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.

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