What happened

Shares of The Medicines Company (NASDAQ:MDCO) dropped 14.5% on Thursday following an announcement after the bell on Wednesday that the drugmaker plans to raise $150 million selling convertible notes, with the potential to raise another $22.5 million if the purchaser uses its overage option.

So what

Convertible notes, sometimes referred to as convertible bonds, are essentially a loan that can be repaid by the company using cash, shares, or a combination of the two. The chance of being repaid in cash makes them slightly better for investors than secondary offerings, where investors are diluted instantly, but the reality of the situation is many -- if not most -- drug companies issuing convertible notes end up repaying them with shares. And in the meantime, the company has to pay interest on the notes -- albeit at a lower interest rate than just issuing an unsecured bond.

The Medicines Company hasn't announced the interest and conversion rate for the notes yet, so it's hard to know how expensive the capital raise is going to be for current shareholders. Investors are clearly worried that the conversion rate will be low enough that the notes could end up creating substantial dilution if The Medicines Company can't repay the notes in cash.

Balance sheet with pen and magnifying glass

Image source: Getty Images.

Investors may also be getting nervous about the takeover of the company's board by activist investor Alex Denner, which resulted in the ousting of longtime CEO Clive Meanwell -- who moved into a newly created role of chief innovation officer this week.

Now what

The notes aren't due until 2024, so The Medicines Company has some time to get to cash-flow positive. In fact, its cholesterol-lowering drug inclisiran is wrapping up clinical development and should be submitted to U.S. and EU regulators in late 2019 and early 2020, respectively.

Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.