On March 31, the Federal District Court in Maryland upheld the Centers for Medicare & Medicaid Services’ (CMS) “new formulation” definition. CMS issued the new definition in its November 2021 final rule under the Medicaid Drug Rebate Program (MDRP), taking effect January 1, 2022.
Based on revised CMS regulations and the recent upholding in Vanda Pharmaceuticals, Inc. v. CMS,* drug companies should consider the procedural and operational implications.
Line Extensions and Alternative Unit Rebates
Under the MDRP, drug manufacturers with prices exceeding the inflation rate are subject to additional Medicaid rebates. The additional per-unit rebate is equal to any excess of a product’s Average Manufacturer Price (AMP) over the baseline quarter inflation-adjusted AMP.
In 2010, to dissuade drug makers from trying to avoid the additional per-unit rebate by altering a product slightly (making it a new drug with a new baseline AMP), Congress created an alternative unit rebate amount (URA). The URA applies to line-extensions of oral dosage innovator BLA or NDA drug products.
Now, drug sponsors who created a line extension product with a new baseline AMP would still have to pay a rebate: either using the normal rebate calculation or the new URA calculation. The URA calculation uses the inflation rebate and baseline AMP of the initial brand name drug.
CMS Defines Line Extension, New Formulation, and Solid Oral Dosage Form
The URA alternative sparked several issues, mainly stemming from the question as to whether a product qualified as a line extension. In response, on December 21, 2020 (effective January 1, 2022), CMS issued a final rule creating regulatory definitions of “line extension,” “new formulation,” and “solid oral dosage form.”
Line Extension
CMS’ final rule defines “line extension” as “a new formulation of the drug, [that] does not include an abuse-deterrent formulation of the drug (as determined by the Secretary)."
New Formulation
CMS’ final rule defines “new formulation” as “a change to the drug, including but not limited to an extended-release formulation or other change in release mechanism, [or] a change in dosage form, strength, route of administration, or ingredients.”
Combination Drugs
The final rule clarified that combination drugs are not necessarily excluded from the “new formulation” definition. In general, new drug/device combinations or new combinations of drugs will not qualify as a new formulation. However, the final rule states, “If an initial brand name listed drug is a combination of two or more drugs, and then a manufacturer begins selling a new formulation of that combination drug, then the new drug satisfies the definition of a new formulation and must be identified as a line extension.”
Solid Oral Dosage Form
The final rule also expanded on FDAs definition of “solid oral dosage form.” Under FDAs definition, “solid oral dosage form” is limited to “capsules, tablets, or similar drug products intended for oral use.” While CMS previously applied FDAs definition, CMS’ final rule now broadens its definition of “solid oral dosage form” to “an orally administered dosage form that is not a liquid or gas at the time the drug enters the oral cavity.”
CMA went on to clarify that the URA line extension alternative applies as long as the initial drug is in solid oral dosage form. Line extensions need not be in solid oral dosage form to qualify for the URA alternative.
The CMS final rule expanded the types of candidate drugs that qualified as line extensions, opening up legal debates regarding FDA/CMS parallels and Congressional intent.
Vanda Pharmaceuticals, Inc. v. CMS
In April 2022, Vanda Pharmaceuticals, Inc. filed a complaint in the Federal District Court for the District of Maryland to contest CMS’s definition of “new formulation.”
In 2014, Vanda gained approval of its Hetlioz (tasimelteon) capsules to treat a rare sleep disorder. In 2020, FDA approved two Vanda products based on this initial drug: (1) an NDA for oral suspension Hetlioz LQ, and (2) a supplemental NDA expanding the indication of Hetlioz capsules. Both new products were approved for use in treating a rare pediatric sleep disorder.
The new products qualified as line extensions under the CMS definition. Vanda’s complaint claimed that the products did not qualify as line extensions, reasoning that:
- A new NDA approval cannot be a line extension
- A line extension must be an oral solid dosage form
- CMS definition of “line extension” falls outside of the meaning of “line extension,” and
- Inclusion of “extended-release formulation” in the statutory definition of “new formulation” suggests Congress intended to target drugs with only slight modifications.
On March 31, 2023, the court rejected Vanda’s arguments and upheld the CMS definition of “new formulation” (Civ. No. MJM-22-977 (Dist. Md. 2023)). The court reasoned that a new NDA-approved product can be a line extension because the definition applies to single source or innovator multi-source drugs (both being drugs approved under NDAs).
The court held that a line extension does not have to be an oral solid dosage form because the “oral solid dosage form” requirement applies only to the single-source or innovator multi-source drug. The court also upheld the meaning of “line extension” as being in agreement with the CMS definition of “line extension” and opined that the broadened CMS interpretation of “new formulation” is consistent with Congress’ intent to lower Medicaid drug costs.
Conflicting Incentives
CMS claims that the new definitions and meanings are not in disagreement with Congressional intent and that Congress would have included a narrow definition of line extension in the statute if it had intended to limit the definition.
Although a broadened CMS interpretation of “new formulation” may be consistent with Congress’ intent to lower Medicaid drug costs, such a broadened definition is a disincentive for innovation. The years of research and development that it takes to gain approval for a new drug can be applied to modifications that lead to treatments for new indications, improve patient convenience, and increase therapeutic compliance. By penalizing promising pathways for medical advances, the incentive to seek new uses and applications for approved drugs is lost.
Implications of Vanda v. CMS
In fiscal year 2021, Medicare Part D drug spending was 2.5 times greater than Medicaid spending. This fact—in addition to the court upholding the CMS final rule—predicts expanded application of drug rebates.
Line extensions play a critical role in new drug life cycle projections. In response to the CMS final rule, drug applicants and sponsors should consider procedural and operational implications for the MDRP and whether a product will qualify as a line extension.
In general, more drugs will qualify as line extensions, subject to the MDRP alternate rebate calculation. Life cycle return predictions must now incorporate increased rebates from new line extensions. Drug makers will need to identify all potential line extension products, re-evaluate the URA calculation, and update rebate prediction methods.
In some cases, drugs with NDA approval may be classified as non-innovator multiple-source drugs instead of single-source or innovator multiple-source drugs.
Regarding strength, a new strength produced or sold after the initial strength will be deemed a line extension subject to the alternative URA calculation. CMS suggests that drug makers consider all drug strengths of all initial drugs per quarter. The original drug is not necessarily defined by its date of approval or the first date of marketing and can vary over quarters.
Combination drugs may qualify as line extensions if an initial brand name listed drug is a combination of two or more drugs, and a manufacturer begins selling a new formulation of that combination drug.
The broadened definition of “solid oral dosage form” increases the types of drug products that may qualify as line extensions. For example, line extensions could now include orally inhaled products, buccal film, or sublingual film (as opposed to only capsules, tablets, or similar drug products intended for oral use).
Importantly, CMS notes that the alternative URA only applies when a corporate relationship exists between the line extension drug manufacturer and the initial listed drug manufacturer.
CMS confirmed that the alternative rebates will not be retroactive. For time periods prior to January 1, 2022, CMS asks that drug makers continue to follow the statutory definitions and make reasonable assumptions in determining whether a product meets the requirements for a line extension.
* Pharmaceutical Law Group P.C. represents Vanda Pharmaceuticals in matters unrelated to the issues raised in Vanda Pharm. v. Ctrs. for Medicare & Medicaid Servs., Civil Action MJM-22-977 (D. Md. Mar. 31, 2023).