A Winning Streak? IRA’s Drug Price Negotiation Program Survives Again

On March 1, 2024, Judge Colm F. Connolly of the District of Delaware granted the government’s motion for summary judgment in the first substantive ruling on the constitutionality of the Inflation Reduction Act (“IRA”).  The court first held that AstraZeneca Pharmaceuticals LP and AstraZeneca AB’s (collectively, “AstraZeneca”) lacked Article III standing to challenge the Center for Medicare and Medicaid Services’ (“CMS”) guidance under the Administrative Procedure Act (“APA”).  The court then rejected AstraZeneca’s challenge to the IRA as an unconstitutional taking on the merits because, in its view, AstraZeneca “ha[d] not identified a property interest protected by the Constitution that is put in jeopardy by the Program.”[1] The court’s opinion comes on the eve of oral argument in a closely-followed related case in the District of New Jersey and marks a significant development in IRA jurisprudence.

Background

The IRA authorizes the Secretary of Health and Human Services (“Secretary”) to establish a Drug Price Negotiation Program (“Program”) through CMS.[2] Under the Program, the Secretary (through CMS) selects drugs for negotiation by identifying a “universe” of “qualifying single source drugs” and then narrowing it down to “negotiation-eligible drugs,” i.e., “the 50 qualifying single source drugs with the highest total Medicare Part D expenditures over a specified 12-month period.”[3] Afterwards, CMS “rank[s] the negotiation-eligible drugs according to total expenditures” before it selects and publishes a list of selected drugs.[4] Once the list is published, manufacturers of those drugs “must decide whether to enter into an agreement with CMS to negotiate the maximum fair price of the drug.”[5]

To help implement the Program, CMS released a guidance document during the spring of 2023 that applies only to the 2026 price period.[6] AstraZeneca’s Farxiga product, which is used to treat Type II diabetes, is one of the selected drugs for the 2026 price period negotiation.[7] AstraZeneca has noted that 17 generic manufacturers have received tentative approval for generic versions of Farxiga, one or more of which will begin competing with Farxiga “sometime between October 2025 and Summary 2026.”[8]

On August 25, 2023, AstraZeneca filed suit and raised three claims: the first two “allege that CMS’s Guidance violates the [APA]” and the last “alleges that the IRA is unconstitutional and violates AstraZeneca’s Fifth Amendment right to due process.”[9] As discussed below, the court rejected AstraZeneca’s arguments and granted the government’s cross-motion for summary judgment.

AstraZeneca’s APA Claims Dismissed for Lack of Jurisdiction

The Court dismissed AstraZeneca’s APA challenges to the CMS guidance because “AstraZeneca has failed to identify a cognizable injury-in-fact that is caused by the guidance and could be redressed by vacatur of the guidance.”[10]  AstraZeneca had alleged that it was injured in four separate ways: (1) by reduced incentives to look for additional uses for Farxiga; (2) simultaneous generic competition and mandatory pricing based on the timing of anticipated generic competition; (3) negative impacts on AstraZeneca’s decision-making for other drugs; and (4) uncertainty about the value of Farxiga.  The court rejected the first, second, and third alleged injuries as too vague, hypothetical, and speculative for constitutional standing.  With respect to the fourth alleged injury (uncertainty), the court reasoned that the only uncertainty was the outcome of the lawsuit and that AstraZeneca “cannot create standing to file a suit by filing the suit.”

AstraZeneca’s Due Process Claim Fails as Matter of Law

The court flat out rejected AstraZeneca’s Fifth Amendment claim on the merits.  The court began by identifying AstraZeneca’s alleged property interest, noting that “the property interest [that] AstraZeneca contends merits protection under the Fifth Amendment’s due process clause is the ability to sell its drugs to Medicare at prices above the ceiling prices and negotiated maximum fair prices established by the IRA.”[11] While AstraZeneca also alleged a protected interest in “patent rights,” the court found that AstraZeneca “never identifie[d] a patent or explain[ed] how the IRA affects or could affect a patent right.”[12]

The court concluded that AstraZeneca’s claim to a taking of its right to sell Farxiga at higher prices failed as a matter of law because participation in the Program is voluntary and “AstraZeneca does not have a protected property interest in selling drugs to the Government at prices the Government will not agree to pay.”[13] While “[t]he IRA offers a powerful incentive – the opportunity to sell products to more than 49 million Medicare and Medicaid beneficiaries – to induce drug manufactures to participate in the Program and negotiate with CMS maximum fair prices for selected drug,” it “is not, as AstraZeneca contends, ‘a gun to the head,’” but rather “a potential economic opportunity that AstraZeneca is free to accept or reject.”[14]

Takeaways

Judge Connolly’s decision bodes poorly for the many still-pending challenges to the IRA, as other judges may look to his 47-page opinion for guidance.  Many of those still-pending challenges raise similar claims and arguments.  For example, an amicus brief filed by Fresenius Kabi, a company that develops both generic small molecule and biosimilar products, in another lawsuit identifies some of the same harms of the IRA that Judge Connolly found insufficiently concrete for standing, including that the IRA “actively discourage[s] [brand companies] from investigating new indications for existing products,” which can then negatively affect the ability of generic and biosimilar manufacturers from seeking approval for off-patent indications.[15]  Going forward, litigants still pursuing similar claims as AstraZeneca would do well to address Judge Connolly’s criticisms of the vagueness of AstraZeneca’s injuries by being prepared with specific quantification of the alleged harms to their business and their timing. 

Like AstraZeneca’s challenge, many of the other pending IRA suits raise Fifth Amendment takings claims.  While Judge Connolly found no protectable property right in simply charging Medicare and Medicaid existing high prices, he avoided ruling on whether a property right exists by virtue of AstraZeneca’s patents because AstraZeneca had failed to make a showing of which patents were impacted or their value.  Future challengers should consider putting up a more robust showing on patent valuation and the IRA’s impact on it to avoid AstraZeneca’s fate.   

The timing of this opinion is also significant as it comes on the eve of oral arguments in the District of New Jersey with respect to four out of the seven pending remaining cases.  It follows three weeks behind the Western District of Texas’s dismissal of another IRA challenge for lack of subject matter jurisdiction and venue.  Stay tuned as we continue to monitor these developments.