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URL: http://www.bailii.org/ew/cases/EWCA/Civ/2001/1896.html
Cite as: [2001] EWCA Civ 1896, [2002] Eu LR 197, [2002] UKCLR 305

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Secretary of State for Health, R (on the Application of v Association of Pharmaceutical Importers & Anor [2001] EWCA Civ 1896 (8th December, 2001)

		Neutral Citation Number: [2001] EWCA Civ 1896
		Case No: C/2001/0747; C/2001/0747/A; C/2001/0747/B

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CROWN OFFICE LIST
MR JUSTICE THOMAS

Royal Courts of Justice
Strand,
London, WC2A 2LL

8th December 2001

B e f o r e :

THE MASTER OF THE ROLLS
LORD JUSTICE ALDOUS
and
LORD JUSTICE WARD
____________________

THE QUEEN
And
THE SECRETARY OF STATE FOR HEALTH

Respondent

Ex parte

ASSOCIATION OF PHARMACEUTICAL IMPORTERS
And
DOWELHURST LIMITED

ASSOCIATION OF THE BRITISH PHARMACEUTICAL INDUSTRY

Appellants

Party Directly Affected

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

Mr N. Green QC, Mr M. Hoskins and Mr C. West (instructed by Roiter Zucker for the Appellants)
Mr N. Giffin and Mr J. Coppel (instructed by Solicitor to the Department of Health for the Respondents)
Mr D. Anderson QC and Miss M. Gray (instructed by CMS Cameron McKenna for the Party Directly Affected)
____________________

HTML VERSION OF JUDGMENT
(AS APPROVED BY THE COURT)
____________________

LORD JUSTICE ALDOUS:

This is the judgment of the Court in an appeal brought by the Appellants, the Association of Pharmaceutical Importers (API), now called British Association of European Pharmaceutical Distributors, and one of their members, Dowelhurst Limited, who appeal against the order of Mr Justice Thomas of 14th March 2001 which dismissed their application for judicial review.

The application for judicial review was dated 18th October 1999. In it the appellants sought, as against the Secretary of State for Health, an order quashing the modulation provisions contained in Chapter 21 of the 1999 Pharmaceutical Price Regulation Scheme (PPRS). Further relief was sought, including a declaration that the modulation provisions were unlawful and an injunction preventing the Secretary of State from giving effect to those provisions. In their grounds, they alleged that the modulation provisions were unlawful as they were in breach of Article 28 EC and could not be justified under Article 30 EC. They also alleged that the modulation provisions were unlawful as they were contrary to Articles 10 and 81 EC.

In 9 out of 15 EU Member States the prices of prescription medicines are controlled directly. The form of intervention adopted in the UK has for many years been based primarily on controlling the profits of the pharmaceutical companies. Since as early as 1957 a voluntary price regulation scheme, then called the VPRS, was adopted. It was and is operated by the Department of Health as a voluntary scheme, but is now called the PPRS, a name which reflects its more formal nature. As we have said, its main feature has been the regulation of the overall profitability of pharmaceutical companies with sales of branded medicines to the NHS. It seeks to achieve reasonable prices for the NHS, whilst recognising that the pharmaceutical industry needs to earn sufficient profits to enable it to develop new and improved medicines. Under the scheme profits made by the pharmaceutical companies from their sales to the NHS are monitored to ensure that they remain at a reasonable level. If a company’s profits exceed its target, it is required to reduce its prices or to make a cash payment to the Department. The overall company profitability is normally assessed as a return on capital employed by the company in supplying the medicines to the NHS. A target profit expressed as a return on capital employed is set for each member company. The method of calculation has changed slightly over the years. The detail is not important for these proceedings. It is sufficient to note that under the 1999 scheme two levels of target were employed. Level 1 was set at 21% which was used for the overall assessment of profits which may lead to a requirement for price cuts or cash repayments to the Department. Level 2 set at 17% was to be used in order to assess applications to increase prices. The scheme also made provision for a margin of tolerance in certain circumstances which are not relevant to these proceedings.

Under the PPRS there are no direct restrictions upon the prices for new products placed on the market. It is the member company’s overall profit target that has to be met.

At first sight, it is odd that there should be control over company profits when there is a general emphasis in the world on free trade. However the nature of a state-run medical service makes this necessary. The patient is the ultimate consumer: his needs are provided for by doctors and dentists who prescribe appropriate drugs. They are supplied to the patient by dispensing chemists who are remunerated by the Department of Health. Although the Department may in certain circumstances influence what is supplied, in general that is not the case. It follows that the person who chooses the drug and its amount, the doctor, is not subject to the direct influence of price.

Pharmacists are independent contractors working within the NHS. They can buy products from any source, but have to supply the product prescribed by the doctor. Thus if the prescription uses the brand name, the pharmacist must supply the branded product. If the generic name is used, the product can come from any source and may be branded or not.

The method of payment to pharmacists is intended to encourage good value for the NHS. In principle pharmacists are reimbursed for the cost of the product and are paid a professional fee for dispensing it. To enable this to be done, a body called the Prescription Pricing Authority publishes a monthly price list prepared by the NHS called the Drug Tariff. This sets out the manufacturers’ list price for branded products and the current price allowed for each generic product. It is those prices that the pharmacists get paid, subject to a “claw back” scheme. It follows that the pharmacist will be paid at the Drug Tariff price, but will make an extra profit if he can obtain the relevant product at a discount from the list price. One source of equivalent products offered at a discount is branded products put on the market in other Member States of the European Union and imported by members of API. Such products are known as parallel imports.

Parallel imports arise from price restrictions and the patent law prevailing within the European Union. It was established by the European Court of Justice in Parke Davis v Probel Case C-24/67 [1967] ECR 55; [1968] CMLR 47; [1968] FSR 393 that the mere existence and exercise of a patent right did not infringe Articles 81 and 82 EC. Further, although the exercise of patent rights to prevent importation was prima facie contrary to Article 28 as being a quantitative restriction on trade between Member States, the normal exercise of such rights would ordinarily fall within the exception provided for industrial property rights in Article 30. However the doctrine of exhaustion of rights serves to restrict the right of the patentee to bring proceedings for infringement by importation and sale in a State when the patentee has already consented to the marketing of the goods in question in another Member State. The principle of the free movement of goods prevails (see Centrafarm BV v Sterling Drug Inc. Case C-15/74; [1974] ECR 1147).

The pharmaceutical market in the United Kingdom has been particularly susceptible to penetration by parallel imports. This arose from the relatively high price of drugs in this country compared with certain European countries, such as Spain, Italy and Greece, which impose price controls. Such price differences that existed have been exacerbated by the rise in the value of sterling. The parallel importers buy the patented product in say Greece and import it into the UK with perhaps some repackaging. They then sell it to the pharmacist at a discount to the Drug Tariff price, thereby enabling the pharmacist to make a greater profit. To enable that to be worthwhile, it seems that the parallel importer needs to purchase the patented product at a price about 20% cheaper than the Drug Tariff price. The success of such trade is evident from the turnover of Dowelhurst. In 1994 they had a turnover of Ł26.6 million. That had increased by 329% by the end of 1998. As the business of parallel imports has grown, the ABPI has expressed concern at the damage it is causing its members who are the companies who carry out research and development to provide the new drugs needed to alleviate suffering in the world.

The market in pharmaceuticals is to an extent dominated by patented and branded products. In general they are the most up-to-date and therefore are likely to be the most efficacious. Those products can be considered in three categories. First, patented products for which there is no satisfactory therapeutic alternative. These will be branded with the trade mark of the patentee. Second, patented products where there is a satisfactory therapeutic alternative. These will be branded. The therapeutic alternative may or may not be patented and may or may not be branded. Third, branded drugs not covered by patents. These drugs will have direct competition from generic equivalents.

The stimulus for these proceedings was a speech made by Mr Frank Dobson when he was the Secretary of State for Health at the ABPI dinner in April 1999. As reported in the Financial Times he said that for every pound the NHS saved through parallel imports, the industry lost Ł6. That was, he said, bad for industry and bad for Britain. If industry co-operated, the government would consider a system that gave extra rewards for newer research-based products and would use the PPRS as a method of trying to reduce the incidence of parallel imports.

The 1999 scheme which emerged after negotiation between the Department and ABPI had three elements: a cap on profits, a requirement that prices of drugs be reduced by 4.5% and in chapter 21 an ability to modulate. Chapter 21 enabled the member companies to provide an overall price cut of 4.5% by choosing, subject to certain restrictions, how that was to be achieved. For example, the price of one product could be cut by 9% which could, all things being equal, allow the price of another product to be maintained. In reality, the 1999 scheme consisted of only two elements: a cap on profits and a requirement of an overall price reduction of 4.5% achieved within the conditions of the scheme. The liberty to choose how to achieve the overall price cut has been called modulation; no doubt this has resulted from the need to use one word instead of a number to describe what is meant. However it is important to note that the need to modulate only arises when a price cut is required.

We shall come in detail to the modulation provisions of the 1999 PPRS which are said to be illegal, but it is important to bear in mind that modulation provisions had been part of the PPRS since 1983. It was in that year that member companies were required to reduce the NHS list price of proprietary and generic medicines by 2.5%. That could be achieved by companies making differential price reductions “providing that the total savings equated to a 2.5% reduction on all products”.

A further price cut of 2.5% took place in 1986 and again member companies of the scheme were entitled to deliver the cut by differential price reductions.

The 1986 scheme did not require a further price cut and it did not contain any provision for modulation. It followed that member companies were free to increase or decrease the prices which prevailed at the introduction of the scheme, provided that the ultimate result was a nil cost to the NHS. In fact there were 357 price increases and 235 price reductions.

Modulation was an important feature of the 1993 scheme. It was a requirement of the Secretary of State that all companies with annual sales to the NHS above the Ł1 million would reduce their prices for all products by 2.5% at the time of introduction of the new agreement in October 1993. Those prices were to remain frozen for 3 years, except for certain eligible price increases. The Department preferred that there should be a standard reduction in all prices, but it was prepared to negotiate variable levels of price changes per product, provided that the net effect would achieve the overall reduction. It was the stated policy of the Department:

“The Department is prepared under the scheme to consider proposals from companies for price modulations, where the combined effect of a set of price increases and decreases from a number of products is a cost-neutral outcome. The maximum permissible price increase for any one product is 10%. The Department may wish to monitor the effects of the modulation over several years, to ensure that the cost-neutral effect is achieved for the company in question. Any discrepancies which emerge will be raised with the company concerned. Modulations will not normally be permitted on products in Selected List categories.”

At the outset of the 1993 scheme there were 379 modulations, of which 163 were price increases and 193 price decreases. Throughout the entirety of the 1993 scheme there were 914 modulations of which 569 were increases and 334 decreases. The large number of price increases were probably caused by the depth of the price reduction.

The Department believes that the ability of companies to modulate under the 1993 scheme was widely known. It must have been known to employees of the member companies involved in price setting. It was also reported in August 1993 in the widely read trade paper called SCRIP. Even so, it appears that the employees of Dowelhurst did not know of modulation until the arrival of the 1999 scheme.

The operation of the schemes prior to 1999 was not truly transparent to the industry as a whole. For example, the published terms of the 1993 scheme did not constitute a complete record of the rules whereby the scheme was operated in practice. Thus one of the Department’s objectives in drafting the 1999 scheme was to make it more transparent. The Department during the negotiations with ABPI leading to the 1999 scheme cited the requirements of open government and the need to make decisions transparent and demonstrably objective. Further some ABPI members felt that the “discretion” to modulate under the 1993 scheme had been undermined by a reluctance of the Department to approve proposals and that the stated principles were not always observed.

The principal features of the 1999 scheme are:

(1) The restriction upon profits to which we have referred.

(2) An initial price cut of 4.5% to be delivered from 1st October 1999. Member companies retained the discretion to leave prices on particular products unchanged, or to reduce them by variable amounts provided the 4.5% reduction in cost of sales to the NHS was achieved.

(3) Following the initial price cut, remodulation could take place which might involve both reductions and increases in prices, but only up to the level which prevailed on 1st August 1999. The effect of remodulation had to be cost-neutral, that is, it must not threaten the delivery of the 4.5% cut.

(4) Until 1st January 2001 member companies could not increase prices above their 1st August 1999 levels. They remained however entitled to apply for price increases by reference to their profit targets.

(5) From 1st January 2001 companies could remodulate by increasing prices above the level which prevailed at 1st August 1999. However such price increases were restricted to 20% above the 1st August 1999 level. The Department reserved the right to withhold agreement to price increases of 10% or more in any one year.

(6) Since price modulation and the requirement of a cost-neutral outcome were not easy to predict, member companies were permitted a margin of error of 0.5% on either side of the prescribed target.

(7) Companies seeking to modulate their prices had to comply with appropriate information requirements of the Department.”

The modulation provisions of the 1999 scheme were not different in kind to those that had been applied previously, but the difference in detail restricted modulation and remodulation to an extent. The major difference between the 1999 scheme and previous schemes was the large price reduction. That meant that deeper price cuts were necessary. However the fact that members were not permitted to increase prices above the August 1999 level and the limits on increases thereafter, meant that room for manoeuvre under the 1999 modulation provisions was smaller than it was under the 1993 scheme.

The 1999 scheme contained 29 chapters and annexes A-E. Chapter 1 set out the purposes and chapter 2 contained an introduction. Thereafter it proceeded with chapters on application, entry mechanism, products covered, information to be provided and chapters concerned with calculation of profits. Chapter 18 required the 4.5% reduction on the prices of medicines covered by the PPRS. Chapter 21 contained the modulation provisions. As they alone are attacked, we will set them out in full.

“Principles underlying modulation as an alternative to a price reduction of 4.5% on all products

21.1 As an alternative to an across the board price reduction, scheme members may modulate the list price of their PPRS products by reductions that equate to an overall level of 4.5%. Product list prices may be increased or decreased during the period 1 October 1999 to 31 December 2000, provided that they do not exceed those that prevailed on 1 August 1999. Modulation will be deemed to have occurred where:

List prices have been reduced by a percentage other than 4.5%.

List prices remain unchanged from those that prevailed on 30 September 1999.

21.2 Companies can remodulate at any time from 1 October 1999, provided the Department is notified 21 days in advance of the implementation of the price change. The Department will have 14 days in which to respond to modulation notifications and will only withhold agreement where it can be shown that the effect would place the delivery of the price reduction in doubt.

21.3 Companies will not be permitted to substitute discounts or contract prices already in place before 30 September 1999. Price reductions made on products where the patent or supplementary protection certificate expires after 1 July 1999 and before 1 January 2001 will not be allowed in calculations of modulations or overall adjustments made to achieve the price reduction

Modulation principles after 1 January 2001

21.4 The Department is keen to minimise interference in the conduct of companies’ commercial affairs consistent with safeguarding public expenditure. Companies are permitted to modulate the prices of products provided that the effect of the modulation is cost neutral.

21.5 From 1 January 2001 list prices may be increased to a level no greater than 20% above the level that existed on 1 August 1999 subject to the agreement of the Department. The Department will consider applications for increases of more than 20% for products with NHS sales of Ł100,000 or less where a medical need can be justified. The Department may withhold agreement to any price increase of 10% or more in any one year.

21.6 The prices of new products introduced after 1 October 1999 can be increased by up to 20% after 1 January 2001. Any reduction in the price of a new product cannot be used to offset price increases on other products until the new product has been on the market in the UK for two years.

21.7 Scheme members will not be permitted to use price reductions that may be necessary as a result of patent or supplementary protection certificate expiry to justify a price increase on other products. Consequently scheme members will not be allowed to include in their modulation proposals price reductions made on products where the patent or supplementary protection certificate has expired within one year before, or will expire within two years after, the proposed date for modulation. Where a competitor product enters the market within two years of patent or supplementary protection certificate expiry, the exclusion period for modulation purposes will be extended to a maximum of 2 years from the market entry of the competitor product.”

As well as making the 1999 scheme more transparent, legislation was enacted to provide a statutory background. It was accurately described by the judge:

“30. S. 33 of the Health Act 1999 (under which the PPRS was made) provides that the Secretary of State can enter into schemes with an industry body for the purpose of limiting prices or profits; a manufacturer or supplier to be bound by the scheme has to consent to the scheme being applied to him. The statutory provisions include requirements for the supply of information.

31. Under s. 35, the Secretary of State is empowered to adopt a statutory scheme for limiting prices and profits, but the provisions of the statutory scheme cannot be applied to a member of the PPRS, as s. 33(7) provides that statutory schemes do not apply to members of voluntary schemes made under s. 33.

32. On 24 January 2000, the Secretary of State made The Health Services (Control of Prices of Branded Medicines) Regulations 2000 (SI 2000 No 123) imposing a 4.5% price cut in respect of branded medicines supplied to the NHS by reference to a price list published by the Department on its internet web site; other provisions enable manufacturers or suppliers to apply for a price increase. Like the PPRS it does not impose a price cut in respect of generics. However, unlike the PPRS, it contains no modulation provisions; it is an across the board measure and allows no commercial latitude. The evidence of the Department was that this omission was intended as an incentive for all suppliers and manufacturers of branded products to join the PPRS, as the statutory scheme does not apply to those who are members of the PPRS.”

Against that background, we turn back to the complaint of the appellants. They allege in their Form 86A that the modulation provisions which are contained in chapter 21 of the 1999 PPRS are in breach of Articles 28 and 81 EC and are unlawful. They seek relief which would have the effect of preventing the provisions of chapter 21 being applied. Their complaint in general terms is that the modulation provisions have the object or effect of restricting, distorting or preventing competition. They are potentially capable of directly or indirectly making it impossible, or more difficult than it would be in the absence of modulation, to sell parallel imported pharmaceutical products in the United Kingdom. Putting that in commercial terms: the provisions enabled, tended or encouraged (however you wish to call it) members of the PPRS to make deeper price cuts on some products, in particular products the subject of parallel importation.

Mr Brownlee, the Branch Head of the PPRS branch of the International and Industry Division of the Department, suggested in his first affidavit that a successful challenge to the 1999 scheme as a whole by the appellants would be counter-productive so far as they were concerned. The result would be, in the first instance, a greater degree of commercial freedom to compete with parallel imports. To that there was no challenge in the evidence of the appellants. We suspect that Mr Brownlee is correct and it is for that reason that the appellants wish to eliminate the modulation provisions in chapter 21, whilst leaving in place all the other provisions of the 1999 scheme. That the Department submitted was not appropriate. As Mr Brownlee said:

“In the Department’s view, however, it would not be appropriate for the court, in effect, to rewrite the 1999 Scheme in terms which the parties would not have agreed of their own accord. It would follow that no relief ought to be granted to the Applicants even if their legal submission were held to be well-founded.”

Whether or not that statement is correct must be the first issue to be decided.

The judge held that it was not possible to sever the modulations provisions in chapter 21 from the rest of the agreement. He said:

“42. ABPI and the Department both contended that the modulation provisions could not be severed; API did not address any specific argument to the contrary. It might have been important to decide whether, for the purposes of severance, because the PPRS is an agreement, the contractual test was applicable or whether, because of the nature of the PPRS, the public law test set out in cases such as Kent County Council v Kingsway Investments [1971] AC 72 and DPP v Hutchinson [1990] 2 AC 783 applied. In R v North Hertfordshire District Council ex p Cobbold [1985] 3 All ER 486, Mann J, after setting out a number of the authorities in public law, applied the test of whether a discrete part could be excised without altering the character or substance of the rest. In contract the test can be formulated as whether severing the provisions would alter entirely the scope and intention of the agreement (see the authorities cited in Chitty 28^th edition at paragraph 17-189). However in the argument before me it was not suggested that there was any material difference in the private and public law tests for severance as applied in the circumstances of this case.

43. In my view whatever test is applied it is not possible to sever the modulation provisions. It is clear on the evidence that they are an integral part of the agreement made; they are an essential part of characterising it as “light touch regulation”, as they leave substantial room for free market competition. Without them, the provisions of the agreement would have been structured differently. Indeed agreement may not have been reached, as I accept that the ABPI would probably not have agreed to a 4.5% price cut if modulation had not been included. Without the modulation provisions, therefore the character and the substance of the scheme would have been fundamentally altered; the substance would have been materially changed.”

The judge was right to conclude as he did. Professor Jones, the Director General of the ABPI, explained in his evidence that ABPI’s goal during the negotiations leading up to the 1999 scheme was to reach an agreement on a replacement of the 1993 scheme which would preserve savings to the NHS and enable companies to compete on price with their competitors. The Department’s opening position was that they wanted a price cut and an initial figure of 6% was put forward. The figure of 4.5% could, in ABPI’s view, only be accepted on the basis that the scheme gave companies flexibility on how to deliver the savings which the NHS required. This included the right to modulate on reasonable terms. It was Professor Jones’s view that the ABPI would not have agreed the 4.5% overall price cut without a right to modulate. It was not suggested that that evidence did not set out accurately what happened and the view of ABPI.

We have no doubt that the modulation provisions in chapter 21 of the 1999 scheme must be considered as part of the whole scheme. They were an essential element of the whole scheme and are in part at least the result of the Department’s requirement that there should be a price cut of 4.5%. They, converted the requested price cut on each drug into a requirement for an overall price cut of 4.5%, subject to conditions. We therefore reject the submission in the appellants’ skeleton argument that the modulation provisions were severable from the scheme as a whole.

The appellants averred in their reply submissions that they were only concerned with the modulation provisions. They submitted that they should be granted a declaration, which we assume would be in the form sought; namely “a declaration that the modulation provisions contained in chapter 21 of the 1999 PPRS scheme are unlawful”. They submitted that it was a matter for the Department to decide how to comply with that declaration.

That submission disregards the commercial and legal realities of the scheme. The required price cut and the modulation provisions are entwined. In fact each element of the scheme is entwined. The ability to fix the prices of new branded products cannot be exercised by a member of the scheme without consideration of the ceiling on profits and also the prices charged for other drugs. Chapter 21 is part of the required price reduction as it sets out how that can be achieved. The modulation provisions would not exist without the price cut and the price cut would not have been agreed without the modulation provisions. The scheme is one arrangement designed to secure the provision of safe and efficient medicines for the NHS at reasonable prices, to promote a strong and profitable pharmaceutical industry capable of sustained research so as to lead to the availability of new and improved medicines, and to encourage the efficient and competitive development and supply of medicines in this country and other countries (see Chapter 1 of the scheme).

It is not possible to consider the modulation provisions as a separate part as they are not a separate part, and it would be wrong to grant a declaration upon that false basis. In some arrangements, it may be possible to consider the legality of a part, but this is not such a case. Chapter 21 is but one chapter which combines with the other chapters to achieve the purposes of the whole scheme. The scheme is not a collocation of parts which can be considered separately.

As we have said the case as pleaded and argued was that only the modulation provisions in chapter 21 were illegal. For the reasons we have given, that case is based upon a misapprehension as to the nature of the 1999 scheme. Its legality can only be and has to be considered as a whole. That was not the basis of the appellants’ case. It follows that the relief claimed cannot be granted and the appeal must fail.

That conclusion is not just a “pleading point”. As the appellants did not wish the court to consider the legality of the scheme as a whole, the evidence was directed, in the main, to the pleaded issue, namely whether the claimed relief should be granted. If the appellants had sought to attack the whole scheme, we anticipate that further evidence would have been filed.

There is another reason why the relief sought should not be granted. Judicial review is not the most convenient means to consider the legality of the 1999 scheme. As we have pointed out, a voluntary scheme has existed since 1957. Modulation first occurred when the first price reduction was required in 1983 and it existed in the 1993 scheme. In theory it can result in a detrimental effect and/or a beneficial effect on parallel imports. There was some evidence as to whether modulation has hindered parallel imports, but it is not possible to know from that evidence whether there has been a net detrimental effect over the years since 1983. However the evidence does show that the UK market share of parallel imports grew from 3% in 1994, to 7% in 1998, to 10.5% by September 1999 and to 12.4% by August 2000. The appellants’ submissions were based upon theory, but what actually happened over the years could throw light upon the potential effect of the 1999 scheme.

An investigation into the effect of the PPRS schemes since 1983 would be difficult if not impossible in judicial review proceedings with only the present parties involved. It could, however, be done by the Commission. That we believe is the appropriate body to investigate the legality of the 1999 scheme and, if necessary, take action.

In view of our conclusion, there is no need to consider the submissions of the parties as to what would offend Articles 28 and 81. We will therefore refrain from so doing, except to comment on the judge’s conclusion that a requirement of an overall 4.5% price cut could not potentially discriminate against imports so as to be contrary to Article 28. He said:

“71. … It is not and cannot be contended that the requirement that there be an overall 4.5% price cut is unlawful. Nor it seems to me could it be contended that, if the Department had merely stipulated that there was to be an overall reduction of 4.5% by each supplier and left it to each of the pharmaceutical companies, subject to rules on predatory pricing and other anti-competitive behaviour, how to achieve that, such a stipulation would have been unlawful. Allowing the members to deliver that price cut in a manner of their choosing could not, it seems to me, be unlawful, for it would simply be allowing them the commercial freedom of the market subject to the ordinary rules on anti-competitive behaviour.”

The judge went on to conclude:

“104. … It seems to me that if the PPRS had merely imposed a 4.5% price cut and allowed the pharmaceutical companies complete commercial freedom to achieve this in the way they wished, then it is difficult to see how, in the absence of evidence that this might potentially discriminate against imports, such a provision would have been contrary to Article 28. API thus had to show that there was some potential effect of the modulation provisions that would hinder imports in a discriminatory way. The difficulty that API faced was that they advanced this case without the evidential basis to support it, for the reasons I have given.”

That conclusion disregards the way that drugs in the UK are supplied and priced. Drugs are supplied according to the needs of the patient at a price which is set in the Drug Tariff. In the case of patented drugs, the price is the list price of the manufacturer. It follows that if there was no restriction upon prices except a requirement to price cut, a company could reduce its prices on a product to meet competition from a parallel import of that product. But it could do that knowing that its overall profitability would not be reduced because it could recoup any loss from the price paid for other branded drugs prescribed by doctors. In any case it is the PPRS which as a whole produces an effect and it is that effect, or its potential, which has to be analysed in the context of Articles 28 and 81 EC.

We should deal shortly with the appellant’s submission that the Department was in breach of the Transparency Directive 1989/105/EEC of 21 December 1989. No such allegation was made in the Form 86A and permission to amend was not sought under Part 54.15 CPR. No doubt the submission was put forward in an attempt to rebut the finding that the appellants’ case lacked an evidential basis. The fault, the appellants submitted, was not theirs. It was the lack of transparency, the refusal to give disclosure and in any case the onus was not on them. We have no hesitation in concluding that that submission was not open to the appellants in this Court. It should have been properly pleaded so as to enable evidence to be provided. Further the normal rules as to onus of proof apply, namely the party making the allegation bears the burden. That of course put a difficulty in the path of the appellants in these proceedings where investigation of the facts was difficult and because “since its Dassonville judgment, the actual or potential impact on market access in fact is crucial for the application of Article 30 [28] of the EC Treaty” (per Advocate General Jacobs at paragraph 31 of Case C/405/98 Konsumentombudsmannen v Gourmet International Products AB [2001] ECR 1-1795). It must also be crucial for the application of Article 81.

It must also be remembered that the members of API have a right to compensation if any member of the ABPI contravenes Article 81 or otherwise acts illegally.

Conclusion

We would dismiss the appeal.

Order:

Appeal dismissed

Secretary of state and ABPI to have their costs of the appeal (See separate judgment on costs)

Leave to appeal to the House of Lords refused.

(order does not form part of the approved judgment)