Delivering on its self-delivering RNAi platform

RXi Pharmaceuticals 4 November 2015 Initiation

RXi Pharmaceuticals

Delivering on its self-delivering RNAi platform

Initiation of coverage

Pharma & biotech

3 November 2015

Price

$0.44

Market cap

$29m

Net cash ($m) at 30 June 2015

14.0

Shares in issue (m)

64.9

Free float

96%

Code

RXII

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.2

7.3

(76.9)

Rel (local)

(2.4)

7.0

(77.8)

52-week high/low

$2.16

$0.36

Business description

RXi is an early-stage drug development company focused primarily on dermatology and ophthalmology. Lead clinical projects, RXI-109 in dermal indications (Phase II) and in AMD (Phase I ready) stem from its proprietary self-delivering sd-rxRNA platform. Licensed-in immunomodulator Samcyprone is initially being developed for warts, alopecia areata and melanoma.

Next events

Start of Phase I/II trial of RXI-109 AMD (study 1501)

Q415

Start of Phase II of Samcyprone in warts

Q415

RXI-109 six-month data in dermal scarring from ongoing 1402 study

H116

Q3 results

November 2015

Analysts

Katherine Genis

+1 646 653 7026

Christian Glennie

+44 (0)20 3077 5727

Over the past year, RXi Pharmaceuticals (RXi) has made significant headway with its pipeline as well as in securing partnerships. Its lead compound RXI-109 is in Phase II in dermatological scarring and is entering the clinic this year in retinal scarring in wet AMD. Phase II dermatology treatment Samcyprone was in-licensed, while a deal was struck with MirImmune for the out-licensing of its proprietary sd-rxRNA technology. We expect the company’s budding pipeline, recently simplified shareholder structure and deal-oriented strategy will continue to garner renewed investor attention and share price momentum. We value RXi at $91m or $1.40 per share.

Year end

Revenue ($000s)

PBT*
($000s)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/13

399

(6,696)

(0.65)

0.0

N/A

N/A

12/14

71

(6,954)

(0.42)

0.0

N/A

N/A

12/15e

0

(8,053)

(0.20)

0.0

N/A

N/A

12/16e

0

(10,820)

(0.17)

0.0

N/A

N/A

Note: *PBT and EPS are normalized, excluding intangible amortisation, exceptional items and share-based payments.

Portfolio progressing with initiation of key trials

RXi is advancing three projects in clinical programs in the coming months. A Phase I/II trial for RXI-109 for the prevention of subretinal scarring in wet AMD should commence in 2015 on its newly FDA cleared IND. RXI-109’s lead indication of dermal scarring reports six-month data in early 2016 in the ongoing 1402 study, after recently announcing positive results of a three-month read out. We forecast peak sales of $1.5bn for RXI-109 in the dermal scarring market, which includes sales from reconstructive procedures and scar revision surgery, assuming payments are mainly out of pocket. RXi also plans the initiation of a Phase II trial with the recently in-licensed Samcyprone in common warts in the coming months.

Technology platform with out-licensing potential

RXi has developed a 'self-delivering' RNAi platform (sd-rxRNA), which it believes has advantages over conventional RNAi silencing, with the aim of achieving efficient spontaneous cell uptake, potent and long-lasting intracellular activity but lower immune activation. In preclinical studies RXi has demonstrated efficient cellular uptake of sd-rxRNA in tissues such as skin, retina, lung, spinal cord and liver. In March 2014, RXi out-licensed RXi’s sd-rxRNA technology to MirImmune for ex vivo use in developing cell-based cancer immunotherapies, signifying validation of RXI’s technology platform and paving the way for similar future agreements.

Valuation: $91m or $1.40 per share

We value RXi at $91m or $1.40 per share ($1.17 per diluted share) based on an NPV of lead pipeline projects applying our standard 12.5% discount. Estimated cash holdings of $12m (September 2015) enable a cash runway that should extend to the latter part of 2016, or longer if 13-month share rights are exercised, which were issued in conjunction with its recent equity fundraising ($10.4m gross funds).

RXi Pharmaceuticals is a research client of Edison Investment Research Limited

Investment summary

Company description: Unique RNAi platform

RXi Pharmaceuticals was established in 2012 as a spin-out from Galena Biopharma (incorporated in 2006) for the development of innovative therapeutics, focusing primarily on the areas of dermatology through its proprietary siRNA technology platform and immunotherapy agents. Its technology builds on the work of its scientific board chairman Dr Craig Mello, jointly awarded the Nobel Prize in 2006 for the discovery of RNA interference. The company’s lead candidate, RXI-109 is in development for dermal and retinal scarring and we anticipate multiple data readouts in these indications over the next 12 months. Earlier this year, the company licensed in immunomodulator Samcyprone, which is under development in dermatological indications. RXi began trading on NASDAQ in February 2014, following two years on the OTC market. In total, the company has raised $38m, including funds of $10.4m via a public offer in June 2015. Headquartered in Marlborough, Massachusetts, RXi has 15 employees.

Valuation: $91m or $1.40 per share

We value RXi at $91m or $1.40 per share based on a risk-adjusted NPV for lead pipeline projects RXI-109 and Samcyprone and their associated costs, applying our standard 12.5% discount. We believe the potential of its pipeline is considerably underappreciated by investors in view of the current market capitalization of $29m ($0.44 per share), particularly given its estimated net cash balance at end September 2015 of $12m. Our forecasts include NPVs on forecast sales for RX-109 in dermal scarring (risk adjusted at 20%) and AMD (risk adjusted at 5%) and for Samcyprone in hard to treat common warts (risk adjusted at 20%). Additionally, we include forecasts for the US market only pointing to the potential value in opportunities for RXi’s projects globally.

Financials: Adequately funded through at least 2016

RXi reported its Q215 results on 12 August; a net loss of $2.2m was recorded versus a loss of $3.2m in Q214. The company continued its tight control on costs, reporting R&D expenses of $1.4m in Q215 compared with $1.2m in Q214 and a slight dip in SG&A of $804km in Q215 versus $850km in Q214 due to lower legal costs. Earlier this year RXi restructured its capital, eliminating preferred shares through the full conversion of Series A and Series A-1 convertibles into common stock. In June it completed a share offer, raising $9.3m net proceeds ($10.4m gross) via the sale of 26 million units at $0.40, each unit comprising one common share, a 13-month right to purchase 0.5 of one share of common stock at $0.455 per share and a five-year warrant to purchase 0.5 of one share of common stock at $0.52 per share. At RXi’s share price of $0.44 we note the low price of the options and highlight the 13-month rights offer as a potential funding source of $5.9m. There is also the possibility of a share consolidation, given lack of compliance with NASDAQ’s requirements and threat of delisting as RXI’s share price is below the required $1.

Sensitivities: Opportunity on cutting-edge science

RXi is vulnerable to the risks of an earlier-stage drug development company, including the possibility of unfavourable outcomes in clinical trials, regulatory changes, success of competitors and decisions by potential partners. Additionally, as RXi looks to complete mid-stage drug development trials for its treatments, particularly Phase II trials for RXI-109 in dermal scarring and Samcyprone in common warts it may need to secure financing from late 2016, contingent on funds raised through the exercise of warrants. RXi is operating in the highly innovative and ground-breaking field of RNA silencing, an area with enormous potential but also with little clinical success to date. The company’s preclinical data thus far have been positive and early work in the clinic to date has been encouraging.

RXi Pharmaceuticals: A differentiated RNAi approach

RXi has been active over the past year, completing two licensing deals – the in-licensing of dermatology treatment Samcyprone and the out-licensing of its proprietary technology capabilities to MirImmune, while steadily advancing its lead compound RXI-109 in dermatological and ophthalmology indications. The company remains operationally lean, maintaining its strategic focus on opportunistic deal making, while simultaneously advancing its discovery and clinical development programs arising from its novel advanced RNAi-based technology platform.

Exhibit 1: RXi discovery and development pipeline

Treatment

Indication

Status

RXI-109

Hypertrophic scars and keloids

Phase IIa data (study 1402) H116

RXI-109

Retinal scarring (macular degeneration)

IND accepted and Phase I (study 1501) planned Q415

RXI-109

Corneal scarring

Preclinical

Samcyprone

Cutaneous warts

Phase II initiation Q415

Samcyprone

Alopecia areata, cutaneous metastases of melanoma

Ongoing Phase II investigator sponsored trials

Source: Edison Investment Research

What is RNA interference (RNAi)?

RNAi, also known as RNA silencing, is a natural phenomenon by which cells prevent protein production by interfering with gene expression. Craig Mello, PhD, a founder of RXi Pharmaceuticals, shared the 2006 Nobel Prize in Medicine for its discovery. It is thought that the RNAi mechanism evolved as a natural cellular defence against exogenous double stranded RNA from RNA viruses.

The central paradigm is that DNA is transcribed to messenger RNA (mRNA), which is translated into a protein. However cells produce other types of 'non-coding' RNA with different functions and one such class are the small interfering RNAs (siRNAs, 20-30 nucleotides long), which play a key role in mRNA regulation. Together with a protein of the Argonaute family, siRNA forms an RNA-induced silencing complex (RISC) and when the RISC recognizes its target mRNA (based on nucleotide matching of the siRNA), it binds and enzymatically cleaves and destroys the mRNA, thereby inhibiting the unwanted activity instructed by the mRNA, eg cell proliferation. The siRNA is intact and RISC can continue to cleave many copies of the target mRNA.

Through the delivery of synthetic siRNAs, RNAi provides a novel and potentially powerful approach to treat diseases that involve overexpression of specific proteins (eg collagen in scarring or cholesterol in hypercholesterolaemia). It may also be effective in rare genetic diseases that involve a mutation in one allele, with the other allele being normal, so reducing the mutant protein could prevent disease symptoms (eg familial amyloidosis and Huntington's disease). RNAi therapeutics can be designed against any mRNA (even for proteins not considered 'druggable') and have the advantage of blocking production of disease-causing proteins before they are made.

Large pharma companies (including Roche, Novartis and Merck) have historically found the delivery of siRNA and microRNA therapeutics challenging and have largely left the field to smaller biotech companies to develop RNAi-based therapeutics in a broad range of indications, including RXi Pharmaceuticals, Alnylam Pharmaceuticals, Arrowhead Research, Sirnaomics, Dicerna Pharmaceuticals, Silence Therapeutics, Sylentis (Zeltia), Quark Pharmaceuticals and Mirna.

RXi’s RNAi Therapeutic Platform: sd-rxRNA

The delivery of RNAi therapeutics to the right organ and cells is key. Developed in house RXi’s 'self-delivering' RNAi platform (sd-rxRNA) contains a variety of nuclease stabilizing and lipophilic chemical modifications, which the company believes has advantages over a conventional liposome-encapsulated approach. The result is RNA-antisense hybrids that combine the beneficial properties of both conventional RNAi and antisense technologies, with the aim of achieving efficient spontaneous cell uptake, potent and long-lasting intracellular activity but lower immune activation. Preclinically RXi has demonstrated efficient cellular uptake of sd-rxRNA both in vitro and in vivo, in tissues such as skin, retina, lung, spinal cord and liver, and target gene silencing in different cell types. Efforts are currently focused on local rather than systemic delivery of its compounds, including to skin, eye, lung and possibly the central nervous system. The sd-rxRNA platform will require further optimisation to overcome the tissue clearance challenges of systemic delivery.

In addition to its own in-house clinical and preclinical work, in October RXi announced encouraging results from its collaboration with Biogazelle, a firm focusing on RNA gene expression. The companies reported that specifically designed sd-rxRNAs showed robust and potent reduction of multiple long non-coding RNAs (IncRNAs) in a target-specific manner, thereby expanding the potential applications of the sd-rxRNA platform in additional diseases and disorders.

RXI-109 in Phase II for dermal scarring

RXi is developing sd-rxRNA compounds for the treatment of scarring in the skin and eye. Its most advanced clinical candidate, RXI-109 silences the expression of connective tissue growth factor (CTGF), which plays a key role in pathways involved in fibrosis, including hypertrophic and keloid scar formation in the skin. Hypertrophic scars are abnormally raised scars that are darker than the existing skin and caused by increased cell proliferation and collagen production. Keloid scars are similar but spread beyond the original site of skin injury and may continue to grow in size for years. Both hypertrophic scars and keloids can result from common skin trauma such as acne, ear piercing, cuts and burns or vaccination. Two Phase I trials of RXI-109 in healthy volunteers have demonstrated its safety and showed a dose-dependent silencing of CTGF mRNA and protein. Approximately 100 subjects have been treated with RXI-109 by intradermal injection in all trials to date, with no major side effect or safety issues reported. Three Phase IIa trials are now underway in both hypertrophic and keloid scars:

Study 1301 – started November 2013: 22 subjects with hypertrophic scars undergoing scar revision surgery were treated with RXI-109 on one end of the scar and placebo on the opposite end, with three intradermal doses over two weeks. Enrolment is complete and subjects continue to be monitored up to nine months, with study completion expected by end-2015. Initial three-month observations were positive and suggested that initiating treatment two weeks post-surgery, during the proliferation phase of healing, and extending the treatment duration, is more beneficial than initiating treatment in the immediate inflammation phase.

Study 1401 – started April 2014: 16 Subjects with two keloids of similar size/location had one treated with RXI-109 (four weekly injections over one month) and the other with placebo following keloidectomy. Enrolment is complete and a review of preliminary data by an expert panel presented in March 2015. The key endpoint of the trial was the comparison of RXI-109 vs placebo treatment to reduce keloid recurrence, as measured by investigator assessment and visual analogue scales. The panel found the placebo-treated site was more often identified as showing faster recurrence of keloids than that of the RXI-109-treated site in this relatively subjective assessment.

Study 1402 – started July 2014: a refinement of study 1301 in patients with hypertrophic scars. In October 2015, RXi announced positive results from the initial three-month analysis of this study in 15 patients showing visible beneficial effect on the suppression of hypertrophic scarring with patients using RXI-109 as compared to no treatment. Subjects were assessed using four methods; POSAS (Physician and Observer Scar Assessment Scale); Visual Analogue Scale (VAS) and two blind assessments of photographs. Completion date for the study was targeted for mid-2016; however, the company plans additional cohorts for further assessment of the dosing regimen.

By the end of 2015, the company expects final data for Phase IIa Study 1301 and late readouts for Study 1401. In addition to the extension to Study 1402 in severe hypertrophic scars, RXi is also planning a new keloid Phase IIa study with an extended dosing regimen. Results from these studies will inform the design of Phase IIb studies, which we assume will now start in late 2016.

Market potential for dermal scarring is significant

Scars can have long lasting functional, cosmetic as well as psychological consequences for the patient. There are no FDA-approved therapies in the US for the treatment or prevention of scars. At the time of its 2007 deal with Renovo for Juvista (since terminated due to failure in Phase III on lack of efficacy), Shire estimated that the total US scar prevention/treatment market could be worth around $4 billion pa. In the developed world, 100 million patients acquire scars each year, largely as a result of 55 million elective operations and 25 million operations after trauma. The incidence of hypertrophic scarring following surgery varies from 40% in the general population: http://www.ncbi.nlm.nih.gov/pubmed?term=Hypertrophic%20scarring%20and%20keloids%3A%20%20pathomechanisms%20and%20current%20emerging%20treatment%20strategieshttp:// to 70% in certain Asian populations, rising to 91% following burn injury. Keloid scars are more common in darker skin, with a prevalence of less than 0.1% in the UK, rising to 16% in people of African origin. They have a strong genetic component.1 Specifically in the US there were 30.1 million surgical skin procedures in 20102 and according to the 2014 American Society of Plastic Surgeons (ASPS) report, out of 5.8m reconstructive procedures, there were 177,000 scar revision surgeries.

Gauglitz et al, Molecular Medicine. 2011; 17(1-2): 113–125.

CDC National Ambulatory Medical Care Survey 2010.

As suggested by Shire in 2007, the total addressable market for an FDA-approved dermal scar prevention and treatment could be as high as $4bn pa in the US. In 2014, approximately $13 billion was spent on cosmetic procedures in the US, with a mean cost per procedure of $830 (ASPS). Consumer research shows that 85% of patients would (and already do) self pay for the reduction or prevention of scarring. For example, laser skin resurfacing is commonly used to treat wrinkles, warts, scars and deep lines, with an average course costing $2,300 (ASPS, 2011).

We model peak sales for RXI-109 in dermal scarring of $1.5bn in 2027, before risk adjustments. Our forecasts assume use in 50% of scar revision surgeries, 5% of reconstructive procedures3 and 5% of breast augmentation procedures. We assume a largely self-paying market.

Reconstructive procedures included: tumor removal, laceration repair, maxillofacial surgery, and hand surgery.

Exhibit 2: Sales forecast for RX-109 in dermal scarring

Addressable market

Penetration

$m potential 2027

Scar revision surgery ~170,000 pa

50%

350

Reconstructive cosmetic surgery and breast augmentation ~5.9m pa

5%

1,150

Total

1,500

Source: Edison Investment Research

Current therapies for scar management: Variable efficacy

Standard management of hypertrophic and keloid scars includes non-invasive approaches (compression, silicone sheeting, over-the-counter creams) and invasive approaches (surgical excision, corticosteroid injection, radiotherapy, laser therapy and cryosurgery) as well as more experimental third-line therapies (intralesional 5-FU, verapamil, bleomycin, mitomycin-C, interferon alpha and topical imiquimod) – see Exhibit 3. Keloid scars are much harder to treat than hypertrophic scars and have a high recurrence rate, which can be a soon as a few weeks. Often a combination of treatments is more effective than monotherapy, for example, surgery plus steroid injection and silicone sheeting, or steroid plus 5FU. Treatment can be expensive, lengthy, and in the case of steroids and experimental drugs, have adverse side effects. Moreover, many current therapies have only been tested in small trials and efficacy data is extremely variable.

Exhibit 3: Current approaches for scar prevention and reduction

Details

Response Rate

Recurrence rate

Comments (including adverse effects)

Prevention of scarring post-surgery

Pressure therapy

Compression bandages 23h/day for six-12 months

50-100%

-

First-line therapy for hypertrophic burn scars and ear keloids post-excision. Poor compliance due to discomfort and treatment duration.

Silicone gel sheeting
(or silicone gel)

≥12h / day for ≥ two months

50-100%

-

Widely used despite poor clinical evidence; sheets may hinder movement or be visible, leading to poor patient compliance. Expensive.

Flavonoids (onion extract)

Mederma/Contractubex Gel (Merz Pharma): 2x daily for four-six months

-

-

Limited efficacy and variable data. Available OTC - eg Mederma Gel costs $160 for five months.

Reduction of existing scars

Corticosteroids

Intralesional injections of triamcinolone acetonide (TAC), several treatments once or twice a month

50-100%

9-50%

First line for keloids, second line for hypertrophic scars in combination with surgery, PDL and cryotherapy. Painful injections. Side effects in 40% of patients are fat atrophy, dermal thinning and telangiectasias.

Scar revision surgery

Excision with tension-free closure; skin grafting;

-

50-100%

Efficacious for hypertrophic scars; High recurrence rates of 45-100% for keloids without adjuvant therapy.

Laser therapy (PDL)

Short-pulsed dye laser, two-six treatments every two-six weeks

30-40%

4% hypertrophic, up to 50% keloids

More effective for hypertrophic scars than keloids, and in combination with steroid. Expensive, requires specialist.

Cryotherapy

Liquid nitrogen

70% with other therapies

8-50%

Limited to smaller scars, common side effects include blistering, pain and depigmentation.

Radiotherapy

Superficial X-rays over five-six sessions during early post-operative period.

56% (76% after surgery)

14-29%

Second/third-line approach. Used as adjuvant after keloid excision; adverse effects include immediate skin reaction; low risk of malignancy.

Source: Gauglitz et al, Molecular Medicine. 2011; 17(1-2): 113, Edison Investment Research

Drugs in development for scarring prevention and reduction

There are relatively few treatments in development for dermal scarring. RXI-109 looks to be the most advanced in development siRNA-based therapy for scarring. Pfizer's PF-06473871(EXC-001) is an antisense oligo which also targets CTGF. It completed five Phase II trials in 2012-2014, but its development now appears to have been discontinued.

Exhibit 4: Select RNAi drugs in development for scar prevention

Product

Company

Approach (target)

Delivery

Status

EXC-001
(PF-06473871)

ISIS/Excaliard (now PFE)

Antisense oligo (anti-CTGF)

Injected

Five Phase II completed; discontinued in 2015

RXI-109

RXi Pharmaceuticals

siRNA (anti-CTGF)

Self-delivering siRNAi, intradermal injection

Three Phase II ongoing

ACT1 (Granexin Gel)

FirstString Research

Synthetic peptide (connexin analogue)

Topical

Phase II complete 2013; Phase III being planned

GBT009

Garnet BioTherapeutics

Cell therapy, purified from adult bone marrow

IV injection

Phase II in five patients ongoing

SCX-001 (Nefopam)

ScarX Therapeutics

Small molecule (catenin inhibitor)

Topical

Phase I/IIa planned

Source: Edison Investment Research

RXI-109 for ophthalmic indications

RXi is also developing RXI-109 for retinal scars (intraocular use) and corneal scars (topical use). In wet age-related macular degeneration (wet AMD) abnormal blood vessels grow subretinally (neovascularisation) and leak fluid and blood. RXI-109 may reduce the subretinal scarring seen in wet AMD and reduce the rate of vision loss. In animal models, a single intravitreal dose of RXI-109 reduced levels of CTGF protein at day seven in a dose-dependent manner. The Investigational New Drug (IND) was passed by the FDA in August 2015 and RXi aims to start a dose-escalating Phase I/II trial to evaluate RXI-109 in patients with advanced wet AMD (already treated with anti-VEGF medications) in Q4 2015 – study 1501.

Retinal scarring: Market potential

AMD is a leading cause of vision loss in the over 65s and represents a significant market opportunity. According to US NIH National Eye Institute estimates, there are 200,000 new cases a year and over two million Americans had AMD in 2010; a figure expected to rise to five million by 2050. There is no cure, but vision loss may be slowed by treatments which reduce neovascularisation such as the anti-angiogenic VEGF-inhibitors (Lucentis, Macugen, EYLEA and off-label use of Avastin), and photodynamic or laser therapy. While anti-VEGF treatment normally stabilizes or can improve vision, scar formation after treatment has been identified as one of the main causes of the loss of visual acuity.4 The value of the wet AMD treatment market was estimated at $4bn in 2011 and could reach over $8bn by 2016, according to Nature Reviews Drug Discovery 2012, due to an ageing population and as additive and complementary treatments become available. In 2014, the two leading treatments for AMD (VEGF inhibitors Eylea and Lucentis) each registered $1.7bn in sales and both are on track to achieve more than $2.0bn in sales in 2015. We currently model potential sales reaching $1.3bn for RXI-109 in AMD in 2030 assuming 25% market penetration.

Ophthalmology 2014 March; 121(3): 656-666.

Competitor drugs in development for wet AMD

It is envisaged that RXI-109 will potentially be used in combination with existing VEGF inhibitors, in order to target both VEGF and CTGF to down regulate both the angiogenesis and fibrosis pathways. In addition to RXI-109, several other RNAi approaches are being taken in this area, the most advanced being Quark Pharmaceuticals/Pfizer's PF-655 which is an siRNA against a proprietary target protein that inhibits mTOR. In Phase II, PF-655 in combination with Lucentis was better at improving visual acuity than Lucentis alone. In addition to RNAi drugs in development there is also significant competition from other approaches for wet AMD. Drugs under development include including an anti-PDGF (platelet derived growth factor) under development by Ophthotech in Phase III, which in combination with a VEGF-inhibitor, looks to disrupt the formation of new blood vessels. Top-line data for Ophthotech’s treatment is expected in 2016.

Exhibit 5: RNAi drugs in development for AMD

Product

Company

Approach (target)

Delivery

Status

PF-655

Quark Pharmaceuticals/PFE

siRNA (against RTP-801)

Lipid, polymer and antibody-based delivery

Phase II in wet-AMD complete; Phase IIb in DME ongoing

TT211 and TT231 (second generation)

Benitec

ddRNAi (anti-VEGF)

DNA-directed RNAi (ddRNAi). Viral or non-viral vectors

TT211 preclinical in wet AMD. TT231 for wet and dry AMD

STP601 (Acurita)

Sirnaomics

siRNA (against VEGF, VEGFR1 and VEGFR2)

Biodegradable polypeptide nanoparticles

IND enabling studies underway in US (AMD)

Source: Edison Investment Research

Samcyprone

In February 2015, augmenting its portfolio of treatments in therapeutic dermatology, RXi licensed in global rights for the topical gel, Samcyprone from Hapten Pharmaceuticals for an upfront payment of $100,000 and 200,000 shares of RXi common stock. Hapten will also be eligible for milestones and escalating mid-single digit royalty payments based on commercial objectives and product sales. RXi is currently conducting a Phase II program for Samcyprone in viral warts, while we understand that trials are ongoing by independent investigators in alopecia areata (baldness) and in cutaneous metastases of malignant melanoma, where Samcyprone recently received orphan drug status. Other potential indications for Samcyprone include actinic keratosis, basal-cell carcinoma, squamous-cell carcinoma and cutaneous metastasis of non-melanoma cancers. Samcyprone is a proprietary gel-like formulation of the topical DPCP (immunomodulator diphenylcyclopropenone), with a potential improved safety profile through its lower concentrated dosing and more consistent easier delivery. DPCP is not FDA approved and must be formulated in acetone by a pharmacist, based on directions from an individual dermatologist and therefore there is no standardized usage. It works through the initiation of a T-cell response by altering the expression of multiple genes and miRNAs in the immune response. A small molecule, DPCP has been used by dermatology centers for more than 30 years, primarily as a stimulant for the regrowth of hair in patients with alopecia areata. In one retrospective study with 54 patients with alopecia areata (alopecia areata is an autoimmune disease in which hair loss occurs in some or all areas of the body), terminal hair growth was labelled ‘excellent’ at 76%-100% in 40.7% of patients, ‘good’ at 51%-75% in 14.8%, ‘moderate’ at 26%-50% in 14.8% of patients and mild (<25%) in 29.6% of patients.5 Recent data published in peer reviewed journals also show DPCP efficacy in certain skin diseases, ie alopecia areata, warts and cutaneous metastases of malignant melanoma. There is currently one patent and three outstanding patent applications for Samcyprone covering the compositions and methods of use in warts, HPV, skin infections, skin cancer and immunocompromised patients, expiring between 2019 and 2031.

dermnetnx.org/treatments/diphencyprone.html

According to RXi, the total addressable market in the three indications for which DPCP is currently being used (warts, melanoma and alopecia areata) is approximately $1bn, with warts the greatest potential market at an estimated $500m. Warts are benign tumours caused by infection with human papilloma viruses and can be mucosal or cutaneous. Cutaneous warts are common, particularly among the young. Various studies have shown that up to 33% of children and young people have cutaneous warts and 3%-5% in adults. In children and teenagers warts disappear within a year, but while there is little research, are typically of longer duration in adults with recovery affected by immune system strength. This spontaneous resolution can take years, and in the interim warts can grow and spread causing pain and distress due to appearance. A number of treatments have been used for cutaneous warts, but evidence of efficacy remains poor. Imiquimod is the most commonly-used medication for cutaneous warts, despite its lack of approval in this indication (it is currently indicated for basal cell carcinoma, actinic keratosis and genital warts in adults) and prior to becoming generic in 2011 achieved sales of $350m in 2010. There are no controlled trials for imiquimod in cutaneous warts, but there is some evidence of efficacy in various case studies.

RXi is finalizing its protocol for a Phase II trial in warts, targeted for initiation by year-end. Primary endpoint of the study is clearance of Samcyprone-treated warts versus untreated warts over a 12-week treatment period. The company expects this first study to be relatively easy to recruit, enabling a safety database to support investigator sponsored trials in added indications. Our model includes peak sales for Samcyprone of $177m in 2027 in hard to treat warts only at 50% penetration.

Exhibit 6: Treatments for cutaneous warts6

Lynch MD, et al. Management of cutaneous viral warts. BMJ 2014; 348: g3339 DOI: 10.1136/bmj.g3339. Kwok CS, et al. Topical treatments for cutaneous warts. Cochrane Database of Systematic Reviews 2012, Issue 9. Art. No: CD001781. DOI: 10.1002/14651858.CD001781.pub3.Boull C, Groth D. Update: treatment of cutaneous viral warts in children. Pediatr Dermatol. 2011; 28: 217-29.Leung L. Recalcitrant nongenital warts. Aust Fam Phys. 2011; 40: 40-2.Lipke MM. An armamentarium of wart treatments. Clin Med Res. 2006; 4: 273-93.

Mechanism

Examples

Ablative therapies*

Salicylic, lactic and other acids; cantharadin; silver nitrate; cryotherapy; laser therapy and photodynamic therapy; hyfrecation; curettage

Antimitotic and antiviral therapy

5-fluorouracil, bleomycin, topical cidofovir, podophyllin/podophyllotoxin

Stimulate host immune responses

against the virus

Imiquimod, oral cimetidine; topical and oral zinc; intralesional candida, mumps, or Trichophyton antigen; intralesional interferon; contact sensitizers such as diphenylcyclopropenone

Other

Ingenol mebutate (Picato), Duct tape*, retinoids

Mechanism

Ablative therapies*

Antimitotic and antiviral therapy

Stimulate host immune responses

against the virus

Other

Examples

Salicylic, lactic and other acids; cantharadin; silver nitrate; cryotherapy; laser therapy and photodynamic therapy; hyfrecation; curettage

5-fluorouracil, bleomycin, topical cidofovir, podophyllin/podophyllotoxin

Imiquimod, oral cimetidine; topical and oral zinc; intralesional candida, mumps, or Trichophyton antigen; intralesional interferon; contact sensitizers such as diphenylcyclopropenone

Ingenol mebutate (Picato), Duct tape*, retinoids

Source: Edison Investment Research. Note: *It is proposed that ablative therapies and those such as duct tape might expose the immune system to HPV antigen, causing a host immune reaction.

Given DCPC’s ability to alter the expression of miRNAs in immune responses, RXi anticipates studies with Samcyprone could enable the discovery of drug targets to treat skin and systemic-related immune disorders, resulting in the development of more potent/selective compounds.

Preclinical development targeting collagenase and tyrosinase

In recent quarters, RXi has completed work showing dose-dependent knock down in mRNA and protein levels in compounds targeting the collagenase and tyrosinase enzymes, additionally supported by in vitro studies in cell cultures and skin equivalents. RXi has reported strong interest in these compounds from third parties in both the therapeutic and consumer skin care areas. Applications in the cosmetics field have the potential to progress relatively quickly. In October, RXi announced the selection of two compounds for cosmetic product development based on its sd-rxRNA platform. RXI-231, targeting tyrosinase, showed a visible reduction of pigmentation in melanocytes in a human epidermis tissues culture, displaying 100 fold potency over well-known skin lightening agent kojic acid. RXI-185, targeting collagenase matrix metalloproteinase-1 (MMP-1), has been selected for its potential in skin improvement. RXi looks to be well positioned in this area as CEO Geert Cauwenbergh has considerable experience, having worked for Johnson & Johnson in charge of developing the skin care franchise for the beauty and cosmetic consumer.

MirImmune out-licensing

In March of 2014, RXi out-licensed RXi’s sd-rxRNA technology to MirImmune for ex-vivo use in developing cell-based cancer immunotherapies. The agreement allows MirImmune access to RXi’s sd-rxRNA and rxRNAori patent families for ex-vivo modification of cells for the treatment of cancer in return for an annual licensing fee, milestone payment, sublicensing income, single-digit royalties, as well as the right to acquire a double-digit stake in MirImmune’s equity. We believe the agreement signifies a validation of RXi’s technology platform, opening doors for future licensing agreements. RXi seeks similar arrangements with prospective partners also reporting ongoing discussions with potential strategic partners to partake in more comprehensive deals entailing equity investments.

Sensitivities

RXi is subject to the risks associated with earlier-stage drug development companies, including the possibility of unfavourable outcomes in clinical trials, regulatory changes, success of competitors and commercial decisions by potential partners. Additionally, as RXi looks to complete mid-stage drug development for its treatments, particularly Phase II trials for RX-109 in dermal scarring and Samcyprone in warts, it will need to secure additional financing from late 2016. Required funding will be contingent on the future conversion of outstanding warrants. RXi is operating within the highly innovative and ground-breaking field of RNA silencing, an area with enormous potential but also with limited clinical success to date. The opportunity in this area provides significant upside on success of projects progressing through clinical programs; however, the novel approach brings additional risk. As stated, RXi’s technology platform combines the beneficial properties of both conventional RNAi and antisense technologies, with the aim of achieving potent and long-lasting intracellular activity but lower immune activation. Preclinical data so far has been positive. Early work in the clinic to date has been encouraging. Lastly, in the case of Samcyprone there remains risk related to the three outstanding patent applications.

Valuation

We value RXi at $91m or $1.40 per share on an rNPV basis or $1.17 per diluted share, when considering a potential exercise of 13 million shares issued at a strike price of $0.455 in connection with the company’s recent share offer. We believe the potential of its pipeline is underappreciated by investors pointing to the company’s current market capitalization of $29m ($0.44 per share) and bearing in mind its estimated net cash balance at end September 2015 of $12m. We model risk-adjusted cash flow for RX-109 in its targeted indications of dermal scarring and AMD through its expected patent life to 3031 and for Samcyprone in its lead indication for the treatment of warts with market exclusivity also running to 3031, including discounted future operational cash flows including expected R&D and general and administrative expenses attached to each clinical treatment in development. We include aggregate estimated risk adjusted and discounted milestones from potential partners for the licensing in of RX-109 in dermal scarring ($11m) and AMD and for Samcyprone ($5m) in viral warts risk. Our forecasts also include royalty and milestone payments as per RXi’s agreement with Hapten for Samcyprone.

We do not include additional indications for Samcyprone in cutaneous metastases of melanoma and other cancers and alopecia areata, given lack of visibility of those trials undertaken by independent investigators. However, we note the significant potential upside in these indications, which represent additional large market opportunities.

We also maintain penetration rates for RX-109 in the large market for AMD peaking at 25%, given potential competitive treatments under development.

We do not yet place a value on the preclinical work by RXi in beauty and cosmetic skin care.

We forecasts sales in the US only. As RXi’s portfolio progresses in development, we foresee the potential for the commercialization of its products into international markets, which would provide further significant upside to our valuation.

We assume a price of $2,500 per treatment for RX-109 in dermal scarring and AMD and $800 per treatment for Samcyprone, based on current treatments and procedures in their respective indications (including that for multiple Botox treatments in dermal scarring) and factoring in inflationary based price increases. Our forecasts assume a largely self-paying market.

Exhibit 7: Valuation

Product

Launch

Peak sales ($m)

Risk Adj.

Royalty rate

rNPV ($m)

rNPV/share ($)

RX-109 scarring

2021

1,453

20%

17.5%

73.5

1.13

RX-109 AMD

2022

1,077

5%

15.0%

1.2

0.02

Samcyprone

2020

177

20%

17.5%

4.0

0.06

Net cash est (Q315)

12.2

0.19

Overall valuation

90.9

1.40

Number of shares (m)

64.9

Source: Edison Investment Research

Financials

RXi looks to be adequately capitalized with Q315 cash on hand estimated at $12m, which should fund the company into the latter part of 2016. As guided by management, RXi’s current operating cash outflow will likely be maintained at ~$2.0m per quarter throughout next year. Earlier this year the company restructured its capital, eliminating preferred shares through the full conversion of all Series A and Series A-1 convertibles into common stock. In June, the company also completed a successful share offer, raising $9.3m net proceeds ($10.4m gross) via the sale of 26 million units at $0.40 with each unit comprising one common share, a 13-month right to purchase 0.5 of one share of common stock at $0.455 per share and a five-year warrant to purchase 0.5 of one share of common stock at $0.52 per share. At RXi’s share price of $0.44 we note the low price of the option and consider the 13-month right a viable financing option which could bring funds of up to $5.9 million if exercised. Additionally, RXi has a $10.7m outstanding equity line available through the Lincoln Park Capital Fund, which becomes accessible following the expiration of the 13-month purchase rights. Our forecasts include $10m in illustrative long-term debt in our model in each of 2016 and 2017, ie a $20m near-term funding requirement, mainly to cover expected R&D costs. However amounts remain heavily dependent on the ongoing trial requirements of clinical programs and RXi’s ability to license out its later-stage projects in a timely fashion to partners on reasonably attractive terms. RXi published second quarter 2015 results on 12 August. The net loss for the quarter was $2.2m compared with the $3.2m loss in Q214. R&D of $1.4m in Q215 compared with $1.2m in Q214 as the company continued a rigorous control on costs, while focusing efforts on its three ongoing clinical trials, and particularly 1402 in dermal scarring. RXi maintains its lean corporate structure. Excluding non-cash based compensation, SG&A expenses were $0.6m in line with the $0.6m reported in Q214.

Exhibit 8: Financial summary

$000s

2013

2014

2015e

2016e

2017e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

399

71

0

0

0

Cost of Sales

0

0

0

0

0

Gross Profit

399

71

0

0

0

Research and development

(5,401)

(5,680)

(6,468)

(9,000)

(10,000)

General & administrative

(3,697)

(3,217)

(3,377)

(3,647)

(4,012)

EBITDA

 

 

(6,819)

(7,067)

(8,123)

(10,873)

(12,205)

Operating Profit (before GW and except.)

 

 

(6,720)

(6,980)

(8,054)

(10,820)

(12,148)

Intangible Amortisation

0

0

0

0

0

Exceptionals/Other

(12,250)

0

0

0

0

Share-based payments

(1,979)

(1,846)

(1,791)

(1,827)

(1,863)

Operating Profit

(18,970)

(6,980)

(8,054)

(10,820)

(12,148)

Net Interest

24

17

1

0

0

Other (includes change in fair value of warrants)

0

9

0

0

0

Profit Before Tax (norm)

 

 

(6,696)

(6,954)

(8,053)

(10,820)

(12,148)

Profit Before Tax (FRS 3)

 

 

(20,925)

(8,800)

(9,844)

(12,647)

(14,012)

Tax

0

0

0

0

0

Deferred tax

0

0

0

0

0

Profit After Tax (norm)

(6,696)

(6,954)

(8,053)

(10,820)

(12,148)

Profit After Tax (FRS 3)

(20,925)

(8,800)

(9,844)

(12,647)

(14,012)

Average Number of Shares Outstanding (m)

10.3

16.4

39.6

64.9

64.9

EPS - normalized fully diluted ($)

 

 

(0.65)

(0.42)

(0.20)

(0.17)

(0.19)

EPS - FRS 3 ($)

 

 

(2.88)

(0.79)

(0.25)

(0.19)

(0.22)

Dividend per share ($)

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

195

201

195

207

217

Intangible Assets

0

0

0

0

0

Tangible Assets

177

183

177

189

199

Other

18

18

18

18

18

Current Assets

 

 

14,743

8,988

10,958

10,126

7,967

Stocks

0

0

0

0

0

Debtors

0

0

0

0

0

Cash

14,440

8,546

10,240

9,408

7,249

Other

303

442

718

718

718

Current Liabilities

 

 

(2,076)

(1,334)

(1,822)

(1,822)

(1,822)

Creditors

(2,076)

(1,334)

(1,822)

(1,822)

(1,822)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

0

0

0

(10,000)

(20,000)

Long term borrowings

0

0

0

(10,000)

(20,000)

Other long term liabilities

0

0

0

0

0

Net Assets

 

 

12,862

7,855

9,331

(1,489)

(13,637)

CASH FLOW

Operating Cash Flow

 

 

(6,311)

(7,758)

(7,544)

(10,767)

(12,091)

Net Interest

0

0

0

0

0

Tax

0

0

0

0

0

Capex

(78)

(95)

(64)

(65)

(67)

Acquisitions/disposals

0

12

0

0

0

Financing

15,684

1,947

9,301

0

0

Dividends

0

0

0

0

0

Other

18

0

0

0

0

Net Cash Flow

9,313

(5,894)

1,694

(10,832)

(12,158)

Opening net debt/(cash)

 

 

(5,127)

(14,440)

(8,546)

(10,240)

592

HP finance leases initiated

0

0

0

0

0

Exchange rate movements

0

0

0

0

0

Other

0

0

0

0

0

Closing net debt/(cash)

 

 

(14,440)

(8,546)

(10,240)

592

12,751

Source: Company notes, Edison Investment Research

Contact details

Revenue by geography

257 Simarano Drive,
Suite 101, Marlborough,
MA 01752
508-767-3861
www.rxipharma.com

N/A

Contact details

257 Simarano Drive,
Suite 101, Marlborough,
MA 01752
508-767-3861
www.rxipharma.com

Revenue by geography

N/A

Management team

President and CEO: Geert Cauwenbergh, Dr. Med. Sc.

Chief development officer: Pamela Pavco, PhD

Dr Cauwenbergh became CEO of RXi in 2012. Prior to that, he was CEO and a founder of Barrier Therapeutics, a biopharmaceutical firm specializing in dermatology drug development bought by Stiefel in 2008. He also previously worked for Johnson & Johnson for 23 years, holding various senior management positions, including vice president of research and development for the J&J Skin Research Center. Dr Cauwenbergh served as chairman of the board of trustees of BioNJ from 2009 to 2010.

Dr Pavco joined RXi as chief development officer after working at Galena Pharmaceuticals as senior vice president of Pharmaceuticals until 2012. Prior to that she was senior director R&D Project Management at Sirna Therapeutics, where she was responsible for the discovery, research and development of Sirna-027, the first chemically modified siRNA to enter clinical trials. At Sirna she also held various senior management roles.

VP medical affairs and safety assessment: Lyn Libertine, MD

Vice president research: Karen Bulock, PhD

Dr Libertine joined RXi from Galena Pharmaceuticals, where she served as director of Pharmacology until 2012. Prior to that she worked at Critical Therapeutics on the development team filing the sNDA for oral asthma treatment, Zyflo. She has also held various positions in pharmacology and cytology with CytoMed and UCB Pharma.

Dr Bulock joined RXi from Galena, where she served as associate director of research from 2012. She has over 20 years of experience in assay development and discovery project management, including the discovery and preclinical development of RXI-109. She has also supported small molecule drug discovery programs at CytRX and Essential Therapeutics.

Management team

President and CEO: Geert Cauwenbergh, Dr. Med. Sc.

Dr Cauwenbergh became CEO of RXi in 2012. Prior to that, he was CEO and a founder of Barrier Therapeutics, a biopharmaceutical firm specializing in dermatology drug development bought by Stiefel in 2008. He also previously worked for Johnson & Johnson for 23 years, holding various senior management positions, including vice president of research and development for the J&J Skin Research Center. Dr Cauwenbergh served as chairman of the board of trustees of BioNJ from 2009 to 2010.

Chief development officer: Pamela Pavco, PhD

Dr Pavco joined RXi as chief development officer after working at Galena Pharmaceuticals as senior vice president of Pharmaceuticals until 2012. Prior to that she was senior director R&D Project Management at Sirna Therapeutics, where she was responsible for the discovery, research and development of Sirna-027, the first chemically modified siRNA to enter clinical trials. At Sirna she also held various senior management roles.

VP medical affairs and safety assessment: Lyn Libertine, MD

Dr Libertine joined RXi from Galena Pharmaceuticals, where she served as director of Pharmacology until 2012. Prior to that she worked at Critical Therapeutics on the development team filing the sNDA for oral asthma treatment, Zyflo. She has also held various positions in pharmacology and cytology with CytoMed and UCB Pharma.

Vice president research: Karen Bulock, PhD

Dr Bulock joined RXi from Galena, where she served as associate director of research from 2012. She has over 20 years of experience in assay development and discovery project management, including the discovery and preclinical development of RXI-109. She has also supported small molecule drug discovery programs at CytRX and Essential Therapeutics.

Principal shareholders

(%)

Broadfin Capital

9.43

Empery Asset Management

6.93

Anson Group

6.56

OPKO Health

3.45

Companies named in this report

Alnylam, MirImmune, Arrowhead, Sirnaomics, Dicerna, Silence Therapeutics, Quark, Mirna, ISIS, First String, Garnet Biotherapeutics, ScarX Therapeutics, Benitec, OPKO Health

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

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Level 25, Aurora Place

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NSW 2000, Australia

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