With NPV calculations you should either build the risk (i.e....

With NPV calculations you should either build the risk (i.e. clinical and commercial) into the discount rate or use the risk free rate and then discount the cashflow by some probability. If you do both then you are double counting the risk and can end up discounting something of real value down to near zero.

I prefer to use the discounted cashflows and the risk free rate approach since it allows you to easily see what probabilities you are using for each cashflow prediction. It also makes it much easy to create a whole series of possible outcomes and assign individual probabilities to each possible outcome. For example, if you think Pillar 1 has a 20% chance of success, then multiple the raw cashflow prediction by 0.2 and then use the risk free rate (1.13% based on the Australian 10 year bond yield) for the NPV calculation. Do the same for all the other Pillars, add the NPVs together, divide by the number of shares on issue (plus expected dilution) and you have your “true” SP value.

The difficult part in all this is estimating the probability of success for each of the pathways. I find it helpful to work backwards and calculate what the market is implicitly predicting as reflected in the current SP. If you do this exercise you will find the market thinks the chance of us succeeding is less than 1%. If you think this is ludicrously low then RAC is a good buy, if you think it is ludicrously high then sell or short the stock.