2020 was supposed to be a year remembered for the 40th anniversary of the publication of the Orange Book—a celebration of one aspect of the Hatch-Waxman Amendments—but it could turn out that 2020 is remembered as the year in which the Hatch-Waxman Amendments took a significant blow to the face.  Specifically, when ANDA (and 505(b)(2)) “skinny labeling” (i.e., labeling carve-outs) was struck down and the generic drug industry faltered.

Carve-outs (or skinny-labeling), in which a generic sponsor uses a “section viii” statement to remove from proposed product labeling any indications or other language covered by a method-of-use patent listed in the Orange Book for a given Reference Listed Drug (RLD), have been pretty routine since the Hatch-Waxman Amendments were enacted in 1984.  Permitted by Congress under Section 505(j)(2)(A)(viii), a section viii statement inherently acknowledges that a given patent is listed in the Orange Book but declares that the patent does not cover a condition of use for which an ANDA applicant is seeking approval.  Although the RLD and generic drug are listed in the Orange Book as A-rated, they are only rated as substitutable insofar as they are labeled the same.  As FDA once stated in the Orange Book Preface: “Therapeutic equivalence determinations are not made for unapproved, off-label uses.”

RLD sponsors, understandably, tend to dislike so-called carve-outs, as they allow generic competitors to access the market without addressing listed patents.  As a result, RLD sponsors often petition to preclude carve-outs on the grounds that a carve out would affect the safety and efficacy of the product for the remaining indications in the labeling.  Typically, FDA rejects these petitions, and the practice is now a staple to facilitate generic competition.  But, even though Congress and FDA accept the practice as commonplace, the Federal Circuit just threw a major wrench in the system.

In a 2-1 decision, the Federal Circuit recently held in GSK v. Teva that skinny-labeling can constitute induced infringement, rendering any generic sponsors who relied on a section viii statement for a method of use patent vulnerable to patent litigation.  As the RLD holder, GSK had listed several patents in the Orange Book for carvedilol (Coreg), initially approved for use in the treatment of hypertension, and subsequently for the treatment of congestive heart failure and left ventricular dysfunction following a myocardial infarction.  GSK listed the ‘069 method of use patent, which was reissued and relisted as the ‘000 patent in November 2003, covering the combination of carvedilol and an angiotensin-converting enzyme (“ACE”) inhibitor, diuretic, and/or digoxin with the use code “decreasing mortality caused by congestive heart failure.”  Teva submitted its ANDA in 2002 with a Paragraph IV certification for the ‘069 patent, and, at some point after the ‘069 patent was reissued as the ‘000 patent, submitted a section viii statement for it, effectively converting its ‘069 Paragraph IV certification to a carve-out.  Teva received tentative approval in June 2003, and launched upon expiration of a different patent in 2007 with an AB rating.  Teva subsequently revised its labeling to include the indication for treatment of heart failure, as required by FDA to ensure that its label was identical to the GSK RLD.

In 2014, GSK sued for induced infringement of the reissued ‘000 patent.  At trial, Teva argued that it had carved-out the treatment of congestive heart failure with a section viii statement, and therefore could not have infringed the ‘000 patent.  The jury sided with GSK, finding that Teva caused physicians to prescribe generic carvedilol for the carved-out indication and therefore willfully induced infringement.  In a rare move, the district court granted Teva’s motion for Judgement as a Matter of Law (“JMOL”) and overturned the jury verdict because GSK did not prove that Teva’s actions caused physicians to infringe.  GSK appealed.

The Federal Circuit reviewed the JMOL de novo, evaluating whether “the record is critically deficient of the minimum quantum of evidence to sustain the verdict” (citations omitted).  Looking at the JMOL standard, the Federal Circuit assessed whether the jury’s findings are supported by substantial evidence and whether the jury’s verdict can be supported by its findings.   In no uncertain terms, the Federal Circuit held that the “criteria of induced infringement are met” based on the “ample record evidence of promotional materials, press releases, product catalogs, the FDA labels, and testimony of witnesses from both sides.”  Mainly, the evidence consisted of materials in which Teva had noted that its product was a “generic of Coreg” and “AB rated” without any reference to specific indications.  Notably, the Court implied that the labeling alone may have been enough, as “[p]recedent has recognized that the content of the product label is evidence of inducement to infringe.”  Given that there was substantial evidence to support the jury’s verdict of inducement to infringe the ‘000 patent, the Federal Circuit overturned the JMOL, reinstated the $235 million damages award, and remanded the matter to back to the district court.  The opinion was sure to stress that its decision was not based on policy but purely on applicable patent law.

Federal Circuit Chief Judge Prost vehemently dissented.  Focusing on the “critical balance” of patent rights with public access to innovation, she noted that the Majority decision “undermines this balance,” particularly since Congress specifically provided for the skinny label pathway.  The dissent astutely points out that the Federal Circuit’s holding “nullifies Congress’s statutory provision for skinny labels,” slowing the introduction of low-cost generics.  The dissent stresses that Teva did everything right here, following all statutory and regulatory requirements, never expressly marketing for the carved-out indication, and omitting the indication from its labeling until the method of use patent expired.  With no legally sufficient evidence to support inducement or to support that doctors prescribed generic carvedilol based on any action taken by Teva, the dissent would uphold the JMOL.  To do otherwise, the dissent writes, “undermines Congress’s design for efficient generic drug approval.”

This case highlights the delicate balance that Congress tried to walk between intellectual property rights and facilitating generic drug access when passing the Hatch-Waxman Amendments, and how that balance can be upset by a single court decision.  The evergreening/patent thicket problem just became even bigger for the generic drug industry, as innovators of a product with multiple indications, like cancer drugs that are approved for individual types of cancers, can now—absent a reversal of the panel decision—use a successive method-of-use patent to legally keep all competition off the market indefinitely.

There are also questions of fairness here, as well as reliance interests for generic drug companies.  As Chief Judge Prost pointed out in her dissent, Teva followed the law to a T but is nonetheless on the hook for $235 million.  And generic companies have been doing this for years; are they now all liable for induced infringement?  For industry, the uncertainty leaves a wide open question of whether taking advantage of the skinny label process is advisable.

Given the huge implications here for the generic industry, Teva is sure to appeal this case, either en banc or to the Supreme Court.  But it may be years before we have any certainty.  Neither FDA nor Congress has said anything about this decision yet, but we would be surprised if FDA did not chime in on the issue in some form.  After all, it significantly upsets the Hatch-Waxman balance FDA has strived to achieve and mischaracterizes FDA’s long held position on therapeutic equivalence determinations.

FDA published a constituent update and Federal Register notice asking for comment on a number of questions pertaining to labeling of “foods comprised of or containing cultured seafood cells.” The notice discusses the basis for FDA’s jurisdiction over such products, as well as misbranding provisions that FDA considers relevant.  The notice then poses a number of questions, including:

• Should the name or statement of identity of foods comprised of or containing cultured seafood cells inform consumers about how the animal cells were produced?
• What terms should be in the name or statement of identity of a food comprised of or containing cultured seafood cells to convey the nature or source of the food to consumers?
• Should names for conventionally produced seafood products established by common usage, statute, or regulation be included in the names or statements of identity of food derived from cultured seafood cells?
• When comparing conventionally produced seafood to foods comprised of or containing cultured seafood cells, what attributes (such as nutrition, taste, texture, or aroma) vary between the foods and should FDA consider to be material to consumers’ purchasing and consumption decisions?

Doubtless, these questions will prompt the submission of comments and information from both industry and consumer advocacy organizations.

As noted in the Federal Register notice (and as we discussed in a prior blog posting), FDA and USDA previously reached an agreement on oversight of food derived from cells of USDA-amenable species (e.g., cattle, swine, and chickens). Subsequently, GAO issued a report recommending in part that FDA and USDA take measures to more formally and broadly communicate their understanding that FDA will oversee cell-derived seafood products – other than catfish. Those relatively new to food regulation might not be aware that Congress transferred jurisdiction over catfish from FDA to USDA through provisions in the 2008 and 2014 Farm Bills. We recounted that saga here.

The deadline for submission of comments is March 8, 2021. Comments can be submitted here.

Welcome to the inaugural edition of Hyman, Phelps & McNamara, P.C.’s monthly wrap up of food, beverage and supplement news, including regulations, guidances, events, and whatever else is catching our eye.  (Yes, we know that beverages and dietary supplements are “food” within the meaning of the FFDCA, but our international readers might not be aware of that nuance in U.S. law – so please just roll with the title.)

Food & Beverage

• FSMA Traceability: The FDA has proposed a new rule for FSMA traceability as part of the New Era of Smarter Food Safety initiative. Our initial analysis is forthcoming.
• Pesticides: FDA issued its annual Pesticide Residue Monitoring Program Report for FY 2018. The Pesticide Residue Monitoring Program is administered by the FDA to ensure that FDA-regulated foods in U.S. commerce comply with the pesticide tolerances, or maximum residue levels, set by the U.S. Environmental Protection Agency (EPA).
• Strengthening Organic Enforcement: USDA has proposed a rule intended to strengthen organic control systems, improve farm to market traceability, and provide robust enforcement of the USDA organic regulations. Comment period closes at 11:59 pm Eastern on October 5, 2020.
• Domestic Hemp Production Program: USDA’s AMS is providing an additional thirty (30) days for public comments on the interim final rule that established the Program. The comment period will be open from September 8, 2020 to October 8, 2020.
• Nutrition Facts Label: On September 18, 2020, FDA announced additional flexibility for manufacturers with less than $10 million in annual food sales who need to comply with updated Nutrition and Supplement Facts label requirements by January 1, 2021. Although the compliance date will remain in place, FDA announced they will not focus on enforcement actions during 2021 for these smaller food manufacturers.
• Sometimes Denigration is OK: But it has to be truthful, accurate, and narrowly drawn – a fine needle to thread. In a challenge brought by Clif Bar & Company, NAD concluded in part that Kind, LLC’s depiction of two bars in a commercial had a reasonable basis and was not “falsely denigrating.”
• Enforcement: DOJ announced “the largest-ever criminal penalty following a conviction in a food safety case” – a cool $17.25 million levied against Blue Bell Creameries. See our summary here.
• Bioengineered Animals: FDA posted a helpful webinar for product developers to help them understand the agency’s expectations for data submitted in support of a new animal drug application. (In the U.S., animals that have undergone intentional genomic alteration are subject to regulation as new animal drugs, even if they are only intended for food use.)

Supplements

• CRN’s Board voted unanimously to reaffirm that participation in the Supplement OWL is a requirement of association membership for companies that market eligible finished products.
• Pharmaceutical ingredients found in cognitive enhancement supplements: Merits of the study aside, one possible consequence is increased scrutiny of the quality of products marketed in this category. Hat tip to CRN.

Some Things We Are Monitoring:

• 2020-2025 Dietary Guidelines: Expected by year end.
• A Petition from the Harvard Law School’s Animal Law and Policy Clinic (discussed in our FDALawBlog) regarding the naming of cell-based or cultured meat and poultry products requesting that the FSIS establish a labeling approach for cell-based meat and poultry that “does not overly restrict speech and that respects the First Amendment.”
• Supreme Court oral arguments on December 1 on the application of the Alien Tort Statute to ethical sourcing claims in Nestlé Doe I and Cargill v. Doe I.
• Lawsuits challenging FDA’s GRAS notice regulation and the agency’s oversight of bioengineered animals, and one challenging USDA’s BE labeling rule – all of which grind on, and on, and on…
• OEHHA’s proposed rulemaking to provide an exception for some exposures to listed chemicals in cooked or heat-processed foods – comments are due by October 21.

Upcoming Events:

• FDLI Annual Conference: Exploring Advanced Topics in Food & Drug Law, October 6-8, 2020, where HPM’s Karin Moore will lead a lunchtime table discussion about Corporate Social Responsibility claims.
• CRN Day of Science and Annual Conference, October 13-16, where HPM’s Ricardo Carvajal will participate in a panel discussion on what the industry really needs from FDA.
• Consumer Brands Association Fall Food Labeling Workshop, October 19-23, 2020
• FDA public meeting on ‘‘CBD and Other Cannabinoids: Sex and Gender Differences in Use and Responses.” November 19, 2020

On September 24, 2020, the Department of Health and Human Services (HHS) and the Food and Drug Administration (FDA) announced a Final Rule and an FDA Guidance for the importation of certain prescription drugs. (See our coverage of the proposed rule and draft guidance here.) The Final Rule and FDA Guidance set forth the details of the two separate pathways introduced in the July 2019 Safe Importation Action Plan (see our summary here) and satisfy the rulemaking directive in President Trump’s July 2020 Executive Order on Drug Importation (see our coverage of the Executive Orders here). The following day, the Centers for Medicare & Medicaid Services (CMS) issued Release No. 114 (CMS Release), containing guidance on manufacturer obligations under the Medicaid Drug Rebate Program (MDRP) with respect to multi-market approved (MMA) products created under the pathway provided in the FDA Guidance.

The Final Rule

The Final Rule implements Section 804 of the Federal Food, Drug, and Cosmetic Act (FDC Act), 21 U.S.C. § 384, to allow for the importation of certain prescription drugs from Canada. Under the Final Rule, states (including the District of Columbia and U.S. territories), Indian Tribes, and, in certain circumstances, pharmacists or wholesale distributors (SIP Sponsors), may develop a Section 804 Importation Program (SIP) that must be authorized by FDA. The SIP Sponsors must specify which prescription drugs will be included in the SIP. Certain categories of prescriptions drugs are excluded by statute from inclusion in the SIPs, including controlled substances, biological products, infused drugs, intravenously injected drugs, drugs inhaled during surgery, intrathecally or intraocularly injected drugs, and drugs subject to Risk Evaluation and Management Strategies (REMS). Drugs that are going to be imported must be approved by the Health Products and Food Branch of Health Canada, and, other than the labeling, meet the conditions in an FDA-approved new drug application (NDA) or abbreviated new drug application (ANDA). This does not mean that a SIP Sponsor or Importer (described below) must obtain FDA approval of an NDA or ANDA for the imported drug, but that the product is currently marketed in the U.S. under an NDA or ANDA, and the imported version of the drug meets the conditions of that NDA or ANDA. In order to ascertain that such conditions are met, the manufacturer must provide the Importer with an attestation that the imported drug meets the conditions of the NDA or ANDA (regardless whether the manufacturer approves of the importation). In addition, the Importer or manufacturer must arrange for the imported drug to be tested by a U.S. laboratory for compliance with established specifications and standards.

Before imported drugs may be sold in the United States, they must undergo testing as described above, and be relabeled for sale in the United States. Each SIP Sponsor must identify the FDA-registered repackager or relabeler in the United States that will relabel the imported products with the required U.S. labeling, including the following required labeling statement: “[This drug was/These drugs were] imported from Canada without the authorization of [Name of Applicant] under the [Name of SIP Sponsor] Section 804 Importation Program.”

To protect the drug supply chain, SIP Sponsors must identify a Canadian Foreign Seller that will purchase the prescription drug directly from its manufacturer and a U.S. Importer that will buy the drug directly from the Foreign Seller. The Foreign Seller must be licensed by Health Canada as drug wholesalers and registered with FDA as a Foreign Seller; the Importer must be a wholesale distributor or pharmacist licensed to operate in the United States. Both the Foreign Seller and the Importer will be subject to the supply chain security requirements set forth in the FDC Act and Final Rule. Initially, each SIP will include one SIP Sponsor, one Foreign Seller, and one Importer. However, if the SIP Sponsor can demonstrate that it has consistently imported eligible prescription drugs in accordance with Section 804 and the Final Rule, the SIP Sponsor may submit a supplemental proposal to FDA to add additional Foreign Sellers or Importers to the SIP. Each SIP is envisioned to be limited to an initial two-year period, but may be reauthorized by FDA if the SIP satisfies the statutory requirements that the program (1) pose no additional risk to public health and safety and (2) result in a significant reduction in the cost of drugs to the American consumer.

As we’ve noted in our previous posts, FDC Act § 804 was enacted in 2003, and until now, no administration has made the statutorily required certification that an importation program will pose no additional risk to the public’s health and safety and will result in a significant reduction in the cost of covered products to the American consumer. Concurrent with the issuance of the Final Rule, HHS for the first time made the required certification to Congress. However, the Final Rule places the burden of demonstrating consumer savings on the SIP Sponsors; each SIP Sponsor is required to provide FDA with data and information about its SIP, including the SIP’s cost savings to the American consumer. At this time, six states (Vermont, Florida, Colorado, Maine, New Mexico, and New Hampshire) have passed laws that allow for the development of drug importation programs.

The FDA Guidance

Unlike SIPs, which arrange for eligible drugs to be imported whether or not the manufacturer approves of such importation, the FDA Guidance provides an importation pathway that may be used at the option of manufacturers. The FDA Guidance explains that “FDA has become aware that some drug manufacturers may be interested in offering certain of their drugs at lower costs and that obtaining additional National Drug Codes (NDCs) for these drugs may help them to address certain challenges in the private market.” The challenges FDA refers to are most likely contracts with payors and GPOs that lock in drug prices and/or price reductions for the currently available NDCs during the term of the contract. The FDA Guidance outlines the process for drug manufacturers to obtain NDCs for FDA-approved products originally intended to be marketed and sold in a foreign country (not limited to Canada) that are imported to the United States. A “multi-market approved product” (MMA product) can be (1) an FDA-approved prescription drug, (2) an FDA-licensed biological product, including an FDA-approved NDA that was deemed to be an FDA-approved Biologics License Application (BLA) but not a blood or blood component or an allogeneic cellular or tissue-based product, or (3) a combination product approved in an NDA or BLA. In the United States, the MMA product has to be authorized for marketing by the manufacturer, be the subject of a supplement to an approved NDA or BLA, and meet certain quality and labeling requirements.

The MMA product, including its labeling, must be the same as the FDA-approved drug or FDA-licensed biological product, except that the prescribing information, container label, and package label must state, “Imported following the procedures recommended in FDA Guidance: see [current link to the FDA Guidance],” The FDA Guidance recommends that a manufacturer obtain a new labeler code for its MMA products to avoid confusion with the FDA-approved drug or FDA-licensed biological product. The FDA Guidance includes other recommendations to help distinguish an MMA product and minimize potential product confusion, such as adding easily visible contrast stripes to the MMA product container and issuing Dear Healthcare Provider Letters with information about the MMA product. A manufacturer that wishes to import an MMA product must complete the registration and listing process for each MMA product. A manufacturer of an MMA product must also comply with the FDC Act drug supply security requirements for product identification, tracing, and verification.

Although the Notice of Availability for the draft guidance had asked for comments related to expanding this pathway to generic drug manufacturers, the final FDA Guidance is limited to brand products. The biggest change from the draft guidance to the final FDA Guidance is the inclusion of FDA-licensed biological products, including deemed biological products such as insulin, in the MMA product category. This may be significant because, as noted above, biological products may not be imported from Canada under the SIPs.

The CMS Release

The CMS Release addresses the eligibility of MMA products to receive payment under the MDRP and determines that such products meet the definition of a “covered outpatient drug.” According to CMS, an MMA product satisfies the statutory definition of a covered outpatient drug because it is a prescribed drug that is approved under FDC Act § 505 or licensed under the Public Health Service Act § 351. The manufacturer must enter into a Medicaid drug rebate agreement with HHS that includes the new labeler code and NDCs for the MMA products to ensure payment by Medicaid. The manufacturer would also need to comply with the statutory and regulatory requirements for participation in the MDRP with respect to the MMA products.

With regard to calculation of average manufacturer price (AMP) and best price, CMS views a manufacturer authorizing the sale of an MMA product in the United States under the FDA Guidance as similar to the manufacturer marketing an authorized generic product, with the non-MMA product being equivalent to the brand product and the MMA product being equivalent to an authorized generic marketed under the manufacturer’s approved NDA. Accordingly, CMS refers manufacturers to the its rules and recently proposed updates on authorized generic for guidance on the calculation of average manufacturer price (AMP) and best price. See Medicaid Program Proposed Rule, 85 Fed. Reg. 37286 (June 19, 2020); see also 42 C.F.R. § 447.506; CMS Releases 111 and 112. (See our coverage of the proposed rule here.) The CMS Release does not address calculation of AMP and best price for biological MMA products, to which the authorized generic provisions do not apply.

With regard to AMP, a manufacturer should treat the FDA-approved MMA product as a separate product that it has authorized to be sold under its NDA and submit a separate AMP for the MMA product based on the sales of that MMA product only. The manufacturer would submit a separate AMP for the non-MMA product based on the sales of that product only, not taking into account any sales of the MMA product. The MMA and non-MMA products would likely have different labeler codes and NDCs (as recommended in the FDA Guidance) , but the base date AMP for the MMA product would be the same as that for the non-MAA product because both are marketed under the same NDA. As the proposed Medicaid rule is finalized, CMS may issue additional guidance on AMP calculations for MMA products.

A manufacturer’s best price should reflect the lowest price available to any entity sold under a manufacturer’s NDA. CMS again analogized to the authorized generic product scenario in which the statutory definition of best price expressly provides that, in the case of an authorized generic, the best price shall be inclusive of the lowest price for such authorized drug available from the manufacturer during the rebate period to best price eligible entities. See 42 U.S.C. § 1396r-8(c)(1)(C) and 42 C.F.R. §§ 447.505, 447.506. Accordingly, the best price for either the MMA product or the non-MMA product sets the best price for both products.

The CMS Release does not address the treatment of drugs imported from Canada under SIPs. However, such drugs most likely would not be considered covered outpatient drugs because, unlike MMA drugs, drugs imported under a SIP do not meet the definitional requirement of being approved under an NDA or ANDA.

On Sept. 23, 2020, a coalition of public health and consumer advocacy groups submitted a Citizen Petition to FDA, requesting that FDA start considering the cumulative health effects of substances added to food as (according to Petitioners) is required by the Federal Food, Drug, and Cosmetic Act (FDC Act) and FDA’s own regulations. Several of the coalition members  have previously challenged FDA’s approach to safety of food ingredients (the Environmental Defense Fund has challenged FDA’s GRAS regulations, and the American Academy of Pediatrics issued a policy statement in 2018 suggesting that FDA should consider cumulative and synergistic effects of food additives in the context of other chemical exposures that may affect the same biological receptor or mechanism).

Petitioners allege that FDA and the US food industry have failed their statutorily mandated responsibility to consider the cumulative effect of food ingredients.  Allegedly, this failure has resulted in Americans, in particular children, being exposed to health risks.  In fact, Petitioners suggest that it may have contributed to dramatic increases in a variety of chronic diseases such as obesity, diabetes, and kidney disease.

Petitioners claim that under the Federal Food, Drug, and Cosmetic Act (FDC Act), FDA must review the cumulative effect of substances added to foods “taking into account any chemically- or pharmacologically-related substances in the diet;” although FDA has incorporated that requirement into the regulatory definition of “safety” for the various categories of food ingredients, i.e., food additives, color additives, GRAS substances, and food contact substances, as well as for animal drugs, it allegedly has not enforced that requirement.

Petitioners claim that they reviewed all GRAS notices for human food ingredients since 1997 and identified only one notification, in which the notifying company considered the purported cumulative effect requirement.  Moreover, they note, FDA guidance for industry does not address how food manufacturers are to evaluate cumulative effects.  Instead, the cumulative effect seems to be equated to or confused with “cumulative exposure” or “cumulative intake” of the single substance rather than with cumulative effects of related substances in the diet.

Petitioners suggest that FDA use a regulation related to drugs, 21 C.F.R. § 201.57, which defined pharmacological class for drugs and biologics as model.  Petitioners also request that FDA define diet as not being limited to food and beverages but specifically include dietary supplements and tap water.

Petitioners summarize their requests as follows:

• Update of FDA’s rules by defining key terms so they remove any ambiguity and removing outdated references;
• Issuance of guidance to industry to explain the steps those conducting safety determinations should take to follow the law; and
• Revision of FDA’s forms for notices and petitions to more clearly require the necessary information

The Third Circuit handed down a precedential decision this week in the case of Federal Trade Commission v. AbbVie Inc., et al., No. 18-2621 (3d Cir. Sept. 30, 2020), ruling that the District Court for the Eastern District of Pennsylvania erred in requiring AbbVie and Besins to disgorge $448 million in the FTC’s case involving reverse payments under the Hatch-Waxman Act, and outright rejecting the FTC’s authority to seek disgorgement under 13(b) of the FTC Act.  This precise issue of 13(b) disgorgement is being heard by the Supreme Court this term in  FTC v. Credit Bureau Center and AMG Capital Management v. FTC.  The Third Circuit decision is consistent with the Seventh Circuit’s decision in Credit Bureau Center, 937 F.3d 764, 775 (7th Cir. 2019), and two judges on the Ninth Circuit in AMG Capital Management, 910 F.3d 417, 429 (9th Cir. 2018) (O’Scannlain, J., concurring).  See our previous posts here and here for more information about the cases at the Supreme Court.

As a brief aside, while this blog post focuses on the disgorgement aspect of this 99-page decision, many of our readers will be interested in the Court’s analyses of the FTC’s reverse payment theory and sham litigation under Noerr-Pennington.

And now back to disgorgement.  The Third Circuit analyzed the text of Section 13(b) and found it lacking: “Section 13(b) authorizes a court to ‘enjoin’ antitrust violations. It says nothing about disgorgement, which is a form of restitution, not injunctive relief.” (internal citations omitted).  The Court also looks at the statute contextually, indicating that Section 13(b) applies to antitrust violations that are believed to be imminent or ongoing. If there nothing imminent or ongoing, there is nothing to enjoin, and the FTC cannot sue under Section 13(b). Disgorgement, on the other hand, is intended to deprive a wrongdoer of past gains, which is not the focus of 13(b).  The court reasoned that “[i]f Congress contemplated the FTC could sue for disgorgement under Section 13(b), it probably would not have required the FTC to show an imminent or ongoing violation.”

As we noted in our post discussing the Supreme Court’s June 2020 decision in Liu v. Securities and Exchange Commission, the Securities Exchange Act, 15 U.S.C. § 78u(d)(5), includes explicit language giving courts the power to grant “any equitable relief” for securities violations, and the Supreme Court threw the SEC a lifeline and vacated and remanded that case for consideration whether disgorgement fell under the principles of equitable relief.  Unfortunately, Section 13(b) of the FTC Act does not include such specific language, nor does the Food, Drug, and Cosmetic Act.  The FDA simply relies on the vague statement that courts can “restrain violations” of the FDC Act to support its demand for disgorgement and/or restitution:  “The district courts of the United States and the United States courts of the Territories shall have jurisdiction, for cause shown to restrain violations of section 301 . . . .”   21 U.S.C. § 332(a).

As we eagerly await a date for oral arguments in the FTC cases, consider whether the decisions out of the 3rd and 7th Circuits (and two judges on the 9th Circuit) reflect a more current view of Section 13(b) than the years of decisions holding that courts may order disgorgement under Section 13(b). A similar consideration would apply to the FDC Act.  As the 3rd Circuit pointed out in its decision, quoting the 7th Circuit, “until recently, ‘[n]o circuit ha[d] examined whether reading a restitution remedy into section 13(b) comports with the FTCA’s text and structure.’”  And the Supreme Court will be examining just that issue shortly.  Stay tuned.

Two federal courts, in unrelated cases, separately rejected plaintiffs’ attempts to force FDA to authorize the use of hydroxychloroquine to treat or prevent COVID-19.  Hydroxychloroquine, a drug that has been used for over 60 years, has been touted by President Trump as an effective treatment or preventative measure against COVID-19.  In March 2020, FDA issued a narrow Emergency Use Authorization (EUA) for hydroxychloroquine, that allowed hospitalized patients diagnosed as having COVID-19 to obtain the drug from the Strategic National Stockpile if no clinical trial was available for them.  Just three months later, in June 2020, FDA revoked the EUA after it “determined that [hydroxychloroquine is] unlikely to be effective in treating COVID-19.”  FDA also stated that the “ongoing serious cardiac adverse events and other serious side effects” changed the risk-benefit basis for the EUA.  Neither the EUA, nor its revocation, affect physicians’ ability to prescribe commercially available hydroxychloroquine using their medical judgment.

In the Michigan case, the Association of American Physicians & Surgeons (“AAPS”) sued on behalf of its physician members who sought to prescribe the drug to their patients but claimed FDA “impeded the ability of President Trump to make [the drug] available to the public.”  AAPS claimed it had standing to sue in its own right, to sue on behalf of its members, and to sue on behalf of patients of its members.  AAPS alleged that it was injured because it had to cancel one of its conferences due to state mandates prohibiting large public gatherings; that doctors were injured because they were limited in their ability to prescribe hydroxychloroquine due to fear of retaliation by state medical boards; and that patients were injured because they were unable to receive prescriptions of hydroxychloroquine from AAPS member physicians.  Because these alleged injuries lacked causal connection to FDA’s actions, the court rejected all of plaintiff’s theories for standing and dismissed the case.

The Kansas case, brought by pro se plaintiff Peter Mario Goico, more colorfully alleged that FDA was effectively holding him and his elderly father hostage by not authorizing the “prophylaxis [sic]” use of hydroxychloroquine.  Goico claimed FDA was depriving his father and him of their First Amendment rights because they were unable to attend religious services and a political protest due to their susceptibility to COVID-19.  In denying plaintiff’s second emergency motion for TRO, the court found that plaintiff “having to take the kinds of safety precautions that many Americans have been taking for months to avoid or minimize the risk of exposure to COVID-19” is not sufficient to justify the high threshold for a TRO.   FDA’s response to plaintiff’s motion for a preliminary injunction is due on October 20, 2020.

Although both plaintiffs took issue with FDA for their inability to access hydroxychloroquine, neither appears to have a response to FDA’s position that doctors are free to prescribe the commercially available drug off-label as they see fit.  Perhaps the risk-benefit analysis FDA conducted in revoking the EUA is persuasive, but FDA generally declines to impede the practice of medicine, as it recently reaffirmed:  “FDA generally does not seek to interfere with the exercise of the professional judgment of health care providers in prescribing or using, for unapproved uses for individual patients, most legally marketed medical products.”  FDA, Proposed Rule: Regulations re “Intended Use,” fn. 3.

Hyman, Phelps & McNamara, P.C. is pleased to announce that Serra Schlanger will present at this year’s Drug Pricing Transparency Congress, a virtual conference, on November 16–17, 2020.  This conference gathers stakeholders to examine the evolving landscape of state drug price reporting and transparency efforts.  Serra will speak about the state laws that require price disclosures to be made directly to health care providers, as well as join a panel of experts to discuss recent developments and practical tips for compliance with the various state requirements.

As a sponsor of the event, we can offer our readers a special discount off the registration.  The discount code is DPC200.  We look forward to seeing you at this virtual conference.

On September 22, FDA announced the creation of a Digital Health Center of Excellence (DHCoE), which has grown out of their existing Digital Health Program.  The objectives of the DHCoE include connecting and building partnerships, sharing knowledge and innovating regulatory approaches related to digital health.  The landing page provides helpful links to other content on the FDA website related to digital health.

It appears that the DHCoE provides new organization for the work that the Agency has already been doing in the digital health space. DHCoE services are organized into those that empower stakeholders, connect stakeholders, share knowledge and innovate regulatory approaches.  For each service, there are numerous examples of ongoing activities that the digital health team has been providing.

With its kick-off, the DHCoE focus will be to raise awareness and engage stakeholders.  Starting this winter and into next year, they plan to focus on building partnerships, including creation of a digital health community of practice and assembling FDA and CDRH advisory groups.  Overall, the DHCoE appears to set the stage for developing and implementing improvements to digital health policy and processes.

For those interested in learning more and asking questions related to the DHCoE, FDA is offering two listening sessions in October and November.  They will also be involved in the upcoming Patient Engagement Advisory Committee Meeting on Artificial Intelligence and Machine Learning in October.

Quite some time ago, we blogged on the organic livestock and poultry practice (OLPP) rule.  The rule established minimum indoor and outdoor space requirements for chickens based on the type of production and stage of life, as well as added new provisions for livestock handling and transport for slaughter.   After years of work, a final rule was published the day after President Trump’s inauguration, with an effective date two months later.  However, USDA delayed the effective date several times, and ultimately withdrew the rule because the agency concluded that it did not have the authority to issue the rule and it also determined that the costs outweighed the benefits.   The Organic Trade Association (OTA) sued USDA claiming that USDA’s basis for withdrawal was unfounded.

Fast forward to Oct. 31, 2019, when the OTA filed a motion for summary judgment.  In its motion for summary judgment, OTA argued, among other things, that the regulatory impact analysis (RIA) of the withdrawal rule contained serious flaws.  USDA had acknowledged that the RIA of the OLPP contained errors.  When it issued the withdrawal rule, it issued a revised (or withdrawal) RIA which corrected several main errors of the OLPP RIA and concluded that benefits of the OLPP had been overstated.

Rather than responding to the motion for summary judgment, USDA requested that the Court stay the proceedings and remand the case to USDA to allow USDA to correct the RIAs.  Upon review of OTA’s expert’s analysis, USDA had determined that the withdrawal RIA still contained errors and it requested remand to make sure that the impact of those errors would be addressed; it wanted to correct and clarify the record in a manner that would permit judicial review.

Recognizing the value of a complete and correct record, the Court granted the motion (over the opposition of OTA) and set a deadline of 180 days, or September 8, 2020, for USDA to publish a final rule fully explaining its updated cost/benefit analysis.

On April 23, 2020, USDA published the Economic Analysis Report (Report) reviewing and evaluating the OLPP RIA and the withdrawal RIA.  The Report identified several additional errors in the OLPP RIA which had been carried forward to the revised RIA.  USDA requested comments on the Report.

On September 17, 2020, USDA published its final decision, announcing that it had found nothing in the comments to the Report that  would cause it to reject or modify the findings of the Report, and affirming the findings of the Report which discredit both the OLPP RIA and the withdrawal RIA.

Based on the Report and comments to the Report USDA concluded that “the [flawed OLPP] RIA does not support promulgation of the OLPP Rule.”  It further concluded that “[i]mplementing the OLPP rule based on such a flawed economic analysis is not in the public interest.”  Because the parts of the final withdrawal rule that do not rely on the flawed revised RIA remain intact, USDA also concluded that no further action is needed for that RIA.  Now that the administrative record has been “corrected,” the lawsuit can proceed.

Last week brought a reminder that the government can bring to bear a range of legal theories – some old, some new – in pursuing alleged violations of food safety requirements.

The U.S. Department of Justice (DOJ) announced a sentence levying $17.25 million in criminal penalties against Blue Bell Creameries, whose ice cream products were implicated in an outbreak of foodborne illness. The sentencing follows a plea agreement entered last May, in which Blue Bell pleaded guilty to misdemeanor counts of distributing adulterated products and agreed to pay the criminal penalties, and also agreed to pay $2.1 million to resolve alleged violations of the False Claims Act. According to DOJ, “the $17.25 million fine and forfeiture amount is the largest-ever criminal penalty following a conviction in a food safety case.”

We won’t recount the long history of the Blue Bell saga here, but the company allegedly declined to initiate a recall or issue a formal notification to consumers after being informed that product samples had tested positive for Listeria monocytogenes. Subsequently, the strain detected in the products was linked to a strain that sickened consumers, and FDA inspectors found sanitation issues at the company’s manufacturing facilities.  Although the government charged the company’s former president, Paul Kruse, with seven felony counts, the court dismissed those charges in July 2020 because the government failed to use proper charging procedures.  With this corporate settlement, it is unknown whether the government will pursue any further charges against individuals.

Separately, DOJ announced the issuance of an injunction against Fortune Food Product, a producer of sprouts and tofu products whose manufacturing operation was alleged by FDA to be in violation of certain requirements of the produce safety regulation and the current good manufacturing practice regulation for food.  FDA’s press release notes that this is “the first consent decree of permanent injunction against a firm or grower for violating public safety standards under the Produce Safety Rule enacted under the Food Safety Modernization Act of 2011.”  The company will be unable to resume production until it has complied with the terms of the injunction, effectively closing the company’s doors until it demonstrates to FDA’s satisfaction that it can produce compliant products.

FDA’s Software Pre-Certification (Pre-Cert) Program is intended to create a new streamlined regulatory process for software as a medical device (SaMD) (see our earlier blog posts on the program here, here, here, here, and here).  On September 14, 2020, FDA updated the Digital Health Software Precertification (Pre-Cert) Program website with a new summary document, Developing the Software Precertification Program:  Summary of Learnings and Ongoing Activities (Summary) and updated Frequently Asked Questions.  The Summary highlights FDA’s key learnings from the initial testing and the next steps planned for the program.  In short, the Agency appears to be addressing important questions in their development and testing of the Pre-Cert program.  However, three years into the process it is not clear when the program might be ready to move into its next phases of beta testing and eventual launch.

As a refresher, the Pre-Cert program has four key components following a Total Product Lifecycle (TPLC) approach:

• Demonstrate a culture of quality and organizational excellence through an Excellence Appraisal (pre-certification),
• Determine the SaMD’s required review through a Review Determination Pre-Submission (Pre-Sub) meeting,
• Conduct a Streamlined Review, and
• Verify a SaMD’s continued safety, effectiveness, and performance and the organization’s commitment to culture of quality through post-market Real-World Performance.

The Pre-Cert program was initially formed in 2017.  The Agency conducted research in 2018 and in 2019 entered what it refers to as the “build and iterate phase”  with publication of the Working Model 1.0 and 2019 Test Plan.  FDA has said that upon completion of the build and iterate phase, the program will move to beta testing with scaled-up testing of the program and finally transition from Pilot to Program.  No proposed dates have been given yet for these next phases.

During the last year, FDA has continued to work with the nine pre-cert pilot companies and has also worked with new companies that volunteered to participate in the 2019 Test Plan.  While the test plan sought to include software developers that develop both low- and high-risk SaMDs as well as those that intend to develop a SaMD but are not considered a traditional medical device manufacturer in the test phase, it is not clear in the current Summary the type and number of companies that have been included beyond the nine pilot companies.

Mock Excellence Appraisals were conducted with an interactive approach and a draft framework for a library of activities, processes, and Key Performance Indicators (KPIs) used by high performing organization has been developed.  FDA also tested and continues to test the Streamlined Review process.  Comparisons are made between premarket submissions that have undergone traditional review with the outcomes of a Streamlined Review package. The Streamlined Review package includes extracted elements from the Excellence Appraisal, Review Determination Pre-Sub, and the traditional premarket submission.  FDA’s summary notes that “FDA found that there was variability regarding the specific information needed from the masked software review elements to achieve a comparable outcome to current review practices,” concluding that further work is needed.  Summary at 4.  The Summary additionally notes challenges with defining SaMD products consistently and collection of ongoing Real-World Performance data.

Next steps for the Pre-Cert Program include refinements across the program to “drive repeatability of the processes, improve the quality and quantity of information, provide clarity to internal and external stakeholders, and reduce the time burden on both internal and external stakeholders.” Id. at 6.  Per the Summary, the following are notable plans as the Pre-Cert programs continues to unfold:

• Explore improvements to Excellence Appraisals to reduce variability and develop consistency across different SaMD developers,
• Evaluate the usefulness and relevance of the software submission content in determination of SaMD market authorization and use that information to evaluate how information collected in Excellence Appraisals, Review Determinations, and Real-World Performance monitoring can be used for Streamlined Review,
• Explore the use of technology, such as automated remote access to digital data, for collection of Real-World performance data,
• Simulate scenarios to test interdependencies between the four components of the Pre-Cert program,
• Determine criteria for maintaining Excellence Appraisal status, and/or the need for re-appraisals, and
• Consider obtaining legislative authority to fully implement the Pre-Cert program as a new pathway for SaMD.

With this update, the Agency is acknowledging several challenges that this program presents.  In moving Agency oversight from a periodic, product-focused review to a continuous review of both product and company, new burdens are introduced, and, for the program to be successful, it is imperative that the overall burden to industry is not increased over the current premarket review of design documentation and test results.  The Agency’s planned approaches to further refine and test the program appear sound and, if successful, should result in a useful program.  However, this update shows that there is still much work to do and that the promise of a streamlined regulatory process for SaMD that will allow developers to more quickly release new and modified products is not yet a reality.

On Monday, September 14, the United States Court of Appeals for the Second Circuit reversed the December 2018 opinion from the United States District Court for the Southern District of New York that invalidated the New York Opioid Stewardship Act (OSA).  In Association for Accessible Medicines v. James, the Second Circuit reinstates the New York OSA previously been invalidated by the District Court, with the exception of one key provision.

The New York State Legislature enacted the OSA in September 2018 to raise $600 million over six years to address the ongoing costs to the state of New York in addressing the opioid crisis.  As detailed below, the annual $100 million “opioid stewardship payment” is assessed collectively on all registered opioid manufacturers and distributors that sell or distribute opioids in the state, each of which is responsible for paying a portion of the $100 million based on its market share of opioid sales in New York.  As originally enacted, the OSA included a “pass-through prohibition” that barred registrant from passing the costs of their opioid stewardship payments on to purchasers, including the ultimate consumer.  Registrants that violated the pass-through prohibition were subject to a monetary penalty of up to $1 million per violation.

Various aspects of the OSA, including the pass-through prohibition, were challenged in three lawsuits brought by industry trade associations and an opioid manufacturer.  The plaintiffs argued that the pass-through prohibition violated the dormant Commerce Clause, which prohibits state laws from discriminating against interstate commerce, or favoring in-state commerce over out-of-state commerce.   New York moved to dismiss each case on jurisdictional grounds under the Tax Injunction Act (TIA), arguing that the opioid stewardship payment is a tax and is not subject to District Court review.  Under the TIA, “the district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.”  28 U.S.C. § 1341.  In a consolidated Opinion and Order issued December 19, 2018, the District Court held that neither the opioid stewardship payment, nor the pass-through prohibition is a “tax” under the TIA, and that the latter violated the dormant Commerce Clause.  Because the opioid stewardship payment requirement could not survive without the pass-through prohibition, the District Court held that the OSA was invalid in its entirety.

After the District Court’s decision, the New York State Legislature enacted a new payment mandate, the opioid excise tax, that did not include a pass-through prohibition and the pass-through provision was not included in the State’s appeal.  On appeal, the Second Circuit determined that the opioid stewardship payment required under the OSA is a tax within the meaning of the TIA and is thus not within the subject matter jurisdiction of the District Court.  The Second Circuit reversed the District Court’s judgment invalidating the OSA, with the exception of the pass-through prohibition not included in the appeal.

Under the current version of the OSA, each manufacturer and distributor registered in New York is required to submit an annual report detailing all opioids sold or distributed in the state.  The report must include gross revenue of all opioid sales, the number of containers and the strength and metric quantity of controlled substance in each container, and the total number of morphine milligram equivalents (MME) sold or distributed.  Annual  reports must be submitted on April 1 of each year based on the actual opioid sales and distributions of the prior calendar year.  The reports are used to determine the “ratable share” of the opioid stewardship payment owed by each manufacturer and distributor.  A registrant’s ratable share is calculated by dividing the total MMEs sold by the registrant in New York by the total amount of MMEs sold by all registrants.  For example, if a Registrant A sold a total of 100,000 MMEs in New York in one year and all registrants sold a total of 10,000,000 MMEs, Registrant A’s ratable share of the opioid stewardship payment is 1% or $1 million.

New York is required to notify registrants of their ratable share by October 15, based on opioids sold or distributed for the prior calendar year.  Given that the District Court had previously struck down the OSA as unconstitutional, it is our understanding that registrants would not have submitted an annual report on April 1, 2020 for 2019 opioid sales.  However, registrants likely should anticipate submitting an annual report by April 1, 2021 covering 2020 opioid sales in New York State.  The state will then notify registrants of their ratable share for 2020 sales by October 15, 2021.  Registrants will be required to pay their ratable share of 2020 opioid sales quarterly beginning January 1, 2022.  Failure to comply with the OSA may result in a civil penalty up to $1,000 per day.  Additionally, if the registrant fails to pay its ratable share, the state may also assess a penalty of 10-300% of the registrant’s ratable share.

Note that the OSA stewardship payment is wholly separate from the aforementioned excise tax on the sale of opioids, which is part of the state’s tax law and not the controlled substance law.  On April 12, 2019, after the District Court struck down the OSA as unconstitutional, Governor Cuomo signed a budget bill that included the opioid excise tax.  The excise tax, which went into effect July 1, 2019, is imposed on the first sale of an opioid unit in New York State by a registrant.  Generally, the “first sale” is the transfer of title from a registrant to a purchaser for consideration.  “First sale” does not include the dispensing of an opioid prescription to the end user, or the transfer of title of an opioid unit from a manufacturer in New York to a purchaser outside New York when the opioid will be used or consumed outside the state.  It is presumed that every sale of an opioid by a registrant within or into New York is the first sale unless it is established otherwise.  The New York Department of Health publishes a list of drugs that are subject to the opioid excise tax, as well as an MME calculation guidance.  The excise tax is also assessed based on the MME, but there are separate tax rates depending on the product’s wholesale acquisition cost (WAC):

• $0.0025/MME for opioids with a WAC of less than $0.50 per unit
• $0.015/MME for opioids with a WAC of $0.50 or more per unit

All first sales must be reported on a quarterly opioid excise tax return and paid no later than the 20th day of the month following the quarter in which the opioid was sold.  Registrants must file a return even if they had no sales during the quarter.  The first required filing was due January 21, 2020 and covered an extended period beginning July 1, 2019, and ending December 31, 2019.  The filing for the current July 1 – September 30 period is due October 20, 2020.

As it currently stands, it is our understanding that both the OSA (minus the pass-through provision) and the opioid excise tax remain in effect.  It is unclear whether New York will reconsider the opioid excise tax in light of the reinstatement of the OSA.   Hopefully further clarification from the state will be forthcoming.

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.

As we reported in a previous post, Donald Trump several weeks ago threatened drug manufacturers with the prospect of an Executive Order mandating international reference price limitations, unless the manufacturers put forward proposals to significantly reduce drug prices by August 24.  On Sunday, September 13, not having elicited the desired reaction from manufacturers, Trump issued the threatened Executive Order on Lowering Drug Prices by Putting America First.  The Order first directs the Secretary of the Department of Health and Human Services (HHS) to “immediately implement his rulemaking plan” to test a payment model under Medicare Part B, under which Medicare would pay no more than a “most favored nation price” for certain high-cost prescription drugs.   That price would be the lowest price for a drug that the manufacturer sells in a member country of the Organisation for Economic Co-operation and Development (OECD) that has a comparable per-capita gross domestic product, adjusted for volume differences and differences in national gross domestic product.  There is no further explanation of how these adjustments should be made.  In directing the HHS Secretary to “implement his rulemaking plan,” the Order presumably was referring to an Advance Notice of Proposed Rulemaking (ANPR) issued by HHS in November 2018 which proposed to implement an international reference pricing payment model under the auspices of the CMS Center for Medicare and Medicaid Innovation (CMMI).  See 42 U.S.C. § 1315a(b).  (Click here for our post on the ANPR.)  HHS has not taken any action on that ANPR to date.

In addition, the Order extends the international reference pricing concept to Medicare Part D, which was not contemplated in HHS’s earlier ANPR.  Therefore, the Order directs HHS to “develop and implement a rulemaking plan,” again under the auspices of CMMI as authorized in 42 U.S.C. 1315a(b), to limit Medicare payment to the most favored nation price for Part D drugs where insufficient competition exits and seniors are faced with prices above those in comparable OECD countries.  The CMMI model would test whether limiting prices to the most favored nation price would mitigate poor clinical outcomes and increased expenditures on drugs.

Ironically, both the Part B and Part D mandates of the Order rest on the authority of 42 U.S.C. 1315a(b) – which was enacted in 2010 as part of the Affordable Care Act.  In a case pending before the Supreme Court, the Trump Administration is seeking to invalidate the Affordable Care Act in its entirety on constitutional grounds.  See Brief for the Federal Respondents, State of California, et al. v. State of Texas, et al., Nos. 19-840 and 19-1019.  Oral argument is scheduled for November 10.  If the Administration prevails in that case, one of the more minor consequences will be the invalidation of this Executive Order.  In addition, a change of administration in January may result in the revocation of this Executive Order (among many others) and/or withdrawal of the mandated HHS proposed regulations, as often happens after a change in administration.  If final regulations are ever issued, there is a strong possibility of a legal challenge from the drug manufacturer industry, which is strenuously opposed to international reference pricing.

Despite these uncertainties, the significance of this Executive Order should not be minimized.  International reference pricing was proposed by the Obama Administration in 2016 (see our post here), was reintroduced by this Administration in the HHS ANPR in 2018, and was incorporated into H.R. 3, the drug pricing bill passed by the House on December 12, 2019.  Although international reference pricing was not included in S. 4199, the Republican-sponsored Senate drug pricing bill introduced by Senator Grassley on July 2, it is now definitively being championed by Trump.  Regardless of the fate of this Executive Order or the result of the upcoming election, this bipartisan concept will not go away soon.