For this relief, much thanks

Defenders of the research-based industry are hoping for an early Christmas present from the European Court of Justice (ECJ). All the signs are that a small but significant victory is on the way against parallel importing. Right at the end of October, a senior judge responsible for a leading case at the court made clear his view that international drug firms do not necessarily have to make life easy for parallel importers. The formal ruling on the case at issue is expected within weeks.

Parallel importing

The main conclusion the judge drew is that "refusal by a dominant pharmaceutical undertaking to meet all orders of its customers so as to restrict parallel trade does not automatically constitute an abuse of a dominant position." In simpler terms, GlaxoSmithKline — the company at the heart of the case — is not obliged by European Union (EU) competition law to provide Greek wholesalers with unlimited quantities of its anti-epileptic Lamictal at Greek prices, so that Greek wholesalers can ship the consignments to the UK or Germany and sell them at the higher prices there.

If this opinion from the Court's Advocate General is backed by the other judges on the case, it will offer some welcome relief to an industry that continues to suffer from opportunistic exploitation of the quirks of EU law. It won't bring parallel importing to an end, but it will allow manufacturers to say "no" to wholesalers who are clearly over-ordering domestically to furnish parallel trade.

"Such behaviour should not be considered abusive where the differences in prices of medicines between the member states are the result of state intervention and in the light of the specific circumstances of the European pharmaceutical market," the Advocate General says in his opinion. This is one of the first explicit recognitions by the ECJ that there is something odd about the EU pharmaceutical market.

How GSK got into a jam

It puts its finger precisely on the perverse effect of two co-existing, but contradictory legal requirements: the EU single market rule that goods can move around freely within it; and the tough national price controls imposed on drugs in most member states.

The single market is a good thing, generally — promoting competition, allowing economies of scale, widening customer choice — but it is based on the assumption that prices are set in light of market conditions. National price controls for drugs may be a good thing, too — certainly for hard-pressed social security institutions trying to make ends meet in the face of spiralling health care costs and demands. The European association of pharmaceutical parallel traders claims that in 2002, parallel trade between EU member states — amounting to an estimated 140 million packs — generated direct savings to patients and social health insurance systems in excess of €630 million.

But these two approaches just don't mix. Ultimately, the diversion of profit from manufacturers to wholesalers is not in the interests of the consumer or of society. And since there is no prospect at present of member states relinquishing price controls, the only rational way to arrest the phenomenon is by making exceptions to the EU's single market and competition rules. This is what the Advocate General has wisely urged. He says a dominant undertaking is not obliged to meet orders that are out of the ordinary and is entitled to take such steps as are reasonable to defend its commercial interests. He points out that it is the price differentials created by the intervention of the states in the pharmaceutical market that create the possibility for parallel trade. This, coupled with the high degree of regulation of the pharmaceutical market by the EU and the member states, means that the normal conditions of competition do not prevail in the pharmaceutical market.

He adds that requiring a dominant pharmaceutical undertaking to supply all export orders would in many cases impose a disproportionate burden, given the moral and legal obligations a company has to maintain supplies in all member states. He goes further — with words that will sound like music in the ears of the research-based industry. Given the specific economic characteristics of the sector, the Advocate General says, a requirement to supply would not necessarily promote either free movement or competition, and could even harm the incentive for pharmaceutical companies to innovate. And he spells out what the drug manufacturers have long been claiming, but had received little sympathy for from the ECJ until now. Such parallel trade, says the Advocate General, does not always produce any benefit for the consumer, or the member state as the primary purchaser. In some circumstances the only benefit is received by those in the distribution chain, he underlines.

The opinion is perhaps the most explicit admission to date that something is rotten, not only (as Hamlet pointed out 400 years ago) in the state of Denmark, but right across the EU. The Advocate General emphasizes that his conclusions are highly specific to the pharmaceutical industry in its current situation and to the problem at issue in this specific case.

The opinion comes in the wake of a formal ruling by the ECJ in January 2004 that allowed German pharmaceutical firm Bayer to maintain a quota scheme preventing French and Spanish wholesalers from selling the heart drug Adalat to UK pharmacists. The court ruled that Bayer had not been proved to be breaching EU competition law in the way it behaved when parallel importers were eating into its direct sales in the early 1990s.

These developments don't amount to carte blanche for the industry to put an end to all parallel importing. "Conduct by a dominant pharmaceutical undertaking that more clearly and directly partitions the common market or had negative consequences for competition arising other than as a consequence of its restriction of parallel trade could still be considered abusive," according to the court. For instance, the ECJ has already clarified in earlier rulings that the protection of a trademark is not without limits, so it may not be used to artificially partition the internal market in a bid to frustrate parallel imports. A parallel importer may repackage a proprietary medicinal product and reaffix the trademark or even replace it with the trademark used in the market of destination, provided that repackaging does not adversely affect the original condition of the product or the reputation of the trade mark and its owner. But the GSK opinion does represent a further breakthrough in understanding.

In addition, it comes as a blow to continuing European Commission efforts to allow wholesalers to export drugs to countries where prices are higher. They initiated infringement proceedings against several member states in 2003 because it felt they were not doing enough to encourage parallel importing.

The Commission also issued a communication earlier this year aimed at easing parallel importing of medicines. Internal Market Commissioner Frits Bolkestein said at the time: "The ultimate aim is to ensure patients and health care providers can benefit from parallel imports, without taking any risks with patient safety."

Aiming to help businesses and national administrations take full advantage of the internal market in medicinal products, the Communication covered the rights and obligations of the parties concerned, and the guarantees to which they are entitled according to EU law, the Commission said. Its tenor can be judged by the fact that it won instant acclaim from the European association representing parallel importers.

Basing itself on judgements of the ECJ over the last 20 years, the Commission confirmed its conviction that there should be no major administrative barriers to parallel trade in pharmaceuticals. It insisted, for instance, that member state authorities should grant marketing authorizations for parallel-imported medicinal products through a simplified procedure. Against this background, confirmation in a formal ECJ ruling of the Advocate General's opinion on the GSK case in Greece will make life a little easier for research-based firms.