European Commission required to reconsider GSK Parallel Imports Decision

13 November 2006

Richard Eccles

In a significant judgment, especially for the pharmaceuticals sector, the CFI has partially annulled a Commission decision which had been appealed by a Spanish subsidiary of the British pharmaceutical giant GlaxoSmithKline (“GSK”). The 2001 Commission decision had found that GSK’s dual-pricing system for the sale of commonly used drugs infringed Article 81(1) EC Treaty. In its decision the CFI examined the need to give the ‘legal and economic context’ of the pharmaceuticals sector special consideration when assessing alleged infringements of EC competition law.

In 1998 GSK notified its new sales and distribution conditions for exemption under the notification regime, as was then required under EC competition law rules. The conditions established a dual-pricing system for a number of commonly used drugs to be sold to wholesalers in Spain in order to discourage parallel trade. Wholesalers wishing to sell the drugs, primarily in the UK, engaging in parallel trade would have to pay more than if they were to sell the drugs to hospitals and pharmacists in Spain.

The CFI held that, whilst agreements which aim to hinder parallel trade in principle have the restriction of competition as their object or effect, it cannot be presumed that parallel trade in pharmaceuticals has a detrimental impact on the prices paid by consumers. Therefore it does not automatically follow that an agreement intended to limit parallel trade has the object of restricting competition. An economic analysis is required to determine this and the Commission should have considered the “specific and essential characteristics of the pharmaceutical sector”, in particular the fact that the price of medicines reimbursed by national health insurance schemes are insulated from competitive forces due to the fact that they are fixed by an administrative process in most Member States. The CFI also indicated that GSK may have applied different prices because different national markets existed, rather than in order to prevent the existence of different markets.

The Commission had established that dual-pricing had had a detrimental effect on the welfare of consumers (both national health schemes and patients). The difference between the prices of medicines available in Spain and other Member States had been reduced, affecting in the process the ability of the Spanish parallel traders to compete with parallel traders from other Member States. Therefore, despite finding that the Commission had mistakenly assessed the anti-competitive object of the dual-pricing scheme, the CFI upheld the Commission’s conclusion that the dual-pricing system constituted an agreement which had the effect of restricting competition, contrary to Article 81(1).

The CFI held that the Commission failed to conduct the appropriate examination of GSK’s factual arguments and evidence in order to be in a position to conduct the complex balancing exercise required under Article 81(3). The CFI found that the Commission had failed to undertake sufficient examination of GSK’s arguments in relation to the importance of research and development and investment in innovation. While not reaching a conclusion on the facts of the matter, the CFI appears to imply that the unique characteristics of the pharmaceuticals sector may justify an exemption under Article 81(3) EC on the grounds of efficiency if parallel trade reduces the level of funds available to the pharmaceutical companies to invest in research and development of new medicines.

The CFI indicated that merely holding substantial market shares which is limited to certain of the relevant products on a national geographic basis, does not by itself mean that there is a substantial elimination of competition in the particular legal and economic context of the pharmaceutical sector. In addition the CFI found that the Commission should have considered the fact that the nature of the pharmaceutical sector is that competition by innovation is fierce and that competition on price exists when manufacturers of generic medicines are able to enter the market on patent expiry. Therefore the CFI held that it is necessary to assess what form of competition must be given priority to ensure the maintenance of effective competition under Article 81(1).

The partial annulment of the Commission’s decision that GSK’s relevant sales and distribution arrangements were not eligible for exemption under Article 81(3) means that the Commission is now required to reconsider GSK’s application for an exemption as originally submitted to the Commission even though it has not been possible to notify agreements for exemption since 2004.

The judgment is of particular significance to the pharmaceutical sector and the application of Article 81 (3) to agreements in the sector. It clearly shows that restrictions on parallel exports do not per se infringe the competition rules but must be fully and individually assessed in their economic context.

GlaxoSmithKline Services Unlimited v Commission (Case T-168/01), judgment of the Court of First Instance, 27 September 2006.