Innovation At What Cost?: The Effects Of Pharmaceutical Drug Prices On Venture Capital Investment

Abstract

Drug pricing is a highly contentious issue in the United States. Drug prices are much less regulated in the US than in most other countries. Proponents of additional government regulation highlight the often-exorbitant prices of niche drugs and the consistent price increases in drugs whose underlying formulas do not change. Opponents of further government regulation stress the importance of financial incentives to encourage future innovation and the increasing costs of drug development. There is a wide body of scientific literature which predominantly links drug price increases with increased funding for drug development in future years. Previous studies have neglected to factor in the influential role of startups in pharmaceutical innovation. This paper seeks to contribute to the existing literature by primarily analyzing average drug price changes calculated from a cumulative database of price schedules and venture capital investment in pharmaceutical startups. A total of 1,864,777 drug prices and 3,551 venture capital deals were analyzed through various regressions. Price increases in the majority of drugs corresponded to increased venture capital investment, especially in early-stage startups. However, drastic price increases from the most price-volatile group of drugs negatively affected venture capital investment, especially in late-stage startups. In general, increasing drug prices encourage and fund future innovation in pharmaceuticals, but extreme price gouging drives the opposite effect. Future legislation must penalize extreme price gouging, while providing adequate incentives for pharmaceutical companies to commit the necessary investment to fund the significant costs of drug development.