Pierre Dubois: Low drug prices could threaten future investment and innovation

In May, French economist Pierre Dubois of the Toulouse School of Economics led one of the seminars in the MUNI Seminar Series on the topic of Pharmaceutical Regulation and Incentives for Innovation in an International Context. In an interview with ECON MUNI, he explained why low drug prices could threaten future investment in research and development, how European pharmaceutical market regulation works, and why European countries risk losing access to innovative treatments.

You began your career studying agricultural contracts in the Philippines and social programmes in Mexico. What led you from development economics to pharmaceutical markets and health policy?

It was a gradual evolution driven by a desire to improve well-being and poverty. I started my PhD in development economics after working for an NGO with street children in Brazil. Later, my research shifted toward agricultural contracts and risk-sharing, which led me to study vertical market relationships and industrial organization. From there, I became interested in food market regulation as a tool for public health. Extending that focus from nutrition policy to healthcare markets and pharmaceuticals felt like a completely natural next step.

From your experience speaking with policymakers, what is the most common misconception that health ministers or regulators bring to discussions about drug pricing?

The most common misunderstanding is the belief that drug prices should reflect their low production costs, making high margins look unwarranted. Facing tight budgets, regulators often argue that because R&D costs have already been paid, prices should come down. However, this reasoning overlooks a crucial dynamic, current profits are what incentivize future R&D. If returns on successful drugs are too low, investors will pull back, leading to a lack of future medical innovation.

Lower drug prices are often presented as an obvious policy success. Your work suggests that the welfare effects are more complex. What do policymakers often miss when evaluating drug-pricing reforms?

The trade-off between the short and long-term welfare effects of lower drug prices is not straightforward. The first difficulty is that expected prices shape firms' incentives to invest; overly stringent price regulation depresses anticipated returns on valuable R&D; a classic tension between short-run and long-run efficiency.

The second challenge concerns the valuation of an innovative treatment itself. Beyond direct therapeutic effects, new treatments can generate future healthcare savings and improve patients' labor productivity. Properly accounting for all these dimensions already makes cost-benefit analysis difficult. In national health insurance systems, an additional layer of complexity arises because the marginal cost of public funds must also be factored into pricing.

Nonetheless, making the long-term welfare case more transparent can help policymakers better appreciate the investment value of high-impact innovative treatments, such as vaccines or gene and cell therapies. This can justify the reimbursement of expensive treatments on the grounds that they serve both long-run health outcomes and the sustainability of healthcare budgets, even if they create short-term budgetary pressure.

Some of your research shows that free trade in pharmaceuticals across EU borders can, under certain conditions, increase costs for health systems. Could you explain the mechanism in practical terms?

Parallel trade is legal in the EU. Because drug prices vary across countries based on local income levels, parallel traders buy drugs in low-price markets and resell them in wealthier ones. Pharmaceutical companies anticipate this and compress international price differences during negotiations. The result is a less efficient allocation of resources and higher total expenditures across the EU. Banning parallel trade could benefit both companies and health systems. Alternatively, it could be minimized through narrower price differences combined with lump-sum transfers from wealthier countries.

There is broad agreement that Europe and the world need new antibiotics, yet firms have weak incentives to invest in them. What exactly is broken in the antibiotic market, and which policy instruments look most promising?

Antibiotics become less effective over time as pathogens develop resistance. To prevent this, authorities restrict the use of novel antibiotics, meaning firms expect very low sales volumes. Combined with low prices driven by cheap, off-patent substitutes, this creates a massive market failure for R&D. To fix this, we must delink revenue from sales volumes. The EU recently introduced Transferable Exclusivity Extensions (TEEs), where antibiotic developers receive an exclusivity voucher they can sell to another patent holder, effectively financing innovation through other market sectors. Another approach is mandating rapid diagnostic tests before prescribing new antibiotics, which curbs overuse and justifies a sustainable premium price for the test-and-treatment package.

Drug shortages have become a recurring problem across Europe, including in the Czech Republic. Public debate often focuses on supply chains and manufacturing capacity. Your work points to additional economic mechanisms. What are they?

Our research shows that regulated drug prices are the critical underlying driver of shortages through three mechanisms. First, keeping prices too low to ensure affordability slashes manufacturers' margins, reducing their ability to invest in resilient infrastructure. Second, extreme generic price competition erodes margins to the point where no supplier can afford spare capacity to absorb market disruptions. Third, prices in one country affect availability in others. Higher prices in the UK support larger production capacity globally, but when a shortage hits, those higher prices attract the scarce supply away from other nations. A country like the Czech Republic, with low regulated prices, faces double exposure; its pricing structure weakens global supply incentives, and during shortages, manufacturers deprioritize it in favor of higher-paying markets.

Smaller countries such as the Czech Republic often use external reference pricing and tend to secure relatively low prices. What are the consequences of this strategy that may not be visible in a national health ministry’s budget?

When a country links its drug prices to those in other nations, it creates cross-market ripple effects. Pharmaceutical firms anticipate how a price agreed in one country will impact their negotiations elsewhere. As a result, countries known for enforcing very low reimbursement prices can actually be at a disadvantage. To avoid anchoring a low reference price that would constrain them globally, firms often respond by delaying or completely avoiding product launches in these markets. This cross-referencing distorts the price equilibrium across Europe, making it incredibly difficult to assess the net impact on actual drug access. Furthermore, no country can prevent others from referencing its prices. To fix these spillovers, we need coordination at the European level. Harmonizing reference price frameworks to account for GDP differences across member states, while discouraging mutual cross-referencing, would help create a much more efficient and fairer pricing equilibrium for Europe as a whole.

The United States has debated linking drug prices to prices paid in other high-income countries, including European countries. What would such a policy mean for European pricing strategies and for European patients?

The United States is implementing this policy in 2026, aligning Medicaid prices for certain branded drugs to the second-lowest net price among eight reference countries. Forcing companies to disclose negotiated net prices creates unprecedented international transparency. The effects on Europe are twofold. First, it undermines European payers who rely on confidential discounts; because any concession in Europe mechanically lowers the US price, pharmaceutical firms will resist European price cuts, preferring delayed or restricted market access instead. Second, this will create a global price for innovative drugs anchored to the US market, bypassing European cost-effectiveness frameworks. Consequently, European patients face delayed or withdrawn access to innovative treatments if their countries cannot pay this globally converging higher price. The only viable solution is stronger European coordination building on the 2025 joint clinical assessment framework and delegating drug procurement to the European level, which requires significant changes to national healthcare systems.

If your current research agenda has the influence you hope for, what would be different for patients and health systems ten years from now?

To close on an optimistic note, I hope to see a European-level system for procuring innovative drugs. With Asian countries, China in particular, and the United States investing massively in pharmaceutical innovation, Europe must contribute its fair share to financing healthcare R&D not only to ensure patient access to treatments for cancer or neurodegenerative diseases, but also to avoid global dependency. This cannot be achieved efficiently through fragmented national pricing systems riddled with parallel trade and reference pricing. Beyond European-level drug price negotiations, I hope our ongoing research on pricing the new generation of personalized medicines, like gene and cell therapies, proves useful. These treatments are incredibly costly to produce and challenge the sustainability of health insurance systems. However, for therapies where production costs will likely fall over time due to technological progress, regulators and the industry could agree on dynamically declining price trajectories, provided both sides can commit to long-term agreements.