European Pharmaceutical Price Regulation, Firm Profitability, and R&D Spending

38 Pages Posted: 27 Sep 2006  

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)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2006

Abstract

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.

Keywords: Pharmaceutical, Price Regulation; Profitability; Research and Development

JEL Classification: I11, O34, I18

Suggested Citation

Golec, Joseph H. and Vernon, John A., European Pharmaceutical Price Regulation, Firm Profitability, and R&D Spending (August 2006). Available at SSRN: https://ssrn.com/abstract=932989 or http://dx.doi.org/10.2139/ssrn.932989

Joseph Golec (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

John A. Vernon

University of North Carolina (UNC) at Chapel Hill ( email )

102 Ridge Road
Chapel Hill, NC NC 27514
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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