Background
Section 340B of the Public Health Service Act requires pharmaceutical manufacturers participating in federal drug programs to offer covered outpatient drugs to eligible healthcare providers (“covered entities”) at steeply discounted prices—sometimes as low as $0.01. When Section 340B was enacted in 1992, few covered entities had in-house pharmacies, so HHS permitted them to partner with third-party “contract pharmacies” for drug distribution. The contractual relationship treats the pharmacy as an agent of the covered entity, which retains title to the medication.
In 2010, HHS issued guidance allowing covered entities to partner with unlimited contract pharmacies. This sparked explosive growth: the number of contract pharmacies increased from approximately 1,300 in 2010 to around 23,000 by 2019. As contract pharmacy use expanded, drug manufacturers like Novartis responded by restricting the delivery of 340B drugs to only an in-house pharmacy or a single contract pharmacy per covered entity. HHS issued an advisory opinion in 2020 stating manufacturers must honor all authorized contract pharmacies, but after the Third and D.C. Circuits sided with manufacturers, HHS withdrew the opinion in 2021.
In response, 22 states enacted legislation prohibiting manufacturers from restricting contract pharmacy participation. Missouri Senate Bill 751 is one such law, prohibiting manufacturers from denying or restricting delivery of 340B drugs to any pharmacy authorized by a covered entity, unless prohibited by HHS. Novartis challenged S.B. 751 as unconstitutional under the dormant Commerce Clause and preemption doctrines, seeking preliminary injunctive relief.
The Court’s Holding
The Eighth Circuit affirmed the district court’s denial of Novartis’s motion for preliminary injunction on dormant Commerce Clause grounds. The court rejected Novartis’s extraterritoriality argument, finding that S.B. 751 regulates only the delivery of 340B drugs to Missouri-based covered entities and contract pharmacies, not out-of-state transactions between manufacturers and wholesalers. While the law may incidentally affect interstate commerce, it lacks the specific impermissible extraterritorial effect that triggers dormant Commerce Clause invalidation, distinguishing it from earlier cases like Styczinski and Frosh. The court also rejected Novartis’s discrimination argument, noting that S.B. 751 does not facially discriminate against out-of-state manufacturers and applies equally to all pharmaceutical companies regardless of origin.
Under Pike balancing—the test for nondiscriminatory laws with only incidental effects on interstate commerce—the court held that Novartis failed to show the burden on commerce was “clearly excessive in relation to the putative local benefits.” Novartis argued that S.B. 751 and similar laws in 21 other states create an unconstitutional patchwork of varying regulatory regimes, but the court rejected this approach, citing Exxon Mobil Corp. v. Governor of Maryland for the proposition that the mere possibility of differing state regulations is insufficient to overcome Pike balancing. The court also confirmed that Pike balancing survives the Supreme Court’s decision in National Pork Producers Council v. Ross, noting that six Justices retained the test and a majority approved its application even when balancing economic burdens against noneconomic benefits.
Addressing preemption, the court affirmed the district court’s dismissal of Novartis’s patent law and field preemption claims, finding no conflict between S.B. 751 and federal law or the 340B statutory scheme. Novartis did not show likelihood of success on the merits, suffered no irreparable harm, and the balance of equities weighed against preliminary injunctive relief.
Key Takeaways
- States may regulate the delivery of pharmaceuticals to in-state entities without violating the dormant Commerce Clause, even when those regulations incidentally affect interstate commerce and national markets.
- The principal-agent relationship between covered entities and their contract pharmacies means drug manufacturers cannot impose restrictions that conflict with a covered entity’s designation of authorized contract pharmacies, at least at the state regulatory level.
- The “patchwork” concern—that multiple states enacting similar legislation creates regulatory burden—does not survive Pike balancing; compliance costs alone are insufficient to invalidate an otherwise permissible state law.
- Drug distribution regulation (allocation of where drugs go) is distinct from drug pricing regulation; while courts have invalidated state price controls under the dormant Commerce Clause, distribution allocation may receive greater deference.
Why It Matters
This decision reinforces state authority to regulate pharmaceutical distribution within their borders and validates a growing consensus among state legislatures that the 340B Program should permit covered entities maximum flexibility in contracting with multiple pharmacies. For safety-net providers—hospitals and clinics serving low-income populations—the ruling protects their ability to expand drug distribution channels and maximize 340B savings to fund broader healthcare services, as Congress envisioned when creating the program. The decision also reflects judicial deference to state economic regulation under the dormant Commerce Clause framework, particularly when regulations apply evenhandedly and address legitimate local interests like ensuring access to discounted drugs for vulnerable populations.
For drug manufacturers, the decision closes one avenue of challenge to state-level contract pharmacy restrictions and suggests that the 22 states’ legislative approach will withstand constitutional scrutiny. However, manufacturers retain potential federal remedies: they could appeal to the Supreme Court, seek legislative solutions at the federal level to preempt state laws, or pursue regulatory action through HHS. The decision does not address whether federal legislation or administrative action could override state laws, leaving open the possibility of future conflict between federal and state approaches to managing the 340B Program’s growth and the manufacturer profit erosion it causes.