Healthcare · Biotech
Biotech Sector Primer
A 41-page primer plus Excel valuation model on biotech companies: cash runway, the clinical probability chain, multi-programme rNPV and the patent cliff.
2026 Edition · data as of June 2026
- pages
- 41
- sections
- 15
- model sheets
- 13
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The full primer
£25 / ~$32
- 41 pages, 15 sections
- Worked examples and applied cases
- 2026 Edition, data as of June 2026
Excel model
Valuation template
£45 / ~$58
- 13 sheets (.xlsx)
- Runs the primer's worked valuations live
PDF + Excel model Best value
Both files together
£59 / ~$76
- The 41-page primer
- The 13-sheet Excel model
- £70 bought separately · £11 less
Complete Healthcare Library
All three Healthcare industries: three primers, three Excel models (Pharmaceuticals, Biotech, and Medtech).
Inside the primer
The 15-section contents, a worked valuation page, and the Excel dashboard.
Contents
- 01 How Biotech Makes Money
- 02 Listed Biotech Types
- 03 The Clinical Stage Ladder
- 04 Segments and Modalities
- 05 Revenue Drivers: Standard Build
- 06 Cost Structure: Burn and Runway
- 07 Valuation Frameworks
- 08 Worked Example: Runway Calculation
- 09 Worked Example: Multi-Program rNPV
- 10 Applied Cases: Runway and Franchise
- 11 Applied Cases: Partnership and Platform
- 12 The Companies in This Primer
- 13 Key Metrics and Screening
- 14 Risks, Benchmarks and Case Study
- 15 Glossary and Cheat Sheet
Worked examples and applied cases · 41 pages · 15 sections · 3 worked companies
The Excel model
Educational material for professional use. This primer and its model are not investment advice or a recommendation to buy or sell any security, and they are not personalised. Worked valuations use illustrative calibrations, not fair-value estimates for any company.
A listed biotech company sits on one side of a line. Once a drug is approved, patent protection can make a single franchise very profitable for a limited time. Before approval the company burns cash, and its value rests on how long the money lasts and on the odds that its lead programme succeeds. The two sides need different tools, and mixing them is the commonest error: a loss-making company cannot be valued on its earnings at all.
Biotech valuation benchmarks by clinical stage
Before approval, a programme is worth its commercial cash flows multiplied by the odds of getting there. The odds change sharply from one phase to the next, and the primer takes them from the BIO 2011-2020 success-rate study.
| Stage | Method | Benchmark | What sets the position |
|---|---|---|---|
| Phase I | Option value; rNPV | 7.9% chance of approval (6.7% on the later Citeline data) | Therapeutic area: haematology, rare disease and oncology carry their own base rates |
| Phase II | rNPV | 15.1% chance of approval; only 28.9% pass to Phase III | The Phase II readout, the largest single hurdle |
| Phase III | rNPV with narrower odds | 52.4% chance of approval | Peak sales, launch year, years of exclusivity after launch |
| Approved franchise | Franchise DCF through the patent cliff; P/E cross-check | 100%, discounted at 8% | Share of revenue in the lead franchise; years to loss of exclusivity |
| Any company still burning cash | Cash runway | Under 4 quarters acute; 4-8 caution; over 8 comfortable | Burn measured from operating cash flow, not the GAAP loss |
The primer discounts pipeline cash flows at 10% and marketed franchises at 8%, on an illustrative 4.50% Treasury yield. The odds sit in each year's cash flow, never in a higher rate. A programme moves up its row with larger peak sales or an earlier launch; a company moves down when its runway ends before first sales and the raise is priced below model value. For a franchise owner, one more benchmark matters: the primer's franchise company is worth $176.66 a share as a going concern but $95.91 if exclusivity ended today, and the $81 gap is the value of the patent runway left.
Worked example: a biotech rNPV valuation
Take a hypothetical clinical-stage company with $1,000M of cash, no debt, 100M shares and two programmes. Each programme's cash flows are built year by year, weighted by its chance of approval and discounted at 10%. The trial now running is charged in full; later-phase spending is weighted by the chance of reaching it.
| Step | Amount |
|---|---|
| Programme 1 rNPV (Phase III, $1.8B peak sales, 52.4% chance) | $1,277M |
| Programme 2 rNPV (Phase II, $1.5B peak sales, 15.1% chance) | $101M |
| Plus cash | +$1,000M |
| Less PV of unallocated G&A ($80M a year, 20 years at 10%) | -$681M |
| Company value | $1,697M |
| Value per share (100M shares) | $16.97 |
Overhead takes back almost half of what the pipeline is worth, because it earns nothing and must be funded until a drug sells. Programme 2 shows why the full schedule matters. The quick screen multiplies its $2,373M of launch cash flows by 15.1% and stops at $359M; the full schedule also charges $258M of trial spending and lands at $101M.
Now test the cash. Year-one spending of $450M is $112.5M a quarter, so $1,000M covers 8.9 quarters, just above the comfortable line. Run the cash forward year by year instead and the balance reaches minus $350M in year 3, before the lead drug's first sales. Raising $350M at an illustrative $16.00 means 21.9M new shares, and value per share falls to $16.80, whatever the trial shows.
The primer shows both programme schedules in full, re-runs the value across odds, peak sales and the discount rate, and values a franchise owner and a diversified company through their patent cliffs. The Excel model does the same with your own programmes.
Which biotech valuation method fits which company
| Company type | Primary method | Check with | Why |
|---|---|---|---|
| Clinical-stage cash burner | rNPV on each programme plus net cash | Runway and a cash roll-forward to first sales | No earnings to read; survival depends on liquidity |
| Profitable franchise owner | Franchise DCF through the patent cliff | P/E; the franchise floor if exclusivity ended today | Stable earnings, but one franchise carries most of the risk |
| Mature company with a pipeline | Franchise DCF plus pipeline rNPV | P/E | Commercial cash funds trials without dilution |
| Platform or partnership company | Sum-of-parts rNPV | The company's own profit-share line, never the partner's global sales | A platform earns an uplift only after repeat launches |
| Rare-disease specialist | Franchise DCF | P/E once earnings are positive | Label expansion and orphan-drug pricing carry the franchise |
What the full primer adds
The primer builds the tools in order: how biotech makes money, the listed company types, the clinical stage ladder and the main modalities, then the revenue build and the cost side of burn and runway. Worked examples follow: a runway calculation, then an illustrative clinical-stage company with two programmes valued year by year, and a concentrated franchise owner and a diversified profitable company valued through their patent cliffs. Applied cases cover runway, franchise concentration, partnerships and platforms, and screening closes with runway, concentration and the probability chain.
Free guides on the site cover the individual pieces, so you can revise one idea without reopening the PDF: biotech cash runway, rNPV for clinical-stage biotech, clinical trial success rates by phase, success rates by therapeutic area, platform vs single-asset biotech, franchise concentration and partnership economics. Research profiles for Vertex, Regeneron, Amgen, Gilead, Moderna and BioMarin run the same screens on filed results. The companion Excel model spans thirteen sheets, from the probability chain and three worked companies through a valuation summary, a runway calculator and the concentration and patent-cliff views to a live sensitivity grid, so changing a programme's odds or peak sales re-runs the value.
Sheets: Quick Start, Instructions, Assumptions, PoS Chain, BioCo 1, BioCo 2, BioCo 3, Valuation Summary, Runway Calculator, Concentration, Patent-Cliff Bridge, Sensitivity, Dashboard.
Biotech valuation: free guides
Biotech valuation FAQ
- How do you value a biotech company?
- Decide first which side of the commercial line it sits on. A clinical-stage company that burns cash is valued as the sum of its programmes' risk-adjusted NPVs (rNPV), plus cash, less debt and the present value of corporate overhead, with cash runway checked alongside. A profitable franchise owner is valued on a franchise DCF through its patent cliff, with P/E as a cross-check and pipeline rNPV added on top.
- What is a good cash runway for a biotech?
- Runway is cash and short-term investments divided by quarterly cash used in operations, not the GAAP net loss. Under four quarters is acute financing risk, four to eight is a caution band, and above eight is usually not the binding constraint at unchanged burn. A comfortable static figure can still hide a raise: the primer's worked company shows 8.9 quarters but runs out of cash a year before its lead drug starts selling.
- What are the odds that a drug in Phase II is approved?
- About 15.1% on the BIO 2011-2020 data the primer uses as its default: 28.9% pass Phase II, 57.8% pass Phase III and 90.6% of filings are approved. From Phase I the figure is 7.9% and from Phase III 52.4%. The later Citeline 2014-2023 study gives a lower 6.7% from Phase I, useful as a sensitivity.
- What discount rate is used in a biotech rNPV?
- The primer discounts pipeline cash flows at 10% and marketed franchises at 8%, both built on an illustrative 4.50% ten-year Treasury yield. The odds of clinical success go into each year's cash flow; loading failure risk into the rate as well would count it twice.
- Why can't you value a biotech on P/E?
- A loss-making company has no earnings for the ratio to read, so its P/E is not meaningful and the valuation has to come from rNPV and runway. A peer table that sets a profitable franchise owner beside a cash-burning platform on trailing P/E is comparing two different businesses. P/E works as a cross-check only on companies with stable positive GAAP earnings.
See this methodology applied to a real company:
Moderna (MRNA) →