Civan and Maloney on Pharmaceutical R&D

The Berkeley Electronic Press has published an article by Abdulkadir Civan and Michael T. Maloney titled, "The Effect of Price on Pharmaceutical R&D.  They conclude,

The results of our research clearly indicate that society benefits from the money spent by people in the United States on prescription drugs. The retail price of existing drugs induces new drug development. The higher the prices of existing drugs in a therapeutic category, the larger the number of drugs in the development pipeline in that therapeutic category. We find this result by looking crosssectionally at the drug development pipeline sorted by the types of diseases that new drugs target.

The estimated price elasticity of drug development across numerous specifications averages approximately 35 percent, and is 0.51 in our preferred specification.  This implies that if drug prices decline by 50 percent, a number well within the range of possibility if drug re-importation becomes common, the number of drugs in the development pipeline could decline by 25 percent.

Of course, our estimates are based on a cross-sectional analysis of the marginal choice of drug companies to develop drugs in one category versus another.  These estimates may not apply to an across-the-board decline in prices. However, as we have shown before, the fact that the U.S. drives drug development means that these estimates of price elasticity must be considered carefully in the debate over drug re-importation and other price controls. It is possible that lowering price will kill the goose that lays the golden eggs.

The emphasis added by bolding is mine.  Provisions in health care reform that focus on government bargaining power to control cost scare me.  They may result in lower current costs at the expense of future benefits through innovation.  Effective reform will treat the symptom of increasing costs, highly regulated health care system, with an injection of market incentives and not treating the symptom with government provision or financing of health care services.