Stock management of pharmaceuticals – ECJ to toughen its stance?

On 1 April 2008 the European Court of Justice released Advocate General Ruiz-Jarabo’s opinion in a case involving GlaxoSmithKline’s stock management policy of certain drugs in Greece. This creates unwelcome uncertainties about the legality of stock management systems operated by pharmaceutical companies for dominant products. The opinion of the Advocate General is not binding on the ECJ whose judgment in the case is now awaited.

GSK’s policy limited quantities of products sold to wholesalers to levels sufficient to meet the needs of the Greek market. GSK was clear that the policy was intended to limit the levels of parallel trade from Greece. Wholesalers claimed that this policy was an abuse of dominant position under Article 82 EC Treaty.

The case was prompted by a reference from the Athens court of appeal of certain questions based on those raised in the earlier Syfait case (the ECJ decided in May 2005 that it was unable to rule on the Syfait questions as the referring body was not competent to make the reference).

Advocate General Ruiz-Jarabo’s opinion takes a much tougher stance towards GSK (and towards the pharmaceutical innovator in general) than the Syfait opinion of Advocate General Jacobs.

AG Ruiz-Jarabo considers that a restriction of supply by a dominant pharmaceutical company in order to limit parallel trade can in principle be a breach of Article 82 EC Treaty. AG Jacobs took the view that given the particular characteristics of the pharmaceutical sector such a restriction could be justified as a reasonable and proportionate measure in defence of that company’s commercial interests, while AG Ruiz-Jarabo does not. AG Ruiz-Jarabo does not agree that the restriction is justified due to the negative impact of parallel trade on GSK’s incentives to innovate.

It remains to be seen whether the ECJ will follow AG Ruiz-Jarabo’s opinion.

The text of AG Ruiz-Jarabo’s opinion was not available in English at the time of writing. Please click here for the ECJ’s press release regarding the opinion and here for the language versions currently available.

AG Ruiz-Jarabo recommends that the ECJ should find that acts of an undertaking holding a dominant position are not per se in breach of Article 82 EC Treaty, even where the circumstances of the case leave no doubt as to the intention or as to the anti-competitive effect of such acts. He continues that such acts can in principle be a breach of Article 82 EC Treaty but may be objectively justified.

AG Ruiz-Jarabo accepts that the pharmaceuticals sector is not subject to normal conditions of competition. He notes the importance of patents and that holders of industrial property rights can easily assume positions of dominance.

GSK had argued that the reduction in revenues caused by parallel trade has a negative impact on incentives for pharmaceutical companies to invest in research and development (R&D) of new products. However, AG Ruiz-Jarabo sees no causal link between harm to R&D and parallel trade. He ventures that the pharmaceutical sector is only one of a number of sectors reliant on intangible property such as intellectual property rights and that the argument regarding R&D and innovation incentives is designed to “seduce public opinion”.

As regards pricing, AG Ruiz-Jarabo appears unconvinced by arguments that government ceilings on pharmaceutical reimbursement prices harm pharmaceutical companies’ commercial interests. He notes that governments have to provide objective and justifiable reasons for their decisions on reimbursement of pharmaceutical prices.

AG Ruiz-Jarabo continues that the EU provides a favourable environment for R&D. He also takes the view that even if GSK’s refusal had been justifiable, it would have been regarded as disproportionate in as much as it eliminates competition in distribution in Europe by limiting parallel importers in Greece.

In summary, AG Ruiz-Jarabo believes that where an undertaking holding a dominant position refuses to fulfil the entirety of wholesalers’ orders for pharmaceutical products, in order to reduce exports and the prejudice to the undertaking arising from parallel trade, this can in principle be a breach of Article 82 EC Treaty. However, this refusal can be objectively justified, so that it would not constitute a breach of Article 82 EC Treaty. Objective justification can be present in particular, where:

• the undertaking holding the dominant position is obliged to act in this way due to the regulation of the market in question. However, government imposed price ceilings and obligations to maintain sufficient stocks for the entire national market may not be relied upon;

• the enterprise holding the dominant position provides proof that its only intention is the defence of its legitimate business interests. However, arguments that parallel trade has a negative impact on innovation incentives are not sufficient;

• the economic efficiency of the behaviour in question can be demonstrated. However, this had not been demonstrated by GSK.