Biogen (NASDAQ:BIIB) is following the old saying, "If you can't beat 'em, join 'em" for its multibillion drug Tecfidera or, more accurately, "If you might not be able to beat 'em later, license 'em now."

Today, the big biotech announced a licensing deal with Alkermes (NASDAQ:ALKS) for ALKS 8700, a monomethyl fumarate to treat the relapsing forms of multiple sclerosis. Biogen is paying for half of the 2017 development costs for ALKS 8700 -- $28 million so far -- and will pick up all the costs starting Jan. 1, 2018. Alkermes is due an initial $50 million milestone payment that should be paid in 2017 and $150 million if the drug is approved in the U.S. before the end of 2021. If ALKS 8700 is approved, Biogen will pay Alkermes a mid-teens royalty on worldwide net sales of the drug, including minimum annual payments for the first five years following Food and Drug Administration approval, and be responsible for all marketing activities.

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What's a methyl or two among (new) friends

Tecfidera and ALKS 8700 work in the same way with pretty similar structures. Tecfidera is dimethyl fumarate, which is broken down into monomethyl fumarate. ALKS 8700 is a prodrug of monomethyl fumarate, meaning it's inactive until it's metabolized into monomethyl fumarate.

The inactive structure will hopefully result in fewer gastrointestinal side effects compared to Tecfidera, which caused abdominal pain in 18% of patients in the clinical trials supporting its approval. The drug also caused diarrhea, nausea, and/or vomiting in 9% to 14% of patients. Alkermes is running a five-week gastrointestinal tolerability study called EVOLVE-MS-2 that's comparing the two drugs head to head, which is due to read out in the first half of next year.

Because the structures are so similar, Alkermes is developing ALKS 8700 under the FDA's 505(b)(2) regulatory pathway, which requires companies to prove that their drug exposes patients to the same amount of active ingredient but allows them to use efficacy data from the initial drug approved. The quicker development pathway put Alkermes on path to submit a marketing application in 2018, supported by bioequivalence studies and a two-year safety study known as EVOLVE-MS-1.

A win-win?

The benefits to Biogen are clear. The deal allows the big biotech to get a piece of ALKS 8700 sales that could cut into sales of Tecfidera. And ALKS 8700 also extends the patent life of its fumarate franchise because ALKS 8700 has patents out to 2033, significantly longer than the 2027 patent runway for Tecfidera, which could be shortened as generic-drug makers try to invalidate the patents in court.

It isn't quite as clear if Alkermes is getting that great of a deal. Investors seem to agree, with shares of the company zooming up as much as 3.8% in morning trading before dipping lower than they closed on Friday.

Some of the concern likely has to do with wording in the Securities and Exchange Commission document for the deal that puts a lot of pressure on the aforementioned EVOLVE-MS-2 head-to-head gastrointestinal tolerability study. If ALKS 8700 is deemed inferior for gastrointestinal tolerability, Biogen can get its $50 million up-front payment back through temporary reductions in royalty rates and the minimum payments to Alkermes will terminate. The deal also notes that if Biogen decides to terminate the deal for gastrointestinal inferiority, Alkermes doesn't get rights to ALKS 8700 back.

One of the reasons smaller biotechs license their drugs to larger drugmakers is to pawn off the clinical trial risk, but Alkermes doesn't seem to have done that. Perhaps the company is confident that EVOLVE-MS-2 will read out positively, but with limited gastrointestinal data so far, it's hard for investors to gauge the risk-reward profile of the deal.

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