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Wheels of justice

More than a decade after a decision made by a now defunct regime, GSK is still awaiting a court decision on dual pricing structures in Spain

books_hammerThe outcome this autumn of the European Court's consideration of a dual pricing structure implemented by GlaxoSmithKline (GSK) in Spain to combat parallel exports – and first notified to the European Commission by GSK 10 years ago – certainly demonstrates, as the proverb goes, that the wheels of European justice grind exceeding slow. However, the outcome of this and the other leading European case in the area of parallel trade (also involving GSK) leads to the conclusion that those wheels also fail to grind exceedingly fine, as the uncertainties in the judgment make for a distinctly lumpy product.

The origin of the case lies back in 1998 when, under a regime which no longer exists, GSK notified to the European Commission its general conditions of sale to wholesalers covering 82 medicinal products, with a view to obtaining clearance from the Commission that the sales conditions either did not constitute an anti-competitive agreement, or if they did, could benefit from an exemption.

The sales conditions provided that where medicines were resold in Spain and the sale price financed by Spanish public funds, the price would not exceed the maximum industrial price fixed by the Spanish health authorities. The sales conditions importantly also said that where either of these two conditions was not present, the wholesaler would pay a higher commercial price.

In 2001, the Commission decided that the sales conditions infringed European competition law by charging higher prices where medicines were exported by the wholesaler. Off went GSK to the European Court of First Instance to appeal against the Commission's decision.

The Court of First Instance thought about the case for another five years, giving judgment in 2006. That court held that although it was clear that the aim of the sales conditions was to restrict parallel trade, it was necessary to see also whether the effect of this was to prevent prices to consumers from falling. The Commission had not done this, and their decision could therefore not be upheld.

Neither side was happy with this judgment so they both appealed to the European Court of Justice, bringing with them as interveners European, German and Spanish wholesalers' associations and also, interestingly, Poland.

Firstly, the European Court held that it was not necessary to check whether the effect of the sales conditions was to prevent prices falling to the detriment of consumers. If the sales conditions had the purpose of limiting exports, it was enough to constitute an anti-competitive agreement. In the interesting part of the decision, the Court then examined whether the Commission was right to refuse an exemption. 

One of the arguments GSK had raised in favour of an exemption was that parallel trade deprived it of revenues needed to undertake research and development to the benefit of consumers. The Court found that the Commission had too hastily dismissed this argument and should consider again whether this was indeed the case.

So the Court sent the case back to the Commission to reassess – and this is where the case remains for now.

An interesting question is whether indeed the Commission needs to do anything with the case at all, despite being ordered to reconsider it by the Court. As already mentioned, the notification regime under which the Commission originally examined the sales conditions no longer exists. Therefore, the Commission would now appear to be under no legal obligation to continue considering the case. When the law changed in 2004, abolishing notification in favour of parties making their own "self assessments," the Commission simply dropped cases that were pending. Why then, should it continue with this one?

What is more, the original Commission decision has now in any event become moot. During the time the judges have been pondering the case, the Spanish government came up with a way of sidestepping the issue by applying its lower controlled reimbursement price by retrospective discount and only where it can be proved that the drugs were supplied to patients in Spain. The Spanish Competition Commission gave this new scheme its blessing in 2009.

The judgment in the Spanish case follows an earlier ruling of the same court a year previously regarding a different scheme applied to Greek wholesalers. That case did not concern differential pricing, but the imposition of quotas so as to ensure that wholesalers got only enough product to satisfy domestic requirements. GSK was a dominant supplier of the drugs in question, and the case arose because European law prevents dominant suppliers from refusing to supply without objective justification. Applying the quota system constituted a refusal to supply for export.

In a decision more favourable to GSK than might have been expected, the Court decided that GSK could refuse to supply Greek parallel traders where their orders were not in line with regular commercial practice – even where GSK was a dominant supplier of the drug in question.

The Spanish and Greek cases together, certainly leave a joint legacy of uncertainty as to what constitutes in the Greek case, regular commercial practice, and what weight in the Spanish case could be given in the future to the research and development justification. Despite this, some might see the beginning of a trend in European Court judgments of showing a little more sympathy for big pharma's arguments in favour of allowing some restriction on parallel trade in an industry that depends on funding vast research and development against a background of differential prices imposed essentially by public bodies and not of the suppliers' own making.

The Commission perhaps has other fish to fry. On the same day that the Court gave judgment in the Spanish wholesalers case, the Commission carried out raids on sanofi-aventis and others, following hard on the heels of the completion of the Commission's sector enquiry into pharmaceuticals last summer. A likely subject of the Commission's investigations is agreements with generic companies aimed at buying off challenges to pharma companies' patents and delaying market entry of competing generic products. Such settlement agreements have been widely litigated in the US with varying results. Another front, it seems, is opening up.

The Author
Edward Miller is partner at Reed Smith
He can be contacted on +44 (0)20 3116 3470 and at emiller@reedsmith.com

To comment on this article, email pme@pmlive.com

29th January 2010

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