What happened

Shares of Apellis Pharmaceuticals (NASDAQ:APLS) fell over 16% today after the company reported the details of a convertible debt offering. The business will offer $220 million in notes bearing 3.5% interest that come due in 2026 and can be repaid with cash or newly issued stock. The total offering could swell to $253 million if there's strong demand, although the business expects net proceeds of no more than $244.9 million after accounting for fees. 

The offering will pad the company's balance sheet, which boasted $289 million in cash at the end of June. Considering that the stock has more than doubled since the beginning of 2019, management could have issued stock instead of debt but chose to raise cash in a more shareholder-friendly manner. 

As of 12:03 p.m. EDT, the stock had settled to a 14.5% loss.

A chart drawn on a chalkboard showing a steady rise and then a sudden drop.

Image source: Getty Images.

So what

Why does Apellis Pharmaceuticals need so much cash? Well, the company's drug candidates continue to advance through clinical studies. The company has two ongoing phase 3 trials, two ongoing phase 2 trials, and one ongoing phase 1b clinical trial. Mid- and late-stage studies are larger and more expensive to conduct.

Case in point: Apellis Pharmaceuticals spent $91.2 million on research and development expenses in the first half of 2019, which was more than double the total from the year-ago period. The business also reported a net cash outflow of $75 million in the first six months of this year. 

Now what

The convertible debt offering shouldn't change how investors view the pharma stock for better or for worse -- this is simply the normal course of operations. Apellis Pharmaceuticals ultimately will be judged by the success or failure of its drug candidates in treating autoimmune and inflammatory diseases. Investors will soon get their first glimpse of that potential when top-line results from a phase 3 study are announced in December 2019.