Risk adjusted NPV
Sector Deep DivesA drug programme's DCF multiplied by the probability it actually reaches market.
Also written: rNPV, eNPV
A clinical stage asset either reaches market or it does not, and a single expected cash flow line hides that. Risk adjusted NPV values the success case properly as a DCF, then multiplies by the compounded probability of getting there.
The probabilities come from published industry transition rates by phase and therapeutic area, not from optimism. Phase I to approval sits in the low single digits; Phase III to approval is far higher, which is why value is so concentrated around readouts.
Each asset in a pipeline is valued separately and the results summed, with unallocated corporate costs and the cash balance handled at group level.
The output is extremely sensitive to the probabilities, which is the main criticism and the reason they must be stated explicitly rather than buried. An analyst quietly assuming 80% where the industry rate is 65% has not made an optimistic forecast, they have made an undisclosed one.
Worked example
A Phase III asset worth 2,400 if approved, with a 65% chance of trial success and an 85% chance of approval thereafter, reaches market 55% of the time. Its risk adjusted value is 55% of 2,400, or 1,326, less remaining development cost.
A successful readout removes the trial risk, so the probability jumps to 85% and the value to about 2,040. Same drug, same forecast, over 50% more value.