The European Court of Justice has again refused to set down clear guidance on the legality of refusal by pharma companies to fill export orders from parallel traders. The ongoing legal battle between drug wholesalers and pharma companies about restrictions on parallel trade enters a new phase of uncertainty following the most recent ruling by the European Court of Justice in a case brought against pharma giant GSK by a group of Greek wholesalers.
Parallel trade comes about where wholesalers take advantage of different reimbursement prices for the same drugs prevailing in different EU Member States by buying drugs and shipping them from low price countries to high price countries.
The most recent ruling (itself in a case that has kept the parties in litigation for eight years already) is the latest episode in a continuing soap opera of cases zigzagging between national European courts and competition regulators, the European Commission and the European Court of Justice. Unfortunately, the implication of the ruling is that this particular series still has a long time to run.
In his earlier advisory opinion to the Court in this case, the European Advocate General had clearly not been impressed with the string of familiar arguments that GSK had dutifully trotted out. These are essentially that drug companies’ refusal to supply parallel traders for export is justified by differential national reimbursement prices imposed on the drug companies by state social security authorities, rather than set by the drug companies; that parallel trade unfairly impinges on a fair return on the substantial R&D required to bring a drug to market; that restrictions on drug exports were needed to ensure adequacy of national supply in each country; and that parallel trade serves only to line the pockets of the parallel traders rather than serving the interests of consumers.
As expected, the European Court did not dissent from the views of its Advocate General. To do otherwise would have been to open up a new exception to the much-promoted imperative of completing the European internal free market by vigorously attacking any obstacle placed in the way of interstate trade. It would have taken a very brave court indeed to do this.
However, in a significant move toward the position advanced by the pharma companies, the Court held that pharma companies can refuse to supply “unusual” orders from wholesalers. But to prevent the drug companies from jumping to the conclusion that any export order at all could be “unusual,” the Court also made it clear that a refusal to supply based only on the fact that the order was for export rather than domestic sale would be unlawful. It was for the national courts to decide what was unusual in the light of previous “regular commercial practice.”
The Court raked up two previous cases, both more than 30 years old, as authority for this idea. One admittedly is one of the leading cases in the area of abusive refusal to supply. However, in a judgment in that case running to more than 300 paragraphs, you really need to look hard to identify the two sentences the Court relied on in the GSK case. The other case cited by the Court concerned a refusal to supply petrol in a fuel shortage, where it was held to be not abusive for BP to supply less fuel to an occasional customer than to a regular customer. Hardly a compelling analogy to GSK’s case.
One might speculate that the Court felt that it was caught between a rock and a hard place. The Court did not want to make the pharma industry—among the most vibrant sectors in the EU—a new wide exception to its crusade to complete the internal market. However, perhaps a degree of sympathy for the fact that the national pricing differentials at the root of the problem are not the pharma companies’ fault, left the Court with a desire to leave the door open just a crack.
So where does all this leave us? With about €4 billion of parallel trade annually, one might think that there is an awful lot of “regular commercial practice” that parallel traders can use to justify their export orders. One might also ask whether it would still be normal commercial practice for a parallel trader to request an increase in supplies of 5 percent, or 10 percent, or 20 percent—measured over a month, a year or perhaps the history of the trader’s relationship with the relevant drug manufacturer. What about the case of a parallel trader who currently trades in one drug but, seeing differentials falling away, switches his request for supply to similar volumes of another drug manufactured by the same supplier? Such questions will all provide first rate opportunities to grow the practices of the drug companies’ and parallel traders’ lawyers.
The truth is that although pharma companies are likely to hail the judgment a major step forward, it may in practice be difficult to convince national courts that large orders for export from existing traders are unusual within the meaning of today’s judgment, given the already widespread nature of parallel trade. The judgment will, however, at the same time provide support to those national courts and competition authorities—such as the French Competition Council—who have shown sympathy with the more fundamental arguments raised by the pharma companies.
Likely reaction by pharma companies will be to pursue their existing progression down the supply chain. As the Courts continue to fail to resolve the uncertainty about how the law regulates drug distribution, pharma companies are likely to attempt to gain more security by acquiring more and more direct ownership and control of distribution. Even this, however, is not a complete answer. A refusal to supply a third-party distributor can still be abusive even where the supplier has established its own internal distribution system—particularly where the supplier was previously trading with the third-party distributor. This difficulty for the drug companies may also then lead to a temptation to leverage the existing legal obligation to satisfy demand in each national market by canny planning of creation and utilization of production capacity so as to ensure that in a given geography, available supply does not exceed local demand. So we might see some cases where drug manufacturers argue that they simply don’t have sufficient production capacity to be in a position to guarantee supply in the various EU member states, while at the same time feeding demand for export orders.
Overall, this case unfortunately looks like another piece of rather inelegant sidestepping of this key issue by the European Court. The result will be more litigation and more uncertainty in the market as to the permissible scope of parallel trade. In short—business as “usual”….
This article was first published in International Clinical Trials, October 2008.