Biogen Windfall Reveals Europe's Best Capitalized And Most Mispriced Biotech

| About: Biogen Inc. (BIIB)

Step forward Europe’s best capitalized biotech, Forward Pharma (NASDAQ:FWP). Or at least it will be in a few weeks when Biogen’s (NASDAQ:BIIB) $1.25bn check clears, a payment that marks the first step in settling a long-running patent dispute between the two companies.

Finer details, including any ongoing royalty payments, have yet to be confirmed pending further hearings, but it seems likely that around a 10% royalty will be due on future Tecfidera sales, a figure that many had been expecting. What is less clear is why Biogen did not simply buy Forward, which was capitalized at $862m before news of the deal emerged.

Maybe Forward was not a seller, or was simply holding out for more than the US biotech was prepared to pay. If anyone knows the future value of Tecfidera it is Biogen – many believe that the drug will face intensifying competition from newer MS agents in the coming years – so maybe the Danish company was predicting a rosier future than its owner was prepared to support.

Either way, the valuation of Forward likely reflects a mid-point of two scenarios for investors – a take-out at a considerable premium, or a crash to zero had a deal not emerged. The Nasdaq-listed company has essentially nothing else to its name other than its Tecfidera rival, and no doubt a large team of in house patent lawyers.

Ongoing argument

Not that the situation is over yet. The deal as it stands is being described as an insurance policy by the sell-side; Ronny Gal from Bernstein wrote today that the move is “somewhat courageous by the new CEO – as we will find out within couple of months if the money was well spent or not.”

The spat is essentially over who was first to patent the active ingredient in Biogen’s blockbuster MS pill Tecfidera, dimethyl fumerate, for use in MS. Forward Pharma has always insisted that they filed patents in the US and Europe about 1.5 years before Biogen, and this settlement would seem to represent an acknowledgment that this was the case.

Biogen attests that it has patent protection until 2028 – this is held by the ‘518 patent in the US, and the ‘537 patent in Europe. Forward’s product, FP 187, has similar patents that it believes have been infringed, and would protect it until 2025. These patents are ‘871 in the US and ‘342 in Europe.

Interference hearings will be held in the next few months to rule on who filed first and therefore whose patents are valid. Biogen has agreed to royalties ranging from 0% to 20%, depending on the outcome.

Win win?

Access to these additional patents could be important given another challenge to the ‘514 patent by the hedge fund manager Karl Bass, via the inter-partes review route. Should he win this could open the door to generic competitors from 2023, something that Biogen can now shield itself against by pivoting to Forward’s IP. A decision is due by March 22.

Despite the deal removing the worst-case scenario of losing the patent case with no insurance policy in place, Biogen shares meanwhile were little moved on the news. The outcome of the hearings in the next few months will be needed to calculate just how savvy the US biotech has been in this situation.

The clear winner at this stage is undoubtedly Forward Pharma, as the cash payment is assured. Its Nasdaq-listed shares jumped 52% this morning, given it a new market value of $1.4bn.

The fund Nordic Biotech is a major investor in the thinly traded stock, and Florian Schönharting, Nordic's partner and chief investment officer, is listed in Forward's 2015 annual report as beneficial owner of a 55% equity stake. With the company saying it is now considering both share buybacks and a cash distribution, Mr. Schönharting is about to enjoy a lucrative start to 2017.

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