Californovation? California is Set to Become a Drug Manufacturer

Californovation (sung to the tune of the Red Hot Chili Peppers’ Californication, obviously): the new portmanteau seems appropriate for California, who just keeps coming up with new ideas to address the many hurdles consumers face with respect to access to affordable medicines.  Last year, we wrote about California’s adoption of the controversial AB 824, designed to address anticompetitive agreements that may keep generic drugs from entering the market (thereby inflating drug prices for consumers), in an effort to control drug prices at the state level.  Now, California has passed another bill to address drug pricing – this time introducing additional competition at lower prices by supplementing the drug supply chain with state-sponsored drugs.

The California legislature passed SB 852 in early September, and it may be the first legislation of its kind in the  U.S.  The bill essentially allows California to become a drug manufacturer.   It doesn’t quite nationalize drug manufacturing (or whatever the state version of nationalizing would be), but it requires the state of California to partner with industry to “produce or distribute generic prescription drugs and at least one form of insulin, provided that a viable pathway for manufacturing a more affordable form of insulin exists at a price that results in savings” in an effort to “increase patient access to affordable drugs.”  Specifically, California would engage in drug production only “to produce a generic prescription drug at a price that results in savings, targets failures in the market for generic drugs, and improves patient access to affordable medications.”

SB 852 directs the California Health and Human Services Agency (“CHHSA”) to enter into partnerships “resulting in the production or distribution of generic prescription drugs” to be made available to both public and private purchasers.  Under the statutory definition, a “partnership” includes contracts or purchasing agreements for the procurement of generic prescription drug with a payer, state governmental agency, group purchasing organization, nonprofit organization or entity.  The statute doesn’t specify exactly how these partnerships will work, but it is clear that these partnerships must be for the “manufacturing or distribution of generic prescription drugs.”  Because any drug resulting from the CHHSA-led partnership must be produced or distributed by a drug company registered with FDA, at least one drug manufacturer will likely be a part of the partnership even if not explicitly called for under the “partnership” definition.

The statute requires CHHSA to identify and prioritize the production of generic drugs that would have the greatest impact on lowering drug costs to patients or purchasers, increasing competition and addressing shortages, improving public health.  CHHSA must prioritize drugs for chronic or high-cost conditions, including an insulin.  For each top drug identified, CHHSA must determine whether a viable pathway exists for a partnership based on the relevant legal, market, policy, and regulatory factors.   Once the drugs have been identified, CHHSA then sets a price based on user fees, ANDA acquisition costs amortized over five years, mandatory rebates, contracting and production costs, research and development costs, and other initial start-up costs amortized over five years.  Once developed, the drugs will be made available to all purchasers at a transparent price and without rebates (unless federally required).  The statute requires CHHSA to report to the Legislature on the feasibility of directly manufacturing prescription drugs, as well as the drugs selected and activities undertaken.

This is a really interesting approach to the drug affordability problem that FDA has been trying to address (even if it may be outside the Agency’s statutory mandate) for years.  But the mandated drug production and/or distribution partnership raises many questions, particularly if the partnership is executed from production.  The legislation requires CHHSA to select drugs based on priority and the need for competition, but often those high priority, expensive drugs are still subject to patents and exclusivity periods.  As a result, development costs could include potential Paragraph IV challenges, or, in the case of insulin and other biologics, the BPCIA patent dance.  Could those be included in the pricing calculations?  Or will this exercise instead be limited to the Off-Patent Off-Exclusivity list?

Novel approaches often result in a myriad of legal challenges.  So while California continues to innovate and think outside the box in an effort to address drug pricing, surely someone in the industry is thinking of ways to challenge SB 852.  Governor Newsom has until September 30 to sign the bill. He proposed a similar plan in January 2020, so it’s unlikely that this will be a tough sell for him.