Life Sciences Procurement Update: FY2025 NDAA would change rules of origin for drugs

The specific proposals include:

• Provisions within the Senate bill that would, subject to “availability,” require the Department of Defense (DoD) to procure U.S.-origin generic drugs, active pharmaceutical ingredients (APIs), and “key starter materials,” and also require market analysis and reporting on the pharmaceutical supply chain; and

• An amendment proposed by Senators Marco Rubio (R-FL) and Elizabeth Warren (D-NH) that focuses on the domestic manufacture standard for ascertaining “U.S.-made end products” under the Trade Agreements Act (TAA), to close the gap identified in Acetris.

NDAA Section 887

Section 887 sets forth revised TAA country of origin requirements applicable to the DoD in its procurement of generic drugs, effective October 1, 2025. A key aspect of the Section is that it would require DoD to develop a “Defense-Relevant Generic Drugs List” based on an established DoD “risk management framework” by its effective date. Under the section, DoD could only contract to purchase listed drugs that are:

• manufactured in the U.S., and
• include API and “Key Starting Materials” that are domestic or from TAA designated countries.

“Key Starting Material” is defined to include “a raw material, an intermediate, or an [API] that is used in the production of an [API] and that is incorporated as a significant structural fragment into the structure of the active pharmaceutical ingredient." Not surprisingly, the section includes a waiver based on “availability,” to address cases where product that meets the U.S. manufacture and API/key starting materials restrictions is not offered or considered to be available for a given procurement.

Some key considerations associated with Section 887:

• U.S. manufacture requirement: With respect to listed generics, the section would close the Acetris “loophole” (discussed in detail below, which currently permits product manufactured in the U.S. with API from non-TAA designated countries to be procured by Federal agencies. But in doing so, it does not restore the TAA substantial transformation framework, as would the Rubio/Warren Amendment. Rather, Section 887 would take a very significant step further in that it would require U.S. manufacture of all listed generics procured by DoD and would disallow their manufacture in TAA designated countries (multiple trade agreement signatory countries, including England, France, Germany, Israel) whose products are entitled to be treated with parity vis-à-vis U.S.-origin products for U.S. government procurement. Although this would be subject to waiver based on “Availability,” if adopted in its current form, this requirement would arguably put the U.S. out of compliance with existing trade agreements.

• API + Key Starter Material requirement:  Section 887’s requirement for product to include only API from the U.S. or TAA designated countries would also take a significant step beyond the current TAA substantial transformation framework. Under the TAA substantial transformation test, if API or key starter materials from non-designated countries are substantially transformed into a finished product that is of U.S. or designated country origin, the product is eligible for U.S. government procurement. Under Section 887, listed generics with API or key starter materials from non-designated countries would be blocked. Thus, if the Section 887 construct were established, it would be contrary to established decisional law interpreting the TAA. Customs and Border Protection (CBP) decisions involving API and finished drug product have found substantial transformation in certain cases for single-API and in cases involving dual-API product. Accordingly, the absolute requirement in Section 887to include API/key starter ingredients from the U.S. or TAA designated countries also could be considered to be inconsistent with trade agreement obligations.

• “Availability” waiver: Under Section 887, DoD would be authorized to waive the section’s requirements in order to buy product that does not meet the U.S.-manufacture, API, and key starter material requirements if “... the head of military service or Depart­ment of Defense agency or field activity if the head determines that satisfactory quality and sufficient quantity of a generic drug described in subsection (a) cannot be pro­cured in sufficient quantities to meet military needs or as and when needed at United States market prices.” Notably, finding non-availability based on relative price or cost is not permitted under the FAR clauses implementing the TAA. Presumably, U.S.-origin generics made with domestic, or TAA designated country API/key starter materials could well be significantly more expensive than product subject to such manufacture in a non-designated country such as China or India. This waiver authority could open another loophole to allow product from China into medical facilities, separate and apart from Acetris.  

NDAA Section 848

Titled “Report and Updated Guidance on Contin­ued Risk Management for Pharma­ceutical Supply Chains of Department of Defense,” Section 848 requires DoD to provide a report to Committees on Armed Serv­ices of the Senate and the House of Representatives within two years of its enactment that  examines current supply chain risk.  In the report, DoD is required to assess the Department’s reliance of product from “high-risk” countries, and generally speak to pharmaceutical supply chain management and related risk. The report must include information on the status of drugs, API, key starter materials, and excipients originating from “high risk” countries. The Department also would be required to address the availability of this information, identify any limitations on information availability, and provide recommendations to address any challenges identified.

NDAA Section 744

Titled, “Plan to Ensure Access of Members of the Armed Forces to Safe, High-Quality Pharmaceuticals,” Section 744 is similar to Section 848 in that it also requires assessment of the current supply chain and reporting to Congress.  Section 744 requires the Secretary of Defense to develop and report on a plan to work toward ensuring access by the Armed Forces to “safe, high-quality” drugs and “...eliminate or mitigate risks in the pharmacy supply chain...” for the Department. The plan is to consider a wide variety of considerations, including “visibility” into and “validation” of country of origin for finished drugs and their components, “engagement” with drug suppliers regarding country of origin, and “elimination or reduction” of reliance on high risk or “very-high risk” sources. In support of the U.S.-origin requirements for drugs laid out in Section 887, Section 744 requires the Department to develop a plan for transition to domestic or TAA-compliant sources of API and key starting materials.

Section 744 also requires the Department to consider a plan in which it would take an active role in onshoring of drug manufacture.  In this regard, it requires DoD to assess the “feasibility and advisability” of establishing an in-house pharmaceutical manufac­turing facility, and to set forth the requirements, and timing and budget for its construction.

Rubio/Warren NDAA Amendment - S. Amendment 2443

Background: This amendment, titled “Modification of Rules of Origin for Pharmaceutical Products,” is meant to address concerns that an increasing volume of drugs with APIs from China are permitted to be procured by the federal government since the Acetris holding in 2020. Although this is an amendment, and was not cleared to be included in the NDAA, it could still be included in a final NDAA conference package.

Back in 2020, the Acetris court identified a “loophole” of sorts in the TAA country of origin (COO) framework, allowing API from non-designated countries such as China to be used in finished drug product purchased under U.S. government contracts so long as final manufacture takes place in the U.S. (even if substantial transformation is not attained during that final manufacture). Basing their decision on the definition of “U.S.-made end product” in the Federal Acquisition Regulation (FAR), the Acetris court concluded that for a product manufactured in the U.S., simple manufacture would be sufficient to confer domestic origin, regardless of the COO of the API. See 48 C.F.R. 52.225-5(a). In coming to this conclusion, the Court rejected an established body of caselaw that held that the origin of a single-API drug is determined by where the API is made unless a “substantial transformation” occurs in the country of final manufacture. Thus, the Acetris decision opened the floodgates for Chinese and other non-TAA compliant API to be used in product supplied to the U.S. government without having to be substantially transformed in the United States.

Impact of the Amendment: The Amendment would revise the TAA to “plug the Acetris loophole” with statutory language that would mandate amendment to the FAR to require finished drug products manufactured in the U.S. to be “substantially transformed” in the U.S. to be considered TAA compliant. With this override, product with API from China and other countries that are not TAA “designated countries” would again be prohibited from being procured by Federal government agencies, unless substantial transformation in a designated country/U.S. ornonavailability were found. Notably, however, the Amendment creates confusion as to the assessment of origin for the API itself. The Amendment requires update of the Federal Acquisition Regulation (FAR) 180 days after its enactment.

With revisions suggested under the Amendment, the relevant TAA provision at 19 U.S.C. 2518(4)(B) would read as follows (see introduced text and deletions in and bold and bolded strikethrough, respectively):

(B)Rule of origin

An article is a product of a country or instrumentality only if (i) it is wholly the growth, product, or manufacture of that country or instrumentality, or (ii) in the case of an article which consists in whole or in part of materials other than an API from another country or instrumentality, it has been substantially transformed into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was so transformed, or (iii) in the case of an article which consists of an API, the pharma ingredient is wholly the growth, product, or manufacture of that country or instrumentality.

Section (B)(ii), as amended, would apply the TAA substantial transformation test to all products that include API (finished drug products) and any other products that do not include API. By explicitly requiring the substantial transformation test to be applied in the origin analysis, it overrides the “manufacture only” standard applied for products subject to U.S. manufacture, per Acetris. Although an alternative reading of this language could be to understand this section to apply to all products other than those that include an API, given the context we do not think this alternative reading is intended. The Amendment’s very title “Modification of Rules of Origin for Pharmaceutical Products,” speaks to this language being focused on drugs.

The Amendment introduces confusion, however, with its added section (B)(iii), which addresses assessment of origin for API specifically. Presumably this section was added to inform the origin analysis for API, which was carved out from the revised section (B)(ii), which only addresses finished drug product and other non-drug products. However, (B)(iii) does not mirror (B)(ii) in applying the substantial transformation test. Rather, it assumes that all components of the API and manufacture originate from the same country and is silent as to the very common scenario where API manufacture involves components from one country (or more) and manufacture into finished API in a separate country. As a result, under the Amendment, an API made in Germany using raw materials from India and China that were reacted together (and substantially transformed) in Germany cannot claim German origin because the API would not be “wholly the growth, product, or manufacture” of Germany. And there is no direction as to how to decipher API origin for purposes of the analysis down the line of finished product that includes that API. In our view, this section must be revised to restore and require application of the substantial transformation framework to the API origin analysis. This framework has been fundamental to the TAA since its inception, and there appears to be no reason here to exclude it – policy or otherwise - other than a potential oversight.

If you have any questions or are interested in discussing potential ways to achieve revisions to the Rubio/Warren amendment or the NDAA sections described in this piece, please do not hesitate to reach out to our Life Sciences Procurement Team.

Authored by Joy Sturm, Allison Pugsley, Craig Lewis, Michael Mason, Cybil Roehrenbeck, Mike Scheimer, Stacy Hadeka, Christine Reynolds, Ashley Ruhe, and Lauren Colantonio.