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Examining the link between price regulation and pharmaceutical R&D investment
Author(s) -
Ver John A.
Publication year - 2005
Publication title -
health economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.55
H-Index - 109
eISSN - 1099-1050
pISSN - 1057-9230
DOI - 10.1002/hec.897
Subject(s) - economics , pharmaceutical industry , cash flow , relative price , profit (economics) , context (archaeology) , investment (military) , exploit , microeconomics , public economics , monetary economics , finance , pharmacology , politics , political science , computer science , law , medicine , paleontology , computer security , biology
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.