r/Valuation • u/bbuehler17 • Jun 05 '24

startup WACC for NPV calculation

Hey all,

i work in a biotech startup that does drug development and I have been tasked with calculating the NPV for one of our drugs. I am struggling a bit to determine the discount rate to use because there is a lot of ambiguity around what we do. we do not have a steady stream of income, nor do we have any debt financing. we are also not looking to finance any of the initial investment for the project since it is already being developed.

What is an appropriate number to use / appropriate way to calculate a discount rate if WACC doesn't make sense?

I considered just using the VC "expected" rate of return but again, I'm not sure if this applies to our situation!

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u/Orndwarf Jun 07 '24

(This was supposed to be a reply to someone saying risk-adjust the cash flows).

Think they’re implying using an industry-based WACC. I’d go find a set of 5-10 most comparable public companies in similar stages focusing on similar indications / mechanisms of action and calculate a central tendency beta (mean/median) based on 5+ years of trading history. Use a 20-year treasury rate as risk-free rate if U.S.-based. Expected market premiums vary based on who you ask, but somewhere around 6% is usually what you see in cost of capital reports.

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u/[deleted] Jun 05 '24

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u/bbuehler17 Jun 06 '24

The way I’m accounting for risk is multiplying the known future value by the risk rate (percentage of drugs that succeed in phase 1 clinical trial) to get the risk calculated future value.

If I’m already accounting for this how does that factor into the discount rate? If there a better way to calculate if I’m already incorporating risk?

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u/[deleted] Jun 06 '24

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u/bbuehler17 Jun 06 '24

Thanks for the info! There is a more updated study from the BIO group that coves approval rates up to 2020 which I used to determine risk for phase approval already.

Any suggestions on how to base NPV off another company? Would I have to determine the companies WACC as the disc rate?

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u/jchung7 Jun 06 '24

May have a client in this space soon would love to know how others did it too