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As Expected, CytRx Will Spin Out Its RNAi Drug Operations; Can It Find the Cash to Do It?

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CytRx will spin out its RNAi-drug programs into a separate business after an internal analysis of its business concluded that the technology could gain better traction in the marketplace if it is developed outside the company, CytRx said this week.

CytRx said that it will transfer all of its RNAi therapeutic assets into a new subsidiary, which is expected to be established "in the coming months … subject to obtaining financing." The company said it anticipates owning a "significant" stake in the new firm.

"A thorough analysis of our corporate structure and current valuation led us to conclude that repositioning our RNAi technology could substantially accelerate the movement of … RNAi drug candidates into the clinic," CytRx President and CEO Steven Kriegsman said in a statement.

The disclosure comes less than three months after Kriegsman told RNAi News that the company was considering spinning out the business (see RNAi News, 11/11/2005). However, it is unclear how CytRx will finance the move — especially since the company has only enough cash to sustain its current programs into the second quarter, according to a recent filing with the US Securities and Exchange Commission.


"A thorough analysis of our corporate structure and current valuation led us to conclude that repositioning our RNAi technology could substantially accelerate the movement of … RNAi drug candidates into the clinic."

From Frontrunner to Backbencher

After undergoing a corporate reorganization in 2003, CytRx became an early mover in the RNAi field, acquiring key intellectual property from the University of Massachusetts related to the use of siRNAs as human therapeutics for indications including obesity, type II diabetes, and amyotrophic lateral sclerosis.

The company then adopted an outsourcing approach to its RNAi-drug research and development: It signed deals to sponsor research at the University of Massachusetts Medical School in the areas of amyotrophic lateral sclerosis and human cytomegalovirus (see RNAi News, 1/16/2004), and at Massachusetts General Hospital in ALS (see RNAi News, 10/17/2003).

The company's only RNAi drug candidate, an siRNA targeting RIP140, a ligand-dependent transcriptional repressor linked to fat burning, is covered by IP licensed from Imperial College London (see RNAi News, 5/28/2004).

Additionally, CytRx has an agreement with UMMS under which the school will disclose any new technologies it develops until mid-2007 pertaining to RNAi, diabetes, obesity, neurodegenerative diseases including ALS, and cytomegalovirus (see RNAi News, 7/23/2004). CytRx has the right to acquire an option to negotiate on an exclusive basis to obtain the technology.

But CytRx's RNAi activities have taken a backseat to its non-RNAi drug programs, which are more advanced — CytRx recently began a phase II trial of the ALS drug arimoclomol, and is conducting a phase I study of a DNA/protein-based vaccine for HIV.

In a press release issued last month outlining its 2006 corporate goals, the company focused primarily on arimoclomol and its HIV vaccine, noting only that it "hopes to move a lead candidate from its RNAi therapeutics drug development program … through the development phase toward an IND submission."

A few months earlier, however, Kriegsman told RNAi News on the sidelines of the Rodman & Renshaw Techvest 7th Annual Healthcare Conference in New York that the company was considering spinning out its RNAi drug activities as a separate, publicly traded, pure-play RNAi drugs firm (see RNAi News, 11/11/2005).


CytRx "would like to create a company that will bill itself as [an RNAi specialist] as a way to play the space. … The idea would be that whenever there's excitement in the RNAi field that their spinout will be a beneficiary of it."

Now, it seems, CytRx has made the decision to go forward with the spinout, but it remains unclear how the company plans to finance the move. Shares of CytRx have been trading around $1.19, off a 52-week high of $1.85 and well off the $3.10 trading price hit in May 2003, shortly after the company announced its shift to RNAi. Furthermore, the stock only recently regained compliance with the Nasdaq Capital Market's $1 minimum bid requirement (see RNAi News, 1/5/2006).

CytRx also continues to struggle under a cash crunch. As of Sept. 30, 2005, the company had $11.2 million in cash and short-term investments, with quarterly expenses totaling about $3.5 million. CytRx said in its third-quarter report filed with the US Securities and Exchange Commission that it has working capital adequate to "operate at … currently planned levels into the second quarter of 2006."

"The company is pursuing several sources of potential capital, although it does not currently have commitments from any third parties to provide capital," CytRx noted in the SEC filing.

According to Andrew McDonald, a research analyst for ThinkEquity Partners, CytRx's financing options are limited. "They could do some highly dilutive financing and give a ton of warrants to whoever buys in on the deal. They're in a rough position — they're essentially being held over a barrel and they've got to find [willing] investors."

McDonald does not cover CytRx. He covers Alnylam, a company with which ThinkEquity has had a banking relationship, but does not own shares of the company.

Regarding CytRx's strategy of spinning out its RNAi operations, McDonald said that the company is "trying to coattail off of the success of Alnylam [Pharmaceuticals and] would like to create a company that will bill itself as [an RNAi specialist] as a way to play the space. … The idea would be that whenever there's excitement in the RNAi field that their spinout will be a beneficiary of it," he said.

Indeed, Kriegsman said in a statement that the RNAi subsidiary "will be a pure-play RNAi company and can now more easily be compared with other RNAi companies, which could materially increase CytRx's overall valuation."

McDonald, however, noted that he doesn't expect the shake up at CytRx "will help them a whole lot with investors that know the space."

Officials from CytRx declined to comment for this article.

— Doug Macron ([email protected])

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