Canadian Drug Importation May Undermine Intellectual Property Protection

In Short

The Situation: Earlier this year, Florida became the first state to receive authorization for its Section 804 Importation Program ("SIP") from the U.S. Food and Drug Administration ("FDA"). This initial step toward the legal importation of certain prescription drugs from Canada is the first of its kind, and legal challenges are likely.

The Result: Florida has until January 5, 2025, to begin importing prescription drugs under its SIP.

Looking Ahead: Following Florida's lead, other states have their own SIPs pending before the FDA. The importation of certain drugs pursuant to authorized SIPs is likely to affect drug programs, drug pricing, and intellectual property protections in the pharmaceutical space.

On January 5, 2024, the FDA authorized Florida's SIP under the Federal Food, Drug, and Cosmetic Act ("FD&C Act"), the first official step on Florida's journey to import certain prescription drugs from Canada. Florida is the first state to receive such FDA authorization, although other states are pursuing or intend to pursue such authorization in the coming years. FDA authorization, however, is only the beginning of a long process to Section 804 importation, and significant legal uncertainty remains.

What is Section 804?

Section 804 of the FD&C Act allows for the importation of eligible prescription drugs from Canada by pharmacists and wholesalers. 21 U.S.C. § 384. On October 1, 2020, the FDA issued regulations implementing Section 804. 21 C.F.R. § 251. Under the program, a State or Indian Tribe proposes a SIP and manages and oversees importation. 21 C.F.R. § 251.2. To receive approval, the FDA must determine that the particular SIP will "pose no additional risk to the public's health and safety[] and result in a significant reduction in the cost of covered products to the American consumer." 21 U.S.C. § 384; 21 C.F.R. § 251.4(a).

Section 804, though a significant change to U.S. drug regulation, is limited in scope. Section 804 explicitly excludes many categories of drugs, including controlled substances, biological products, infused drugs, intravenously injected drugs, and drugs inhaled during surgery. 21 U.S.C. § 384. FDA regulations further exclude Risk Evaluation and Mitigation Strategy ("REMS")-subject drugs and others under the Drug Supply Chain Security Act, such as blood components intended for transfusion, radioactive drugs, imaging drugs, medical gases, certain homeopathic drugs, and compounded drugs. 21 C.F.R. § 251.2. Additionally, pharmacies and wholesalers may only import prescription drugs that are approved and granted a Drug Identification Number by Canadian regulators, that also meet the conditions enumerated in a currently marketed, FDA-approved new drug application ("NDA") or abbreviated NDA ("ANDA") but for the condition regarding U.S.-specific labeling. 21 C.F.R. § 251.2.

In an authorized SIP, the drug's supply chain can only include one manufacturer, one Foreign Seller, and one Importer. 21 C.F.R. § 251.14(a). Under the Section 804 regulations, a manufacturer is an NDA or ANDA holder/owner, an owner or operator that manufactures an eligible prescription drug, or a drug master file holder. 21 C.F.R. § 251.1. The Foreign Seller must be "an establishment within Canada engaged in the distribution of an eligible prescription drug that is imported or offered for importation into the United States" and the Foreign Seller must be registered with the FDA and be approved by Health Canada to distribute wholesale drugs. 21 C.F.R. §§ 251.2, 251.9(a). The Foreign Seller must purchase the SIP drugs directly from the manufacturer and then sell them directly to an Importer in the United States. 21 C.F.R. § 251.14(a). The Importer must submit a Pre-Import Request to the FDA specific to the drug before importing the drug, must be the U.S. owner of the particular drug at the time of entry into the United States, and must hold a pharmacist or wholesale distributor license from the FDA or the SIP-sponsor state. 21 C.F.R. §§ 251.2, 251.5(a). The Importer is responsible for ensuring the drug is properly relabeled, meets statutory testing requirements, and is imported only though an FDA-authorized port of entry. 21 C.F.R. §§ 251.13(b); 251.17(b). Though broad in its potential effect, importation under the FDA legal regime is fraught with legal hurdles and limitations.

History of Section 804

Congress initially enacted Section 804 of the FD&C Act in 2000, later amending it in 2003 to limit the location of the potential drug supply to Canada. For nearly two decades, the FDA did not implement Section 804, and the importation program remained untouched. Indeed, the FDA expressed skepticism regarding the ability and authority to safely implement the program. In October 2020, under the Trump administration, the FDA issued the final rule implementing Section 804, and Florida filed the first SIP proposal. FDA approval of Florida's SIP, when coupled with the Biden administration's 2021 executive order directing the FDA to work to develop SIPs, signals a continued bipartisan emphasis on review of Section 804 requests.

Florida's SIP is limited to certain facilities: Under the program, only pharmacies or wholesalers employed by or under contract with certain types of facilities, such as Medicaid pharmacies, the central pharmacy of the Florida Department of Health, and the Florida Department of Corrections, would be eligible to receive imported prescription drugs. The SIP restricts the imported drug's use as well. For instance, pharmacies may only use drugs imported through the Florida Department of Health's central pharmacy for treatment in a county health department or free clinic, and Medicaid pharmacies may only dispense the drugs to Medicaid recipients. The list of drugs covered by Florida's SIP is also limited, focusing on drugs for conditions like HIV/AIDS, mental illness, prostate cancer, and urea cycle disorder.

Notably, FDA's authorization of Florida's SIP is for a period of two years from the date when the Importer files an electronic import entry for consumption for its first shipment under the SIP.

Whether Florida's plan results in actual savings remains to be seen, but other programs are likely to follow. Numerous states, including Colorado, Maine, New Mexico, and Vermont, have pending proposals before the FDA, and other states, such as Michigan and Texas, have introduced or fully enacted bills authorizing the development of their own proposals. We are monitoring developments across the country to assess the effect these programs will have on the pharmaceutical industry and health care services in the United States.

Challenges to the Program

Due to its wide-ranging implications, Section 804 is the subject of significant controversy, including past and likely future legal challenges. The Pharmaceutical Research and Manufacturers of America ("PhRMA"), an association of drug manufacturers, brought the most significant legal challenge to the SIP program's implementation in Pharm. Rsch. & Manufacturers of Am. v. Dep't of Health & Hum. Servs., 656 F. Supp. 3d 137 (D.D.C. 2023).

The complaint, filed in 2020 and amended in 2021, alleged seven claims against the implementation of Section 804 by the Department of Health and Human Services ("HHS"), the first six of which alleged that HHS and other defendants, in certifying the benefit of drug importation as required by Section 804 and implementing the SIP rule, violated the Administrative Procedure Act by (i) acting in excess of its statutory authority, (ii) taking actions that were arbitrary and capricious, and (iii) failing to adhere to proper procedure. For example, PhRMA alleged that HHS and FDA violated the FD&C Act in the final rules by authorizing the importation of "unapproved and "misbranded" drugs. First Amended Complaint ¶ 155. PhRMA further argued that in the HHS Secretary's certification of Section 804 to Congress, it failed to consider the potential health risks and the reduction in consumer costs resulting from importation. Id. ¶ 141. PhRMA also asserted procedural shortcomings, including the lack of notice of proposed rulemaking and opportunity to comment. Id. ¶¶ 150–51, 176.

PhRMA's final claim alleged that the program violates manufacturers' freedom of speech by (i) compelling manufacturers to allow Importers to use their FDA-approved labeling without payment, (ii) compelling manufacturers to conduct testing or provide Importers with information to conduct testing, and (iii) preventing manufacturers from including details on their labels addressing the differences between imported and domestic drugs. Id. ¶¶ 186–188. And, PhRMA argued the final rule "would work an uncompensated taking by expropriating applicant holders', physical manufacturers', and drug master file holders' intellectual property in their drug labeling, testing protocols (or testing services), and in the similarity (or lack thereof) of U.S. and Canadian drugs, and giving it to Importers without providing any compensation." Id. ¶ 162.

The court never reached the merits of these claims, dismissing the suit in February 2023 for lack of standing because no particular SIP was authorized at that time. PhRMA, 656 F. Supp. 3d at 152, 157. Following Florida's authorization, legal challenges may begin anew.

Intellectual Property and Regulatory Exclusivity Implications

The importation program, among other things, presents possible trade secret, trademark, patent, and regulatory exclusivity issues. First, the program requires an "[a]ttestation and information statement from the manufacturer that establishes that the drug proposed for import, but for the fact that it bears the [Canadian Health Products and Food Branch ('HPFB')]-approved labeling, meets the conditions in the FDA-approved NDA or ANDA, including any process-related or other requirements for which compliance cannot be established through laboratory testing." 21 C.F.R. § 251.5(c)(4)(xii). The manufacturer of the drugs must supply the Importer with all the information needed to conduct Statutory Testing, including testing protocols, Certificate of Analysis, samples of analytical reference standards, or the manufacturer needs to conduct the Statutory Testing. 21 C.F.R. § 251.16(b). In its complaint, PhRMA argued that this requires the manufacturers to either conduct the required testing or turn over trade secrets to the Importers. First Amended Complaint ¶¶ 74–75. PhRMA alleged that the value of the trade secrets will be diminished, and the FDA lacks the statutory authority to require disclosure of trade secrets and other confidential information. Id. ¶¶ 115(a), 160, 161.

Second, the importation program requires "the manufacturer of an eligible prescription drug [to] provide an Importer written authorization for the Importer to use, at no cost, the FDA-approved labeling for the drug." 21 C.F.R. § 251.13(a). In its compliant, PhRMA argued this requirement would result in the manufacturer ceding rights in their trademarks without compensation, which would dilute the trademark's value and be inconsistent with trademark law. First Amended Complaint ¶¶ 115(b), 158.

Third, PhRMA argued that allowing the importation of drugs with remaining patent life or regulatory exclusivities "would upend the Hatch-Waxman Act's successful balance between promoting innovation and fostering drug competition." Id. ¶ 115(c). Generally, importation of a patented invention and the importation of a product made by a patented process, without authorization, are acts of infringement. 35 U.S.C. § 271(a), (g). In Impression Products v. Lexmark International, which involved (i) the sale of printer toner cartridges outside of the United States by Lexmark, (ii) the acquisition of those cartridges after use outside the United States, and (iii) the importation of those used cartridges by Impression into the United States, the Supreme Court found that the sale of the cartridges by Lexmark had exhausted its patent rights. 581 U.S. 360, 367–68, 377–82 (2017). Specifically, the Court held that "[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act." Id. at 377. Using that reasoning and depending upon the patents involved and the factual circumstances, a court may find that the direct sale of an eligible prescription drug from its manufacturer to the Foreign Seller results in patent exhaustion and allows the Foreign Seller to use or resell the drug without restriction under the Patent Act.

Fourth, the importation of eligible drugs from Canada potentially operates to circumvent the regulatory exclusivity provided by Hatch-Waxman for new drug applications for products containing chemical entities never previously approved by the FDA because the imported drugs are not drugs subject to FDA approval pursuant to 21 U.S.C. § 355(b)(2) or ANDA requirements. As the exclusivity provisions of Hatch-Waxman only preclude approval under 21 U.S.C. § 355(b)(2) or certain ANDAs, importation may act as a de-facto loophole for the protections.

Potential Challenges in Canada

U.S. legal challenges will not be the only barrier to implementation of a SIP. Canadian regulators may prove another impediment. Shortly following Florida's authorization, Health Canada announced that it would be taking action to safeguard the Canadian drug supply and highlighted regulations that protect drugs intended for the Canadian market. For now, Canadian restrictions are slight, but if SIPs become more prevalent and begin to affect drug availability in Canada, further regulation would almost certainly follow.

Three Key Takeaways

1. The Florida SIP is likely to serve as a playbook for other states as they develop their own SIP plans.
2. Although the program survived previous legal disputes, HHS's approval of Florida's SIP may serve as new grounds for challenging the implementation of Section 804. 
3. In addition to potential constitutional and regulatory violations, importation may undermine various intellectual property protections, including trade secret, trademark, patent, and regulatory exclusivity.

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