December 20, 2013 - 11:15pm EST by
2013 2014
Price: 2.97 EPS $0.00 $0.00
Shares Out. (in M): 36 P/E 0.0x 0.0x
Market Cap (in $M): 107 P/FCF 0.0x 0.0x
Net Debt (in $M): -16 EBIT 0 0
TEV ($): 91 TEV/EBIT 0.0x 0.0x

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  • Pharmaceuticals
  • Spin-Off


Rxi Pharmaceuticals, an April 2012 spinoff from Galena Biopharma (GALE), is developing drugs based on their messenger RNA interference (RNAi) technology.  RNAi- based drugs represent an entirely new class of drugs with not a single such drug currently FDA approved despite billions of failed R&D dollars.  Rxi has just one drug, anti-scarring drug Rxi-109, in clinical trials with their remaining candidates still pre-clinical.   RNA interference technology has “gold mine” potential, however, as it allows drugs to "turn off" or reduce expression of individual genes. Over-expression is the root cause of many serious and currently untreatable diseases like ALS, liver disease, macular degeneration, and retinoblastoma among many others.   Rxi Pharmaceuticals has a technology that delivers the RNAi drug across cell walls without toxicity, overcoming the primary obstacle that caused numerous other RNAi -based drugs developed by numerous other companies to fail.  This technology represents one of the leading, if not the leading platform, for development of potentially numerous RNAi-based drugs.  I'm not a biotech expert and wouldn't touch this except that there has been buying this year by some first-rate biopharma investors with remarkable investment track records and/or insider knowledge.  While the fully diluted market cap is over $100 million, less than $20 million is in the public float (from the spinoff) and the company has not yet achieved a Nasdaq listing.  Rxi Pharmaceuticals runs "under the radar" as it isn't investable for funds of significant size.  It trades about $150K per day on average, however, suitable for individual investors and small funds that might wish to speculate.  Furthermore, the stock trades significantly lower than the purchases (most at $4.35) made earlier this year by the successful bio-pharma investors.  Finally, I'll note that there is tremendous tax-loss selling pressure this year as many investors have big gains to offset. Rxi trades at less than 30% of its high for the year and the stock has been very weak despite apparent good progress at the company.


Dr. Craig Mello was awarded a Nobel Prize in 2006 for the discovery of the naturally occurring RNA interference mechanism some years earlier in collaboration with Dr. Andrew Fire.  Publically traded bio-tech CytRx (CYTR) began an internal program with Dr. Mello as an adviser to develop RNAi technology and then formed a subsidiary in January, 2007.   The subsidiary was spun off to shareholders in 2008 as Rxi Pharmaceuticals.  In 2011, Rxi acquired Apthera and changed their name to Galena Biopharma (GALE) to focus their limited funds on the acquired cancer vaccine Neuvax.  Galena’s progress on the cancer vaccine has been good and Galena’s stock is up multiples so the focus on cancer doesn’t necessarily reflect poorly on the RNAi prospects.  On April 27, 2012 Galena  spun off their RNAi assets again under the name Rxi Pharmaceuticals.  To finance Rxi Pharmaceuticals operations, convertible preferred shares were sold primarily to Tang Capital Partners and RTW Investments.  This convertible preferred continues to represent the majority (about 24 million out of about 36 million) of diluted shares outstanding.  About 8% of the shares at the time were spun off to Galena Biopharma shareholders.   A number of shares were retained by Galena Biopharma who has since sold some but retains more than 1 million.


CEO Geert Cauwenbergh was a Johnson and Johnson executive for 23 years including the position of Global Head R&D for Dermatology & Skin Care.  He notes in an interview that he learned good processes at J&J  but eventually felt suffocated by the system.  In his later years at J&J he was responsible for spinouts and felt he could manage the little companies he was spinning out himself.  He left to form Barrier Therapeutics in 2001 on $74 million in venture capital money, took it public in 2004, and sold it for $148 million to Stifel Laboratories in 2008.  He ran Rhei Pharmaceuticals HK Ltd. for two years before selling the company.  He formed Phases 123 LLC, a company focused on identifying high potential health care technology platforms and emerging health care companies.  He was hired by a hedge fund (I presume Tang Capital and/or RTW Investments to be discussed later) to perform due diligence on the RXi Pharmaceuticals spinoff prior to their investment.  He spent three months studying the company and stated in an interview

"At the end of three months of research into RXi, the hedge fund asked me what I wanted to do. They said, 'If you don't stay, we won't invest.' And I told them that I was not going anywhere. I had previously thought that RNAi was a graveyard, but after reviewing RXi's animal studies and the results that another firm, Excaliard, had achieved, I concluded that RXi's technology was actually getting inside the cell — meaning that it could turn off the functioning of disease-causing genes. It had the potential to be a gold mine."


Genes in the cell nucleus have the code for production of proteins.  The code is transported throughout the cell by messenger RNA.  A virus will intercept this message and interject it’s own instructions.  Dr. Mello discovered in laboratory experiments that cells have a virus defense mechanism, known as RNA interference (RNAi), that recognizes the presence of a virus and represses the infected messenger RNA.  The RNA interference keeps the virus from being replicated throughout the cell.  There was great excitement early in the 2000’s decade around this discovery and Dr. Mello was awarded a Nobel prize in 2006.  Could scientists cure diseases caused by over-expression of genes by interfering with the messenger RNA similar to the body's own virus defense mechanism?  It seemed possible that any individual gene could be “blocked” by interfering with its associated messenger RNA.  Scientists could turn off any gene they wanted, or perhaps just partially turn it off by blocking only a portion of the messenger RNA.  The major drug companies launched research programs and spent billions on RNAi technology through the 2000’s decade.  By around 2008 RNAi technology was recognized as a bust.  While many compounds were developed that could block an over-expressed gene, the naked compounds could not get past the cell wall to do it.  Attaching the compound to a carrier that could get it across the cell wall often caused toxicity.  The major drug companies shut down their RNAi R&D and there was quite a stigma attached to it.  Note in the quote above from Rxi’s current CEO that he thought that RNAi was a “graveyard”.

But the Rxi researchers took a different path.  Rather than identifying compounds that could block disease-related gene over-expression, they focused first on the delivery problem.  How could they get compounds across the cell wall without toxicity?  The result is described in their most recent 10-K.

“By utilizing the expertise in RNAi and the comprehensive RNAi platform that we have established, we believe that we will be able to discover and develop lead compounds and progress them into and through clinical development for potential commercialization. Our proprietary therapeutic platform is comprised of novel RNAi compounds, referred to as rxRNA® compounds, that are distinct from, and we believe convey significant advantages over, classic siRNA (conventionally-designed “small interfering RNA” compounds), and offer many of the properties that we believe are important to the clinical development of RNAi-based drugs. We have developed a number of unique forms of rxRNA® compounds, all of which have been shown to be highly potent both in vitro and in preclinical in vivo models. These RNAi compounds include rxRNAori® and sd-rxRNA®, or “self-delivering” RNA. Based on our research, we believe that these different, novel siRNA configurations have various potential advantages for therapeutic use. These potential advantages include high potency, increased resistance to nucleases and off-target effects, and, in the case of the sd-rxRNA® compounds, access to cells and tissues with no additional formulation required, and, hence, reduced cell toxicity, which is known to be an issue with unmodified siRNAs.”


So Rxi’s value proposition is that they have a proprietary method to get RNAi compounds across the cell wall.  This is a possible solution to the problems that brought down billions of dollars of R&D by the major pharmaceutical companies.  So there are companies that spent a lot of money developing these compounds and then abandoned them because they couldn’t get the compounds into the cells.  Can Rxi get those compounds into the cell?  Well they sure are going to try.  In fact, in March of 2013 they bought a dozen compounds and related intellectual property from Opko Health’s failed RNAi program for 1.67 million shares and future milestone payments and royalties.  Opko was primarily working on diseases of the eye.  This choice of target is consistent with Rxi’s strategy of focusing on organs that are easily accessible.  They can get the compound across the cell wall, but getting the compound to the cell through the blood stream  presents additional problems that they don’t want to tackle initially.  Their initial focus is on drugs that can be injected directly into the eye, skin, central nervous system, lung, and tumors.  They do, however, have systemic delivery systems and a pre-clinical compound to treat fibrosis of the liver.

Skepticism about RNAi technology remains high.  Managers at the major drug companies have already been burned by their own failed RNAi programs.  Rxi will have to convince them with clinical trials before there will be interest in partnering.  And Rxi must partner as they do not have the resources to bring a drug to market.  Their current cash is projected to run out in the 2nd quarter of 2015.  Their lead compound developed internally is RXI-109 which reduces scarring in the skin following surgery or trauma.  Phase 1 trials showed no toxicity, very minor side effects, and 50% knockdown of connective-tissue growth factor (CTGF) whose over-expression is known to play a role in scarring.  This is more effective than a similar RNAi anti-scarring drug, Excaliard, that Pfizer purchased for roughly $200 million following successful phase 2 trials.  Phase 2 trials for RXI-109 have begun with results expected to come in throughout 2014.  Successful phase 2 results will likely result in partnering or the sale of RXI-109 with CEO Cauwenbergh hoping for a price similar or higher than Excaliard's.  Importantly, successful trials of RXI-109 will build credibility with the Pharmaceutical companies for partnering on other RNAi compounds and possibly more transfer of failed compound deals like the one with Opko.   With some early success Rxi could be partnered with a number of drug companies advancing numerous drug candidates.


Insider Buying

So this is all very interesting to a laymen.  But I have no expertise in bio-tech and wouldn’t even be aware of this company except that I followed it after a spinoff.  But I’ve taken a small speculative position here because there is big upside and other smart bio-tech investors have purchased shares at higher prices.

On March 7, 2013 Rxi announced a $16.4 million private placement of shares at a reverse-split adjusted price of $4.35.  These funds are expected to be adequate to complete phase 2 clinical trials of the company's lead drug, anti-scarring RXI-109.  Participating in the placement were previous holders Tang Capital and RTW Investments and new investors Broadfin Capital, billionaire Philip Frost's company, Opko Health, and Dr. Frost's personal investment vehicle Frost Gamma Investments.

Tang Capital is run by Kevin Tang.  He describes his background in proxy fight documents with Penwest in June of 2010.

 Kevin Tang, who you elected last year, is the founder and manager of Tang Capital, an investment company focused on the biopharmaceutical industry with an established record of delivering superior returns to its investors. Since its inception on September 3, 2002 through May 28, 2010, Tang Capital has generated a total return, net of all fees and expenses, of 520%, for an annualized rate of return of 26%. Mr. Tang has nineteen years of experience evaluating biopharmaceutical companies in his current capacity as a portfolio manager and his prior capacity as a biotechnology analyst. He has considerable experience governing biopharmaceutical companies as a board member and currently is a director of A.P. Pharma, Inc. (NASDAQ: APPA) and Ardea Biosciences, Inc. (NASDAQ: RDEA), which he co-founded in 2006.

Dr. Roderick Wong founded RTW Investments, LLC, in 2010 and serves as its Chief Investment Officer and Managing Partner. RTW specializes in a long-short equity strategy focused on the health care industry. From March 2005 to January 2009, Dr. Wong worked for Davidson Kempner Capital Management LLC where he served as Managing Director and Portfolio Manager for the Davidson Kempner Healthcare Funds from inception. Under his leadership, healthcare assets under management at Davidson Kempner grew to approximately $750 million. Previously, Dr. Wong worked at Sigma Capital Management, an SAC Capital company, as a Healthcare Analyst and also on the Biotechnology equity research team at Cowen & Company. Dr. Wong graduated from the University of Pennsylvania Medical School, received his MBA from Harvard Business School, and graduated Phi Beta Kappa with a B.S. in Economics from Duke University. Dr. Wong also serves as an Adjunct Assistant Professor at the New York University Stern Business School and as a board member of Penwest Pharmaceuticals, a publicly traded specialty pharmaceuticals company.

This link (http://www.swaprent.com/files/HFA041410.pdf) describes a very successful track record while growing assets at Davidson Kempner Capital Management before starting his own hedge fund where he has continued to be successful.


And from Forbes website, some information on Phillip Frost.

“Pharma industry veteran Phillip Frost has stakes in more than a half-dozen firms, including diagnostics and drugmaker Opko Health, with a 42% stake worth $1.2 billion. A former dermatology professor, he got his start in pharma in the early 1970s when he took over Key Pharmaceuticals with partner Michael Jaharis (also a Forbes 400 member) to develop generics and veterinary products. They sold to Schering-Plough in 1986. Frost then founded Ivax and sold it to Teva Pharmaceutical Industries for $7.6 billion in 2005; he is still chairman of the generic drug leader.”

Philip Frost is active as an investor including stakes in a number of microcaps.   Dr. Frost is a self-made billionaire with an outstanding track record of successful investments.  This Seeking Alpha articles describes some of his big winning investments and suggests he should sit aside Warren Buffet, Steve Jobs, and Bill Gates as one of the most successful businessmen in America  (http://www.trefis.com/stock/teva/articles/144709/an-analysis-of-the-investment-success-of-dr-phillip-frost/2012-09-21).  Forbes estimates his fortune at $3 billion with most of that made in the pharmaceutical industry.  When his participation in the private placement was announced, Rxi stock rose to over $10 on heavy volume.  It's been slowly coming back down ever since.  While other VIC members are skeptical of his current company Opko Health (OPK see short writeup on VIC), there’s no doubt that he has been quite successful in the past with many multi-bagger investments.  He also definitely has knowledge of the drug development space.  His transfer of Opko’s failed compounds doesn’t impress me, his investment of cash into Rxi does.

Broadfin Capital celebrated its seven-year anniversary in September with a net return of 6.5% for the month—bringing its year-to-date returns to 18.4%.  Founded by Kevin Kotler in 2005, Broadfin today manages $420 million in a fundamental long/short equity value strategy focused on healthcare. Broadfin's flagship fund, the Broadfin Healthcare Fund, has delivered annualized returns of 16.5% and a cumulative return of 192%. That fund is currently closed to new investments.  Prior to founding Broadfin, Kotler ran a $10 million to $15 million healthcare portfolio for the Galleon Group, returning 24% over 13 months.  Prior to Galleon, Kotler had worked as a medical technology analyst at ABN Amro, ING Barings and UBS Securities.


So Kevin Kotler has an impressive record in health care and note also that prior to this purchase he had no other interest in this company.  Phillip Frost might have invested cash in order to secure some value for his failed drugs.  Tang and Wong already owned a huge portion of this company through their preferred stock holdings and might be willing to put in more cash to avoid bankruptcy.  But Kotler is a new investor with no other motivation other than he must perceive value at the $4.35 price.

Finally, the CEO himself, Geert Cauwenbergh, picked up small numbers of shares on the open market from July through October at prices ranging from $4.87 down to $3.09.  Directors Robert Bitterman and Curtis Lockshin also purchased token amounts around $4.

Valuation & Comparables

Tekmira Pharmaceuticals (TKM.TO) with a market cap of $152 million also has an effective platform for delivering RNAi to cells.

Rxi Pharmaceuticals has spent about $50 million on R&D through their history as of October 2013.  Adding in their existing cash of roughly $16 million gets you to $66 million in investment.  Then they own 12 compounds from Opko for which they paid 1.67 million shares at $4.35 or roughly $7.5 million for a total of roughly $73 million.   I'm not pretending that I can place a value on this company, this is a speculation, but what they have in it might be of interest.

So in Summary, Rxi Pharmaceuticals is in the words of the CEO potentially a “gold mine” and very successful and very knowledgeable bio-tech investors bought shares at prices well above the current trading price.   The public float is too small for serious bio-tech investors to pay attention, but big enough for the little guy.  Like all other early stage drug development companies this is speculative, but it’s also potentially a multi-bagger several times over.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


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