ECJ rules on pharmaceutical stock allocation for dominant products

United Kingdom

On 16 September 2008, the European Court of Justice (ECJ) ruled that dominant pharmaceutical companies are not entitled to refuse to meet ordinary orders from wholesalers in order to limit parallel exports by those wholesalers. The judgment does make clear that stock allocation in the pharmaceutical sector should not receive special treatment but leaves to national courts to determine when a wholesaler’s orders are or are not “ordinary”. At the same time, the ECJ accepts that a dominant company should be permitted to take reasonable and proportionate steps to protect its own commercial interests.

The ECJ case stems from a reference from the Athens Court of Appeal for a preliminary ruling on the application of Article 82 EC Treaty which prohibits the abuse of a dominant position. The case involved the Greek subsidiary of GlaxoSmithKline plc (GSK), which was restricting supply to wholesalers in order to limit their parallel trade activities.

The ECJ held that it would in principle be an abuse of a dominant position on the relevant market for medicinal products for the dominant undertaking to refuse to meet ordinary orders from wholesalers with the intention of putting a stop to parallel exports by those wholesalers. On the other hand, the ECJ held that it would be permissible for a dominant supplier to refuse to honour extraordinary orders, since this would be a reasonable and proportionate protection of its commercial interests. The judgment recognises that, if this were not the case, the only choice left to suppliers would be to abstain from any supply to low-price national markets.

The ECJ did not offer guidance on what is understood by “ordinary” or “extraordinary” orders other than to state that historical relations between the parties and the size of the orders compared to national demand are relevant factors; instead, the ECJ left the determination of this issue to the national court.

The ECJ considered the particular situation of the pharmaceutical industry and to what extent refusals to meet orders might be justifiable. The ECJ on the whole rejected claims by GSK that the specific circumstances of the pharma sector justified its refusal to supply. In detail the ECJ found that:

  • Parallel exports of medicinal products from an EU Member State where prices are low to one where prices are higher do benefit final consumers because parallel exports open up in principle an alternative source of supply to buyers and enhance product choice.
  • Parallel trade in medicines is liable to exert pressure on prices and consequently create financial benefits for social health insurance funds and for patients.
  • Manufacturers have some influence on the sale and/or reimbursement price of their medicines through their price negotiations with Member States.
  • The judgment does appear to accept that a supplier’s regulatory obligation to supply national demand can to some extent justify a limitation of supply to wholesalers, in that it may inform the analysis of what constitutes a reasonable refusal to honour an extraordinary order. The judgment is ambiguous on this point.

However, the ECJ side-stepped arguments put forward by GSK that it is necessary for pharmaceutical companies to limit parallel exports in order to avoid the risk of a reduction in their investment in research and development for new medicines.

The ECJ’s judgment in this case limits the scope of stock allocation systems implemented by dominant companies, especially where they are aimed at preventing parallel trade by wholesalers. The pharmaceutical industry can nonetheless take comfort from the ECJ’s finding that even dominant companies should be permitted to take steps that are reasonable and proportionate to the need to protect their own commercial interests, even if uncertainty remains concerning the definition of (extra)ordinary wholesaler orders and consequently of what constitutes an acceptable restriction of supply to a wholesaler.