Skip to main content
Log in

Financial Effects of Pharmaceutical Price Regulation on R&D Spending by EU versus US Firms

  • Leading Article
  • Published:
PharmacoEconomics Aims and scope Submit manuscript


EU countries closely regulate pharmaceutical prices, whereas theUS does not.

This paper shows how price constraints affect the profitability, stock returns and R&D spending of EU and US firms. Compared with EU firms, US firms are more profitable, earn higher stock returns and spend more on R&D.

We tested the relationship between price regulation and R&D spending, and estimated the costs of tight EU price regulation. Although results show that EU consumers enjoyed much lower pharmaceutical price inflation, we estimated that price controls cost EU firms 46 fewer new medicines and 1680 fewer research jobs during our 19-year sample period.

Had theUS used controls similar to those used in the EU,we estimate itwould have led to 117 fewer new medicines and 4368 fewer research jobs in the US.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1
Table I
Table II
Fig. 2
Fig. 3
Fig. 4
Table III
Table IV

Similar content being viewed by others


  1. The Dorgan-Snow US Senate Bill, S.334 proposed legalized importation, often called reimportation because pharmaceuticals are often developed and manufactured in the US, exported to a price-controlled EU country or Canada, and then reimported back to the US. Reimportation is an indirect method of price control that is similar to European parallel trade. Increased parallel trade in the 1990s has decreased pharmaceutical prices in the EU.[1] Parallel trade is a more general term than reimportation because it refers to any product trade that occurs after the original manufacturer sells the product. For example, product manufactured in Germany, sold to an agent in Spain, and then resold by the agent in Spain to an agent in England is parallel trade. Reimportation fits the more common situation in the US, where a US manufacturer sells to a Canadian agent, who then resells to another agent in the US. The Medicare Prescription Drug Price Negotiation Drug Act of 2007 (S.3) proposed direct price negotiation between Medicare officials and drug firms.[2] President Clinton’s Health Security Act proposed price controls for new drugs.[3]

  2. Maine allows reimportation. In August 2006, California legislators passed the Prescription Drug Initiative,[4] requiring manufacturers to discount pharmaceuticals by between 40% and 60% for low-income state residents.

  3. The firms were Abbott Labs, Bristol-Meyers Squibb, Eli Lilly, Glaxo, Johnson & Johnson, Merck, Pfizer, SmithKline Beecham, Warner-Lambert, Wyeth-Ayerst (American Home Products), Ciba-Geigy, Dupont-Merck, G.D. Searle, Genentech, Hoechst-Roussel, Hoffmann-La Roche, Knoll, Marion Merrell Dow, Syntex, Upjohn and Zeneca.

  4. US pharmaceutical and CPI (all items price 1982–4 = 100) indexes are from the Bureau of Labor Statistics.[14] EU CPI is from Eurostat Harmonized Indices of Consumer Prices (all items).[15] The EU pharmaceutical price index is from Eurostat[15] starting in 2001 and compiled from OECD Health Data 2003[16] for the years before 2001.

  5. A search of the Wall Street Journal for articles that discussed average pharmaceutical price inflation compared with consumer price inflation produced only three articles from 1984 until 1992. Between 1992 and 1993, 12 such articles appeared, and from 1994 through 2005, 42 articles appeared.

  6. Owned by Standard and Poor’s Inc., Compustat[19] compiles financial and accounting data mostly from company financial reports such as 10K statements. These data are packaged into various databases, such as the segments database. Compustat data are widely used by accounting and finance researchers. Our study relies most heavily on the Compustat Global database. It is an objective source for detailed financial and market data on more than 13 000 publicly traded international companies in more than 80 countries.

  7. These filters tend to eliminate small and young firms with few sales. Because the following results are size weighted, including these firms has little effect on the results.

  8. The Compustat Global Industrial/Commercial data used for this table contain some errors that we have corrected. The errors were contained in the EU firms’ data, perhaps because Compustat’s US database has been available since 1950 and its foreign portion of the Global database is relatively new (since 1993). Figures for Aventis between 1999 and 2003 needed to be multiplied by 1000, as did AstraZeneca’s figures for 1997. R&D figures for GlaxoSmithKline between 1993 and 1995 and Novo-Nordisk in 1993 were incorrect due to typographical errors. All of these were changed based upon figures found in the firms’ annual reports. Finally, the very large merger between Sanofi and Aventis in 2004 posed a unique problem. Instead of Compustat figures , which reflected merger-related accounting, we simply used the firms’ combined 2003 figures for the combined firm in 2004. This likely understates the true figures somewhat, but because the firm booked a very large intangible asset to reflect the premium paid for the merger, the reported figures are large enough to cause the EU totals to be substantially overstated.

  9. EFPIA member associations include those in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK.

  10. Many firms voluntarily adopted price constraints in this period in response to the Clinton administration’s proposed pharmaceutical price constraints.

  11. R&D shifts from the EU to US include Pharmacia in 1995, Aventis in 1999, GlaxoSmithKline in 2000 and Novartis in 2002. Reasons given for these moves include growing US sales compared with EU sales, and requirements that they perform clinical trials in the US, particularly FDA phase III trials. US-based trials also facilitate new drug marketing as firms establish relationships with top US physicians who set prescription guidelines for other physicians. There are also individual cases that show a direct connection between EU price controls and R&D shifts from the EU to the US. One case involves Bayer A.G. Spain and France set a price for Bayer’s second best-selling drug (Adalat®) at 40% below its price in England. When Bayer restricted supply to French and Spanish wholesalers who were reselling their supplies in England, the European Commission fined Bayer €3 million in 1996 and ordered them to stop restricting supply. Worldwide sales of Adalat®, which had been growing strongly, subsequently fell by 4% (3%) in 1998 (1999), mostly due to French and Spanish wholesalers reselling Adalat® at relatively low prices. As a consequence, Bayer cut its EU R&D spending by 1% in 1998 and by 14% in 1999. Conversely, Bayer increased its US R&D spending by 8% in 1998 and by 31% in 1999. Figures are taken from Bayer annual financial reports 1997–2001.[23]

  12. The data on foreign firms’ US pharmaceutical R&D spending[24] and assets[25] come from the Bureau of Economic Analysis, assets by industry and country. These data are available starting in 1999. The data on US firms’ foreign pharmaceutical R&D spending come from the National Science Foundation.[26] Data for 2002 is the latest available.

  13. Because the independent variables (\({\hat b_{i,1}}\) and \({\hat b_{i,2}}\)) are measured with error, the estimates of β1 and β2 could be biased. Greene[29] showed that, when one independent variable is measured with error, its estimate is biased toward zero, but when more than one independent variable is measured with error, the bias depends on a number of parameters. To the extent that the estimates are biased toward zero, the tests for statistical significance are conservative.

  14. The following model is used to evaluate and compare R&D spending over time:

    $$PVR{D_t} = {{R{D_{t + 1}}[1 - {{{{(1 + {g_s})}^n}} \over {{{(1 + k)}^n}}}]} \over {(k - {g_s})}}$$

    where g s is the growth in R&D spending from year t through year n; RD t + 1 is pharmaceutical R&D spending in year t + 1; PVRD t is the present value of pharmaceutical R&D spending; and k is the discount rate associated with R&D spending flows.

  15. Data on the distribution of R&D expenditures in the pharmaceutical and biotechnology industries across labour and non-labour inputs are not typically available in firms’ financial statements. We searched the financial statements filed on the US Securities and Exchange Commission’s Electronic Data Gathering, Analysis and Retrieval[37] database for those that discussed their labour inputs, and labour was mentioned as at least a majority of R&D expenses. We conducted a limited analysis of ‘pure play’ biotechnology firms with R&D expenditure and labour expense data listed on Compustat. These firms had little or no revenue from marketed products so they were solely research firms. Under reasonable assumptions about the distribution of labour expense between R&D and non-R&D employees, labour represents close to 90% of their R&D expenses.

  16. For example, Germany sets annual pharmaceutical spending budgets for medical service providers, which in turn, tends to cap the amount that providers are willing to pay for pharmaceuticals. Annual budgets change at different rates in different years, with different implications for potential pharmaceutical price changes.


  1. Ganslandt M, Maskus KE. Parallel imports and the pricing of pharmaceutical products: evidence from the European Union. J Health Econ 2004; 23: 1035–57

    Article  PubMed  Google Scholar 

  2. Congressional Budget Office. S.3 Medicare prescription drug price negotiation drug act of 2007. 2007 Apr 16 [online]. Available from URL: [Accessed 2010 Apr 8]

    Google Scholar 

  3. Congressional Budget Office. HR1200 American health security act of 1993. 1993 Dec 16 [online]. Available from URL: [Accessed 2010 Apr 8]

    Google Scholar 

  4. California Office of the Governor. California senate bill 798 prescription drug initiative. 2006 Aug 24 [online]. Available from URL: [Accessed 2010 Apr 8]

    Google Scholar 

  5. Vernon JA. Examining the link between price regulation and pharmaceutical R&D investment. Health Econ 2005; 14: 1–16

    Article  PubMed  Google Scholar 

  6. Scott Morton F. The strategic response by pharmaceutical firms to Medicaid most-favored-customer rules. RAND J Econ 1997; 28: 269–90

    Article  PubMed  CAS  Google Scholar 

  7. Ruback R. The effect of discretionary price control decisions on equity values. J Financial Econ 1982; 10: 83–106

    Article  Google Scholar 

  8. Golec J, Hegde S, Vernon JA. Pharmaceutical R&D spending and threats of price regulation. J Financial Quant Anal 2010; 45: 239–64

    Article  Google Scholar 

  9. Doukas J, Switzer L. The stock markets valuation of R&D spending and market concentration. J Econ Bus 1992; 44: 95–115

    Article  Google Scholar 

  10. Chan LKC, Lakonishok J, Sougiannis T. The stock market valuation of research and development spending. J Finance 2001; 56: 2431–56

    Article  Google Scholar 

  11. Eberhart AC, Maxwell WF, Siddique A. An examination of long-term stock returns and operating performance following R&D increases. J Finance 2004; 59: 623–50

    Article  Google Scholar 

  12. Toppe Shortridge R. Market valuation of successful vs nonsuccessful R&D efforts in the pharmaceutical industry. J Bus Finance Accounting 2004; 31: 1301–25

    Article  Google Scholar 

  13. Vernon JA. Drug research and price controls. Regulation 2003; 23 (4): 22–5

    Google Scholar 

  14. US Department of Labor, Bureau of Labor Statistics. Consumer price index [online]. Available from URL: [Accessed 2010 Apr 9]

  15. European Commission. Eurostat [online]. Available from URL: [Accessed 2010 Apr 9]

  16. OECD. OECD health data 2003: a comparative analysis of 30 countries. Paris: OECD Publishing, 2003

    Book  Google Scholar 

  17. Ellison SF, Mullin WP. Gradual incorporation of information: pharmaceutical stocks and the evolution of President Clinton’s health care reform. J Law Econ 2001; 44: 89–130

    Article  Google Scholar 

  18. Tessoriero H. Torrid drug price increases pause. Wall Street J 2004 Dec 6; A3

    Google Scholar 

  19. Standard and Poors. Compustat [online]. Available from URL: [Accessed 2010 Apr 9]

  20. Stapleton R, Subrahmanyam M. The market model and capital asset pricing theory: a note. J Finance 1983; 38: 1637–46

    Article  Google Scholar 

  21. European Federation of Pharmaceutical Industries and Associations (EFPIA). Year in review 20012002. Brussels: EFPIA, 2002

    Google Scholar 

  22. Pharmaceutical Research and Manufacturers of America. Pharmaceutical industry profile: 2005. Washington, DC: PhRMA, 2005

  23. Bayer investor relations [online]. Available from URL: [Accessed2010 Apr 8]

  24. US Department of Commerce, Bureau of Economic Analysis. Foreign direct investment in the US: financial and operating data for US affiliates of foreign multinational companies. Selected data by industry [online]. Available from URL: [Accessed 2010 Apr 9]

  25. US Department of Commerce, Bureau of Economic Analysis. Foreign direct investment in the US: financial and operating data for US affiliates of foreign multinational companies. Assets by industry and country [online]. Available from URL: [Accessed 2010 Apr 9]

  26. The National Science Foundation. Industrial research and development information system. Company R&D performed outside the United States by industry [online]. Available from URL: [Accessed 2010 Apr 9]

  27. European Federation of Pharmaceutical Industries and Associations (EFPIA). The pharmaceutical industry in figures. Brussels: EFPIA, 2005

    Google Scholar 

  28. Giaccotto C, Santerre R, Vernon JA. Drug prices and research and development investment behavior in the pharmaceutical industry. J Law Econ 2005; 48: 195–214

    Article  Google Scholar 

  29. Greene WH. Econometric analysis. New York: Macmillan Publishing, 1990

  30. Grabowski HG, Vernon JM.Anew look at the risks and returns to pharmaceutical R&D. Manage Sci 1990; 36 (7): 804–21

    Article  Google Scholar 

  31. Myers SC, Shyam-Sunder L. Measuring pharmaceutical industry risk and the cost of capital. In: Helms RM, editor. Competitive strategies in the pharmaceutical industry. Washington, DC: American Enterprise Institute Press, 1996: 208–37

  32. DiMasi JA, Hansen RW, Grabowski HG. The price of innovation: new estimates of drug development costs. J Health Econ 2003; 22: 151–85

    Article  PubMed  Google Scholar 

  33. DiMasi JA, Hansen RW, Grabowski HG, et al. Cost of innovation in the pharmaceutical industry. J Health Econ 1991; 10: 107–42

    Article  PubMed  CAS  Google Scholar 

  34. Moris F. Industrial R&D employment in the United States and in US multinational corporations. Arlington (VA): National Science Foundation, Division of Science Resources Statistics, 2004 Dec [online]. Available from URL: [Accessed 2010 Apr 8]

    Google Scholar 

  35. US Department of Labor, Bureau of Labor Statistics. Pharmaceutical and medical manufacturing (NAICS 3254). Washington, DC: Bureau of Labor Statistics, 2004 [online]. Available from URL: [Accessed 2010 Apr 9]

    Google Scholar 

  36. US Department of Labor, Bureau of Labor Statistics. Pharmaceutical and medical manufacturing (NAICS 3254). Washington, DC: Bureau of Labor Statistics, 2004 [online]. Available from URL: [Accessed 2010 Apr 9]

    Google Scholar 

  37. US Securities and Exchange Commission. Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system [online]. Available from URL: [Accessed 2010 Apr 8]

  38. Santerre RE, Vernon JA. Assessing consumer gains from a drug price control policy in the United States. Southern Econ J 2006; 73: 233–45

    Article  Google Scholar 

  39. Gambardella A, Orsenigo L, Pammolli F. Global competitiveness in pharmaceuticals: a European perspective [report prepared for the Directorate General Enterprise of the European Commission]. Brussels: European Commission, 2000 Nov

Download references


Joseph Golec has consulted for PhRMA and the Biotechnology Industry Organization (BIO). John Vernon has undertaken some industry consulting.

No sources of funding were used in the preparation of this article.

Author information

Authors and Affiliations


Rights and permissions

Reprints and permissions

About this article

Cite this article

Golec, J., Vernon, J.A. Financial Effects of Pharmaceutical Price Regulation on R&D Spending by EU versus US Firms. Pharmacoeconomics 28, 615–628 (2010).

Download citation

  • Published:

  • Issue Date:

  • DOI: