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Commonwealth v. TAP Pharmaceutical Products, Inc.

Supreme Court of Pennsylvania

June 16, 2014

COMMONWEALTH OF PENNSYLVANIA
v.
TAP PHARMACEUTICAL PRODUCTS, INC.; ABBOTT LABORATORIES; ASTRAZENECA PLC; ASTRAZENECA, HOLDINGS, INC.; ASTRAZENECA PHARMACEUTICALS LP; ASTRAZENECA LP; BAYER AG; BAYER CORPORATION; SMITHKLINE BEECHAM CORPORATION D/B/A GLAXOSMITHKLINE; PFIZER, INC.; PHARMACIA CORPORATION; JOHNSON & JOHNSON; ALZA CORPORATION; CENTROCOR, INC.; ETHICON, INC.; JANSSEN PHARMACEUTICAL PRODUCTS, L.P.; MCNEIL-PPC, INC.; ORTHO BIOTECH, INC.; ORTHO BIOTECH PRODUCTS; L.P.; ORTHO-MCNEIL PHARMACEUTICAL, INC; AMGEN, INC.; IMMUNEX CORPORATION; BRISTOL-MYERS SQUIBB COMPANY; BAXTER INTERNATIONAL INC.; BAXTER HEALTHCARE CORPORATION; IMMUNO-U.S., INC.; AVENTIS PHARMACEUTICALS, INC.; AVENTIS BEHRING, L.L.C.; HOECHST MARION ROUSSEL, INC., BOEHRINGER INGELHEIM CORPORATION; BOEHRINGER INGELHEIM PHARMACEUTICALS, INC.; BEN VENUE LABORATORIES; BEDFORD LABORATORIES; ROXANE LABORATORIES; SCHERING-PLOUGH CORPORATION; WARRICK PHARMACEUTICALS CORPORATION; SCHERING SALES CORPORATION; DEY, INC., DONNA A. BOSWELL, ESQ., ANN M. VICKERY, ESQ., AND JOSEPH A. YOUNG, ESQ., Intervenors. APPEAL OF: BRISTOL-MYERS SQUIBB COMPANY

Argued May 7, 2013

Re-submitted April 25, 2014

Page 351

Appeal from the decision of the Commonwealth Court (Opinion re Post-Trial Motions of the Commonwealth and Bristol-Myers Squibb Company) dated August 31, 2011 at No. 212 MD 2004. Robert E. Simpson, Judge, Bonnie Brigance, President Judge, Barry F. Feudale, Judge.

For Joseph A. Young, INTERVENOR: Peter F. Vaira, Esq., Vaira & Riley, P.C.

For Bristol-Myers Squibb Company, APPELLANT: Jennings Fuqua Durand, Esq., Steven M. Edwards, Esq., William T. McEnroe, Esq., Robert C. Heim, Esq., Albert Suh, Esq., Dechert LLP; Stephen Allen Loney Jr., Esq., Hogan & Hartson, LLP; C. Michael Moore, Esq., Sonnenschein Nath & Rosenthal, LLP; David Newmann, Esq., Jack Mentzer Stover, Esq., Jayson R. Wolfgang, Esq., Buchanan Ingersoll & Rooney PC; Lyndon M. Tretter, Esq., James S. Zucker, Esq., Ceylan A. Ayasli, Esq.

For Amgen, Inc., APPELLEE: Steven Barley, Esq., Frank Richard Emmerich Jr., Esq., James J. Rohn, Esq., James J. Rohn, Esq., Conrad O'Brien PC, Kelleen McGinnis Scott, Esq., Joseph H. Young, Esq.; Kelleen McGinnis Scott, Esq.; Jennifer A. Walker, Esq.; Joseph H. Young, Esq.

For Phizer, Inc., Pharmacia Corporation, APPELLEE: Dana Elizabeth Becker, Esq., Maire Ellen Donovan, Esq., Abby Jane Elgart, Esq., Barry L. McCoy Jr., Esq., Erica June Smith-Klocek, Esq., Megan L. Traversari, Esq., Morgan Lewis & Bockius, L.L.P.

For Commonwealth of Pennsylvania, APPELLEE: Joseph Stephen Betsko, Esq., James A. Donahue, Esq., Kathleen Granahan Kane, Esq., PA Office of Attorney General; William O. Crutchlow, Esq., John M. Elliott, Esq., Dean Richard Phillips, Esq., Elliott Greenleaf & Siedzikowski, P.C.; Donald E. Haviland Jr., Esq., Christina Marie Philipp, Esq., Haviland Hughes, LLC; Norman Wesley Marden, Esq.; Judith Pinsof Meyer, Esq., J.P. Meyer Associates; William H. Platt II, Esq., Platt Fleischaker, LLP.

For Immunex Corporation, APPELLEE: Frederick Edward Blakelock, Esq., Gibbons P.C.; Eric Wilson Sitarchuk, Esq., Ballard Spahr Andrews & Ingersoll, L.L.P.

For TAP Pharmaceutical Products, Inc., APPELLEE: John W. Boyle, Esq., Matthew Renwick Divelbiss, Esq., John Daniel Goetz, Esq., Jones Day; Alexandra Makosky, Esq., Pepper Hamilton, L.L.P.; Joseph Uhl Metz., Esq., Kilworth Paxson, L.L.P.; Thomas B. Schmidt III, Esq.

For Bayer Corporation, APPELLEE: Amy Beth Carver, Esq.

For Boehringer Ingelheim Corporation, APPELLEE: Lauren O. Casazza, Esq., Brian P. Kavanaugh, Esq., Jane S. Park, Esq., Helen E. Witt, Esq., Kirkland & Ellis, LLP, Alan Klein, Esq., Duane Morris, L.L.P.; Anne M. Sidrys, Esq.

For Johnson & Johnson Defendants, APPELLEE: Walter W. Cohen, Esq., Kevin Joseph Kehner, Esq., Obermayer Rebmann Maxwell & Hippel, L.L.P.

For Baxter International Inc., APPELLEE: Joseph Gerard DeRespino, Esq., DeRespino & Dougher, P.C.

For Aventis Pharmaceuticals, Inc., APPELLEE: Brian T. Feeney, Esq., Greenberg Traurig, LLP; Bryan Lynn Norton, Esq., Lydecker, Lee, Behar, Berga & deZayas; Brett A. Schlossberg, Esq., Fox Rothschild, L.L.P.

For AstraZeneca Pharmaceuticals LP, APPELLEE: John G. Harkins Jr., Esq., Harkins Cunningham, LLP.

For Schering Sales Corporation, Warrick Pharmaceuticals Corporation, APPELLEE: Michael Brian Hayes, Esq., Montgomery, McCracken, Walker & Rhoads, L.L.P.

For Pharmacia Corporation, APPELLEE: Susannah R. Henderson, Esq., Morgan Lewis & Bockius, L.L.P.

For Bayer Corporation, APPELLEE: Lisa Ann Mathewson, Esq., Welsh & Recker, P.C.

For Bayer AG, APPELLEE: Bridget Elizabeth Montgomery, Esq., Eckert Seamans Cherin & Mellott, LLC.

For Merck & Co., Inc., APPELLEE: Lathrop Barrere Nelson III, Esq., Richard L. Scheff, Esq., Montgomery, McCracken, Walker & Rhoads, L.L.P.

BEFORE: MR. JUSTICE SAYLOR. CASTILLE, C.J., SAYLOR, EAKIN, BAER, TODD, MCCAFFERY, STEVENS, JJ.

OPINION

Page 352

OPINION ANNOUNCING THE JUDGMENT OF THE COURT

MR. SAYLOR, JUSTICE

This case is among a number of civil actions brought by state attorneys general against pharmaceutical companies nationwide challenging the propriety of prescription drug pricing, in particular, as it impacts third-party reimbursement for brand-name drug purchases subsidized by government social welfare programs. The Commonwealth has centered its claims upon alleged overpayments tied to the use of an industry benchmark figure known as " AWP" in government reimbursement formulas. While many issues of concern have been raised about the Commonwealth's approach to this litigation and the judgment it has obtained, our present decision to overturn the monetary component of that judgment is grounded on the Commonwealth's failure, by any measure, to offer a rational accounting for the billion dollars in rebate monies which Commonwealth agencies received from the drug manufacturers it has haled into court.

I. Background

A. General Overview

The Commonwealth's Department of Public Welfare (" DPW" ) and its Department of Aging (" DOA" ) each administer programs using public funds to subsidize purchases of prescription drugs by qualified persons with low incomes and/or disabilities. DPW maintains a cost-sharing relationship with the federal government under Title XIX of the federal Social Security Act, 42 U.S.C. § § 1396 to 1396w-5, also known as the Medicaid Act, to provide necessary medical care to indigent persons. See 62 P.S. § § 441.1 to 449 (containing the enabling provisions for the Commonwealth's Medical Assistance Program).[1] DOA operates the Pharmaceutical Assistance Contract for the Elderly (" PACE" ), offering financial assistance in prescription drug purchases to low-income, elderly citizens.[2]

Page 353

Per the relevant aspects of these programs, private entities, including physicians and pharmacies (herein termed " providers" ), purchase branded drugs from wholesalers and administer and dispense them to program beneficiaries. The providers then submit claims to DOA and DPW, which tender reimbursement per statutory and regulatory formulas, respectively. See generally 72 P.S. § 3761-509(6); 55 Pa. Code § 1150.51.

In the salient time period (1991 through 2004), state statutes and regulations relied upon industry-reported figures -- average wholesale prices or " AWPs" -- as a key benchmark in these reimbursement formulas. See 72 P.S. § 3761-502; 55 Pa. Code § 1121.2. AWPs were based upon price reports made by prescription drug manufacturers, including defendant Bristol Myers Squibb Company (" BMS" ), to industry publishing services. See TAP, 36 A.3d at 1211 (explaining that " [s]ince the late 1960s, nearly every branded prescription drug sold in the United States has an AWP, which is published in commercial pricing compendia like Red Book, First DataBank, and Medispan" (citing In re Pharm. Indus. AWP Litig., 491 F.Supp.2d 20, 32 (D. Mass. 2007), aff'd, 582 F.3d 156 (1st Cir. 2009))). Generally, drug manufacturers reported AWPs at 20 or 25 percent above wholesale acquisition costs (" WACs" ),[3] or they simply transmitted their WACs to the publishers, which calculated the AWPs according to the same markup conventions. Despite the self-reporting dynamic, however, neither Congress, nor the Pennsylvania General Assembly, nor the Commonwealth executive branch provided a concrete definition for the AWP conception or otherwise sought to impose meaningful restrictions on their content.[4]

By 1991, there was a wealth of information available to state officials and to the public at large confirming that AWPs served as a " list" or " book" price, so that the term " average wholesale price" was (or had become) a misnomer. See, e.g., State of Louisiana v. DHHS, 905 F.2d 877, 880 (5th Cir. 1990) (reflecting a federal government agency's observation in the 1970s that " AWP data are frequently inflated" and " should not be equated with the estimated acquisition costs for a drug." (quoting 40 Fed. Reg. 34518 (Aug. 15, 1975))).[5] The disconnect may have initially related to price incentive mechanisms utilized by drug manufacturers to enhance market share, such as discounts and rebates, and narrowing profit margins for wholesalers on account of increased efficiencies and intense competition. See Pharm. Indus. AWP Litig., 491 F.Supp.2d at 33; TAP, 36 A.3d at 1213 (quoting a pharmaceutical company as recognizing that AWPs were " the legacy of a distribution system which ceased to exist in the early 1980s" ); id. (asserting that " although the market changed, the mechanism by which AWPs were set did not change, so there became

Page 354

an increasing disconnect between reality and price setting" ).

Great controversy ensued concerning the degree to which state agencies apprehended the evolving AWP convention and whether providers were being overpaid because of its use in program reimbursement formulas. In response, the federal and state governments implemented various pricing reforms and cost-containment measures within reimbursement systems. For example, DPW and DOA eventually routinized a practice of discounting AWPs in the Medical Assistance and PACE reimbursement formulas, so that instead of paying the listed AWP price to providers, they paid a rate, for example, of AWP minus 10 percent (" AWP-10" ).[6]

In addition, since 1990, federal law has required that, for each brand-name drug, manufacturers must pay rebates to state Medicaid programs. See 42 U.S.C. § 1396r-8. To enable the government to calculate those rebates, manufacturers must submit Average Manufacturer Prices (" AMPs" ) and " best prices" to the federal Center for Medicare and Medicaid Services (" CMS" ) on a regular basis. See id. § 1396r-8(b)(3). AMPs are defined as " the average price paid to the manufacturer for the drug in the United States by wholesalers for drugs distributed to the retail pharmacy class of trade [after deducting] customary prompt pay discounts." Id. § 1396r-8(k)(1). " Best price" generally means the lowest price available from the manufacturer during the rebate period, inclusive of discounts and other rebates. Id. § 1396r-8(c)(1)(C)(ii). The main rebate is calculated by multiplying the total units of a drug purchased under a state program in the rebate period by the greater of: 1) the difference between AMP and best price for the drug, or 2) a minimum rebate percentage of the AMP, currently 23.1 percent. See id. § 1396r-8(c)(1). Additional rebates are provided, See, e.g., id. 1396r-8(c)(2), and states have the ability to impose others. The General Assembly also adopted a rebate system for PACE, very similar to the Medical Assistance regime, in 1991. See 72 P.S. § § 3761-702 to 3761-707.[7]

Despite such measures, state attorneys general, among others, claimed pharmaceutical companies were manipulating price data to create a " spread" between prices actually paid by providers and the amount of reimbursement the providers obtained from government social welfare programs. See, e.g., State v. Abbott Labs., 2013 WI App 31, 346 Wis.2d 565, 829 N.W.2d 753, 759 (Wis. Ct. App. 2013) (discussing spread marketing in the context of a successful action by the State of Wisconsin against a drug manufacturer); AstraZeneca LP v. State, 41 So.3d 15, 27 & n.8 (Ala. 2009) (same, in the

Page 355

setting of litigation by the State of Alabama against a drug manufacturer which ultimately was unsuccessful). Drug manufacturers were accused of " marketing the spread," to enhance their own market share over competitors, by encouraging physicians to prescribe their products based on profitable returns to their practices. See, e.g., id.[8]

The pharmaceutical companies offered many defenses, denying that they employed unethical marketing practices, with some also positing that they merely submitted accurate WACs to the pricing services and did not control the subsequent calculation and reporting of AWPs. See, e.g., TAP, 36 A.3d at 1214. The drug manufacturers also emphasized that state legislatures and agencies intentionally provide profits to providers to ensure access for program beneficiaries to the medications they need. See, e.g., id. at 1231. In all events, the companies maintained that it was well known among all associated with the industry that AWPs served only as a suggested list price establishing a basis for negotiation. See, e.g., AstraZeneca, 41 So.3d at 29-33 (reasoning that Alabama could not have reasonably relied on alleged fraudulent misrepresentations about AWPs by a pharmaceutical manufacturer, given that state officials knew of the disparity between AWP and WAC, they had ample data concerning actual drug acquisition costs by pharmacies, and the state nevertheless always utilized reimbursement formulas it deemed appropriate).

B. The Present Litigation

In 2004, the Commonwealth commenced the present litigation against BMS and thirteen other pharmaceutical companies on behalf of DPW and PACE, consistent with other actions referenced above. The Commonwealth claimed that the defendants engaged in deceptive practices between 1991 and 2008 by causing inflated AWPs for their brand-name drugs to be published in industry publications.[9]

The Commonwealth advanced three common-law causes of action, i.e., negligent misrepresentation, fraud, and civil conspiracy; one equitable claim in the nature of unjust enrichment; and one statutory claim asserting multiple acts in violation of the Unfair Trade Practices Consumer Protection Law.[10]

In its most simplistic form, the Commonwealth contended that AWP, per the plain meaning of the words underlying the acronym, suggests that the figure is in fact ...


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