When Forma Therapeutics cozied up to Celgene last year, it looked like the Watertown, MA-based company had added another name to its list of partners and set itself up to potentially sell its own drugs someday, rather than just discover them for others.
As it turns out, though, Forma got one more thing out of that partnership: an introduction to what may be its future buyer.
Forma today is announcing a big deal with Summit, NJ-based Celgene (NASDAQ: CELG), adding on to the $200 million drug development partnership the two struck roughly 11 months ago. It’s a large, multi-stage transaction with various options baked in, but what it boils down to is this: Celgene is writing Forma a $225 million check to tap into its drug discovery engine once again, this time as part of a broader effort that could span various different fields of biology. Celgene could also fork over another $375 million in a few years to continue the work, and then buy Forma afterwards—for a price that escalates with Forma’s progress in developing drugs.
That means Forma, which has only needed $44 million in venture backing from the likes of Novartis Option Fund, Lilly Ventures, and Bio*One Capital of Singapore to get to this point, could be in line for a big payday without diluting its shareholder base—should Celgene sign on the dotted line, of course.
“What’s great is it’s up to us to deliver on that value,” says Forma CEO Steven Tregay.
Here’s how the deal will work. Celgene is paying Forma $225 million up front to get access to both its drug discovery engine and its network of academic collaborators for three and a half years. If Celgene likes what it sees, it can opt to start another collaboration—this one two years long—for more money, and then a third pact, also two years long, for a total of $375 million more (Forma didn’t specify how much cash it’ll get for each opt-in decision). During the third collaboration term, Celgene will decide whether to buy Forma.
The price Celgene would pay, which would be determined with the help of a third party, isn’t defined yet. There’s no floor and no ceiling to it, according to Tregay. Rather, it’s tied to the value Forma creates over the course of the partnership. This will be determined by things like the breadth of biology Forma explores, and the value of the company’s more advanced programs once it’s time to hammer out a deal. If Forma discovers and starts development of a potential blockbuster drug, its price would go up—enabling it to avoid the nightmare scenario of setting a price now and realizing later that it had sold its portfolio for pennies on the dollar.
“You really only know you have the next Gleevec when you have the clinical data,” Tregay says. “The 7.5 year [timeframe] was really set up to make sure that the pipeline could mature to a stage where we would have a good understanding of the value that’s created around some of the…programs.”
Of course, there are a lot of ifs in there. Option deals are no guarantee, and Celgene could say “thanks, but no thanks” to Forma after three and a half years and move on. The two companies have structured the deal, however, so that this type of decision wouldn’t cripple Forma, while still giving Celgene the chance to add prospects to its pipeline.
As part of the deal, for instance, while Celgene gets first dibs to cut licensing deals for any current and future Forma drug programs, Forma would keep U.S. rights. Celgene would only be able to bring all those rights in-house through a buyout, meaning that if it decided to walk away, Forma would still have commercial rights to the programs the two had been working on together in the largest pharmaceutical market in the world, with Celgene picking up the development tab. Forma would also maintain full rights to any other programs it comes up with that Celgene doesn’t pick up—and could presumably sell or partner them off to generate more revenue, or returns for shareholders.
“At no point are we suddenly in a situation where they don’t go all the way, and we’re left with screening hits or something like that as the only value in the company,” Tregay says. “A lot of this is really understanding what drives and aligns motivations, and then structuring a deal such that the deal doesn’t get in the way of those aligned cultures and motivations. [In our case], if we part ways, Forma’s fully empowered to become a U.S. commercial enterprise.”
Forma will consult with Celgene, but ultimately has the final say as to which targets to go after and which compounds to develop into drugs. It’ll take the lead on the preclinical work, and then move the experimental drugs that come out of that work through Phase 1 testing. At that point, Forma would hand them over to Celgene, which, assuming it opts to license the drug candidates, would cover all the associated costs of further trials.
The deal builds out of the original transaction Forma struck with Celgene a year ago. In April 2013, Celgene agreed to pay $200 million in up front plus future payments for non-U.S. rights to certain compounds that Forma discovers. That deal, however, only centered around the field of protein homeostasis, or the ability of cells to properly manufacture or deactivate proteins.
This time around, Forma will focus on a different, specific set of targets during each collaboration period that fit within an established strategy. Tregay says some of the ideas under consideration are epigenetics and tumor metabolism, but that Forma may branch out from there—maybe rare diseases, for example—depending on “where the biology may take us.”
Forma has struck partnerships with a list of other big companies, like Genentech, Boehringer Ingelheim, Johnson & Johnson, and Eisai Pharmaceuticals, bringing in more than $300 million in partnership revenue to date. Though its shareholders haven’t gotten a piece of that action as of yet, Forma has options. It established an LLC structure last year, for instance, and that gives it the ability to hive off a program that Celgene doesn’t take on after Phase 1 testing, and flip it to someone else for a shareholder return.
As recently as last year, Forma appeared to be headed towards an IPO. Should the Celgene courtship turn into a marriage, that obviously won’t be the case anymore. But given Forma can now pour most of its cash into research, and not worry about development costs, Tregay doesn’t have any regrets.
“For us, to be honest, it was really a no-brainer to go down this path,” he says.