Competition Law & Parallel Trade of Pharmaceuticals – Wholesaler Welfare or Consumer Welfare?

1. Assimakis KOMNINOS Competition Law & Parallel Trade of Pharmaceuticals – Wholesaler Welfare or Consumer Welfare?

2. Spanish Case (Art. 81 EC) • Glaxo’s Proposition: • State-fixed prices are for medicines that are to be used and paid for in one country’s healthcare system – nowhere else • If medicines are to be exported, there is no reason why the price of these medicines should not be an open negotiation with wholesalers • 1998 – notification to the European Commission • 2001 – Commission prohibition Decision • 2001 – GSK Appeal • 2006 – CFI Judgment (partial annulment) • 2006 – Appeals to the ECJ • 2008 – ECJ Judgment ?

3. Greek Case (Art. 82 EC) • 2000 – Surging parallel exports from Greece → 7 times domestic sales • 2000 – GSK emergency measures (allocation system) • 2001 – GSK European Allocation System implemented in Greece • 2000/2001 – Notifications to the Hellenic Competition Committee (HCC) and Greek Wholesalers’ complaints and civil actions before the HCC and civil courts • 2001 – HCC “unlimited supplies” interim measures Decision • 2001 – orders exhaust GSK’s entire stock within 24 hours • 2001 – EOF (Greek Medicines Regulator) intervenes (GR + 25%) • 2002/2003 – HCC hearings & preliminary reference to ECJ • 2003 – Civil Courts of First Instance reject the wholesalers’ actions - appeals • 2004 – AG Jacobs’s Opinion • 2005 – ECJ declines to admit the case • 2006 – 11 separate cases at Athens Court of Appeal – new references to ECJ (Syfait II) • 2006 – HCC final Decision – follows AG Jacobs – no Art. 82 EC abuse

4. Why Is This An Issue? • Public health • Sensitive matter • Public service obligations • Prescription Medicines • Close regulation at almost all stages of research, development, sale, distribution and supply to customers • Advertising to consumers prohibited – patients’ purchases are cost-uninterested • Sales to consumer without a prescription is prohibited

5. Why Is This An Issue? • High degree of State Intervention • National Governments fix prices - Different legitimate government priorities • allow higher prices thus encouraging research and development, employment and the emergence of new medicines? • fix lower prices and thus reduce the national health budget? • E.g. up to 2003 in Greece prices by law had to be the lowest in the EU (declared unconstitutional by the Greek Conseil d’État) • Payers → National health services, sick funds, patients • THUS: States both price-setters and payers

6. Why Is This An Issue? • Extra-ordinary differences of price • e.g. Athens Court of First Instance (Syfait II): “Indicatively, based on the calculations of the plaintiffs themselves in their actions, their selling price of Imigran Tabl F/C 2 X 100 mg was 3,229 drachmas (with purchasing price 3,133.7 drachmas) in Greece and 5,968 drachmas in Europe, the one of Imigran Tabl F/C 4 X 50 mg was 3,229 drachmas (with purchasing price 3,133.7 drachmas) in Greece and 5,776 drachmas in Europe…..” • e.g. in Bayer/Adalat between 1989 and 1993, the prices fixed by the Spanish and French health services were, on average, 40% lower than prices in the United Kingdom • Formidable opportunities of arbitrage with formidable profits for wholesalers

7. Who Benefits? Who Loses? • No or minimal benefits for patients and payers • e.g. “Clawback” savings less than 1% of the UK budget for medicines – less than 10% of the price difference represents savings for payers • If States want to save money, they do not rely on parallel trade to do so, but fix the prices themselves accordingly • Losses – less money for R & D • e.g. sales of Adalat by Bayer UK, fell by almost half between 1989 and 1993 • Competitiveness of the European pharmaceutical industry • DG-Enterprise (see e.g. Pricing Working Group Report of June 2007)

8. Why Is This An Issue? • Safety issues in place of import - Shortages in place of export / risks for the supply of the local market • e.g. EOF Press Release of 2001: “With regard to press reports concerning shortages in certain medicines, EOF would like to note the following: The appeared shortages, as it is also noted by pharmacists, are due to the export of medicines from Greece primarily to other EU Member States, because of the legal system of parallel imports-exports that constitutes intra-Community trade and cannot be hindered. EOF, pursuant to the current legislation, is in a position to control the sufficiency of the supply of the market only at the level of pharmaceutical companies ... It must be recognised by everybody that is active in the commerce of medicines that one of the primary objectives of the system of authorisation of the producers, importers, wholesalers and pharmacists is to ensure the sufficient supply of the national market…”

9. New Era? Safe Harbour for Pharmaceutical Companies? – Art. 81 EC • Bayer (Adalat) • No Art. 81(1) EC agreement - Unilateral quota schemes • GSK Spain • Art. 81(1) EC - Not an “object” infringement of Art. 81(1) EC • special legal & economic context • no naked restriction of exports – freedom to export at the normal price • Spanish legislation → no intention to be exported (old Art 100 L. 25/1990 now Art 90 L. 29/2006) “Spanish state-fixed prices only applicable to products dispensed and reimbursable by the State in Spain” • Art. 81(1) EC – “Effect”: some minimal benefits

10. New Era? Safe Harbour for Pharmaceutical Companies? – Art. 81 EC • Art. 81(3) EC - Pharmaceutical companies bear burden of proof BUT Commission must take their arguments seriously • Undertaking must employ “convincing arguments and evidence” → Commission must “adequately examine those arguments and that evidence”, conduct a “proper examination”, “validly take into account all the factual arguments and the evidence pertinently submitted” by an undertaking, and refute certain of those arguments, especially if they are “sufficiently relevant and substantiated to require a response” or if they are “relevant, reliable and credible, having regard to their content”. Glaxo Spain, ¶¶ 235, 236, 263, 303

11. New Era? Safe Harbour for Pharmaceutical Companies? – Art. 81 EC • CFI in Glaxo Spain: • “[P]arallel trade has the effect of reducing [research & development-destined] income, to an uncertain but real degree. That practice, which economists know as ‘free riding’, is characterised by the fact that the intermediary leaves the role which he traditionally plays in the value chain and becomes an arbitrageur and thus obtains a greater part of the profit. The legitimacy of that transfer of wealth from producer to intermediary is not in itself of interest to competition law, which is concerned only with its impact on the welfare of the final consumer. In so far as the intermediary participates in intra-brand competition, parallel trade may have a pro-competitive effect. In the medicines sector, however, that activity is also seen in a special light, since it does not bring any significant added value for the final consumer.” (¶ 273)

12. New Era? Safe Harbour for Pharmaceutical Companies? – Art. 82 EC • Syfait, AG Jacobs’s Opinion (2004) • HCC final Decision (2006) • Syfait II, pending (2008?) • Dominance – Market definition? • Industry claims all products which are traded are economically substitutable • GSK Spain: interesting dicta • BUT NB: HCC Decisions 2002/2006, Commission Astra Zeneca Decision • No per se or otherwise abuse; in any event conduct objectively justified

13. New Era? Safe Harbour for Pharmaceutical Companies? – Art. 82 EC • Syfait, AG Jacobs noted the specific context of the pharmaceutical sector and concluded that parallel trade harms rather than benefits consumers because it: • discourages or delays launching of products in low priced countries • may have an adverse impact on incentives for pharmaceutical undertakings to innovate • benefits mostly traders rather than end consumers (patients) or customers (public bodies or taxpayers) • The AG found that unilateral measures by dominant companies prompted by the problems of parallel trade were lawful • NB pharma-only exception

14. Greek Postscript • New L 3580/2007, Art. 15 • Greek State has had enough with shortages • Setting priorities: wholesalers are obliged to first cover the local needs; when and if Greek needs are covered, then they are allowed to export • Wholesalers allowed to export only the medicines that they have purchased directly from the pharmaceutical companies • Not possible wholesalers to be middlemen and collect the units from other wholesalers in order to export them (safety concerns)

15. What to keep from the GSK cases for competition law in general • New generation of case law: consumer welfare → ultimate aim of competition law • In line with the new Article 81(3) Notice-Guidelines • Viewing the older case law through this angle (Consten & Grundig) • Market integration → not an aim in itself but a proxy of consumer welfare • That presumption may be disproved in cases of very particular legal and economic context (pharma) • Object – Effect (Article 81 EC) • Even object infringements can be saved through Article 81(3) EC • Object should not be seen as set in stone → in reality, an empirical presumption that certain conduct usually produces anti-competitive harm

16. What to keep from the GSK cases for competition law in general • Burden and standard of proof clarifications • Article 81(3) EC • Undertaking must employ “convincing arguments and evidence” → Commission must “adequately examine those arguments and that evidence”, conduct a “proper examination”, “validly take into account all the factual arguments and the evidence pertinently submitted” by an undertaking, and refute certain of those arguments, especially if they are “sufficiently relevant and substantiated to require a response” or if they are “relevant, reliable and credible, having regard to their content”. Glaxo Spain, ¶¶ 235, 236, 263, 303 • Procedural curiosity • Must the Commission take an “exemption decision” in this case? (transitional law problem)