Parallel Trade in the Pharmaceutical Sector: The Fight Continues

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 RD spending and innovation
• estimates suggest RD 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 RD
• Negative consequences of lower RD spending?
• Increased risk of counterfeiting ?
• due to need to repackage manufacturers 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

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CFI GSK 2006 (contd)

• 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 RD
  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 (contd)

• 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 (contd)

• Administrative proceedings (contd)
• 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

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GSK (2008) Factual setting (contd)

• 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

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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

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Relevant article 82 jurisprudence (contd)

• United Brands (1978)
• Facts
• United Brands had dominant position in production
  of bananas
• cut off supplies to ripener/distributor for
  promoting another producers bananas
• Key principle
• An undertaking in a dominant positioncannot
  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) (contd)

• 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 undertakings conduct is abusive
  is dependent on the specific economic and
  regulatory context

22
AG Jacobs (2004) (contd)

• 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 undertakings commercial
  interests 100

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AG Ruiz-Jarabo Colomer (2008)

• Dominance
• GSK challenged Greek competition authoritys
  finding of dominance in respect of Lamictal
• AG Jacobs ruled this was a matter for national
  court to decide
• Abuse
• despite GSKs intention to limit parallel
  trading, its conduct is not a per se abuse
• justifications for quota system can therefore be
  considered

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AG Ruiz-Jarabo Colomer (2008) (contd)

• 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 RD investment and parallel tradeI 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 RD for
  competitiveness 109-113

25
AG Ruiz-Jarabo Colomer (2008) (contd)

• (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

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ECJ GSK (2008)

• Dominance
• adopts the Greek competition authoritys 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 GSKs abusive
  conduct can be considered

27
ECJ GSK (2008) (contd)

• 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

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ECJ GSK (2008) (contd)

• (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) (contd)

• Conclusion Ordinary orders
• ECJ suggests that the specificities of the pharma
  sector (highly regulated pricing, the impact of
  parallel trading on RD) 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) (contd)

• 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

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Conclusions
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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

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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?

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Questions