1. Parallel Trade in the Pharmaceutical Sector: The Fight Continues
The GSK Case and Other Recent Developments in EU Law
Claudia Berg
29 October 2008
/ /

2. Overview Factual background: Parallel trade and medicines
Legal background
quota system (Article 81; ECJ Bayar/Adalat [2004])
dual pricing (AG Jacobs; AG Ruiz-Jarabo Colomer; ECJ GSK [2008])
GSK Judgment (September 2008)
Conclusion

3. Factual background: Parallel trade and medicines

4. Parallel trade: back to basics
What is parallel trade?
EU particularly suited to parallel trade
considerable price differentials between Member States due to price regulation
differentials in supply practices due to Member State regulation
Favourable principles of EC law
single market
free movement of goods (Article 28 EC)
‘regional exhaustion of IP rights’
/ /

5. Commercial reality Number of parallel traders
estimated to be 100 parallel trading companies, employing over 12,000 staff Europe-wide: Europe Economics, 2008
Annual value of parallel trading
estimated value €4.9 billion
150 million packets of medicines annually: Europe Economics, 2008
/ /

6. Adverse impact on pharma companies
Disruptive effect on pharma companies in higher priced markets
Loss in equivalent to price differential
significant price differentials, cancer drug example
recent estimates in UK loss of £770 million annually
Negative impact on R&D spending and innovation
estimates suggest R&D spending of £3 billion annually
/ /

7. Positive impact for consumers?
Lower prices in importing countries?
however, profits largely retained by parallel traders
Undermines European supply chain?
distribution of pharma products is aimed at ensuring supplies are available within each national territory
Undermines health policy objectives of Member States?
some Member States expressly choose to charge higher prices to encourage R&D
Negative consequences of lower R&D spending?
Increased risk of counterfeiting ?
due to need to repackage manufacturer’s medicines
/ /

8. Legal background

9. Quota systems What is a quota system?
aim is to limit the supply to wholesalers to local demand
Settled EU case law
direct and indirect export bans are per se in breach of Article 81EC (“object box”)
VW (1998): €102 million; Opel (2000) €43 million; Nintendo (2002) €168 million; Zanussi (1978)
ECJ Bayer/Adalat (2004)
Article 82
Jacobs AG GSK (2004)
Ruiz-Jarabo Colomer GSK (2008)
ECJ GSK (2008)
/ /

10. Bayer/Adalat (2004)
Facts
Bayer reduced supplies of the drug Adalat to its wholesalers in Spain and France to amounts needed for local use in order to prevent parallel trade
Commission found tacit agreement as wholesalers continued to do business with Bayer
ECJ
Bayer merely acting unilaterally
no concurrence of wills
no agreement
/ /

11. Dual pricing: CFI GSK [2006]
What is dual pricing?
Facts
terms and conditions agreement setting higher export prices for Spanish wholesalers
Commission deemed in breach of Article 81
Agreement did not have anti-competitive object
Agreement had an anti-competitive effect
/ /

12. CFI GSK [2006] (cont’d)
Commission failed to consider whether the exemption under Article 81(3) applies
Commission is obliged to balance between:
anti-competitive effects (loss of marginal price benefits in importing countries); and
pro-consumer benefits (more investment in R&D – increased innovation - fiercer inter-brand competition)
Both Commission and GSK have appealed CFI decision
/ /

13. GSK Judgment (September 2008)

14. GSK (2008) – Factual setting
November 2000: GSK stops supplying wholesalers and supplies hospitals and pharmacies directly via subsidiary
December 2000: GSK applies for negative clearance from Greek competition authority
February 2001: GSK resumes selling products to wholesalers however, refuses to supply the wholesalers in full
Wholesalers commence administrative and civil proceedings
/ /

15. GSK (2008) – Factual setting (cont’d)
Administrative proceedings
Administrative proceedings commenced before Greek competition authority
August 2001: Greek competition authority adopts interim measures requiring GSK to meet in full orders which it received
January 2003: Greek competition authority suspends the case and seeks preliminary ruling from ECJ
October 2004: AG Jacobs gives opinion
/ /

16. GSK (2008) – Factual setting (cont’d)
Administrative proceedings (cont’d)
May 2005: ECJ rules does not have jurisdiction to meet request of competition authority
September 2006: Greek competition authority rules that GSK had abused its dominant position from November 2000 to February 2001
GSK appeals before national court
/ /

17. GSK (2008) – Factual setting (cont’d)
Civil proceedings
April 2001 – November 2002: Wholesalers commence action in Greek Court of First Instance (“Greek CFI”)
January – October 2003: Greek CFI gave judgment that GSK did not abuse dominant position
Wholesalers appeal to Greek Court of Appeal
Greek Court of Appeal refers to ECJ for preliminary ruling
April 2008: AG Ruiz-Jarabo Colomer gives opinion
September 2008: ECJ hands down judgment
/ /

18. Relevant Article 82 jurisprudence
Commercial Solvents (1974)
Facts
Commercial Solvents dominant supplier of raw material required for production of anti-tuberculosis drugs
Commercial Solvents refused to supply manufacturer of anti-tuberculosis drugs to favour its own drug-producing subsidiary
Key principle
It is an abuse for an undertaking dominant in one market to refuse to supply goods or services to an undertaking with which it is in competition in a neighbouring or associated market, with the possibility of eliminating all competition on the part of that undertaking in the latter market
/ /

19. Relevant article 82 jurisprudence (cont’d)
United Brands (1978)
Facts
United Brands had dominant position in production of bananas
cut off supplies to ripener/distributor for promoting another producer’s bananas
Key principle
“An undertaking in a dominant position…cannot stop supplying a long-standing customer who abides by regular commercial practice, if the orders placed by that customer are in no way out of the ordinary”
/ /

20. AG Jacobs (2004) Significance of AG Jacobs’ opinion Dominance:
dominance in respect of Lamictal, a prescription medicine for epilepsy, was found by Greek competition authority
AG Jacobs accepted this finding
/ /

21. AG Jacobs (2004) (cont’d) Abuse
review of refusal to supply case law establishes 3 key principles:
(1) dominant undertaking will on occasion have an obligation to supply its products/services
(2) this obligation is circumscribed:
no need to meet orders which are ‘out of the ordinary’;
an undertaking is entitled to take reasonable steps to defend its commercial interests
(3) whether an undertaking’s conduct is ‘abusive’ is dependent on the specific economic and regulatory context
/ /

22. AG Jacobs (2004) (cont’d) Objective justification
restricting supply with the aim of limiting parallel trading is not a per se abuse of dominance
finds a pharma company pursuing reasonable and proportionate measure in defence of its commercial interests if:
(1) Pervasive regulation of price and distribution in pharma sector;
(2) Risk to the innovative pharma industry
(3) Doubtful benefit of parallel trade to consumer welfare
Conclusion: “a restriction of supply by a dominant pharmaceutical undertaking in order to limit parallel trade is capable of justification as a reasonable and proportionate measure in defence of that undertaking’s commercial interests” [100]
/ /

23. AG Ruiz-Jarabo Colomer (2008)
Dominance
GSK challenged Greek competition authority’s finding of dominance in respect of Lamictal
AG Jacobs ruled this was a matter for national court to decide
Abuse
despite GSK’s intention to limit parallel trading, its conduct is not a per se abuse
justifications for quota system can therefore be considered
/ /

24. AG Ruiz-Jarabo Colomer (2008) (cont’d)
Objective justification
Objective justification is available if dominant firm proves:
(1) Market regulation constrains the dominant firm to behave in this way, however disregarding price and supply control by member states;
(2) Necessary to protect the dominant firms’ legitimate business interests, in particular incentives to innovate
BUT:
“I cannot see that there is necessarily any causal link between any possible negative impact on R+D investment and parallel trade…I find the argument that the loss of income resulting from parallel imports of patented medicines acts as a disincentive misleading, since it is aimed only at seducing public opinion, which is sensitised to the vital importance of R+D for competitiveness” [109]-[113]
/ /

25. AG Ruiz-Jarabo Colomer (2008) (cont’d)
(3) Conduct in question has a net economic benefit (i.e increased patient welfare and decreased cost to the healthcare system) ;
BUT: “Apart from the description of the 'horrors' caused by parallel trade, GSK does not indicate any positive aspect resulting from its restriction of supplies to the wholesalers, except that its profit margins recover” [118]
Critique:
the bar is set signicantly higher than in the Syfait opinion;
nearly impossible to meet requisite standard
/ /

26. ECJ GSK (2008)
Dominance
adopts the Greek competition authority’s view that GSK has dominance with respect to Lamictal
does not give any guidance as to the meaning of dominance in this context
Abuse
Starting point: United Brands and Commercial Solvents
“it is established case law that a refusal to supply by a dominant undertakingconstitues an abuse, if without any objective objective justification, that conduct is liable to eliminate a trading party as a competitor”
does not directly deal with the issue of per se abuse under Article 82, however, suggests objective justifications for GSK’s abusive conduct can be considered
/ /

27. ECJ GSK (2008) (cont’d) Objective justification?
Consequences of parallel trade for ultimate consumers
Impact of State price and supply regulation in the pharma industry
(1) Consequences of parallel trade for consumer welfare
parallel trading can be beneficial to consumers
while it is true that profits from parallel trading tend to be retained by the wholesalers rather than be passed on to the consumer:
parallel trade provides an alternative, potentially cheaper supply of medicines
parallel trade can exert downward pressure on prices
parallel trade can potentially offer a wider range of medicines to the consumer
/ /

28. ECJ GSK (2008) (cont’d)
(2) Impact of State price and supply regulation in the pharma industry
finds the pharma sector is characterised by regulated pricing
however, this should not be used to justify refusal to supply:
manufacturers can influence national prices in negotiations with State authorities
where a medicine is protected by a patent, the only price competition is between manufacturers and parallel traders
cannot breach the fundamental principle of avoiding the partitioning of markets along national lines
/ /

29. ECJ GSK (2008) (cont’d) Conclusion: ‘Ordinary orders’
ECJ suggests that the specificities of the pharma sector (highly regulated pricing, the impact of parallel trading on R&D) should not be relied upon to justify refusal to supply
Returns to the United Brands (1978) test of ‘ordinary orders’
“A dominant pharma firm, in order to put a stop to parallel exports, refuses to meet ordinary orders from wholesalers, abuses its dominant position.”
/ /

30. ECJ GSK (2008) (cont’d) What is meant by ‘ordinary’?
“It is for the national court to ascertain whether the orders are ordinary in the light of both the size of those orders in relation to the requirements of the market in the first Member State and the previous business relations between that undertaking and the wholesalers concerned”
/ /

31. Conclusions

32. Critique of GSK (2008) Confused analysis
compromise between AG Jacobs and AG Ruiz-Jarabo Colomer
Minimal attention given to the economics and special features of the pharma industry
these considerations are replaced by the United Brands ‘ordinary orders’ test
Limited guidance on concept of ‘ordinary order’
commercial uncertainty
Divergent national health policies are disregarded
/ /

33. Impact for pharma clients
Legal uncertainty as to what is and what is not permissible under Article 82;
Uncertainty about supply chain management: what are ordinary orders?
historical average? over what time?
pure exporters?
- Impact on Dual pricing Policy?
/ /

34. Questions
/ /