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Galena Preps for RXi Spinout as Investor Lawsuits Proceed

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By Doug Macron

Galena Biopharma this week announced that it has taken additional steps toward its goal of spinning off its RNAi drugs subsidiary RXi Pharmaceuticals, though ongoing legal disputes with investors continue to raise questions about when, and if, the transaction will occur.

The company said that its board of directors has declared a conditional spin-off stock dividend of one share of RXi for each outstanding share of Galena. The dividend will be payable on March 8, and the distribution of RXi shares is expected to occur within 60 days.

Upon completion of the distribution, RXi will operate as a standalone company, Galena President and CEO Mark Ahn said in a statement.

Threatening this plan, however, is a series of lawsuits filed by investment groups with stakes in Galena, all of which allege that protections within securities-purchase agreements require the biopharmaceutical company to buy back millions in devalued warrants.

RXi was established in 2007 as a pure-play RNAi spinout of CytRx. Early last year, the company announced that it was merging with peptide immunotherapy firm Apthera in a bid to diversify (GSN 4/7/2011). Through that deal, Apthera's management took control of the new firm, which retained the RXi name, and cut away much of its RNAi research and development as it pushed a non-RNAi cancer therapy to the forefront.

Despite Ahn's assurances that the merged company remained “committed and focused” on RNAi, a few months later it announced that it was changing its name to Galena and that all of its RNAi assets would be moved into a new subsidiary called RXi (GSN 12/15/2011).

Notably, Galena also said it would retain RXi's Nasdaq listing and eventually spin out RXi into a separate company that would trade on the over-the-counter market as a penny stock.

Concurrent with the spinoff announcement, Galena also said that it had signed agreements with two institutional investors — Tang Capital Partners and RTW Investments — to sell 83 percent of the new RXi for $9.5 million. The firms also agreed to buy $2.5 million in Galena stock, of which $1.5 million would be passed along to RXi.

Shortly thereafter, however, Galena, Tang, and RTW amended their deal, cutting the price for Galena's stock from $1 to $0.65 a share, lowering the equity's value to $455,000. Galena was still obligated to give RXi $1.5 million.

According to court documents, this change in valuation raised the ire of certain Galena investors, who had participated in an April 2011 equity sale and held warrants for Galena stock with a $1-per-share exercise price.

Allegedly, all the investment groups asked Galena to buy back the warrants, which was their right pursuant to the terms of the April offering, but the drug developer refused.

In December, the first lawsuit over the matter was filed by Hudson Bay Master Fund, which is seeking $1.4 million in damages (GSN 12/22/2011). The next month, a group of firms — Tenor Opportunity Master Fund, Aria Opportunity Fund, and Parsoon Opportunity Fund — jointly filed similar litigation seeking $1.5 million (GSN 1/19/2012).

At the end of January, Cranshire Capital Master Fund filed suit against Galena seeking $1.3 million, and in February, Iroquois Master Fund joined the fray with a $1 million lawsuit (GSN 1/26/2012 & 2/9/2012).

Galena has not responded publicly to the suits as it has been observing a US Securities and Exchange Commission-mandated quiet period related to the planned RXi spin out. However, it has filed responses to all four complaints that deny any wrongdoing and seek the dismissal of the lawsuits.

According to the litigation, Galena is required to buy back the warrants if asked under certain conditions, including in the event of a “fundamental transaction,” such as the merger or consolidation of the company with or into another.

In responding to the suits, Galena has denied that such a transaction occurred. Company officials were not available for additional comment this week.


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