Case study 2: Dividing up equity

By Project team , on 1 June 2014

Assessing funding needs and the value of equity in entrepreneurial cell therapy projects

Assessing funding needs for early-stage cell therapy companies and the equity distribution among new investors and existing owners in these companies, constitute a critical challenge for stakeholders involved in creating successful companies around individual cell therapy projects. The BRITS tool provides stakeholders guidance in dealing with these challenges. Specifically:

– The cash flow statement produced by the tool helps stakeholders in assessing the funding needs associated with various development stages.

– The NPV calculation can be used to support negotiations surrounding the distribution of equity among investors and novel investors in cell therapy companies.

We use the case study of company X, which is seeking funding to develop a new allogeneic cell therapy in the oncology market space as a case study. The company completed preclinical studies and has regulatory approval to proceed with a phase I/IIa study to assess the therapy’s safety and to collect preliminary data on the therapy’s efficacy. In addition, managers use the following assumptions about the therapy they are developing and the commercialisation trajectory they will follow:

The product and its market
  • A treatment consists of a single dosage containing 10^8 cells
  • The company hopes to charge an average price of $60k for the treatment.
  • Other variable costs, primarily logistics costs associated with delivering the product to the patient are $200,-/treatment.
  • The company plans to manufacture the therapy in-house.
  • The market the treatment will reach is a market of 10,000 patients per year; During the first year after launch the company will reach 25% of this market and it will take four years to reach the company’s total target market.
Clinical trials costs
  • The clinical costs of running a phase 1/2a trial with 10 patients are $100k per patient, with manufacturing costs at $50k per treatment.
  • The clinical costs of running a phase 2b trial with 50 patients are $150k per patient, with manufacturing costs at $50k per treatment.
  • The clinical costs of running a phase 3 trial with 100 patients are $150k per patient, with manufacturing costs at $40k per treatment.
Manufacturing set-up costs
  • All manufacturing is done using PLANAR technology. Moreover, the firm incurs process development costs of $250k, technology transfer costs of $100k, and PPQ batches costs of $100k, at each of the commercialisation stages.
Staff costs
  • To supervise the commercialisation of the cell therapy, the company employs three executive-level managers, three senior and three junior researchers throughout the commercialisation process, and four other staff members to provide administrative and technical support during each of the three clinical trials stages of development. Post-commercialisation, the company will need to hire an additional 16 technical/administrative staff members. Finally, to support marketing efforts, three marketing professionals will be hired during phase 3 trials, and this total will increase to eight marketing professionals post-commercialisation.
Fixed costs
  • Estate costs are $100k/year during clinical trials phases 1/2a and clinical trials phase 2b. These costs increase to $150k/year during clinical trials phase 3 studies, and $250k/year post-commercialisation.   Marketing and sales costs kick in once the company enters clinical trials phase three studies at $350k/year.
  • Fixed costs for a logistics infrastructure kick in at $200k/year post-commercialisation.
Cost of capital
  • Investors in this type of company are assumed to achieve an annual rate of return on capital of 25%; Moreover, as the company is a UK company, the corporate tax rate is assumed to be 15%.

Using the inputs listed above, the tool produces the following cash flow statement that projects the financial in- and out- goings for the firm for the coming 15 years (see screenshot 1).


Assessing the firm’s development path and funding needs


Based on our data on allogeneic anti-cancer cell therapies entering phase 1/2a trials, we estimate that the duration of phase 1/2a trials will be 2 years, the duration of phase 2b trials will be 4 years, and the duration of phase 3 trials will be another 4 years (see costs boxed in red in Screenshot 2).


Row 20 consolidates all in- and out- goings and highlights yearly in- and out- goings in the form of Earnings Before Interest, After Tax (EBIAT). Adding up the projected outgoings during phase 1/2a trials, the tool projects a funding need of $3.0 Million + $2.6 Million = $5.6 Million (see costs boxed in red in Screenshot 3).

In addition, by adding up the discounted, risk-adjusted cash flow projections of row 28 in the spreadsheet, the tool provides a valuation for this cell therapy project of $8.5 Million (see amount boxed in blue in Screenshot 3).

Accordingly, a $5.6 Million investment to fund clinical trials 1/2a studies, would be worth a $5.6 Million/$8.5 Million = 67% ownership stake.

The tool allows stakeholders to play around with various assumptions underlying the firm’s business planning and assess the implications for these assumptions for the company’s funding needs, valuation, and equity distribution. One example would be for the firm from our example to arrange with managers and R&D workers that 50% of salaries will be paid in equity rather than cash during phase 1 clinical trials. This would significantly reduce the cash burn rate, and increase the valuation of the company. Screenshot 4 presents the cash flow statement and NPV for the same firm and assumptions as before, but reduces salary outgoings by 50% for managers and R&D workers during phase 1 clinical trials.


The revised funding need of the firm to finance clinical trials 1/2a is $2.5 Million + $2.0 Million = $4.5 Million, and the project valuation is $9.3 Million. Accordingly, the value of the $4.5 Million cash, investors would bring in is $4.5 Million/$9.3 Million = a 48% ownership stake.

In addition, the $562,500 of foregone yearly salary of managers and R&D workers for the two years that it will take to complete clinical trials 1 (calculated by subtracting from the amount in cell C10 of the baseline case cash flow statement, the amount in cell C10 of the cash flow statement in Screenshot 4), paid out in equity rather than in cash would be worth (2 x $562,500)/$9.3 Million = a 12% equity stake for these staff members.

Download the screenshots above:

Download (PDF, 1006KB)