Scream this from the rooftops

We can’t just bargain down the prices of pharmaceutical drugs without adverse consequences.  It is hard to measure the effects here, but yesterday I came across this piece of serious empirical work:

EU countries closely regulate pharmaceutical prices whereas the U.S. does not.  This paper shows how price constraints affect the profitability, stock returns, and R&D spending of EU and U.S. firms.  Compared to EU firms, U.S. firms are more profitable, earn higher stock returns, and spend more on research and development (R&D).  Some differences have increased over time.  In 1986, EU pharmaceutical R&D exceeded U.S. R&D by about 24 percent, but by 2004, EU R&D trailed U.S. R&D by about 15 percent.  During these 19 years, U.S. R&D spending grew at a real annual compound rate of 8.8 percent, while EU R&D spending grew at a real 5.4 percent rate.  Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

Here is the paper.  Here is a non-gated copy.  Here is my column on medical R&D.  Here is a previous installment in the series "Scream this from the rooftops."


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