Study Reveals How Price Controls Harmed Biopharma Industry in Europe

Europe has long taken a stricter regulatory approach to the Pharmaceutical industry than the U.S. Nowhere is this more apparent than in the area of price controls. Europe has been zealous in its application of price-caps on prescription medicines in an effort to hold down drug prices.

Unfortunately, these policies frequently lead to sharp declines in research and development (R&D), as pharmaceutical companies have less incentive to invest in new products. This is bad news for consumers who benefit from these products and innovations. Now a new study, published by healthcare consultant Vital Transformation, confirms this is the case.

The study examined how European price controls have impacted, “biopharmaceutical industry investments in the European Union relative to the United States.” What the study found was that this “downward pressure” on prices in Europe correspond to less European investment and access to innovative medications. Several data points are particularly noteworthy.

For instance, the study found that for every 10% drop in the price of European price-controlled medications, there was a “14% decrease in total VC funding (10% early stage and 17% late stage), 7% decrease in biotech patents, 9% decrease in biotech start-up funding relative to the US, and an 8% increase in the relay of access to medicines.”

This suggests that any attempt by governments to set drug prices artificially low is directly related to a substantial decline in pharmaceutical investment and expenditures. The result is a less dynamic industry where jobs move overseas, and the most innovative drugs are introduced elsewhere. Consumers also miss out because they must wait longer for new treatments and have less options available to them.

The study also specifically looked at how the European Union compared to the U.S. after accounting for the impact of European price caps on drugs. Researchers found that in 2019, “late-stage venture capital funding in the European Union was just 3%” of that in the United States. In addition, between 2003 and 2019, “biotech investments in the United States increased sixfold,” while they remained virtually unchanged in the European Union. Even more troubling, by 2020 “the U.S. share of total annual biotech startups was roughly three times greater than the EU share.”

According to the study, these findings are both robust and consistent with previous academic research on the matter. Previous theoretical and empirical studies have found that European price controls caused “measurable declines in the EU biopharma ecosystem” relative to the U.S. A 2009 study out of Harvard Business School, and another published in 2014 in the Health Economics Review Journal are both cited as examples.

The study concludes by noting that should similar price controls to those in Europe be introduced in the U.S., they would most likely have an even greater negative impact on biopharma key performance indicators, since the U.S. serves as a leader in investment and innovation.

The results of this study should serve as a cautionary tale of how price controls devastated the European biopharma industry. They are also particularly timely, as U.S. Congressional leaders consider adopting industry price controls that would set prices for prescription drugs. If these leaders are successful, they may unintentionally undercut American leadership on biopharmaceutical R&D and harm consumers who benefit from market innovations and new drug products. U.S. leaders should think twice before imitating Europe’s misguided prescription drug price-setting experiment.

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