The valuation practices and target price accuracy in pharmaceutical sector. Case study: Recordati.

Abstract

This thesis aims to examine the peculiarities regarding the valuations of pharmaceutical companies in the equity reports issued by sell-side analysts. We want to verify whether the valuation techniques suggested by the theory and those used in practice coincide. We classify all the valuation techniques in three categories: based on fundamentals of the company (DCF, DDM and so on), on company’s market multiples (market ratios approach) and the hybrid ones (e.g., real option). We want to identify the valuation methods that perform better in terms of price accuracy (that is considered a quantitative indicator of the quality of an equity research) and understand the rational standing behind such a choice. Though, we want to find not only the dominant category of valuation methods, but also the prevalent valuation method within each of three categories. Moreover, we wonder whether the usage of only one dominant valuation approach is superior with respect to the case when the target price is obtained as a mix of two or more valuation procedures.