Binary events: the Phase 3 readout
Value on success, value on failure, the implied probability.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: binary events: the phase 3 readout.Updated 2 October 2026
Part of healthcare financial models, with the models, labs and guides around it.
What it does
A trial readout splits a biotech into two companies. On success the lead programme has only the regulator left to clear, so its value rises to the approval probability times its unrisked value; on failure it is worth the costs already committed and nothing more. Today’s rNPV is the probability-weighted average of the two, exactly. Read backwards, the share price implies a probability of success, which is the number an investor compares with their own; on failure the price is floored at net cash, because investors expect a failed company to stop spending rather than burn its cash.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Readout, rows 6–12: Inside the current stage (1), Present value of cash flows inside the stage (spent either way), Present value of cash flows after the stage, unrisked, Programme A: value inside the stage…
- Readout, rows 15–18: Everything else: Programmes B and C, corporate costs, net cash, Equity value per share if the trial succeeds, Equity value per share if the trial fails, spending as planned, Probability-weighted value per share: Phase 3 probability x success + the rest x failure
- Readout, rows 21–26: Net cash per share: what a failed company could return if it stopped, Value per share on failure, never below net cash, Move from today’s price on success, Move from today’s price on failure…
What a reviewer looks for
- Valuing failure at zero for the whole company rather than for the programme.
- Counting the costs of the trial only in the success case.
- An implied probability read against a failure value no investor would pay.
Learn it, then build it
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 · 9 min
Hedge Fund Stock Pitch Template and Framework
Vocabulary: Binary Event, Implied Probability of Success, Probability of Technical and Regulatory Success (PTRS), Sum-of-the-Parts (SOTP).