Will Reducing Drug Prices Slow Innovation?

August 12, 2021
Back to all publications >


The pharmaceutical industry has long argued that high drug prices reflect the high cost of innovation and that reducing drug prices would necessarily slow the pipeline of new drugs. These arguments have been bolstered by studies of large pharmaceutical companies showing statistical associations between the projected market size or revenue for pharmaceutical products and research & development (R&D) activity. Our analysis recognizes the increasingly important role of small biopharmaceuticals in drug development, companies that typically have lit t le revenue and negative earnings, but are now responsible for more than 40% of new drug approvals.

We examine the relationship between changes in revenue and R&D for companies of different size from 2000-2018. While changes in R&D expense correlate with changes in revenue for the largest biopharmaceutical companies(>$7B market cap), no such relationship is found for smaller companies. Modeling the impact of differential cost reductions on the pipeline of new products, we find that any negative impact of drug price reductions may be mitigated through strategic allocation of cost reductions by large companies to different stages of clinical development.

Will Reducing Drug Prices Slow Innovation?


A flurry of legislative activity in the 117th Congress is aimed at reducing drug prices to ensure that essential medicines for preventing and treating disease are affordable to all Americans. One of the major concerns about such legislation is that reducing drug prices would necessarily lead to reduced investment in industry spending on research and development (R&D) and slow the pipeline of innovative, new treatments for currently intractable diseases.

This concern was bolstered by an April 2021 report from the Congressional Budget Office (CBO) titled Research and Development in the Pharmaceutical Industry, which considered the impact of legislation introduced in the 116th Congress that would have authorized the Secretary of Health and Human Services to negotiate drug prices paid by Medicare or Medicaid. The CBO concluded that “The prospect of such lower revenues would make investments in R&D less attractive to pharmaceutical companies…” and that “…approximately 8 fewer drugs would be introduced to the U.S. market over the 2020-2029 period and about 30 fewer drugs over the subsequent 10 years.”

The CBO’s findings are not unprecedented. A series of papers by Vernon and colleagues examined the finances of the pharmaceutical industry from 1993-1994, years that the Clinton Health Plan was being debated in Congress. These studies showed that pharmaceutical R&D spending decreased during the years that the Clinton plan was being debated, then experienced a (slow) rebound after the Clinton proposals were rejected. A complementary dynamic has been observed in response to exogenous factors that increase the market for pharmaceutical products such as demographic changes in the US population and passage of Medicare Part D. Both factors have been shown to be associated with increased R&D spending and clinical trial activity specifically in therapeutic areas most impacted by anticipated changes in market size.

These observations are consistent with a financialized view of the biopharmaceutical industry, which posits that the allocation of resources to R&D is driven by the projected revenue from product sales and return on investment. In this context, product pricing and the size of the available market are considered to be the primary determinants of R&D spending. A corollary to this view of the industry is that, faced with declining revenue or lower project ions of future revenue, companies would choose to reduce investments in R&D and prioritize their profitability, rather than develop new products with lower profit margins or returns on investment.


After modeling three separate scenarios, this analysis demonstrates the ability of large pharmaceutical companies to mitigate any impact of drug price reductions on their product development pipelines through strategic allocation of cost reductions to different phases of clinical development. The three scenarios shown achieve equivalent reductions in R&D spending, but result in reductions in the number of new drug approvals by 4.3%, 8.6%, and 0% respectively. It should be emphasized that this model does not posit any changes in the process of pharmaceutical development or regulatory review, but simply agile resource and asset management.

Three scenarios for reducing R&D expense in response to a 10% decrease in pharmaceutical revenue. The model assumes different levels of cost reduction by companies of different size and that cost reductions will be achieved by reduction of spending on phased clinical trials. The three scenarios posit differential allocation of cost reductions between phase 1, phase 2, or phase 3 trials.

This analysis suggests that any negative impact of drug price reductions on the pipeline of pharmaceutical innovation may be mitigated through strategic allocation of spending reductions in large pharmaceutical companies. Policymakers do not need to make a false choice between reducing prices to ensure the affordability of pharmaceutical products currently on the market and the innovation required to bring new products to market in the future.

Download Report