Court’s Construction of the Term “Original New Drug Application” Formerly in Medicaid Rebate Statute Offers Rebate Relief for Some Drugs Approved Under Literature-Based NDAs

From the enactment of the Medicaid Drug Rebate Statute in 1990 until last year, a term appearing in the statute – “original new drug application” – caused  controversy and uncertainty.  The term was not defined in the statute and the legislative history shone no light on it.  Yet it had enormous fiscal implications for drug companies under the Medicaid Drug Rebate Program (MDRP).  Until April 2019, innovator drugs, which are subject to a substantially higher per-unit rebate than non-innovator drugs, were defined as drugs approved under an “original new drug application.”  This begged the question, what is an original NDA over and above an NDA?  The term obviously did not include an ANDA, but what about NDAs that are not original in that they rely on previously approved applications or data that are not original to the applicant, such as a section 505(b)(2) application or a literature based application?  In February 2016, CMS issued a final regulation construing an “original NDA” as simply an approved NDA,  “unless CMS determines that a narrow exception applies.”  42 CFR 447.502.  In subregulatory guidance, CMS advised that narrow exceptions would only be granted for drugs that were approved under FDA’s paper NDA policy prior to 1984 or under literature‑based 505(b)(2) applications, and that had no patent protection or statutory exclusivity.  For drugs on the market as of April 1, 2016, the regulation established a deadline of April 1, 2017 for requesting a narrow exception.  Manufacturers could also submit requests for up to one year after the launch of a new drug or after an acquisition of a drug.  Effective April 1, 2019, a statutory amendment codified CMS’s interpretation by deleting the word “original” and codifying the narrow exception process.

Why then are we posting an article about a term that no longer exists in the U.S. Code?  The reason is that a recent decision of the D.C. District Court construed the former term in a manner that may offer rebate relief to companies marketing drugs approved under FDA’s pre-Hatch Waxman paper NDA policy, and those approved under literature based applications submitted under FDC Act section 505(b)(2).  The case, STI Pharma v. Azar, No. 18-cv-1231 RDM, 2020 U.S. Dist. LEXIS 49618 (D.D.C. Mar. 23, 2020), concerned STI’s Sulfatrim, an antibiotic suspension with pediatric indications.  The drug was originally approved in January 1983 as a paper NDA.  Its approval was based on its chemical equivalence and bioequivalence to Bactrim Suspension, which had been approved a decade earlier.  STI purchased Sulfatrim from an intervening owner in 2011 and began marketing it two years later.  Because the drug was approved under an NDA, STI categorized the drug as an innovator multiple source drug, which subjected it to higher rebates than noninnovator multiple source drugs.

After CMS published its 2016 Final Rule adopting the narrow exception approach, STI timely requested a narrow exception to classify Sulfatrim as a noninnovator multiple source drug despite its approval under an NDA, and CMS granted the request effective from April 1, 2016, when the CMS “narrow exception” rule took effect.  However, STI requested CMS’s permission to treat Sulfatrim as a noninnovator multiple source drug status retroactively to the fourth quarter of 2013, when STI first began marketing Sulfatrim.  CMS denied STI’s request, explaining that “[a] drug category change pursuant to a narrow exception request approval does not apply to reporting periods prior to the effective date of the Final Rule because the narrow exception did not exist before that date.”  STI Pharma, 2020 U.S. Dist. LEXIS at *19.

STI challenged CMS’s reading of the statute, arguing that Sulfatrim was a “noninnovator multiple source drug” because FDA approved the drug based on its equivalence to the previously approved Bactrim Suspension.  In other words, Sulfatrim and Bactrim Suspension are equivalent drugs, and the “original” NDA was granted for Bactrim Suspension — not Sulfatrim. CMS agreed that this is a permissible reading of the MDRP statute, and, indeed, that is the interpretation CMS itself adopted in the 2016 Final Rule.

Contrary to both parties’ briefs, the Court did not believe that it had to weigh in on the reasonableness of CMS’s interpretation of the MDRP statute.  Rather, according to the Court, “the case can and must be decided at Chevron step one.”  Id. at *23.  Under Chevron Step One, the Court used the same analysis it would have applied “in the absence of an administrative interpretation of the statute” to determine whether Congress has unambiguously expressed an intention on the precise question at issue.  Id. at *24.

According to the Court, the ordinary meaning of “original NDA” and “innovator drug” cannot include duplicate drugs, like Sulfatrim, that were approved under the pre-1984 paper NDA process.  Sulfatrim could not be the “original NDA” because “Sulfatrim was not the source, beginning, or the product or model from which copies are made. Rather, Bactrim was.”  Id. at *29.  Sulfatrim’s approval documents repeatedly refer to Sulfatrim as a “generic version of the Bactrim product,” and a “duplicate NDA for [Bactrim].” The Court also noted that “innovate,” the verb form of the term “innovator,” in its ordinary meaning, is “to introduce as or as if new.”  Id. at *34. Courts have used innovator interchangeably with pioneer, novel, non-generic drugs.  The Court agreed with STI that this “common understanding of the word ‘innovator’ shows ‘that Congress did not intend to classify duplicate generic drugs as innovator multiple source drugs.’”  Id. at *35 (emphasis in original).

The Court concluded that the traditional tools of statutory interpretation “reveal[ed] a ‘single right answer’ to the meaning of the statute.”  Id. at *40.  Accordingly, the Court held that “CMS’s decision declining to reclassify Sulfatrim as a noninnovator multiple source drug for the period from 2013 through 2016 must be set aside as not in accordance with law.”  Id.

This case has obvious relevance to companies that, like STI, were granted a narrow exception by CMS but told that it would not be applied retroactively before April 1, 2016.  Such companies now have grounds for requesting a retroactive reclassification for periods prior to that date.  However, the case also has relevance to companies that market drugs that might have been candidates for a narrow exception, but the company for one reason or another failed to meet CMS’ April 1, 2017 regulatory deadline for requesting one.  Under the court’s reasoning, such a drug – for example a duplicate drug approved under FDA’s paper NDA policy – was not an innovator drug according to the plain meaning of the statue until the 2019 amendment.