# Running the numbers: the quick calculations and due-diligence checks pros do on the fly
A biotech founder pitches you a "billion-dollar" cancer drug. It is in Phase 2. Before the coffee cools, a seasoned analyst has already scribbled four numbers on a napkin and concluded the company runs out of cash in 14 months. That speed is not genius. It is a handful of repeatable calculations and red-flag checks anyone can learn.
This lesson gives you those calculations, worked with real numbers, plus the diligence checks that keep you from trusting a story dressed up as a deal.
Two anchor numbers to carry in your head, both flagged as estimates:
Why the US dominates: drug prices are largely unregulated at point of sale, and the country has a large privately insured population. Europe is bigger by population but spends less per capita because national payers (the bodies that reimburse care, like the UK's NHS or Germany's statutory insurers) negotiate hard.
Keep those anchors. Every "peak sales" estimate you build should be sanity-checked against them.
Peak sales is the highest annual revenue a drug is expected to reachreachThe number of unique people exposed to your message in a given period. Unlike impressions, reach counts each person once, no matter how often they see it.Voir la définition complète →. The back-of-envelope formula:
Peak sales = Eligible patients
× Diagnosis rate
× Treatment rate
× Your drug's market share
× Annual net priceWorked example. Suppose a drug treats a chronic condition:
Peak sales = 126,000 × $20,000 = $2.52 billion per year.
Note "net price." US list prices are fiction; actual net price after rebates to PBMs (Pharmacy Benefit Managers, the middlemen who negotiate discounts) can be 30 to 50% lower. Always model net, not list.
For rare diseases the logic inverts: tiny patient counts, huge prices. An orphan drug (one targeting a disease affecting few patients, under 200,000 in the US per FDA definition) might serve 5,000 patients at $300,000 each = $1.5 billion. Same order of magnitude, very different risk profile.
Burn rateBurn rateBurn rate is the speed at which a company spends its cash reserves, usually measured per month, before reaching profitability or raising more funding.Voir la définition complète → is how fast a company spends cash. Runway is how long until it hits zero.
Runway (months) = Cash on hand / Monthly net burnExample. A clinical-stage biotech reports $120 million cash and a quarterly operating cash outflow of $30 million.
Now the pro insight: match runway against the next value inflection, usually a trial readout. If the Phase 2 data reads out in 18 months but runway is 12, the company must raise money before the data, from a position of weakness. That is a red flag, and it often means dilution (existing shareholders' stakes shrink as new shares are issued) or a bad partnering deal.
Drugs fail. A lot. So you cannot value a pipelinepipelineAll active sales opportunities across the stages of the sales process, together with their combined potential value and probability of closing.Voir la définition complète → drug as if it will certainly launch. rNPV discounts future cash flows both for time and for the probability the drug survives each stage.
You need PoS (Probability of Success): the historical odds of moving from one phase to approval. Widely cited industry benchmarks (from studies like the BIO/Informa "Clinical Development Success Rates" analyses, treat as estimates):
These vary hugely by disease area. Oncology sits well below average; some metabolic and infectious disease programs sit above.
Simplified worked logic. Say a drug in Phase 2 has a projected launch value (NPVNPVNet Present Value is the sum of an investment's future cash flows discounted to today, minus the initial outlay. A positive NPV signals value creation.Voir la définition complète → of cash flows if approved) of $3 billion. Apply Phase 2 PoS of ~18%:
Risk-adjusted value ≈ $3B × 0.18 = $540 million, before further discounting development costs still to be spent.
That gap between the $3B headline and the $540M risk-adjusted figure is exactly where founders and skeptical investors argue. When someone quotes only the un-risked number, they are selling, not analyzing.
For methodology, the FDA's own dataown dataData collected directly from your own customers and prospects through your own channels: your most reliable and privacy-compliant source.Voir la définition complète → on approvals is a useful free reference: FDA Novel Drug Approvals.
TAMTAMTotal Addressable Market: the total revenue opportunity if you captured 100% of potential customers in your target market.Voir la définition complète → (Total Addressable MarketTotal Addressable MarketTotal Addressable Market: the total revenue opportunity if you captured 100% of potential customers in your target market.Voir la définition complète →) is the full revenue opportunity if you captured everything. Founders inflate it. Triangulate from two independent directions:
1. Top-down: total disease spend × your addressable slice.
2. Bottom-up: patients × price × share (your Calculation 1).
Example. A founder claims a $10B TAMTAMTotal Addressable Market: the total revenue opportunity if you captured 100% of potential customers in your target market.Voir la définition complète → for a device.
The 2.5x gap means the founder is counting patients who will never be diagnosed, priced, or reimbursed. Trust the number where top-down and bottom-up converge, not the biggest one.
🎬 [VIDEO: "How Drugs Get Priced" - youtube.com - a clear explainer on US drug pricing, PBMs, and the gap between list and net price]
Numbers tell you the size. These checks tell you if the size is real.
A patent cliff is when key patents expire and generics (or biosimilars, the near-copies of biologic drugs) crush revenue, often 80%+ within a year or two. Check the composition-of-matter patent expiry and any Loss of Exclusivity (LoE) date. A drug with $2B in sales and an LoE in three years is a very different asset than one with 12 years of runway.
One approved product means one point of failure: a safety signal, a competitor launch, a manufacturing halt, and revenue collapses. Diversified pipelines are safer. Ask: what happens to this company if the lead product misses?
Approval is not payment. In the US, a drug can be FDA-approved yet poorly reimbursed if payers refuse favorable coverage. In Europe, each country runs a separate HTA (Health Technology Assessment) process; bodies like the UK's NICE (National Institute for Health and Care Excellence) or Germany's IQWiG decide whether the price is justified by the benefit. A device or drug with no reimbursement pathway has no real market, regardless of TAMTAMTotal Addressable Market: the total revenue opportunity if you captured 100% of potential customers in your target market.Voir la définition complète →.
Know the difference: FDA clearance (via the 510(kkThe average number of new users each existing user generates through referrals. Above 1.0, growth compounds on itself and becomes exponential.Voir la définition complète →) pathway, for devices similar to something already on the market) is far lighter than FDA approval (via PMA, Premarket Approval, for high-risk devices) or drug approval via a BLA/NDA (Biologics License Application / New Drug Application). "FDA cleared" and "FDA approved" are not synonyms, and sloppy founders blur them.
Vérification des acquis
1. Why does the peak sales formula multiply eligible patients by both a diagnosis rate and a treatment rate before applying market share?
2. A colleague builds a peak sales estimate that comes out larger than the entire global pharmaceutical market. What is the most reasonable conclusion?
3. Why is the US the single largest pharmaceutical market despite Europe having a larger population?
4. Select ALL correct answers about why a seasoned analyst can assess a pitch quickly on a napkin.
Sélectionnez toutes les réponses correctes.
5. Select ALL correct answers about applying market-share assumptions in a peak sales estimate.
Sélectionnez toutes les réponses correctes.
Faced with any biotech or medtech opportunity, run this sequence:
1. Peak sales: patients × price × share. Sanity-check against the $1.6T pharma / ~$550B medtech anchors.
2. Runway vs. inflection: does cash last past the next data readout?
3. rNPV reality check: apply phase-appropriate PoS. Is the headline un-risked?
4. TAM triangulation: do top-down and bottom-up agree?
5. Red flags: patent cliff, single-product risk, reimbursement gap, clearance vs. approval.
If any single check fails hard, the others rarely rescue the deal.
*This lesson is educational and not investment, legal, or medical advice. All figures are estimates as of the mid-2020s; verify against current primary sources.*