Biotech rNPV and sum-of-the-parts model
Three programmes, stage probabilities, launch curves, SOTP. Value a development-stage biotech programme by programme: build a launch curve from patients and price, risk-adjust by stage, discount to an rNPV, and sum the parts to a price per share.
Built in: Equity research and hedge funds, Investment banking, Private equity
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: biotech rnpv and sum-of-the-parts model.Updated 2 October 2026
Who builds it, and for whatThe standard valuation for a biotech initiation, a healthcare fund’s position or a licensing negotiation: a company with no earnings valued on what its pipeline would earn if it reached the market, weighted by the probability that it does. Healthcare equity analysts, biotech investors and business development teams build it, and most of the debate is about probabilities and launch curves rather than the discount rate.
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| A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | Assumptions | ||||||||||||||||||||||
| 2 | $m unless stated. Annual periods Y1 to Y20. | ||||||||||||||||||||||
| 4 | Year | Unit | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 | Y9 | Y10 | Y11 | Y12 | Y13 | Y14 | Y15 | Y16 | Y17 | Y18 | Y19 | Y20 | |
| 5 | Timing | ||||||||||||||||||||||
| 6 | Year | year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | |
| 8 | Company | ||||||||||||||||||||||
| 9 | Discount rate | % | 12.0% | Annual, one company-wide rate, applied mid-year. | |||||||||||||||||||
| 10 | Tax rate | % | 21.0% | Applied to positive programme operating profit only. | |||||||||||||||||||
| 11 | Diluted shares outstanding | m shares | 80.0 | ||||||||||||||||||||
| 12 | Cash and investments | $m | 320.0 | ||||||||||||||||||||
| 13 | Debt | $m | 40.0 | ||||||||||||||||||||
| 14 | Assumed share price | $ per share | 9.50 | Illustrative input, not market data. | |||||||||||||||||||
| 15 | Unallocated corporate costs, Y1 | $m | 35.0 | Costs not attributed to a programme. Not risk-adjusted. | |||||||||||||||||||
| 16 | Corporate cost growth, annual | % | 3.0% | ||||||||||||||||||||
| 18 | Stage-transition probabilities (illustrative assumptions) | ||||||||||||||||||||||
| 19 | Phase 1 to Phase 2 | % | 60.0% | Probability of passing this stage only, not cumulative. | |||||||||||||||||||
| 20 | Phase 2 to Phase 3 | % | 35.0% | ||||||||||||||||||||
| 21 | Phase 3 to filing | % | 60.0% | ||||||||||||||||||||
| 22 | Filing to approval | % | 90.0% | ||||||||||||||||||||
Select a cell to see its row, its schedule and the type of cell. Font colours: blue for inputs, black for formulas, green for links to other sheets. Scroll sideways to see every period.
Download
Biotech rNPV and sum-of-the-parts model: the workbook
Excel workbook with working formulas, no macros and no external links. Work with it above first; it is the same model as the preview.
What the base case says
- Programme A rNPV
- $708.0m
- Programme B rNPV
- $-42.4m
- Programme C rNPV
- $163.2m
- Equity value
- $774.3m
- Equity value per share
- 9.68
- Upside / (downside) to assumed share price
- 1.9%
- Clinical risk adjustment
- $3,129.6m
- Equity value per share, Phase 3 success
- 16.47
- Equity value per share, Phase 3 failure
- -0.51
- Implied probability of Phase 3 success
- 46.2%
Read from the workbook as served, every input at its default. Periods: Y1, Y2, Y3, Y4, Y5, Y6, Y7, Y8, Y9, Y10, Y11, Y12, Y13, Y14, Y15, Y16, Y17, Y18, Y19, Y20. The figures are invented and move with whatever you type in.
What this model is
A risk-adjusted net present value (rNPV) and sum-of-the-parts valuation of a development-stage biotech with three programmes, in Phase 3, Phase 2 and Phase 1, over twenty annual periods (Y1 to Y20).
Each programme is forecast from patients and price through launch, uptake and loss of exclusivity. Each year’s cash flow is weighted by the probability of reaching the stage that year falls in, then discounted. The programme rNPVs, corporate costs and net cash give equity value per share.
The Readout sheet values the lead programme in a Phase 3 success scenario and a failure scenario, and derives the probability of success implied by an assumed share price.
Seats: Equity research and hedge funds, Investment banking, Private equity.
Careers that do this work: equity research, hedge funds, investment banking, venture capital, private equity.
How the schedules connect
Every row in the workbook is tagged with the schedule it belongs to; the inspector above shows the tag when you click a row. These are the schedules this model is made of and where each one lives.
Clinical probability and stage gating
The chance of reaching the market, and what it weights
Assumptions, rows 19–22 · Programmes, rows 6–12 · Programme A, rows 6–8 · Programme B, rows 6–8 · Programme C, rows 6–8
Launch curve
Patients times price, ramped to peak, eroded at exclusivity loss
Programmes, rows 15–21 · Programme A, rows 11–16 · Programme B, rows 11–16 · Programme C, rows 11–16
Programme rNPV
Revenue to risk-adjusted cash flow to a value
Assumptions, row 6 · Programmes, rows 24–27 · Programme A, rows 19–34 · Programme B, rows 19–34 · Programme C, rows 19–34
Sum of the parts
Programmes, corporate costs, net cash, per share
Assumptions, rows 9–16 · SOTP, rows 6–9 · SOTP, rows 12–22 · SOTP, rows 25–28
Binary events: the Phase 3 readout
Value on success, value on failure, the implied probability
Readout, rows 6–14 · Readout, rows 17–20 · Readout, rows 23–28
What you should be able to explain
- How stage-transition probabilities multiply into a cumulative probability of approval, why the current stage’s costs are not risk-adjusted, and why each later cost is weighted by the probability of reaching the stage in which it is spent.
- How a launch curve is built from an addressable population, a treated share, a penetration ramp and a net price, and why gross-to-net matters.
- What loss of exclusivity does to a programme’s value and why the year it falls is one of the most sensitive inputs.
- Why corporate costs and net cash sit outside the programmes, and how much of a biotech’s value is probability rather than cash flow.
- Why one discount rate is used here and the stage risk is carried by the probability, not the rate.
What a reviewer looks for
- Risk-adjusting revenue but not the later-stage costs, so a failed Phase 2 pays for a Phase 3.
- A revenue line grown at a rate rather than built from patients, penetration and price.
- Gross price used as net, or exclusivity loss ignored, which can double a programme’s value.
- Stage risk carried twice, in a higher discount rate and in the probability.
- The sum of the parts quoted without the unallocated corporate costs that the programmes depend on.
Conventions this workbook uses
Stated on the cover sheet too. A model is only as trustworthy as the decisions it tells you it made.
- Revenue = addressable patients x % diagnosed and treated x penetration x net price per patient x exclusivity factor. Patients are in thousands and prices in $ thousands a year, so revenue is in $m.
- Uptake: penetration rises linearly from the launch year and reaches its peak in the final year of the uptake period. From the loss of exclusivity (LOE) year, a retained share of revenue continues.
- Stage-transition probabilities are the chance of passing a single stage. The cumulative probability of approval (PTRS, probability of technical and regulatory success) is the product of the transition probabilities from the current stage to approval. All probabilities are illustrative assumptions.
- Timeline: each programme has a last year for each clinical phase (0 where the phase was completed before Y1). Years after Phase 3 ends and before launch are filing and regulatory review. Pre-launch commercial cost falls in the year before launch.
- Risk adjustment, by stage: a cash flow is weighted by the probability of reaching the stage in which it occurs, conditional on the current stage. Current-stage cash flows carry a weight of 1. A later phase carries the product of the transitions before it; filing, review and pre-launch costs carry every clinical transition; commercial cash flows from launch carry the full PTRS, including approval.
- Development and launch costs and commercial cash flows are shown separately on each programme sheet, so the expected spend can be read on its own.
- Tax is charged on positive programme operating profit only. Losses are not carried forward and corporate costs receive no tax relief; both simplifications reduce value.
- Corporate costs are unallocated costs, grown at a fixed annual rate and not risk-adjusted, because they are incurred whether or not a programme succeeds.
- Equity value = programme rNPVs - present value of corporate costs + cash and investments - debt. Future financing, dilution and cash flows after Y20 are not included.
- Discounting is mid-year at one company-wide rate. Stage risk is carried by the probabilities, not by a higher discount rate, so that it is not counted twice.
- Readout: Programme A reads out at the end of Phase 3. In the success scenario its filing and pre-launch costs become certain and only approval remains on the commercial cash flows; in the failure scenario Programme A is worth its current-stage cash flows only. Weighted by the Phase 3 probability, the two scenarios equal the base-case value.
- The failure value per share is floored at net cash per share, on the assumption that a company would cut spending or return cash rather than continue as planned. Wind-down costs are ignored. The implied probability uses this floor.
Build it yourself
The starter workbook
The launch curve has been cleared on each programme sheet: launch flag, uptake, patients treated, net price, exclusivity factor and net revenue. Rebuild it from the Programmes sheet inputs. The Checks sheet shows when peak revenue reconciles to patients, penetration and net price.
Blanks: Launch curve. Free with any account. Compare with the worked model when you are done: download above.
The path around this model
Understand it, drill it, read the build, then apply it to a real company.
Build · Lab · ~12 min
Biotech Readout
Multiply stage probabilities, risk-adjust a programme, value a company in each outcome with a cash floor, and read the implied probability of success off a share price.
Read · Guide · 12 min
Biotech Valuation: rNPV, Launch Curves and the Sum of the Parts
Read · Guide · 12 min
How to Build a DCF Model: Build Order, Terminal Value and the Sanity Checks
Apply · Skill
Sum-of-the-Parts
Value the segments separately and show what a single multiple hides.
Apply · Skill
Model Audit
Find the errors in a financial model before someone senior does.
Vocabulary: rNPV (Risk-Adjusted Net Present Value), Probability of Technical and Regulatory Success (PTRS), Peak Sales, Loss of Exclusivity (LOE), Sum-of-the-Parts (SOTP), Gross-to-Net, Binary Event, Implied Probability of Success.
Questions about this model
What is the stock worth after the Phase 3 readout?
Two numbers, and the model gives both. If the trial succeeds, Programme A has only approval left to earn and the shares are worth about $17.0. If it fails, the programme is worth only the costs already committed, and the company spending as planned would be worth less than its $3.50 of net cash a share, so the price on failure is floored at cash. The assumed $9.50 share price sits between them at a 45% implied chance of success, against the model’s 60%, and the probability-weighted average of the two outcomes equals the base-case value per share.
Where do the stage probabilities come from?
Published industry base rates by phase, adjusted for the therapeutic area, the mechanism and the quality of the data so far. They are the most argued-over inputs in the model, which is why they sit together on the Assumptions sheet as illustrative assumptions, and each programme’s cumulative probability of approval is shown as the product of the stages still ahead of it.
Why are the current stage’s costs not risk-adjusted?
Because the company is spending that money now, whatever the trial shows. Each later cash flow happens only if the programme gets that far, so it is weighted by the probability of reaching the stage it falls in: the next trial by the chance of passing this one, filing and launch preparation by the chance of passing every trial, and revenue by the full probability of approval. That is what makes an early programme cost more than it is worth until the data arrive.
How much of the value is probability?
The SOTP sheet shows it as the clinical risk adjustment: the unrisked NPV of the programmes less their rNPV. For a pipeline with an early asset the gap is most of the value, which is why a single trial readout can move the share price more than any change in the discount rate.
Should each programme have its own discount rate?
Some practitioners use higher rates for earlier programmes. This model uses one rate and lets the probability carry the stage risk, because using both counts the same risk twice. The discount-rate sensitivity on the SOTP sheet shows what a different rate would do.
What does it cost?
Nothing to preview: the whole workbook is on this page, and a free account works with it online, every formula included. Every starter workbook downloads with a free account. L3VLUP Plus ($4.99/month) keeps one worked model each billing month, yours for good, and L3VLUP Pro ($25/month) keeps every one.
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