The European Court of Justice, Luxembourg

An EU Court of Justice preliminary legal opinion may result in a fall in medicine prices across Europe if it is upheld by the full Court.

On Tuesday, the Advocate General of the European Court of Justice found that GlaxoSmithKline, Europe's biggest pharmaceutical company, had breached European competition law when it refused fully to complete l orders from a group of wholesalers in Greece because it wanted to limit the damage caused by parallel trade – i.e. re-exporting to higher priced markets.

Drug prices in Greece are among the lowest in Europe and GSK's lawyers had claimed that wholesalers had been placing ever-larger orders for certain drugs, mainly so that they could export the products and take advantage of the benefit of higher prices in other EU states.

Parallel trade is estimated to amount to €4bn to €5bn a year, or about 3% of European pharmaceutical sales.

In 2000, GSK changed its Greek distribution system, and supplies to wholesalers were interrupted. The wholesalers claimed that this amounted to anti-competitive conduct and an abuse of a dominant position. The issue was referred to the ECJ.

The Advocate General Dámaso Ruiz-Jarabo said that the Treaty provision which prohibits abuse of dominant position does not admit of any exception. Moreover, he maintains that the Treaty does not provide a basis for attributing to undertakings in a dominant position conduct which is in itself abusive, even when the circumstances of the case leave no room for doubt as to its anti-competitive purpose or effect. On the contrary, such conduct may be objectively justified.

The Opinion said:

First, in the view of the Advocate General, the European pharmaceuticals market is an imperfect market, with a low level of harmonisation, characterised by State intervention in respect of pricing and public reimbursement systems and by the duty to supply and where, because of the industrial patents of pharmaceutical products, the holders of those industrial property rights can easily assume positions of dominance.

Nevertheless, the Advocate General believes that the price regulation system is not completely free from the influence of the manufacturers, who negotiate prices with the health authorities of the Member States. By the same token, the duty to supply does not justify cutting off supplies to rival wholesalers, because the needs of patients in a Member State are not subject to sudden changes, and the statistics for the various illnesses are reliable, offering companies a degree of predictability which enables them to adapt to the market.

Second, protection of legitimate business interests may justify conduct such as that of GSK, in accordance with certain case-law of the Court of Justice. However, in the present case, the Advocate General rejects the idea of a causal link between the loss of income because of parallel trading and the producer's reduction of investment in research and development. In fact, the European Union offers undertakings a favourable environment in that respect, encouraging them to minimise the costs entailed by research and development by means of block exemptions for horizontal agreements of that nature.

Lastly, the Advocate General suggests that undertakings in a dominant position may be entitled to demonstrate the efficiency in economic terms of their potentially abusive conduct. As regards the circumstances of the present case, however, the Advocate General takes the view that – apart from the description of the negative consequences of parallel trade –GSK has not indicated any positive aspect resulting from its cutting down on medicinal supplies to wholesalers.

The Advocate General said that it could be possible for a company to provide an “objective justification” for such conduct – but that GSK's arguments, which focused on the pricing system for drug products, the duty to supply and the impact lost revenue would have on R&D investment, were not sufficient. AdvocateGenerals' opinions are not binding, but are followed in most ases.

Pharmaceuticals industry under pressure

The prospect of a Democrat winning the White House in November is not welcome news for Big Pharma and besides Tuesday's setback for GSK, drugs companies are already under pressure in Europe to cut prices.

Last month, the UK government scrapped a pricing mechanism for prescription medicines but in Ireland, where Big Pharma is responsible for almost 50% of Irish merchandise exports, policymakers have to tread carefully - see Big Pharma link in Related section below.

The UK government rescinded a five-year plan almost 2.5 years before the mechanism, known as the pharmaceutical price regulation system (PPRS). The Health Secretary, Alan Johnson, is targeting the drugs industry in order to reduce his Department's spending by 3%, or £1bn.

It is thought that prices for some proscribed drugs could fall by 10% over the next five years instead of the previously scheduled 7%. Some European countries, including Ireland, base the prices they pay on a basket of prices from different countries, including the UK.

Last year, the UK Office for Fair Trading (OFT) recommended that the Pharmaceutical Price Regulation Scheme (PPRS) should be reformed, to deliver better value for money from NHS expenditure on drugs and to focus business investment on drugs that have the greatest benefits for patients.

An OFT study identified a number of drugs where prices are significantly out of line with patient benefits. These include treatments for cholesterol, blood pressure and stomach acid. The OFT said that at present, many alternative products are available in these and other major areas of expenditure, yet some drugs are much more expensive, but not significantly more effective, than others.Specifically, some drugs currently prescribed in large volumes are up to ten times more expensive than substitute treatments that deliver very similar benefits to patients.

The study recommends that the current 'profit-cap- and price-cut' scheme be replaced with a patient-focussed, value-based pricing scheme, in which the prices the NHS pays for medicines reflect the therapeutic benefits they bring to patients. This would enable the NHS to obtain greater value for money from its existing drug spend.

The OFT estimates that a value-based scheme could release in the region of £500 million per year that could be used more effectively, giving patients better access to medicines and other treatments which they may currently be denied. Over time, value-based pricing would also give companies stronger incentives to invest in drugs for those medical conditions where there is greatest patient need.

In response to the UK government's recent pricing move. the pharmaceutical industry said that it has lost confidence in the UK as a place to do business to an "alarming degree" and the situation is only set to deteriorate.