Healthcare · Biotech
rNPV for Clinical-Stage Biotech
Single-asset rNPV for clinical-stage biotech: success-weighted cash flows at a 10.0-10.5% discount, a worked Phase II example, and equity as rNPV plus net cash.
Selborne Research · Biotech coverage: 7 guides, 6 company profiles, a primer and Excel model
Educational analysis for professional use. This guide is not investment advice or a recommendation to buy or sell any security, and it is not personalised.
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Clinical Risk Belongs in the Probability, Not the Discount Rate
Risk-adjusted net present value (rNPV) is a DCF in which each forecast cash flow is multiplied by the cumulative probability of success (PoS): the odds of getting from the asset’s current trial phase to approval. The result is then discounted at a normal nominal rate. Raising the discount rate to 20% or more and applying a low PoS counts the same clinical failure twice.
Equity follows: equity = rNPV + net cash − debt. For a pre-profit company with one lead asset, that is the asset’s rNPV plus whatever cash is left when the trial results arrive, which is why cash runway sits beside every pipeline model.
rNPV Building Blocks
| Step | Action |
|---|---|
| 1 | Forecast net cash flows from the valuation date through exclusivity (R&D outflows pre-approval; commercial inflows post-launch) |
| 2 | Discount at a nominal rate (default 10.0%; the example below uses 10.5% to show how little half a point moves the answer) |
| 3 | Multiply commercial PV by cumulative PoS from the asset’s phase to approval |
| 4 | Subtract remaining risk-adjusted development costs (often embedded in the same PoS chain) |
| 5 | Add net cash, subtract debt, for equity |
Pipeline peak sales are estimates; a drug on the market is anchored on filed sales, such as Vertex’s cystic fibrosis (CF) drugs at $11.15B in FY2025.
PoS Inputs: The BIO Benchmark
The model’s default rates come from the BIO, Informa Pharma Intelligence and QLS Advisors study for 2011–2020. NDA/BLA is the filing for FDA approval (new drug or biologics licence application).
| Transition | Rate |
|---|---|
| Phase I → II | 52.0% |
| Phase II → III | 28.9% |
| Phase III → NDA/BLA | 57.8% |
| NDA/BLA → approval | 90.6% |
| Likelihood of approval (LOA) from Phase I | 7.9% |
A later Citeline study of 2014–2023 gives lower rates (6.7% LOA from Phase I) and makes a useful sensitivity. The example below starts at Phase II, so it uses the last three BIO rates. Rates also differ widely by disease area; success rates by therapeutic area sets out when an area rate should replace the average.
Worked Example: Phase II Asset
Illustrative inputs:
| Parameter | Value |
|---|---|
| Starting phase | Phase II |
| Launch | Year 5 |
| Peak sales | $1,500M (linear ramp years 5–7) |
| Exclusivity | 10 years from launch (through year 14) |
| Commercial margin | 30% of revenue |
| Discount rate | 10.5% nominal |
| PoS (Phase II → approval) | 28.9% × 57.8% × 90.6% = ~15.1% |
Revenue and cash flow schedule:
| Year | Revenue ($M) | CF at 30% ($M) |
|---|---|---|
| 0–4 | $0 | $0 |
| 5 | $500 | $150 |
| 6 | $1,000 | $300 |
| 7–14 | $1,500 | $450 |
Valuation:
| Step | Result |
|---|---|
| PV of commercial cash flows @ 10.5% | ~$1,551M |
| × PoS 15.1% | ~$235M risk-adjusted commercial value |
The ~$1,551M is what the commercial cash flows would be worth if approval were certain; the 15.1% PoS from Phase II cuts it to ~$235M. At the 10.0% model default the same cash flows give ~$245M. Step 4 then takes off the remaining development spend, the current phase in full and each later phase weighted by the chance of reaching it, to reach the asset’s rNPV.
Peak sales and PoS move rNPV more than ±50 bps on the discount rate does, so stress the phase-transition rates first.
rNPV vs Earnings-Based Valuation
A profitable biotech is valued on what it sells, plus rNPV for each pipeline programme. A loss-maker’s programmes carry the whole equity:
| Company | FY2025 revenue | FY2025 GAAP net income |
|---|---|---|
| Vertex (VRTX) | $12.0B | $3,953M |
| Moderna (MRNA) | $1.9B | $(2,822)M loss |
Vertex’s CF franchise (92.9% of FY2025 revenue, $11.15B) is valued on filed sales, with rNPV lines on top for programmes such as povetacicept, for the kidney disease IgA nephropathy (FDA decision due 30 November 2026, as of August 2026). See Vertex.
Moderna had $8.1B of cash and investments against a $(2,822)M FY2025 GAAP net loss. Its equity is rNPV on intismeran, an individualised mRNA cancer vaccine, and its other mRNA programmes, plus the runway test. See Moderna.
A Reference Point From WIPO
WIPO, the UN’s intellectual property agency, works an illustrative Phase I cystic fibrosis case in its biotechnology valuation guide to ~$70M of rNPV at a 10% discount rate: a textbook example, not a market price.
A clinical-stage company's two programmes are valued year by year and its cash rolled forward to first sales, beside a franchise owner valued through its patent cliff.
- 15 sections, the clinical stage ladder to cash runway, multi-programme rNPV and a patent cliff
- 41 pages
- a two-programme clinical-stage company with its runway and dilution, a concentrated franchise owner and a diversified profitable company
- 3 worked companies
- profitable franchise owners and a cash-burner, on filed concentration, cash and burn
- 6-company screen
The Excel model is the primer's rNPV engine live across 13 sheets: a phase-by-phase PoS chain on BIO 2011-2020 rates, from Phase I to Approved; three worked companies, each switchable between clinical and commercial mode and valued year by year over 20 years, with later-phase R&D weighted by the odds of reaching it; a valuation summary with franchise floors; a runway calculator that rolls real cash forward, shows when it runs out if the lead fails, and prices the dilution from the raise; concentration and patent-cliff views; and a sensitivity grid. Change PoS, peak sales, R&D or the discount rate and the value moves.
See what's in the Biotech Sector Primer →£25 PDF · £59 with the Excel model · £159 for all three Healthcare industries
Frequently Asked Questions
- What is rNPV for a clinical-stage biotech asset?
- Risk-adjusted net present value forecasts net cash flows for a single development programme, multiplies each period by cumulative probability of success (PoS) at that phase, and discounts at a nominal cost of capital. Clinical risk sits in the PoS numerator; the discount rate carries time value and commercial risk, not a second clinical haircut.
- What discount rate do Selborne biotech models use?
- The default is 10.0% nominal: a 4.50% long-run 10-year U.S. Treasury yield plus an equity risk premium. Clinical risk sits in the probability of success by phase, so the discount rate does not count it a second time.
- How do you get from rNPV to equity value?
- Equity value equals rNPV on the asset (or the sum of asset rNPVs) plus net cash minus debt. For a pre-profit company with one lead programme, that means lead-asset rNPV plus cash, adjusted for whether the cash lasts until the readout (cash runway).
- When should you use rNPV instead of P/E?
- P/E only works where there are steady GAAP earnings to divide by, as at profitable franchise owners such as Vertex, Gilead and BioMarin; even there, pipeline programmes are valued separately with rNPV. Loss-making or pipeline-heavy companies such as Moderna have no meaningful P/E, so rNPV on each programme plus net cash does the work until commercial cash flows stabilise.
Read next
Clinical Trial Success Rates by Phase
FDA phase definitions and BIO/Informa success rates: 52.0% to 28.9% to 57.8% to 90.6%, cumulative 7.9% LOA from Phase I; the later Citeline 2014–2023 data give 6.7%.
Biotech Cash Runway Explained
Cash runway formula for pre-profit biotech: liquidity divided by quarterly operating cash outflow, the 4- and 8-quarter reference points, and why net loss is the wrong denominator.
Platform vs Single-Asset Biotech
How programmes that share one technology fail together: a worked example of correlated pipeline risk, the sum-of-programmes floor, and what FDA platform designation does and does not do.
Pharma rNPV Pipeline Valuation
Risk-adjusted NPV for drug pipelines: PoS-weighted cash flows, an 8.5% WACC built on a 4.50% 10-year Treasury rate, and a worked Phase III asset at $1,621M.
See it applied
These company profiles apply the concepts from this guide to real public companies.