Drug Prices and Research and Development Investment Behavior in the Pharmaceutical Industry

This paper argues theoretically and shows empirically that pharmaceutical R&D spending increases with real drug prices, after holding constant other determinants of research and development (R&D). Specifically, an estimated elasticity suggests that a 10 percent increase in the growth of real drug prices is associated with nearly a 6 percent increase in the growth of R&D intensity. Simulations that are based on our multiple‐regression model indicate that the capitalized value of pharmaceutical R&D spending would have been about 30 percent lower if the federal government had limited the rate of growth in drug price increases to the rate of growth in the general consumer price index during the period 1980–2001. Moreover, the results suggest that a drug price control regime would have resulted in 330–65 fewer new drugs, representing over one‐third of all actual new drug launches brought to the global market during that time period.