The valuation of pharmaceutical intangibles

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Originality/value

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.

Citation

Russell, M. (2016), "The valuation of pharmaceutical intangibles", Journal of Intellectual Capital, Vol. 17 No. 3, pp. 484-506. https://doi.org/10.1108/JIC-10-2015-0090