Pharmaceutical purchasing in the United States has some unique factors impacting purchasing decisions. Specifically, government purchasers must abide by the Trade Agreements Act (TAA). Private entities are not required to follow the TAA and can purchase a product produced in any country in the world, but government purchasers must first select products that are produced in the U.S. or manufactured by permitted trade partners. It is important for companies who sell pharmaceuticals to government entities to understand the implications of the TAA and the Federal Supply Schedule (FSS). An example of this would be a company supplying medications to a VA hospital.

The FSS provides government agencies with access to pre-negotiated contracts and allows companies to publicly view a list of prices for many different products, including pharmaceuticals. If a company is selling product to the federal government, the TAA requires that the sold products are made in the U.S. or in a TAA compliant country. There are two ways to determine where the product is made.

1. If the product is grown, produced, or manufactured there, then it’s classified as a product of that country.
2. If the product is substantially transformed, resulting in a final product with a distinct character and use, then it’s classified as a product of that country.

It’s noteworthy that the product must fulfil one of these criteria, not both. However, this does not mean that the active ingredient’s country of origin is the product’s country of origin. Not every country participates in the TAA, and non-compliance with this law can lead to contract termination, financial penalties, and legal actions.

There are about 80 countries that are not TAA compliant, with two notable countries being China and India, which are two major global pharmaceutical manufacturers.  Based on an article PHSL wrote in 2022, over 30% of active ingredients are sourced from China and India, while those two countries only account for 2% of the top 100 brand name drugs. Despite this, if the product is made or transformed in the U.S., government buyers cannot reject it, even if the active ingredients are coming from a non-compliant country.

List of non-TAA compliant countries:

What does this mean for manufacturing decisions?

Pharmaceutical manufacturers should consider their competitors’ source countries to determine if a strategic advantage is possible for TAA compliance and the FSS. If a pharmaceutical manufacturer can change the product origin to the U.S. or a TAA compliant country, their product would align with the requirements for government purchasing. When all competitors of a particular medication are in non-TAA compliant countries, the negotiation likely focuses on price and ability to provide consistent supply of product. TAA compliance from one or more manufacturers of a product requires that the government avoid adding the non-compliant products.

The TAA incentivizes government product purchasing from U.S. or compliant trade partner country organizations. This law can be used as a strategic advantage for pharmaceutical manufacturers operating in the U.S. or in other compliant trade partner countries. Manufacturers should also monitor the list of TAA compliant countries for any changes that may positively or negatively impact the status of their products, thus impacting their government purchasing opportunities. Manufacturers interested in competitor TAA landscape analyses should contact PHSL!