30 May – LAWFUEL – The Law News Network – Next Tuesday, on 31 May, …

30 May – LAWFUEL – The Law News Network – Next Tuesday, on 31 May, the European Court of Justice (ECJ) will decide whether pharmaceutical companies are entitled to prevent parallel trade in the EU.

Parallel trade in pharmaceuticals

Differentials in pharmaceutical pricing and healthcare spending between EU Member States have led to substantial differences in the cost of drugs across the EU. This in turn has resulted in significant parallel trade activity, which has dented pharmaceutical company profits in Europe.

Pharmaceutical companies, on the other hand, are becoming increasingly creative in seeking to prevent the erosion of pricing structures by those free riding on the pricing differentials. Their activities are, however, subject to EU competition rules prohibiting restrictive agreements (Article 81 EC) and the abuse of dominance (Article 82 EC). In its essence, action to prevent parallel trade has long been seen by the European Commission and European Court as contrary to single market integration, which is one of the fundamental aims of the EC Treaty.

Next Tuesday, the ECJ will rule on whether the competition rules prohibit action taken by pharmaceutical companies to prevent parallel trade. Given the amount of money lost to parallel traders, the issue is one of fundamental importance to the pharmaceutical industry.

The case so far

In November 2000, GlaxoSmithKline (GSK) started restricting the supply in Greece of three of its own medicinal products.

Until November 2000, GSK had met all Greek orders in full but found that wholesalers were exporting the drugs to other EU Member States, where prices are much higher than in Greece. GSK therefore started supplying hospitals and pharmacies directly and refused or restricted supplies to Greek wholesalers.

Greek wholesalers made complaints to the Greek Competition Commission (CC) and GSK sought clearance of its distribution policy by the CC.

The CC asked the ECJ to rule on whether a dominant pharmaceutical company may refuse to supply wholesalers in a Member State in order to prevent parallel trade in the EU.

Advocate General Jacobs delivered his non-binding opinion on 28 October 2004. To the surprise of most commentators, and to the delight of the pharmaceutical companies, he concluded that refusal to supply by a dominant pharmaceutical company to prevent parallel trade is capable of objective justification, and therefore not in breach of the rules prohibiting abuse of dominance (Article 82 EC).

The Advocate General’s Opinion

Jacobs found GSK’s practices to be objectively justified on grounds which echo the arguments made by the pharmaceutical companies over the last three decades:

Price harmonisation is undesirable: setting levels low would reduce spending on innovation and setting them high would reduce access by health services and consumers.

Unchecked parallel trade is unlikely to promote competition and may well reduce innovation. The pharmaceutical industry is characterised by the high fixed costs of R&D. The incentive to innovate in the industry relies upon companies being able to recoup their R&D costs and make a profit. There are three possible results of unrestricted parallel trade:
– pharmaceutical companies delay the launch of new products in low-price Member States;
– prices would rise in the low-price Member State, with a negative impact on consumer access; or
– the pharmaceutical companies would be unable to recoup their R&D costs and would lose their incentive to innovate.

the profit made from the price differentials between Member States tends to be retained by the parallel trader and not passed on to consumers or the health service.

What if the ECJ concurs with Advocate General Jacobs’ Opinion?

Endorsement by the ECJ of GSK’s practices would mean a huge victory for the pharmaceutical companies. While other industries also suffering from parallel trade (motor cars, wines and spirits) will be keeping a close eye on the case, it is likely to be limited to:

the pharmaceutical industry – given the unique mix of high fixed costs, innovation and national price regulation;

unilateral practices: agreements restricting parallel trade could still fall foul of the prohibition against restrictive agreements in Article 81 EC.

Gavin Robert, a partner in Linklaters EU Competition Group, and a specialist in healthcare, said:

“This is a fundamental case in the long-running battle between pharmaceutical companies and parallel traders. The Court has a choice: it can endorse the Advocate General’s opinion that restricting parallel trade is not always bad; or it can maintain the status quo. But whatever the outcome, it is unlikely to be the end of the story.”

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