The Accuracy of Multiples Used to Estimate the Market Value of Large U.S. Pharmaceutical Companies

Many researchers and analysts have shown that expensing R&Ds can distort the profitability measures and market value estimates of R&D intensive firms and treat R&Ds as assets. This paper assesses the valuation accuracy of five goodwill, five enterprise and two price multipliers that can be used to estimate the market values of large U.S. pharmaceutical companies with significant R&D expenditures during the 2010-2022 period. Our results support that goodwill multipliers generally provide the smallest estimation errors of the market values of pharmaceutical firms with significant R&Ds and that gross profit is a superior measure of the profitability of these firms.