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Planned RXi Spinout Triggers Lawsuit from Investment Group


By Doug Macron

RXi Pharmaceuticals' spinout from parent firm Galena Biopharma has raised the ire of investment group Hudson Bay Master Fund, which last month alleged in a lawsuit that Galena has failed to meet its obligation to protect the value of its investment following a series of securities sales.

In a recent filing with the US Securities and Exchange Commission, Galena said it has “valid defenses” against the charges and that it will “defend the claims vigorously.” Company officials were not available for additional comment due to the observation of a regulatory quiet period related to the spinout of RXi.

Hudson Bay is seeking, among other things, a payout of roughly $1.4 million from Galena.

RXi was created in 2007 as a pure-play RNAi drugs spinout of CytRx, which aimed to focus on small molecules and other therapeutic technologies, and went public on the Nasdaq the next year. Earlier this year, RXi announced that it was merging with private peptide immunotherapy firm Apthera (GSN 4/7/2011).

Through that deal, Apthera's CEO took control of the merged company and moved Apthera's lead drug candidate to the front of RXi's pipeline, while cutting back on much of the firm's RNAi drug-development efforts.

Shortly thereafter, RXi announced that it was changing its name to Galena and shifting all RNAi programs over to a subsidiary that would retain the RXi name (GSN 9/29/2011). Galena, which is keeping RXi's Nasdaq listing, also said that the RXi subsidiary would be spun out by the end of the year as a new company publicly traded on the over-the-counter market.

As part of the process, 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. While Galena has touted the transaction as key to ensuring that RXi has funds to advance its lead RNAi candidate toward the clinic, Hudson Bay charged in its lawsuit that it gives Galena's “former principal and most valuable asset to … institutional investors for nominal consideration.”

It also values Galena stock at less than what Hudson Bay would pay upon the exercise of warrants purchased from RXi prior to the restructuring. The investment group argued that provisions of its deal with RXi require the company to make good on the loss of value in its investment.

Hudson Bay said that in 2007 it purchased CytRx securities, but that its investment deal did not include “adequate protection” against dilution and changes in value caused by events such as a merger, spinoff, or change of ownership.

Thus, when CytRx spun out RXi, “Hudson Bay's investment was significantly depreciated and [the firm] lost its right to participate in the upside of the assets and technology transferred to RXi,” according to the lawsuit.

Seeking to tap the potential value in RXi's RNAi assets but not repeat its mistake, Hudson Bay said that it decided to participate in RXi's public securities offering from earlier this year (GSN 3/3/2011), but with the caveat that if RXi sold new securities at a price lower than the $1 exercise price of the warrants it purchased, it would have to adjust Hudson Bay's exercise price to reflect the lower amount.

Hudson Bay said that it was also given the option to demand RXi repurchase the warrants sold in the event of a predefined “fundamental transaction,” such as the planned spinout.

About a month later, RXi undertook another public offering, and Hudson Bay said that it agreed to exchange its warrants from the previous offering for new warrants, again with the same protective terms as before. Through that deal, the firm acquired and continues to hold a warrant to buy 1.93 million shares of RXi common stock at $1 per share, it said.

Hudson Bay noted in its lawsuit that as part of its effort to spin out RXi, Galena signed an agreement to sell $2.5 million of its stock to certain investors. However, this deal was later amended, lowering the price of the shares to $455,000, valuing the stock at $0.65 per share, which is “substantially lower than the purchase price of $1 per share offered by RXi” under Hudson Bay's warrants.

Because Galena is the “successor in interest to RXi,” it assumes RXi's duties and responsibilities under its warrants, the lawsuit states.

Hudson Bay said that it had originally requested that Galena adjust the exercise price of its warrants from $1 to $0.65 a share, but in October Galena “claimed that the [merger with RXi] did not trigger the anti-dilution adjustment under the warrant.”

Galena also refused to repurchase the unexercised portion of the warrant, which is valued at $1.37 million.

In an e-mail provided to the court by Hudson Bay, Galena officials agreed to adjust the exercise price of Hudson Bay's warrants to $0.65, conceding that the wording of the warrants is “ambiguous.” However, Galena requested that the request to repurchase the warrants be retracted.

Hudson Bay said that it undertook settlement discussions with Galena, but that these “proved futile.”

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