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174 Fighting the Diseases of Povertyif they exceed pre-determined levels (Menon, 2001). Likewise,Germany’s government sets levels at which it will reimburse purchasesof specific classes of drugs, with consumers paying any difference.This has the result that the consumer’s perception of thecost of buying newer drugs is much greater than the real price differential.As a result, consumers have an incentive to buy olderdrugs that are less effective.Price controls reduce the ability of producers to implement effectiveprice differentiation strategies. In essence, fewer drugs aresupplied at a price higher than would be paid by the poorestconsumer but lower than would be paid by the wealthiestconsumer. As a result, wholesalers and retailers are likely to carry asmaller range of drugs. If the price controls are widespread andtargeted at the most profitable drugs, they are likely to have a substantialimpact on profits throughout the value chain. That meansnot only fewer wholesalers and pharmacies, but also less investmentin new drugs by pharmaceutical companies. (The economicconsequences can be seen in Appendix Figure 6.)Economic theory is backed up by increasing amounts of empiricalevidence. Price controls have had a direct negative impact on thenumbers of new drugs that are submitted for regulatory approval.A recent US Department of Commerce study found that the pricecontrols used by a range of OECD countries have resulted in a significantdecrease in spending on both old and new drugs (U.S.Department of Commerce, 2004). It found that these controls havedecreased the price, pushing it closer to marginal production costs,which in turn leaves less revenue for future investment in R&D. Thestudy estimated that, after extrapolating to a broader set of OECDcountries, the diminished returns as a result of price controls are inthe range of US $18 billion to $27 billion annually. If this lost revenuecould be recouped through deregulated pricing strategies, the studycalculates that an additional three or four new molecular entities(NMEs) could be developed every year. To put this into context, only30 NMEs were approved by the FDA between 2000 and 2003.Price controls in some European countries have also hindered