Why Forward Pharma A/S Stock Gained 48.2% on Tuesday

By George BudwellMarketsFool.com

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What happened

Shares of theDanish drugmaker Forward Pharma A/S (NASDAQ: FWP) gained 48.2% yesterday as the result of a settlement and licensing deal with Biogen (NASDAQ: BIIB) involving an ongoing patent dispute over the multiple sclerosis drug Tecfidera. Per the terms of the deal, Biogen will fork overa non-refundable$1.25 billion licensing fee, and possibly pay 10% to 20% royalties on Tecfidera'snet sales to Forward starting in 2021.

So what

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A $1.25 billion windfall is obviously a major win for a company that had a market cap of less than $670 million a day ago. However, this deal also limits the company's risk of losing its patent dispute with Biogen and potentially receiving nothing for its efforts as a result. Biogen, on the other hand, was able to better define the risk associated with this patent litigation for its shareholders, which is probably why its stock barely reacted to this news -- despite a sizable loss of cash.

Now what

Forward is considering using this influx of cash to possibly fund both stock buybacks and a special dividend. While that's great news for the drugmaker's shareholders, the ultimate fate of this patent dispute is far from resolved, and hence, the future royalty payments on Tecfidera's sales are not guaranteed. So, given that Forward is still a cash-flow-negative operation when excluding this massive windfall, investors may want to remain cautious with this speculative stock after its dramatic move yesterday.

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George Budwell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Biogen. The Motley Fool has a disclosure policy.