Drugmakers aim to strike down Medicare drug-price negotiations at Supreme Court

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Chief Executive Officers of pharmaceutical companies testify before the Senate Finance Committee on “Drug Pricing in America: A Prescription for Change, Part II” February 26, 2019 in Washington, DC. From left to right are Richard A. Gonzalez, chairman and CEO of AbbVie Inc; Pascal Soriot, executive director and CEO of AstraZeneca; Giovanni Caforio, chairman of the board and CEO of Bristol-Myers Squibb Co.; Jennifer Taubert, executive vice president and worldwide chairman of Janssen Pharmaceuticals, Johnson & Johnson; Kenneth C. Frazier, chairman and CEO of Merck & Co. Inc.; Albert Bourla, CEO of Pfizer and Olivier Brandicourt, CEO of Sanofi.
Win Mcnamee | Getty Images News | Getty Images

The pharmaceutical industry is aiming to strike down Medicare’s historic new powers to slash drug prices for seniors through a Supreme Court ruling, legal experts say.

Drugmaker Merck, the U.S. Chamber of Commerce and Bristol Myers Squibb filed separate lawsuits within days of each other this month asking federal courts in Washington, D.C., the Southern District of Ohio, and New Jersey to declare the price negotiations unconstitutional under the First and Fifth amendments.

The lawsuits are the opening salvo in what will go down as a historic and potentially decisive battle over the federal government’s efforts to control rising drug prices.

The Inflation Reduction Act, passed in a narrow party-line vote last year, gave Medicare the power to negotiate prices for the first time in the program’s nearly 60-year history — a watershed moment that the Democratic Party had long fought for.

The pharmaceutical industry views the program as posing a major threat to revenue growth and profits. The companies claim the program will stifle future drug development in the U.S.

Merck fears its blockbuster cancer therapy Keytruda, which generated 35% of the company’s $59 billion in revenue for 2022, will be targeted by the program in the future. The company also worries the federal government will select its Type 2 diabetes drug Januvia, which generated $2.8 billion in revenue in 2022, for negotiations this year.

Drugmaker Abbvie, a member of the Chamber of Commerce’s Dayton, Ohio, chapter, is defending its blood cancer drug Imbruvica, which generated $4.6 billion in revenue last year, or about 8% of its total sales.

And Bristol Myers Squibb is trying protect its blood thinner Eliquis, which brought in $11.8 billion in sales last year, or about 25% of the company’s $46 billion total revenue for 2022.

These are the first lawsuits challenging Medicare’s new powers, but they are unlikely to be the last.

The big drugmakers’ lobby group, the Pharmaceutical Research and Manufacturers of America, told CNBC in a statement that it supports the claims made in the lawsuits.

A spokesperson for PhRMA said the organization is also considering litigation against Medicare. PhRMA’s members include other big drugmakers like Eli Lilly, Pfizer and Johnson & Johnson.

Legal experts and financial analysts who cover the pharmaceutical industry said Merck, the chamber and Bristol Myers Squibb will try to litigate their claims all the way to the high court.

“These lawsuits were written with the Supreme Court in mind,” said Robin Feldman, an expert on intellectual property and health law at the University of California College of the Law in San Francisco.

Nicholas Bagley, a former Justice Department attorney, said the high court is the “big fish.” Any decision striking down the Medicare price negotiations would ultimately have to be made by the justices, said Bagley, former chief legal counsel to Michigan Gov. Gretchen Whitmer.

Chris Meekins, an analyst with Raymond James, noted that the all four attorneys representing Merck previously served as clerks to conservative Supreme Court justices: They clerked for Antonin Scalia, Brett Kavanaugh and Neil Gorsuch.

“That is noteworthy in that it is clear to us that Merck is ready and willing to take this all the way to the Supreme Court if needed,” Meekins wrote in analyst note.

Long legal battle ahead

Merck, the chamber and Bristol Myers Squibb filed their lawsuits ahead of two key deadlines.

Health and Human Services Secretary Xavier Becerra will publish a list by Sept. 1 of the 10 drugs that Medicare has selected for the negotiations. The drugmakers then have to agree to participate and file manufacturing data to the Centers for Medicare and Medicaid Services the following month.

The actual price reductions that come out of the negotiations, which conclude in August 2024, won’t take effect until January 2026.

The companies face severe financial penalties that are several times higher than their drug’s daily revenues if they do not enter the negotiations and comply with the program’s conditions. Drugmakers can avoid the taxes only if they pull their drugs out of Medicare and Medicaid rebate programs.

Meekins said in his analyst note earlier this month that Merck might try to get the federal courts to block the law before the deadlines.

But Bagley noted that Merck and the chamber did not file motions for preliminary injunctions to immediately block the law’s implementation. Bristol Myers Squibb did not either. He said the plaintiffs can’t plausibly claim an immediate injury now because the price cuts wouldn’t go into effect until 2026.

Bagley said the parties could ask for an injunction that is tied to the October deadlines when they sign agreements to participate in the negotiations and start submitting data.

The odds are that the lawsuits will be a long slog, Bagley said. “Any fight over the proper remedy will come at the end of the case, once the legal merits are finally resolved,” he said.

The judge assigned to Merck’s case is Randolph Daniel Moss, who was appointed by former President Barack Obama. The chamber’s case is assigned to Judge Thomas M. Rose, who was appointed by former President George W. Bush.

Bagley said both judges would probably be skeptical of a motion for preliminary injunction tied to the October deadlines, though Rose could perhaps be persuaded to allow it.

Expect more lawsuits this fall

Kelly Bagby, vice president of litigation at the AARP Foundation, said more lawsuits will almost certainly come when HHS publishes the list of 10 drugs in September.

AARP is the influential lobby group that represents people older than age 50. The organization has strongly advocated in favor of Medicare’s new negotiation powers.

Bagby said pharmaceutical companies whose drugs are selected for negotiation will likely ask federal courts for preliminary injunctions to block the law’s implementation when the list publishes in September.

The list of drugs subject to negotiation could include Pfizer‘s Ibrance, Johnson & Johnson‘s Xarelto, Eli Lilly‘s Jardiance, Amgen‘s Enbrel and AstraZeneca‘s Symbicort, among others, according to a March analysis published in the Journal of Managed Care and Specialty Pharmacy.

Pfizer CEO Albert Bourla told Reuters in May that he expects legal action to be taken against Medicare over the negotiations, though he said it is unclear if the drugmakers will be able to stop the law’s implementation before the 2026 cuts go into effect.

Eli Lilly, in a statement to CNBC, said the company shares the companies’ concerns and will evaluate the negotiations implementation to “determine any possible actions.”

Bagby also believes the issue is heading for the Supreme Court. She said the companies will probably scatter their cases around the country — like Merck, the chamber and Bristol Myers Squibb did — in an attempt to get federal appellate courts to issue competing decisions.

The Merck case in Washington, D.C., district court would move on appeal to the D.C. Circuit Court of Appeals, which has a majority of judges appointed by Democratic presidents.

The chamber’s case would be appealed to the U.S. Sixth Circuit Court of Appeals, which has a majority of judges appointed by Republican presidents, particularly Donald Trump.

And Bristol Myers Squibb’s case would head to the U.S. Third Circuit Court of Appeals, which also has a slight majority of judges appointed by Republicans.

If circuit court decisions on the matter contradict one another, the Supreme Court would step in to decide the issue, Bagby said.

White House press secretary Karine Jean-Pierre said the Biden administration is confident it will succeed in the courts.

“There is nothing in the Constitution that prevents Medicare from negotiating lower drug prices,” Jean-Pierre said in a statement.

And Beccera added that “we’ll vigorously defend the President’s drug price negotiation law, which is already lowering health care costs for seniors and people with disabilities.”

“The law is on our side,” Becerra said in a statement.

Patents at the center of the fight

Feldman, the intellectual property and health law expert, said the success or failure of the pharmaceutical industry’s attempt to take down Medicare’s new powers will hinge to a large degree on whether the courts consider patents a form of private property.

Merck claims in its complaint that the negotiations violate the Fifth Amendment, which prohibits the government from taking private property for public use without just compensation. Bristol Myers Squibb made an identical argument in its complaint.

Merck and Bristol Myers Squibb argue that Medicare is taking pharmaceutical companies’ private property — patented drug products — and coercing them to accept a price that is much lower the market value of the medications. The chamber made broader due process claims under the Fifth.

Feldman said the Fifth was written with property such as land in mind. Patents differ substantially from land because they are issued by the federal government, she said. And, she noted, drug prices are driven to a significant degree by the value derived from government-issued patents.

The Supreme Court has not ruled that patents are private property under the Fifth’s “takings clause,” Feldman said, pointing to the 2018 case Oil States Energy Services v. Greene’s Energy Group.

Justice Clarence Thomas said in his majority opinion in the case that the high court has long recognized patents as a matter involving “public rights,” but the court hasn’t definitively explained the difference between these government-derived public rights and private rights.

“Applying the takings clause to patents would be like the shot heard round the world — it would be an extraordinary shift and the companies will have a heavy lift to convince the courts that those words apply to patents,” Feldman said.

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