Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

For many biotechs without a drug on the market or in the earliest stages of selling one, burning heaps of cash is a way of life. During biotech's recent five-year bull run, it was easy to sell stock to replenish that cash. 

But markets aren't especially thirsty for biotech stocks right now. Relypsa is learning that the hard way.

The Bay Area firm's first drug, Veltassa, which treats the blood condition hyperkalemia, was approved late last year. But the process of building a market for the drug is burning enough money that Relypsa will likely have to raise cash this year, CFO Kristine Ball said on Wednesday's earnings call.

Relypsa has cash-raising options beyond the stock market, Ball said. But the fact it has to look elsewhere shows how much of a problem equity financing has become for biotech, with the Nasdaq Biotech Index down more than 20 percent this year. 

Relypsa shares were down 10 percent on Thursday to about $15 on concerns about financing and the slow launch of Veltassa. 

Cash Crunch
Investors seem concerned about Relypsa's cash pile and its slow launch of a new drug.
Source: Bloomberg
Intraday times are displayed in ET.

Relypsa is burning a fair amount of cash. It lost $1.40 per share in the fourth quarter and expects operating expenses in 2016 of between $275 and $300 million. It is expected to produce just about $40 million in revenue this year.

Veltassa could do more than $600 million in sales in 2020, but the ramp-up has been slow. Only 1,229 prescriptions have been written since launch, and significant revenue isn't likely until the second half of this year. Analysts expect nearly $6 million in the first half of the year, and more than $20 million in the second half.  Expanding the drug's reach takes marketing and more studies, which cost money.

The Biotech Furnace
Relypsa will need to raise cash again as it works to get its first drug going.
Source: Bloomberg

Relypsa knows better than most the pain of trying to raise that cash in the stock market. Its stock price at the beginning of January was around $28, and its peak last year was near $40. In an equity offering in early 2015, the company managed to sell 4.5 million shares and raise $172.67 million at about $38.50 a share.

Earlier this year, the company sold about 2.5 million shares at an average price of $18.18, netting it $44.2 million. That's an experience it probably doesn't want to repeat.  

Other companies trying to sell more shares this year have had a similarly rough time. The average performance of additional offerings in biotech and pharma this year is -17.6 percent. It's hard to see a return to the booming equity market of 2014 and early 2015 coming any time soon.  

Raising debt might be an easier road for Relypsa. Its drug is already approved and has a big potential market, though there are restrictions on its use, and a competitor may arrive later this year. It's the first new treatment in 50 years for hyperkalemia, a condition of excessively high potassium levels in the blood. Ten of eleven analysts tracked by Bloomberg have "buy" ratings on the stock, with an average rating of $41.90 -- suggesting banks have a high opinion of the company's prospects. 

The company might be a bit on the young side to sell bonds. But a sizable loan to bridge the company to profitability is not unrealistic. The fees for such a loan might be cheaper than for an equity offering, and it wouldn't dilute current shareholders.

Another option might be making an expanded deal with a bigger partner for Veltassa's rights in the U.S. The company has a limited two-year marketing deal with Sanofi right now. But it would risk selling such rights cheap, given current conditions, and such a deal could limit future revenue.

Relypsa has better options. But other biotechs, with drugs further from the market, may not be so lucky. Cash crunches may force them into deals they'd rather avoid.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net