In recent years, many pharmaceutical companies in the United States have turned to the US Foreign-Trade Zones Program to lower production costs. In this QAD Precision Report we look at the benefits of foreign-trade zones (FTZ) for pharmaceutical companies.
Pharmaceutical companies and their contract manufacturers are flocking to Foreign-Trade Zones to lower costs, speed delivery, and improve regulatory compliance.
Foreign-Trade Zones were first established in 1934, but were not significantly utilized by US-based manufacturers until the 1980s.
In 1995, the US-tariff structure was changed. These changes created an “inverted” tariff-rate relationship between imported raw materials and finished pharmaceutical products. Many raw materials used to produce pharmaceutical products carry a higher duty rate than the finished products. As a result, US-based pharmaceutical manufacturers not using an FTZ are inadvertently penalized by this inverted tariff structure.
In order to eliminate duty costs associated with producing pharmaceutical products in the US, companies had two choices: move production overseas or utilize a Foreign-Trade Zone.
Many pharmaceutical companies chose to utilize an FTZ rather than move production offshore. This allows companies to retain jobs and manufacturing in the US. Furthermore, a FTZ helps companies in three critical ways:
- Lower costs
- Increase delivery speed
- Improve regulatory compliance
Lower Costs
Pharmaceutical companies designated as a Foreign-Trade Zone can obtain relief from the inverted tariff structure. Companies are able to continue using their existing processes and procedures. No significant changes are needed to be made in a zone.
Companies choosing to manufacture pharmaceutical products in an FTZ are able to pay the duty of the finished product. This allows US-based pharma producers to be free from all duties on imported materials processed through their FTZ operations. This enhances global competitiveness for existing US-based manufacturing facilities.
Another FTZ benefit is savings on scrap and yield loss. Pharmaceutical manufacturing inevitably produces scrap and yield loss. Companies located in an FTZ are not required to pay duties on losses incurred during the manufacturing process.
This not only provides cost savings, but encourages job creation and manufacturing in the US.
Increase Delivery Speed
Another benefit for pharmaceutical companies becoming an FTZ is increased delivery speed. Production and warehouse facilities designated as an FTZ are able to utilize direct delivery for imports. Direct delivery procedures allow for quick movement to the FTZ facility from US ports. Pharma zone operators do not need Food and Drug Administration (FDA) preclearance.
Not only does being located in an FTZ save money, it can also save time. Leveraging an FTZ allows for quicker delivery of pharmaceutical products to the domestic and global markets.
Improve Compliance
Designation as a zone not only saves companies money and time, but it can also improve their regulatory compliance.
Companies can save in an FTZ by only submitting one customs’ entry fee per week with Weekly Entry procedures. This allows for quicker releases by both Customs and Border Protection (CBP) and the FDA.
Additionally, while in an FTZ, pharmaceutical companies can both produce and store pharmaceutical products that have not yet received FDA approval. Product can be held in a zone until FDA approval, then it can be shipped into domestic markets and/or exported. This allows companies to both add delivery speed while increasing regulatory compliance.
Pharmaceutical companies becoming FTZs has been a growing trend for a while. However, in recent years this has been expanding. There is a new industry trend of pharmaceutical companies requiring their contract manufacturers to become FTZs.
According to the 2020 Annual Report of the Foreign-Trade Zones Board, FTZ warehouse/distribution operations received over $283 billion in merchandise. FTZ production operations received $341 billion in merchandise. Pharmaceuticals are among some of the top industries utilizing zone production activity according to the report.
Pharmaceutical warehouse and distribution operators brought in $8.469 million of foreign-status products into an FTZ. Additionally, pharmaceutical production operators brought in $16.568 million worth of products.
Not only can pharmaceutical companies and their contract manufacturers become an FTZ to meet current needs, they can utilize an FTZ to meet future needs as well.
Although many pharmaceutical companies have long been using Foreign-Trade Zones, there are still many that have not yet taken advantage of this unique program. FTZ designation can save companies both money and time while increasing delivery speeds and regulatory compliance. Foreign-Trade Zones for pharmaceutical manufacturers and their contract manufacturers is a prescription for success. Now all that’s left to do is fill it.
