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Prelude to the Ruling

The 340B drug discount program requires pharmaceutical manufacturers to offer to sell their products at significant discounts to safety net providers called “covered entities.” In 1996, the Health Resources and Services Administration (HRSA) issued guidance authorizing covered entities to enter into a contract pharmacy arrangement with a single third-party contract pharmacy, to which the manufacturer would ship 340B medications but bill the covered entity. In 2010, HRSA issued revised guidance permitting covered entities to enter into an unlimited number of contract pharmacy arrangements.

Unhappy with growing participation in the 340B program by covered entities using multiple contract pharmacies and locations, beginning in 2020, some manufacturers began to impose distribution limitations on contract pharmacy arrangements. For example, AstraZeneca’s policy dictated that 340B pricing would not apply to drugs dispensed through contract pharmacies except for instances in which covered entities did not have their own onsite dispensing pharmacy. Sanofi and Novo Nordisk similarly sought to restrict 340B drug shipments to contract pharmacies with one exception: they agreed to ship to an unlimited number of contract pharmacies if the covered entitles furnished pharmacy claims data using their 340B ESP tools.

In May 2021, HRSA sent warning letters to these three manufacturers, forcing the manufacturers to resume shipping to all contract pharmacies or risk violating federal law. The drug manufacturers sued in response. The district courts sided with the manufacturers, ruling that HRSA could not enforce its 2010 contract pharmacy policy.

The district court rulings hinged on verbiage in Section 340B(a)(1) of the Public Health Service Act. That Section states that manufacturers that have entered into pharmaceutical pricing agreements with HHS “shall offer” covered outpatient drugs for purchase by 340B program covered entities. The manufacturers contended that “offer” meant only that 340B drugs had to be made available for purchase by a covered entity, not that they had to deliver 340B drugs wherever the covered entities requested. In contrast, the government argued that “offer” imposed a duty on manufacturers to sell the drugs to any covered entity that wished to purchase them, regardless of where the covered entities wanted the drugs shipped. The district courts agreed with the manufacturer’s definition and the government appealed to the Third Circuit.

The Third Circuit’s Ruling

On January 30, 2023, in Sanofi Aventus U.S., LLC v. HHS, the Third Circuit agreed with the district courts and ruled in favor of the drug manufacturers in a single consolidated appeal. In their ruling, the Third Circuit rejected the government’s argument that “offer” mandates that manufacturers deliver 340B drugs wherever covered entities want them delivered. Instead, while Section 340B requires manufacturers to “offer” drugs at a discounted price to covered entities, Section 340B’s text does not specify how a manufacturer should deliver the drugs. Therefore, Section 340B(a)(1) cannot be read to require manufacturers to deliver 340B drugs whenever and wherever covered entities demand—i.e., the section does not require delivery to an unlimited number of contract pharmacies.

The Impact for 340B Contract Pharmacy Programs

The practical impact of this ruling is that it permits continued manufacturer restrictions on covered entities’ use of contract pharmacies. However, the ruling is limited to the Third Circuit’s geographical reach, which includes Pennsylvania, New Jersey, and Delaware.

As of this ruling, roughly 21 drug manufacturers impose similar restrictions to AstraZeneca, Sanofi, and Novo Nordisk regarding contract pharmacy shipments. The Third Circuit ruling may incentivize more manufacturers to limit 340B shipments to only one contract pharmacy if the covered entity lacks its own pharmacy. Covered entities, in response, may struggle to provide needed services to their patients.

If you want to learn more about how the Third Circuit’s ruling may impact you as a covered entity, contact Daphne Kackloudis at dlkackloudis@bmdllc.com or Jordan Burdick at jaburdick@bmdllc.com