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

Health Econ. 2005 Jan;14(1):1-16. doi: 10.1002/hec.897.


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.

MeSH terms

  • Commerce / legislation & jurisprudence
  • Drug Costs / legislation & jurisprudence*
  • Drug Industry / economics*
  • Drug Industry / legislation & jurisprudence*
  • Economic Competition
  • Economics, Pharmaceutical / statistics & numerical data*
  • Models, Economic*
  • Research / economics*
  • United States