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Examining the link between price regulation and pharmaceutical R&D investment

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  • John A. Vernon

    (Department of Finance & Center for Healthcare & Insurance Studies, Graduate School of Business, University of Connecticut, Connecticut, USA)

Abstract

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. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • John A. Vernon, 2005. "Examining the link between price regulation and pharmaceutical R&D investment," Health Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 1-16.
  • Handle: RePEc:wly:hlthec:v:14:y:2005:i:1:p:1-16
    DOI: 10.1002/hec.897
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Grossmann, Volker, 2013. "Do cost-sharing and entry deregulation curb pharmaceutical innovation?," Journal of Health Economics, Elsevier, vol. 32(5), pages 881-894.
    2. Sahay, Arvind & Jaikumar, Saravana, 2016. "Does Pharmaceutical Price Regulation Result in Greater Access to Essential Medicines? Study of the impact of drug price control order on sales volume of drugs in India," IIMA Working Papers WP2016-02-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Brekke, Kurt R. & Holmås, Tor Helge & Straume, Odd Rune, 2015. "Price regulation and parallel imports of pharmaceuticals," Journal of Public Economics, Elsevier, vol. 129(C), pages 92-105.
    4. repec:spr:rvmgts:v:12:y:2018:i:1:d:10.1007_s11846-016-0218-8 is not listed on IDEAS
    5. Joseph Golec & Shantaram Hegde & John A. Vernon, 2005. "Pharmaceutical Stock Price Reactions to Price Constraint Threats and Firm-Level R&D Spending," NBER Working Papers 11229, National Bureau of Economic Research, Inc.
    6. Vernon, John A. & Golec, Joseph H. & Lutter, Randall & Nardinelli, Clark, 2009. "An exploratory study of FDA new drug review times, prescription drug user fee acts, and R&D spending," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1260-1274, November.
    7. John A. Vernon & W. Keener Hughen, 2006. "The Future of Drug Development: the Economics of Pharmacogenomics," Working Papers id:589, eSocialSciences.
    8. Pierre Dubois & Olivier de Mouzon & Fiona Scott-Morton & Paul Seabright, 2015. "Market size and pharmaceutical innovation," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 844-871, October.
    9. Patricia M. Danzon & Andrew Epstein & Sean Nicholson, 2007. "Mergers and acquisitions in the pharmaceutical and biotech industries," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(4-5), pages 307-328.
    10. Thornton Snider Julia & Romley John A. & Vogt William B. & Philipson Tomas J., 2012. "The Option Value of Innovation," Forum for Health Economics & Policy, De Gruyter, vol. 15(2), pages 1-19, April.
    11. repec:bla:jpbect:v:19:y:2017:i:1:p:121-141 is not listed on IDEAS
    12. Bruce L. Benson, 2015. "Regulation As a Barrier to Market Provision and to Innovation: The Case of Toll Roads and Steam Carriages in England," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 30(Spring 20), pages 61-87.
    13. Joseph P. Cook & Graeme Hunter & John A. Vernon, 2010. "Generic Utilization Rates, Real Pharmaceutical Prices, and Research and Development Expenditures," NBER Working Papers 15723, National Bureau of Economic Research, Inc.
    14. John A. Vernon & W. Keener Hughen, 2005. "The Future of Drug Development: The Economics of Pharmacogenomics," NBER Working Papers 11875, National Bureau of Economic Research, Inc.
    15. Joseph H. Golec & John A. Vernon, 2006. "European Pharmaceutical Price Regulation, Firm Profitability, and R&D Spending," NBER Working Papers 12676, National Bureau of Economic Research, Inc.
    16. Simone Ghislandi & Michael Kuhn, 2016. "Asymmetric information in the regulation of the access to markets," Department of Economics Working Papers wuwp219, Vienna University of Economics and Business, Department of Economics.
    17. Nebibe Varol & Joan Costa-Font & Alistair McGuire, 2012. "Do International Launch Strategies of Pharmaceutical Corporations Respond to Changes in the Regulatory Environment?," Chapters,in: The LSE Companion to Health Policy, chapter 12 Edward Elgar Publishing.
    18. Henschke, Cornelia & Sundmacher, Leonie & Busse, Reinhard, 2013. "Structural changes in the German pharmaceutical market: Price setting mechanisms based on the early benefit evaluation," Health Policy, Elsevier, vol. 109(3), pages 263-269.
    19. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2017. "The Dynamics of Pharmaceutical Regulation and R&D Investments," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(1), pages 121-141, February.
    20. Barrenho, E & Smith, PC & Miraldo, M, 2013. "The determinants of attrition in drug development: a duration analysis," Working Papers 12204, Imperial College, London, Imperial College Business School.
    21. Giaccotto, Carmelo & Santerre, Rexford E & Vernon, John A, 2005. "Drug Prices and Research and Development Investment Behavior in the Pharmaceutical Industry," Journal of Law and Economics, University of Chicago Press, vol. 48(1), pages 195-214, April.
    22. Joseph H. Golec & John A. Vernon, 2007. "Financial Risk in the Biotechnology Industry," NBER Working Papers 13604, National Bureau of Economic Research, Inc.
    23. Jobjörnsson, Sebastian & Forster, Martin & Pertile, Paolo & Burman, Carl-Fredrik, 2016. "Late-stage pharmaceutical R&D and pricing policies under two-stage regulation," Journal of Health Economics, Elsevier, vol. 50(C), pages 298-311.
    24. Shin-Yun Wang & Chih-Chiang Hwang, 2011. "Application of options to the pharmaceutical markets: The solutions of corruption and counterfeit drugs in emerging markets," International Journal of Accounting and Information Management, Emerald Group Publishing, vol. 19(2), pages 169-181, June.
    25. Patricia M. Danzon & Eric L. Keuffel, 2014. "Regulation of the Pharmaceutical-Biotechnology Industry," NBER Chapters,in: Economic Regulation and Its Reform: What Have We Learned?, pages 407-484 National Bureau of Economic Research, Inc.

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