16 November 2004

In Syfait and others v Glaxosmithkline (Case C-53/03) Advocate General Jacobs has delivered an Opinion finding that the refusal by a dominant pharmaceutical company to meet all orders placed by wholesalers, thereby limiting parallel trading of its products, does not automatically constitute an abuse of a dominant position.

The matter came before the European Court of Justice ("ECJ") by way of a preliminary reference made by the Greek Competition Commission. Glaxosmithkline ("GSK") had stopped supplying Greek wholesalers with its products because a large proportion of their orders was being exported to other EC Member States where prices were much higher. Instead, GSK initially supplied only hospitals and pharmacies directly. It subsequently reinstated supplies to wholesalers, but in limited quantities in order to prevent parallel imports. The wholesalers complained to the Greek Competition Commission about this refusal to meet their orders, who in turn asked the ECJ whether and in what circumstances a dominant pharmaceutical company may refuse to meet in full the orders it receives from wholesalers in order to limit parallel trade.

Advocate General Jacobs concludes that a dominant pharmaceutical undertaking which restricts the supply of its products does not necessarily abuse its dominant position within the meaning of Article 82 merely because it intends to restrict parallel trade, provided it can demonstrate an objective justification for this conduct. The objective justification in this case can be found in several important industry-specific characteristics:

Pervasive regulation of price and distribution in the European pharmaceuticals sector
Member States intervene to varying degrees to fix or influence the prices of pharmaceuticals. It is these price differentials which create the opportunities for parallel trade within the EU. Combined with the high degree of regulation to which the distribution of pharmaceutical products is subject at both national and Community levels, this means that normal conditions of competition do not prevail in the pharmaceuticals market; to require a dominant pharmaceutical company effectively to supply all export orders would in many cases impose a disproportionate burden.

Economics of the innovative pharmaceutical industry
Given that it is not currently possible to negotiate a price increase in low-price Member States, there is a risk that dominant pharmaceutical companies would respond to an obligation to supply parallel traders within a given Member State by removing existing products and delaying the launch of new products there. Price differentials would be replaced by a greater fragmentation of the market, with a differing range of products available from one Member State to another. This would in turn reduce incentives for pharmaceutical companies to invest in research and development.

Consequences of parallel trade for consumers and purchasers
Ordinarily the benefits of parallel trade are reaped by those who are able to buy the products at a lower price on the market. Given the special features of the European pharmaceuticals industry, such benefits are tenuous: in many Member States the majority of the drug price falls on the social health insurance system, not the consumer. The price differential which gives rise to the parallel trade gets absorbed as profit by those involved in the distribution chain. Parallel trade does not, therefore, produce any benefits for the ultimate consumers of the products.

The Advocate General’s Opinion has demonstrated a much greater willingness to take into account the specific characteristics of the pharmaceutical industry. After the Adalat case, which dealt with parallel imports under Article 81, and provided that the Court follows this Opinion, the industry will also have some helpful guidance under Article 82.

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