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HQ H011276

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February 4, 2008

OT:RR:CTF:VS H011276 HEF

CATEGORY: VALUATION

Port Director
U.S. Customs and Border Protection
1901 Cross Beam Drive
Charlotte, North Carolina 28217

RE: Pharmaceutical research materials; Valuation under 19 U.S.C. § 1401a; Fallback method

Dear Port Director:

This is in response to a letter from your office dated April 27, 2007, requesting internal advice on behalf of SmithKline Beecham Corporation d/b/a GlaxoSmithKline (“GSK”), regarding the proper valuation method for certain pharmaceutical research and development materials. In issuing our response, we have given consideration to a submission on behalf of GSK, dated April 12, 2007, and additional submissions, dated April 16, 2007, September 20, 2007, and January 7, 2008. Consideration was also given to information presented by representatives of GSK in a meeting held at our office on August 30, 2007.

GSK requests confidential treatment of business proprietary information concerning the sourcing, valuation, and specific costs related to the subject import transactions. Specifically, GSK requests confidential treatment of information identified as Appendix 1, Attachments 1 and 4-8 of Appendix 2, and Attachment 1 of Appendix 3. In addition, GSK requests confidential treatment of information identified in double brackets in the text of Appendices 2 and 3. We are granting this request for confidentiality. Confidential information has been redacted from the public version of this letter.

FACTS:

This internal advice request arises from a prior disclosure made by GSK to Customs and Border Protection (“CBP”) on June 26, 2006, concerning the valuation of research and development (“R&D”) materials on entries made between June 1, 2001 and May 31, 2006. On June 26, 2006, GSK requested that CBP suspend liquidation of all entries of R&D materials pending the determination of an appropriate valuation methodology for the materials. At the meeting held at our office on August 30, 2007, GSK requested that our office only address the issue of whether the valuation methodologies it proposes to use for future entries of R&D materials is acceptable pursuant to 19 U.S.C. § 1401a(f). Therefore, our response is limited to the methodologies proposed for future entries of R&D materials, and it does not address the methodologies GSK proposes to use for entries subject to the prior disclosure.

GSK’s R&D Process

GSK is an international company involved in the development and manufacture of pharmaceutical products. GSK conducts R&D projects in the United States and at various locations abroad. During the meeting held at our offices on August 30, 2007, representatives from GSK explained the company’s drug development process and how the company presently accounts for certain R&D costs. The discovery and development of a pharmaceutical product occurs over several phases. The first phase encompasses the study of disease processes and the identification of new drug targets. The GSK representatives explained that during this initial stage, GSK researchers are not directing their efforts towards treatment of a specific disease. Instead, the research involves the process of identifying biological targets. GSK’s Molecular Discovery Research (“MDR”) directorate and its Centers for Excellence for Drug Discovery (“CEDDs”) are involved in this initial phase. Once a target is identified, research is commenced to find biologically derived molecules or agents that interact with the selected target family. In support of this process, MDR maintains banks of compounds at various locations for use in high throughput screening and testing processes. The GSK representatives stated that hundreds of thousands of compounds are screened against the target to identify the compounds that interact with the target in the desired manners. GSK’s Biological Reagents & Assay Development (“BRAD”) division is responsible for the production of biological reagents used for the target biological receptors. These reagents include: cell lines, cell membranes, and genetically modified viruses and proteins. The compounds are screened against the target biological receptors to identify promising reactions. On the basis of this initial research and screening, the most promising compounds, or the “lead compounds” are selected to undergo further testing with respect to their chemical and pharmacological properties. GSK notes that very few of the compounds that undergo initial testing will be identified as “lead compounds.”

During the second phase, the CEDDs will identify specific projects, which consist of a program of work relating to the use of a lead compound in connection with a specific biological activity or medical condition. A lead compound may be assigned to several different projects. The lead chemical compounds are sent to GSK’s Chemical Development division (“ChemDev”), along with their laboratory scale synthetic preparation methods. From these instructions, ChemDev produces Active Pharmaceutical Ingredients (“APIs’) for further testing and studies, and ChemDev is ultimately responsible for determining the optimum process for large-scale production of a stable and effective version of the API concerned. The Safety Assessment division (“Safety”) studies initial quantities of the API to determine the safety and efficacy of the compound concerned. GSK’s Biopharmaceutical Development division (Biopharm) produces biological APIs and products, such as monoclonal antibodies, recombinant proteins, DNA, and vaccines. The Pharmaceutical Development division (“PharmDev”) takes the API from ChemDev and the biological API from Biopharm and develops the best formulation for administering the final drug product to the patient, (e.g., tablet, pill, solution, etc.). Safety works in cooperation with Drug Metabolism and Pharmacokinetics (“DMPK”) to assess the effects of the compound concerned in non-human subjects. PharmDev will also manufacture small amounts of the API drug product for use in preliminary human volunteer studies. The CEDDs conduct small-scale clinical studies in patients to determine whether sufficient evidence exists to demonstrate that a therapeutic benefit is derived from the drug candidate without serious adverse effects in the targeted patient population. The CEDDs will conduct research up to “proof of concept,” the point at which feasibility of a new drug is determined. As a compound progresses through the clinical trials, ChemDev increases production of the API and transfers production of the API from scale-up labs (“SULS”) to pilot manufacturing plants. At various stages of the API production process, starting and intermediate materials are shipped to other pilot plants, third-party contract manufacturers, or GSK’s commercial manufacturing sites for further manufacturing.

The candidates that demonstrate proof of concept will be transferred to GSK’s Medicines Development directorate, which will manage late-stage development work. GSK states that the chance that an investigated compound will be launched commercially is less than one percent.

GSK’s Financial Accounting Systems

GSK does not sell the subject R&D materials. Instead, the materials are shipped free of charge to GSK locations and to third party contractors throughout the R&D phases. Therefore, materials in the early stages of development and those in the advanced stages of development may be transferred across international borders on more than one occasion. The R&D materials and the materials used in their production are not inventoried. They are expensed as part of the R&D process. GSK R&D does not calculate the standard costs of materials, and it does not have the accounting systems necessary to determine a specific standard cost for any R&D material that it manufactures or ships. However, it does maintain financial databases for budgeting purposes. These databases account for two types of costs: (1) external project expenditures and (2) internal project expenditures.

External project expenditures (“EPE”) include the cost of materials, external consultants, contract manufacturing, external laboratory testing, and other similar costs. These costs are captured from the moment a lead compound is selected as a candidate and a project is defined. The costs are normally captured by: (1) project, (2) cost center, and (3) expense type. While EPE is tracked from the moment a lead compound is selected as a candidate and a project is defined, GSK states it is not usually possible to attribute particular purchases to materials that go into a specific production process and that may cross a border after purchase. Therefore, the cost of the materials cannot be separated from the total EPE amount. Furthermore, costs that are not strictly related to the production of R&D materials cannot clearly be excluded for purposes of determining the customs value of the R&D materials.

Internal project expenditures (“IPE”) include site-related costs, salaries, contract labor, travel, entertainment, relocation, recruitment, non-project specific laboratory costs and supplies, office costs, utilities, maintenance, and depreciation. Such costs also include general expenses and overhead, such as centralized corporate R&D administration costs, as well as costs incurred by GSK R&D for activities undertaken prior to lead candidate selection, such as the purchase and distribution of compounds for initial screening and chemical synthesis of similar compounds by GSK R&D. Costs directed at developing processes and methodologies for future commercial production of final drug products are also included as IPE and are captured in separate cost centers within both ChemDev and PharmDev. IPE is budgeted for and captured on a monthly and annual basis.

GSK has developed a “Full Time Equivalent” (“FTE”) rate for use with the valuation methodologies it proposes to use. To obtain the FTE rate, GSK adds the total IPE spend for all directorates and divisions, including the IPE incurred by the R&D Group’s centralized administrative functions, and divides this sum by the total number of project direct and project support FTEs. GSK asserts that this calculation results in an average fully absorbed FTE rate for all of GSK R&D.

GSK’s Proposed Valuation Methodologies

GSK proposes to value future entries of R&D materials using the “fallback method” under 19 U.S.C. § 1401a(f). GSK has proposed what it believes is the most appropriate fallback method for each of the following types of materials that it imports based on GSK R&D’s current structure and accounting systems. In addition, GSK notes that the following methodologies are subject to change in the event that the R&D Group undergoes restructuring. Therefore, GSK pledges to monitor such restructuring and any other changes that will impact these methodologies and modify them as appropriate, and, in certain cases, annually to ensure customs compliance.

From the following proposed valuation methodologies, GSK proposes to exclude research and development costs associated with work conducted prior to selection of the lead compounds, where these costs can be segregated by cost center. Where such costs cannot be segregated, GSK states that it will include these costs in the customs value of the subject merchandise. GSK also proposes to exclude certain development costs associated with optimizing production of the APIs and other materials for commercial production.

Chemical Compounds

Chemical compounds for screening are purchased or produced by MDR, as described above, and stored in three compound banks. GSK generally produces or purchases two types of compounds. The first type is exotic and unique in structure, and the second type is used as a building block for the synthesis of new compounds for screening. The second type is produced on a larger scale, and therefore, costs significantly less per unit. The compounds will be shipped either in solid form or in a solvent. At the point of export to the United States, GSK is unable to determine whether a given compound has been externally purchased or internally synthesized. However, MDR has the ability to aggregate the total costs of all compounds purchased from third parties in a given year. Consequently, GSK proposes to use a modified computed value methodology to calculate two values each year: a value for the unique compounds and a value for the building block compounds. In this regard, GSK proposes to take the average external acquisition cost per gram of compound of MDR’s annual compound spend for the previous year and add to this amount an element to cover the cost of vials that are sent to third parties to be filled with compound and returned to MDR. Costs to reflect whether a given sample is in a solution or in solid form and the type of container and packaging used will also be added.

ChemDev APIs

As indicated above, ChemDev produces APIs for use in R&D projects. GSK proposes that the imported APIs should be appraised using a modified computed value methodology. GSK explains that it does not maintain records of the actual costs of the materials used to manufacture APIs in any specific campaign. However, ChemDev does maintain a database that tracks EPE allocated to a specific project. This total EPE amount includes the actual material cost and can be identified on a monthly and annual basis. GSK states that although it is not possible to determine the actual material cost for producing a batch of API, it is possible to attribute the effort (and therefore the IPE) and EPE costs to a campaign for a specific API. EPE and IPE costs associated with activities undertaken prior to a campaign will also be tracked, as the cost of setting up of the necessary means of production is also included in the cost of production. However, as noted above, GSK proposes to exclude the costs associated with the work ChemDev undertakes in “ramping-up” for full-scale commercial production of the APIs.

To determine the value of a specific API, GSK proposes to add the total EPE and IPE costs of previous campaigns of the API concerned and divide that sum by the total corresponding output of the API generated by the campaigns in question to produce a weighted average cost per gram. GSK states that a weighted average would be used, because the IPE and EPE associated with the actual campaign cannot normally be determined at the time the API is imported. GSK submits that where a single API is being manufactured for more than one project, this methodology will account for the total cost and the API output across the projects.

APIs that are being produced for the first time are typically manufactured in small amounts of less than one kilogram. Since previous cost data will be unavailable for new APIs, GSK proposes that their value be determined by using the weighted average of APIs produced in all other campaigns over the last year where the total output is less than one kilogram.

For intermediate stage APIs, GSK proposes that a suitable proportion of the average weighted value of the finished APIs be used to provide the basis for customs valuation. To do this, GSK would first divide the average weighted value for the API by the number of processing stages required to produce it. Then, GSK would multiply the resulting figure by the number of processing stages required to produce the intermediate API in question.

Drug products

PharmDev formulates chemical and biological API into suitable dose forms and manufactures drug products for use in clinical trials. GSK proposes to appraise the drug products using a modified computed value methodology. The value would include the cost of the API produced by ChemDev and the cost for PharmDev to formulate and package the API into a corresponding dose form for use in clinical trials. GSK proposes this methodology, as it cannot attribute the IPE and EPE costs to the production of individual batches of the product. However, it is possible to calculate the IPE and EPE costs for each dose form across projects for a given year. Therefore, in order to determine the value of each dose form for the coming year, GSK proposes to take the total EPE and IPE costs for the corresponding dose form over the previous year and divide that amount by the total quantity of the corresponding dose form produced over the last year. The value of the ChemDev API used in the drug product will be added to this amount and based on the calculation methodology discussed above in the ChemDev API section.

Intermediate drug products

PharmDev produces intermediate drug product tablets that may be shipped after undergoing any of the following processing steps: granulation/drying, blending, compression, coating and packing. For valuation purposes, GSK will distinguish between pre-compression and post-compression tablets, as costs to produce a tablet up to the compression stage represent approximately [XXX] of the total cost to produce the tablet. To determine the customs value for pre-compression intermediate drug products GSK will utilize [XXX] of the total cost to produce the tablet, which will be calculated according to the above modified computed value methodology for final drug products. GSK will declare the full value of the final drug product for post-compression products.

GSK sometimes ships inhaler devices in unassembled form with intermediate drug products. The unassembled device represents [XXX] of the cost to produce the final device. GSK proposes that the value of the intermediate devices should be the cost of the API plus [XXX] of the cost of the final device.

Comparators

PharmDev purchases comparators for use in clinical trials, but it does not track the cost or purchase of these materials. Consequently, GSK proposes that the value of the drug product used in the corresponding clinical trial be used as the basis of the value of the comparator and the modified computed value methodology proposed for drug products, as discussed above, be utilized.

Placebos

PharmDev produces placebos for use in clinical trials that are similar to the drug products in dosage form. However, the placebos do not contain an API. GSK does not track the production and packing costs for the placebos. Thus, GSK proposes to utilize the same modified computed value methodology used for drug products, as discussed above, but the calculation will not include the value of the API.

Blood and Tissue Samples

GSK extracts blood and tissue samples from test subjects and biological materials in order to perform safety studies to support clinical trials. Serum and plasma are included in GSK’s blood products categorization. Under the fallback method, GSK proposes to value these materials based on the time taken to extract the given material and prepare and package the sample in question for export plus the costs of any packing used. Specifically, GSK will use experienced scientists to conduct a quantitative and qualitative labor effort assessment for a representative sample of each test subject (blood, serum, plasma, and tissue). The scientists will interview the scientists who actually extract the samples to determine the effort necessary to extract each type of sample, prepare the paperwork, and package the sample for export. The results for each type of sample will be multiplied by the current fully absorbed average company wide FTE rate and the cost of the packing will be added for each type of sample.

BRAD Biological reagents

BRAD produces and ships the following biological reagents: (1) proteins in solution, including antibody proteins; (2) genetically modified recombinant viruses; (3) cell lines; (4) cell lines cloned for archiving purposes; (5) cell membranes; (6) nucleic acid DNA/RNA; and (7) recombinant micro-organisms. BRAD captures all expenditures as IPE, but it does not maintain any costed inventory. Therefore, it is not possible to identify the cost of materials used in the production of any specific batch of biological material produced by BRAD. Moreover, the time required to produce various reagents varies widely depending on the scale of production required and the means of production used. Where large-scale production is necessary, more efficient means of production are used. This may reduce the amount of time required to produce a given amount of reagent when compared with the time required to produce the same reagent in smaller quantities, using less efficient means of production. GSK proposes to value these materials using a modified computed value based on representative labor and cost studies. GSK further details the proposed methodologies in confidential portions of Appendix 2 of its letter dated April 12, 2007. The methodologies take into account the unique characteristics of the materials involved, the production technique employed, the scale of production used, and any packing costs incurred.

Biopharm biological materials

GSK advises that Biopharm is a new group that produces and ships the following materials: (1) nucleic acid DNA/RNA; (2) genetically modified cell lines with plasmids inserted, or development cell banks not made up to good manufacturing practice (“GMP”) standards; (3) GMP cell bank vials; (4) purified non-GMP bulk biological compounds expressed by cell lines in bulk form; (5) purified GMP bulk biological compound expressed by cell lines in bulk form (i.e., bulk biological API); and (6) formulated and lyophilized biological compound (i.e., biological drug product). Biopharm EPE is tracked in three geographical cost centers, and the means of tracking the output of biological materials depends upon the materials involved. Although it is possible to determine the EPE and IPE costs associated with the production of these materials on a monthly basis, GSK is unable to attribute such costs to the manufacture of a specific batch of materials. Therefore, GSK proposes to value these materials using a modified computed value method. Due to Biopharm’s short history with the production of these materials, GSK proposes that the value of many of the products be averaged over all of the materials until sufficient data has been accumulated to calculate a value for each type of material produced by Biopharm. Where sufficient data is not available for a specific type of material, GSK proposes to use a weighted average across material types. GSK further details the proposed methodologies in confidential portions of Appendix 2 of its letter dated April 12, 2007. These methodologies take into account the unique characteristics of the materials, variations in production techniques, differing scales of production, and the costs of packing. In addition, GSK notes that Biopharm is unable to segregate the costs associated with “ramping-up” for full-scale commercial production. Therefore, GSK proposes to include such costs in the IPE calculations for these materials.

ISSUE:

Whether the imported R&D materials, as described above, may be appraised pursuant to 19 U.S.C. § 1401a(f).

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 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)).

As indicated above, the materials are not sold by GSK to its research facilities or to third party contractors. Therefore, the transaction value method may not be used to determine the value of the imported materials.

The second method of appraisement is the transaction value of identical and similar merchandise. See 19 U.S.C. § 1401a(c). The transaction value of identical and similar merchandise refers to a previously accepted transaction value of identical or similar merchandise that was exported at or about the same time as the merchandise being valued. In this case, 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 a method of appraisement, because the merchandise concerned (i.e., the imported merchandise or identical or similar merchandise) is not resold in the United States.

The computed value method is the next method of appraisement, and it is based upon, among other things, information regarding the cost of materials, processing, profit, and general expenses. See 19 U.S.C. § 1401a(e). As noted above, GSK is unable to provide this information for most of the imported R&D materials, because the actual costs cannot be determined at the unit level.

Therefore, GSK requests appraisement of the imported materials using the “fallback” method of valuation in 19 U.S.C. § 1401a(f)(1), which provides:

Value if other values cannot be determined or used. 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.

Blood and Tissue Samples

With respect to importations of blood, serum, plasma, and tissue samples, GSK relies on Headquarters Ruling Letter (“HRL”) 563461, dated May 18, 2006, to assert that these materials should be valued using the fallback method under 19 U.S.C. § 1401a(f), on the basis of the time taken to extract, prepare, and package the sample in question for export plus the costs of packaging and any materials used. In HRL 563461, the National Marrow Donor Program imported certain human blood products from foreign medical facilities. CBP determined that the transaction value method could not be used to value the imported materials, as it is illegal to buy and sell human organs and tissue, including blood products, under U.S. law. The foreign medical facility could collect, and the importer did pay for, the costs of extraction and international shipping. After eliminating appraisement under the methods set forth in 19 U.S.C. § 1401a(c)-(e), CBP appraised the merchandise pursuant to 19 U.S.C. §1401a(f) using the best evidence available, which was the fee paid to the foreign medical facility for the cost of the extraction procedure. In the instant case, GSK conducts the extraction procedures internally. GSK has provided detailed procedures of how it will calculate the cost of the extraction procedures. Based on the information provided, we are satisfied with the methodology, and we note that GSK will update this methodology on an annual basis. Therefore, we agree that the blood, serum, plasma, and tissue samples may be appraised, pursuant to 19 U.S.C. § 1401a(f), on the basis of the time taken to extract, prepare, and package the sample for export, in addition to the costs of any packaging and materials employed in the process.

Other R&D Materials

GSK proposes to use a modified computed value methodology, pursuant to 19 U.S.C. § 1401a(f), for future entries of the other R&D materials that it imports. These R&D materials include: chemical compounds, APIs, drug products, intermediate drug products, comparators, placebos, and the biological materials produced by BRAD and Biopharm.

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.

In HRL 546112, dated July 5, 1996, CBP rejected a pharmaceutical company’s use of a “declaration value” as an acceptable means of appraisement under the fallback method. At issue were two types of drugs imported to the United States solely for purposes of testing and research. The drugs were not imported into the United States on the basis of a sales transaction, and there were no similar transaction values of identical and similar merchandise that could be used to appraise the imported materials. Deductive value could not be used to appraise the drugs, as they were not sold in the United States. CBP noted that an actual computed value could have been derived under 19 U.S.C. § 1401a(e), had the importer provided the necessary information. Instead, the importer argued that CBP should appraise the merchandise, pursuant to 19 U.S.C. § 1401a(f), on the basis of the “declaration value”. The “declaration value” was used in a protocol on research and development materials that the importer had entered into with the related manufacturer of the drugs. The protocol did not explain how the “declaration value” was determined, but according to the importer, the “declaration value” represented the average cost of all [emphasis added] research and development materials, and the average cost was arrived at by “allocating gross costs to all such materials using a simple averaging technique.” Noting that the “declaration value” appeared to be an attempt at some form of modified computed value, CBP rejected its use, citing to 19 U.S.C. § 1401a(f)(2)(D), which provides that merchandise may not be appraised on the basis of “a cost of production, other than a value determined under subsection (e) of this section for merchandise that is identical merchandise or similar merchandise to the merchandise being appraised.”

By contrast, in HRL 548164, dated September 20, 2002, CBP approved the use of a modified computed value for appraising research APIs imported into the United States. In that case, the research APIs were not imported into the United States on the basis of a sales transaction. Instead, the importations were the result of transfers of research materials among facilities belonging to the same company. There were no transaction values of identical and similar merchandise to use to appraise the imported materials, and the imported materials were not sold in the United States. Moreover, the manufacturing facilities associated with the production of the research APIs could not track their costs to produce each research API. However, each facility could track its aggregate costs per fiscal year. After determining that the methods of appraisement set forth in 19 U.S.C. § 1401a(b)-(e) could not be used to appraise the research APIs, CBP held that a modified computed value could be used pursuant to 19 U.S.C. § 1401a(f). The modified computed value method utilized a weighted average to determine the value of the research APIs. The weighted average was derived from the aggregate costs incurred by the facilities involved in the production of APIs.

While the facts of these cases appear to be similar, important differences account for their divergent outcomes. First, in HRL 546112, hardly any explanation was provided as to how the companies derived the “declaration value” of the imported drugs. By contrast, in HRL 548164, the importer provided a thorough explanation of its proposal to use a modified computed value methodology, which was supported by detailed financial information from the API manufacturing facilities. Moreover, in HRL 548164, the proposed modified computed value was specific to the imported APIs, as opposed to the general “declaration value”, proposed in HRL 546112, which used the average cost of all research and development materials to arrive at an “average cost” for two specific drugs. Finally, in HRL 548164, CBP determined that the computed value of the research APIs could not be determined at the time of entry, pursuant to 19 U.S.C. § 1401a(e), because the manufacturing facilities could only track their aggregate costs per fiscal year. In addition, the lead auditor of the importer’s compliance assessment agreed that the method of cost allocation appeared to be reasonable and an appropriate alternative appraisement under 19 U.S.C. § 1401a(f).

It is our opinion that the instant case presents circumstances more analogous to those present in HRL 548164. In this regard, we note that GSK does not sell the materials to its U.S. facilities, thereby eliminating the use of the transaction value method. Further, there are no sales of identical and similar merchandise. As neither the imported materials nor identical or similar merchandise (i.e., the merchandise concerned) are sold in the United States, deductive value cannot be used to appraise the material. The computed value method is also unavailable, because GSK does not have the ability to determine the cost of imported materials at the unit level. Therefore, the merchandise must be appraised using the fallback method pursuant to 19 U.S.C. § 1401a(f). We also note that GSK’s proposals specifically account for the type of R&D material being imported. Based on these specific circumstances, we find the use of the modified computed value methods, as described above, as acceptable means to appraise the imported R&D materials under 19 U.S.C. § 1401a(f).

Proposed Exclusions

GSK proposes to exclude two types of costs from the proposed valuation methodologies. First, GSK proposes to exclude certain R&D costs associated with work conducted prior to the selection of the lead compounds, where these costs can be segregated by cost centers. Second, GSK proposes to exclude certain development costs associated with optimizing production of the APIs and other materials for full-scale commercial production, where GSK can segregate these costs.

As noted above, computed value includes the cost or value of the materials and the fabrication and other processing employed in the production of the imported merchandise, as well as an amount for profit and general expenses. See 19 U.S.C. 1401a(e)(1)(A)-(B). In addition, computed value includes any assist, where its value has not already been included as an element of computed value under subparagraphs (A) or (B) of 19 U.S.C. § 1401a(e)(1). See 19 U.S.C. § 1401a(e)(1)(C). 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.” 19 U.S.C. § 1401a(h)(1)(A)(iv).

The Statement of Administrative Action (“SAA”), adopted by Congress with the passage of the TAA, provides that with respect to computed value:

The cost or value of the materials and the fabrication and other processing of any kind employed in the production of the imported merchandise will be determined on the basis of information supplied by, or on behalf of, the producer and will be based upon the commercial accounts of the producer, if such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced.

The “amount for profit and general expenses” will be determined on the basis of information supplied by, or on behalf of, the producer and will be based upon the commercial accounts of the producer, provided that such accounts are consistent with the generally accepted accounting principles applied in the country where the goods are produced and unless the figures provided are inconsistent with those usually reflected in sales, of merchandise of the same class or kind as the imported merchandise, that are made by producers in the country of exportation for export to the United States.

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.

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 imported merchandise.

Based on the facts and evidence presented in this case, it is our opinion that the costs for the research performed prior to the selection of the lead compounds may be excluded, where these costs can be segregated. During the meeting held at our office on August 30, 2007, GSK representatives characterized the research conducted prior to the selection of the lead compounds as “blue sky” research. The representatives explained that during the initial stage of the drug development process, GSK researchers are not directing their efforts towards treatment of a specific disease. Rather, the researchers are studying disease processes and attempting to identify new targets. Once a target family is identified, researchers screen hundreds of thousands of compounds to see if they have any promising interaction with a biological target. Based on the results of this screening process, GSK identifies the lead compounds for use in future studies. It is only after the selection of the lead compounds that specific projects are identified, and programs of work, relating to the use of a particular compound with a specific biological activity or medical condition, are formulated. GSK asserts that ChemDev is capable of producing the imported R&D materials without the benefit of this early research. Based on the facts and evidence presented in this case, we agree that the research conducted prior to the selection of the lead compounds is “conceptual in nature” and that it is unnecessary for the production of any of the imported APIs, drug products, or biological agents. Again, this finding assumes that GSK can segregate these costs within a particular cost center. In instances where these costs cannot be segregated in this manner, GSK is to include the costs in the value of the imported R&D materials. We caution that questions of this nature, i.e., whether specified R&D is necessary for the production of the imported merchandise, can only be addressed case-by-case based on the facts, circumstances, and evidence presented. In addition, we note that these costs are relevant to GSK in determining the prices it charges for its commercial products. Therefore, with regard to the future importation of commercial products, GSK shall include such costs in the transaction value of the commercial products as part of the price actually paid or payable.

GSK also proposes to exclude development costs associated with optimizing production of the APIs and other materials for commercial production. GSK explains that its laboratories are capable of producing sufficient amounts of the APIs and other materials for GSK’s R&D purposes. The costs that GSK proposes to exclude are for testing and research designed to optimize future large-scale commercial production of a finished drug product and determine whether such production meets GSK’s business acceptance criteria. As such, GSK contends that these costs are not related to the production of the imported R&D materials, but rather, they are expenditures associated with the future production of commercial products. GSK notes that these costs will be included in the price that GSK will charge for its commercial products. Therefore, these costs will be included in the transaction value of the final commercial products imported into the United States as part of the price actually paid or payable. Based on the facts and evidence provided, we agree that these costs are unrelated to and unnecessary for the production of the imported R&D materials. Therefore, these costs may be excluded from the value of the imported R&D materials, where GSK can identify and segregate such costs. In instances where these costs cannot be segregated, GSK is to include the costs in the value of the imported R&D materials.

HOLDING:

The use of the fallback method, pursuant to 19 U.S.C. § 1401a(f), if other values cannot be determined, is acceptable as a means of appraising the imported R&D materials. Based on the facts presented, the blood, serum, plasma, and tissue samples may be appraised, pursuant to 19 U.S.C. § 1401a(f), on the basis of the time taken to extract, prepare, and package the sample for export, in addition to the costs of any packaging and materials employed in the process. GSK’s proposals to use modified computed values, as described in this ruling, for the other R&D materials that it imports are acceptable under 19 U.S.C. § 1401a(f). GSK may exclude from the values of the imported materials the costs of research performed prior to the selection of the lead compounds and the development costs associated with optimizing production of the APIs and other materials for commercial production of the finished drug products, where GSK can sufficiently segregate these costs. GSK is to include these costs in the value of the imported materials, in instances where the costs cannot be segregated. Moreover, this holding is premised on the understanding that GSK will review and modify the proposed methodologies, as necessary, but such review should occur at least on an annual basis.

Please mail this decision to counsel for the internal advice applicant no later than sixty days from the date of this letter. Sixty days from the date of this letter, the Office of Regulations and Rulings will take steps to make this decision available to CBP personnel and to the public on the CBP Home Page on the World Wide Web at www.cbp.gov, and by means of the Freedom of Information Act as well as by other means of public distribution.

Sincerely,


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