Biotech Dilemma: When a Loan Isn't Non-Dilutive

Retrophin takes out a convertible note. As Dendreon has shown, taking on debt can be dangerous if the company can't pay it back. Investors should look for companies like Seattle Genetics and Regeneron Pharmaceuticals that have assets they can sell to slow the cash burn.

Jun 5, 2014 at 8:41PM

On this week's episode of Biotech Banter, we've got three related tweets about Retrophin's (NASDAQ:RTRX) announcement last week to take out a convertible note to help pay for its license of an orphan drug called Thiola from Mission Pharmacal.

While technically a non-dilutive financing that keeps investors' equity the same, multiple people on Twitter jumped in, pointing out that it's only non-dilutive if the company has money to pay back the loan at the end of the term. Otherwise, the lender will be repaid with shares of the company's stock.

Paying back a loan isn't a problem for companies that meet their revenue expectations. Unfortunately, there are plenty of examples of biotechs, such as Dendreon (NASDAQ:DNDN), where the lofty goals were never met. Dendreon has more than half a billion dollars in long-term debt on its balance sheet and still isn't profitable.

One way to avoid the dilemma of either taking out a loan, or diluting shareholder value though secondary offerings, is to find companies that have assets they can sell to slow the cash burn. Senior biotech specialist Brian Orelli highlights two in the video below: Seattle Genetics (NASDAQ:SGEN), which licenses out rights to use its antibody payload to other companies, and Regeneron Pharmaceuticals (NASDAQ:REGN), which has a deal with Sanofi to pay a large chunk of its R&D costs.

Or you could just invest in drugmakers with so much cash they hand it out to investors every quarter
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Brian Orelli and David Williamson have no position in any stocks mentioned. The Motley Fool recommends Seattle Genetics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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