Key Takeaways:
- In the latest legal development in the ongoing 340B contract pharmacy litigation, the United States Court of Appeals for the District of Columbia Circuit ruled earlier this week that the 340B Drug Pricing Program does not categorically prohibit manufacturers from imposing conditions on the distribution of covered drugs to covered entities, including to their contract pharmacies.
- Although the court noted that the conditions imposed by Novartis and United Therapeutics Corporation on covered entities did not violate the 340B statute, it acknowledged that there could be other, more onerous restrictions that would in fact violate the law.
- This case is the second of at least three federal courts of appeals scheduled to rule 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 Seventh Circuit reaches a similar conclusion, the U.S. Department of Health and Human Services ("HHS") will be tasked with deciding whether the 340B statute supports any minimum level of contract pharmacies.
On May 21, 2024, the United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") issued its decision in United Therapeutics Corporation v. Carole Johnson, et al./Novartis Pharmaceuticals v. Carole Johnson (consolidated cases), affirming the United States District Court for the District of Columbia ("District Court") and rejecting the government's position that the 340B statute categorically prohibits manufacturers from imposing contractual conditions on how their products may be distributed ("contract pharmacy restrictions"). The decision upholds the District Court's ruling that set aside the Violation Letters sent to the manufacturers from HHS, upholds the District Court's declaratory judgment that the 340B statute "does not categorically prohibit manufacturers from imposing conditions on the distribution of covered drugs to covered entities," and holds that the conditions imposed by the manufacturers in this case on contract pharmacies "do not violate section 340B on their face."
However, the D.C. Circuit notes that there may be restrictions imposed by drug manufacturers that would, in fact, violate the 340B statute—in this way, the decision is specific to the facts presented by the manufacturers in this case. The decision closely follows the decision reached by the Third Circuit in Sanofi Aventis U.S. LLC v. HHS, 58 F.4th 696 (3d Cir. 2023), where the court similarly held that the Health Resources and Services Administration ("HRSA") had erred in concluding that the statute "requires drug makers to deliver drugs to an unlimited number of contract pharmacies."
Notably, there is still an outstanding court of appeals case challenging the same position by HRSA in the Seventh Circuit, Eli Lilly and Company, et al. v. Xavier Becerra, et al. The outcome in the Seventh Circuit could determine whether or not this case will ultimately make its way up to the Supreme Court, or if HRSA will need to reconsider its current contract pharmacy policy.
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 deeply discounted 340B ceiling prices. While drug manufacturers were originally required to offer 340B discounts only to covered entities' in-house pharmacies, HRSA 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.
However, 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. More background information about the 340B contract pharmacy dispute can be found in a client alert Foley Hoag published on February 2, 2023.
In this case, Novartis and United Therapeutics Corporation—which sell drugs subject to the 340B discount—began to limit the number and kinds of contract pharmacies to which they would ship orders beginning in 2020. For example, United Therapeutics sought to work only with contract pharmacies previously used by the covered entity to distribute Section 340B drugs during the first three quarters of 2020.
In response, in December 2020 HHS issued 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. HHS reasoned that drugs shipped to any contract pharmacy are still "purchased by" the covered entity and, thereby, within the plain language of Section 340B. According to the agency, a covered entity may choose any number of delivery locations. Subsequently, HHS issued Violation Letters to several drug makers—including Novartis and United Therapeutics—that 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, various drug manufacturers—including Novartis and United Therapeutics—filed separate litigations 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 (each manufacturer developed its own individual contract pharmacy policy). 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.
In this case, Novartis and United Therapeutics sought vacatur of the enforcement letters, declaratory judgments that the disputed conditions are lawful, and injunctions barring future enforcement. On summary judgment, the District Court rejected HHS's position that Section 340B categorically prohibits manufacturers from imposing contractual conditions on how their products may be distributed. For that reason, the court thus set aside the enforcement letters and declared that the disputed conditions do not violate Section 340B. The District Court reserved for future cases the question whether the conditions might be unlawful under some other theory, so it declined to enjoin future enforcement.
While the Novartis and United Therapeutics appeal was pending , on January 30, 2023, the United States Court of Appeals for the Third Circuit also reviewed this matter when issuing its decision in Sanofi Aventis U.S. LLC v. United States Department of Health and Human Services. There, the Third Circuit enjoined 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 Third Circuit held 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. As a result, the Third Circuit enjoined HHS from enforcing this policy against the three manufacturers in the suit: Sanofi, Novo Nordisk, and AstraZeneca.
The D.C. Circuit Affirms the District Court's Opinion
On appeal, the D.C. Circuit reviewed United Therapeutics and Novartis' claims in a consolidated opinion, affirming the District Court, which held that Section 340B does not prohibit manufacturers from limiting distribution of discounted drugs by contract.
In its opinion, the D.C. Circuit rejected HRSA's position that Section 340B prohibits drug manufacturers from imposing any conditions on the distribution of discounted drugs to covered entities. Analyzing Section 340B's requirement that manufacturers "offer each covered entity covered outpatient drugs for purchase" at or below a specified ceiling "price," the D.C. Circuit concluded Section 340B merely requires manufacturers to propose to sell covered drugs to covered entities at or below a specified monetary amount. Because Section 340B is silent about delivery conditions, the court determined that this silence preserves the ability of sellers to enforce certain delivery conditions. The D.C. Circuit also relied on the fact that the Third Circuit in Sanofi Aventis U.S. LLC v. United States Department of Health and Human Services held HRSA erred in concluding Section 340B "requires drug makers to deliver drugs to an unlimited number of contract pharmacies" because the statute is "silent about delivery."
The D.C. Circuit also stated that HRSA's position would produce "absurd consequences." For example, the court explained that United Therapeutics manufactures specialty drugs that require an "unusual degree of instruction and support." To ensure patient safety, United Therapeutics makes drugs available only through specialized pharmacies or healthcare providers. According to the court, United Therapeutics could be forced to distribute these specialty drugs in a potentially dangerous manner if that type of restriction violated Section 340B.
The court also found that United Therapeutics' willingness to work with at least one contract pharmacy designated or previously used by the entity would not lead one to characterize this policy as undermining the bona fides of any "offer" or increasing the contract "price." Further, the D.C. Circuit determined this policy conformed to business practices that have governed the 340B program during much of the program's history. For example, until 2010 HRSA's policy only required manufacturers to work with one contract pharmacy where a covered entity lacked an in-house pharmacy.
The D.C. Circuit concluded that Section 340B does not categorically prohibit manufacturers from imposing conditions on the distribution of covered drugs to covered entities. In reaching this conclusion, the court also determined the conditions at issue—those contract policies maintained by Novartis and United Therapeutics—did not violate Section 340B on its face. Still, the court did not foreclose the possibility that other manufacturer restrictions could violate the statute. Nor did it foreclose the possibility that the conditions in this case could violate Section 340B as applied in particular circumstances.
Next Steps
Following the Third Circuit's opinion in Sanofi Aventis U.S. LLC v. HHS, the D.C. Circuit is the second U.S. Court of Appeals to issue its opinion in the contract pharmacy cases currently pending in federal courts across the country. Other drug manufacturers are still awaiting a decision in the Seventh Circuit. The Seventh Circuit could reach a different conclusion than the Third Circuit and D.C. Circuit and, thereby, create a circuit split. In such a scenario, there is a significant likelihood that this issue could go to the Supreme Court next term. On the other hand, if the Seventh Circuit is aligned with the Third Circuit and D.C. Circuit, there may be a convergence in lower courts across the country and the Supreme Court may not ultimately take the case. While this case is a significant win for drug manufacturers, it is unclear what the immediate 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.
On a final note, the D.C. Circuit limits its analysis to the specific restrictions at issue, so this ruling does not immediately apply to other manufacturers. There are at least four other manufacturers that had already filed suit in the United States District Court for the District of D.C., but who have had their cases stayed pending the D.C. Circuit's decision in this case. For those cases pending in the District Court in D.C., this decision will make it challenging for HRSA to succeed. HRSA will now have to demonstrate those other manufacturers have specific restrictions that differ from United Therapeutics and Novartis that would have changed the D.C. Circuit's analysis. More globally, absent a decision in favor of the government out of the Seventh Circuit that would create a circuit split, courts are circling around a nationally uniform view of the 340B statute with which HRSA ultimately needs to comply.
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