HQ W548164
SEP 20 2002
RR:IT:VA W548164 EK
Port Director
U.S. Customs Service
477 Michigan Ave., Room 200
Detroit, MI 48226
RE: Request for Internal Advice; Pharmacia & Upjohn Co.
Dear Port Director:
This is in response to your letter of June 13, 2002, requesting internal advice on behalf of Pharmacia & Upjohn (Pharmacia), regarding the proper valuation and method of quantifying applicable costs for merchandise imported by Pharmacia. In a letter dated April 18, 2002, Pharmacia requested that you seek internal advice regarding valuation issues for imported merchandise. In addition, in a submission dated September 3, 2002, Pharmacia clarified and revised certain facts. We have forwarded this submission to your office for review.
Initially, Pharmacia requested our office to issue a prospective ruling request; however, in a letter dated March 5, 2002, this office informed Pharmacia that we could not issue a prospective ruling since transactions were pending in various ports of importation. At that time, we also granted Pharmacia's request for confidentiality that included a specific exhibit and the bolded and bracketed information in the submission. At this time, Pharmacia is requesting confidential treatment relating to business proprietary sourcing, valuation, specific costs, and pricing related to Pharmacia's import transactions. This includes Exhibit III (included in submission) and text within the
April 18, 2002, submission that is bolded and bracketed. We are granting this request for confidentiality.
FACTS:
Pharmacia is a company involved in the research, development, production and sale of pharmaceutical products. Research projects are conducted both in the United States and abroad in order to discover and develop new products. The discovery and development of a pharmaceutical product requires many lengthy stages and phases of research and testing that can be grouped into general classes of study. Pharmacia describes these classes as follows: discovery, pre-clinical, clinical, registration, and production. The first stage of discovery research focuses on formulating potential therapeutic approaches. In the second stage of the discovery phase, the goal is to establish the viability of the potential therapeutic approach. In this stage, numerous active pharmaceutical ingredients (APIs) are screened to identify which APIs will be used in ongoing research. This screening includes extensive cellular, receptor, and enzyme level studies.
The next two stages of the discovery phase are the pre-product and product lead team stages. In these two stages, the goal is to narrow the field of components that are to be subjected to further testing and research. If the studies are successful, a single API compound is advanced for pre-clinical development. This level of research prepares the compound for human testing, which includes a four-week animal safety study. Based upon the outcome of this testing, initial dosage forms may be developed and an application for clinical trials are submitted to the Food and Drug Administration (FDA). At this point, based upon the research and testing at the pre-clinical development level could result in a decision to terminate the research program. If the pre-clinical development so indicates, research continues into the clinical development level of study.
In this clinical development level of study, Pharmacia breaks down the research and testing into Phases I II and Ill. The goal of Phase I is to establish that the API compound is safe in humans. If the results of Phase I so indicate, the research proceeds to Phase II, where the goal is to establish that the drug is in fact effective. In Phase III, the goal is to confirm the safety and efficacy of the drug by increasing the number of test patients in a test group. The commercial product definition is finalized and dosing regimens are established. At any time during these three phases, the research and testing of the API compound may cease due to toxicology and safety issues.
In the last two levels of study, registration and production, Pharmacia's goals are to prepare for global product approval and to study ways to extend and broaden the product market following such approval. In these levels of study, studies are conducted to obtain data to support marketing efforts. In addition, long-term effects on morbidity and mortality are examined, dosage form stability studies are on-going, and manufacturing processes are improved.
As this description indicates, the development of a new drug is based on a series of testing and study. Pharmacia indicates that if at any point in time test results so indicate, a research and development (R&D) program may be aborted and further development is discontinued. The focus of Pharmacia's R&D includes pharmaceuticals for the following: cancer, arthritis/inflammation, infectious diseases, and disorders of the central nervous system. To a lesser degree, R&D includes products in the areas of ophthalmology, urology, and women's health. At any given time, an API may be undergoing R&D for two or more indications.
Due to the complex nature of Pharmacia's internal R&D processes, Pharmacia routinely partners with other corporate research entities, both domestic and foreign, in the development of new products. In some situations, Pharmacia performs certain stages of the research and/or clinical study and its partner performs other stages. In other instances, Pharmacia partners with another research entity after that entity has completed the initial stages of discovery and development of an API. Therefore, the various stages of a given R&D program as described above, occur both domestically and abroad. The API's may be developed at a single manufacturing facility or over the course of various development programs at manufacturing facilities in different foreign countries. Pharmacia has provided a list of all its manufacturing facilities, worldwide, and the countries in which they are located. The subject APIs are exported from any one of the foreign countries listed in Pharmacia’s submission.
Given the complexity and scope of Pharmacia's global R&D network and processes, Pharmacia's methods of allocating R&D costs are determined on the aggregate level. Currently, Pharmacia has ten worldwide facilities responsible for manufacturing specific APIs. For any given API, one Pharmacia facility is responsible for costing the initial raw material, the value added to that raw material to create the API, as well as all the R&D applicable to all its APIs. These costs are tracked by Pharmacia on the aggregate level, i.e., each facility can track on a fiscal year basis the total cost of raw materials and the total added value costs for APIs manufactured at its facility. In addition, each facility can track the R&D funds allocated to a single R&D program in its entirety that results in a finished drug; however, the facility is not able to track the R&D costs applicable to a single API product that is not yet a finished drug (the product is in one of the stages described above). Pharrnacia is able to ascertain its total worldwide R&D cost for APIs in a fiscal year. These yearly global costs include R&D for all APIs, including R&D for projects that fail and do not result in the production of a finished API compound.
Pharmacia indicates that although a single facility is responsible for the R&D costs associated with a given API, the various stages of R&D may occur at more than one facility. Therefore, finished drugs, as well as products in an earlier stage of development, may be transferred across international borders in the course of a single R&D program. When the product is imported into the United States, the value of the R&D associated must be declared to Customs. Since Pharmacia tracks the total R&D costs applicable to a finished drug, these costs can be broken down to a unit by unit measure. However, the R&D associated with the API's is somewhat problematic.
In its revised submission of September 3, 2002, Pharmacia indicates that it produces both "commercial APIs" and "research APIs" and their chemical intermediates (produced as one of the developmental steps in producing a finished research API). There are ten manufacturing facilities worldwide that produce "commercial APIs" for commercial sale. In addition, Pharmacia has five research facilities (pilot plants) worldwide that produce "research APIs", i.e., APIs that are used for further research only. Each pilot plant has an associated research laboratory where the "research API" is developed. The pilot plant then produces small quantities of the API for further research. The ten manufacturing facilities can and do track their costs to produce each "commercial API", however they cannot track their costs to produce each "research API". With respect to these, each pilot plant can track only its aggregate costs per fiscal year. Therefore, the actual R&D costs associated with the "commercial APIs" are known at the time of entry. However, the R&D costs with respect to the "research APIs" are not known at the time of entry.
Transaction value and transaction value of identical or similar merchandise pursuant to sections 402(b) and (c) of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979 (TAA), respectively, are used by Pharmacia to appraise finished drugs that are imported into the United States. However, with respect to imported APIs, no sale occurs from one Pharmacia facility to another, nor are these APIs resold in the United States. In addition, Pharmacia indicates that none of the other statutory methods of appraisement are applicable, and requests that Customs appraise the APIs based on a reasonable alternative appraisement methodology contemplated by section 402(f) of the TAA.
ISSUE:
Whether the imported "research APIs" as described above may properly be appraised pursuant to 19 USC 1401a(f).
LAW AND ANALYSIS:
The primary basis of appraisement of imported merchandise is transaction value pursuant to section 402(b) of the TAA, which is defined as the "price actually paid or payable for merchandise when sold for exportation to the United States, " plus five statutory enumerated additions. In order for transaction value to be used as a method of appraisement, it is essential that a "sale" between the parties is available. Without a sale for exportation to the United States, transaction value must be eliminated as a means of appraisement.
If transaction value is not accepted as a method of appraisement, the appraised value must be determined by proceeding sequentially through the alternative bases of appraisement to the first such basis that can be determined. These alternative methods, listed in order of precedence for use are: transaction value of identical or similar merchandise, section 402(c) of the TAA, deductive value, section 402(d), computed value, section 402(e), and value if other values cannot be determined, section 402(f).
As indicated above, the APIs are not sold from one Pharmacia facility to another, thereby eliminating transaction value as a method of appraisement. In addition, there is no transaction value of identical or similar merchandise available to appraise the APIs. Deductive value, which essentially is based upon the resale price in the United States, is not available as a method of appraisement because the product is not resold in the
United States. Appraisement pursuant to computed value is based upon, among other things, information regarding the cost of materials, processing, profit and general expenses. The importer is not able to provide this information because as indicated above, the actual costs of the "research APIs" cannot be determined at the unit level. The actual R&D costs are associated with these APIs are not known at the time of entry.
Pharmacia requests appraisement pursuant section 402(f) of the TAA, utilizing a modified version of computed value. Section 402(f), value if other values cannot be determined or used, provides for the following:
If the value of imported merchandise cannot be determined, or otherwise used for the purposes of this Act, under subsection (b) through (e), [transaction value through computed value] the merchandise shall be appraised for purposes of this Act 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 .. .
Computed value is defined in section 402(e) as:
The computed value of imported merchandise is 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 ... (C) any assist, if its value is not included under subparagraph (A) or (B); and (D) the packing costs.
In addition, pursuant to section 402(h)(1)(iv) of the TAA, the term assist includes "engineering, development, artwork, design work, and plans and sketches that are undertaken elsewhere than in the United States and are necessary for the production of the imported merchandise." With regard to apportionment of assists, 19 CFR 152.103(e) provides "apportionment of the value of assists to imported merchandise will be made in a reasonable manner appropriate to the circumstances and in accordance with generally accepted accounting principles."
With regard to allocation of costs, the Court of International Trade has held that payments can be allocated in a reasonable manner appropriate to the circumstances of the case. See, Chrysler Corporation vs. United States, 17 CIT 1049 (1993).
Pharmacia's proposes the use of section 402(f) of the TAA in appraising the imported "research APIs". It is only these APIs that Pharmacia is unable to track costs. Essentially, in its September 3, 2002, submission, counsel limits the inquiry to these “research APIs”, and indicates that there are only two pilot plants abroad that are involved in production of these “research APIs”. These two pilot plants are in Nerviano, Italy and Stockholm, Sweden.
Pharmacia is unable to determine the actual R&D costs that pertain to any single imported "research API"; however, as indicated above, it can establish the actual costs that pertain to all of its API's produced worldwide in a given fiscal year. Although Pharmacia imports "research APIs" only from its pilot plants in Nerviano, Italy and Stockholm, Sweden, it proposes to include all aggregate costs for all of its pilot plants in determining the value of the "research APIs". This average includes the costs from all five pilot plants in the value of the “research APIs” and represents a weighted average cost to produce “commercial APIs”, worldwide. Pharmacia proposes the use of these costs in total, apportioned, as the basis of the declared value of the imported "research APIs". The appraisement, pursuant to section 402(f), is a modified computed value method using a weighted average value as opposed to actual computed value.
In your memorandum of June 13, 2002, you indicate that your office has discussed this proposal by Pharmacia with the lead auditor on the Pharmacia Compliance Assessment. In light of the circumstances, you agree that Pharmacia's method of cost allocation appears to be both reasonable and an appropriate alternative appraisement utilizing section 402(f) of the TAA. In addition, the auditor agrees that Pharmacia's proposal appears to be sound. You also reviewed the September 3, 2002, submission and continue to concur with Pharmacia's proposed methodology.
Accordingly, based on the information presented, we conclude that it is reasonable under the particular circumstances of this case to accept Pharmacia's proposal regarding the appraisement of the "research APIs", using a modified computed value pursuant to section 402 of the TAA.
HOLDING:
The use of section 402(f) of the TAA, value if other values cannot be determined, is acceptable as a means of appraising the "research APIs" as outlined above. The proposal by Pharmacia to have the merchandise appraised under section 402(f), using a modified version of computed value in capturing the R&D costs associated with the "research APIs", is reasonable and appropriate under the circumstances of this case.
Sincerely,
Virginia L Brown, Chief
Value Branch