Glaxo wins partial victory in EU drug resale case

LUXEMBOURG/LONDON, Sep 28 (Reuters) GlaxoSmithKline Plc has won a partial victory from a European Union court following its attempt to stop Spanish wholesalers from re-exporting the British group's medicines at a fat profit.

The drugs industry says the practice -- known as parallel trade -- costs around 5 billion dollars a year in lost sales and undermines incentives for innovation in the research-intensive pharmaceuticals sector.

Legal experts said the court ruling ordering the European Commission to review a 2001 decision outlawing Glaxo's Spanish pricing scheme was a boost for the wider branded drugs sector, although the legal situation still remained murky.

''This opens the door for pharmaceutical companies to claim that restrictions on parallel trade are justified,'' Gavin Robert, a partner at London law firm Linklaters, told Reuters yesterday.

''As a result, it is likely to be welcomed by many pharmaceutical companies as a step in the right direction.'' The European Court of First Instance said the Commission's main conclusion -- that the aim of sales conditions imposed by Glaxo on the wholesalers was to restrict competition -- was incorrect.

''It cannot be presumed that parallel trade tends to reduce prices,'' the European Court of First Instance said in a statement.

''However, the court considers that GSK has not succeeded in invalidating the Commission's subsidiary conclusion that the general sales conditions have as their effect the restriction of competition,'' the EU's second-highest court said.

Glaxo said the verdict would have no immediate impact on its operations in Europe, since the 1998 dual pricing scheme was only implemented in Spain for a short time. But it welcomed the judgment that the Commission's analysis was partly invalid.

DUAL PRICING In a bid to stamp out parallel trade, Glaxo had set prices for several of its most popular medicines for asthma, allergies, epilepsy and migraine intended for resale outside Spain considerably higher than those for domestic use.

Spain is a common source market for parallel traders, since prices there tend to be low.

Glaxo told the European Commission of the new general sales conditions for its wholesalers in Spain in 1998, but Brussels said the conditions were anti-competitive and broke EU rules.

Glaxo then challenged the decision in the Court of First Instance, saying there were no actual agreements on prices.

The system adopted by Glaxo in Spain is one of several similar schemes used by drug companies to minimise the opportunity for parallel trade. Other arrangements include setting quotas on medicines intended for export.

Pfizer Inc, the world's biggest drugmaker, is another company with special supply arrangements for Spain. A Pfizer spokesman said it was studying the Glaxo ruling but did not see an impact on its own distribution model.

Moves to block parallel trade run counter to the promotion of a single market in Europe -- but manufacturers argue drugs are a special case because their prices are effectively set by governments.

Recent favourable rulings, including court support for Bayer AG's restrictions on supplies of a heart drug, have encouraged drugmakers to step up measures to curb parallel trade. As a result, re-exports have declined somewhat.

Parallel traders argue that is bad news for European healthcare systems, which could face higher medicine bills if competition provided by arbitrage trading is stamped out.

''Research conducted since 2001 has proven that parallel trade creates consumer welfare through competition,'' said Heinz Kobelt, secretary general of the European Association of Euro-Pharmaceutical Companies, which represents traders.

REUTERS SAM HS0909