Constellation Pharma Plots IPO Run As Genentech Passes on Buyout Deal

Xconomy Boston — 

For all the hoopla that surrounds option-to-buy deals in biotech, the “buy” part is really just an option. Sometimes such deals lead to an acquisition, and sometimes they don’t. Case in point: Constellation Pharmaceuticals, which is plotting a new course after longtime partner Genentech decided against buying the company, Xconomy has learned.

Keith Dionne, the president and CEO of Cambridge, MA-based Constellation, and Genentech itself both  confirmed the news today. In an e-mailed statement, Genentech said that Constellation’s epigenetic drugs “are not a strategic fit for our portfolio at this time.”

“Our rigorous portfolio review process is driven by multiple criteria including understanding the biology of a molecule and balancing the risk and reward of each project,” spokesperson Nadine Pinell said in the statement. “All of these factors are considered within the context of our existing drug development portfolio.”

Despite that news, Constellation is celebrating. A quick look at its twitter feed shows tweets today about independence day, with pictures of champagne glasses and fireworks. Dionne says that’s because Constellation has wanted to move forward independent of Genentech “for awhile now.” Constellation is probably going to try to put a round of “crossover” investors together in a new round of funding that would be used to prepare for an IPO, he says.

“We’ll have those discussions and we’ll push down that direction,” he says.

Constellation and Genentech signed a deal in January 2012 to work together to develop epigenetic drugs, which are meant to switch genes on or off without changing the underlying DNA. Constellation got a fat $95 million check up front, research support over the next three years, and potentially even more in the form of downstream milestone payments and royalties for any products to come out of the alliance. Baked in the deal as well was a buyout option: Genentech, after the three-year window, could exercise an option to buy Constellation for a prenegotiated price.

Dionne is a former entrepreneur-in-residence at VC firm and Constellation backer Third Rock Ventures who was named CEO two months after the deal went down. He says that it’s a completely different world today for privately held biotechs, in that small companies now have a shot to go public—despite the market tumult of late. Indeed, Dionne says that when Constellation signed the deal, it and its VC backers “had no idea” that the public markets would open up again for biotechs. When they did, biotechs started going public by the bushel. Yet because it was so closely aligned with Genentech, Constellation couldn’t discuss partnerships with others. It was essentially boxed in, Dionne says.

“We would have gone out on the public markets probably two to three years ago, had we been free to do that,” he says.

FierceBiotech first reported back in January that the three-year collaboration between the two firms had come to and end and that Constellation had laid off some of its staff, prepping itself for Genentech to pass on the buyout option. Dionne says that there were differences between the two companies on strategic direction. Constellation believed that Genentech, if it were to acquire the company, would have taken on its more advanced drug prospects and shut everything else down, laying off all of its 50 or so employees. Pinell confirmed that plan: Constellation would have been integrated into Genentech’s Research and Early Development group on the west coast, and Constellation’s Cambridge headquarters would’ve eventually been closed, she said.

Constellation, however, wanted to go bigger and develop a broader portfolio of drugs, including some preclinical programs it believed in that would’ve been shelved if the acquisition went forward. “Once we saw [the markets] starting to [open up], we realized our portfolio was really much more targeted towards what public companies are looking for, and a little less oriented towards where Genentech wanted to go,” Dionne says.

Constellation will now kick start talks with investors and try to nail down some “targeted partnerships” with some other companies. It’ll do so while advancing four different Phase 1 clinical trials for small molecule drugs aimed at the proteins EZH2  and BET. Constellation is testing the BET drug in leukemia, lymphoma, and multiple myeloma, and has a Phase 1 test underway for the EZH2 drug in lymphoma as well. (Another epigenetics company, Epizyme (NASDAQ: EPZM), is also going after EZH2.)

Even though the two companies are separated, Constellation may still see a payday from Genentech down the road. Genentech picked certain drug targets from Constellation, and would pay the company milestones and royalties if they progress. Dionne wouldn’t specify the size of those payments, but then again, they could show up in an IPO prospectus sometime soon.

Third Rock founded Constellation in 2008 and has joined with a number of investors, among them The Column Group, Venrock, and SR One (the VC arm of GlaxoSmithKline) to put $70 million into the company.