A&L Goodbody LLP
  February 17, 2005 - Ireland

Syfait V Glaxosmithkline - Article 82 and Parallel Trade of Pharmaceuticals

Introduction Advocate General Jacobs, in delivering his Opinion in Syfait and others v Glaxosmithkline (Case C-53/03, 28 October 2004), has found in favour of Glaxosmithkline (GSK) by stating that the refusal by a dominant pharmaceutical company to fulfil all orders from wholesalers does not automatically constitute an abuse of a dominant position, despite such refusal clearly limiting parallel trade of the products in question. Background The case follows in the footsteps of the well-known Bayer Adalat case which dealt with the introduction by Bayer of a quota allocation system to restrict parallel imports. However, unlike the present case, Bayer was not in a dominant position in relation to the product in question and the ECJ found that there was no agreement between Bayer and its distributors. The ECJ’s judgment in Bayer essentially allows non-dominant companies to unilaterally limit the supply of their products to wholesalers within a Member State in order to prevent them from exporting the goods to another Member State, provided this policy does not become part of the agreement with the wholesaler. Factual Background to the Syfait Case The case was referred to the ECJ through a preliminary reference from the Greek Competition Commission. The case arose from the following facts: GSK stopped supplying its Greek wholesalers with its products because the wholesalers exported a substantial proportion of GSK’s products to other, higher-priced Member States. GSK alleged that the export of its products by the wholesalers was leading to significant shortages on the Greek market. When GSK subsequently reinstated supplies to wholesalers, it refused to meet their orders in full in order to prevent parallel imports. The wholesalers complained to the Greek Competition Commission about GSK’s conduct. According to the Competition Commission, GSK enjoys a dominant position within the meaning of Article 82 in Greece in respect of at least one of the products at issue. The Competition Commission adopted interim measures requiring GSK to meet orders in full, and made a reference to the ECJ. It asked the ECJ whether and in what circumstances a dominant pharmaceutical manufacturer may refuse to meet in full the orders it receives from wholesalers in order to limit parallel trade in its products. Opinion of Advocate General Jacobs The Opinion favours GSK by finding that a dominant pharmaceutical manufacturer, which restricts the supply of its products with the intention of limiting parallel trade, does not necessarily abuse its dominant position within the meaning of Article 82 merely because of its intention to limit parallel trade. AG Jacobs states that it must be analysed whether the conduct at issue is capable of objective justification. In this case, he considered GSK’s conduct to be objectively justified due to the particular circumstances of the European pharmaceutical industry, namely: (i) the pervasive regulation of price and distribution in the European pharmaceuticals sector; (ii) the likely impact of unmoderated parallel trade on pharmaceutical undertakings in the light of the economics of the sector; and (iii) the effect of such parallel trade on consumers and purchasers of pharmaceutical products. The regulation of price and distribution in the European pharmaceutical sector AG Jacobs believes that it is impossible to ignore the pervasive and diverse regulation to which the pharmaceutical sector is subject both at national and Community levels and which, in his opinion, sets it apart from all other industries engaged in the production of readily traded goods. In particular, Member States intervene to limit the prices payable for medicinal products within their territory which leads to the price of pharmaceutical products varying largely between Member States. This in turn creates opportunities for parallel trade. In addition, the distribution of pharmaceutical products is subject at both national and Community levels to a high degree of regulation. Many Member States impose additional duties on pharmaceutical manufacturers and wholesalers in order to guarantee the availability of medicinal products in their territory. The AG states that it is the imposition of such public service obligations which require wholesalers to maintain sufficient stocks to meet domestic demand, thus preventing them from exporting their supplies, rather than GSK’s restriction to supply, and that this results in market partitioning. Moreover, he believes that the legal and moral obligations which require pharmaceutical manufacturers to maintain supplies in each Member State make it doubtful whether it is reasonable and proportionate to require such manufacturers to supply wholesalers in low-price Member States who intend to export the quantities supplied. The economics of the innovative pharmaceutical industry The pharmaceutical industry is characterised by substantial investments in research and development (R&D), high sunk costs and the price regulation of pharmaceuticals. In addition, the legal and moral obligations imposed on pharmaceutical manufacturers make it difficult for them to withdraw products already marketed in low-priced Member States. There is therefore a risk that, rather than supplying parallel traders, dominant pharmaceutical companies would delay the launch of new products in lower priced Member States. This would lead to a fall in the levels of output and consumer welfare generated by some pharmaceutical products and an even greater fragmentation of the market with different ranges of products available in Member States. This in turn would reduce incentives for pharmaceutical companies to invest in R&D as price discrimination may help manufacturers to recover their sunk R&D expenditures while allowing supply of the pharmaceutical products to as many countries as possible. The consequences of parallel trade for consumers and purchasers of pharmaceutical products While the benefits of parallel trade are ordinarily enjoyed by those who purchase the products at a lower price, parallel trade in pharmaceutical products does not necessarily result in price competition discernible to the benefit of the end consumer. Nor does parallel trade always result in price competition to the benefit of the national health care system which purchases pharmaceutical products, or the taxpayers who contribute to those funds. The price differential resulting from parallel trade is often absorbed by those involved in the distribution chain and rarely benefits the ultimate consumer. Comment AG Jacobs states that the special features of the pharmaceutical industry justify a restriction of supply by a dominant pharmaceutical manufacturer in order to limit parallel trade as a reasonable and proportionate measure in defence of that company’s commercial interests. However, the AG, mindful not to set a precedent which could have wider implications for other industries, limits his analysis explicitly to the highly specific nature of the pharmaceutical industry and to the particular type of conduct at issue. Indeed he states that it is highly unlikely that any other sector would exhibit characteristics which would lead him to the same conclusion. He also does not exclude the possibility that a restriction of supply by a dominant pharmaceutical manufacturer could fall foul of the Court’s case law on refusal to supply if it has negative consequences for competition arising other than as a consequence of its restriction of parallel trade. The AG’s opinion is welcome in that it shows a willingness to take into account the very specific characteristics of the pharmaceutical industry. If the ECJ follows the AG’s Opinion, this case will provide very helpful guidance to the pharmaceutical industry in how to deal with increasing volumes of parallel imports, particularly following the recent enlargement of the EU.


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