RXi Pharmaceuticals — Update 18 April 2016

In October 2015, RXi announced the selection of two compounds for initial cosmetic product development, RXI-231 and RXI-185, which are both based on the company’s self-delivering RNAi (sd-rxRNA) platform and target the tyrosinase and collagenase enzymes respectively. The company aims to move one of these candidates forward in consumer testing by the end of 2016. In vitro, the compounds have shown a high potency and dose-dependent lowering of the messenger RNA expression of the enzymes, thereby holding the potential to impact alterations in skin tone, texture and pigmentation. Tests to date in monolayer cell cultures and culture human skin equivalents confirm their effect on messenger RNA. RXi plans to move these compounds, which both hold IP protection through at least 2029, on an expedited cosmeceutical development path with the aim to launch at least one on to the market through multiple partnerships, in and around 2019. Potential cash inflow received from the out licensing of the treatments would be earmarked for the funding of later-stage trials of existing clinical compounds in development.

RXi is developing RXI-231 – targeting tyrosinase – to improve skin appearance. Tyrosinase is the key enzyme involved in melanin synthesis, providing color to hair and skin. As shown in Exhibit 1, RXI-231 has shown a visible reduction of pigmentation in melanocytes in human epidermis tissue cultures, also displaying 100-fold potency over well-known skin lightening agent, kojic acid (marketed by Unilever, which registers annual global sales of more than $1bn per year). Collagenases are enzymes that break the peptide bonds in collagen. RXI-185, targeting collagenase matrix metalloproteinase-1 (MMP-1), has been selected for its potential in skin improvement/anti-ageing. Collagen reduces naturally in the ageing process or due to sun exposure eventually leading to wrinkles. Reduced collagen also causes acne scarring. RXI-185 therefore holds the potential to improve the appearance, texture and elasticity of the skin. RXi is focused on working on a topical delivery for both RXI-231 and RXI-185 and evaluating potential alternative delivery to enhance penetration past the skin surface to reach the lower layers of the epidermis and improve absorption in the skin for further impact.

The cosmeceutical development path to market is potentially much shorter than that for therapeutics. Cosmeceuticals are not intended to treat or prevent disease and the regulatory requirements are less rigorous with in vitro lab work only required – no animal data – before human testing. The human testing process normally entails specific evaluation methods such as Chroma Meters to look at the degree of pigmentation or elasticity measurements of the skin to monitor changes over time. RXI-213 and RXI-185 are in functional safety testing and will move to consumer testing thereafter. Following product optimization, RXi anticipates the potential commercialization toward the end of the decade.

RXi estimates the total worldwide market for higher-end skin improvements, which includes retinols and other pigmentation products, at ~$2-3bn and growing 10% a year. Given the high potency of RXi’s compounds, distributors would initially target the premium cosmetic segment for anti-wrinkle, skin laxity, uneven skin tone and pigmentation. Consistent with other premium branded skin products, management indicates initial pricing of its treatments to the consumer would average $400-500 for a one-year supply. Thereafter, further branding would likely follow into lower priced market segments following industry precedent, eg Johnson & Johnson (J&J) RoC retinol originally sold in department stores, before cascading down market via the Neutrogena brand, and then arriving at supermarkets as Aveeno. For forecasting purposes we consider J&J’s anti-ageing cream, retinol, an apt comparator; under its various brands it commands annual revenue of ~$150m. Assuming the launch of just one of RXi’s lead compounds in 2019, we conservatively forecast peak sales of RXI-231 and RXI-185 around 25% of the retinol level, with a gradual build out of brands until patent expiry in 2029. RXi is exploring options for internal or collaborative development paths having received multiple requests from potential partners. Potential partners include large consumer goods companies such as Unilever, P&G, J&J and Shiseido and commercialization would likely span geographic regions. As guided by management we anticipate RXi will receive one-time milestones of ~$2m from each of several distributors based on prior similar industry collaborations. RXi management believes that royalties on sales to distributors of 3-5% are realistic based on industry norms.

Management also reports multiple potential follow-on compounds targeting tyrosinase and collagenase as possible candidates for development on a therapeutics path, which may be used through prescription in multiple areas such as ageing disorders, arthritis and blistering skin complaints.

RXi looks well positioned to move RXI-231 and RXI-185 forward on a cosmeceuticals path given considerable prior managerial experience in the commercialization of cosmetic products. CEO Geert Cauwenbergh has the background and expertise to help bring these programs forward, having worked a number of years for J&J in charge of developing the skin care franchise for the beauty and cosmetic consumer.

RXi continues to progress its therapeutics pipeline, which is principally developed through its own self delivering RNAi platform. Two key trials were initiated in recent months: a Phase I/II with RXI-109 in ophthalmology and Phase II for the in-licensed Samcyprone in cutaneous warts. Additionally, RXi is moving forward with its Phase II trial for RXI-109 in hypertrophic scarring having identified best dosing (5 milligrams per centimeter of incision length) and now exploring six-month treatment regiments (previously three months) recognizing that extending the dose will support a more sustained response during the primary period of scar formation. Six-month data are anticipated in mid-2016 and fully study results expected in mid-2017.

In November 2015 RXi announced the start of a Phase I/II trial evaluating the safety and clinical activity of RXI-109 for retinal scarring, a common and damaging effect of multiple retinal diseases including wet age-related macular degeneration. The initial study, RXI-109-1501, is a multi-centered dose escalation trial in wet age-related macular degeneration (wet AMD). A small number of patients are receiving four doses of RXI-109 at one month intervals administered by intravitreal injection in one eye with evaluation for safety and tolerability utilizing assessment monitoring ocular health and visual acuity. First dosing will be followed by a four-month observation period to assess ocular health. Two patients have been dosed to date without safety issues, with one receiving all four doses and one three doses. A second cohort is planned to start in the coming weeks. Criteria on enrolment is stringent including a requirement that patients have some level of retinal scarring enabling an evaluation of any effect by RXI-109 on the rate of growth of the scar. RXi indicated at the time of its 2015 full-year results that preliminary safety read-outs for the trial are expected in the second half of 2016.

AMD is a leading cause of vision loss in people aged over 65 and represents a significant market opportunity. Anti-VEGF treatment (Lucentis, EYLEA at ~$2bn in 2015 sales) and photodynamic or laser surgery can stabilize or improve vision, however, scar formation after treatment has been identified as one of the main causes of the loss of visual acuity. The RXI-109 is in testing as a supplement to Anti-VEGF treatment. We forecast peak sales potential for RXI-109 in AMD of $1.3bn in 2030 assuming 25% market penetration. Our forecast for RXI-109 in ocular indications is limited to revenue for treatment in wet AMD only. However, we point to its much larger potential when including other possible ocular diseases where sub retinal fibrosis is a component including proliferative vitreoretinopathy (PVR) and proliferative diabetic retinopathy (PDR).

In late December RXi announced the formal start of a Phase II trial evaluating the safety and efficacy of topical gel, Samcyprone, on cutaneous warts – benign epidermal tumors caused by the human papillomavirus (HPV). The multi-center and multi-dose trial, named RXI-SCP-1502, will evaluate 40 subjects with at least one cutaneous, plantar or periungal wart for a minimum of four weeks. Following sensitization treatment (on the inner arm), subjects will receive 10 weekly treatments and evaluated on an Investigator’s Global Assessment Score (IGAS) and wart measurement with the goal of complete eradication of the wart and a return of the skin to normal appearance. RXi management expects the trial to be fully enrolled by end 2016 with early read-outs anticipated in H216, enabling a safety database to support investigator sponsored trials in added indications.

RXI licensed in Samcyprone, a proprietary ointment formulation of the topical immunomodulator diphenylcyclopropenone1, early in 2015. The gel works through the initiation of a T-cell response by altering the expression of multiple genes and miRNAs in the immune response. The clinical program focuses on viral warts and augments ongoing trials by independent investigators in alopecia areata (baldness) and in cutaneous metastases of malignant melanoma, an indication with orphan drug status. Other potential indications for Samcyprone include actinic keratosis, basal-cell carcinoma, squamous-cell carcinoma and cutaneous metastasis of non-melanoma cancers. Our model includes peak sales for Samcyprone of $177m in 2027 in hard-to-treat warts only at 50% penetration.

Our valuation, at $107.2m or $16.5 per share, moves up from $91m or $14.0 per share ($11.7 per diluted share) since our last report of 3 November and is based on an NPV of lead pipeline projects, applying Edison’s standard 12.5% discount. We now include a value for one cosmeceutical compound (RXI-231 or RXI-185) in our formal valuation assuming a risk adjustment of 20% given the need for functional safety testing ahead of trials in humans, but also the potential faster and less complex approval process for these compounds. Our risk adjustments move up for Samcyprone from 20% from 30% and for RXI-109 in AMD from 5% to 10% on the start of their respective Phase I and Phase II trials. Rolling forward our DCF by one quarter causes marginal changes to our valuation.

Our forecasts remain largely unchanged since our last review of the company. RXi reported full-year and fourth-quarter results on 30 March, with a net loss of $2.6m in Q4 fully in line with our expectations. The company maintained its lean operating structure in 2015, reporting R&D expenses of $1.7m in Q415 (vs $1.6m in Q415) and SG&A of $0.9m in Q415 (vs $0.8m in Q414). We estimate that RXi has a cash runway extending into the latter part of 2016 based on cash holdings of approximately $10.6m at December 2015. Additionally, RXi has $10.7m available from an outstanding equity line. The cash runway would also be extended if share rights issued in conjunction with its equity fundraising in 2015 are exercised which, at an option price of $0.46, could yield funds of up to $5.7m. 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, management has also pointed out potential business and corporate development options to strengthen the company’s financial position with hope of additional information in the coming months.

RXi said in March that the company issued a proxy to request permission from shareholders to initiate a reverse split to establish the minimum Nasdaq listing requirement of a share price of at least $1 per share. On 15 April the company announced a reverse stock split of its shares of common stock at a ratio of 1-10 effective 18 April. The share split was carried out in order to ensure a per share trading price of at least $1.00 (for ten consecutive days) in accordance with Nasdaq requirements. Management cited the importance of the Nasdaq listing in its ability to further business and corporate development initiatives.