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This paper describes the pharmaceutical regulatory environment in 19 developed countries from 1992 to 2004 and examines how changes in regulatory policies affect pharmaceutical revenues. Several important findings emerge from our analysis. First, we document a trend towards increasing pharmaceutical regulation over this 13-year period. Second, we find that a majority of regulations reduce pharmaceutical revenues significantly. Third, we find that most countries that adopted new regulations since 1994 already had some regulations in place for controlling costs. We find that such additional regulation had a smaller impact on further controlling costs. However, we find that introducing new regulations in a largely unregulated market, for example the US, could reduce pharmaceutical revenues significantly. Finally, we show that the effects of price controls increase over time.

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Markets for innovative goods involve significant spillovers in a global economy. When US consumers pay higher prices for drugs, this stimulates innovation that benefits consumers all over the world. Conversely, when large European markets restrict prices and profits, foreign consumers bear some of the long-run cost in the form of less innovation. The result is a free-riding problem at a global level. These incentives are particularly strong for smaller markets, whose policies have relatively little impact on global innovation, but can have relatively large impacts on national pharmaceutical budgets. The result is a system in which the largest countries bear disproportionate burdens for stimulating innovation. Using a microsimulation approach, we estimate the impact of these incentive effects. The model’s baseline estimates demonstrates that the US adoption of European-style price controls would harm consumers in the US and Europe; over a 50-year period, it would cost $8 trillion in the US, and $5 trillion in Europe. Similarly, repealing European price controls would add $10 trillion to the wealth of US society, and $6 trillion to wealth in Europe. Even under the most conservative assumptions, adopting price controls generates at best a small benefit, but risks a large cost. On the other hand, reducing pharmaceutical copayments would increase wealth in both societies, a result which is robust to a wide variety of parameter values.