UK: Parallel Trade in the Pharma Sector: Where Now for Stock Management?

Last Updated: 15 June 2005
Article by Sophie Lawrance and Pat Treacy

Originally published in Partnering Focus

The issues raised by the parallel trade of pharmaceuticals are rarely out of the European courts for long. This article considers how competition law currently treats parallel trade by pharmaceutical companies, and looks at likely future developments.

1. Introduction

The relevant competition rules prohibit two types of conduct: anti-competitive agreements between two or more companies and unilateral action by firms which amounts to an abuse of a dominant position. These rules are found in Articles 81 and 82 of the EC Treaty respectively. Attempts to control parallel trade can infringe either Article 81 or Article 82. The competition authorities in Europe attach great importance to encouraging competition throughout the European single market. Conduct or agreements which threaten to divide that single market are therefore subject to close scrutiny.

Conversely, controlling parallel trade is an issue of real importance to most pharmaceutical manufacturers. For these companies, distribution of products around the 25 member states of the EU (together with the 3 members of the EEA) can create significant legal and commercial difficulties. Individual member states retain the right to set reimbursement prices for pharmaceuticals, and many also regulate the way in which medicines are distributed in their territories. As a result, prices and sales conditions for pharmaceuticals vary widely around the EU/EEA. Parallel traders are keen to exploit the possibilities for arbitrage produced by this situation. It is increasingly clear that they can do this without infringing manufacturers’ national intellectual property rights (subject to following the rules which apply to repackaging of medicines). Pharmaceutical manufacturers have therefore tried to use different means to reduce parallel imports, in particular through modifications to their distribution systems. However, the legality of such efforts has not always been clear.

Against this background, last month’s judgment in the case brought by Greek pharmaceutical wholesalers against GlaxoSmithKline, was eagerly awaited by the pharmaceutical industry as a whole. It was alleged that Glaxo had abused a dominant position by refusing to fulfil orders placed by wholesalers. Pharmaceutical manufacturers, in particular, hoped that the European Court of Justice (ECJ) would clarify the extent of the obligation imposed on dominant pharmaceutical companies to supply. However, this expectation was frustrated when the ECJ declined jurisdiction to deal with the case.

Before looking in more detail at the issues raised by the Glaxo case, it is worth going back a step to consider the state of the other "limb" of competition law, relating to anti-competitive agreements.

2. Bayer and Article 81

The issues surrounding parallel trade in the pharmaceutical industry came to the fore in the mid-1990s, when the Commission held that Bayer had breached Article 81 by introducing a scheme designed to reduce levels of parallel trade in its best-selling medicine, Adalat.1 Bayer had placed a cap on the quantities of the medicine it was prepared to supply to wholesalers in France and Spain (both relatively low-price countries). The volumes of Adalat to be supplied were fixed by Bayer at amounts required to service those national markets. Bayer refused to make volumes in excess of this level available, as it feared that these would simply be exported to higher-price countries, in particular the UK. The Commission held that Bayer had entered into an agreement with its wholesalers to interfere with parallel trade.

Bayer appealed against the Commission’s decision on the basis that it had implemented the programme of stock allocation wholly unilaterally.2 Article 81 applies only to agreements or concerted practices between separate companies, and Bayer argued that there was no understanding of any kind between it and its wholesalers – in fact, the scheme was contrary to the wholesalers’ wishes.

This argument goes to the heart of Article 81. The Commission and European Courts had previously tended to find that wherever there is an underlying distribution arrangement, any subsequent shifts of policy within that context may be held to form part of an overall course of contractual relations and thus to give rise to an agreement. This reasoning applies even if a particular policy is imposed by the supplier in contravention of the distributors’ wishes. This approach was applied across the board, including in the pharmaceutical industry. For example, in Sandoz,3 the Court found that the wording "export prohibited" stamped on invoices by Sandoz formed part of the continuing contractual relationship between Sandoz and its customers, even though it was not a requirement of the initial contract. According to the Court, the fact that Sandoz’s customers raised no objection to this meant that an ongoing agreement could be inferred. This was therefore subject to Article 81(1) and the "export ban" was found to infringe. An agreement was held to exist even though acquiescence was neither in the customers’ interests, nor was the ban observed, as parallel exports continued.

However, in spite of the uphelpful prior case law, Bayer’s appeal to the Court of First Instance (CFI) was successful. The CFI, and, following a further appeal by the Commission, the European Court of Justice (ecj), held that there was no agreement between Bayer and its wholesalers. Although Bayer had adopted a policy of controlling the volumes of Adalat that it was prepared to supply, this policy had been implemented unilaterally. The Courts emphasised that there could be no agreement without some evidence of a "concurrence of wills" between Bayer and the wholesalers. The Court said:

"The mere… existence of an agreement which is in itself neutral and a measure restricting competition that has been imposed unilaterally does not amount to an agreement prohibited by [Article 81]. Thus, the mere fact that a measure adopted by a manufacturer, which has the object or effect of restricting competition, falls within the context of continuous business relations between the manufacturer and its wholesalers is not sufficient for a finding that such an agreement exists".4

The approach taken by the Courts in Bayer was subsequently confirmed in the context of the car industry in Volkswagen v. Commission. This case confirms that a unilateral policy may be imposed even in the context of selective distribution.

The result in the Bayer case is favourable to the pharmaceutical industry, as it opens up the possibilities for implementing programmes for managing stock so as to reduce high levels of parallel trade. Nevertheless, it does not wholly protect manufacturers from the prospect that wholesalers who are familiar with the competition rules may seek to "agree" with the manufacturer’s policy, potentially giving rise to an agreement which could be within the scope of Article 81. Equally, pharmaceutical manufacturers should implement any scheme to allocate stock or control parallel trade with care. They should not seek to "collaborate" in any way with their wholesalers, for example, by encouraging them to identify other distributors who are engaging in parallel trade. Any such collaboration would be very likely to be within the scope of Article 81.5

3. Glaxo and Article 82

The Bayer case dealt only with Article 81. Bayer was not dominant in a relevant market, so its unilateral conduct could not be challenged. The question of how the competition authorities would deal with similar unilateral actions by a dominant firm was left open. This issue subsequently arose in relation to GlaxoSmithKline’s distribution policies in Greece.

Like Bayer, Glaxo had sought to reduce levels of parallel trade by limiting the volumes of certain medicines that it was prepared to supply to its Greek wholesalers. Greece is one of the lowest-price countries in the EU/EEA. Glaxo originally took the step of limiting supplies in 2000. As a result, a number of Greek wholesalers’ associations brought an action against the company before the Greek Competition Commission, alleging that Glaxo had breached the prohibition on abusing a dominant position contained in Article 82 EC. The preliminary reference to the ECJ arose from these proceedings, as the Greek authority sought the assistance of the ECJ in deciding whether a pharmaceutical company with significant market power would be entitled to restrict supplies, affecting the possibilities for parallel trade.

3.1 The Advocate General’s Opinion

In October 2004, Advocate General Jacobs gave an Opinion in this matter which was very favourable to pharmaceutical manufacturers in the position of Glaxo.6 It suggested that a refusal to supply would not inevitably be an abuse of a dominant position, even if it is motivated by the aim of limiting parallel trade.

The reasons given by the Advocate General are mainly sector-specific. AG Jacobs identified a number of factors which make the pharmaceutical industry particularly susceptible to parallel trade, but which may also provide some justification to manufacturers who take steps to limit the level of exports. The Advocate General noted that the price differences which give rise to the incentive for parallel trade are not created or maintained by market players, but by the pervasive and diverse domestic and EC regulation of the supply of medicines. Prices and methods of distribution are, to a large extent, set by national governments. In the Advocate General’s view, the differences in regulation between countries are directly responsible for creating the opportunities for profitable parallel trade.

The Advocate General also discussed other economic aspects of the pharmaceutical industry which may distinguish it from other industries engaged in the production of readily traded goods. He considered it significant that, in the pharmaceutical industry, pro-competitive innovation can only be achieved by substantial and costly investment in research and development. Pharmaceutical companies need to be able to take steps to ensure that these high fixed costs can be recovered once the drug gains a marketing authorisation. It is therefore not rational to expect the price of pharmaceuticals to be reduced to the lowest price across the whole of the European Union, as this price may be too low to allow the manufacturer to cover its fixed and variable costs and make a reasonable profit.

Further, the Advocate General noted that parallel trade in medicines rarely benefits the consumer. In most other product markets, the positive effects of parallel trade accrue to consumers by allowing them to purchase products at a lower price. However, parallel trade in pharmaceutical products does not necessarily result in price competition benefiting end consumers, as patients in many Member States pay prescription, rather than market, prices for medicines. Lower prices do not even guarantee any net benefit to the social health system. In many Member States, the pharmaceutical market is structured in such a way that the price paid to pharmacists for supplying a particular product is set at the level at which that product is first marketed in that country. This means that any subsequent reduction in price will only benefit pharmacists. AG Jacobs commented that parallel trade cannot, of itself, cure such inefficiencies.

The Advocate General therefore concluded that pharmaceutical manufacturers may be justified in seeking to manage the way in which their products enter the supply chain. This Opinion gave considerable encouragement to dominant pharmaceutical manufacturers. While any stock management scheme would required to be implemented uniformly, proportionately and without discrimination, pharmaceutical manufacturers nevertheless welcomed the possibility of having considerably greater control over their supply chains without such high risks of breaching Article 82.

3.2 The ECJ’s refusal to rule

Opinions of the ECJ’s Advocates-General are not legally binding. Their function is to provide the judges of the ECJ with a thorough and impartial overview of the legal aspects of a case. In practice, the ECJ rarely departs from Opinions of its Advocates General. In this case, however, the Court declined to follow AG Jacobs, stating that it had no jurisdiction to consider the questions posed by the Greek Competition Commission. It did not disagree with the Advocate General on the substantive issues in the case; it simply refused to consider them on the jurisdictional ground that the Greek Competition Commission does not have the right to refer questions to the ECJ. Only "courts or tribunals" can do so under Article 234 of the EC Treaty. The Greek authority was held not to qualify as such a body.

This is a disappointing result for the pharmaceutical industry as a whole. Both sides of the debate had hoped that the ECJ’s ruling would provide some certainty. Pharmaceutical manufacturers in particular had hoped that the Glaxo case would do for Article 82 what Bayer (Adalat) did for Article 81, and had been encouraged by the Advocate General’s Opinion. This issue therefore remains live. It has the potential to affect any company in the industry which supplies in more than one country. Even small or medium-sized companies could, in certain circumstances, be found to occupy a dominant position.

4. Where does the pharmaceutical industry go from here?

4.1 The future for stock management under Article 82

It remains to be seen how the law in this area will develop. The first test of how the courts will deal with refusals to supply in full by dominant companies may be the ruling of the Greek Competition Commission in the Glaxo case itself. The Greek authority will have to decide whether to follow the Advocate General’s Opinion, notwithstanding its non-binding status. It is likely that courts across Europe will find the Opinion persuasive, and it may be difficult for wholesalers or parallel importers to persuade national courts to take a different approach without making a reference to the ECJ seeking guidance. National competition authorities may also be reluctant to act in a way that does not take account of the guidance provided by the Advocate General.

However, a number of wholesalers’ associations have expressed the view that the Opinion should now be wholly disregarded as it was not upheld by the ECJ. Moreover, the Opinion is arguably inconsistent with the wider application of EC Treaty policies. For example, the ECJ has previously held that the principle of free movement of goods should prevail even where there are economic factors apparently justifying behaviour which infringes this principle. In Merck v. Primecrown, the ECJ addressed this issue in the context of the pharmaceutical industry.7 Although the ECJ acknowledged in that case that the imposition of national price controls in the pharmaceutical industry often distorts the market for pharmaceutical products, it held that this was not enough to justify a derogation from the principle of free movement of goods, which is fundamental to the European single market. It is perhaps worth noting that in Merck v. Primecrown the Advocate General had also suggested in his Opinion that the rules on free movement should be applied less stringently when faced with the particular circumstances of the pharmaceutical industry. The ECJ disagreed. If there is eventually an opportunity for the ECJ to rule on the issues under discussion in the context of Article 82, it may well conclude take the same strict approach should be taken.

In view of the importance of the questions raised by the Glaxo case, it is possible that the Commission itself may step in. The Commission’s power to take over cases from national authorities derives from its obligation to oversee the development of competition law, ensuring that inconsistent judgments by different national authorities are avoided. In general, this power will only be exercised in the early stages of an investigation. However, in exceptional circumstances, it may be appropriate at a later stage. Indeed, the ECJ made a veiled reference to this possibility in its judgment in the Glaxo case, referring to the fact that the Commission may relieve the Greek authority of competence to act as a ground for finding that the Greek Competition Commission was not a "court or tribunal" capable of referring questions to the ECJ.

4.2 Price discrimination: Glaxo Spain

Glaxo is also in the process of defending another allegation of anti-competitive behaviour, this time an Article 81 investigation into its dual pricing policy in Spain. This case may give the European courts another opportunity to consider some of the issues under discussion in the Article 82 case.

Glaxo notified its terms and conditions of sale for Spain to the Commission in 2001 under the old procedure which allowed companies to seek an exemption from the application of the competition rules or confirmation that the rules did not prohibit the proposed agreement. Following a number of complaints from wholesalers, the Commission refused to grant an exemption.8

Glaxo had intended to introduce a differential pricing scheme for the Spanish market. Under this system, wholesalers were charged different prices for the same medicine: one price for local consumption (the maximum price established by the Spanish authorities) and a higher price for export. The Commission refused to give Glaxo the comfort it sought, stating that:

"a pricing policy which makes it economically uninteresting for wholesalers to indulge in parallel trade must be considered to be at least as effective as an outright contractual export ban in excluding such trade because it involves in principle no cost of monitoring compliance".9

Glaxo has lodged an appeal.10 Many of Glaxo’s arguments are likely to turn on similar issues to those raised in the context of Article 82 in the Greek case. Again, Glaxo points to the varying national regulation of pharmaceuticals which creates market distortions and argues that the dual pricing system does not affect competition, but merely seeks to compensate for a distortion of competition caused, in this case, by the low prices set by the Spanish authorities. On this analysis, the pricing clauses are not caught by the prohibition of anti-competitive agreements contained in Article 81(1) at all.

Glaxo is also likely to argue in the alternative (as it did before the Commission) that its notified agreement on balance has pro-competitive effects and therefore fulfils the exception criteria contained in Article 81(3). Glaxo claimed before the Commission that its terms and conditions were pro-competitive as they ensured that levels of parallel trade would not be so high as to have an adverse impact on the company’s ability to finance vital research and development. It also referred to the fact that parallel trade only benefits parallel traders, as neither consumers nor national health authorities are able to take direct advantage of the reduction in prices.

These arguments are similar to the factors which the Advocate General considered could provide a dominant company with objective justification for engaging in conduct which might otherwise breach Article 82. Of course, even if the CFI agrees with Glaxo in its Article 81 case, this will not automatically enable the arguments to be used in the context of Article 82. However, it would be a strong indication that there has been a change in the way the Courts view the pharmaceutical market.

5. Conclusion

The policies surrounding the pharmaceutical sector are somewhat schizophrenic. On the one hand, the sector is regarded as a mainstay of European industry. For example, the current Enterprise & Industry Commissioner, Günter Verheugen, recently stated:

"Not only is the pharmaceutical sector vital to our economy and science base but it will be a key component in the enormous health challenges which will dominate the political agenda for the foreseeable future".11

On the other hand, the sector is subject to the full rigour of competition law and has repeatedly been the subject of investigations by the competition authorities which are indended to force the industry to accept unfettered parallel trade. Pharmaceutical manufacturers gained some comfort from the ECJ’s ruling on Article 81 in Bayer, but the Court’s recent refusal to examine the substantive issues in the Greek Glaxo case means that many of the questions relating to Article 82 remain unanswered. Although pharmaceutical manufacturers can legitimately take some comfort from the Advocate General’s Opinion, any company which may be described as dominant should exercise caution until the European Courts have had another opportunity to address the issues.


1. Commission Decision 96/478, OJ [1996] L201.

2. CFI appeal: Case T-41/96 [2000] ECR-II 3383; ECJ appeal: Case C-3/01 [2004] 4 CMLR 13.

3. Case C-277/87 Sandoz v. Commission [1990] ECR I-45; only a summary of the judgment is published.

4. Case C-3/01 [2004] 4 CMLR 13 at paragraph 141.

5. See for example the Commission’s decision in Nintendo, OJ [2002] L255/33.

6. Case C-53/03, available on

7. Case C-267/95 [1996] ECR I-6285

8. . Commission Decision 2001/791, OJ [2001] L302/1.

9. Para. 118 of the Commission Decision.

10. A date has not yet been set for the CFI’s judgment.

11. Commission reference: SPEECH/05/311, 1 June 2005, available on

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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