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

EU countries closely regulate pharmaceutical prices whereas the U.S. does not. This paper shows how price constraints affect the profitability, stock returns, and Ramp;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 (Ramp;D). Some differences have increased over time. In 1986, EU pharmaceutical Ramp;D exceeded U.S. Ramp;D by about 24 percent, but by 2004, EU Ramp;D trailed U.S. Ramp;D by about 15 percent. During these 19 years, U.S. Ramp;D spending grew at a real annual compound rate of 8.8 percent, while EU Ramp;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