Biotech Valuation: 3 Methods That Work

You’re looking at a biotech stock. The company has no revenue, no earnings, and a drug with an FDA decision two years out. The stock is up 40% this month. Is it cheap or expensive? You have no idea, because every valuation tool you learned from tech stocks doesn’t work here.

The solution: three methods built for biotech. Risk-adjusted NPV, peak sales multiples, and comparable analysis. Each answers a different question. Together they tell you whether the market is pricing in realistic approval odds or smoking something.

Why P/E fails for biotech

Traditional valuation uses P/E or EV/EBITDA multiples. Those require earnings and revenue. Most biotechs are pre-revenue: they burn $50-200 million a year developing a drug that won’t generate revenue for 3-7 years. You’re valuing a clinical lottery ticket, not a business.

Yet the market still assigns biotechs market caps. BridgeBio (BBIO) trades at ~$85 with a market cap near $16.5 billion. Sarepta (SRPT) trades at $15.43, ~$1.66 billion market cap. Crinetics was acquired by Vertex for $10 billion, or $83.86 per share. Those numbers come from somewhere. Here are the three methods that produce them.

Method 1: Risk-adjusted NPV (rNPV)

Risk-adjusted net present value (rNPV) is the core biotech valuation method. You project the drug’s future cash flows if it reaches market, then multiply each by the cumulative probability of approval to get a present value that accounts for clinical risk.

The key insight: clinical risk is binary, so you capture it with probability weights, not a high discount rate. The discount rate should be 10-13%.

Here’s the framework in six steps:

1. Estimate the addressable market. How many patients have the disease? What will the drug cost per year? Orphan drugs can price at $200,000-$400,000 per patient; broader indications $10,000-$50,000.
2. Project peak sales. Multiply treatable population by expected price, minus gross-to-net discounts. Peak sales are reached 3-5 years post-launch for specialty drugs, 5-8 for primary care.
3. Build a revenue curve. Sales ramp up, plateau during exclusivity, then decline after patent loss. 10-year exclusivity is typical.
4. Apply probability weights. Multiply each year’s cash flow by cumulative probability of reaching that point. From Phase 1, approval probability is ~10-12%. From Phase 3, 55-60%. With an NDA filed: 85-90%. These are BIO 2011-2020 industry averages.
5. Discount at a low rate. Discount probability-weighted cash flows at 10-13%. Clinical risk is already in the probability weights.
6. Sum it up. The rNPV is the sum of probability-weighted, discounted cash flows minus probability-weighted development costs.

Worked example: A Phase 3 oncology drug with $1 billion peak sales, 60% cumulative approval probability, 10% discount rate, and 3 years to launch. If approved, it generates roughly $500-700 million in annual profit at peak. A 10-year profit stream discounted at 10% gives an unrisked NPV of roughly $3-4 billion. Apply 60% probability: $3.5B × 0.60 = $2.1 billion. Subtract probability-weighted Phase 3 costs of ~$100-180M. Net rNPV: approximately $1.9-2.0 billion for this single asset.

This is why Phase 2 readouts move stocks so violently. A Phase 2 success takes a drug from ~12% to ~55% cumulative approval probability, and the rNPV roughly quintuples overnight. But remember: roughly one-third of Phase 2 successes fail to replicate in Phase 3. A positive Phase 2 is a hypothesis, not an approval signal. For more on reading Phase 2 data critically, see our guide on how to read a clinical trial press release without getting fooled.

Method 2: Peak sales multiple

The rNPV method requires a revenue model. The peak sales multiple is the quick version: estimate peak annual revenue, then apply a multiple.

Biotechs with approved drugs typically trade at 3-8x peak sales. Established pharma trades lower, 4-6x. High-growth biotechs launching their first $1B+ revenue drug can trade at 8-10x. The multiple reflects growth expectations, exclusivity, and pipeline optionality.

Real example: BridgeBio (BBIO) trades at ~$85, market cap ~$16.5 billion. Its one approved drug, Attruby, generated $180.6 million in U.S. revenue in Q1 2026, annualizing to ~$722 million. At 10x revenue, Attruby is worth ~$7.2 billion. That leaves $9.3 billion for the pipeline, primarily BBP-418 (PDUFA November 27, 2026) and encaleret (ADH1). BBP-418 targets LGMD2I, maybe 2,000 U.S. patients at $300,000/year = $600 million peak sales. At 3x, BBP-418 contributes ~$1.8 billion. The math gets thin: $7.2B + $1.8B = $9 billion against $16.5 billion market cap. The remaining $7.5 billion is betting on earlier pipeline assets. For the full breakdown, see our BridgeBio BBP-418 PDUFA analysis.

Real example: Sarepta (SRPT) trades at $15.43, market cap ~$1.66 billion, with $2.18 billion in trailing revenue. That’s a 0.76x revenue multiple. Is Sarepta cheap, or a value trap? The market is pricing in Elevidys label expansion concerns and slowing DMD franchise growth. A 0.76x multiple is either the bargain of the decade or a warning that revenue is eroding. The multiple tells you the price, not the risk behind it.

Real example: Vertex paid $10 billion for Crinetics (CRNX), which had $10.7 million in Q1 2026 revenue. That’s a 143x revenue multiple. But Vertex wasn’t buying current revenue; it was buying an endocrine platform with 10+ pipeline programs. The peak sales multiple only works when you can credibly estimate peak sales; for platform companies, use rNPV instead. See our Vertex Crinetics $10B acquisition analysis.

Method 3: Comparable analysis

Find companies with similar pipeline stage and indication, then compare market caps. If two companies both have systemic mastocytosis drugs in Phase 3, but one trades at $2.5 billion and the other at $1.5 billion, the spread implies the market sees something different in the data, management, or commercial opportunity.

How to find comparables:

1. Search ClinicalTrials.gov by indication to find companies running trials in the same disease.
2. Filter to companies at the same clinical stage. A Phase 2 asset is not comparable to a Phase 3 asset; the probability weights are different.
3. Compare market caps, not stock prices. Share count matters.
4. Check if comparables have other pipeline assets that inflate their market cap. A pure-play biotech with one drug is not comparable to a diversified company with five.

The limitation: comparable analysis assumes the market has priced peers correctly. If the entire sector is overvalued, your analysis will tell you your stock is “in line” with peers that are also expensive. Use it as a sanity check, not a primary method.

The “priced for approval” problem

The most dangerous valuation trap is a stock that has already moved on positive Phase 3 data before the PDUFA date. BridgeBio is the textbook case: $16.5 billion market cap, clean Phase 3 data, no AdCom planned (a positive signal), PDUFA on November 27. The stock has already priced in approval and then some. Even if BBP-418 is approved, the upside is limited. The risk-reward is asymmetric: a CRL would crater the stock 40-60%, while approval adds 10-15%.

The 37% CRL base rate (2018-2022 FDA data) means more than one in three applications get rejected. Buying at full premium with a 37% chance of a 40-60% drop is gambling without the odds posted. For what a CRL means and how to react, see our guide on what a PDUFA date is and how FDA decisions work.

Cash runway: the dilution risk

A biotech with less than 12 months of cash is a dilution risk regardless of pipeline quality. When cash runs low, the company sells shares at a discount. Secondaries typically drop the stock 20-30% on announcement.

Check the latest 10-Q: cash and equivalents minus quarterly burn rate. If the company has $200 million and burns $50 million per quarter, that’s 4 quarters of runway. Under 12 months is a red flag. Under 6, avoid.

5 questions to ask before buying any biotech stock

1. What is the risk-adjusted NPV of the nearest-term asset vs. the market cap? If rNPV of the lead asset is $2B and the market cap is $10B, the market is pricing $8B in earlier pipeline. That’s a lot of hope.
2. What peak sales multiple is the market applying? Above 10x is aggressive. Below 2x on a growing franchise is either a value opportunity or a trap.
3. How do comparable companies at the same stage trade? Find 2-3 peers on ClinicalTrials.gov. If your stock is 3x the peer group market cap for the same-stage asset, you need a reason.
4. Has the stock already moved on the catalyst? If the stock is up 40% into a PDUFA, approval is priced in. CRL risk is not.
5. How much cash runway does the company have? Under 12 months = dilution risk. Under 6 = avoid until they raise capital.

Biotech valuation is not about precision. It’s range-finding: is this stock worth $2 billion or $20 billion? The three methods give you triangulation points. When rNPV, peak sales, and comparable analysis all point to the same range, you have conviction. When they diverge, the market is pricing in something you can’t see. Figure it out before you buy.