Document Type

Article

Publication Date

5-17-2022

Publication Title

SSRN

DOI

http://dx.doi.org/10.2139/ssrn.4097744

Abstract

The pharmaceutical industry has long argued that high drug prices reflect the high cost of innovation and that reducing drug prices would necessarily slow the pipeline of new drugs. These arguments have been bolstered by studies of large pharmaceutical companies showing statistical associations between the projected market size or revenue for pharmaceutical products and research & development (R&D) activity. Our analysis recognizes the increasingly important role of small biopharmaceuticals in drug development , companies that typically have little revenue and negative earnings, but are now responsible for more than 40% of new drug approvals. We examine the relationship between changes in revenue and R&D for companies of different size from 2000-2018.While changes in R&D expense correlate with changes in revenue for the largest biopharmaceutical companies (>$7B market cap), no such relationship is found for smaller companies. Modeling the impact of different al cost reductions on the pipeline of new products, we find that any negative impact of drug price reductions may be mitigated through strategic allocation of cost reductions by large companies to different stages of clinical development.

This analysis suggests that any negative impact of drug price reductions on the pipeline of pharmaceutical innovation may be mitigated through strategic allocation of spending reductions in large pharmaceutical companies. Policy makers do not need to make a false choice between reducing prices to ensure the affordability of pharmaceutical products currently on the market and the innovation required to bring new products to market in the future.

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