Trade Group Sues State of California to Block S.B. 17 Drug Pricing Bill

As an update to a recent Health Law Alert ("California Passes Two Drug Pricing Transparency Laws," 11/20/17), we learned that on December 8, 2017, pharmaceutical industry trade group, Pharmaceutical Research and Manufacturers of America, (PhRMA) sued the State of California to block the implementation of the S.B. 17 on the grounds that the law violates the Commerce Clause, First Amendment, and the Fourteenth Amendment's Due Process Clause. The complaint states that although the law purports to provide accountability for drug pricing, it is really "the political assignment of blame" and "incorrectly and unfairly singles out" manufacturers for public condemnation.

Specifically, the suit alleges that the S.B. 17 requirement that a manufacturer wishing to increase a qualifying product's wholesale acquisition cost (WAC) by 16 percent of more over the defined lookback period may not do so unless it first provides registered purchasers and the State with 60 days' advance notice unconstitutionally interferes with interstate commerce because: (i) it attempts to restrict WAC nationwide; and (ii) in doing so, will create an obligation that results in "stockpiling, opportunities for price coordination, and other burdens on interstate commerce."

PhRMA also asserts that the notice requirement violates the First Amendment by compelling speech that discriminates based on speaker, content, and viewpoint. PhRMA contends that S.B. 17 discriminates based on speaker by "singling out" pharmaceutical manufacturers, discriminates based on content by forcing the notification where no notification would normally be given, and discriminates based on content and viewpoint by requiring manufacturers to state in their announcement of a price increase whether it is justified on a single ground, i.e., a change or improvement in the drug, thereby conveying California's preferred message that this the only legitimate reason for a price increase.

Finally, PhRMA argues that the S.B. 17 is unconstitutionally vague because it does not specify if it applies to WAC increases in the two-year period prior to S.B. 17's effective date. In other words, it leaves unanswered whether price increases—dating back as far as January 2016—should be counted as increases for purposes of determining whether the law's "de facto price freeze" is triggered. In addition, PhRMA also pointed to the lack of clarity regarding whether a manufacturer is required to comply with the 60-day notice requirement prior to the law's effective date of January 1, 2018 as problematic. For example, if a manufacturer wants to increase the price of a drug about the threshold in January 2, 2018 could it do so if it did not provide notice on November 3, 2017?

Quarles & Brady will continue to monitor developments in the pending litigation. The case is Pharmaceutical Research and Manufacturers of America v. Brown et al., case number 2:17-cv-02573, in the U.S. District Court for the Eastern District of California.

For more information, please contact Simone Colgan Dunlap at (602) 229-5510/simone.colgandunlap@quarles.com, Laura D. Pone at (312) 715-5090/laura.pone@quarles.com, or your Quarles & Brady attorney.