Health Law Daily Drug manufacturer entitled to retroactive adjustment of rebates it paid to states
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Wednesday, March 25, 2020

Drug manufacturer entitled to retroactive adjustment of rebates it paid to states

By Jeffrey H. Brochin, J.D.

The Medicaid Drug Rebate Program in effect during the relevant period should have been construed by CMS to treat duplicate drugs subject to the lower rebate rate.

A federal district court in the District of Columbia has granted the motion for summary judgment filed by STI Pharma LLC (STI), the maker of Sulfatrim® pediatric suspension, in a case involving a question of statutory construction as to the proper classification of the drug. Although properly classified as a "non-innovator multiple source" drug when it was acquired by STI, the subsequent CMS filings erroneously identified the drug as an "innovator multiple source" drug, thereby adversely affecting the Medicaid rebate that STI was obligated to remit to the states under the Medicaid drug rebate program (STI Pharma, LLC v. Azar, March 23, 2020, Moss, R.).

MDRP. In 1990, Congress created the MDRP to offset Medicaid costs incurred by the federal government and the states for outpatient drugs provided to Medicaid recipients. The program required that drug manufacturers enter into rebate agreements with HHS and agree to pay rebates to the states in order to receive state Medicaid payments for covered outpatient drugs.

The statute established rebate rates for three different categories of drugs: (1) single source; (2) innovator multiple source; and (3) non-innovator multiple source. The MDRP required drug manufacturers to pay higher rebate rates to the states for drugs falling into the first and second categories than for those considered non-innovator drugs.

Dispute over Sulfatrim. In 2011 STI purchased the right to market Sulfatrim from Actavis Mid Atlantic, LLC (Actavis). During the period that Actavis marketed Sulfatrim, it categorized the drug as a non-innovator multiple source drug. However, when STI began to market the drug in 2013, it submitted the statutorily required information about Sulfatrim to CMS and categorized the drug as an innovator multiple source drug. As a result, STI paid rebates to the states at the higher rate that corresponded to innovator multiple source drugs.

In February 2016, following the publication of CMS’ 2016 final rule, STI asked CMS to reclassify Sulfatrim as a non-innovator multiple source drug under the narrow exception for duplicate drugs originally approved under paper NDAs. CMS granted that request prospectively, effective April 1, 2016, but refused to grant STI’s request to have the reclassification made retroactive from 2013. STI filed suit alleging that CMS’ refusal to correct the categorization retrospectively was arbitrary and capricious, not in accordance with law, and in excess of the agency’s statutory authority in violation of the Administrative Procedure Act (APA). Both parties moved for summary judgment, which the court granted to STI.

Drug approval pathways. Prior to the enactment of what became known as the Hatch-Waxman Amendments (P.L. 98-417), drugs like Sulfatrim were approved under the "paper new drug application" process that the FDA used to evaluate certain non-pioneer drugs. However, following passage of Hatch-Waxman, the FDA approval process typically utilizes one of two paths: (1) the new drug application (NDA) process, or (2) the abbreviated new drug application (ANDA) process. Drug manufacturers have two options under the NDA process: they can either submit evidence based on their own clinical trials demonstrating the drug’s safety and effectiveness, or they can rely on literature produced by others that demonstrates the drug’s safety and effectiveness.

For ANDA applications, drug manufacturers seeking approval of generic versions of previously approved drugs need not submit clinical studies proving the drug’s safety or effectiveness but may, instead, demonstrate that the generic drug is the chemical equivalent and bioequivalent of the previously approved branded drug. Furthermore, prior to Hatch-Waxman, the FDA employed another drug approval process called the paper NDA process. However, the FDA abandoned the paper NDA process for duplicate drugs after enactment of Hatch-Waxman because the new statutory scheme subsumed that process.

Prior version of MDRP controlling. Although Congress amended the MDRP statute in relevant respects in 2019, the instant parties agreed that the prior version of statute—which went unchanged in relevant respects from its enactment in 1990 until the recent amendments in 2019—governed the present dispute. However, the construction of that statute as to classifying duplicate drugs from that era was the central issue before the court.

To further cloud the issue, in 2007, CMS published a final rule that addressed the definition of an "innovator multiple source" drug, noting that "by statute, an innovator multiple source drug is a drug that was originally marketed under an original NDA approved by the FDA. We do not believe that it would be consistent with the statute to modify the definition to include drugs marketed under an ANDA." CMS therefore created the non-innovator distinction.

Resolving any ambiguity. STI argued that Sulfatrim was a non-innovator multiple source drug because the FDA had approved the drug based on its equivalence to Bactrim Suspension whose NDA was approved by the FDA before it approved the paper NDA for Sulfatrim. Sulfatrim and Bactrim Suspension are equivalent drugs, and the "original" NDA was granted for Bactrim Suspension—not Sulfatrim. CMS agreed that this was a permissible reading of the MDRP statute, and, that such was the interpretation that CMS itself adopted in the 2016 Rule.

The court agreed with STI, finding that there was no dispute that Sulfatrim was approved by the FDA as "a generic version of the Bactrim product" that had already been approved by the FDA and marketed by its manufacturer, and they therefore concluded that the version of the MDRP statute in effect during the relevant period was best read to treat duplicate drugs approved pursuant to paper NDAs as non-innovator multisource drugs subject to the lower rebate rate.

For the foregoing reasons, the court granted STI’s motion for summary judgment and remanded the case back to CMS.

The case is No. 1:18-cv-01231-RDM.

Attorneys: Kinsey S. Reagan (Kleinfeld Kaplan & Becker LLP) for STI Pharma, LLC. Sean Michael Tepe, U.S. Department of Justice, for Alex M. Azar, II.

Companies: STI Pharma, LLC

MainStory: TopStory CMSNews FDCActNews DrugBiologicNews GenericDrugNews HatchWaxmanNews MedicaidNews PrescriptionDrugNews

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