Brussels, 8 May 2001
Commission prohibits Glaxo Wellcome's dual pricing system in Spain
The European Commission has decided to prohibit the dual pricing system which Glaxo Wellcome (GW) had introduced for all its pharmaceutical products in Spain. GW had notified this system to the Commission for clearance in 1998. Under the dual pricing system, GW requires its Spanish wholesalers to pay a higher price for products which they export to other Member States than the price which they pay when reselling the same products for consumption on the domestic market. This system aims to reduce parallel trade within the Single Market. In the Commission's view, the system interferes with the Community's objective of integrating national markets and restricts price competition for GW products. The Commission also concluded that the dual pricing system cannot be justified on economic grounds. GW must immediately end its dual pricing system and inform the Commission within two months of the steps it has taken to achieve this.
Commenting on this decision, Competition Commissioner Mario Monti said: "Pharmaceutical companies or other companies cannot put in place distribution arrangements which perpetuate the partitioning of the Single Market into national markets. In principle market partitioning arrangements do not qualify for an exemption, but we have carefully examined GW's economic arguments. However, none of these arguments were convincing upon closer scrutiny."
In 1998, Glaxo Wellcome (GW) - now merged with SmithKlineBeecham into GlaxoSmithKline (GSK) - notified to the Commission new conditions for the sale of all its products to wholesalers in Spain. These wholesalers would have to pay markedly higher prices for products which they would export than for products which they would resell for consumption on the domestic market. The large majority of wholesalers signed the new sales conditions. Following the notification, the Commission also received four complaints from wholesalers and associations of wholesalers involved in parallel trade of pharmaceutical products.
Glaxo Wellcome's arguments and Commission's decision
GW does not contest that the dual pricing system aims at impeding parallel trade. It argues, however, that its system does not restrict competition because the price differences between Member States result from the differences between national governments' regulatory action. This action concerns the setting of sales prices as well as the reimbursement of pharmaceutical products. Prices vary considerably between Member States. GW in particular contrasts Spain (where regulatory maximum prices prevail) with the United Kingdom (where companies' profits are capped but where companies can set their prices freely in principle).
The Commission rejects this argument on legal and factual grounds:
The European Court of Justice has already ruled that the existence of divergent national price regulations in the pharmaceutical sector does not exclude the principle of free movement of goods (Merck Primecrown judgment, 1996). In the Commission's view, this divergence does not exclude the application of the Treaty competition provisions either.
Moreover, factual evidence shows that GW does not simply accept prices set by the Spanish authority. There is always negotiation and for four products which are prime candidates for parallel trade, GW has even negotiated price increases with the Spanish authorities. Furthermore, the level of parallel trade in pharmaceuticals is affected by other non-regulatory factors such as currency fluctuations. At the time of the notification fluctuations between the peseta and the pound had a considerable impact on price differences for Glaxo's products between the two Member States. GW does not deny that parallel trade due to currency fluctuations is legitimate.
GW's dual pricing system also excludes or limits de facto parallel trade from Spain to other Member States for the vast majority of its products. It therefore interferes with the Community's objective of integrating national markets and it restricts price competition for GW products to a significant extent. The Commission notes that in view of the patent protection enjoyed by the pharmaceutical products, parallel trade often constitutes the only alternative source of supply.
GW claims that, in any event, there are "consumer welfare" arguments for justifying any restriction of competition which results from its dual pricing system. It refers to the losses it incurs due to parallel trade and states that these losses seriously affect its R&D budget which it uses to develop innovative drugs.
The Commission sees no merit in this argument since it is not corroborated by the facts. To start with, there does not appear to be any causal link between the losses due to parallel trade and GW's R&D investments. Moreover, these losses are too insignificant to affect these investments to a considerable extent. Finally, it must be stressed that the R&D budget of pharmaceutical companies while important only represents around 15% of their total budget. Losses stemming from parallel trade could just as well be deducted from the companies' other budget items such as marketing costs.
GW also contends that parallel trade may lead to shortage of supply for its products in Spain. Here again the Commission finds no evidence for this contention.
Immediate termination of the system
The Commission has not imposed a fine (notified agreements are immune from fines) The Commission has also taken into consideration the fact that this case is novel since it is the first time that a pharmaceutical company has sought to justify restrictions of parallel trade on the basis of economic arguments. However, GW must immediately end its dual pricing system and inform the Commission within two months of the steps it has taken to achieve this.