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Biotech Readout

A development-stage biotech is worth one of two things the day after its lead trial reads out. A healthcare analyst values both before the result: what the company is worth if the trial works, what it is worth if it fails, and where today’s share price sits between them.

What is a binary event? A single result, such as a trial readout or a regulatory decision, that moves a company’s value to one of two levels. Read backwards, the share price before it implies the probability the market is paying for, which is the number to compare with your own.

Four steps on one company, marked together. The biotech rNPV model builds the same values from patients, prices and probabilities for three programmes.

Company 3 · the Phase 3 trial reads out next

The company

Lead programme: Phase 3
Phase 1 to Phase 2: 55%
Phase 2 to Phase 3: 35%
Phase 3 to filing: 55%
Filing to approval: 90%
PV of cash flows in the current stage: $-80m
PV after the stage, if it gets there: $1000m
Everything else, net cash included: $80m
Net cash: $150m
Diluted shares: 80m
Share price: $4.75

Step 1 · Reaching the market

Multiply the probabilities of every stage still ahead of the lead programme, the current one included.

Probability of reaching the market, %

Step 2 · The programme’s rNPV

The current stage is spent whatever happens; everything after it is weighted by that probability.

rNPV, $m

Step 3 · The two companies after the readout

On success the trial’s own probability drops out and only the stages after it remain. On failure the programme is worth its in-stage costs, but investors expect a failed company to stop spending, so a share is never worth less than net cash per share.

Value per share on success, $Value per share on failure, $

Step 4 · What the price implies

Where does today’s price sit between the two outcomes? That position is the probability of success the market is paying for.

Implied probability of success, %

Keep going

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Biotech rNPV and sum-of-the-parts model · free Excel, formulas live

Provided for information purposes only, not financial advice. The companies, trials and prices in this lab are illustrative, produced from assumptions you control, and must not be relied on for any investment, financial or business decision. Read the full notice

Not advice, and not a recommendation. Everything L3VLUP publishes is provided for information purposes only. Nothing here is financial, investment, legal, tax or accounting advice, a personal recommendation, or an offer or solicitation to buy or sell any security or financial instrument. It takes no account of anyone’s objectives, financial situation or needs.

Not a regulated adviser. L3VLUP does not provide regulated financial services. Speak to a suitably qualified and regulated professional before acting on anything you read here.

Illustrative figures. Default values are plausible starting points chosen so a model has somewhere to begin. They are not data, not a view on any company, and not calibrated to anything. Outputs move with whatever you type in.

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