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KaloBios Pharmaceuticals Inc. has lined up $14 million in loans to see it through and out of bankruptcy, financing that could be paid off in the form of bargain-priced stock that would water down the holdings of former chief executive Martin Shkreli.

Nomis Bay Ltd. has joined Black Horse Capital LP in offering loans designed to fund a deal to get KaloBios back on its feet and soothe a sore spot—the company's association with Mr. Shkreli, who attained notoriety for hiking the price of a vital drug by 5,000% last year.

KaloBios was on the point of being liquidated last November when Mr. Shkreli took control of it, after which the stock price rose. About a month later, he was pushed out of KaloBios after his arrest on fraud charges unrelated to the company. He remains one of the company's largest shareholders.

Mr. Shkreli denies the fraud charges, which date back to his days as a hedge-fund manager. His KaloBios shares are pledged to secure his bail.

Meanwhile, KaloBios is operating under chapter 11 bankruptcy protection, raising money to revive a deal Mr. Shkreli was working on at the time of his arrest. KaloBios's new leaders have told the company's bankruptcy judge that he has no say in what is going on at the company.

If the financing works out, Mr. Shkreli's influence will be even more muted, KaloBios lawyer Gregory Werkheiser told Judge Laurie Selber Silverstein at a hearing Monday in the U.S. Bankruptcy Court in Wilmington, Del.

To "claw its way back from near-oblivion," as Mr. Werkheiser put it, KaloBios is trying to buy benznidazole, a tropical disease treatment that could earn the owner a ticket for a fast ride through the regulatory process.

Benznidazole is an established treatment for Chagas Disease in Latin America, but it isn't yet approved in the U.S., where 300,000 people are afflicted.

The proposed loans are to pull off a $3 million deal with Savant Neglected Diseases LLC, which owns the drug. Savant says it will sell to KaloBios, but only if the company exits bankruptcy swiftly and has $10 million to put it on solid financial ground.

Nomis Bay and Black Horse are the only new investors, so far, that are willing to take a chance on the troubled biotech company.

The proposed loans are tied to assurances that Mr. Shkreli will have voting control of no more than 20% of KaloBios's shares once the company emerges from chapter 11, Mr. Werkheiser said. If the loans are paid off in KaloBios stock, he said, Mr. Shkreli's holdings will be diluted to an estimated 16% of the equity in the company.

Judge Silverstein Monday said she'd likely allow KaloBios to move ahead on the loans, subject to resolving some disputed terms related to compensating the proposed lenders should a better financing package be found.

At Monday's hearing, Mr. Werkheiser said investors are "scared to death of the Shkreli effect."

"Investors are wary of KaloBios because Mr. Shkreli was associated with the company, even though that involvement was only for one month and Mr. Shkreli is no longer involved in management," Judge Silverstein observed.

The man who replaced Mr. Shkreli as chief executive, Cameron Durrant, said in court papers that investors have been reluctant to plunge more money into KaloBios due in part to the company's "brief, but disastrous association with Martin Shkreli and the negative press coverage, legal troubles, and ill-will surrounding Mr. Shkreli, as well as broader concerns about the state of the biotechnology and pharmaceutical industry that Mr. Shkreli's comments have fueled."

Mr. Shkreli's lawyer, Ben Brafman, disputed linking investors' reticence to Mr. Shkreli's involvement.

"To suggest that a sophisticated investor may be cautious about the current state of play in the biotech sector may have some merit. To suggest however, that any sophisticated investor's hesitation is linked to Mr. Shkreli's 'brief' association with the company is just absurd speculation that borders on recklessness," Mr. Brafman said in an email.

Write to Peg Brickley at peg.brickley@wsj.com

(END) Dow Jones Newswires

March 21, 2016 18:55 ET (22:55 GMT)

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