The cost of US pharmaceutical price regulation: a financial simulation model of R&D decisions

✍ Scribed by Thomas A. Abbott; John A. Vernon

• Publisher: John Wiley and Sons
• Year: 2007
• Tongue: English
• Weight: 206 KB
• Volume: 28
• Category: Article
• ISSN: 0143-6570
• DOI: 10.1002/mde.1342

✦ Synopsis

Abstract

Previous empirical studies that have examined the links between pharmaceutical price controls, profits, cash flows, and investment in research and development (R&D) have been largely based on retrospective statistical analyses of firm‐ and/or industry‐level data. These studies, which have contributed numerous insights and findings to the literature, relied upon ad hoc reduced‐form model specifications. In the current paper we take a very different approach: a prospective micro‐simulation approach. Using Monte Carlo techniques we model how future price controls in the US will impact early‐stage product development decisions in the pharmaceutical industry. This is done within the context of a net present value (NPV) framework that appropriately reflects the uncertainty associated with R&D project technical success, development costs, and future revenues. Using partial‐information estimators calibrated with the most contemporary clinical and economic data available, we demonstrate how pharmaceutical price controls will significantly diminish the incentives to undertake early‐stage R&D investment. For example, we estimate that cutting prices by 40–50% in the US will lead to between 30 and 60% fewer R&D projects being undertaken (in early‐stage development). Given the recent legislative efforts to control prescription drug prices in the US and the likelihood that price controls will prevail as a result, it is important to better understand the firm response to such a regulatory change. Copyright © 2007 John Wiley & Sons, Ltd.