The ‘Canberra Hypothesis' 50 years on: what can we learn about the pricing and economics of the pharmaceutical industry?
- Brendan Shaw
- 6 days ago
- 6 min read
Brendan Shaw
“It supported the assertion of those working in the pharmaceutical industry that in pricing a product one had, to be successful, to consider carefully the relative merits and the relative price of the alternatives in the market. The paper argued that price competition operated in the prescription medicine market just as it does in the markets, for example, for cars, clothes, comestibles, consumer durables and cosmetics.”
- Office of Health Economics, The Canberra Hypothesis, London, 1975
In January 1975, at the Australian Academy of Science building in Canberra, Australia, the Founding Director of the United Kingdom’s Office of Health Economics, George Teeling Smith, gave a talk entitled ‘The Canberra Hypothesis’. His talk put forward the idea that, despite claims in some quarters, the pricing of prescription medicines was a competitive market given the level of competition between pharmaceutical companies and the growing number of medicines available to treat a range of different diseases.
Whether he wanted to make his controversial claims at safe distance far away from Whitehall, or just wanted to escape England’s winter and give the speech in the blazing sunshine of Australia’s January summer is unclear. While the original speech has not been found, the OHE subsequently published a report later that same year largely prepared by my good friend, David Taylor, entitled The Canberra Hypothesis: The Economics of the Prescription Medicine Market.
What is the 'Canberra Hypothesis'?
As a resident of Canberra, I was amazed to learn that my hometown had lent its name to a policy perspective about international drug pricing and pharmaceutical economics. Despite being a health and pharmaceutical economist for more than 20 years, I'd never heard of this Hypothesis before, nor realised the role that Canberra played in influencing debates about pharmaceutical pricing policy 50 years ago.
I was even more amazed to realise that many of the observations coming out of the Hypothesis are just as relevant today as they were 50 years ago.
Essentially, the Canberra Hypothesis argues that pharmaceutical companies - even those that have patent protection for their new medicines - are subject to competition in the market. This happens by virtue of competition from competitor firms and from rival technologies.
The Hypothesis drew its insights from the growing field of innovation economics and things like endogenous growth theory which recognise the role that technology, innovation and entrepreneurialism play in driving competition in the pharmaceutical market.
A key implication of the Hypothesis is that governments, insurers, other payers, policy makers, NGOs and other health stakeholders should consider the importance of business and industrial issues in developing their pharmaceutical pricing policies. They ignore these issues to the detriment of their own policy objectives.
The Hypothesis also developed links between Australia and the United Kingdom in the important policy areas of funding medicines within universal public medicine systems. The Hypothesis tapped into the key issues of managing budgets with providing sufficient incentives to encourage the development and use of science, innovation and the life sciences sector in both countries, as well as globally.
Apparently, Teeling-Smith’s ‘Canberra Hypothesis’ speech was not well received in some quarters in Whitehall when word of it got back to London, in part because it challenged the basis for some of the cost-saving initiatives being introduced to the UK National Health Service by the then British Government. This is perhaps itself proof that some things never change.
How is the 'Canberra Hypothesis' relevant today?
Professionally, as someone who has spent significant parts of my career arguing with these stakeholders on exactly this point, I found all this fascinating from a policy and historical perspective. It was also reassuring, as many of the things I had been arguing over 20 plus years in public and in policy circles were supported by the Canberra Hypothesis - with much intellectual, theoretical and policy arguments to support my various arguments with policy makers, bureaucrats, activists and other economists.
With debates today about national sovereignty of the pharmaceutical industry, supply chain issues and vaccine nationalism highlighted by the Covid-19 pandemic, increasing medicine shortages, evolving pharmaceutical pricing policies in Europe, the United States, the UK and Australia, the acceptance of something like the Canberra Hypothesis which states there actually is some form of innovative competition between products, firms, countries and technologies in the sector seems particularly important.
The Hypothesis also draws on evolving theories of innovation and industrial economics, pricing and market economics, endogenous growth theory and so on, to argue that a broader understanding of competition in high-value, innovative industries like pharmaceuticals and life sciences is needed to appreciate the economic dynamism in the sector, and to design government pricing policies that take account and nurture these longer-term dynamic competitive forces.
This year is the 50th anniversary of the Canberra Hypothesis
However, the 50th anniversary this year of the Canberra Hypothesis is just as important to me at a personal level. Aside from actually living in Canberra, my good friend, David Taylor, and I had often discussed the Canberra Hypothesis because he was a lead author of the original 1975 Office of Health Economics paper.
Amid various dinner discussions over the years about the future of Australia, the UK, the EU, the global pharmaceutical industry, Brexit and cricket, David and I had many discussions on the Canberra Hypothesis.
David and I had both agreed some years ago that the Hypothesis is just as relevant today to pharmaceutical policy debates as it was 50 years ago. We also thought that, on the occasion of its 50th anniversary, we should do something to acknowledge that and revive the economic and policy debates that the original Hypothesis achieved all those years ago. Unfortunately, he and I weren't able to progress these ideas much before David sadly passed away in January this year before we had a chance to act on our intentions. David's passing in January was almost 50 years to the day of Teeling-Smith's original January 1975 'Canberra Hypothesis' speech in Canberra.
It was partly as a testament to David's legacy after his passing, and partly the realisation that the 50th anniversary year was suddenly upon us, that at the beginning of this year I penned the paper 'The ‘Canberra Hypothesis’ 50 years on: medicine prices and the economics of the pharmaceutical industry'. My paper reviews the theory behind the Canberra Hypothesis, reviewing how the world of economics, health policy and the pharmaceutical industry had changed over the subsequent 50 years - with particular reference to Australia and the UK, before recommending a new program of research into pharmaceutical industry economics and a program of communication this to the broader stakeholder community.
Fittingly, my paper was reviewed at this year's Health Economists' Study Group meeting in the UK on 1 July. As best as I can tell, this date is 50 years to the day since David's original 1975 paper was published. In another fortunate coincidence, it just so happened that this year's HESG meeting was hosted by the Office of Health Economics, which made it even more fitting.
Where to from here for the Canberra Hypothesis?
The consensus from the HESG meeting was that, indeed, the Canberra Hypothesis is just as relevant today to policy debates about the pricing of medicines and pharmaceutical innovation. It was also observed that because of the trajectory of national and global issues, the propositions put forward by the Hypothesis are more important today than ever.
The unanswered question is the best way to take things forward from here. That will require some further thought. I feel that some sort of workshop, research program, or policy work dedicated to the topic would be a good start.
David would have approved of that.
Any suggestions are most welcome.
You can read the full paper 'The ‘Canberra Hypothesis’ 50 years on: medicine prices and the economics of the pharmaceutical industry' here.
In memory of Emeritus Professor David Taylor
David Taylor was Emeritus Professor at the UCL School of Pharmacy and had a distinguished career in the pharmaceutical industry and in academia. Sadly, David passed away in mid-January 2025. As well as being a professor in public policy, pharmacy and the pharmaceutical industry, David was a great mentor, professional colleague and friend. Whether it was debating the finer points of pharmaceutical industry economics, the perils of Brexit, or the extent to which Australians cheat at cricket, David was always good for an insightful comment and a laugh or two over a glass of wine. David was a lead author of the OHE paper, 'The Canberra Hypothesis: The Economics of the Prescription Medicines Market', based on George Teeling-Smith’s January 1975 speech in Canberra, Australia. David was passionate about the Hypothesis and the issues it discusses. You can read more about David here: https://www.theguardian.com/society/2025/apr/03/david-taylor-obituary
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