OBJECTIVES : Many European countries regulate drug prices in order to cope with rising health expenditures. On the other hand, price regulation distorts incentives to invest in pharmaceutical R&D. This study aims at empirically assessing the impact of price regulation on pharmaceutical R&D expenditures.  METHODS : We analyze a sample of 20 leading pharmaceutical companies between 2000 and 2008. The share of sales in Europe serves as a proxy for the degree of price regulation. We control for other determinants of R&D such as cash flow, company size, leverage ratio, growth rate, and Tobin’s q. RESULTS : Our results suggest a nonlinear relationship between European sales ratio and R&D intensity. Beyond a threshold of 33% of sales generated in Europe, a higher presence in Europe is associated with lower R&D investments. CONCLUSIONS : Price regulation has a negative impact on pharmaceutical R&D investments. Policy makers must take long term effects of regulation into account.