District Courts Issue Key Decisions in 340B Contract Pharmacy Cases

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Over the last two weeks we have seen a flurry of activity from U.S. District Courts across the country in the ongoing contract pharmacy disputes between pharmaceutical manufacturers and HRSA, the agency responsible for administering the 340B program. As you will recall from our previous coverage (I’ve linked to that full history of that coverage at the end of this post), in the summer of 2020 a group of manufacturers including Eli Lilly, Sanofi, Novo Nordisk, Novartis, United Therapeutics, and Astra Zeneca, began to impose certain restrictions on 340B covered entities that wished to purchase and dispense their products through contract pharmacies.

While the manufacturers’ policies differ in their scope, all are generally designed to limit 340B exposure from contract pharmacies in response to the precipitous rise in the total number of contract pharmacies in recent years, the undeniable growth in the overall 340B program, and claims from manufacturers about risks around the statutory prohibitions on drug diversion and duplicate discounts. In response, HRSA issued an Advisory Opinion in December 2020 (which was since withdrawn) finding such manufacturer restrictions run afoul of the 340B statute and issued Enforcement Letter in May 2021 to each of the manufacturers. Most recently, on September 22, 2021, HRSA sent notices to the manufacturers that it was referring their cases to the HHS Office of Inspector General for assessment of civil monetary penalties.

In early 2021, in response to HRSA’s Advisory Opinion (and later in response to the Enforcement Letters), most of these impacted manufacturers sued in Federal District Courts across the country alleging a wide variety of claims, including that HRSA lacks the authority to require manufacturers to offer 340B discounts to contract pharmacies. Following briefing and oral arguments in these cases, beginning in late October we began to see decisions on the parties’ motions for summary judgment and the government’s motions to dismiss.

  • On October 29, 2021 the U.S. District Court for the Southern District of Indiana issued a decision in the case brought by Eli Lilly
  • On November 5, 2021 the U.S. District Court for the District of New Jersey issued a consolidated opinion in the cases brought by Sanofi-Aventis and Novo Nordisk
  • Also on November 5, 2021 the U.S. District Court for the District of Columbia issued a consolidated opinion in the cases brought by Novartis and United Therapeutics

Reading through these decisions (one over 100 pages!), the picture still remains far from clear.  However, several things do jump out at us after reading each of these decisions

  1. Manufacturers won’t be paying penalties anytime soon – and probably won’t be changing their policies. In each of the three cases, the judges vacated the Enforcement Letters, although on different grounds. Even if there is a pathway to imposing fines on the manufacturers for failure to provide discounts to contract pharmacies, HRSA will likely need to go back to the drawing board on how it approaches enforcement.
  2. Manufacturers may have won the battle, but they have not won the war. While the immediate impact of the decisions is relief for the manufacturers from the Enforcement Letters, the decisions also suggests a path forward for HRSA to enforce its contract pharmacy guidance. While each of the cases is unique, the decisions suggest there is statutory support for HRSA’s contract pharmacy guidance and that manufacturers may not necessarily be free to impose “strings” on access to their products.
  3. There is a lot at stake in these cases – meaning this saga is far from over. Buried in a footnote in the Sanofi/Novo Nordisk case is a slice of what is at stake in these cases. According to the court in that case: “Prior to any restrictions, manufacturers—including Sanofi and Novo—sold 10.5 million 340B-priced units per month. Subsequent to their policies aimed at curbing contract pharmacy arrangements, they sold 2.9 million units.” The administrative record compiled by HHS in the case suggests that the annualized reduction in 340B sales as a result of the manufacturer contract pharmacy policies is nearly 83 million 340B-priced units, representing annualized losses of $3.2 billion for 340B covered entities. The stakes in these cases are therefore enormous, suggesting neither party is likely to back down anytime soon. What comes next is likely more agency action and, likely, appeals.

Below we briefly summary the decision in each of these cases.

Eli Lilly and Company v. HHS

On October 29, 2021 the United State District Court for the Southern District of Indiana issued its opinion in challenge brought by Lilly. The Court in the Lilly case focused on two issues: (1) whether or not the now-withdrawn HHS Advisory Opinion is an arbitrary and capricious agency action; and (2) whether or not the May 17th Enforcement Letters were a violation of the Administrative Procedure Act (APA).

With respect to the December 2020 Advisory Opinion (recall this Advisory Opinion was struck down by the District Court for the District of Delaware in June in the Astra Zeneca case), the Court narrowly found the Advisory Opinion was an arbitrary and capricious agency action in violation of the APA on the basis that the 340B statute itself is silent as to covered entities’ entitlement to utilize contract pharmacies. We say “narrow” because the Southern District of Indiana did not consider whether there was a better interpretation of the statute, or even whether the agency was entitled to deference for its position supporting the use of contract pharmacies. Instead, the Court narrowly focused on whether or not the Advisory Opinion was compelled by the ambiguous text of the statute.

With respect to the argument by Lilly that the Enforcement Letter is contrary to law, the Court disagreed, finding that the 340B statute does not permit drug manufacturers to impose extra-statutory conditions on covered entities’ access to discounted medications. For this, the Court relied on the legislative history of the 340B program and the plain language of the 340B statute itself, which is broad. However, the Court left open the possibility that the 340B statute may not support a policy that requires drug manufacturers to deliver to an unlimited number of contract pharmacies.

Ultimately, however, the Court vacated the Enforcement Letter on the basis that the letters were an arbitrary and capricious agency action because HRSA failed to acknowledge, and explain, its change in position regarding its authority to enforce violations of the 340B statute. In what is a relatively narrow win for Eli Lilly, the Court pointed to previous statements from HRSA that it had represented that the contract pharmacy guidance was non-binding and that it lacked the authority to enforce the guidance. Because the agency did not provide any reasons – let alone good reasons – for its apparent change in enforcement policy, the court vacated the enforcement letters.

Top-level takeaway: A relatively narrow win for Eli Lilly which suggests a possible path forward for HRSA to enforce its contract pharmacy guidance if it can explain the basis for its change in enforcement posture.

Novartis Pharmaceutics v. Espinosa; United Therapeutics v. Espinosa

Consolidating two different complaints, on November 5, 2021 the United State District Court for the District of Columbia issued its opinion in challenges brought by Novartis and United Therapeutics. In a short and limited opinion, the D.C. District Court vacated the Enforcement Letters on the basis that the 340B statute does not, on its face, preclude manufacturers from imposing conditions on the use of contract pharmacies. Disagreeing with the Southern District of Indiana in the Lilly case and (as discussed below) the District of New Jersey in Sanofi/Novo Nordisk, the Court rejected the argument that the 340B statute’s plain language, purpose, and its legislative history prohibit manufacturers from imposing conditions on their offers of 340B-priced drugs to covered entities.

The decision from the D.C. District Court, however, is limited. In particular, the Court vacated the Enforcement Letters because HHS’s position that a manufacturer’s ability to impose any conditions on their offer of 340B priced-drugs to covered entities was not supported by the 340B statute. The Court was unable, based on the record before the Court, to determine whether the manufacturer policies were permissible under the 340B statute. Unlike the Court in the Lilly and Sanofi/Novo Nordisk cases, the D.C. District Court did not opine on possible legal theories on which HRSA might better succeed.

Top-level takeaway: A clear win for Novartis and United Therapeutics and the most pro-manufacturer case of the series; however, its impact is limited by the narrow scope of the decision. A clear split emerges in the District Courts as to whether or not the 340B statute’s plain text, purpose, and legislative history are consistent with manufacturer attempts to limit access to contract pharmacies.

Sanofi-Aventis U.S. v. HHS; Novo Nordisk Inc. v. HHS

In a whopping 122-page consolidated opinion, on November 5, 2021 the United State District Court for the District of New Jersey issued its opinion in challenges brought by Sanofi and Novo Nordisk. In the lengthy opinion, the Court considered three pieces: (1) the December 2020 Advisory Opinion; (2) the 2020 340B Administrative Dispute Resolution (ADR) Rule; and (3) the May 17 Enforcement Letters.

Unlike the Court in the Lilly which considered and found unlawful the 2020 OGC Advisory Opinion, the District of New Jersey Court refused to take up the issue of the Advisory Opinion finding that such consideration was moot on the basis that HHS had already withdrawn the opinions.

With respect to the ADR Rule (only challenged by Sanofi), the District Court ultimately upheld the rule after considering three arguments from Sanofi: (1) the rule necessitated a new notice-and-comment period because it had been effectively withdrawn; (2) the final rule was not a “logical outgrowth” of the proposed rule; and (3) the rule is arbitrary and capricious. On the first argument – that the rule had effectively been withdrawn – the Court pointed out that the Affordable Care Act required an ADR rule and so the public was effectively on notice that an ADR rule was an eventuality, even given the lengthy period of no activity. On the second – that the rule was not a logical outgrowth – the Court pointed to voluminous comments from the public on the proposed rule on the topics included in the final rule that Sanofi alleged were not logical outgrowths from the proposed rule. Lastly, the agency disagreed that the ADR rule was arbitrary and capricious (and rejected several other Constitutional arguments)

With respect to the Enforcement Letters, Sanofi and Novo Nordisk alleged a handful of arguments, most of which the Court dismissed. For example, the Court rejected arguments that the Enforcement Letters were subject to notice-and-comment, that they violated the Takings Clause, and that the letters are arbitrary and capricious based on procedural issues. With respect to the latter issue, that the Enforcement Letters are arbitrary and capricious because the agency engaged in unexplained inconsistencies, the New Jersey District Court found that HRSA has been consistent over time with respect to contract pharmacies as a permissible drug delivery system, consistent with respect to the rationale for contract pharmacies, and also consistent with respect to HRSA’s position on manufacturers placing conditions on contract pharmacies. Unlike the Court in the Lily case which found HRSA’s enforcement position inconsistent, Sanofi and Novo Nordisk did not properly raise this issue.

The New Jersey Court did, however, ultimately vacate the letters, although it did so on a very narrow basis and in doing so largely aligned itself with the Southern District of Indiana in finding that contract pharmacy arrangements are consistent with the 340B statute and there is no statutory support for manufacturer restrictions.  In particular, the Court relied on both the plain language and the purpose of the 340B statute (including its legislative history) in finding that contract pharmacy arrangements are consistent with the 340B statute. As an example, the Court pointed to evidence that Congress had a chance to eliminate the use of contract pharmacies when it first enacted the program, and yet chose not to do so. Further, the Court pointed to evidence that at the time of the creation of the 340B program, just 5% of covered entities had an in-house pharmacy, suggesting Congress intended covered entities to rely on contract pharmacies.

In addition to finding contract pharmacy arrangements generally permissible, the Court also found the manufacturer policies impermissible on the basis that nothing in the statute authorizes such conditions, and that their use would undermine the purpose of the program.

However, in another narrow decision, the Court ultimately vacated and remanded the enforcement letters because the Court was unwilling to determine the correct number of contract pharmacies. In remanding back to HRSA, the Court instructed the agency to consider and explain how many contract pharmacies the statute permits, acknowledging that “an unlimited number of contract pharmacies” may render the overall statutory scheme unworkable and violate the duplicate discount and diversion prohibitions.

Top-level takeaway: A short-term win for Sanofi and Novo Nordisk with a possible path forward for HRSA to take enforcement action against the manufacturers if it can devise an appropriate contract pharmacy policy. In siding with the Southern District of Indiana that unilateral manufacturer restrictions on contract pharmacies are impermissible under the 340B statute, the stages are likely set for a lengthy fight.

Medicaid and the Law’s Running Coverage of the 340B Contract Pharmacy Dispute:

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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