PubMed · 5007213
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F J Ingelfinger. 1972-02-03. Why trust the professional?. https://doi.org/10.1056/nejm197202032860512
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This paper examines the link between price regulation and pharmaceutical research and development (R&D) investment. I identify two mechanisms through which price regulation may exert an influence on R&D: an expected-profit effect and a cash-flow effect. Using established models of the determinants of pharmaceutical R&D, I exploit a unique fact to quantify firm exposure to pharmaceutical price regulation: relative to the rest of the world, the U.S. pharmaceutical market is largely unregulated with respect to price. Using this fact within the context of a system of quasi-structural equations, I simulate how a new policy regulating pharmaceutical prices in the U.S. will affect R&D investment. I find that such a policy will lead to a decline in industry R&D by between 23.4 and 32.7%. This prediction, however, is accompanied by several caveats. Moreover, it says nothing about the implications for social welfare; therefore, these issues are also discussed.
We analyze the effect of price regulation on delays in launch of new drugs. Because a low price in one market may 'spill-over' to other markets, through parallel trade and external referencing, manufacturers may rationally prefer longer delay or non-launch to accepting a relatively low price. We analyze the launch in 25 major markets, including 14 EU countries, of 85 new chemical entities (NCEs) launched between 1994 and 1998. Each NCE's expected price and market size in a country are estimated using lagged average price and market size of other drugs in the same (or related) therapeutic class. We estimate a Cox proportional hazard model of launch in each country, relative to first global launch. Only 55% of the potential launches occur. The US leads with 73 launches, followed by Germany (66) and the UK (64). Only 13 NCEs are launched in Japan, 26 in Portugal and 28 in New Zealand. The results indicate that countries with lower expected prices or smaller expected market size have fewer launches and longer launch delays, controlling for per capita income and other country and firm characteristics. Controlling for expected price and volume, country effects for the likely parallel export countries are significantly negative.
During the 1990s, concerns that nonprofit (NP) hospitals were being sold at below-market prices to investor-owned (IO) chains helped to prompt the widespread adoption of state laws regulating the sale and conversion of nonprofits. In this paper, we provide a simple test of under-pricing using the IO acquirer's abnormal stock market returns at the time of the acquisition. Prior to regulation, we find that IO chains did not earn abnormal returns from their acquisitions of NPs and earned greater returns from purchasing other IO and privately owned hospitals. In states that subsequently adopted regulations, acquisition activity slowed significantly and acquirer returns became negative. Efficient markets theory suggests that, absent regulation, expected merger synergies were already being transferred to the NP target and that regulation may have reduced expected synergies or increased the costs of acquiring NP hospitals.