US key---they are the most productive

Most governments apply some form of price controls on pharmaceutical products. And although the price of pharmaceuticals is only one of many variables that impact the effectiveness of any health-care provision system, pharmaceutical sales are the main source of revenues for pharmaceutical companies to invest in future generations of innovative medicines. Overly restrictive price controls levied on bio-pharmaceuticals, by definition, mean less revenue for biopharma companies to invest in R&D. The bottom line is that when bio-pharmaceutical companies more fully capture the value of their innovations from the market, they reinvest much of those additional revenues toward future innovations. Research in pharmaceutical economics continually demonstrates that innovative pharmaceutical output is strongly linked to robust revenue streams. As the OECD report Pharmaceuticals Pricing Policies in a Global Market explains, “There is a high degree of correlation between sales revenues and R&D expenditures.”25 Indeed, recent data from the United Kingdom’s Department of Innovation, Universities, and Skills R&D Scoreboard indicate a very strong relationship between R&D expenditures and sales for the largest 151 pharmaceutical firms worldwide in terms of expenditures on R&D.26 Henderson and Cockburn find that R&D expenditures are directly proportional to the sales revenues available to fund R&D investment.27 Gambardella finds that sales revenue from previous periods has a significant positive impact on R&D.28 Moreover, pharmaceutical firms with the greatest sales are also the ones with the largest R&D investments, which may in part explain why most global R&D investments are undertaken by the largest multinational firms.29 Symeonidis notes that this is in part because large firms are better able to spread the risks of R&D uncertainty over multiple simultaneous projects.30 Take, for example Europe’s experience with price controls: up until the 1970s, European Union (EU) countries developed the vast majority of the world’s innovative pharmaceutical products.31 But as European countries implemented more stringent price regulations, innovation output fell. Indeed, a key reason why Europe has produced fewer biopharmaceutical innovations than the United States in recent decades is because its biopharmaceutical firms have not generated as much revenue (which can be reinvested in R&D) as American ones. (While it’s true that both American and European pharmaceutical firms sell into global markets, the largest proportion of drugs sold in the EU are made by EU companies, and the largest proportion of drugs sold in the United States are made by American ones, explaining why countries’ drug pricing and procurement levels affect firm-level profits differently across the Atlantic.) Differential revenues explain in part why, as noted, in the 2000s, more new chemical entities were developed in the United States than in the next five nations—Switzerland, Japan, the United Kingdom, Germany, and France—combined.32 European drug-price controls indeed factor directly into this reality. For example, Golec and Vernon contend that, because of drug price regulations, “European Union pharmaceutical firms are less profitable, spend less on R&D, and earn smaller stock returns than U.S. firms.”33 Drawing on data from 1986 through 2004, they go on to show that the economic tradeoff for the European Union’s maintaining real pharmaceutical prices constant over 19 years was forgoing about 46 new medicine compounds. Golec and Vernon took this one step further by presenting a counterfactual scenario of the United States adopting EU-type price controls over the same time period; they estimate that similar price controls would have resulted in 117 fewer new medicine compounds.34 Countries that impose overly strict regulations on the prices of pharmaceutical drugs also disincentivize international companies from entering markets to provide more innovative health-care solutions. A study that examined the 28 largest pharmaceutical markets between 1980 and 2000 found that countries with strict price controls hurt both domestic innovation in the life sciences as well as domestic consumers.35 Not only are drug launches delayed in these price-controlled countries compared to other less-regulated countries; companies are also less likely to introduce their product in additional markets once it is available in a market with heavy price regulations. Domestically produced pharmaceutical products from countries with stronger price controls also reach a smaller market internationally.36 Other studies yield similar findings in the international market for pharmaceuticals. In one, the probability of pharmaceutical launch is positively related to the expected price and volume of sales for a given market.37 This follows the logic that pharmaceutical companies will launch their products in markets where they can better capture the value of their innovations. Another study confirms the finding that consumers in countries that have stricter price controls, compared with countries that do not, have to wait longer for drug launches by international firms. 38 These studies highlight the interconnected nature of global life-sciences innovation, where government-mandated price controls do a disservice to consumers, domestic pharmaceutical firms, foreign pharmaceutical firms, and overall drug innovation. The United States foots most of the bill for global life-sciences innovation. Although the United States produces about 22 percent of global GDP and accounts for 4 percent of the world’s population, it accounts for 44 percent of global biomedical R&D expenditures and its domestic market accounts for 40 percent of the world’s pharmaceutical market share. 39 Other countries that impose overly strict price controls are free riding off the United States’ and other similar nations’ efforts. All nations benefit when breakthrough treatments for various diseases are discovered, but by imposing price control mechanisms, countries send a clear signal that they do not want to pay for the costs that go into discovering and commercializing such treatments.