Technology, Media & Healthcare

How to Underwrite a Biotech or Therapeutics Company

Underwrite a biotech or therapeutics company by valuing each asset on risk-adjusted NPV, applying probabilities of success by clinical phase, then comparing cash runway to the next value-inflecting milestone. Key metrics are months of runway, probability-weighted asset value, patent life remaining at launch, and the size and timing of milestone or royalty payments from partners.

What makes biotech / therapeutics underwriting different

Biotech and therapeutics companies spend years and large sums developing drugs before generating revenue. Value is binary at each milestone: a positive trial readout or approval can multiply value, while a failure can erase most of it. Value comes from the probability-weighted cash flows of approved products, partnerships that provide upfront and milestone payments, and IP that protects pricing. Risk comes from clinical failure, regulatory delays, safety signals, manufacturing issues, competitive drugs reaching market first, and running out of cash before the next milestone. The structure of financing is often milestone-driven, with tranches tied to trial results.

Lenders rarely lend against clinical-stage pipelines alone. Venture debt is available to well-funded biotechs, sized relative to cash and equity backing, with tranches tied to milestones. Royalty and synthetic royalty investors provide capital against approved products or late-stage assets, sizing on forecast sales and royalty rates. Equity investors underwrite the science, unmet need, clinical design and commercial potential, accepting binary risk for large upside. They model risk-adjusted NPV and scenario outcomes, and they pay close attention to cash runway to avoid dilutive financing.

Key metrics

Cash runway

Months of cash relative to burn determines whether the company can reach its next milestone without raising capital.

Venture lenders often look for runway beyond the next major clinical readout plus a cushion.

Probability of success by phase

Clinical trial success rates vary by phase and therapeutic area and drive risk-adjusted valuation.

Risk-adjusted NPV

Combines forecast cash flows with probabilities of success to value each asset.

Patent life at launch

Remaining exclusivity after approval determines the period of protected revenue.

Partnership milestone and royalty terms

Upfront payments, milestones and royalties provide non-dilutive capital and validate the asset.

Peak sales potential

Patient population, pricing and competition determine commercial value.

How to underwrite it, step by step

Inventory pipeline assets with indication, phase, mechanism, timelines and competitive landscape.
Review clinical data, trial designs, endpoints and regulatory interactions.
Assign probabilities of success by phase and model risk-adjusted cash flows for each asset.
Diligence patents, exclusivity, freedom to operate and licensing obligations.
Review partnership agreements for milestones, royalties, rights and termination clauses.
Assess manufacturing strategy, CMO agreements and supply risk.
Analyze cash burn and runway to key milestones under base and delay scenarios.
Structure financing with milestone-based tranches, covenants and appropriate security.

Due diligence checklist

Pipeline overview with development timelines
Clinical study protocols, reports and data
Regulatory correspondence including FDA meeting minutes
Patent portfolio and freedom to operate analyses
License and partnership agreements
CMO and supply agreements
Cash flow forecast and burn analysis
Commercial forecasts and market research
Safety and pharmacovigilance reports
Cap table and financing history

Key risks and mitigants

Clinical trial failure

Use milestone-based tranches and require sufficient equity to fund development.

Regulatory delay or rejection

Review regulatory interactions and model delays in runway analysis.

Cash runway shortfall

Set minimum cash covenants and require equity raises before additional debt tranches.

IP challenge or early generic entry

Obtain IP analysis and model revenue under shorter exclusivity.

Manufacturing failure

Review CMO capabilities, redundancy and quality history.

Partner termination

Review partnership terms and the company's ability to continue development independently.

Typical financing and deal structure

Clinical-stage biotechs are mainly funded by venture equity, public equity and partnerships. Venture debt provides additional runway, typically structured in tranches with later draws tied to clinical or financing milestones, and includes warrants and minimum cash covenants. Late-stage and commercial companies may use royalty financing, synthetic royalties or revenue interest financing, where investors receive a percentage of product sales until a return cap is reached. Term loans become available once products generate meaningful revenue. Licensing deals and acquisitions commonly use contingent value rights or milestone payments tied to approvals and sales thresholds, aligning price with clinical outcomes.

Red flags

Runway that ends before the next key readout
Trial designs with endpoints regulators have questioned
Key patents expiring shortly after expected approval
A partner with broad termination rights for convenience
Single-source manufacturing with past quality issues

Frequently asked questions

How do you value a pre-revenue biotech company?

Pre-revenue biotechs are often valued using risk-adjusted NPV, which models future sales of each drug candidate and applies probabilities of success for each clinical phase. Investors also compare valuations of similar companies and recent transactions. Cash runway, partnership terms and IP strength strongly influence the final valuation.

What is rNPV?

Risk-adjusted NPV discounts future cash flows of a drug candidate and multiplies them by the probability of reaching each development stage. It reflects both time value and the chance of failure. The approach lets investors compare assets at different stages on a consistent basis and highlights which milestones most affect value.

Can biotech companies get debt financing?

Yes, but mainly through venture debt or royalty financing. Venture lenders provide loans to well-funded biotechs, sized relative to cash and equity backing, with milestone-based tranches. Royalty financing is available for approved or late-stage assets with forecastable sales. Traditional bank loans are uncommon until products generate stable revenue.

What is royalty financing in biotech?

Royalty financing provides capital in exchange for a share of future product revenue or existing royalties owed by a partner. Investors underwrite forecast sales, patent life and royalty rates. Payments typically continue until a return cap is reached or the royalty term ends, making it non-dilutive capital for the company.

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Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.