Pharmaceutical Stock Price Reactions to Price Constraint Threats and Firm-Level R&D Spending

Political pressure in the United States is again building to constrain pharmaceutical prices either directly or through legalized reimportation of lower-priced pharmaceuticals from foreign countries. This study uses the Clinton Administration's Health Security Act (HSA) of 1993 as a natural experiment to show how threats of price constraints affect firm-level Ramp;D spending. We link events surrounding the HSA to pharmaceutical company stock price changes and then examine the cross-sectional relation between the stock price changes and subsequent unexpected Ramp;D spending changes. Results show that the HSA had significant negative effects on firm stock prices and Ramp;D spending. Conservatively, the HSA reduced Ramp;D spending by $1.6 billion, even though it never became law. If the HSA had passed, and had many small firms not raised capital just prior to the HSA, the Ramp;D effects could have been much larger