Will the volume-based procurement policy promote pharmaceutical firms’ R&D investment in China? An event study approach

Abstract

Innovation is the key to the development of the pharmaceutical industry. The pilot program of China’s “4 + 7” volume-based procurement policy (“4 + 7” procurement policy) brings the drug price back to a reasonable level through trading procurement quantities for lower drug prices. The policy manages to reduce the burden of the health care system, improve efficiency, and push the pharmaceutical industry to transform and update from the era of high gross profit of generic drugs to innovative drugs. So far, few studies have investigated the influence of the volume-based procurement policy on the innovation of pharmaceutical firms. By combining the event study and Difference-in-Difference (DiD) methodology, this study finds that the abnormal return (AR) of firms with high R&D intensity is lower than that of firms with low R&D intensity during the event window period. Moreover, further analysis identifies the moderating effect of firm size and firm type. Specifically, the results show that the negative influence of high R&D intensity on abnormal return (AR) during the announcement of the “4 + 7” procurement policy is stronger in large firms and innovative pharmaceutical firms. Finally, we discuss the policy implications of our study.