10 key points on Parallel Trade and Pharma

29.01.2018

1. What is parallel trade?

Parallel trade is the cross-border sale of goods within the EU by traders outside of the manufacturer’s distribution system without the manufacturer’s consent. The commercial rationale underlying parallel trade is the ability to buy goods in one EU Member State at a relatively low price and subsequently to resell them in another Member State where the price is higher. In the case of pharmaceuticals, this is incentivised by the considerable variations in drug prices between EU/EEA Member States.

2. What is the Commission’s positon on parallel trade?

The EU Commission’s position is that parallel imports increase price competition as the import of goods from a country with lower prices forces sellers in the country of destination to reduce prices. This is the fundamental principle underpinning the single market. This in turn helps consumers. It is on this basis that the Commission has consistently found pharmaceutical companies to have infringed competition law by preventing parallel trade.

3. Has the Court of Justice of the EU (“CJEU”) taken a different positon to the Commission on parallel trade?

The CJEU has sometimes taken a more nuanced approach to the Commission, seeking to balance the competing interests of the pharmaceutical sector and national health systems. However, its guiding principle has been the same as the Commission: maintaining the single market, including in relation to the pharmaceutical sector. This applies not only under the competition rules, but also to legal considerations such as the enforcement of national intellectual property rights, where the application of the principle of Community Exhaustion underpins the free movement of goods across national borders, once they have been placed on the market.

4. Are restrictions of resales permissible under competition law?

Explicit bans on exports in distribution agreements are likely to infringe the prohibition on anti-competitive agreements (Article 101(1) TFEU). In Sandoz v Commission (1990) the CJEU considered that the sending of invoices by a supplier bearing the words “export prohibited” breached EU competition rules.

5. Are stock management programmes viewed more favourably?

Stock management programmes (“SMPs”) ensure that the correct quantity of product is available to meet the needs of individual markets and can reduce excess stock holding on a national level.

The competition implications of SMPs were assessed in the General Court’s judgment in Bayer (Adalat) (2000), which was subsequently upheld by the CJEU. This case concerned the parallel export of Bayer’s ‘Adalat’ product by French and Spanish wholesalers to the UK. Bayer implemented an SMP under which French and Spanish wholesalers would be supplied only with a quantity of Adalat calculated on the basis of orders made in the preceding year.

The Commission found that Bayer had entered into an agreement with the wholesalers to prevent exports to the UK, thereby infringing Article 101 TFEU. However, the General Court held that there was no agreement on which Article 101 could ‘bite’, on the basis that there was no genuine ‘concurrence of wills’ between the parties because, rather than agreeing with Bayer, the distributors had objected to Bayer’s policy of reducing the quantity of drugs available for parallel trade. An SMP may have an impact on parallel trade, but it must be imposed, unilaterally, by the manufacturer, without seeking (or receiving) agreement from national distributors.

6. How is dual pricing treated under competition law?

Typically dual pricing schemes involve the supply of products for sale in a particular Member State at a given price, suitable to pricing and conditions in that country, but impose a supplement if the products are to be sold elsewhere in the EU/EEA.

Dual pricing strategies have been the subject of a long-running CJEU case concerning GlaxoSmithKline’s (“GSK”) Spanish distribution model. GSK originally notified its dual pricing model to the Commission for approval (a procedure that is no longer available). The Commission’s initial Decision was that the agreement amounted to an export ban and so restricted competition by object.

This assessment was overturned by the General Court, but was reinstated by the CJEU in GSK v Commission (Spain, 2009). However, the CJEU agreed with the General Court that the Commission had not properly considered whether the agreement could have benefited from an individual exemption under Article 101(3) TFEU, on the basis of benefits to research and development, even though the CJEU had found the agreement was a restriction by object.

7. When can a dominant company refuse to supply parallel traders?

In Lelos v GSK (Greece, 2008), the CJEU held that it might be permissible for dominant companies to refuse to meet orders in certain circumstances. The Court suggested that manufacturers may refuse orders from wholesalers that are ‘out of the ordinary’, threaten its own legitimate commercial interest and are essentially destined for parallel export.

8. What are the practical implications for dominant companies engaged in parallel trade?

On the basis of Lelos v GSK it seems likely that dominant pharmaceutical manufacturers can refuse orders from distributors that appear disproportionate to previous business dealings between them or to the projected requirements for the relevant national market. However, great care is needed in ensuring that all the requirements are satisfied before supply is refused.

9. Is there as an overall position in relation to competition law and parallel trade?

Pharmaceutical companies adopt a variety of mechanisms to mitigate the effects of parallel trade. Insofar as these are in conflict with the single market objective of the EU/EEA, competition law has tended to take a strict approach and some of these approaches have been found to be unlawful. Other strategies may work effectively if appropriately implemented and have tended to receive a more sympathetic hearing from the Court than the Commission.

10. What impact is Brexit likely to have on parallel trade?

It remains to be seen what impact Brexit will have on parallel trade into the UK. If the UK remains inside the single market, pharmaceutical companies will almost certainly be unable to limit parallel trade. However, if the UK ultimately withdraws from the single market, this may provide greater scope for limiting parallel trade between the UK and EU/EEA countries.

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