High Risk, High Reward. At Least It Was Cheap!

 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.

Pfizer is a Motley Fool Inside Value selection. Novartis is a Global Gains recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.


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