Regarding the ‘free-cash-flow’ argument made in the third footnote of our piece.
To reiterate, the claim against Figure 2 in our research note is that (1) capitalists discount not net earnings, but the free cash flow; and (2) that, in the case of pharmaceutical firms, the relative magnitude of the free cash flow (compared to the average) is higher than the relative magnitude of net earnings (compared to the average).
If the relative magnitudes of the free cash flow and of market capitalization are the same, it follows that capitalists see the future growth of pharmaceutical free cash flow and/or risk as being the same as the average.
But that is not what the data indicate.
Instead, they show that:
1. In terms of magnitudes, the relative shares of market capitalization > net earnings > free cash flow.
2. In terms of trends, the slopes of market capitalization > net earnings > free cash flow.