Reed Smith Client Alerts

The Third Circuit has issued the first of several anticipated federal appellate decisions addressing whether drug manufacturers may limit the distribution of drugs purchased under the Section 340B drug discount program to “contract pharmacies.” The court of appeals held that the statute does not compel distribution to an unlimited number of contract pharmacies and enjoined potential enforcement actions against certain manufacturers that had limited distribution of their products to contract pharmacies.

On January 30, 2023, the United States Court of Appeals for the Third Circuit issued its decision in Sanofi Aventis U.S. LLC v United States Department of Health and Human Services (Sanofi),1 a consolidated appeal relating to whether drug manufacturers may impose limits on the number of “contract pharmacies” to which they will ship discounted drugs sold to participating “covered entities” under Section 340B of the Public Health Service Act.2 On the merits, the panel unanimously ruled that the statute did not require manufacturers to distribute discounted products sold to covered entities under the Section 340B program to an unlimited number of contract pharmacies, and enjoined the federal government from enforcing a contrary position against the manufacturers. The case is the first federal appellate decision to address the contract pharmacy issue.


The Section 340B drug discount program requires pharmaceutical manufacturers, as a condition to Medicaid and Medicare Part B coverage for their outpatient drugs, to offer to sell their products at significant discounts to “covered entity” safety net providers participating in the 340B program. In response to concerns that many covered entities did not operate their own in-house pharmacies, the Health Resources and Services Administration (“HRSA”) issued guidance in 1996 authorizing covered entities to enter contract pharmacy arrangements with a single third-party contract pharmacy, whereby the manufacturer would ship the discounted product to the contract pharmacy but bill the covered entity.3 In 2010, HRSA issued revised guidance that allowed covered entities to enter into an unlimited number of contract pharmacy arrangements.4

As the scope of 340B-program discounted sales expanded following the implementation of HRSA’s revised guidance, some manufacturers imposed distribution limitations on contract pharmacy arrangements beginning in 2020. These included limiting contract pharmacy arrangements to covered entities that did not otherwise have their own in-house pharmacies, limiting the number of contract pharmacies they would recognize, and conditioning contract pharmacy distribution on agreements to provide claims data to the manufacturers to assess potential duplicate discounts or diversion. The Department of Health and Human Services (“HHS”) Office of the General Counsel initially issued an advisory opinion that the 340B statute required distribution to an unlimited number of contract pharmacies, and HRSA subsequently issued notices to manufacturers that their policies were in violation of Section 340B and may be cause for enforcement actions. In response, manufacturers filed lawsuits seeking declaratory and injunctive relief with respect to the agency’s enforcement notices.5