Examining the link between price regulation and pharmaceutical R&D investment.
This paper examines the link between price regulation and pharmaceutical research and development (R&D) investment. I identify two mechanisms through which price regulation may exert an influence on R&D: an expected-profit effect and a cash-flow effect. Using established models of the determinants of pharmaceutical R&D, I exploit a unique fact to quantify firm exposure to pharmaceutical price regulation: relative to the rest of the world, the U.S. pharmaceutical market is largely unregulated with respect to price. Using this fact within the context of a system of quasi-structural equations, I simulate how a new policy regulating pharmaceutical prices in the U.S. will affect R&D investment. I find that such a policy will lead to a decline in industry R&D by between 23.4 and 32.7%. This prediction, however, is accompanied by several caveats. Moreover, it says nothing about the implications for social welfare; therefore, these issues are also discussed.
Vernon
John A
JA
Department of Finance & Center for Healthcare & Insurance Studies, Graduate School of Business, University of Connecticut, Connecticut, USA. jvernon@business.uconn.edu
D003132:Commerce / Q000331:legislation & jurisprudence; D016527:Drug Costs / Q000331:legislation & jurisprudence*; D004345:Drug Industry / Q000191:economics* / Q000331:legislation & jurisprudence*; D004465:Economic Competition; D017850:Economics, Pharmaceutical / Q000706:statistics & numerical data*; D018803:Models, Economic; D012106:Research / Q000191:economics*; D014481:United States