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SEC Filing Indicates RXi Will Trade as 'Penny Stock,' Face Alnylam IP Challenge


By Doug Macron

Galena Biopharma last week took another step toward spinning out its RNAi drugs subsidiary RXi Pharmaceuticals into a separate publicly traded company, filing a preliminary prospectus for an RXi stock offering with the US Securities and Exchange Commission.

While the prospectus did not include specific details regarding the number of shares or when they will be distributed, it did suggest that RXi will be facing an uphill climb as it moves forward on its own. Notably, the SEC filing indicated that the company's shares will likely be deemed a “penny stock,” which limits their ability to be traded.

The filing also suggested that RXi could face a legal challenge from RNAi kingpin Alnylam Pharmaceuticals, which warned that RXi is infringing its intellectual property.

Established in 2007 as a spinout of CytRx (GSN 1/11/2007), RXi went public in 2008 on the Nasdaq Exchange. It operated as an independent RNAi therapeutics developer until early this year, when it acquired private immunotherapy firm Apthera (GSN 4/7/2011).

Through that transaction, Apthera's CEO Mark Ahn took over as RXi's president and CEO. The newly combined company also pushed Apthera's lead drug candidate, the phase II cancer drug NeuVax, to the forefront of RXi's pipeline and cut back on RNAi-related research and development, maintaining a single drug candidate in the preclinical anti-scarring agent RXI-109.

At the time, Ahn said that the new RXi remained committed to RNAi as a therapeutic modality, and characterized the acquisition as a bid to diversify the company.

However, less than six months later, RXi announced that it was changing its name to Galena and that it was pushing its RNAi operations into a new subsidiary that would retain the RXi name and eventually be spun out (GSN 9/29/2011). Ahn said that this change in course was made to address concerns over investors undervaluing the immunotherapy and RXi platforms.

As part of the move, Galena would retain RXi's Nasdaq listing. Institutional investors also agreed to buy $9.5 million in RXi preferred stock, which will convert into 83 percent of the firm's equity upon completion of the spinoff process. An additional eight percent of the stock is to be distributed to Galena shareholders on a one-for-one basis, while Galena itself will retain four percent.

The remaining equity will go to Advirna, a privately held company that licensed key RNAi technology to RXi and is co-owned by RXi CSO Anastasia Khvorova.

Based on RXi's recent SEC filing, it appears that the effort is well underway. However, it seems that RXi might not be in as financially strong a position as it was prior to the Apthera acquisition.

Ahn said in September that the institutional investment into RXi, which includes the stock purchase and a commitment for a $1.5 million loan, would give the RNAi shop funds enough to operate into 2013, covering the company as it moves toward its goal of moving RXI-109 into a phase I/II trial in 2012 while maintaining its ongoing collaborations.

However, in last week's SEC filing, RXi indicated that this money will only carry it until the end of next year, at which point it will need to find additional financing.

But doing so may prove tricky. RXi said in the filing that its shares will not trade on the Nasdaq as they did before. Rather, they will list on the over-the-counter market, which is expected to result in a “limited market” for the stock. Additionally, “it is likely that … our common stock will be deemed to be a penny stock,” which requires additional disclosure by broker/dealers in connection with any trades involving the securities.

“The additional burdens imposed upon broker-dealers by such requirements could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of the common stock and the ability of holders of the common stock to sell their shares,” RXi noted in the filing.

RXi may also be facing an IP challenge from Alnylam, which it said has issued a letter stating that RXi requires a license to its patents and patent applications.

“We understand that other companies working in the RNAi area have received similar letters from Alnylam,” RXi said. “Although we believe, based on the advice of our patent counsel, that our current and planned activities do not infringe any valid patent rights of Alnylam, there is no assurance that we will not need to alter our development candidates or products or obtain a license to Alnylam’s rights to avoid any such infringement.”

Officials from RXi did not return a request for comment.

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