The Impact of Drug Reimportation and Price Controls: The U.S. and Massachusetts
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Executive Summary IPI Policy Report - # 184
by David G. Tuerck, John Barrett, Douglas Giuffre, Zaur Rzakhanov on 09/22/2004

Executive Summary Text:
Recent advances in the pharmaceutical and biotechnology industries have improved the quality and length of human life through the development of new drugs. Nevertheless, there is a widespread perception that the prices of new drugs are too high, based on the difference between prescription drug prices in the United States and in other countries.

Consumer groups and the media are putting pressure on public officials to make prescription drugs more affordable. The advocates for lower prices generally favor two approaches: allowing U.S. citizens to reimport drugs from foreign countries like Canada, or instituting price controls here in the United States. These proposals, while yielding lower drug prices in the short run, could have significant negative impacts on innovation and on the regional economies in which the pharmaceutical and biotechnology industries play an important role. The development process, in most instances ultimately unfruitful, is extremely costly. The few drugs that do make it to the marketplace must earn enough to pay for the research and development for the majority that do not.

This report examines the effects that price controls and reimportation programs would have on drug development success and investment in the United States and, because it is both a significant research center and home to some of the nation’s most vociferous advocates of drug reimportation, on the economy of Massachusetts.

We first identify the impact on drug development and R&D spending in the United States. We then identify the effects on an array of economic indicators for the Massachusetts economy.

Drug price controls and reimportation schemes would shrink the pipeline for new prescription drugs by reducing the ability of companies to recover their investment in research and development. We estimate that, in the 12 years following the implementation of a price control policy:

• R&D spending by pharmaceutical and biotechnology firms would fall by $14.8 billion, in net present value terms.
• Price control policies would lead to the abandonment of an additional 262 drugs for economic reasons.
• Under a price control policy, only nine new drugs would likely be approved in a year —a decrease of more than 70 percent from the current average of 31.

Reduced R&D spending attributable to price controls or drug reimportation would also have a serious negative effect on the U.S. economy and, in particular, on those states such as Massachusetts, whose economies benefit from the existence of strong pharmaceutical and biotechnology sectors.

In Massachusetts, where nearly 10 percent of the nation’s pharmaceutical and biotech research and development dollars are spent:

• Price controls would destroy 3,957 jobs over the first six years.
• By 2010, the loss in economic activity (as measured by value-added) in Massachusetts would total $247 million (in 2000 dollars).