The Fourth Circuit Upholds CMS’ Definition of “Line-Extension Drug” and “New Formulation”

On April 10, the Fourth Circuit unanimously affirmed a summary judgment ruling for the Centers for Medicare & Medicaid Services (CMS) regarding the agency’s definitions of “line-extension drug” and “new formulation” for purposes of determining rebates that drug manufacturers may owe the Medicaid Drug Rebate Program (MDRP).  Vanda Pharmaceuticals, Inc. v. Centers for Medicare and Medicaid Servs., No. 23-1457 (4th Cir. Apr. 10, 2024).

Under the Medicaid Drug Rebate statute, a pharmaceutical manufacturer whose drug prices increase faster than the rate of inflation must pay additional per-unit rebates to the program.  The amount of the additional rebate is the excess (if any) of a drug’s current average manufacturer price (AMP) over the inflation-adjusted AMP for a statutorily specified baseline quarter. To address concerns that manufacturers were making minor changes to drugs in order for them to be characterized as new covered outpatient drugs with updated (and higher) baseline AMPs, Congress amended the statute in 2010 to add an alternative rebate for line extensions of oral dosage form single source or innovator multiple source drugs (i.e., NDA or BLA drugs).  Under that line-extension provision, a manufacturer that introduces a line-extension drug with a new baseline AMP must pay the greater of the rebate calculated in the ordinary manner, or an alternative rebate calculated in a manner that is tied to the inflation rebate of the predicate drug and thereby the predicate drug’s baseline AMP.   The statute defines a “line extension” as a “new formulation” of an existing drug, with certain exceptions.

In 2020, CMS issued a final rule providing a broad definition of “new formulation” as “any change to the drug, provided that the new formulation contains at least one active ingredient in common with the initial brand name listed drug.”  We wrote a memorandum summarizing CMS’ regulation here.

In April 2022, Vanda Pharmaceuticals filed a complaint in the Maryland Federal District Court to challenge CMS’ definition on Administrative Procedure Act (APA) grounds.  We previously blogged on the district court’s decision last year.  In short, the Federal District Court for the District of Maryland granted summary judgment to CMS and rejected Vanda’s arguments that (1) a drug approved under a new NDA cannot be a line extension; (2) a line extension, like its predicate drug, must be an oral solid dosage form; (3) CMS’ definition exceeds the plain meaning of “line extension”; and (4) Congress intended to target only slight alterations of a drug, as evidenced by the sole example in the statute of “an extended-release formulation.”  Vanda Pharmaceuticals, Inc. v. CMS, Civ. No. MJM-22-977 (Dist. Md. 2023).

The Fourth Circuit has now affirmed the Maryland Federal District Court decision, finding that CMS’ definitions of “line extension” and “new formulation” were neither contrary to law nor arbitrary and capricious under the APA.  More specifically, the Fourth Circuit found that the agency’s definition of “line extension” is “clearly within the bounds of the statute” and “a perfectly sensible way to implement the regime set by the Medicaid statute.”  The Court also found “that a broad definition of new formulation is appropriate.”  With regard to whether both the initial brand name drug and the line extension must be an oral solid dosage form, the Court found that CMS’ interpretation that only the initial brand name listed drug must be an oral solid dosage form is the more persuasive.

As we discussed in our 2023 blog post, this decision has implications extending beyond the MDRP.  The 2022 Inflation Reduction Act (IRA) imposes inflation rebates for Medicare Part D drugs whose price increases outpace the rate of inflation and defines “line extension” in a manner that is virtually identical to the MDRP definition.  The IRA also directs CMS to establish a formula for determining the inflation rebate for line extensions consistent with the formula under the MDRP, and in February of last year, CMS did so by issuing guidance adopting the MDRP definition of a new formulation for purposes of Medicare Part D inflation rebate.  Therefore, the Fourth Circuit’s ruling will impact drug manufacturer rebates for line-extension drugs in both Medicaid and Medicare Part D.  As the Fourth Circuit itself observed, “Line-extension status makes a big difference to the federal purse.  It creates the prospect of larger inflation-based rebates, which make up an increasingly large portion of the total amount paid under the Medicaid Drug Rebate Program—more than half since 2012.”