Impact of Rejecting Chevron Deference on Biopharma

By Mickey Koplove

What Happened

On June 28, the Supreme Court of the United States (SCOTUS) overruled the most cited legal case in its history, colloquially called Chevron deference. In brief, this doctrine directs/encourages courts to seek guidance from the Executive branch in cases where aspects of laws or regulations are ambiguous on a specific issue. The courts have also regularly deferred to the scientific and technical expertise of Executive agencies, such as the FDA and EPA, to develop and implement policies for solving that ambiguity.Chevron deference had been the precedent for close to 40 years until this ruling.

SCOTUS objected to and nullified this established policy based on an originalist interpretation of the Constitution. In other words, the Constitution does not explicitly provide the Executive branch with authority for legal creation and interpretation. That responsibility sits with the Legislative branch. Therefore, Congress is responsible for remediation regardless of whether its members have the necessary scientific and/or technical expertise to close the gaps observed and adjudicated by the Judicial branch.

This decision did not come out of the blue, as corporations have been increasingly pushing back on federal agency regulations in recent years. For example, on May 6 of this year, the FDA issued a Final Rule mandating its regulatory oversight of laboratory developed testing, bringing about an outcome that is considered to be overreach by the affected industries. A lawsuit against the FDA was quickly filed by the American Clinical Laboratory Association.

What It Means for the Biopharmaceutical Industry

The most obvious and potentially troubling problem from this ruling is that the wealth of scientific and technological expertise in our federal agencies can now be legally excluded from regulating key issues.

The impact for our industry is potentially serious. The biopharmaceutical industry works under the large and weighty umbrella of international regulatory agencies. In fact, it can be argued that the disciplined thinking, performance, and reviews to meet stringent expectations of regulatory agencies is one of the factors that has made us as competent as we are today.

At a minimum, this change will make it easier for litigants to challenge FDA rulings. Bad actors will potentially have more latitude to stretch the limits, and the FDA will be constrained in their ability to enforce rulings. In addition, the decision provides more opportunity for district and circuit court judges with hostile views of regulation to provide unfavorable interpretations instead of deferring to experts in federal agencies.

Furthermore, this can open the door to new judicial decisions that overrule the FDA, such as last year’s judgement by a Texas federal judge to pull mifepristone from the market. Consider the potential ramifications for local judiciary to develop their own interpretations of complex and evolving scientific areas such as cell and gene therapy or genome editing. History informs us that certainty and consistency in regulatory decision-making are essential in developing innovative therapeutics.  Inconsistent or conflicting directions, and major changes in established policy, cause a great deal of churn and additional work as the changes are debated, approved, and implemented.

What It May Mean for Investors in Our Industry

The impact of this ruling may also stretch to the investment community. On one hand, investors may interpret casting off Chevron deference as a reduction in expensive regulatory burdens, which could kick off additional investment in biopharma research, development and facilities. However, if the decision (or lack of a clear decision) raises uncertainty and fear of delays, then capital availability may retreat. This would lead to increases in the cost of capital and restrict industry growth.

What You Can Do

• Don’t react to the noise. For the immediate future, maintain your current growth plans and only adjust program strategies based on data from your research, development, and commercial processes. Changes will take some time to become apparent.
• Closely monitor upcoming judicial decisions that challenge federal agency regulations, including the FDA, DEA, and EPA among others. Leverage your industry peers and experts to understand the implications on our industry, and how the US government, investment bankers, and venture capitalists are likely to view and react.
• Consider adopting a more conservative stance toward large, at-risk capital expenditures until you have clarification on the longer-term financial implications.

For help with navigating the impact of regulation changes, contact our team at info@convergeconsulting.com today.