Recent comments made by EC Vice President Joaquín Almunia suggest that the EC may be turning its attention back to parallel trade issues in the pharmaceutical sector. Parallel traders exploit price differentials between EU Member States (which result from national price controls and regulations) by importing pharmaceutical products from EU Member States with low prices to those with higher prices. In the past, pharmaceutical companies have faced scrutiny from the EC in relation to distribution strategies aimed at limiting the effect of parallel trade in their products. Almunia stated that although parallel trade was an "old issue," the EC has again been "looking into this but [has] not yet decided to open formal proceedings in any case." However, Almunia did not "exclude that in the future [the EC] will adopt some decisions to open proceedings in some cases of parallel trade.”
Parallel trade in pharmaceuticals is widespread in the EU, with parallel traders exploiting the opportunity for arbitrage created by price differentials between EU Member States (which result from national price controls and regulations). According to information received by the EC in the course of its pharmaceutical sector inquiry, the turnover of parallel traders in Europe is approximately €3.5 billion - €5 billion, which is between 2 percent and 3 percent of the overall market. This raises issues for pharmaceutical manufacturers because, in the context of the EU internal market, the competition rules in the Treaty on the Functioning of the European Union (TFEU) limit the ability of companies to impose territorial restrictions on distributors and prevent cross-border sales. Pharmaceutical manufacturers must therefore tread carefully when designing and implementing strategies to counter the effect of parallel trade.
Two common strategies used by pharmaceutical companies for limiting the effect of parallel trade are dual pricing and supply allocation schemes. However, both strategies have previously been scrutinized by the EC and the EU Courts, and therefore present competition law risks in the EU.
Dual pricing: In 2001, the EC found that a dual pricing scheme established by a pharmaceutical company in Spain infringed Article 101 TFEU by creating a structure under which Spanish wholesalers had to pay higher prices for products they intended to export than for those that would be resold on the domestic market. Following appeal, the Court of Justice of the EU (CJEU) held that, in principle, such agreements aimed at prohibiting or limiting parallel trade are restrictions of competition by object under Article 101(1) (Cases C-501/06P etc., GlaxoSmithKline Services Unlimited v EC). However, the CJEU upheld the General Court’s finding that the EC had failed properly to consider evidence, including that relating to the specific structural features of the pharmaceutical market relating to the possible exemption of the agreement under Article 101(3). In the context of a similar scheme put in place by Pfizer, the Spanish National Audience recently ruled] in July 2011 (See Spanish National Audience forces application of ECJ “dual pricing” ruling by the Competition Commission, Issue 18, December 2011) against the Spanish Competition Commission for dismissing a complaint against Pfizer without having taken into account the CJEU’s judgment in GlaxoSmithKline. The Spanish Competition Commission had dismissed the complaint because it did not consider Pfizer's pricing policy to constitute a dual pricing system, but the National Audience disagreed with its reasoning.
Supply allocation: Non-dominant pharmaceutical manufacturers can draw some comfort from the CJEU’s ruling in the Bayer Adalat case in 2004 that there are circumstances in which a non-dominant undertaking can unilaterally decide to restrict supplies to its customers, even if that measure would hinder parallel imports of the product in question. However, that decision turned on the fact that the CJEU found that the EC had adduced insufficient evidence of "concurrence of wills" between Bayer and its customers. For pharmaceutical manufacturers with a dominant position, the line between legitimately protecting commercial interests and breaching competition law is even more finely drawn. In the Greek GlaxoSmithKline case (Cases C-468/06 to C-478/06 Sot Lélos Kai Sia EE v GlaxoSmithKline AEVE), the CJEU stated that in order to determine whether a refusal to supply is reasonable and proportionate, it is necessary to ascertain whether the orders from the wholesalers in question are "out of the ordinary," without providing guidance on what might constitute an "ordinary order."
Whether or not the EC initiates any cases in the near future for restricting parallel trade, Almunia’s comments serve as a reminder that parallel trade is still on the EC’s radar, even if the sector inquiry indicates that the EC has set its sights elsewhere.