Parallel trade still a grey area for GSK

This June, the Hellenic Competition Commission was asked to consider, for a second time, the legality of measures taken by GSK in Greece between November 2000 and February 2001. During this period, GSK decided to supply Greek pharmacists directly, and had refused to sell drugs (including its epilepsy medicine Lamictal) to wholesalers. European competition laws prevent dominant firms from abusing their market power by refusing to supply without objective justification. The limited number and/or absence of substitutes for Lamictal enabled the wholesalers to argue that GSK had a dominant position in the supply of that drug, and that its refusal to supply was an unjustifiable measure to prevent parallel trade by the wholesalers. GSK said that it was justified in restricting parallel trade where the pricing differentials driving that trade were not of its own making, but as a result of national price regulation.

Edward Miller

The wholesalers complained to the Hellenic Competition Commission, which, in 2003, finally concluded that the matter was all too difficult and sent it off to be decided by the European Court. GSK was delighted to discover in October 2004 that the European Court's Advocate General Jacobs essentially agreed with GSK's view that restrictions on parallel trade in pharmaceuticals were justified because of the particular circumstances of pricing in that sector. However, the advocate general is not a judge, and merely advises the court. The European Court itself decided to sidestep the issue on technical grounds, saying that the Hellenic Competition Commission did not have jurisdiction to send the matter to Europe, as it was only a commission and not a court, and sent the case all the way back to Greece.

Most interesting, is how Advocate General Jacob's opinion was dealt with when the case came back for decision this June. GSK was found to have infringed national Greek competition law by refusing to sell. Restriction of parallel trade had an adverse effect on the pricing at which national authorities purchased drugs, and in some countries, directly on prices to consumers. The refusal to sell was motivated by a desire to maximize GSK's profits, and GSK had not shown that not having these profits would prejudice consumers by restricting its R&D. This line of reasoning seems to reject the views of Advocate General Jacob. However, for reasons that are not entirely clear from the ruling, the commission held that the equivalent European law on refusal to sell had not been infringed, as it would be unfair to apply this law in a market where freedom on pricing had effectively been suspended.

These themes recur in a decision in a different case in the European Court of First Instance this September. This concerned GSK's dual-pricing system in Spain, by which GSK charged different prices depending on whether drugs were exported, or sold under the Spanish reimbursement system. This was condemned by the European Commission and GSK appealed to the court. Again, the question was whether the restriction on parallel trade was lawful, but this time the case was based on the existence of a restrictive agreement, rather than on the misuse of power.

GSK first tried to argue that there was no agreement with the wholesalers on the dual-pricing system at all. This was rather hopeful given that the wholesalers had been requested to return a form letter to GSK confirming acceptance of GSK's general sales conditions containing the dual-pricing structure, with 75 of them doing so. GSK also failed to persuade the court that parallel trade benefited no one but the intermediaries creaming off the difference between national pricing regimes. This was rejected on the same grounds as the commission in the Greek case. However, the court found that there might be merit in GSK's argument that general permission of parallel trade would be against consumer interests by limiting funds available for R&D. The court struck down the European Commission's ruling against GSK as it had not given proper consideration to this point.

Where to now? Well, the Hellenic Competition Commission's decision may be subject to an appeal, as may be the ruling of the European Court of First Instance in the Spanish case. In any event, the commission must now consider whether it should grant an exemption to GSK on the grounds that restricting parallel trade is justified to safeguard R&D budgets. The disturbing take away for GSK and the pharma companies is that both the Hellenic Competition Commission and the European Court of First Instance now perceive parallel trade in pharmaceuticals as not simply lining the pockets of the parallel traders, but also providing price benefits to consumers and purchasing heath authorities.