Key Takeaways:

• In the latest legal development in the ongoing 340B contract pharmacy litigation, the Third Circuit Court of Appeals ruled earlier this week that the 340B statute does not require drug manufacturers to provide drugs at the 340B ceiling price to an unlimited number of contract pharmacies.
• This is the first of at least three federal courts of appeal scheduled to rule in the coming months on the scope of 340B contract pharmacy requirements, leaving the potential for an eventual circuit split and a possible Supreme Court showdown next year.
• If the other circuits come to a similar conclusion, HHS will be tasked with deciding whether the 340B statute supports any minimum level of contract pharmacies.
• Based on the court’s decision, manufacturers that are not a party to the litigation will need to decide whether they should consider restricting distribution of drugs sold under the 340B Drug Pricing Program to only the in-house pharmacy of a covered entity, or to one or more contract pharmacies.

On January 30, 2023, the United States Court of Appeals for the Third Circuit issued its decision in Sanofi Aventis U.S. LLC v. United States Department of Health and Human Services, enjoining the United States Department of Health and Human Services (HHS) from requiring three drug manufacturers to provide drugs at the 340B ceiling price to an unlimited number of retail pharmacies contracted with 340B covered entities. Specifically, the court held that: (1) the drug makers’ challenge to HHS’ Advisory Opinion describing HHS’ contract pharmacy policy is not moot; (2) Section 340B of the Public Health Service Act (Section 340B) does not require drug makers to deliver drugs to an unlimited number of contract pharmacies, so HHS’ enforcement efforts against drug makers are unlawful; and (3) HHS’ administrative dispute resolution (ADR) Rule was lawfully promulgated. Notably, the Third Circuit only enjoined HHS from enforcing this policy against the three manufacturers in the suit: Sanofi, Novo Nordisk, and AstraZeneca. Ultimately, this decision leaves HHS with an important question: if the statute does not support covered entities contracting with an unlimited number of contract pharmacies, does it support any minimum level of contract pharmacies?  Further, it leaves those manufacturers that are not a party to the litigation with an important question: should they consider restricting distribution of drugs sold under the 340B Drug Pricing Program to only covered entities, or to a single contract pharmacy under arrangements with that covered entity?

Background: 340B Contract Pharmacy Dispute

The 340B Drug Pricing Program requires drug manufacturers to offer outpatient pharmaceuticals to statutorily defined covered entities (including certain hospitals and certain federal grantees, such as federally qualified health centers) at a deeply discounted 340B ceiling price. While drug manufacturers were originally required to offer 340B discounts only to covered entities’ in-house pharmacies, the Health Resources and Services Administration (HRSA)—an HHS agency—has since authorized covered entities to contract with retail pharmacies to fill prescriptions for 340B-acquired drugs on their behalf. The use of contract pharmacies was initially limited, but in 2010, HRSA issued guidance allowing covered entities to work with an unlimited number of contract pharmacies. Many manufacturers oppose the 2010 contract pharmacy policy on the basis that it has contributed to the explosive growth in the 340B program and because it generates issues related to diversion and program compliance. 

In the ACA, Congress instructed HHS to establish an ADR procedure to hear disputes between manufacturers and covered entities regarding the 340B program. Although the statute required HHS to promulgate those rules within 180 days, HHS did not issue a proposed rule creating ADR procedures until 2016. A year later, after receiving comments on the rule, HHS withdrew the ADR rule from the Unified Agenda of Federal Regulatory and Deregulatory Actions. In December 2020, in response to litigation filed by several 340B covered entities, HHS finalized the ADR rule originally proposed in 2016, despite having withdrawn the rule from the unified agenda three years earlier. 

Also in December 2020, HHS released an Advisory Opinion declaring that Section 340B unambiguously requires drug makers to deliver 340B drugs to an unlimited number of contract pharmacies, in line with its earlier 2010 guidance. Five months later, HHS issued Violation Letters to several drug makers who adopted policies limiting the distribution of 340B drugs to contact pharmacies allegedly in violation of the Advisory Opinion’s guidance. The Advisory Opinion and Violation Letters both concluded that drug makers must deliver discounted drugs to an unlimited number of contract pharmacies. 

Shortly after HHS issued its Advisory Opinion, six different pharmaceutical manufacturers filed separate litigations in federal district courts across the country challenging HRSA’s policy requiring manufacturers to provide drugs at 340B ceiling prices to an unlimited number of contract pharmacies. Not only did the manufacturers bring the litigation, they also notified covered entities that they would not honor multiple contract pharmacy arrangements. While their exact claims varied, the manufacturers generally asserted that HRSA exceeded its authority by permitting unlimited use of contract pharmacies in the 340B program, and, furthermore, that HRSA’s ADR Rule conflicts with the Administrative Procedure Act (APA). 

Over the past year, the federal district courts reviewing these cases have come to different conclusions about the permissibility of HRSA’s 340B contract pharmacy policy. Most relevant for the appeal in the Third Circuit, the District Court for the District of Delaware held in a case brought by AstraZeneca that the Advisory Opinion was arbitrary and capricious because it wrongly characterized the Section 340B statute as unambiguous, which led to HRSA withdrawing the advisory opinion. The District Court also vacated the Violation Letter because it rested on the flawed premise that Section 340B was unambiguous. 

Things played out differently in the District Court for the District of New Jersey in cases brought by Sanofi-Aventis and Novo Nordisk. There, in a consolidated opinion, the District Court held that Sanofi and Novo Nordisk’s challenge to HHS’ Advisory Opinion was moot because the Advisory Opinion had been withdrawn by HRSA. Further, while the court found that contract pharmacy arrangements are consistent with the 340B statute and there is no statutory support for manufacturer restrictions, it ultimately vacated the Violation Letters and remanded to the agency to further consider and explain how many contract pharmacies the 340B statute permits. Lastly, the District Court upheld the ADR Rule. 

The Third Circuit Holds HRSA’s Interpretation of 340B Statute is Invalid, But Upholds the ADR Rule

On appeal, the Third Circuit reviewed the AstraZeneca, Sanofi-Aventis, and Novo Nordisk decisions in a single consolidated appeal. First, as a preliminary matter, the Third Circuit held that the drug makers’ challenge to the Advisory Opinion is not moot. Although HHS rescinded its Advisory Opinion after losing in the District of Delaware, HHS maintained its position that drug makers must deliver their drugs to an unlimited number of contract pharmacies by taking enforcement action in accordance with that view.   

Next, the Third Circuit addressed whether HRSA’s position in the Advisory Opinion and Violation Letters that the 340B program requires drug makers to deliver drugs to an unlimited number of contract pharmacies is permissible. The court held that HHS’ Advisory Opinion and Violation Letters were unlawful for the following reasons: 

• First, while Section 340B requires manufacturers to “offer” drugs at the discounted price to covered entities, Section 340B’s text is silent about how a manufacturer can deliver those discounted drugs to the covered entity. The Court concluded that the statutory requirement for manufacturers to “offer each covered entity covered outpatient drugs for purchase at or below the applicable ceiling price” does not imply that the offeror must deliver goods whenever and to whomever the buyer demands. For this reason, Section 340B’s language does not require delivery to an unlimited number of contract pharmacies. In fact, “[n]owhere does Section 340B mention contract pharmacies.”  Unless Section 340B expressly prohibits drug makers’ policies, HHS cannot show that drug makers violated the statute.
• Second, the court further explained that the structure of the 340B statute confirms that the statute does not require unlimited delivery. Elsewhere in Section 340B, the statute instructs HHS to set up a program under which “covered entities may enter into contracts with prime vendors for the distribution of covered outpatient drugs.”  Congress could have included similar language for contract pharmacies, but they chose not to. Implicit in the court’s reasoning is that contract pharmacies are not “covered entities.”  Similarly, Congress could have required drug makers to deliver their drugs to certain places; however, the absence of such language means Congress chose not to.
• Third, the court concluded that neither the drafting history nor the legislative purpose compels a different outcome. HHS argued that Congress considered, but did not adopt, language that would have required discounts on drugs “purchased and dispensed by, or under a contract entered into for on-site pharmacy services with,” a covered entity when enacting Section 340B. HHS reasoned that this legislative history illustrated Congress’ intent for drug makers to provide discounts on all drugs “purchased by” covered entities, irrespective of how they are dispensed. Rejecting that reasoning, the Third Circuit concluded that the opposite inference is equally likely: “Congress could have omitted the language about on-site pharmacies because it did not want any contract pharmacy involved in the 340B program.”  

Lastly, the Third Circuit found that HHS did not violate the APA by withdrawing the proposed ADR Rule before later finalizing it. The Third Circuit noted that “[t]he APA does not mention withdrawing proposed rules. Nor has the Supreme Court.”  Further, the court stated that if HHS “…had the power to effectively nullify the prior notice and comments, we think it would require something more than what happened here.”  While the ADR Rule was marked as withdrawn in the Unified Agenda of Federal Regulatory and Deregulatory Actions, that publication was not created as part of the APA. In essence, the proposed rule was marked as withdrawn in an informal publication with no nexus to the APA, so the Third Circuit deemed the ADR Rule satisfied the APA’s procedural requirements. 
 
Next Steps

The Third Circuit is the first U.S. Court of Appeals to issue its opinion in the contract pharmacy cases currently pending in federal courts across the country. As mentioned above, several other drug manufacturers have challenged HRSA’s 340B contract pharmacy policy, and those manufacturers are still awaiting decisions in the D.C. Circuit and the Seventh Circuit. These courts could reach different conclusions than the Third Circuit and create a circuit split. If that happens, there is a significant likelihood that this issue could go to the Supreme Court next term. Ultimately, while this case is a significant win for drug manufacturers, it is unclear what the potential impact on the Section 340B program will be until the other appellate courts have ruled and it is clear whether the Supreme Court will or will not grant certiorari. In addition, the decision leaves open a significant question for HRSA to consider: if the statute does not support covered entities contracting with an unlimited number of contract pharmacies, does it support any minimum level of contract pharmacies (for example, a single contract pharmacy for those 340B covered entities that lack an in-house pharmacy)? For the time being, the Third Circuit only enjoined HHS from enforcing this policy against the three manufacturers in the suit: Sanofi, Novo Nordisk, and AstraZeneca. As such, HHS can continue enforcement against other drug manufacturers for the time being. 

Our healthcare lawyers at Foley Hoag will continue to track the ongoing dispute regarding 340B contract pharmacies carefully, and will provide further updates as they develop.

Law Clerk Kian Azimpoor co-authored this alert.