Watch stocks you care about
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
Biogen Idec (Nasdaq: BIIB ) yesterday licensed a drug candidate for treating amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig's disease, from privately held Knopp Neurosciences.
The good news is that if KNS-760704 proves successful in the phase 3 trials expected to start next year, it won't have much competition. Sanofi-aventis' (NYSE: SNY ) Rilutek is the only drug approved to treat ALS.
The bad news? There's a reason Rilutek is the only approved drug. The neurodegenerative disorder is one tough cookie. Pfizer's (NYSE: PFE ) Neurontin? Fail (in ALS at least). Novartis' (NYSE: NVS ) TCH346? Fail. Teva Pharmaceutical's (Nasdaq: TEVA ) talampanel? Didn't even make it past phase 2 trials.
Fortunately, Biogen isn't risking a whole lot on Knopp's drug. There's a $20 million upfront payment, and Biogen will buy $60 million worth of stock in Knopp. That $60 million will be worth a whole lot less if KNS-760704 fails its phase 3 trials, but at least there's upside to the investment if the drug works, something that Biogen wouldn't get from a large upfront payment.
Once it's clear the drug works, larger payments kick in. In total, Biogen is on the hook for an additional $265 million in development, regulatory, and sales milestones. The company also has to pay tiered, double-digit royalties on worldwide sales.
KNS-760704 looked pretty good in its phase 2 trial, but considering the aforementioned blowups, I wouldn't pencil in sales quite yet. But I do like the risk-reward ratio that Biogen has set up. One more drug in the pipeline never hurts even if it is of the high-risk, high-reward variety.
When the risk-reward ratio gets out of whack, it's time to sell or maybe even short.