How to Value a Biotech Startup?
In 2025, the biotech sector is rapidly gaining momentum, following closely in the footsteps of artificial intelligence (AI), with $4.37 billion raised from 26 large rounds. Investors seem particularly interested in biotech startups leveraging AI for drug discovery.
Leading the pack are Pathos AI and Truveta, both of which raised over $300 million and achieved unicorn status. Such funding rounds come as no surprise given the immense growth potential of AI-powered biotech startups. However, biotech companies face long development timelines, which delay revenue generation while simultaneously incurring substantial R&D expenses.
To help you navigate the excitement and uncertainty surrounding biotech, in this article, we will review what drives the valuation of biotech startups..
What drives the valuation of biotech startups?
The valuation of a biotech startup centers around drug candidates and the leadership team. Let us examine how exactly these two factors impact valuations.
Market size
Drug candidates can add more value to a biotech startup by targeting more indications. Every indication targeted is essentially a new market unlocked. When more markets are targeted, the scale of revenue increases and the product enjoys more revenue stability.
Chances of approval
Only 1 in 10 drug candidates ever reach the market. Before even requesting approval from the US Food and Drug Administration (FDA) through a New Drug Application (NDA), a drug candidate must go through three phases of clinical trials. So, the value derived from a drug candidate depends on how far it is from securing NDA approval.
Diversification
Just like an investment portfolio, a drug candidate portfolio benefits from diversification. When a biotech startup has an extensive drug candidate portfolio, the probability that all candidates will fail is extremely low.
Even if we assume a failure rate of 90%, there’s only a 34.87% chance that a portfolio of 10 candidates fails entirely. If the portfolio size is increased to 20 candidates, the chance of total failure drops to 12.16%. At portfolio sizes greater than 43, the chance of total failure drops to less than 1%.
So, the startup with more drug candidates can achieve a better risk-adjusted net present value (rNPV) than the startup with only one drug candidate.
Skills and education
Since biotech is a highly technical sector, the skills and education of the leadership team are extremely important valuation drivers. Founders with scientific backgrounds and experience in drug development are likely to drive investor confidence and command premium valuations.
In addition to the scientific acumen of the founders, investors should also consider the quality of researchers.
Business acumen
Biotech startups have unique business models. In this sector, a startup may continuously make research and development expenditure without any cash inflows for years. Hence, at the leadership level, there must be an amalgamation of business and scientific acumen.
Given the inherent complexities of drug development, investors prefer founders with prior experience in leading pharmaceutical companies. Such experience fosters the decisiveness needed to abandon unviable drug candidates without emotional bias and enhances the ability to negotiate effectively with manufacturers and commercial partners.
How to value biotech startups using the market approach?
While you can value certain established biotech companies using the market approach, you cannot always do the same with biotech startups. In biotech company valuations, you must simply apply the market valuation multiple and make the necessary adjustments to arrive at the company’s valuation.
However, most biotech startups are yet to generate revenue. So, traditional valuation multiples such as EV/Revenue and EV/EBITDA are not relevant for this industry.
Some believe that cost-based valuation multiples, such as EV/R&D expenditure, are relevant for biotech startups. But biotech startups can have varying cost structures. Additionally, two biotech startups with similar R&D expenditure may not have the same success in the development of drugs or medical devices.
That being said, you could use market valuation multiples to value biotech startups that are generating revenue. Let us understand this process with an example.
Valuing Galen Pharma: Applying the 2025 Biotechnology Industry EV/Revenue Multiple to Estimate Enterprise Value
According to Eqvista’s research, the average EV/Revenue multiple in biotechnology was 20.20 as of January 2025. Now suppose that Galen Pharma has an annualized revenue of $50 million, total debt of $30 million, and cash and cash equivalents worth $16 million.
Then, you can calculate Galen Pharma’s enterprise value (EV) by multiplying its revenue by the EV/Revenue multiple.
By subtracting the total debt from the EV and adding the cash and cash equivalents, you will arrive at Galen Pharma’s valuation.
So, Galen Pharma’s valuation would be = $50 million × 20.20 – $30 million + $16 million
= $996 million
Valuing biotech startups using the Income approach
The risk-adjusted net present value method is widely used for valuing startups that are involved in drug development but have yet to receive US FDA approval. Just like the DCF method, rNPV also involves forecasting future cash flows and discounting them. But, in the rNPV method, we also adjust these values for risk or probability of success.
To use this valuation method, you must know the following variables:
- Expected research and development (R&D) expenditure in each clinical trial phase
- Expected duration of each clinical trial phase
- Expected revenue post-approval
- Discount rate
- Probability of transitioning to the next phase
Typically, we assume a discount rate between 10-13% in the rNPV method. Before exploring this method further, let us look at some market research.
The following table summarizes the expected durations, R&D costs, and probabilities of successful transition for each development phase in the biotech industry.
| Stage | Expected duration (in months) | Expected R&D cost (CPI-adjusted from 2013 dollars to 2025) | Probability of transitioning to the next phase |
|---|---|---|---|
| Phase I | 19.8 | $23.93 million | 59.52% |
| Phase II | 30.3 | $61.97 million | 35.52% |
| Phase III | 30.7 | $276.65 million | 61.95% |
| NDA submission | 16 | $4.30 million | 90.35% |
Note: All cost figures represent CPI-adjusted median R&D expenditures, except for the NDA submission cost, which reflects the projected 2025 filing cost.
In our example, we will apply the rNPV method to Asclepius Pharma, a biotech startup with only one drug candidate whose expected costs and duration of clinical trial stages are as follows:
| Stage | Expected duration (in years) | Expected present value of R&D cost at the start of the phase |
|---|---|---|
| Phase I | 2 | $25 million |
| Phase II | 3 | $60 million |
| Phase III | 3 | $280 million |
| NDA submission | 1 | $4.30 million |
We will also assume a discount rate of 10% and an annual revenue of $300 million for 10 years after approval. This allows us to make the following forecasts.
Present value of costs
| Stage | Expected duration | Expected present value of R&D cost at the start of the phase (in millions) | Start date | Discounting factor | Present value (in millions) (F = C÷E) |
|---|---|---|---|---|---|
| Phase I | 2 | -$25.00 | 0 | 1 | -$25.00 |
| Phase II | 3 | -$60.00 | 2 | 1.21 | -$49.59 |
| Phase III | 3 | -$280.00 | 5 | 1.61051 | -$173.86 |
| NDA submission | 1 | -$4.30 | 8 | 2.14358881 | -$2.01 |
Present value of revenues
| Year | Revenues (in millions) | Discounting factor | Present value (in millions) (D = B ÷ C) |
|---|---|---|---|
| Year 9 | $300 | 2.357948 | $127.23 |
| Year 10 | $300 | 2.593742 | $115.66 |
| Year 11 | $300 | 2.853117 | $105.15 |
| Year 12 | $300 | 3.138428 | $95.59 |
| Year 13 | $300 | 3.452271 | $86.90 |
| Year 14 | $300 | 3.797498 | $79.00 |
| Year 15 | $300 | 4.177248 | $71.82 |
| Year 16 | $300 | 4.594973 | $65.29 |
| Year 17 | $300 | 5.05447 | $59.35 |
| Year 18 | $300 | 5.559917 | $53.96 |
| Total present value of revenues | $859.95 |
To adjust these figures for risk, we need to calculate the probability of occurrence for each phase using the following formula.
Probability of occurrence PoO = Previous phase’s PoO ×(1-Current phase’s transition probability)
We will assume that Asclepius Pharma is ready for Phase I. Hence, the PoO for this phase will be 100%. The PoOs for other phases would be as follows:
| Stage | Probability of occurrence (PoO) |
|---|---|
| Phase I | 100% |
| Phase II | 59.52% |
| Phase III | 21.14% |
| NDA submission | 13.10% |
| Post-approval revenues | 11.83% |
Now, we can finally calculate the rNPV as follows.
| Stage | Present value of cash flows (in millions) | Probability of occurrence (PoO) | Risk-adjusted present value (in millions) (D = B × C) |
|---|---|---|---|
| Phase I | -$25.00 | 100.00% | -$25.00 |
| Phase II | -$49.59 | 59.52% | -$29.51 |
| Phase III | -$173.86 | 21.14% | -$36.76 |
| NDA submission | -$2.01 | 13.10% | -$0.26 |
| Post-approval revenues | $859.95 | 11.83% | $101.76 |
| Risk-adjusted net present value (rNPV) | $10.23 |
In this example, we saw how Asclepius Pharma, a startup with only one drug candidate, can be valued at $10.23 million. The primary reason for the low valuation in comparison to high expected revenues is the low probability of success in the biotech sector.
If we were valuing Asclepius Pharma after its drug candidate had already passed phase I, its valuation would have been $71.61 million. If the startup had reached the NDA submission stage, it would have been valued as a unicorn.
Eqvista- Valuation clarity through data-backed insights!
When a biotech startup has started generating revenue, you can value it easily using the market approach. However, a biotech startup involved in drug discovery is expected to start generating revenue 8 years after reaching the clinical trials stage. In this extended pre-revenue phase, the risk-adjusted net present value (rNPV) method can help you make informed assessments.
If you need a fair and unbiased valuation to assess the viability of a biotech investment opportunity, consider relying on Eqvista. Our valuation reports empower investors to make high-stakes decisions with confidence. Contact us to know more!
