Sanofi-Aventis U.S., LLC v. U.S. Dep't of Health & Human Servs., Civil Action 21-00634 (FLW)

CourtUnited States District Courts. 3th Circuit. United States District Courts. 3th Circuit. District of New Jersey
Writing for the CourtHon. Freda L. Wolfson U.S. Chief District Judge
Docket NumberCivil Action 21-00634 (FLW),21-00806 (FLW)
Decision Date05 November 2021


al., Defendants.


al., Defendants.

Civil Action Nos. 21-00634 (FLW), 21-00806 (FLW)

United States District Court, D. New Jersey

November 5, 2021


Hon. Freda L. Wolfson U.S. Chief District Judge

Plaintiffs Sanofi-Aventis U.S., LLC, and Novo Nordisk Inc.[1] sue the United States Department of Health and Human Services (“HHS”), former HHS Secretary Alex M. Azar II, former HHS General Counsel Robert P. Charrow, Acting HHS Secretary Norris Cochran, Acting HHS General Counsel Daniel J. Berry, the Health Resources and Services Administration (“HRSA”), former HRSA Administrator Thomas J. Engels, and Acting HRSA Administrator


Diana Esposito (collectively, “the Government”) for agency action relating to “the 340B Program, ” a drug-purchasing provision in the Veterans Health Care Act, Pub. L. No. 102-585, 106 Stat. 4943, 4967-71 (1992), codified at the Public Health Services Act, Pub. L. No. 78-410, 58 Stat. 682 (1992); 42 U.S.C. § 256b.

In 1992, Congress enacted the 340B Program to guarantee prescription drug discounts for medically vulnerable populations and to enable providers in underserved areas to maximize their resources by purchasing drugs from participating manufacturers at the discounted rate. Because most 340B providers cannot afford an in-house pharmacy, or serve large geographical areas where travel is unfeasible or cost-prohibitive, HHS has long interpreted the statute to require manufacturers to ship orders directly to contract pharmacies, such as CVS or Walgreens, which dispense covered drugs to 340B-eligible patients. Contract pharmacies now number in the tens of thousands. Seeking to limit these arrangements for the first time in 2020, manufacturers, including Plaintiffs, implemented various policies. HHS has taken enforcement action in response.

Sanofi challenges three agency actions arising in this context: a 2021 Violation Letter in which HHS threatened to impose Civil Monetary Penalties (“CMPs”) on Sanofi for overcharging for drugs through its policy, called an “Integrity Initiative, ”[2] a 2020 Advisory Opinion (“AO”) interpreting § 340B to require Sanofi to ship drugs to multiple contract pharmacies, and a 2010 Administrative Dispute Resolution Rule (“ADR Rule”) designed to adjudicate claims arising under § 340B. According to Sanofi, its Integrity Initiative fully complies with the 340B Program, the AO is arbitrary and capricious under the Administrative Procedures Act (“APA”), 5 U.S.C. § 500 et seq.,


and the ADR Rule is both unconstitutional and arbitrary/capricious. Novo challenges the AO and the Violation Letter on similar grounds, but it does not challenge the ADR Rule. Plaintiffs and the Government cross-move for summary judgment on all issues. For the following reasons, I DENY Sanofi's motion as to the ADR Rule and GRANT HHS' motion on the same; GRANT in part Sanofi's and Novo's motions as to the Violation Letters, and PARTIALLY VACATE and REMAND the Letters for further consideration, consistent with this Opinion; and DENY the parties' motions on the AO as moot.


A. Statutory Framework

This case involves the 340B Program, which Congress created thirty years ago to provide certain hospitals and clinics, known as “covered entities, ” with prescription drugs at or below a heavily discounted rate, called the statutory ceiling price. 42 U.S.C. §§ 256b(a)(1), (4). All parties agree that the relevant statutory language reads:

The Secretary shall enter into an agreement with each manufacturer of covered outpatient drugs under which the amount required to be paid . . . to the manufacturer for covered outpatient drugs . . . purchased by a covered entity . . . does not exceed an amount equal to the average manufacturer drug price for the drug . . . in the preceding calendar quarter, reduced by the rebate percentage described in paragraph (2). Each such agreement . . . shall require that the manufacturer offer each covered entity covered outpatient drugs for purchase at or below the applicable ceiling price if such drug is made available to any other purchaser at any price

Id. § 256(a)(1).[3] Covered entities include various federally funded health centers serving native and tribal populations, community hospitals serving low-income or rural areas, and specialized clinics. Id. §§ 256b(a)(4)(A)-(O). A complete chart, provided by the Government Accountability Office (“GAO”), is appended below.


Image Omitted

GAO Report, No. 18-480. Only Congress may expand the list of covered entities, as it has done several times since 1992, most recently in 2010. Pharm. Rsch. & Mfrs. of Am. v. Dep't of Health and Hum. Servs., 43 F.Supp.3d 28, 31-32 (D.D.C. 2014). Under the statute, covered entities may not request duplicate discounts or rebates, i.e., a 340B discount and a Medicaid rebate. 42 U.S.C. § 256b(a)(5)(A). Covered entities also may not engage in drug diversion, which is defined as “resell[ing] or otherwise transfer[ring]” a covered outpatient drug “to a person who is not a patient of the entity.” Id. § 256b(a)(5)(B).

The 340B Program operates through standardized form contracts with HHS, known as Pharmaceutical Pricing Agreements (“PPAs”), which recite the obligations in § 340B and set out terms identical to those contained in the statute. 42 U.S.C. §§ 1396r-8(a)(1)-(5). When a


manufacturer signs a PPA, as it must do to opt into the 340B Program, it agrees to “offer each covered entity covered outpatient drugs for purchase at or below the applicable ceiling price if such drug is made available to any other purchaser at any price.” Id. § 256b(a)(1). The ceiling price is much lower than the market price-in some cases as little as one penny per pill.[4] 82 Fed. Reg. 1, 210, 1, 215 & n.1 (Jan. 5, 2017) (estimating discounts between 25 and 50 percent on average).[5]The price is protected from public view by statute and HHS is prohibited from disclosing it in all but a few instances. 42 U.S.C. § 1396r-8(b)(3)(D). The terms of a PPA are not otherwise negotiated or bargained for. Astra USA, Inc. v. Santa Clara Cty., Cal., 563 U.S. 110, 113 (2011). The government may terminate a PPA if it finds that a manufacturer has knowingly and intentionally overcharged a covered entity or has otherwise failed to comply with § 340B. Id. § 1396r-8(b)(4)(B)(v); 61 Fed. Reg. 65, 406, 65, 412-13 (Dec. 12, 1996).[6] In the alternative, the government may impose a CMP on any manufacturer who knowingly and intentionally overcharges a covered entity, up to $5, 000 per overcharge. 42 U.S.C. § 256b(d)(1)(B)(i)(IV); 82 Fed. Reg. at 1, 228 (defining, in part, the statutory terms “overcharge” and “knowingly and intentionally”).

According to Congress, the 340B Program has dual benefits: “enable [covered] entities to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services, ” and ensure affordable prescriptions for the


uninsured/underinsured.[7] H.R. Rep. No. 102-384, pt. 2, at 12 (1992). Likewise, as the GAO recently found, “providers have used the benefit made available through the drug discounts to provide critical health care services to communities with underserved populations that could not otherwise afford [such] services-for instance, by increasing service locations, developing patient education programs, and providing translation and transportation services.” Am. Hosp. Ass'n, et. al., Amici, at 3 (quoting GAO Report, No. 11-836)[8]; Nat'l Ass'n of Comm. Health Ctrs., et al., Amici, at 15-20.[9]

Congress conditioned manufacturers' eligibility for Medicare Part B and Medicaid, two of the nation's largest health insurance programs, [10] on participation in § 340B. 42 U.S.C. § 1396r-8(a)(1). If a manufacturer declines to opt into the 340B Program by signing a PPA with HHS, or runs afoul of its statutory obligations, it risks losing billions of dollars and a “significant portion


of [ ] annual revenue.” Am. Compl., ¶ 28. The 340B Program is considered essential to the country's safety net system for medically vulnerable populations, many more patients rely on it today than in 1992, and it is growing every year. For example, covered entities purchased $12 billion in discounted drugs in 2015, saving approximately $6 billion.[11] Such sales comprised about three percent of the entire U.S. prescription drug market.[12] By 2018, the number of hospitals and associated sites had increased by 3, 000 percent compared to 2005, to 2, 541 hospitals and 26, 641 sites.[13] 743 manufacturers and 12, 722 covered entities participated in all, [14] while discounted drug purchases reached $24 billion that year.[15] The 340B Program is estimated to encompass 40 percent of all U.S. hospitals today and 14 percent of all branded outpatient drug sales, and it is the second largest drug purchasing program behind Medicare Part D. Vandervelde Amici, at 7-8.[16] “[A]lmost half the U.S. pharmacy industry now profits, ”[17] and according to a recent report, drug sales topped


$38 billion in 2020, up 27 percent over 2019 and quadruple the amount in 2014.[18] At the same time, though these numbers appear large, it is important to put them in context. Between 2010 and 2018, the pharmaceutical industry as a whole generated $8.6 trillion in profit. Am. Hosp. Ass'n, et al., Amici, at 5 & n.3 (citation omitted).

B. Guidance History

The present dispute centers on “contract pharmacies, ” which partner with covered entities to dispense 340B-priced drugs off-site. To date, HHS has issued two non-binding guidance documents authorizing covered entities to use contract pharmacy arrangements.

i. The 1996 Guidance

HHS issued the first guidance document in 1996,...

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