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Pharmaceutical Spending and Early-Stage Innovation in Pharmaceuticals in Europe: an Instrumental Variable Analysis.

On 28th  November 2016 (1-2pm) Dimitrios Kourouklis, PhD Student at the Frankfurt School of Finance  Management, will give a presentation about “Pharmaceutical Spending and Early-Stage Innovation in Pharmaceuticals in Europe: an Instrumental Variable Analysis" in Q4.245. Afterwards, Mr. Kourouklis will be available for questions and discussions. His presentation is part of https://wiwi.uni-paderborn.de/dep1/me/research/discussing-research/seam/.

Abstract:A common concern with regard to pharmaceutical cost-containment policies is that they might decrease domestic firm innovation. Still, current literature is ambiguous on whether less domestic sales by pharmaceutical manufacturers, in fact, lead to less innovation. In this paper, we investigate the impact of pharmaceutical spending, as well as pharmaceutical sales in major anatomical therapeutic class (based on retail prices), on domestic drug discovery and early-stage innovation. As a measure of innovation we use the number of patent applications in a country. For our analysis we incorporate panel data from 1999 to 2012 from countries of the European Union. The econometric analysis uses fixed effects with instrumental variable estimation to address potential endogeneity of pharmaceutical spending. The analysis is based on two novel instruments, which are social insurance coverage for pharmaceutical products and the harmonized index of consumer prices for pharmaceutical products respectively. Two-stage least squares (2SLS) estimates show that a 1% increase in pharmaceutical spending per capita reduces patent applications by 0.65%. We find similar results in terms of sign and significance when the sales in each therapeutic class are designated as the independent variable. This suggests that more spending for pharmaceuticals either in per capita or at the therapeutic class level has significantly negative effects on early-stage innovation. Results are robust when controlling for variables that capture non-financial incentives for innovation. Overall, our results do not indicate that cost-containment policies would harm domestic early-stage innovation.

 

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