Split-focus

WORCESTER, Mass.—Looking to strengthen its strategic focus,RXi Pharmaceuticals in late September began the process of splitting into twoseparate publicly traded companies, with RXi Pharmaceuticals to carry on withthe work of RNAi-based therapeutics, and a new company, Galena Biopharma, tofocus on targeted cancer therapies.

As part of the transactions involved in separating theoperations into two public companies, institutional investors have agreed toinvest $9.5 million in RXi preferred stock and $2.5 million in Galena commonstock, for a total of $12 million. The RXi preferred stock will be convertibleinto 83 percent of the equity of RXi as of the completion of the spinoff. Theinvestment in Galena common stock will be priced "at market" based on avolume-weighted average trading price. No warrants will be issued in thetransaction.

The expectation is that approximately 8 percent of theequity in RXi will be distributed on a share-for-share basis so that a holderof one share of Galena common stock prior to the distribution will hold oneshare of RXi and one share of Galena after the spinoff. Galena will retain a 4percent equity position in RXi, and Advirna LLC, a private company and keylicensor of RXi, will acquire 5 percent of the equity. The completion of the spinoffand the related transactions, including the financing of RXi, remain subject tocertain conditions, including registration of the spinoff distribution with theU.S. Securities and Exchange Commission.

"We believe that the spinoff transaction will enhanceshareholder value by providing a sharper strategic focus for both of thecompany's key programs," Galena President and CEO Dr. Mark Ahn said about thedeal. He notes that Galena will focus its resources on its lead product,NeuVax, a cancer immunotherapy that is expected to initiate its Phase IIIPRESENT (Prevention of Recurrence in Early-Stage, Node-Positive Breast Cancerwith Low to Intermediate HER2 Expression with NeuVax Treatment) study in thefirst half of 2012. He adds that Galena also recently acquired Folate BindingProtein-E39 (FBP), a targeted vaccine to prevent recurrence in gynecologicalcancers such as ovarian and endometrial adenocarcinomas, from the University ofTexas MD Anderson Cancer Center and Henry M. Jackson Foundation for the Advancementof Military Medicine. That vaccine is scheduled to commence Phase I/II trialsby the end of 2011.

It seems clear to many market-watchers that the decision tosplit certainly had a lot to do with the introduction of NeuVax—an E75 peptidevaccine with GM-CSF adjuvant—into the pipeline. After all, it was just a coupleweeks before the announced split that RXi had received official notificationfrom the U.S. Food and Drug Administration (FDA) that the Chemistry,Manufacturing and Controls (CMC) partial clinical hold on NeuVax had beenlifted, and that RXi had satisfied all requirements specified by the FDA andhad initiated a clinical trial material manufacturing plan to remain onschedule to meet the planned trial start date.

This news led Zacks Investment Research to note, "We thinkRXi is making great progress in the advancement of its lead candidate NeuVaxfor breast cancer. We maintain our Outperform rating on RXII and reiterate our12-month price target of $2.5 per share."

Of course, that rating may not apply anymore to the futureRXi now that Galena will be carrying the cancer therapies forward—with the newcompany self-described as a "biopharmaceutical company that developsinnovative, targeted oncology treatments that address major unmet medical needsto advance cancer care." Also, investors still need some convincing in terms ofboth companies, as the share price for RXII dropped 23 percent to 76 cents pershare on the announcement. Between then and Oct. 24, when this story went topress, it had gone as high as 80 cents at times, but continued to spend muchtime in the 76-cent range.

The entire split is still very much a work in progress. TheRNAi programs have been contributed to the new RXi to be spun off later thisyear, but for a time, RXi is, in a sense, disappearing from the picturetemporarily. The new Galena Biopharma will continue to trade under the tickersymbol RXII until the completion of the spin-off, after which RXi willreportedly regain use of that symbol.

Also, Galena is based in Portland, Ore., and there is noofficial word yet on whether Massachusetts-based RXi will stay in New England,move to Oregon or be located elsewhere, though a search is underway for a newRXi CEO, given that former RXi CEO Mark Ahn is going to be heading up GalenaBiopharma. He will also serve on the boards of Galena and RXi. Reportedly, Dr.Anastasia Khvorova will serve as RXi's senior vice president and chiefscientific officer and Dr. Pamela Pavco will serve as RXi's senior vicepresident of pharmaceutical development.

Also still in progress is the online home of RXi. In lateSeptember and early October, the RXi website at http://rxipharma.com/redirected to the new Galena website, with a pop-up message titled "Thank youfor visiting the Galena Biopharma (formerly RXi Pharmaceuticals) website,"telling visitors: "On Sept. 26, we announced a change in structure and name forRXi Pharmaceuticals. Effective immediately, the new name is Galena Biopharmaand the company will focus solely on building and developing its oncologypipeline. Over the next several months, Galena will formally spin out its RNAiassets into a separate entity that has already been funded and will retain theRXi Pharmaceuticals name. At that time, a new RXi Pharmaceuticals website willbe available." The process of creating that new website already seems likely tobe well underway, as the URL no longer redirects to Galena as of late October,instead redirecting to a popup menu asking for login information.

And what of the future of RXi once it does reappear on thescene? Ahn says that "RXi will focus on advancing its lead anti-scarring andanti-fibrosis product, RXI-109, into the clinic in 2012, as well as unlockingthe therapeutic potential of gene silencing more broadly through itsproprietary, next-generation RNAi platform with several ongoing and futurepartners."

Ahn sees the split in part as a way to reduce the pain ofthe cash burn that RNAi development represents and to strengthen the balancesheet "at this uncertain time in the financial markets. We view this pair offinancings from a strong group of investors as an endorsement of both of ourplatforms and our planned path forward."

It is worth noting the splitting up and splitting off isn'tanything new for RXi. It was itself a split-off from Los Angeles-based CytRxCorp. back in 2007.