Parallel Exports in the Pharmaceuticals Sector: Take Nothing For Granted

05 March 2007

Richard Eccles

The European Court of First Instance adopted a judgment in GlaxoSmithKline Services Unlimited v Commission on 27 September 2006[1] in which it annulled the European Commission's decision to refuse to grant an exemption under Article 81(3) to a dual-pricing system operated by Glaxo Wellcome, for the sale of certain pharmaceutical products in Spain. Glaxo Wellcome, now GlaxoSmithKline ("GSK"), was compelled by Spanish price control regulation to charge reduced wholesale prices for sale for use on the Spanish domestic market, but imposed higher charges for products destined for parallel export by its wholesaler customers, equivalent to the prices which it originally applied to register in Spain. The European Commission found the relevant terms of supply, contained in Clause 4 of Glaxo Wellcome's General Sales Conditions, to restrict parallel exports and to infringe Article 81(1), and to be ineligible for exemption under Article 81(3)[2]. The European Court of First Instance ("ECFI") rejected the Commission's conclusions that such pricing restrictions on parallel exports had the object of restricting competition contrary to Article 81(1), upheld the Commission's decision as regards the effects of the arrangement on competition, but concluded that the Commission should have fully examined the legal and economic context of the pharmaceuticals sector and should have carried out a full balancing exercise of all relevant evidence, before reaching a conclusion on Article 81(3). Accordingly, the ECFI referred the decision back to the Commission for reassessment under Article 81(3).

This judgment of the ECFI is important on a number of levels. First, it contains important indications of the role of the relevant authority applying Article 81(3) in balancing all relevant evidence, especially in relation to the pharmaceutical sector. Second, it refutes any suggestion that pricing restrictions on parallel exports are a per se restriction of competition that always infringe Article 81(1) or that can never be eligible for exemption under Article 81(3). This case is the first clear indication in a judgment of the ECFI or of the European Court of Justice ("ECJ") rebutting the European Commission's general presumption that restrictions on parallel exports or imports are almost invariably illegal under Article 81 EC. It follows a series of judgments by national courts and decisions of national competition authorities in recent years in the pharmaceuticals sector which have concluded that refusals by dominant companies to supply parallel exporter wholesalers did not infringe Article 82 EC. The relevant national competition case law is considered further below. Third, the ECFI's judgment contains several significant indications as to how pharmaceutical markets should be assessed for Article 81 (and Article 82) EC purposes in the future.

It may be noted that the Commission's decision in the Glaxo Wellcome dual-pricing case was not the first of its type reached by the Commission in the pharmaceuticals sector. In 1994, the European Commission intervened against a price regime introduced by Organon in respect of oral contraceptive products, whereby pills intended for export from the UK no longer qualified for a 12.5% discount which applied to pills marketed within and consumed within the UK[3]. The price regime was contained in a circular sent by Organon to its British wholesalers stating that the discount would be available only on orders which they could prove were intended for the UK and would not be re‑exported. This discriminatory pricing based on geographical destination removed the price advantage of parallel imports of the products in the Netherlands. Organon had notified the European Commission of the arrangement, which had also been the subject of three complaints. As a result of the Commission's investigation, Organon was compelled to discontinue the practice and to reinstate this previous pricing regime.

The Commission's decision in the Glaxo Wellcome dual-pricing case

The Commission found GSK’s dual pricing policy to be equivalent to a restriction on exports. It stated[4] that "a pricing policy which makes it economically uninteresting for wholesalers to indulge in parallel trade must be considered to be at least as effective as an outright contractual export ban in excluding such trade because it involves in principle no cost of monitoring compliance." On various points, the Commission's reasoning on the actual facts stated in the decision was open to question:

Glaxo Wellcome's position could be summed up as being that it was charging a single price for all sales made in Spain, subject to the enforced reductions in prices that it was required to maintain for sales for domestic consumption reimbursed by the Spanish authorities, for which sales Glaxo Wellcome had to apply the maximum price that it had been able to negotiate with the Spanish authorities. Moreover, it claimed a need to avoid the Spanish controlled price being exported to other higher priced member states via parallel trade, in order to preserve and maintain its sources of revenue for research and development. Glaxo Wellcome submitted various arguments to the effect that, in order to generate funds for purposes of innovation, it should be allowed to implement its dual-pricing policy to maintain the levels of profitability allowed by the separate pricing regimes of the different member states, without erosion through parallel trade. Glaxo Wellcome argued that parallel trade reduces the capacity for financing R&D and, moreover, primarily benefits parallel traders rather than consumers.

The Commission stated that pharmaceutical companies have negotiating power when discussing domestic sales prices with the Spanish authorities, and referred to the fact that Glaxo Wellcome had managed to negotiate substantial price increases for four of the eight relevant products, even though the price of another product, Zantac, had simultaneously been reduced. In practice, however, notwithstanding the degree of flexibility which appears to have existed within the Spanish system, ultimately the prices are limited by national regulatory authorities, and any price increases for certain products may also have to be offset at least in part by price reductions for others. Ultimately, due to the Spanish price controls, the permitted Spanish prices for the relevant products were significantly below the price levels which Glaxo Wellcome was able to negotiate under the UK PPRS system. The Commission found that the Spanish regulated domestic price was around at least 90% of the EC average price, but also that prices of the same products in the UK, the primary parallel export destination, were at least 20% higher than the EC average price. This had been exacerbated by significant currency movement whereby the rise in value of the pound sterling had made parallel imports significantly more attractive for consumers and significantly more profitable for parallel importers in the UK.

The Commission stated that the segmentation between Spanish domestic and export market prices did not result from national legislation, by virtue of the fact that the Spanish price control measures left it open to the manufacturer in question to apply the same price to exports[5]. The logic of this statement by the Commission was questionable. It purported to deny the regulatory impact of the national price control measures on the basis that it does not prevent export prices from voluntarily being brought to the same level notwithstanding the fact that export prices are in any event outside the scope of the national price control regime. The Commission further argued that the appreciation of the pound sterling against the Spanish peseta meant that Glaxo Wellcome could not maintain that the price differences between the two countries resulted entirely from differences between the Spanish and British regulatory systems[6]. However, the economic logic of this point was also open to question; exchange rates do fluctuate and during the relevant period of the Commission's investigation, there was in any event a significant difference between the permissible price levels in Spain and the UK.

The Commission considered that various elements of Glaxo Wellcome's case were not supported by the evidence. These were the principal grounds given by the Commission for rejecting Glaxo Wellcome's case for Article 81(3) exemption:

  • The Commission denied any causal link was proven between the effects of parallel trade and R&D investments, and asserted that any savings that might be made by preventing parallel trade would not automatically lead to higher R&D investments.[7] The Commission based this assertion on the fact that approximately only 15% of Glaxo Wellcome's turnover was accounted for by R&D costs. The Commission stated that Glaxo Wellcome could equally cut other costs that were within its control, or spend a greater part of its profits on R&D expenditure. This was despite the fact that although Glaxo Wellcome's turnover and R&D expenditure had both reduced over the relevant period, the R&D expenditure had reduced by a lower proportion which meant that between 1996 and 1998 it came to account for a slightly increased proportion of Glaxo Wellcome's turnover.

  • Glaxo Wellcome had not demonstrated that parallel trade had disrupted its distribution system or resulted in product shortages or delayed product launches in Spain[8];

  • The Commission asserted that it was for Glaxo Wellcome to prove that the criteria of Article 81(3) were fulfilled and that it had failed to do so on several points, including the conditions of benefits to consumers and of no elimination of competition (in respect of a substantial part of the products in question)[9].

The main issue before the ECFI was to be essentially whether it was sufficient for the Commission to have rejected Glaxo Wellcome's arguments as being insufficiently proven, without properly evaluating all the evidence that Glaxo Wellcome had submitted to the Commission concerning the legal and regulatory context and economic circumstances of the pharmaceuticals sector.

The ECFI's findings under Article 81(1)

Anti-competitive Object?

The ECFI rejected the Commission's principal conclusion, that clause 4 of GW's General Sales Conditions must be considered to be per se contrary to Article 81(1) EC as having the object of restricting parallel trade[10]. The ECFI concluded that as the prices of the relevant medicine were to a large extent shielded from the free play of supply and demand due to national regulatory controls, it cannot be taken for granted that parallel trade tends to produce prices that increase the welfare of final consumers. Clause 4 of the General Sales Conditions, whilst aiming to restrict parallel trade, did not in and of itself necessarily restrict competition[11]. A finding of anti‑competitive object would require an indication that the contractual provision in question restricted competition between undertakings so as to reduce the welfare of the final consumer of the products in question. Although the case law of the ECJ has accepted ever since Consten and Grundig v Commission[12] that parallel trade must be given a certain protection, there is no automatic protection of parallel trade under Article 81. Rather parallel trade must be shown to give final consumers the advantage of effective competition in terms of supply or with regard to price (Tepea v Commission[13]) rather, that is, than benefiting other parties such as the parallel traders themselves. Therefore GSK was correct to maintain that in the legal and economic context, the Commission could not rely on the mere fact that clause 4 of the General Sales Conditions established a system of differentiated prices to limit parallel trade, as a basis for its conclusion that there was the object of restricting competition[14].

The ECFI noted that the Commission itself accepted the ambiguous impact of parallel trade in medicines on the welfare of final consumers, with reference to the Commission's Communication on the Single Market of Pharmaceuticals[15]; unless parallel trade can operate dynamically on prices, it creates inefficiencies because the financial benefit accrues to the parallel trader rather than to the healthcare system or the patient. Therefore it could not be presumed in this instance, in the absence of an examination by the Commission of the essential characteristics of the pharmaceutical sector, that the parallel trade restricted by Glaxo Wellcome's sales conditions would have had a beneficial impact on the prices charged to final consumers, or, therefore, that the General Sales Conditions had the object of restricting competition[16].

Anti-competitive Effect?

The ECFI concluded that the Commission was entitled to conclude, on the facts of the case, that clause 4 of the General Sales Conditions had the effect of restricting competition, albeit that this conclusion of the Commission had been reached after a relatively brief examination. Glaxo Wellcome's pricing was considered to have been restrictive because the exporter wholesalers were compelled to charge a higher price than wholesalers operating on the domestic market, in that they were not capable in the long term of reselling the relevant products for less than Glaxo Wellcome's exporter wholesale price in other EC member states[17]. The welfare of final consumers was reduced because they were prevented from taking advantage of the Spanish wholesalers' participation in intra-brand competition on the export markets of the parallel trade originating in Spain[18]. Clause 4 of the General Sales Conditions impeded the competition and in particular the pressure that would otherwise have existed on the unit price of the medicines in question, to the detriment of the final consumer, albeit that the Commission conceded that that pressure may be marginal. For these purposes, the final consumer was taken to mean both the patient and the national sickness insurance schemes acting on behalf of claimants.

It is important to note that the ECFI stated that the fact that GSK's pricing conduct implemented through clause 4 of the General Sales Conditions was attributable to and allowed by the regulatory context, did not mean that it could not be said to infringe the competition rules. Therefore, the ECFI concluded that whilst the legal and economic context must be fully taken into account in the Article 81 assessment, the fact that GSK's pricing was merely consistent with that regulatory context did not in itself justify the pricing decisions for Article 81 purposes[19].

It is also important to note that the ECFI stated that whilst Article 81(1)(d) prohibits agreements which apply dissimilar conditions to equivalent transactions with other parties (thereby placing them at a competitive disadvantage), it was not clear that sales made to exporter wholesalers were equivalent transactions to sales made to wholesalers for resale on the Spanish domestic market. Therefore the necessary elements of contractual discrimination contrary to Article 81(1)(d) were not present[20].

The ECFI’s application of the Article 81(3) exceptions criteria

GSK's arguments in favour of Article 81(3) exemption were essentially that the higher revenues resulting from the dual-pricing regime under clause 4 of the General Sales Conditions contributed to efficiency by means of increased capacity for research and development (R&D) expenditure. This in turn facilitated innovation which, it argued, is the determining parameter of inter-brand competition. Moreover as investment in R&D is costly, high risk and long term, it is financed mainly (and in GSK's case was financed exclusively) from the undertaking's own funds rather than by borrowing. GSK argued that parallel trade, by contrast, has the effect of reducing the returns in the pharmaceutical company concerned and thus of impeding the optimum price by reference to the specific circumstances in each member state. Moreover parallel trade has few positive effects in so far as parallel traders do not compete on price to any significant extent but rather keep for themselves a substantial part of the differential between the prices in force in the member states of origin and of destination, thus depriving the final consumer of any downward pressure on pricing. By contrast, GSK argued, clause 4 of the General Sales Conditions would lead to a gain in efficiency, because although the cost of R&D is global and not attributable to a specific production site or product, the strong competitive pressure by innovation prevailing in the sector would ensure that GSK, acting as a rational economic operator, would transform (so far as necessary) the resulting additional profits into investment in R&D.

Further, GSK argued that these issues needed to be assessed in the context on the Commission Communication on the Single Market of Pharmaceuticals[21] which included the following assertions[22]:

  • The pharmaceutical industry is characterised by fierce competition in terms of innovation which leads to a continuous flow of new products on the market, whereas there is relatively little dynamic competition on prices after the product has been launched.

  • The pharmaceutical industry must pay for investment in R&D and for that purpose it needs to achieve a sufficient level of profitability to be able to devote the necessary resources to develop innovative products.

  • In order to finance its R&D activities, the pharmaceutical industry needs to make profits at a worldwide level, whereas there are significant differences between the member states from the point of view of macro-economic conditions, health systems and price controls.

  • It would be extremely difficult to establish a single price level for the whole of the Community because a low level would provide benefits in terms of immediate health care expenditure but would reduce the revenue available for pharmaceutical R&D investment, whilst high price levels would reduce access to consumers and healthcare providers in countries having less favourable economic and social conditions.

The ECFI concluded that the Commission had failed to undertake a rigorous examination of these arguments. It was necessary for the Commission to examine, first, whether parallel trade had led to a loss of efficiency for the pharmaceutical industry in general and for GSK in particular. However, the evidence contained in the Commission's decision on the effects of parallel trade on competition were ambiguous, since a gain in efficiency for intra-brand competition must be compared with a loss of efficiency for inter-brand competition (at innovation level). Therefore, the Commission was required to examine whether GSK's capacity for innovation could be supported so as to give rise to a gain in efficiency for inter-brand competition. To this end, the Commission was required to undertake a prospective analysis to determine whether the disadvantages of the agreement in respect of competition (Article 81(1) EC) were offset by advantages of the type referred to in Article 81(3)[23].

More specifically, the ECFI rejected certain positions taken by the Commission (mentioned earlier in this article) as follows:

First, it was not sufficient for the Commission to question the correlation between parallel trade and R&D investment merely by stating that it was not proved that there was a causal link between parallel trade (or its limitations) and R&D. Likewise, the Commission's suggestion that GSK instead use part of its substantial profits to fund R&D does not avoid the need for a response by the Commission to GSK's arguments that it has every interest in investing in R&D owing to the lively inter-brand competition which depends on innovation.

Second, it was not sufficient for the Commission to refer to exchange rate movements between the peseta and the pound sterling in the period prior to the introduction of the Euro. Exchange rates were only an aggravating factor since parallel trade is linked, independently of exchange rate fluctuations, to the existence of different pricing control regulations in the different member states, which was the structural origin of the parallel trade problem[24].

Third, the Commission stated in paragraph 156 of its decision that "it is a matter of discretion for pharmaceutical companies to decide how much they wish to invest in R&D. Any savings they might hypothetically make by preventing parallel trade would therefore not automatically lead to higher R&D investments. It is conceivable that these savings might merely be added to the companies' profits." However, the ECFI stated that the Commission could not merely reject the GSK's efficiency and innovation arguments on the grounds that the advantages claimed by GSK would not necessarily be achieved. GSK claimed that its General Sales Conditions have the effect of increasing its capacity for innovation, and the Commission was required to consider whether it was more likely than not that the claimed advantages would be achieved.[25]

Therefore the Commission had not properly substantiated its conclusions on the agreement's ineligibility for Article 81(3) exemption, nor had it properly balanced the available evidence in reaching its conclusion that Article 81(3) treatment should not be granted.

Is it abusive for a dominant pharmaceutical company to refuse to supply an exporter wholesaler?

In the context of its Article 81 analysis, the ECFI also referred hypothetically to the position under Article 82(c) EC. It stated that a dominant undertaking is not precluded from setting different prices in the various member states where the price differences are justified by variations in the conditions of marketing and the intensity of competition.[26] Rather, Article 82 prohibits a dominant undertaking from applying artificial price differences as between member states so as to place customers at a disadvantage and to distort competition through an artificial partitioning of national markets.[27] By contrast, in the present case, it was accepted that each member state constituted a distinct national geographic market due to the different national regulations on pricing and reimbursement of medicines. The ECFI therefore accepted that GSK's general sales conditions applied in relation to wholesalers' operations which would take effect on different geographic markets. Therefore GSK could be said to be responding to separate markets, not partitioning existing markets. As the ECFI stated: "It is possible that GSK applies different prices because different markets exist and not so that different markets will exist."[28]

There is already a developing body of case law at national level in various member states, in particular France, Greece and Spain, to the effect that a refusal by a dominant company to supply an exporter wholesaler, so as to prevent that wholesaler exploiting price differences in the destination market, will not constitute abuse of dominant position:

The Greek Syfait case

The Greek Competition Commission issued a decision on 5 September 2006, shortly before the ECFI judgment in GSK v Commission, also concerning GSK, to the effect that GSK had not abused its dominant position in restricting supplies of certain pharmaceuticals (Imigran for migraines, the epilepsy drug Lamictal and the asthma drug Serevent) to Greek wholesalers to prevent the products being parallel-traded outside Greece.[29] GSK initially discontinued supplies in 2000 but subsequently resumed supplies in 2001 on a restricted basis. Following complaints by the wholesalers to the Greek Competition Commission, the question was referred to the ECJ under Article 234 EC, which held in 2005 that it could not rule due to lack of jurisdiction as the Competition Commission did not constitute a qualifying court or tribunal for the purposes of Article 234.[30] However, Advocate General Jacobs meanwhile issued an opinion to the effect that in the circumstances of the case, it was not abusive for GSK to refuse to supply the orders from the wholesalers in full to prevent parallel trade, taking into account the specific characteristics of the pharmaceuticals sector, including the pervasive regulation of price and distribution in the member states, which were imposed on rather than made or chosen by the pharmaceutical companies.[31]

The Greek Competition Commission has now ruled that GSK did not abuse its dominant position from February 2001 when it applied a quota system for restricted supplies (although it did abuse a dominant position for a limited period from November 2000 until February 2001 when it discontinued supplies altogether).

French Competition Council decision: Pharma-Lab, Pharmajet and Pharmadex

The French Competition Council issued a decision on 20 December 2005[32] that various pharmaceutical companies, including GSK, Pfizer, MSD, Lilly, Sanofi and others had not abused any dominant position in refusing to supply certain exporter wholesalers. This was because when the price of a product is regulated, it should not be regarded as abusive for a supposedly dominant operator to refuse to supply such products to another operator which is not itself active on the market affected by the price regulation and which only seeks to purchase such product at a relatively low regulated price in order to be able to export it at a profit.

Further, the Competition Council rejected allegations of vertical restrictive agreements between pharmaceutical companies and wholesalers providing for a preferential (and hence discriminatory) treatment of wholesalers. According to the Council, the difference in legal and regulatory regimes applicable to the two categories of purchasers (exporter wholesalers and wholesalers reselling within France) could objectively justify a differential treatment.

Pharma-Lab and Pharmajet's cases in the ParisCourt of Appeal

The right of a dominant supplier to refuse to supply wholesalers was also demonstrated in two interlocutory cases in the French courts, in which significant pharmaceutical suppliers have been permitted, at interim stage, to refuse to supply parallel exporter wholesalers in France: Pharma-Lab v Glaxo SmithKline and Pfizer[33] and Pharmajet[34]. Each of these judgments, though interlocutory, contained substantial legal reasoning. The Court of Appeal stated in the Pharma-Lab case that it could not be excluded that some of the pharmaceutical companies in question, including Pfizer and GSK, had a dominant market position, or that Pharma-Lab had suffered discrimination on the part of these companies, but without making any definite findings on these points. However the Paris Court of Appeal indicated that assuming that these suppliers were in a dominant position, the decision by the suppliers to limit the supplies of the relevant products to their various wholesalers on the basis of allocations of a quantity of products by reference to the market shares which they had on the French market, did not in itself constitute abuse of any dominant position.

The Paris Court of Appeal also referred to the Commission Communication of November 1998[35] as indicating a serious question for further discussion as to whether parallel exports and imports can truly be translated into a substantial reduction of costs for patients or healthcare systems, as opposed to increased profit margins of parallel traders. Accordingly, the Court further concluded that there was no evidence that the reductions and refusals of supplies constituted a serious and immediate threat to the general economy, the economy of the pharmaceuticals sector, consumer interests or the interests of the claimants.

Spanish Tribunal for Fair Trade ruling – Pharmaceutical Laboratories

In a ruling of December 2001[36], the Spanish Tribunal for Fair Trade upheld the Spanish competition authority's decision that various pharmaceutical companies, including Glaxo Wellcome, were not abusing any dominant position under Spanish law in refusing to supply to a complainant exporter wholesaler, not only because no dominant position could be identified, but also because there was no abuse. The Tribunal stated that in view of the regulation of the market and the purchasing power of the National Health System, the suppliers did not have the independence of action associated with a dominant position. The regulatory controls referred to were in particular the fixing of prices, obligations to supply the market and limitations on advertising. The Tribunal expressly stated that Glaxo Wellcome’s ability to negotiate prices with the Spanish authorities did not mean that it enjoyed any independence in fixing its prices.

There could be no abuse of any dominant position, it was held, because a company in a dominant position should not be required to initiate commercial relations with all customers or potential customers who request it. As regards the complainant wholesaler, which the competition authority had found had from the start been dedicated to export activities, there were no stable, regular and continuous commercial relations with the suppliers concerned, notwithstanding the fact that isolated or spasmodic orders for products had been placed. On this basis, the suppliers were not guilty of breaking commercial relations because no such relations had been established. Moreover, the competition authority observed that the complainant had alternative sources of supply such as other distributors. This case provides support for the proposition that a dominant pharmaceutical supplier can refuse to supply, or alternatively limit supplies to, wholesalers with whom the supplier does not have any continuing commercial relations, especially if there are no stable, regular and continuous relations with the wholesaler in question.

The relevant geographic market

It is generally accepted (and was agreed between the parties in GSK v Commission before the ECFI), that geographic markets of pharmaceutical products are national in scope because of the differing regulatory regimes price approvals, reimbursement and distribution systems. However, there is a clearly discernable trend from these national level cases, now culminating in the ECFI's judgment in GSK v Commission, in favour of a new approach to market definition in relation to parallel exports of pharmaceutical products. It is implied in the ECFI's judgment and it also seems to be implicit in the approach taken in the above national decisions, that the geographic scope of the relevant market arguably should not be assessed by conventional competition law methodology and should be reassessed with reference to the specific characteristics of parallel exports and imports of pharmaceuticals.

Arguably, rather than operating within the member state of export, whose national regulatory requirements have in large part given rise to that member state normally being treated as a distinct geographic market, the parallel trader exploits the results of that member state's national regulatory regime in order to take advantage by arbitrage of differing price regulatory conditions in the other member states. Therefore the differential national regulatory conditions affect not only the question of whether the agreement or conduct of the pharmaceutical company in question is anti-competitive, but may also affect the prior question of the relevant affected market. The ECFI judgment in the GSK case and the above national decisions allow for the view that wholesalers which predominantly purchase for purposes of parallel exportation can be said to be operating on a different geographical market, i.e. outside the market of the member state of export, and as suppliers into the higher-priced member state of import.

The nature of competition in the pharmaceuticals sector

The ECFI's emphasis on the need to take into account the particular legal and economic context led to a need for reassessment of the Commission's findings of substantial market shares held by GSK in one or more member states. The ECFI concluded[37] that "… the fact of holding substantial market shares … clearly does not in itself make it possible to conclude, in a convincing manner, that competition would be eliminated for a substantial part of the relevant products".

Therefore, for the purposes of the final criterion of Article 81(3), high market shares in a pharmaceuticals market cannot necessarily be taken to indicate that a restriction of competition in respect of such products would signify elimination of a substantial part of the relevant market for Article 81(3) purposes. The ECFI based this conclusion on the fact that there is fierce competition at innovation level in the pharmaceutical sector and that competition on price emerges only when, after expiry of the relevant patents, manufacturers of generic medicines are able to enter the market. Therefore, the ECFI concluded that it was necessary to assess what form of competition must be given priority with a view to ensuring the maintenance of effective competition sought by Article 81 EC.[38]

Next steps

The ECFI concluded by directing the Commission to reassess whether Article 81(3) applies to GSK's General Sales Conditions, even though the notification procedure previously provided for in Regulation 17 no longer exists, as a result of EC Regulation 1/2003. This will be a complex task for the Commission. Full assessment of the efficiency argument involves addressing in detail the likelihood of GSK as a rational operator facing competitive pressures at innovation level, to invest in R&D a significant part of the increased funding that would result from its dual-pricing policy. This in turn may involve addressing such questions as the relative amount of such funding that would be invested in marketing as opposed to R&D, and the relative importance of marketing expenditure in raising awareness of a product emerging from the R&D pipeline. Further, the Commission's Communication on the Single Market of Pharmaceuticals[39] and the arguments presented by GSK referred to the fact that investment in innovation is carried out by multi-national pharmaceutical companies on an international scale. Therefore the economics of investment in innovation would be a global matter, weighed in the balancing exercise against the restrictive effects of parallel trade as between individual EC member states (particularly Spain and the UK).

Moreover, the nature of the balancing exercise for Article 81(3) purposes is expressly, according to the ECFI, a prospective exercise, meaning that the assessment must be carried out on a forward-looking basis by reference to the most recently available and relevant data. It is clearly not permissible for a competition authority (or post-modernisation of the Article 81 regime, a national court) to reject a claimant's Article 81(3) arguments without properly weighing up those arguments and balancing the likelihood of them being fulfilled, against the restrictive effects of the agreement in question.

Such is the scale of the issues to be addressed, that one is left with the impression that the Commission is required to make an assessment of GSK's business plans with particular reference to R&D investment, and then to evaluate those plans in the Article 81(3) balancing exercise. One can imagine how much more complex this exercise could be if it fell to be decided by a national court exercising jurisdiction over agreements or matters arising before it in a private enforcement case. Moreover national courts are more accustomed to adjudicating cases by reference to actual evidence as to past or current situations, rather than making forward-looking assessments of complex economic issues of a partly hypothetical nature. Whilst this does not involve any specifically new considerations regarding the tasks facing national courts applying Article 81(3) following the Modernisation Regulation, the GSK v Commission case does highlight the potential complexities for national courts in doing so.

Meanwhile, the recent trend in national court decisions on possible abuse of dominance in relation to withholding supplies to parallel exporter wholesalers in the pharmaceutical sector, and the ECFI's reasoning in GSK v Commission, indicate that there is no per se prohibition under Articles 81 or 82, of parallel trade restrictions in the pharmaceutical sector. Pricing restrictions on parallel exports in the sector will not have the object of restricting competition contrary to Art.81(1), according to the ECFI, at least if there is no actual indication of consumer welfare detriment in the relevant provision. Rather, the actual effects on competition, including consumer welfare in the member state of import, must be fully assessed in the legal and economic context under Article 81(1). An Article 81(3) assessment requires a full balancing exercise of the efficiencies that may result from agreements inhibiting parallel trade, and any expected benefits of such trade, in the legal (regulatory) and economic context. So, much detailed assessment is needed and very little can be taken for granted in such cases in the pharmaceuticals sector.

Note: This article was first published by Sweet & Maxwell Limited in the European Competition Law Review, Issue 2007/2, and is reproduced by agreement with the publishers.

[1] Case T-168/01 Judgment of 27 September 2006

[2] Cases IV/36.957/F3 Glaxo Wellcome (notification), IV/36.997/F3 Aseprofar and Fedifar (complaint), IV/37.121/F3 Spain Pharma (complaint), IV/37.138/F3 BAI (complaint) and IV37.380/F3 EAEPC (complaint) (OJ 2001 L302, p.1)

[3] 25th Report on Competition policy, 1995

[4] Paragraph 118 of its decision

[5] Paragraph 139

[6] Paragraph 141

[7] Paragraphs 154-161

[8] Paragraphs 170 to 176

[9] See paragraphs 150, 151, 177, 179 and 181

[10] Paragraph 147

[11] Paragraphs 136 and 147

[12] (1966) ECR 299

[13] Case 28/77, (1978) ECR 1391, paragraph 56

[14] Paragraphs 117-121

[15] COM (1998) 588 final of 25 November 1999

[16] Paragraphs 133-135

[17] Paragraph 171

[18] See paragraphs 182, 185, 186 and 190

[19] Paragraph 192

[20] Paragraph 175-176

[21] See note 15 above

[22] Paragraph 264

[23] Paragraphs 295-298, 304 and 307

[24] Paragraphs 283-286

[25] Paragraphs 299-301

[26] Paragraph 177

[27] Tetra Pak v Commission (1994) ECR II-755

[28] See paragraphs 178 and 179

[29] Hellenic Competition Commission Decision 318/V/2006, Hellenic Competition Commission press release, 5 September 2006, at

[30] Syfait and others v GlaxoSmithKline, Case C-53/03, OJ 2005 C 182/06

[31] Opinion of Advocate General Jacobs delivered on 28 October 2004, Case C-53/03

[32] Competition Council, Decision No. 05-D-72 of 20/12/2005

[33] Court of Appeal, Paris, judgment of 20/06/2002

[34] Court of Appeal, Paris, judgment of 16/07/2002

[35] See note 15 above.

[36] Doc. R488/01, Pharmaceutical Laboratories

[37] Paragraph 313

[38] Paragraph 315

[39] See note 15 above.