European Pharmaceutical Price Regulation, Firm Profitability, and R&D Spending
Joseph H. Golec
University of Connecticut - Department of Finance
John A. Vernon
University of North Carolina (UNC) at Chapel Hill; National Bureau of Economic Research (NBER)
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.
Number of Pages in PDF File: 38
Keywords: Pharmaceutical, Price Regulation; Profitability; Research and Development
JEL Classification: I11, O34, I18
Date posted: September 27, 2006
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