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.

Companies borrow money all the time. But when a biotech with only one recently approved drug does a debt financing, it's breaking an unwritten industry commandment.

Relypsa, a biotech based in Redwood, California, announced Tuesday evening it is raising $150 million in senior secured loans paying an 11.5 percent interest rate and maturing in April 2022. Equity financing is the norm in biotech for companies without a longer history of drug sales. 

This isn't a complete shock; Relypsa said earlier this year it would need to cash up. Still, the market responded with a bit of Old Testament wrath. The company's shares fell as much as 18 percent ahead of its Wednesday, post-market earnings release. 

Relypsa's move underscores how difficult the biotech financing environment remains. With its share price in the doldrums, cash dwindling, and its only drug, Veltassa, taking time to ramp up sales, the company looks like it was backed into a rather expensive cash band-aid.  

Breaking the Rules
Biotech investors were not enthused after Relypsa announced a debt financing.
Source: Bloomberg
Intraday times are displayed in ET.

The biotech market's aversion to debt for young companies is understandable. These are firms that are often still burning cash on R&D and on attempting to build a commercial operation to actually sell their drug. Even after an FDA approval, it often takes additional time and work to really get sales off the ground. Revenue for a new drug is often slow to build, and the idea of an extra cash drain can be scary. 

The other worry here? AstraZeneca has a drug for the same condition Veltassa treats, hyperkalemia, up for potential approval later in May. And analysts expect a long ramp-up for Veltassa: Wall Street analyst consensus, compiled by Bloomberg, sees only around $20 million in sales this year and $76 million next year.

Early commercial biotechs are inherently risky, so they rarely get debt financing on good terms. That looks to be the case for Relypsa. An 11.5 percent interest rate is high: The average yield for the CS Leveraged Loan Index is 6.6 percent, and it has actually gotten substantially lower over the past few months. 

Pricey Payout
At 11.5 percent, Relypsa is paying a pretty high interest rate to borrow money in comparison to the average on the CS Leveraged Loan Index.
Source: Bloomberg

Going to the debt market is also understandable in one way: Relypsa managed in early 2015 to sell $172.6 million in shares at an offer price of $38.50. Before Wednesday's news, it was trading around $18. The company probably doesn't want to do a dilutive financing at a price it likely feels undervalues it.

That doesn't mean debt is a great alternative, given the cost. And this cash infusion may not be the last. The company had about $240 million in cash as of its latest earnings report, but launching a drug doesn't come cheap: Morgan Stanley's Andrew Berens estimates this financing will cover less than three quarters of cash burn. And a loan actually adds to the cash burn.

Relypsa has been mentioned as a potential M&A target, but Stifel analyst Stephen Willey suggests this loan may make it less attractive in the near term. 

We'll find out more about what management was thinking on the earnings call Wednesday afternoon. It has a lot of explaining to do. 

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

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