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RXi SEC Filing Sheds Light on Terms Of Split From CytRx, Reveals Financials

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Less than one year after CytRx announced that it had spun out its RNAi therapeutics assets into RXi Pharmaceuticals, the new company has registered with US regulators those of its shares that will be distributed to CytRx shareholders and employees — one of the last steps toward establishing RXi as an independent company.
 
In the registration statement, which was filed this week with the US Securities and Exchange Commission, RXi provided details on how the stock distribution is expected to occur, as well as the reasons behind the decision to separate from CytRx and its financial status as it prepares to become the latest public RNAi drugs player.
 
As first reported by RNAi News, CytRx has been planning for almost two years to spin out its RNAi drugs operations into an independent, publicly traded firm in order to better align it with competitors such as Alnylam Pharmaceuticals (see RNAi News, 11/11/2005).
 
In January, it began this process by establishing RXi as a majority-owned subsidiary, with roughly 85 percent of the new company’s stock owned by CytRx and 15 percent held by members of RXi’s founders and scientific advisors (see RNAi News, 1/11/2007).
 
In the SEC filing, RXi said that CytRx plans to distribute to its shareholders approximately 4.5 million shares of its RXi stock — about 36 percent of the spinout’s total outstanding shares — in the form of a dividend. CytRx also plans to award about 84,000 shares of RXi stock to certain of its directors, officers, and employees.
 
This will reduce CytRx’s stake in RXi to around 6.2 million shares, or 49 percent, which the company has filed to resell.
 
RXi added that it has also filed to float its stock on the Nasdaq exchange under the ticker “RXIP.” Although a fair market value has not been assigned to the stock, for accounting purposes in the registration statement the shares were given a proposed maximum offering price of $1.02 per share.
 
On the other hand, the company noted in the SEC filing that its shares were valued at about $5 per share in licensing deals as recently as April
 
CytRx shares were trading at $X.XX as of midday Thursday.
 
The closing date for the stock distribution has not been set. RXi said that it will not receive any proceeds from the distribution of its stock by CytRx.
 
Spin Cycle
 
When CytRx first said it planned to spin out its RNAi drugs operations, President and CEO Steven Kriegsman told RNAi News that he felt the firm’s RNAi assets were not being properly valued by the investment community, a situation that could be resolved by transferring them to a pure-play RNAi drugs shop.
 
“The CytRx board determined that the best strategy for realizing the potential value of CytRx’s RNAi assets was to contribute them to us,” RXi said in its SEC filing.
 
Such a move, it added, is expected to open up access to capital markets for RXi; enhance the spinout’s ability to compete with other RNAi drug developers; free its management to pursue business strategies based on its RNAi technologies; and facilitate acquisitions and collaborations with other RNAi-focused companies.
 
Additionally, RXi said in the SEC filing that its separation from CytRx will “improve investor understanding of the two companies,” which may help in tapping the public market.
 

“Some investors only invest in companies focused on particular technologies such as RNAi. [Therefore], there may be greater collective investment demand for the publicly traded shares of CytRx and us, separately, than for CytRx shares alone.”

“Some investors only invest in companies focused on particular technologies such as RNAi,” RXi said. Therefore, “there may be greater collective investment demand for the publicly traded shares of CytRx and us, separately, than for CytRx shares alone.”
 
Revealing Position
 
RXi’s SEC filing also revealed the company’s financials for the six months ended June 30, including a 463 percent rise in net loss in the six-month period ended June 30 to $6.2 million from $1.1 million in the same period a year earlier.
 
Contributing to the increase in losses was a rise in research and development spending to $4.5 million in the first half of the year compared with $907,000 in the same six months of 2006 amid start-up costs related to the establishment of RXi’s facilities in Worcester, Mass.
 
Collaboration fees to the University of Massachusetts Medical School and Cold Spring Harbor Laboratory also pushed R&D expenses up.
 
CytRx has established a number of deals with UMMS, all of which were transferred to RXi, including sponsored-research partnerships in ALS and human cytomegalovirus (see RNAi News, 1/16/2004), as well as various exclusive and non-exclusive RNAi licensing agreements pertaining to cancer, diabetes, obesity, certain neurodegenerative diseases, and delivery technologies.
 
In March, RXi obtained a non-exclusive license to shRNA technology developed by CSHL researcher and RXi co-founder Greg Hannon for research and therapeutic applications (see RNAi News, 3/22/2007). In its SEC filing, RXi said that it paid $50,000 up front under the arrangement, and has agreed to pay milestones and royalties.
 
Also contributing to the rise in R&D costs was non-employee stock-based compensation to scientific advisors and consultants, RXi noted.
 
General and administrative expenses in the first six months of 2007 jumped to $1.7 million from $155,000 in the same period the year before, again related to the costs associated with setting up RXi as its own company.
 
RXi recorded zero revenues in the first six months of 2007 and said it does not expect to generate any revenues for the foreseeable future as a development-stage company
 
As of June 30, RXi had cash and cash equivalents totaling approximately $15 million. The company said it expects to be able to fund its currently planned level of operations through the first quarter of 2009.
 
As it still remains majority-owned by CytRx, RXi noted in its SEC filing that its financial results have been “carved out” of the financial statements of CytRx and include both direct and indirect expenses. Indirect expenses, it added, represent expenses incurred by CytRx on behalf of and transferred to RXi.

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