rNPV — risk-adjusted Net Present Value
rNPV is the standard valuation framework for biotech. It projects the future cash flows from a drug or therapy at peak commercialisation, discounts them to present value (using a discount rate of 10–15% to reflect sector risk), and then multiplies by the probability of reaching commercialisation from the current stage.
Example: A Phase 2 asset with projected peak annual sales of $500M, a 25% probability of approval from Phase 2, and a 7-year path to commercialisation has an rNPV roughly calculated as: ($500M × 0.25) ÷ (1.12)^7 = approximately $56M. Each asset in a biotech's pipeline gets its own rNPV, and the company is valued as the sum of its pipeline rNPVs minus net debt plus cash.
Clinical stage benchmarks
Approximate probability of approval by stage (FDA historical data): Pre-IND: 5–10% probability of eventual approval. Phase 1: 10–15%. Phase 2: 15–20%. Phase 3: 50–65%. NDA/BLA filed: 85–90%.
Each stage transition is a value-creation event — which is why biotech funding is often structured as tranches tied to clinical milestones rather than a single upfront investment.
Peak sales estimate as valuation anchor
For later-stage biotechs, peak annual sales potential is the primary valuation driver. Investors project the addressable patient population, likely pricing (especially for orphan/rare disease indications), market penetration rate, and competitive landscape. Peak sales of $1B+ justify large pre-commercialisation valuations. For rare diseases with small patient populations but ultra-high pricing ($500K+ per patient per year), even modest peak sales can justify significant valuations.
Milestone-based deal structures
Most biotech financing and partnership deals are structured as upfront payment + milestone payments tied to clinical and regulatory events. A pharma partnership might pay $10M upfront, $20M on Phase 3 initiation, $50M on NDA filing, and $100M on approval — with royalties on sales thereafter. The sum of potential milestone payments is the implicit valuation ceiling. Founders should model all milestone scenarios to understand the expected value of any structured deal versus a straight equity financing.
Per-patient value in rare disease
In orphan drug and rare disease, standard market sizing doesn't apply. With patient populations of 5,000–50,000 globally, the value comes from pricing power (regulators allow premium pricing for rare disease) and duration of treatment. A therapy treating 10,000 patients at $300K per year generates $3B in annual peak revenue — from an addressable population smaller than a mid-sized city. rNPV in rare disease requires modelling price, duration, market penetration and competitive entry separately.