CMS Definition of “New Formulation” Upheld in Federal Court

On March 31, the Federal District Court for the District of Maryland upheld CMS’s definition of a “new formulation” under the Medicaid Drug Rebate Program (MDRP).  Vanda Pharmaceuticals, Inc. v. CMS, Civ. No. MJM-22-977 (Dist. Md. 2023).  By way of background, manufacturers are subject to an additional per-unit Medicaid rebate if they increase their prices greater than the rate of inflation.  The amount of the additional rebate is the excess (if any) of a drug’s current Average Manufacturer Price (AMP) over the inflation-adjusted AMP for a statutorily specified baseline quarter.  In 2010, concerned that manufacturers were making minor changes to a drug merely so that it could be characterized as new covered outpatient drug with an updated baseline AMP, Congress added to the statute an alternative rebate for line extensions of oral dosage form innovator (i.e., NDA or BLA) drugs.  Under that provision, a manufacturer that introduces a line extension with a new baseline AMP must pay the greater of the rebate calculated in the ordinary manner, or an alternative rebate calculated in a manner that is tied to the inflation rebate of the predicate drug (and therefore indirectly to the predicate drug’s baseline AMP).  Under the statute, a line extension is a ‘new formulation” that is not an abuse-deterrent formulation.

Over ten years after this statutory amendment, on December 31, 2020, CMS finalized a broad definition of “new formulation” as “any change to the drug, provided that the new formulation contains at least one active ingredient in common with the initial brand name listed drug.”  Examples in the regulation include extended-release formulations, new strengths, dosage forms, routes of administration, ingredients, and combinations.  See our memo summarizing CMS’s regulation here.

In 2014 Vanda introduced Hetlioz (tasimelteon) capsules to treat a rare sleep disorder.  In 2020, Vanda obtained approval of an NDA to market Hetlioz LQ, an oral suspension of tasimelteon, to treat children with Smith-Magenis Syndrome (SMS), a neurodevelopmental disorder that causes sleep disturbances (among other things), and Vanda also obtained approval of an sNDA to expand the indication of Hetlioz capsules to include adults with SMS.  Vanda is also conducting clinical studies of a long-acting injectable form of its marketed drug Fanapt tablets, an anti-seizure drug.  All of these products are line extensions under CMS’s definition.  Vanda therefore filed a complaint in the Maryland Federal District Court in April 2022 to challenge CMS’s definition on Administrative Procedure Act grounds.  The essentials of Vanda’s complaint were that (1) a drug approved under a new NDA cannot be a line extension; (2) a line extension, like its predicate drug, must be an oral solid dosage form; (3) CMS’s definition exceeds the plain meaning of “line extension”; and (4) Congress intended to target only slight alterations of a drug, as evidenced by the sole example in the statute of “an extended-release formulation”.

The court rejected all of these objections, either citing the plain meaning of the statute or applying Chevron deference to CMS’s interpretations of ambiguities.  As to Vanda’s argument that a drug approved under a full NDA cannot be a line extension, the Court reasoned that the line extension provision applies to single source drugs or innovator multiple source drugs, both of which are defined, in part, as a drug approved under an NDA.  Accordingly, the Court concluded that a line extension can be a new drug product approved under an NDA.

The court next dismissed Vanda’s claim that, in order for the alternative rebate to apply, the line extension (in addition to the predicate drug) must be an oral solid dosage form.  (Neither Vanda’s Hetlioz LQ nor Fanapt injectable is an oral solid dosage form.)  The alternative rebate provision applies to “a line extension of a single source drug or an innovator multiple source drug that is an oral solid dosage form,” leaving a question as to whether the underscored text qualifies “line extension,” “single source drug”, and innovator multiple source drug” or merely the latter two.  In an extended grammar lesson explaining the “rule of the last antecedent,” the Court held that CMS could permissibly construe “oral solid dosage form” to refer only to the latter two terms, so that the line extension does not have to be an oral solid dosage form.  The Court also rejected Vanda’s attempt to define “line extension” by reference to the dictionary definitions of each word.

Finally, the court addressed Vanda’s claim that CMS’s definition of line extension was overly broad, exceeding Congress’ intent to capture only slight alterations to existing drugs.  This objection echoed a criticism that had been expressed by industry ever since CMS’s proposed rule in 2012.  After all, the statute gives only the example of “an extended-release formulation,” and from that CMS has fabricated a broad net that captures everything from new strengths to new ingredients to new combinations and indications.  Nevertheless, the Court found that a narrow interpretation would be inconsistent with Congress’ intent to reduce Medicaid drug costs.  Somewhat more convincingly, the court also reasoned that Congress recently used the identical statutory language in the August 2022 Inflation Reduction Act (more on this below), and declined to further define “new formulation” despite its presumed knowledge of CMS’s previous Medicaid interpretation.

Absent a successful appeal by Vanda, this decision will have implications going beyond the MDRP.  Beginning this fiscal year (October 1, 2022 through September 30, 2023), the Inflation Reduction Act (IRA) imposes inflation rebates for Medicare Part D drugs whose price increases exceed the rate of inflation. See our summary of the IRA drug provisions here.  The IRA directs CMS to establish a formula for determining the inflation rebate for line extensions consistent with the formula under the MDRP, and defines “line extension” in a manner substantially identical to the MDRP definition.  In a guidance issued on February 9, CMS did as instructed, tying the inflation rebate for a line extension drug to that of initial drug, as under the MDRP.  Given that drug spending under Medicare Part D is over 2.5 times that of Medicaid ($98 billion and $38.1 billion, respectively, in FY 2021), the impact on drug manufacturer rebates of CMS’s line extension definition, and the Court’s failure to overturn it, will be that much magnified.