IHS Global Insight Perspective | |
Significance | This is an ongoing battle between GSK and the Commission for clarity on the issue of dual pricing in the Spanish market. Even though GSK has still not been granted exemption, this is another step in the right direction. |
Implications | The pharmaceutical industry is still seeking solutions to its fight against parallel trade, and the fact that the Commission has been ordered to conduct this review does not guarantee that a favourable decision will be made. |
Outlook | It remains to be seen whether the Commission will allow GSK to engage in a dual-pricing policy as a means of controlling parallel trade. This could potentially have wider effects on the whole pharmaceutical industry, which is currently losing up to 4.5 billion euro ($6.6 billion) on a yearly basis. The industry continues to argue that these losses could be ploughed back into research and development (R&D) efforts instead of the pockets of parallel traders. |
GSK’s Quest to Limit Parallel Trade Practices in Spain
Back in 1998, U.K. pharma giant GlaxoSmithKline (GSK), in an effort to curb parallel-trade practices by wholesalers in Spain, put into place a differential system, in which it charged different prices for the same drug depending on whether the drug was destined for the domestic market or the export market. This pricing strategy applied to 82 of its best-selling drugs and products, 8 of which were identified as being targets for parallel trade. These included Beconase (beclometasone), Becloforte (beclometasone dipropionate), Becotide (Becotide), Flixotide/Flovent (fluticasone), Ventolin (salbutamol), Serevent (salmeterol), Lamictal (lamotrigine), and Imigran (sumatriptan). The European Commission was notified by GSK about this so-called general sales condition, which had been signed by 75 wholesalers; however, in 2001 the Commission deemed this practice to be anti-competitive, on the basis that GSK had failed to provide sufficient evidence to substantiate their claim that the practice was necessary because it promotes technical progress as the money lost through parallel trade could be ploughed back into R&D. In response to the negative feedback from the Commission, GSK took its case to the European Court of First Instance (CFI) in 2006. The CFI subsequently went on to uphold the Commission's earlier decision that the dual-pricing system was uncompetitive in theory, although it went on to annul the Commission’s decision due to the fact that it had failed to thoroughly review the evidence provided in GSK’s exemption request (see United Kingdom: 28 September 2006: European Court Partially Vindicates GSK's "Dual Pricing" Strategy, But Confusion Persists Over Parallel Trade).
ECJ Ruling
Following the decision by the CFI, both GSK and the Commission launched appeals to the European Court of Justice (ECJ) regarding the decision, albeit for different reasons. GSK requested a complete annulment of the Commission’s decision without the need for a review, and the Commission requested that its original decision be upheld. Having considered the evidence brought forward by all parties involved, the ECJ in its ruling on Tuesday ( 6 October) decided to uphold the earlier decision made by the CFI that the dual-pricing policy was an infringement of competition rules. However, it also maintained that the CFI committed an error of law in relation to its findings of "anti-competitive object" regarding GSK general sales conditions, as there was insufficient proof that the pricing policy would adversely affect consumers because this was not its intended purpose. The ECJ dismissed both GSK’s request for a full annulment of the Commission’s 2001 decision—thereby granting it an exemption from competition rules—and the Commission’s request that its original decision be reinstated. As a result, the Commission is now required to conduct a thorough review of the evidence to ascertain whether GSK is eligible for such an exemption.
Outlook and Implications
Parallel trade remains an ongoing problem in the pharmaceutical industry, especially in lower-priced markets such as Greece and Spain, where wholesalers buy drugs and export them to higher-priced markets such as the United Kingdom, thereby making a profit. According to Reuters, this practise currently accounts for 4.5 billion euro ($6.6 billion), of the European Union's 130-billion-euro prescription drugs each year. In a statement, GSK asserted that, "this vindicates GSK’s position that the European Commission did not properly assess its request and we will now study the ECJ judgement in depth". Despite the fact that this is good news for GSK, and in turn other pharmaceutical companies that are experiencing similar issues, the fact that the court has failed to grant GSK exemption still shows that there exists an element of doubt about its argument that the dual-pricing policy is necessary in order to fund R&D. Therefore, this ruling must be viewed with caution, as it still does not provide clarity on conditions under which dual pricing can be employed. Even if GSK is allowed to practise dual pricing at this conflict, the company can only use it in Spain. Spain is the only European country that allows dual pricing, under the Royal Decree 725/2003. The legality of that law has been questioned in Spain, but remains valid under a Supreme Court ruling (see Spain: 4 August 2005: Supreme Court Upholds Dual Pricing Decree in Spain). Groups that are currently engaged in parallel trade have expressed their disappointment with the ruling, stating that, "we trust that the European Commission will have the courage of its convictions and declare that GSK's system cannot benefit from an exemption". GSK has also recently been involved in a legal dispute with Greek parallel traders, in which it won the right to limit parallel-trade supplies in Greece (see Europe: 17 September 2008: European Court Ruling in GSK vs. Greek Wholesalers May Limit Pharmaceutical Parallel Trade). Despite the fact that this ruling fails to provide GSK with an exemption, it will be viewed as a positive development by the company, and the pharmaceutical industry, as it may allow pharmaceutical companies to cut down on the parallel export of their products from Spain. Other companies that have previously taken advantage of the potential for dual pricing in Spain will be able to practice dual-pricing policies more vigorously if GSK is triumphant in this litigation (see Spain: 11 October 2005: Pfizer to Charge Up to 400% Higher Prices for Drugs Destined for Re-Exportation from Spain). The ECJ’s statement on its ruling is available here.