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Galena Faces Second Investor Lawsuit over Planned RXi Spin Out

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By Doug Macron

Galena Biopharma has been hit with another lawsuit by a group of investment firms alleging that the company's plan to spin out its RNAi drugs subsidiary RXi Pharmaceuticals unfairly devalues securities they purchased during a series of public offerings.

Last week, three investment groups — Tenor Opportunity Master Fund, Aria Opportunity Fund, and Parsoon Opportunity Fund — filed a lawsuit in a New York District Court, charging Galena with failing to meet its contractual obligations to protect the firms' investments from dilution and exchanging the warrants they purchased for cash.

The plaintiffs are seeking, among other things, damages of at least $1.5 million from Galena. The suit comes less than a month after another investment group, Hudson Bay Master Fund, sued Galena for $1.4 million for similar claims (GSN 12/22/2011).

RXi was created in 2007 as a spinout of CytRx, which wanted to focus on small molecules and other technologies, and went public the next year. The company's run at independence ended in mid-2011, however, when it merged with private peptide immunotherapy firm Apthera (GSN 4/7/2011).

As part of that transaction, Apthera's management took the reins of the combined company and sharply scaled back its RNAi drug operations, although it said it remained committed to the gene-silencing technology. A few months later, the firm announced that it was changing its name to Galena, and would shift all of its RNAi research and development into a subsidiary that would retain the RXi name (GSN 9/29/2011).

Galena also said that it would hold onto RXi's Nasdaq listing and spin out the RNAi subsidiary as a public company trading on the over-the-counter market as a penny stock (GSN 12/15/2011).

As part of this restructuring, Galena entered into a deal to sell 83 percent of the new RXi for $9.5 million, as well as $2.5 million in Galena stock, to institutional investors Tang Capital Partners and RTW Investments.

The company touted this $12-million transaction as a means to ensure that RXi, which would receive $1.5 million of the money paid for Galena stock, had enough resources to advance its lead RNAi drug candidate through the clinic. But in their lawsuit, Tenor, Aria, and Parsoon charge that it was done without “any third-party appraisal as to the fair market value” of the stock covered by the arrangement.

“As part of this single integrated transaction, Galena is effectively transferring the majority of its RXi RNAi therapy business, its former principal and most valuable business asset, and significant capital, to the investors for nominal consideration,” the investment groups alleged.

Echoing claims made by Hudson Bay in its lawsuit, the three firms said that they had purchased CytRx warrants prior to the RXi spin-out, but failed to make sure they had obtained “adequate protection” against dilution caused by additional stock issuances or the right to require the redemption of the warrants for cash.

When CytRx created and spun out RXi, CytRx's stock and warrants “were significantly depreciated,” according to the newest suit.

Aiming to tap the market potential of RNAi but not repeat their mistakes, the plaintiffs twice invested in RXi — once in 2010 buying warrants with a $6-per-share exercise price, and again in 2011 buying warrants with a $1-per-share exercise price — but made sure the transactions included anti-dilution provisions, as well as options giving them the opportunity to demand that RXi repurchase the warrants at a fair-value price in the event of a “fundamental transaction” such as a merger, spinoff, or change of ownership.

The suit charges that the Apthera merger counts as a fundamental transaction since it “represented a clear shift in the company's strategy” and change in management. In addition, Galena became the “successor in interest to RXi,” and thus assumes all of RXi's duties and responsibilities.

According to the latest lawsuit, shortly after Galena closed the deal with Tang and RTW, the parties amended their deal and reduced the price for Galena stock from $1 to $0.65 a share — “substantially lower than the purchase [prices] ... offered by RXi, now Galena” to the investment groups in 2010 and 2011 investment rounds.

The plaintiffs said in their lawsuit that they asked Galena for an appraisal of the transaction with Tang and RTW, as well as an anti-dilution adjustment of their warrants, which the company refused to perform. They added that Galena also rejected their request to redeem their warrants for cash, “thereby breaching its contractual obligations.”

Officials from Galena were unavailable for comment since the company is currently in a US Securities and Exchange Commission-mandated quiet period related to the planned RXi spin-out.


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