Examining the Link Between Price Regulation, Reimportation, and Pharmaceutical R&D Investment

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 (or re-importation) 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 percent.This prediction, however, is accompanied by several caveats.Moreover, it says nothing about the implications for social welfare; therefore, these issues are also discussed. This paper is forthcoming in Health Economics.Health and Safety, Technology and Industry, Regulatory Reform