– The purpose of this paper is to value the patents of pharmaceutical companies using discounted cash flows, and compare the value-relevance of these assets against alternative intangible asset measures such as reported intangible assets and R&D capital.
– The study values pharmaceutical intangibles using three methods: an income method; the sum of unamortised R&D expenditures; the firm’s reported intangible assets. Value-relevance tests use ordinary least squares regression and Vuong and Clarke tests.
– First, the study finds that the discounted cash-flow valuation of pharmaceutical patents is value-relevant. Second, the value of pharmaceutical patents explains market value better than reported intangible assets but not R&D capital. However, the valuation of pharmaceutical patents is more consistent with the risks of R&D than the valuation of R&D capital which assumes recovery of R&D expenditure.
– This is the first known study that values patents using an income method and compares those valuations with reported intangible assets and R&D capital valuation models.
