Assess the company’s development and funding needs alongside the actual terms of its notes. A biotech may need to raise capital before clinical, regulatory, or commercial milestones generate revenue, while convertible debt can still require cash repayment, cause substantial dilution, or limit the company’s choices. Start with current filings and executed debt documents; neither the label “convertible” nor a stated cash runway tells you the full risk.
Why biotech development risk and convertible debt belong in the same analysis
Biotech financing risk is tied to a path with uncertain timing and outcomes: research and development, clinical trials, regulatory review, and, if successful, commercialization. A delay, an unsuccessful study, or an unexpectedly expensive milestone can increase the amount of capital needed before a program reaches its next stage. If new funding is unavailable, the company may have to delay, reduce, or end development.
Convertible debt adds a separate set of obligations and possible share issuance to that operating risk. A note may convert into equity under certain conditions, but it may also require scheduled payments or cash at maturity, or provide cash-settlement rights around a corporate event. Conversion can reduce an investor’s ownership percentage, and the number of shares may depend on future prices or other contract terms.
Latigo Biotherapeutics, Inc. stated in its Form 10-Q for the quarter ended June 30, 2026: “We may be unable to raise additional funds or to enter into such agreements or arrangements on favorable terms, or at all.” That is the issuer’s disclosure, not a prediction about every biotech company. Read the target company’s own latest filings and agreements for its current plans and obligations.
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How to assess the biotech’s development and funding needs
Map the milestones that consume cash
For each material program, identify its development stage, next planned milestone, expected timing, and major dependencies. These may include trial design and enrollment, manufacturing, regulatory steps, or other work needed to reach the next decision point. Then ask how much funding the company may need before each milestone and what it says it would do if a study is delayed, misses an endpoint, or requires further work.
A trial stage or announced plan is not evidence that a treatment will be approved or commercially successful. Treat management’s schedules and development plans as estimates that can change, not as guaranteed outcomes.
Reconstruct runway from current financial statements
Begin with the latest balance sheet and cash-flow statement, then read the relevant notes and management discussion. Distinguish unrestricted cash from restricted or otherwise unavailable balances. Consider operating cash use, accrued expenses, debt service, committed trial and manufacturing costs, and financing that has actually closed. A proposed financing or management expectation is not a committed source of funds unless the transaction is binding and available.
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Compare management’s stated runway with its assumptions and the costs of upcoming milestones. Build at least two scenarios: a base case using the company’s stated timing, and an adverse case in which a trial or financing is delayed. The question is not only how long cash might last, but whether the company can fund the next meaningful milestone and meet its debt obligations on the way there.
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What to check in the convertible-debt documents
Do not rely on a headline debt balance or a brief filing summary. Read the executed note or indenture, security agreement, amendments, and the latest filing’s debt footnote. Record the terms that determine proceeds, payments, conversion, and creditor rights:
- Proceeds and repayment: Face principal, cash received after any original issue discount and fees, coupon, one-time interest, payment-in-kind terms, amortization schedule, and maturity date.
- Conversion mechanics: Whether conversion is optional or automatic; who controls the election; triggering events and dates; and the formula for the conversion price.
- Price adjustments: Any discount, valuation cap, floor, reset, lookback period, or default conversion price. Check how each works together with other terms.
- Settlement: Whether payment or conversion is in cash, shares, or a combination, and who chooses the settlement method. Check for cash obligations tied to a conversion, refinancing, or corporate event.
- Creditor protections: Security and collateral, lien priority, guarantees, covenants, events of default, cure periods, acceleration, and cross-default provisions.
- Other equity-linked rights: Warrants and their exercise prices, adjustment terms, and any other rights that could result in additional shares.
- Transaction rights: Change-of-control, refinancing, redemption, or repurchase provisions.
Terms vary by issuer and agreement. For example, SEC-filed issuer disclosures include notes with scheduled amortization, an original issue discount, one-time interest, and a conversion discount that may apply after default, as well as notes describing cash payment at maturity and potential cash settlement obligations. Those are examples of provisions to look for, not assumptions about another company’s debt. Brainstorm Cell Therapeutics’ Form 10-Q for the quarter ended June 30, 2026 reports issuer-specific note amounts and terms; those disclosures should not be treated as typical market terms.
How much dilution could convertible notes cause?
Estimate conversion using the contract’s actual formula rather than the initial conversion price alone. At a basic level, the shares issued depend on the amount converted—including any interest that converts—and the applicable conversion price. A discount, cap, floor, reset, or default formula can change that price, so the share count may be sensitive to the stock price, financing price, or other specified conditions.
- Identify each outstanding note and the amount that could convert, including accrued interest if the agreement provides for it.
- Apply the note’s conversion formula under several plausible future share or financing prices. Follow caps, discounts, resets, floors, and default terms as written.
- Include warrants, options, and other securities that could become shares; do not count only the note principal.
- Compare the resulting share counts with the same current share-count basis, and calculate existing holders’ ownership before and after conversion.
- Separately estimate cash required for scheduled payments, maturity, and possible cash settlement. A share-conversion estimate does not answer whether the company can meet cash obligations.
Use consistent assumptions and identify them clearly. If the documents do not establish an outcome or amount, do not substitute a guess. SEC-filed investor offering disclosures explain that discounts or caps can result in more shares for a noteholder’s investment and emphasize considering the aggregate amount of notes issued and potentially issuable.
Can the company repay its convertible debt at maturity?
Check each note’s maturity against the company’s cash runway and the milestones it expects to finance before then. Calculate scheduled amortization and other required payments, then determine whether maturity requires cash repayment, allows conversion, or gives a party a choice. A company that expects to refinance or raise equity may still face a shortfall if that financing does not close on time or on workable terms.
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Look for obligations that could require cash even when conversion is possible, including settlement provisions triggered by a corporate event. Establish who has the relevant election right and whether the contract requires cash, shares, or permits either. Do not assume that all convertible debt will be repaid in stock.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What happens if the plan goes wrong?
Test the terms against adverse but relevant scenarios: a delayed trial, a missed endpoint, greater-than-expected funding needs, a falling share price, or no financing before maturity. Then examine whether the company can amend, refinance, repay, or convert the debt and who controls each option. A lower share price may also matter if the conversion formula includes a discount, reset, or default price.
Review covenants and default provisions for restrictions or consequences that could affect later financing, licensing, asset transactions, or operations. Determine whether a breach has a cure period, whether it can accelerate repayment, and whether a cross-default could affect other obligations. Check collateral and lien priority to understand creditors’ claims relative to common equity. These provisions can affect the company’s flexibility precisely when additional funding is difficult to obtain.
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How to reconcile accounting expense with the cash cost
Trace reported interest expense to the contract and debt footnotes. Issuance discounts and costs may be amortized into reported interest expense, and conversion terms can affect how an instrument is classified or accounted for. Compare those disclosures with the contractual payment schedule and cash-flow statement.
Reported loss can include non-cash expense, while a modest reported interest amount does not eliminate principal repayment, cash-settlement exposure, or dilution. Accounting treatment depends on the instrument’s provisions and applicable standards; one issuer’s accounting should not be generalized to every convertible note.
How to compare two biotech companies or notes
Use the same filing dates, assumptions, and fully diluted share-count basis for each company. Compare both the development and financing picture and the contractual terms; a note cannot be assessed in isolation from the cash needs it must coexist with.
| Compare | What to establish |
|---|---|
| Development risk | Stage and concentration of lead programs; quality and timing of the next clinical or regulatory milestones; trial, manufacturing, and regulatory dependencies. |
| Funding position | Runway relative to milestones, expected capital needs, and financing already committed versus merely prospective. |
| Debt economics | Cash proceeds after discounts and costs; total repayment burden; maturity relative to runway; scheduled payments; and any potential cash settlement. |
| Equity impact | Conversion formula and sensitivity to future prices; potential shares under the same scenarios; and associated warrants or other issuable securities. |
| Creditor rights | Collateral and seniority, covenants, default and acceleration rights, and the parties’ control over conversion, repayment, or settlement. |
What the available evidence can—and cannot—establish
Issuer filings and SEC-filed offering disclosures are primary sources for the terms and risks those issuers report, but company statements about future plans and runway are management estimates. Disclosures can change after new filings, trial events, amendments, financings, or changes in market prices. Use the target company’s latest filings and executed documents as of the date of your analysis.
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The issuer-specific filings discussed here do not establish a representative sector-wide average for convertible-debt use, dilution, or runway. Do not turn a particular company’s figures or terms into a biotech industry benchmark.
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