Pharmaceutical spending and early-stage innovation in EU countries

We investigate the impact of pharmaceutical spending and retail sales in major anatomical therapeutic classes on domestic early-stage innovation. For our analysis, we incorporate panel data from 1999 to 2019 from countries of the European Union. The econometric analysis uses fixed effects with instrumental variable estimation to address potential endogeneity of pharmaceutical spending. The analysis is based on two instruments, social insurance coverage for pharmaceutical products and government defence expenditures, and controls for pharmaceutical R&D spending by U.S.-owned firms and other potential confounders. Two-stage least squares (2SLS) estimates show that a 1% increase in pharmaceutical spending per capita increases patent applications by 2.2%. We find similar results when sales in each therapeutic class are designated as the independent variable. Results are robust when using different time lags and patent grants as a measure of innovation. Overall, increasing pharmaceutical spending in countries of the European Union increases domestic early-stage innovation.