Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 1 of 32
`
`UNITED STATES DISTRICT COURT
`FOR THE SOUTHERN DISTRICT OF NEW YORK
`
`REGENERON PHARMACEUTICALS,
`INC.,
`
`20-10488
`Case No. _______________
`
`Plaintiff,
`
`v.
`
`ECF Case
`
`UNITED STATES DEPARTMENT OF
`HEALTH AND HUMAN SERVICES,
`
`ALEX M. AZAR II, in his official capacity
`as Secretary of the United States Department
`of Health and Human Services,
`
`CENTERS FOR MEDICARE AND
`MEDICAID SERVICES, and
`
`SEEMA VERMA, in her official capacity as
`the Administrator of the Centers for
`Medicare and Medicaid Services,
`
`Defendants.
`
`COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF
`
`Regeneron Pharmaceuticals, Inc. (Regeneron) brings this complaint for declaratory and
`
`injunctive relief against Defendants United States Department of Health and Human Services
`
`(HHS); Alex M. Azar II, in his official capacity as Secretary of HHS; Centers for Medicare &
`
`Medicaid Services (CMS); and Seema Verma, in her official capacity as Administrator of CMS.
`
`In support thereof, Regeneron states the following:
`
`NATURE OF THIS ACTION
`
`1.
`
`The U.S. pharmaceutical industry is one of the marvels of the modern world. Every
`
`year the industry develops new treatments for diseases that have afflicted humans for millennia.
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 2 of 32
`
`Even now, during a worldwide pandemic, U.S. pharmaceutical companies have been working
`
`around-the-clock in an unprecedented effort to discover vaccines, therapies, and other products to
`
`combat SARS-CoV-2, the virus that causes COVID-19.
`
`2.
`
`The success of the U.S. pharmaceutical industry and the scientific advances that
`
`benefit patients have not come about by chance. A new drug can cost years of time and literally
`
`billions of dollars to develop. To encourage the pharmaceutical industry to incur those
`
`extraordinary costs, Congress has provided intellectual property protections but left drug pricing
`
`largely to the law of supply and demand, thus creating incentives for drug developers to expend
`
`the resources necessary for cutting-edge innovation. The resulting access that patients have to life-
`
`saving medicines is a testament to Congress’ wisdom.
`
`3.
`
`Many other countries, by contrast, have taken a different path, thus depriving
`
`patients access to innovative medicines. Because the pharmaceutical industry is characterized by
`
`enormous “sunk” costs (namely, the prior costs of discovering and developing new drugs) but low
`
`“marginal” costs (namely, the ongoing costs of manufacturing existing drugs), foreign
`
`governments—especially those with less innovative pharmaceutical industries—often dictate drug
`
`pricing that allows drug companies to recoup marginal costs but not sunk costs. Yet the only reason
`
`many drugs even exist is because they were developed in the United States, which rewards
`
`innovation and allows drug companies to charge prices that reflect total costs. If every country,
`
`including the United States, gave short shrift to sunk costs, there would be few innovative drugs
`
`to price as the incentives to develop new drugs would decrease if not disappear outright. Congress
`
`thus has repeatedly rejected proposals to model U.S. drug pricing on other countries’ approaches.
`
`4.
`
`Despite Congress’ considered and consistent judgment not to follow foreign
`
`countries’ approaches to drug pricing, on July 24, 2020, the President announced four executive
`
`
`
`2
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 3 of 32
`
`orders addressing pharmaceutical drug pricing. According to the President, “the four
`
`orders … will completely restructure the prescription drug market”—and the fourth is “the
`
`granddaddy of them all.” This fourth order, “the order on favored nations,” would be
`
`“transformative” and require Medicare to “purchase drugs at the same price as other countries
`
`pay.” According to the President, the effect of the orders would be “very dramatic,” “very
`
`shocking,” and “sweeping”—resulting in “the most far-reaching prescription drug reforms ever
`
`issued.”
`
`5.
`
`The Administration released the text of the first three orders alongside the
`
`President’s July 24 announcement. But it elected to “hold” the “transformative” fourth order out
`
`of public view, only issuing it on September 13. That order directed HHS to “implement” a rule
`
`whereby Medicare would, for certain drugs, pay “no more than the most-favored-nation price.”
`
`6.
`
`On November 20, 2020, HHS, acting through CMS, issued the rule previewed in
`
`July and September: a “Most Favored Nation (MFN) Model” for Medicare Part B drug pricing
`
`(the “MFN Rule”). The 258-page MFN Rule establishes an “MFN Model” under which, for the
`
`50 drugs generally making up the highest levels of Medicare Part B spending, the federal
`
`government will reimburse a healthcare provider for the sale of a drug not at the average sale price
`
`for that drug in the United States—as Congress has directed by statute—but only at the lowest
`
`price paid for that drug by any other country that is a member of the Organisation for Economic
`
`Cooperation and Development (OECD) with a GDP per capita at least sixty percent of the U.S.
`
`GDP per capita. The “MFN Model” applies nationwide, is mandatory for all providers and
`
`suppliers in the Medicare program, and will be in effect for seven years beginning January 1, 2021.
`
`7.
`
`In announcing the MFN Rule, the President called the rule “groundbreaking,”
`
`“unprecedented,” and a rule that “will transform the way the U.S. government pays for drugs.”
`
`
`
`3
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 4 of 32
`
`The President acknowledged that “[n]obody has ever done this” before.
`
`8.
`
`Upon issuance of the MFN Rule, it became clear why “[n]obody has ever done this”
`
`before: the MFN Rule, while certainly “transformative,” “groundbreaking,” and “the granddaddy”
`
`of “the most far-reaching prescription drug reforms ever issued,” is also unlawful.
`
`9.
`
`First, the 258-page “transformative,” “groundbreaking,” and “unprecedented”
`
`MFN Rule was issued without the notice-and-comment process required by the Administrative
`
`Procedure Act and the Medicare Act. Despite the fact that the MFN Rule, by design, will have
`
`sweeping effects on millions of stakeholders in the American healthcare system—including
`
`healthcare providers, patients, and pharmaceutical manufacturers—and impact the Nation’s
`
`economy by billions of dollars, Defendants did not properly invite, much less consider, public
`
`input before issuing the rule. Defendants have instead claimed that they need not comply with the
`
`notice-and-comment requirement, an assertion that does not withstand scrutiny.
`
`10.
`
`Second, the lone source of statutory authority Defendants have invoked to issue the
`
`MFN Rule is an obscure provision created by the Affordable Care Act. But the United States is
`
`currently telling the Supreme Court that the entire Affordable Care Act should be struck down. If
`
`Defendants stand by the arguments that the Solicitor General has made to the Supreme Court, then
`
`there is no conceivable statutory authority whatsoever for the MFN Rule. Regardless, the cited
`
`provision does not remotely support Defendants’effort to “transform” the Nation’s pharmaceutical
`
`drug market. It merely establishes the Center for Medicare and Medicaid Innovation (CMMI) and
`
`provides that CMMI may “test” new “payment and service delivery models.” Nothing in that
`
`limited statutory mousehole begins to justify the elephantine and “transformative” MFN Rule or
`
`otherwise permit Defendants to unilaterally replace the Nation’s longstanding, congressionally
`
`mandated, market-driven methodology for pharmaceutical pricing.
`
`
`
`4
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 5 of 32
`
`11.
`
`Third, the MFN Rule is arbitrary and capricious. In their quest to force a nationwide
`
`pricing regimen, Defendants failed to create a control group to assess the effects of the MFN
`
`“model,” and they failed to address critical considerations, including the rule’s adverse effects on
`
`innovation, the pharmaceutical industry’s reliance on longstanding drug pricing law, and the fact
`
`that some companies—like Regeneron—do not control the foreign pricing of products affected by
`
`the MFN Rule. The MFN Rule is also arbitrary and capricious because Defendants’ real
`
`motivation for issuing the rule was animus against the pharmaceutical industry.
`
`12.
`
`Fourth, interpreting the modest provision invoked by Defendants as authorizing the
`
`Executive Branch to “transform” the pricing of prescription drugs by overriding the
`
`congressionally established pricing system violates constitutional separation-of-powers principles.
`
`The MFN Rule also violates the First Amendment, the nondelegation doctrine, due process, and
`
`the Foreign Commerce Clause, and constitutes a taking without just compensation.
`
`13.
`
`Because the MFN Rule was issued without following proper procedure, is in excess
`
`of Defendants’ statutory and constitutional authority, and is arbitrary and capricious, it is unlawful
`
`and this Court should enjoin it. As Congress has recognized on numerous occasions, the
`
`pharmaceutical industry’s long-term ability to innovate and find new cures and treatments for
`
`disease depends on the existence of a domestic pricing system that allows drug developers to
`
`recoup the full costs of drugs, including their development costs. Because the MFN Rule, by
`
`design, will prevent that from happening, judicial review is essential to protect the future of this
`
`important industry and the billions of people it serves.
`
`PARTIES
`
`14.
`
`Plaintiff Regeneron is a New York corporation with its headquarters in Tarrytown,
`
`New York. Regeneron was founded in 1988 as a biopharmaceutical company committed to
`
`developing new medicines for people with serious and rare diseases. The physician-scientists that
`
`
`
`5
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 6 of 32
`
`make up Regeneron’s board of directors and executive leadership team established and maintained
`
`Regeneron’s research-driven approach from 1988 to the present. Since Regeneron’s founding, its
`
`board of directors—comprised of its founding scientists, industry experts, and Nobel laureates—
`
`has consistently pushed the boundaries of scientific excellence and discovery with a shared
`
`commitment to transforming lives. Currently, nine members of Regeneron’s 12-member Board
`
`hold doctorate-level degrees in medical or scientific fields, and the majority are members of the
`
`National Academy of Sciences. Regeneron spent 20 years and $1.3 billion conducting research
`
`before bringing its first drug to market in 2008. Since then, the company has developed seven
`
`FDA-approved medicines, while continually reinvesting in the development of innovative and
`
`urgently needed drugs. One of Regeneron’s FDA-approved medicines is EYLEA® (aflibercept)
`
`Injection (EYLEA), the leading FDA-approved therapeutic for treating wet age-related macular
`
`degeneration (a major cause of blindness) and other retinal diseases.
`
`15.
`
`Defendant United States Department of Health and Human Services is a federal
`
`cabinet-level department tasked with administering various healthcare-related statutes. It is
`
`headquartered at 200 Independence Ave., S.W., Washington, DC, 20201.
`
`16.
`
`Defendant Alex M. Azar II is Secretary of Health and Human Services. Secretary
`
`Azar is sued in his official capacity. He maintains offices at 200 Independence Ave., S.W.,
`
`Washington, DC, 20201. Secretary Azar formally approved the MFN Rule on behalf of HHS.
`
`17.
`
`Defendant Centers for Medicare & Medicaid Services is an agency within the
`
`Department of Health & Human Services that administers the Medicare and Medicaid programs.
`
`It is headquartered at 7500 Security Boulevard, Baltimore, MD, 21244.
`
`18.
`
`Defendant Seema Verma is Administrator of Centers for Medicare & Medicaid
`
`Services. Administrator Verma is sued in her official capacity. She maintains offices at 27500
`
`
`
`6
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 7 of 32
`
`Security Boulevard, Baltimore, MD, 21244. Administrator Verma formally approved the MFN
`
`Rule on behalf of CMS.
`
`JURISDICTION AND VENUE
`
`19.
`
`This Court has subject-matter jurisdiction pursuant to 28 U.S.C. §1331. This action
`
`arises under, among other federal statutes, the Administrative Procedure Act (APA), 5 U.S.C.
`
`§§702 and 706, and the Declaratory Judgment Act, 28 U.S.C. §§2201-02. These provisions allow
`
`Regeneron to pursue both statutory and constitutional challenges to the MFN Rule. The All Writs
`
`Act, 28 U.S.C. §1651, grants this Court authority to enter preliminary relief to preserve the status
`
`quo pending its review of the merits of Regeneron’s claims.
`
`20.
`
`Venue is proper in this district pursuant to 28 U.S.C. §1391(e) because Regeneron
`
`is headquartered and resides in this district and its injured property is located in this district.
`
`I.
`
`Pharmaceutical Pricing in the United States
`
`FACTUAL ALLEGATIONS
`
`21.
`
`The U.S. pharmaceutical industry has rightly been labeled a modern miracle.
`
`Because of today’s drugs, many diseases that have afflicted mankind since time out of mind have
`
`been defeated or are in significant retreat. Indeed, at this very moment, pharmaceutical companies
`
`like Regeneron are working around-the-clock to develop, manufacture, and distribute vaccines and
`
`therapies against SARS-CoV-2, the virus that causes COVID-19.
`
`22.
`
`Congress has deliberately created a legal system that encourages pharmaceutical
`
`companies to invest the extraordinary sums necessary to develop new drugs, a process that can
`
`take years of time and billions of dollars. Congress has provided patent protection to drug
`
`developers and then largely left drug pricing to the law of supply and demand. Drug manufacturers
`
`in the United States thus are generally free to charge a price that reflects not only the “marginal”
`
`costs of their products, but also the “sunk” costs associated with drug development.
`
`
`
`7
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 8 of 32
`
`23.
`
`Pharmaceutical developers and manufacturers like Regeneron generally sell drugs
`
`like those at issue here according to a “buy and bill” model. They first sell the drugs to wholesalers,
`
`who then sell those drugs to pharmacies, hospitals, doctors, and other healthcare providers. At the
`
`end of the chain, patients pay for the drugs either out of pocket or via insurance, often including
`
`government-funded insurance. Purchasers throughout the distribution chain (such as, for example,
`
`wholesalers or pharmacies) regularly attempt to negotiate for lower prices, for instance by joining
`
`in a group purchasing agreement or group purchasing organization.
`
`24.
`
`The following chart, prepared by CMS,
`
`illustrates U.S. drug pricing:
`
`25.
`
`Because each step along the distribution chain involves a change of title, each
`
`purchaser of a drug along the chain typically pays a different price. A manufacturer’s price to a
`
`wholesaler is typically based on that drug’s Wholesale Acquisition Cost (WAC) which is defined
`
`8
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 9 of 32
`
`as “the manufacturer’s list price” to “wholesalers or direct purchasers,” “not including prompt pay
`
`or other discounts, rebates or reductions in price.” 42 U.S.C. §1395w-3a(c)(6)(B). The WAC,
`
`however, typically is higher than the actual price that a wholesaler charges. This is so because of,
`
`among other things, manufacturer rebates and discounts that reduce acquisition costs downstream.
`
`26.
`
`Insurance is a key part of the U.S. healthcare market, including for drugs. Indeed,
`
`either private or government insurance will often pay a significant portion of the cost of a drug.
`
`Patients, by contrast, typically will pay a smaller portion via an out-of-pocket payment. That out-
`
`of-pocket payment is determined by a patient’s deductible, as well as his or her co-payments and
`
`co-insurance. A co-payment is a fixed cost that an individual must pay for a particular drug, while
`
`co-insurance is a percentage of a drug’s price that an individual must cover.
`
`27.
`
`In the United States, approximately half of the population receives private health
`
`insurance through their employers, roughly 15% of the population is uninsured or has some other
`
`form of private insurance, and the rest of the population receives government health insurance.
`
`Approximately 20% of the population receives Medicaid and 15% receives Medicare. See, e.g.,
`
`Health
`
`Insurance Coverage of
`
`the Total Population, Kaiser Family Found.,
`
`https://www.kff.org/other/state-indicator/total-population; Edward R. Berchick et al., Health
`
`Insurance Coverage in the United States: 2017, U.S. Census Bureau (Sept. 12, 2018),
`
`https://www.census.gov/content/census/en/library/publications/2018/demo/p60-264.html.
`
`28.
`
`In terms of expenditures, Medicare is the country’s largest government health
`
`insurer, accounting for 20% of all national health spending. See, e.g., Juliette Cubanski et al., The
`
`Facts on Medicare Spending and Financing, Kaiser Family Found., (Aug. 20, 2019),
`
`https://www.kff.org/medicare/issue-brief/the-facts-on-medicare-spending-and-financing. Those
`
`eligible for Medicare include individuals aged 65 years or older, as well as certain persons with
`
`
`
`9
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 10 of 32
`
`disabilities. Medicare contains several “parts”—Parts A, B, C, and D. Part A covers inpatient
`
`hospital stays, care in a skilled nursing facility, hospice care, and some home health care. Part B
`
`covers certain doctors’ services, outpatient care, medical supplies, and preventive services. Part C
`
`is an alternative to “original Medicare.” Part D adds prescription drug coverage to various
`
`insurance plans. Medicare.gov, What’s Medicare?, https://www.medicare.gov/what-medicare-
`
`covers/your-medicare-coverage-choices/whats-medicare. Both Part B and Part D cover drugs, but
`
`Part B drug coverage existed before Congress created Medicare’s Part D drug benefit and tends to
`
`cover drugs that are unusually complicated or treat especially serious diseases. See, e.g., Dept. of
`
`Health & Hum. Servs., Drug Coverage under Different Parts of Medicare, (May 2020),
`
`https://www.cms.gov/outreach-and-education/outreach/partnerships/downloads/11315-p.pdf.
`
`29.
`
`In 2003, Congress changed the nation’s reimbursement policy for Medicare drugs.
`
`Before 2003, reimbursement was largely based on a drug’s AWP. Now, however, Congress has
`
`mandated use of Average Sales Price (ASP) reimbursement. See 42 U.S.C. §1395w-3a; 42 C.F.R.
`
`§414.800 et seq. As its name suggests, the amount of ASP reimbursement is based on the average
`
`of most sales prices for a drug in the United States, including privately-negotiated discounts or
`
`rebates. ASP reimbursement rates, therefore, are often lower than list prices.
`
`30.
`
`ASP is calculated as follows. First, one must calculate a “manufacturer’s sales [of
`
`a drug, in dollars] to all purchasers [other than exempt sales] in the United States … in the calendar
`
`quarter.” 42 U.S.C. §1395w-3a(c)(1)(A). That number is then divided by “the total number of
`
`such units of such drug … sold by the manufacturer in such quarter.” Id. §1395w-3a(c)(1)(B).
`
`That is, ASP is the average net price at which the manufacturer sells a drug during a calendar
`
`quarter to all U.S. purchasers, excluding exempt sales. Exempt sales, in turn, include sales to
`
`various government entities or otherwise discounted by various provisions of federal law. Id.
`
`
`
`10
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 11 of 32
`
`§1395w-3a(c)(2). Manufacturers must report ASP data to CMS for most Part B drugs.
`
`Manufacturers report this data each quarter. Under federal law, the reimbursement rate equals
`
`106% of a volume-weighted ASP, which CMS calculates based on manufacturers’ reported ASPs
`
`and quarterly sales volumes. Id. §1395w-3a(c)(1). Since 2013, following budget sequestration,
`
`the reimbursement rate equals 104.3% of ASP. See, e.g., Dept. of Health & Hum. Servs.,
`
`Comparing Average Sales Prices and Average Manufacturer Prices for Medicare Part B Drugs:
`
`An Overview of 2013 (Feb. 2015), http://oig.hhs.gov/oei/reports/oei-03-14-00520.pdf.
`
`31.
`
`Accordingly, under Medicare Part B, Congress has determined that reimbursement
`
`rates should be based on the actual prices that drug developers and manufacturers charge on the
`
`open market, without price controls that artificially limit what drug developers and manufacturers
`
`can charge, for instance by tying prices to a drug developer’s marginal costs. In other words, under
`
`Medicare Part B, government insurance payments for drugs are generally not materially different
`
`from what private insurers pay in terms of the amount per drug that manufacturers and developers
`
`receive for the drugs that they sell. This means that the price charged for a drug can reflect the full
`
`costs of the drug, including marginal and sunk costs.
`
`32.
`
`Congress has repeatedly rejected efforts to impose price controls on drugs in the
`
`United States, including reimbursement rates for Part B drugs. Congress has refused to impose
`
`price controls because it recognizes that although price controls may be politically popular at first
`
`blush, such a policy would not, in fact, benefit the United States, given the deleterious effects price
`
`controls would have on supply and innovation.
`
`33.
`
`Congress’ decision to leave drug pricing largely up to the law of supply and
`
`demand, without price controls, has resulted in tremendous health benefits to the public. Nearly
`
`7,000 drugs are currently in development around the world, with more than half of that
`
`
`
`11
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 12 of 32
`
`development occurring in the United States. The United States’ approach to drug pricing thus has
`
`created a seedbed for innovation, with significant benefits to those living today and for future
`
`generations. As the U.S. Council of Economic Advisers, a group of government economists, has
`
`pointedly noted, lowering reimbursement rates for drugs in the United States “makes better health
`
`costlier in the future by curtailing innovation.” Council of Economic Advisers, Reforming
`
`Biopharmaceutical Pricing at Home and Abroad (Feb. 2018), https://www.whitehouse.gov/wp-
`
`content/uploads/2017/11/CEA-Rx-White-Paper-Final2.pdf.
`
`II.
`
`Pharmaceutical Pricing in Other Nations
`
`34.
`
`In the United States, drug developers are free to charge prices that allow them to
`
`recoup both sunk and variable costs. Many other countries, however, have policies that make it
`
`difficult if not impossible for drug developers to recoup their sunk costs. During his 2019 State of
`
`the Union address, the President referred to this dynamic as “global freeloading,” arguing that
`
`foreign countries do not pay a proportionate share of the costs necessary to develop drugs, but
`
`instead leave the United States to shoulder that burden alone.
`
`35. Many foreign governments directly provide health care to individuals within their
`
`geographic boundaries. This means that governments or government-controlled entities are the
`
`principal purchaser of healthcare products, including drugs. Because these governments and
`
`government-controlled entities act as monopsonists (i.e., the single purchaser) or near-
`
`monopsonists, they regularly can dictate prices for healthcare products, including drugs, as a
`
`condition of market access. Because drug developers cannot continue to sell drugs if they cannot
`
`at least recoup their marginal costs, foreign governments regularly set a price that is at or above
`
`marginal cost but below total cost. That is, foreign governments set prices that do not reflect the
`
`sunk costs necessary to develop a drug in the first place.
`
`
`
`
`
`12
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 13 of 32
`
`36.
`
`As the U.S. Council of Economic Advisers has explained:
`
`[I]n price negotiations with manufacturers, foreign governments with centralized
`pricing exploit the fact that once a drug is already produced, the firm is always
`better off selling at a price above the marginal cost of production and making a
`profit, regardless of how small, than not selling at all. Thus, the foreign government
`can insist on a price that covers the marginal production cost—but not the far
`greater sunk costs from years of research and development—and firms will
`continue to sell to that country.
`
`Reforming Biopharmaceutical Pricing at Home and Abroad at 14.
`
`37.
`
`Foreign governments also have indirect tools to set prices below the free-market
`
`price. For instance, foreign governments often require international reference pricing, a “system
`
`whereby a country states that they will pay no more than the price paid by another country or a
`
`basket of countries.” Jason Shafrin, International Reference Pricing, Healthcare Economist (July
`
`21, 2015), https://www.healthcare-economist.com/2015/07/21/international-reference-pricing.
`
`This means that if a drug developer sells a drug at one price in a poorer country (where residents
`
`may not be able to afford a price that includes both sunk and marginal costs), they may be required
`
`to also sell the drug at the same price in a wealthier country. Absent such indirect price controls,
`
`a drug developer could set prices in each region according to ordinary supply and demand
`
`conditions in that region. Accordingly, the result of international reference pricing is also prices
`
`that do not reflect the sunk costs necessary to develop the drug.
`
`38.
`
`Foreign governments also regularly impose therapeutic reference pricing. This
`
`essentially means new medicines must be priced similarly to old medicines. See, e.g., Jason
`
`Shafrin, Cancer drug pricing
`
`in Europe, Healthcare Economist
`
`(Nov. 14, 2016),
`
`https://www.healthcare-economist.com/2016/11/14/cancer-drug-pricing-in-europe/ (“The pricing
`
`considers both patented and generic drugs and generally compares drugs to therapeutic
`
`equivalents.”). Older medicines, however, have, by definition, been in the marketplace longer,
`
`thus giving their developers more time to recoup sunk costs. Older drugs therefore are often sold
`
`
`
`13
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 14 of 32
`
`with prices set above marginal costs but with little to no concern about sunk costs. New medicines,
`
`by contrast, require new investments. The predictable consequence of therapeutic reference
`
`pricing thus is also prices that do not incorporate the sunk costs required to innovate.
`
`39.
`
`Foreign governments may also decide to cut out the drug developer altogether. For
`
`instance, they may require compulsory licensing, whereby drug developers have no choice but to
`
`license their drugs to government-controlled manufacturers. See, e.g., Jason Shafrin,
`
`Pharmaceuticals
`
`in Developing Countries, Healthcare Economist
`
`(May 18,
`
`2008),
`
`https://www.healthcare-economist.com/2008/05/18/pharmaceuticals-in-developing-countries/
`
`(“Brazil has ‘threatened to invoke compulsory licensing (a legal mechanism that, in effect,
`
`legitimises such trampling [of patent rights]) to browbeat a foreign drugs firm into offering huge
`
`discounts.’”). The threat of compulsory licensing, moreover, may be used as a negotiating ploy to
`
`force drug developers to charge prices that do not cover sunk costs. Similarly, foreign governments
`
`may discriminate against U.S. companies, treating them less favorably than their domestic
`
`competitors.
`
`40.
`
`By directly and indirectly forcing drug developers to set prices below total costs,
`
`these and other measures by foreign governments may lead to drug shortages (as the amount
`
`demanded at the artificially low price will exceed the amount supplied at that price) and discourage
`
`investment, as rational drug developers will not invest the immense time and resources necessary
`
`to develop drugs if the associated sunk costs cannot be recouped. As a group of over 150
`
`economists recently explained, “setting price controls at below-market rates leads to shortages,”
`
`and “can lead to a reduction in patient access to certain drugs, less investment in the research and
`
`development of new drugs, and cost-shifting that raises the prices of other therapeutics.
`
`Ultimately, patients … suffer as cures are delayed or entirely undeveloped, while taxpayers [are]
`
`
`
`14
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 15 of 32
`
`denied potential savings from drugs that could obviate more expensive treatments in government
`
`healthcare programs, and the investment of capital in development of new medicines.” Letter to
`
`Alex M. Azar,
`
`Sec’y
`
`of Health & Hum.
`
`Servs.
`
`(Dec.
`
`6,
`
`2018),
`
`https://www.ntu.org/library/doclib/2018/12/Economists-Letter-to-HHS-1.pdf.
`
`41.
`
`These concerns are backed by evidence. It is well-documented that price controls
`
`result in both less innovation and greater shortages. For instance, nearly 90% of new drugs
`
`launched around the world since 2011 are available in the United States; by contrast, Germany and
`
`the United Kingdom only have access to 60% of such drugs. See Comments of Pharmaceutical
`
`Research and Manufacturers of America at 5 (Dec. 2018), https://www.phrma.org/-
`
`/media/Project/PhRMA/PhRMA-Org/PhRMA-Org/PDF/P-R/PhRMA_IPIModelComments.pdf.
`
`The situation is even worse in Canada and France, where less than half of these drugs are available.
`
`See id. And even when new drugs do become available in foreign markets, there often have been
`
`significant delays. See id. (“International reference pricing has been shown to contribute to launch
`
`delays, reduce product availability, and reduce research and development of new treatments and
`
`cures.”). These differences have life-or-death consequences; for example, “[t]he 5-year survival
`
`rate for all cancers is 42 percent higher for men and 15 percent higher for women in the United
`
`States than in Europe.” Id. at 7. Similarly, researchers have concluded that “implementing price
`
`setting policies in the United States would reduce life expectancy among Americans age 55 to 59
`
`years old by 0.5 years in 2030 and 0.7 years in 2060.” Id.
`
`III.
`
`The October 2018 Proposed International Pricing Index Rule
`
`42.
`
`On October 30, 2018, CMS issued an advance notice of proposed rulemaking for a
`
`model linking reimbursement prices for certain drugs under the Medicare Part B program to an
`
`“international pricing index”—the “IPI Rule.” 83 Fed. Reg. 54546 (Oct. 30, 2018).
`
`43.
`
`Under the IPI Rule, the federal government would have surveyed drug prices from
`
`
`
`15
`
`
`
`

`

`Case 7:20-cv-10488-KMK Document 1 Filed 12/11/20 Page 16 of 32
`
`a list of 14 purportedly economically similar countries and then set a reimbursement rate for a drug
`
`based on the average price those countries pay for the drug, rather than the average-sales-price
`
`methodology that Congress mandated.
`
`44.
`
`The IPI Rule would not have applied to the entire United States. Rather, it was
`
`directed to Part B drugs that are separately reimbursable in the Medicare system in certain parts of
`
`the country.
`
`45.
`
`In the advance notice of proposed rulemaking, CMS invited a “general solicitation
`
`of comments” regarding a potential IPI approach. It expressly noted that any IPI approach it
`
`ultimately promulgated would be “implement[ed] through notice and comment rulemaking.” It
`
`stated that it was “considering issuing a proposed rule in the Spring of 2019 with the potential
`
`model to start in Spring 2020.”
`
`46.
`
`The IPI Rule was sharply criticized, and it ultimately died on the vine. CMS never
`
`even advanced to issuing a notice of proposed rulemaking regarding the rule.
`
`47.
`
`Instead, in January 2019, the President asserted in his State of the Union address
`
`that “[i]t’s unacceptable that Americans pay vastly more than people in other countries for the
`
`exact same drugs, often made in the exact same place,” and he “ask[ed] Congress to pass legislation
`
`that finally takes on the problem of global freeloading.”
`
`48.
`
`Congress did not enact any such legislation.
`
`IV.
`
`The President’s July and September 2020 Announcements Regarding an MFN Rule
`
`49.
`
`On July 24, 2020—just three-and-a-half months before the presidential election—
`
`the President announced fou