.
The next method of appraisement is deductive value. See 19 U.S.C. § 1401a(d). Deductive value, which is essentially based upon the resale price in the United States, is not available as the R&D materials are not sold in the United States.
The fourth method of appraisement is computed value. See 19 U.S.C. § 1401a(e). Computed value is based on, among other things, information regarding the cost of materials, processing, profit, and general expenses. See id. As stated above, Merck asserts that it does not have information on the cost of production elements because the materials are not manufactured for commercial purposes and the materials are not costed. This is explained above in Section B on Merck’s accounting practices. Under Merck’s accounting system, R&D materials, and materials used in their production, are not accounted for in such a manner that the standard cost per product can be determined. These materials are not inventoried; instead, they are expensed as part of the R&D process. Therefore, computed value cannot be used as the method of appraisement.
Merck requests appraisement of the imported R&D materials using the “fallback” method of valuation in 19 U.S.C. § 1401a(f)(1), which provides:
If the value of imported merchandise cannot be determined, or otherwise used for the purposes of this chapter, under subsections (b) through (e) of this section, the merchandise shall be appraised for the purposes of this chapter on the basis of a value that is derived from the methods set forth in such subsections, with such methods being reasonably adjusted to the extent necessary to arrive at a value.
Merck proposes to use modified transaction values, modified transaction values of identical or similar merchandise, and modified computed values. Merck also proposes the use of the cost of extraction. In addition to the above valuation methods, Merck believes that certain conceptual research, termed “blue sky” research, should be excluded from the valuation of the R&D Materials.
A. Exclusion from Value: “Blue Sky” Research
Merck proposes to exclude costs of conceptual research from the R&D materials. This research is discussed above in Section C1a. In support of this, Merck cites Headquarters Ruling Letter (HRL) H011276, dated February 4, 2008, and HRL 540753, dated July 19, 1977. In HRL 540753, Customs (now CBP) agreed with the importer’s proposition that research and development does not become part of dutiable value until allocated to a particular product. For clarity, Customs provided the following examples of non-dutiable, conceptual research:
. . . When a team of research scientists are given a free rein or wide latitude in the laboratory to conduct experiments of their own choosing, this is purely conceptual in nature. When a discovery of some nature occurs due to this experimentation, and a possible commercial use for this discovery is considered, this is also conceptual in nature.
HRL 540753. HRL 540753 draws the line between non-dutiable, conceptual research and dutiable research at the point at which “. . . an end product utilizing the discovery is decided upon . . ..” It also distinguishes purely conceptual research from research with a contemplated result. “Where a particular end result is contemplated from the start, all experimentation geared towards the accomplishment of this result, including considerations such as efficiency, durability, etc., is likewise dutiable.” HRL 540753. Therefore, under HRL 540753, if the researchers did not have wide latitude, and instead began their research with a desired result, the research is dutiable.
HRL H011276 analyzed whether or not conceptual research for a Pharmaceutical company, GlaxoSmithKline (GSK), should be dutiable under the Statement of Administrative Action, and summarized its impact as follows:
The legislative history of the TAA stresses reliance on the producer’s books to obtain figures from which a computed value can be calculated. Thus, a presumption exists that where such costs are reflected on the producer’s books, as in the instant case, these costs are included in the computed value of the merchandise.
HRL H011276, 13 (discussing Statement of Administrative Action, H.R. Doc. No. 153, Pt. II, 96th Cong., 1st Sess. (1979), reprinted in Department of the Treasury, Customs Valuation under the Trade Agreements Act of 1979 (1981), at 62). Despite this presumption, however, CBP held that the research at issue in that case was not dutiable. In HRL H011276, the research being analyzed was the study of disease processes and attempting to identify new targets; the research was not directed toward a specific disease. The researchers also screened “hundreds of thousands of compounds” to see if any had a promising interaction with the target. Based on the results, the company selected the “lead compounds”. CBP drew the line between non-dutiable conceptual research and dutiable research at the point at which the “lead compounds” are selected.
GSK’s research process analyzed in HRL H011276 is substantially similar to the process used by Merck. Therefore, Merck may exclude from the value of the R&D materials what it terms “blue sky” research, up to the point at which “lead compounds” are selected. However, as noted in HRL H011276, if these costs cannot be segregated, Merck must include the costs in the value of the imported R&D materials. Also of note, Merck states that it does “capture all R&D expenses with the intent to ensure that all R&D costs are recovered when a drug product is launched for commercial sale.” Therefore, as noted in HRL H011276 with regard to the future importation of commercial products, Merck shall include such costs in the transaction value of the commercial products as part of the price actually paid or payable.
B. Cost of Extraction: Animal Tissue & Fluids
As discussed above in Section C7, Merck may import animal tissue and/or fluids. Merck relies on HRL H011276 and HRL 563461, dated May 18, 2006, in proposing to value these imports based on the cost of their extraction and the materials necessary for shipping and packing.
In HRL 563461, CBP analyzed imports under the National Marrow Donor Program (NMDP). NMDP participates in an international network of marrow donor organizations and imports blood products from matching individuals abroad. As it is illegal to buy and sell human organs and tissues, NMDP pays the foreign medical facility
the cost of extraction and shipping related expenses. CBP held that since it may use “all reasonable ways and means” to appraise the blood products, the blood products should be appraised based on the fee paid to the foreign medical facility for the cost of the extraction procedure (excluding the courier fee, as that is a cost of international shipment).
Blood and tissue samples were imported by GSK in HRL H011276. However, unlike in HRL 563461, GSK conducted the extraction procedures internally. In reliance on HRL 563461, GSK proposed to value the blood and tissue samples based on the time taken to extract the given material and prepare and package the sample plus costs of packing used. It proposed to use experienced scientists to conduct a quantitative and qualitative labor effort assessment for a representative sample of each test subject. The results would then be multiplied by the company wide FTE rate and the cost of packing would be added. CBP agreed that this would be an appropriate method of valuation of the blood and tissue samples.
Merck has proposed an almost identical formula to arrive at the cost of extraction, as discussed above. Merck has also stated that the labor assessment “should be reviewed annually”. Provided Merck reviews the assessment annually, the formula provided is an acceptable means of valuation under 19 U.S.C. 1401a(f).
C. Proposed Modified Computed Value
Merck has proposed to use a modified computed value to value chemical compounds, API (produced by Process Chemistry), chemical intermediates (produced by Process Chemistry), API (GPC), chemical intermediates (GPC), finished drug products, placebos, clinical trial kits and primary containers, and biologics and vaccine materials. Computed value is defined in 19 U.S.C. § 1401a(e) as the sum of:
(A) the cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise;
(B) an amount for profit and general expenses equal to that usually reflected in sales of merchandise of the same class or kind as the imported merchandise that are made by the producers in the country of exportation for export to the United States;
(C) any assist, if its value is not included under subparagraph (A) or (B); and
(D) the packing costs.
19 U.S.C. § 1401a(e)(1).
The use of a modified computed value under 19 U.S.C. § 1401a(f) has been approved by CBP for pharmaceutical R&D materials in both HRL H011276 and HRL W548164, dated September 20, 2002. CBP has also rejected a proposition to use a “declaration value” for pharmaceutical R&D materials in HRL 546112, dated July 5, 1996.
In HRL 546112, the importer proposed to use a “declaration value” for drugs being imported for R&D purposes in the U.S. The “declaration value” came from a protocol on materials between the importer and their parent company overseas. The protocol did not explain how the value was derived; however, counsel for the importer stated that it was an average cost of the products (allocating gross costs to all such items by means of averaging). CBP held that this would be inappropriate because 19 U.S.C. § 1401a(f)(2)(D) “unambiguously prohibits using a cost of production, other than a value determined (under section 1401a(e) (computed value)) for merchandise that is identical or similar to that being appraised.” HRL 546112. CBP did state that if the company were to provide the data necessary for a computed value calculation, it would be possible to include a profit of zero because the drugs were imported for R&D and not for sale. The lack of a profit would not preclude use of the computed value method.
In contrast, in HRL W548164, CBP approved the use of a modified computed value method under the fallback method of appraisement for valuing research APIs being imported into the U.S. Like here and in HRL H011276, the APIs were not imported into the U.S. pursuant to a sale, but were rather being transferred among pharmaceutical research facilities for further research. There were no transaction values for identical or similar merchandise, and deductive value was unavailable because there was no sale in the U.S. Also like in the case at issue and in HRL H011276, the facilities were unable to track their costs to a particular API. However, they were able to track the aggregate costs per fiscal year. Thus, CBP approved the use of a modified computed value utilizing a weighted average to determine the value of the research APIs. This was derived from the aggregate costs incurred by each facility involved in the production of the APIs. The audit team agreed that this was a reasonable and appropriate alternative method of appraisement.
HRL H011276 analyzed and distinguished these two cases. It cited three important distinctions. First, HRL 546112 provided little explanation for how the “declaration value” was arrived at, whereas in HRL W548164 the importer provided a thorough explanation of its proposal to use a modified computed value method (supported by detailed financial information from the manufacturing facilities). Second, the proposed modified computed value methodology in HRL W548164 was specific to the imported APIs, as opposed to HRL 546112, which used the average cost of all R&D activities. Third and finally, in HRL W548164, CBP determined that the value of the R&D APIs could not be determined at the time of importation because costs were tracked in the aggregate over the fiscal year.
In light of these distinctions, CBP determined that the modified computed value methods of appraisement proposed for the R&D materials at issue in HRL H011276 were more similar to those approved in HRL W548164. Like in the present case, HRL H011276 dealt with R&D materials that were being imported without a sale for further research and development. These R&D materials included chemical compounds, API, drug products, intermediate drug products, comparators, placebos, and biological materials. As the materials were not sold to the U.S. facilities, transaction value was not available. In addition, there were no sales of identical or similar merchandise. As the materials were imported for further research and development or manufacturing, there were no sales in the U.S. to use for the deductive method of appraisement. Like in the present case and in HRL W548164, GSK did not have the ability to determine the cost of the imported R&D materials at the unit level. Therefore CBP approved the use of a fallback method of appraisement under 19 U.S.C. § 1401a(f). Specifically, CBP approved the use of GSK’s proposed modified computed value methods. In giving such approval, CBP noted that GSK’s proposals accounted for the type of material that was being imported.
Like in HRL H011276, Merck has proposed the use of modified computed value methodologies for many of its imported R&D materials. Also like in HRL H011276, the company has proposed modified methodologies based on the individual types of materials. As discussed in HRL 546112, an amount does not need to be added to the modified computed value for profit as the materials are imported for further research, development, and manufacturing purposes, and not for sale. See 19 U.S.C. § 1401a(e)(1)(B). Also, in accordance with the computed value methodology, Merck has proposed to add the cost packing to all the formulas discussed below. See 19 U.S.C. § 1401a(e)(1)(D).
1. Chemical Compounds
As discussed above, Merck proposes to value the chemical compounds by multiplying the total headcount of the specific Medicinal Chemistry site (excluding “blue sky” research) for the previous year by the FTE for MRL (equaling the annual labor and overhead at that site), and adding the annual material costs for total compound production at that site for the previous year divided by the total compound output by that site for the previous year (in milligrams), to equal the cost of compound production (in milligrams). Merck proposes to then add the cost of packing and preparing the compound for shipping.
This is similar to the weighted average used by the pharmaceutical company in HRL W548164 to value APIs based on the aggregate costs incurred by each facility involved in the production of the APIs. Merck has provided a detailed description of how the company plans to arrive at the figure to be used, and proposes to use elements specific to the production of the chemical compounds being valued, as opposed to the
more general figures used in HRL 546112. In addition, like in HRL W548164, the value of the chemical compounds cannot be determined at the time of importation because material costs are tracked annually. In accordance with HRL W548164, Merck’s proposed modified computed value methodology for chemical compounds is acceptable.
2. API (Process Chemistry)
As discussed above, Merck proposes to value API produced by Process Chemistry by multiplying the FTE for MRL by the total FTE hours for the production of API for that site from the previous year and dividing by the total API output for the previous year for that site (in kilograms). This would equal the annual labor and overhead per kilogram of API for that site. Merck proposes to then add the forecasted R&D material cost per kilogram of API production at the site and the cost of packing to equal a campaign-specific cost per kilogram.
As total FTE hours for production of API and API output for the previous year will be gathered from the batch records, and batch records capture the time needed for the production of API but not the time the employees spend on other research endeavors, costs used will be specific to the production of API.
This is similar to the method proposed by GSK in HRL H011276. GSK also proposed to use the data from previous campaigns of API, as material costs could only be identified on a monthly and annual basis, and it was not possible to determine the material costs for a particular batch of API. GSK proposed to arrive at a value by adding the costs associated with production (materials, labor, overhead, etc) for a previous campaign and dividing it by the output generated by the same campaign.
Merck’s proposal is similar to that proposed by GSK, in that Merck arrives at the previous year’s API-specific labor and overhead and divides this amount by the campaign-specific materials. Also, in accordance with the important distinctions provided by CBP in HRL H011276, Merck has provided a detailed formula for the costs that will be included and how a value will be determined, the figures used will be specific to the development of APIs at an individual site, and a value would not otherwise be known at the time of importation because the costs are tracked annually. Merck’s proposal is even more specific than the one approved in HRL W548164, as that ruling allowed the company to use figures from all facilities involved in the development of API, while Merck is proposing to use figures specific to the site at which the API was developed. Therefore, Merck’s proposed method of valuation is acceptable.
3. Chemical Intermediates (Process Chemistry)
As stated above, Merck proposes to calculated the value of chemical intermediates produced by process chemistry by multiplying the average annual total manufacturing cost per kilogram of API (as determined above) by the ratio of the number of completed steps to the total number of steps required to produce the finished API. Merck would then add the forecasted R&D material cost per kilogram for the API campaign multiplied by the ratio of the steps completed to the number of steps required to produce the finished API. This equals the campaign-specific intermediate material cost per kilogram, to which Merck would add packing costs. If a campaign is developed for the chemical intermediate itself, the R&D material costs will already be specific to the chemical intermediate, and it is therefore not necessary to figure out the pro-rata formula for the campaign-specific costs when adding them to the manufacturing costs of the chemical intermediate.
As this is simply a pro-rata version of the API calculation above, based on the level of completion of the chemical intermediate in becoming an API, like above, this is an acceptable method of appraisement.
4. API (GPC)
As discussed above, the modified computed value methodology for API produced by GPC will be based on an average annual manufacturing cost per kilogram of API by site. Merck proposes to add the average annual direct and indirect manufacturing cost per kilogram of API (together equaling the average annual manufacturing cost per kilogram of API) and forecasted R&D material cost per kilogram per campaign to equal the campaign-specific API cost per kilogram. The per-kilogram value will be recalculated on an annual basis, with the previous year’s actual data used for the current year’s activity.
This is similar to the weighted average used in HRL W548164, except done on a site by site basis, instead of an aggregate from all sites engaged in the production of API. Merck has provided a detailed description on how they propose to arrive at the value, and it uses annual data, as Merck is unable to attribute data to the particular material upon importation. Merck also customizes the figures for not only APIs, but APIs in a particular campaign at a particular location. This is in accordance with the previous cases, and is an appropriate formula for appraisement under a modified computed value method.
5. Chemical Intermediates (GPC)
As discussed above, Merck proposes to use a modified computed value method for chemical intermediates produced by GPC based on the preceding method for API, except adjusted pro-rata by the number of steps completed in turning the chemical intermediate into the finished API. As above, for chemical intermediates produced by Process Chemistry, this is an appropriate formula for appraisement.
6. Finished Drug Products
As stated above, Merck proposes to value finished drug products by adding the average annual direct and indirect manufacturing costs by site and dividing that by the total annual output by site to equal the average annual formulation cost per unit. To this, Merck proposes to add the per unit API cost by MK number (from the API valuation methodology) to equal the finished drug costs per dose form.
This is similar to the weighted average used in HRL W548164 for API production, except done on a site by site basis, instead of an aggregate from all sites engaged in the production of finished drug products. Merck has provided a detailed description on how they propose to arrive at the value, and the company proposes to use annual data, as data is unable to be attributed the particular finished drug product upon importation. Merck also customizes the figures for not only finished drug products generally (as was done for API in HRL W548164), but by the API included in the finished drug product at the particular location. This is also similar to the formula approved in HRL H011276. In HRL H011276, GSK proposed to add the costs spent to formulate and package the finished drug product to the cost of the included API. Also like in the present case, GSK proposed using the previous year’s data, as it was unable to attribute the costs of production to individual batches. The formula proposed is in accordance with the previous cases, and is an appropriate formula for appraisement under the modified computed value method.
7. Placebos
As discussed above, because placebos are the same as the finished drug product without the API, Merck proposes to value them by using the average annual formulation cost per dose form, from the above formula for finished drug products, without the cost of the API. This is the same formula approved for use by GSK in HRL H011276. As this is in accordance with prior cases, and the above acceptable methodology for finished drug products, this is an appropriate formula to calculate the modified computed value of the placebos.
8. Clinical Trial Kits and Primary Containers
As Merck asserts that, due to blinding, it is not operationally feasible to identify the exact materials in a kit, the company proposes a modified computed method calculated by adding the average cost of assembly per unit and the product cost per unit (finished drug products, placebos, and comparators). Like in many of the previous methodologies, Merck proposes using the previous year’s data, as costs are tracked annually.
This two-part formula will be calculated as follows: Merck proposes to determine the average cost of assembly per unit by adding the annual labor, payroll, and benefits ([xxx]); annual [xxx] packaging, labeling, and distribution costs; annual expenditure on packaging components, and annual overhead allocated to GCS; and dividing that amount by the number of kits and containers produced annually. Merck proposes to determined the per unit product cost (specific to an item number) by adding the value of the finished drug product per item (using the methodology above if produced by GPC or the invoice price if produced by a commercial MMD site), the value of comparators per item (as described above), and the value of the placebos per item (as described above), and dividing that amount by the number of clinical kits and containers in the item.
This is different from the previous material types and the prior cases in that the entire category is being averaged across material types, versus using average annual data for one material type. This distinction, however, does not change the acceptability of a modified computed value method. The average being arrived at is still specific to materials used in this particular category, and is necessary due to the blinding. This is different from the inappropriate average proposed in HRL 546112 in that although a broader average is being used, the average is still for materials actually used in the production of the valued merchandise at the item (group of kits) level. In HRL 546112, the average was across all types of R&D materials for the company. The proposed methodology also meets the other two important distinguishing factors laid out in HRL H011276. Merck has provided a detailed formula for how the company will arrive at the value, and the data is maintained on an annual basis, versus a cost per item basis. Therefore, the proposed formula is appropriate for calculating the modified computed value of the blinded clinical trial kits and containers.
As discussed above, in addition to the blinded containers, Merck may also import labeled containers. Merck proposes to value labeled primary containers in the same manner, except the value of the finished drug product, comparator, or placebo will be specific to the container, rather than based on an average of all three. As the above method is acceptable, this is also acceptable. The formula is even more specific for the imported material because the type of material being imported is known, and, therefore, a material-specific value may be used.
9. Biologics & Vaccine Materials – Bioprocess
As discussed above, Merck proposes to value biologics and vaccine materials (including bulk drug substances, buffers/diluents, cell banks, and plasmids) by adding the labor and overhead cost per batch and R&D material cost per batch to equal the total cost per batch. This amount would be divided by the total estimated output per batch, multiplied by the targeted concentration factor of the final product to equal a batch-specific value (by volume). The labor and overhead cost per batch and R&D material cost per batch would be arrived at by means of an annual estimate calculated using representative studies for each material type.
This is similar to the formula used by GSK in HRL H011276, in which GSK proposed to value biological reagents and biological materials using representative studies for each material type. GSK was permitted to use an average across all material types until enough data could be gathered. In addition to using representative samples by material type like GSK, Merck’s formula allows for customization based on
the scale of production, concentration of the bulk substance, and length of time needed for production. As this is in accordance with prior cases and Merck provided a detailed formula for how the value would be derived, the formula is customized by material type, and the formula is being used because it is not possible to link costs to individual outputs, this is an acceptable formula for valuing biologics and vaccine materials.
D. Proposed Modified Transaction Value
Merck has proposed the use of a modified transaction value for comparators and inventory movements of third party purchases (for some of which, Merck has also proposed the use of a modified transaction value of identical or similar merchandise). Transaction value is defined in 19 U.S.C. § 1401a(b) as “the price actually paid or payable for the merchandise when sold for exportation to the United States” plus statutory additions for packing costs incurred by the buyer, selling commissions incurred by the buyer, the value of any assist, royalty or license fees, and proceeds. These additions are laid out in 19 U.S.C. § 1401a(b)(1)(A)-(E).
1. Comparators
As discussed above, Merck proposes to value comparators by adding the actual per unit purchase price, annual average per item labor and overhead cost (for “blanking”, by method), the cost of the capsule, and the packing. The average per item cost of blanking would be calculated on an annual basis, using the previous year’s data for current year’s activity.
Transaction value is not available because there is no sale for exportation to the U.S. Although the comparators are originally purchased, they are not necessarily purchased for exportation to the U.S. The comparators are also blanked before being imported into the U.S. Deductive value is not available because the comparators are imported for research and development purposes, not sale. Computed value is also unavailable as the cost of production for the comparator is unknown, as is the individual cost for blanking. Therefore, a fallback method must be used.
The formula proposed above is specific as to how the value will be arrived at, the information used in the formula is specific to comparators, and much of the data necessary is only maintained annually. Therefore, under the above analysis, this would appear to be an acceptable method of valuation; however, it is more accurately viewed as a modified computed value method than a modified transaction value. The cost of the comparator being used is more accurately seen as a cost of materials for production as opposed to a sale; the comparators are not sold for exportation and are further processed after purchase. Therefore, the formula proposed by Merck is an acceptable method of valuation, but is more accurately termed a modified computed value method.
2. Inventory Movements of Third Party Purchases
As discussed above, Merck has two types of inventory purchases that must be valued. The first of those is the inventory for which Merck can trace the article to a purchase order and invoice. For this type of inventory, Merck proposes to use a modified transaction value arrived at by adding the actual purchase price and the cost of packing. This would be used for purchased finished drug products, comparators, and excipients.
Although the materials may be traced to a purchase order and invoice, transaction value is unavailable because the materials were not sold for exportation to the U.S. The materials were previously purchased by Merck, and are subsequently being transferred between sites. Deductive value is unavailable because the inventory is not being sold in the U.S., and computed value is not possible because the inventory is purchased from a third party and the necessary information cannot be obtained.
Therefore, the fallback method must be used. Merck has proposed to use a modified transaction value with the original invoice price plus additions for packing costs. This is appears to be a reasonable attempt to arrive at a value for the merchandise. In HRL 548247, dated March 10, 2003, CBP allowed the use of the last price paid by a Mexican facility to an unrelated supplier to be used under 19 U.S.C. § 1401a(f) when parts were passed between the Mexican facility and a related U.S. facility free of charge. This is similar Merck’s proposal with regard to its inventory. Therefore, Merck may value their inventory based upon the last price paid to an unrelated supplier, i.e. the commercial invoice price plus packing. However, Merck is cautioned that because this is a modified transaction value, although it does not appear that any other additions to the price actually paid or payable are present, besides packing costs, if there are other applicable statutory additions under 19 U.S.C. § 1401a(b)(1), those must be added to the invoice price.
E. Proposed Modified Transaction Value of Identical or Similar Merchandise
1. Third Party Samples – API and Intermediates
Merck proposes to use a modified transaction value of identical or similar merchandise for API and Intermediates purchased by Process Chemistry & GPC. The formula proposed is the same for both, so they will be analyzed together.
As discussed above, third party vendors send Merck no-sale samples of intermediate API materials for R&D purposes. A purchase price is available for the final product, but a sample value is not available from the vendor. Merck proposes to use the actual purchase price of final API per kilogram multiplied by the sample size (in kilograms), multiplied by the ratio of steps necessary to produce the sample to total steps needed to produce the final API. This equals the value of sample intermediate material or API, to which Merck proposes to add the cost of packing.
As these are samples sent free of charge, transaction value is unavailable. Transaction value of identical or similar merchandise is also unavailable as the materials are not sold in this condition. Deductive value cannot be used because the materials are not sold in the U.S., and computed value cannot be used because the materials are coming from a third party, and the necessary information is therefore unavailable.
This proposed formula is similar to the formulas proposed above for API and intermediates, except a purchase price for the final product is substituted for the manufacturing cost of the final product as the materials are coming from third parties as opposed to being produced by Merck. Therefore, for the reasons discussed above, this is an acceptable formula for appraisement. However, this is more accurately a modified transaction value than a modified transaction value of identical or similar merchandise, and must be adjusted for any applicable statutory additions, in addition to packaging costs. Merck is also cautioned that the purchase price used must be the price when sold for exportation to the United States. Merchandise may not be appraised on the selling price in the U.S. for merchandise produced in the U.S., the price of merchandise in the domestic market in the country of exportation, or the price of merchandise for export to a country other than the U.S. 19 U.S.C. § 1401a(f)(2)(A),(C) & (E).
2. Inventory Movements of Third Party Purchases
As discussed above, Merck has two types of inventory. Inventory that can be traced to an original purchase order and invoice was discussed above. The other type of inventory cannot be traced to the original purchase and is composed of purchased API and intermediate materials, kit components, clinical booklet labels, R&D materials, and stock chemicals.
In order to use the transaction value of identical or similar merchandise, Merck would have to use a value already accepted by CBP. It is asserted that these values do not exist. Should these values be available, this would be the appropriate method of appraisement. The other methods of appraisement cannot be used for the same reasons that they are unavailable for the rest of the inventory. Instead, Merck proposes to use a modified transaction value of identical or similar merchandise by arriving at an average annual per unit cost by material type plus the cost of packing. The average annual per unit cost by material type would be computed by dividing the “total annual purchase cost by material or component type” by the “annual quantity purchased by material or component type.”
As discussed above in the previous section on inventory, the fallback method must be used. In this case, Merck cannot tie the individual goods to their original purchase orders or invoices, and has therefore proposed a formula using averages. In HRL H011276, GSK proposed to value purchased chemical compounds by averaging the external cost per gram and adding an amount to represent the packing costs (vials
sent to third parties to be filled with the compounds and returned to GSK). This is similar to what Merck has proposed here. Although it was approved by CBP as a modified computed value method when used by GSK, it is more accurately viewed as a reasonable method of appraisement using “all reasonable ways and means”, as the chemical compounds have not been further processed by the company. See 19 U.S.C. § 1500(a).
Under Section 500 of the Tariff Act of 1930, as amended, which constitutes CBP’s general appraisement authority, the appraising officer may:
[F]ix the final appraisement of merchandise by ascertaining or estimating the value thereof, under section 1401a of this title, by all reasonable ways and means in his power, any statement of cost or costs of production in any invoice, affidavit, declaration, other document to the contrary notwithstanding[.]
19 U.S.C. § 1500(a) (emphasis added). In this regard, the Statement of Administrative Action (“SAA”), which forms part of the legislative history of the TAA provides, in pertinent part:
Section 500 is the general authority for Customs to appraise merchandise. It is not a separate basis of appraisement and cannot be used as such. Section 500 allows Customs to consider the best evidence available in appraising merchandise. It allows Customs to consider the contract between the buyer and seller, if available, when the information contained in the invoice is either deficient or is known to contain inaccurate figures or calculations…. Section 500 authorize [sic] the appraising officer to weigh the nature of the evidence before him in appraising the imported merchandise. This could be the invoice, the contract between the parties, or even the recordkeeping of either of the parties to the contract.
In those transactions where no accurate invoice or other documentation is available, and the importer is unable, or refuses, to provide such information, then reasonable ways and means will be used to determine the appropriate value, using whatever evidence is available, again within the constraints of section 402.
Statement of Administrative Acton, H.R. Doc. No. 153, 96 Cong., 1st Sess. Pt 2, reprinted in Department of Treasury, Customs Valuation under the Trade Agreements Act of 1979 (Oct. 1981), at 67. The valuation formula proposed by Merck is a reasonable and appropriate method of valuation.
II. Non-R&D Imports
A. U.S. Goods Returned
As Merck intends to value the returned R&D as described above based on the type of material, only the equipment, instruments, raw materials and supplies of U.S. origin will be analyzed in this section. Merck is proposing to value this merchandise based on the original commercial invoice price.
As the merchandise is not being sold for export to the U.S., transaction value is unavailable. It is stated that there is no identical or similar merchandise being imported, however, if there is identical or similar merchandise for which CBP has accepted a value, that value must be used. Assuming there is not, the deductive value method is also not available because the merchandise is not sold in the United States. The computed value method is also unavailable as the goods are not produced by Merck. Therefore, a fallback method must be used.
CBP has the authority to use all reasonable ways and means to value merchandise. See 19 U.S.C. § 1500(a). As Merck is able to tie the merchandise to its original invoice, this is a reasonable method of appraisement as it is specific to the merchandise in question and relies on a price actually paid for the merchandise. In HRL 548276, dated April 29, 2003, a U.S. designer sold design plans and a U.S. produced prototype to a factory abroad under a single contract. The factory was likely to export the prototype back to the U.S. on consignment for continued testing and evaluation. Using Customs’ authority under 19 U.S.C. § 1500, it was decided that the best evidence available was the invoice price paid by the factory to the designer for the original work. Customs then subtracted from that amount the cost for the CD-ROM used to store the design work to arrive at the value for the prototype upon importation back into the U.S. In this case, the best evidence of the value is the price originally paid by Merck in the U.S. for the U.S. products being imported. Therefore, the value proposed by Merck is acceptable. As this is like a modified transaction value, Merck must be sure to add any applicable statutory additions to value listed in 19 U.S.C. § 1401a(b)(1).
B. Production Samples Sent to Merck for Testing
Merck may import samples of finished commercial products from third party manufactures contracted to produce goods on behalf of Merck or from commercial Merck manufacturing facilities. These are imported for testing and evaluation so that finished commercial products may be released. Merck is proposing to value these samples based on the invoice price for the finished commercial product.
As the samples are sent to Merck for free, there is no sale and transaction value is not available. As these are used before the finished commercial product is released, there will not likely be any values accepted by CBP for identical or similar merchandise. The deductive value method is also not available because the products are used for testing and are not sold in the U.S. As these are produced by third parties or by Merck facilities using the same accounting systems described for the above products, the computed value method is also not available. Therefore, the samples must be valued under the fallback method.
As there are commercial invoices available for the finished product, the use of the commercial invoice for the finished product is an acceptable means of valuing the samples. However, Merck is cautioned that any statutory additions to value listed under 19 U.S.C. § 1401a(b)(1) must also be added to the commercial invoice price. Merck must also insure that the commercial invoice value being used is for the sale of the product for exportation to the U.S., as other values are prohibited under 19 U.S.C. § 1401a(f)(2).
C. Customer Complaint Samples
As discussed above, Merck imports ad hoc returns of commercial drug products from consumers via overseas affiliates. Merck proposes to value these based on the original commercial invoice price for the drug when sold to the consumer.
Transaction value is unavailable because there is no sale to Merck in the U.S. It is also claimed that these are ad hoc importations due to quality-control issues, and therefore, there is no identical or similar merchandise. The deductive value method of appraisement is not available because the drugs are imported for research purposes and are not sold in the U.S.
Merck has claimed that the computed value method of appraisement would not be possible because the exporter (the sales affiliate) did not manufacture or produce the article being valued and because these are low frequency, ad hoc returns of previously sold drugs and obtaining the necessary information would be cost prohibitive. While this may be true, as the drugs are produced by Merck, they should be able to obtain the necessary information. A fallback method of appraisement may not be used if another method is available. However, CBP has allowed resorting to a fallback method where it would be difficult to obtain the information necessary for the computed value method because it is for a previously produced product being returned to the U.S. at a later date. See HRL 563470, dated June 12, 2006.
This is a reasonable method of appraisement under the fallback provision, 19 U.S.C. § 1401a(f). CBP has the authority to use all reasonable ways and means to value merchandise. See 19 U.S.C. § 1500(a). As Merck is able to obtain the original price paid for the merchandise, the company’s proposal is a reasonable method of appraisement.
D. Free Samples Provided by Merck Vendors
Third party vendors may ship samples of finished commercial products for free to Merck commercial manufacturing facilities for testing and evaluation in the hope of generating future sales. As these are samples of finished commercial products, Merck proposes to value these based on the commercial invoice had they been purchased.
As the samples are sent to Merck for free, there is no sale, and transaction value is not available. It has been stated that there are not identical or similar goods known to the company. If there are, 19 U.S.C. § 1401a(c) would be the most appropriate method of appraisement. As these are produced by third parties, the computed value method is also not available. Therefore, the samples must be valued under the fallback method.
As there are commercial invoices available for the finished products, the use of the commercial invoice for the finished product is an acceptable means of valuing the samples. However, Merck is cautioned that any statutory additions to value listed under 19 U.S.C. § 1401a(b)(1) must also be added to the commercial invoice price.
HOLDING:
Fallback methods of appraisement are appropriate for all the R&D materials. Also, to the extent the costs may be segregated, Merck may exclude from the value of the R&D materials what it terms “blue sky” research, up to the point at which “lead compounds” are selected. The cost of extraction is an appropriate method of valuation for animal tissue and fluids. Merck may use the above described modified computed value methods for chemical compounds, API, chemical intermediates, finished drug products, placebos, comparators, clinical trial kits and primary containers, and biologic and vaccine materials. The modified transaction value discussed above may be used to value inventory movements of third party purchases that may be traced back to the corresponding original invoice. The above discussed modified transaction value is also an appropriate means of valuation for third party samples of API and intermediates. The formula provided for inventory movements of third party purchases that may not be traced back to their corresponding invoice is also an acceptable means of valuation. Merck must review these methodologies as discussed in applicable sections above. The fallback methods of appraisement described above are also appropriate for the non-R&D materials.
You are directed to mail this decision to the internal advice applicant, no later than 60 days from the date of this letter. On that date the Office of Regulations and Rulings will make the decision available to CBP personnel, and to the public on the CBP Home Page on the World Wide Web at www.CBP.gov, by means of the Freedom of Information Act, and other public methods of distribution.
Sincerely,
Monika R. Brenner, Chief
Valuation and Special Programs Branch