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RXII: Exploiting a Natural Mechanism: RXi’s sd-rxRNA

By John Vandermosten, CFA 



We are initiating coverage of RXi Pharmaceuticals Corp (NASDAQ:RXII) with a $20.00 price target based on our estimates for a 2023 launch of RXI-109 and a 2022 launch of Samcyprone, both through the efforts of a partner.  The clinical-stage company is focused on delivering interference RNA to silence unwanted gene transcription.  The company has two Phase II assets in scarring and wart indications; however, the more exciting work is being done in oncology and cell therapy where ex vivo treatment of a variety of cells can enhance their ability to fight cancer by downregulating checkpoints.  We see the more advanced programs as partner material which will provide additional capital to develop the oncology programs.  

RXi’s most advanced efforts are represented by two Phase II assets in dermal scarring and warts and a Phase I/II asset in an ocular indication.  The first two indications are associated with RXI-109 and the last with Samcyprone.  In December 2017, RXi provided favorable topline data for its Phase IIa trial for hypertrophic scars.  We anticipate that RXI-109 will advance to a Phase IIb then a Phase III trial in the two lead indications in 2018 and 2019 and achieve eventual approval and commercialization in 2023. We expect a similar timeline for RXI-109 in retinal scarring and Samcyprone in cutaneous warts.  In the oncology sphere, RXi acquired MirImmune in January 2017 to enhance their position in next generation immunotherapies for the treatment of cancer.  MirImmune had originally licensed RXi’s sd-rxRNA technology to enhance immune checkpoint modulation in cell therapy and this research is expected to provide follow-on development candidates in the footsteps of RXI-109.  

RXi’s technology is differentiated from other interference RNA approaches in its ability to self-deliver without the need for a viral vector, electroporation or liposome to transfect the siRNA into the cytoplasm of a cell.  The self-delivering technology has a high rate of transfection efficiency and high cell viability, making it an efficient tool for enhancing cell-based therapies that are developed ex vivo.   

On September 30, 2017, RXi held $5.4 million in cash on its balance sheet.  Capital has been raised over the last several years with public stock offerings eliminating the need to carry any debt.  We expect RXi to consume approximately $2.5 million per quarter as it continues its development work.  Including the $15 million equity line available to the company, it currently holds sufficient cash to continue into the fourth quarter of 2019.  We also anticipate $20 million of upfront payment from a partnership related to the dermal and ocular assets in 2018.

Several factors support our thesis for RXi Pharmaceuticals, including an effective and differentiated delivery method for its interference RNA which has shown high levels of transfection efficiency and positive safety data for a small set of patients.  With multiple monetizable indications in dermatology, ophthalmology and warts, RXi is in a strong position to advance its lead sd-rxRNA candidates to approval and support its developmental oncology pipeline.  


RXi Pharmaceuticals is developing its self-delivering interference RNA (sd-rxRNA) technology platform, which is able to silence the expression of proteins inside cells and thereby impact a substantially broad range of diseases.  RNAi was first discovered by Andrew Fire and Craig Mello who were researching gene expression in c.elegans.  The biological process was brought to the forefront with the award of the Nobel Prize in Medicine in 2006.  In the wake of the Prize, many companies were launched to develop interference RNA (RNAi) technology, with each claiming a different path to differentiate their platform and generate safe and effective results.  RXi emphasized its self-delivering technology which responded to one of the weaknesses inherent in RNAi.  To overcome the delivery problem, RXi combined structural features of single-stranded antisense compounds with RNAi compounds which allows for spontaneous cellular uptake and long-lasting intracellular activity.  

After developing sd-rxRNA, the company sought an indication with few alternative therapies and where the results could be clearly observed by scientists, regulators and investors.  For this reason, RXi selected scarring as a primary focus and rapidly identified the relevant gene responsible for generating scar tissue.  The result of this effort was RXI-109 which is currently being investigated in two studies for dermal and retinal scarring.  

The applicability of RXi’s sd-rxRNA platform is much broader than the scarring indication and work has been done for macular degeneration, fibrosis/scarring, cancer immuno-oncology and other indications.  The ability for RNAi to silence almost any gene of interest enables it to address almost any disease.  This flexibility combined with market and regulatory trends supporting immuno-oncology have provided the impetus for RXi to expand into this area with the acquisition of MirImmune.  The company anticipates partnering its more advanced assets with leading dermatology and ophthalmology companies to focus on developing its internal oncology efforts targeting several cellular immune checkpoints and influencing immune cell differentiation. 

While our target price is generated based on commercialization of RXI-109 and Samcyprone there may be additional indications that can be addressed with the sd-rxRNA platform and there are other candidates in RXi’s portfolio that may eventually generate revenues.  The company anticipates that it can place an oncology indication in the clinic in the next 12 to 18 months with the help of partners, at which time we will assign a value to these programs.  Our analysis does not reflect the benefit of participation in an expedited pathway offered by the FDA or EMA and assumes a Phase III trial will be required before RXI-109 and Samcyprone are approved.     

Key reasons to own RXi Pharmaceuticals:

• Versatile platform with broad applicability and differentiated delivery mechanism
• Multiple non-dilutive approaches to raise capital
   • Phase II sd-rxRNA indications in dermal scarring
   • Phase I/II sd-rxRNA indication in retinal scarring
   • One Phase II candidate in-licensed indication for warts 
   • Out-licensing opportunities for other therapeutic areas
• Development pipeline of additional sd-rxRNA assets in oncology and other indications
• Compelling safety and efficacy profile in Phase II studies
• Large end markets for warts indication
• Well-defined markets for scarring with few direct competitors
• Global rights to intellectual property

Interference RNA

Interference RNA (RNAi) is thought to have evolved as a cellular defense mechanism against invading viruses and genomic parasites.  Research suggests that the RNAi mechanism originated from proteins developed with archaeal, bacterial and bacteriophage origins that are involved in DNA repair and RNA-processing pathways.  Beyond its function to defend the genome from invasive nucleic acids, RNAi provides an approach to silence genes by preventing the synthesis of proteins by blocking messenger RNA from being decoded by ribosomes.  

This silencing employs a group of mechanisms that use small RNA to direct RNAi.  Inside the nucleus of a cell, genes encode proteins through transcription and translation.  During transcription, a portion of double stranded DNA generates a single-stranded RNA molecule.  An enzyme called RNA polymerase attaches to the template DNA and begins to produce complementary RNA.  Certain sequences of DNA indicate transcription initiation and termination, producing a segment which defines the unique gene for the strand.  The sequence is followed by a break of the hydrogen bonds between the DNA-RNA helix.  If the gene represents a protein, then the RNA is further processed into messenger RNA (mRNA), which is sent out of the nucleus to the cytoplasm through the nuclear pore complex.  After the mRNA leaves the nucleus, ribosomes in the cytoplasm catalyze translation of the mRNA to produce a specific amino acid chain, or polypeptide, which subsequently folds into an active protein.  

Exhibit I – mRNA Transiting the Nuclear Pore Complex

RNAi can interrupt this process and neutralize targeted mRNA molecules following transcription.  Silencing can come from either nuclear encoded micro RNA (miRNA) or from synthetic double stranded RNA (dsRNA).  The enzyme Dicer cleaves the miRNA or dsRNA into nucleotide fragments from 19 to 23 base pairs long into what are called small interfering RNAs (siRNAs) which are comprised of a guide strand and a passenger strand.  A protein called Argonaute 2 catalyzes the unwinding of this siRNA duplex and then incorporates the siRNA duplex into the RNA Induced Silencing Complex (RISC) maintaining the guide strand while discarding the passenger strand.  RISC will then seek specific mRNA guided by precise base pair matching between the siRNA guide strand and the mRNA.  When the desired mRNA is identified, the guide strand binds to the mRNA and Argonaute cleaves it resulting in its destruction, thereby silencing the mRNA instructions for a specific protein.  

Self-delivering Interference RNA (sd-rxRNA)

Following the seminal work performed by Fire and Mello and the recognition of their work by the Nobel Committee, many companies were formed to take advantage of the seemingly limitless potential of the RNAi mechanism.  Their efforts sought different solutions to address the difficulties that arose to efficiently use RNAi.  Some of the hurdles included efficient and safe systemic delivery, biodistribution and subcellular localization, rapid liver clearance and delivery to targeted cells.   A variety of approaches arose, including transfection, electroporation and viral mediated delivery among others.  These approaches resulted in difficulties related to limited efficacy, stimulating an interferon response, dose dependent toxicity, high rates of cell death, anti-viral response and incorporation of the viral genome into the DNA, among others. To respond to these complications, RXi developed its own approach to self-deliver RNAi using several modifications to transport the nucleotide to the cell.  They generated a self-delivering interference RNA that does not require a delivery vehicle to cross the cell membrane and penetrate the cytoplasm of the cell.  

Some of the key characteristics of RXi’s self-delivering interference RNA (sd-rxRNA) include:

• Ability to overcome high negative charge;
• Phosphorothioate linkages (vs. a phosphodiester) in the single stranded region of the siRNA;
• Hydrophobic conjugate that helps  in the delivery to cells and tissues of interest; and
• Chemical modifications that enhance the stability of the siRNA.

Exhibit II - Self-delivering interference RNA

To overcome the disadvantages of other delivery mechanisms, RXi developed its sd-rxRNA technology that combines the benefits of conventional RNAi and antisense.  Single stranded antisense compounds have characteristics that allow for favorable tissue distribution and cellular uptake.  When features such as a single-stranded phosphorothioate region, a short duplex region and the addition of nuclease-stabilizing and lipophilic chemical modifications are incorporated into RNAi compounds, the compounds are able to achieve efficient spontaneous cellular uptake and powerful, durable intracellular silencing activity.  This hybrid oligonucleotide compound, sd-rxRNA, may be efficiently taken up into any tissue that is accessible through local administration.

RXi’s Therapeutic Indications

RXi is pursuing indications in hypertrophic scarring, retinal scarring in patients with age related macular degeneration and warts.  In the following section we discuss the specific condition and the current treatment paradigm for these indications.  

Hypertrophic Scarring and Keloids

Hypertrophic scars are comprised of scar tissue that is raised, but less than 4 mm above the skin, are red or pink and can develop anywhere on the body.  Keloids are greater than 4 mm above the skin, grow beyond the area of the original wound, are pink or purple, and continually grow -- frequently on the earlobes, shoulders, cheeks and chest.  Both of these result from excessive amounts of collagen and proliferation of fibrous tissue stemming from an overproduction of connective tissue growth factor (CTGF).  

Exhibit III – Hypertrophic Scar (a) and Keloid (b) Compared

A hypertrophic scar is an abnormal response to trauma or injury and is thicker, raised and wider than what occurs in a normal scar response.  When a wound occurs, fibroblasts and myofibroblasts deposit a dense extracellular matrix composed of collagen and glycosaminoglycans.  When repairing a wound, hypertrophic scarring occurs when the body produces new collagen fibers faster than the old ones are broken down.  Myofibroblasts produce excessive collagen, which is the structural protein that gives skin firmness, strength and durability.  While the scars are not dangerous or life threatening, they can be itchy, painful and unsightly.  

Keloids are raised nodules that develop at the site of an injury and are considered benign tumors.  Keloids occur in approximately 10% of people and darkly pigmented skin is more prone to the condition.  Some areas of the body are more susceptible to keloids such as areas with elevated muscle and skin tension and regions close to the head and neck, mandibular border and posterior neck.  Trauma is one factor contributing to keloid formation as are infection, excessive tension and foreign bodies.  However, keloids may form in the absence of these factors.  


Some treatments are available to address scarring following an injury but prior to the formation of the scar tissue; however, once the scar has formed, surgery is appropriate and may include ablative treatments, cryotherapy, or cold excision laser.  Following surgery, steroids may be injected to inhibit fibroblast growth and collagen synthesis.  Radiation therapy has also been used, however, the risks of this approach are nausea, hair loss, increased likelihood of cancer among many others and perhaps too great for a cosmetic purpose.  

Keloids are more difficult to treat than hypertrophic scars.  One approach to reducing keloids may involve injection of corticosteroids that can shrink the scar, which is temporarily effective in most cases.  Surgery may also be used in conjunction with corticosteroid use, pressure therapy and/or radiation treatment.  Despite the multi-pronged approach, the keloid will return in most cases.  Other approaches are similar to hypertrophic scar treatment and include laser surgery, cryotherapy or ligature treatment.  These approaches do not address the underlying issue of excessive production of CTGF suggesting there is potential for inhibitors that can control CTGF expression.  

Age Related Macular Degeneration (Retinal Scarring)

There are two types of age related macular degeneration (AMD), dry and wet.  The dry type, or non-exudative, non-neovascular type is thought to result from the effects of aging and the thinning of macular tissues and depositing of pigment in the macula.  Wet AMD is usually more severe and arises from the formation of new blood vessels that grow beneath the retina and leak blood and fluid.  The extravasation of fluid from the eye can cause damage to retinal cells resulting in spot blindness.  About 10% of the total AMD population suffers from the wet version.

Treatments have emerged to address the unwanted growth of blood vessels in the eye with anti-VEGF therapy.  Blood vessels grow in the eye due to an overexpression of vascular endothelial growth factor (VEGF), which is a signal protein for blood vessel formation.  A number of anti-VEGF drugs have been developed and approved for AMD treatment, including Avastin (bevacizumab), Eylea (aflibercept) and Lucentis (ranibizumab).  While anti-VEGF treatment is effective in slowing angiogenesis, retinal scaring also occurs in about half these patients, which is also associated with vision loss.  

It is unclear whether or not the anti-VEGF therapy encourages retinal scarring or if it occurs despite this treatment; however, scarring does occur in many AMD patients which negatively impacts visual acuity.  Based on a study by Daniel, about 45% of patients receiving anti-VEGF therapy showed signs of scarring after two years.  This study also found that “eyes with classic neovascularization, a thicker retina, and more fluid or material under the foveal center of the retina are more likely to develop scar[ing].”


AMD usually occurs over time and is manifested as an enlarging shadowy area in the middle of a person’s vision.  Vision can also be fuzzy or distorted.  Reduced central vision may occur in one or both eyes, decreased perception of intensity or brightness of colors and a well-defined blurry or blind spot exists in the field of vision.  Retinal scarring can further blur vision.


Laser eye surgery may address some ocular scar tissue and there is some very early stage work being performed using stem cells to improve scarring.  However, there are no broadly effective and approved approaches to limit the progression of scarring in wet AMD.


Warts are an area of raised, thick skin that can appear anywhere on the body and are caused by the human papillomavirus (HPV).  They are not cancerous but are contagious, spread by contact with someone who is infected usually through a break in the skin.  Those with a weak immune system are more susceptible to warts.  While not dangerous, warts can be unsightly, uncomfortable and painful.  In many cases warts will resolve themselves after several months; however, if a wart remains after a few years, it is not likely to resolve on its own.  


There are many treatments for warts, some that can be performed at home and others at the doctor’s office.  Home treatments include the application of salicylic acid or sanding the wart and covering with tape.  This process can take several months, is labor intensive and is not always effective.  Physicians have access to a broader set of tools and can use cryotherapy, surgery, or strong medicines such as cantharidin or imiquimod to treat.  These approaches can cause scarring, blistering, damage to nearby nerves, sensitivity and skin damage.



The nomenclature for RXi’s lead candidate is RXI-109.  It is an interference RNA-based product designed to reduce the expression of connective tissue growth factor (CTGF), a precursor to fibrosis.  Clinical trials employing RXI-109 are for indications in dermal and retinal scarring.  There is also preclinical discovery work being performed in corneal scarring.

Connective Tissue Growth Factor

CTGF is a key protein in a number of biological processes including cell adhesion, migration, proliferation, angiogenesis, skeletal development and tissue wound repair.  It is also an important element in fibrotic disease and cancer.  CTGF is part of the CCN (for CTGF, Cystein rich protein (Cyr61), and Nephroblastoma overexpressed gene) family of regulatory proteins which are key signaling and regulatory molecules involved in many vital biological functions.

The goal of the retinal scarring program is to slow the advance of advanced wet age-related macular degeneration.  RXI-109 is not a cure, but can block the formation of further subretinal scarring.  Overexpression of CTGF is associated with a number of fibrotic diseases including dermal scarring and subretinal fibrosis.  To address this imbalance, RXi is using RXI-109, its CTGF-targeting RNAi compound to treat the fibrotic component.  CTGF imbalance and the resulting fibrosis is also implicated  in  acute spinal injury, endometriosis, organ fibrosis including liver and pulmonary fibrosis, cutaneous scleroderma and vascular restenosis, in addition to numerous ocular diseases that result in retinal scarring.  Success with RXI-109 in its current clinical focus may suggest further opportunities in these additional indications that could also be pursued by a partner.


RXi licensed Samcyprone in 2014, which is a proprietary topical formulation of diphenylcyclopropenone (DPCP).  The drug has been in use since the 1970s and is used for treating alopecia areata, cutaneous metastases of melanoma and warts, but has not been approved by the FDA or EMA.  DPCP has been used as a compounded drug by some licensed pharmacists and physicians for individual patients, but it does not have a standardized formulation, dosing or application schedule.  Compounded drug products are not FDA-approved, which means they have not undergone FDA premarket review for safety, effectiveness, and quality.  RXi developed a proprietary formulation at a concentration that is  lower than that used by dermatologists relying on product generated by compounding pharmacies.  The company’s optimized formulation is expected to reduce side effects and allow for a standardized response to the drug.  Administration of Samcyprone will be via an ointment, which is expected to be a substantial improvement from the liquid, acetone-based formulations used by compounding pharmacies. 

DPCP acts as an immunomodulator which activates T-cells and triggers an immune response thereby clearing the wart.  The formulation is administered topically first at a higher dose to achieve sensitization after which a lower treatment dose is applied weekly to the wart, inducing a local sensitization reaction. The activated immune system recognizes the active papilloma virus and is able to eliminate it.

Previous studies have been performed using DPCP to evaluate clinical outcome with high rates of success, but without statistical significance.  Side effects of the treatment are not serious and include sensitization issues and eczematous eruptions that can be treated with steroids.

Research performed by RXi finds that market size for wart treatment is from $2 to $4 billion annually in the United States and there are more than 30 million patients that seek treatment for this skin problem.  DPCP has also shown efficacy for alopecia and melanoma, which could be potential off-label uses for the drug.  

Since DPCP has not been previously approved by the FDA, and will therefore be considered a new chemical entity (NCE) when it is presented to the FDA, the drug will receive five years of new chemical exclusivity upon approval.  

Cosmetic Applications

RXi has two sd-rxRNA compounds that are intended for skin tone and wrinkles.  Since these programs are intended for beautifying, promoting attractiveness and altering appearance and not for treatment of a disease, they fall under FDA rules for cosmetics which do not require approval before marketing.  The FDA defines cosmetics as products used for “cleansing, beautifying, promoting attractiveness, or altering the appearance" and not used “in the diagnosis, cure, mitigation, treatment, or prevention of disease"  Claims for these products are regulated by the Federal Trade Commission (FTC) in the United States, which prohibits unfair or deceptive acts or practices in or affecting commerce.  

The largest market for these products may well be in Asia where many countries have an additional category between cosmetics and pharmaceuticals which are classified as “special cosmetics,” quasi-drug or medicated cosmetics.  This category requires additional testing for quality and safety which can take from one to three years depending on the country to get approval.  While the pathway for cosmetics and beauty products is faster than for pharmaceutical products, the environment is extremely competitive.  We believe that a dominant global brand must recognize value in these assets and put the force of their marketing expertise behind them to achieve success.  The two targets in the cosmetic applications are tyrosinase and collagenase which are intended to address skin pigmentation and skin laxity (wrinkles) respectively.  

RXI-231 targets tyrosinase and has completed consumer testing for irritation, sensitization and impact on skin pigmentation.  A readout was provided by the company in November 2017.  Tyrosinase is a key enzyme in the synthesis of melanin, which provides the pigment in our skin, hair and eyes.  Downregulating tyrosinase can address hyperpigmentation disorders such as age spots, liver spots and potentially melanoma.  It may also lighten skin overall.  Pre-clinical work has shown a reduction in pigmentation in a tissue culture of human epidermis, and consumer/functional testing in humans showed that the product can reduce skin pigmentation induced by UV exposure in vivo. This product is expected to attract attention from cosmetic developers in Asia and India.   

RXI-185 targets collagenase, which is an enzyme that breaks down the peptide bonds in collagen.  Specifically, RXi’s compound addresses matrix metalloproteinase 1 (MMP1) which cleaves collagen I, II and III.  RXI-185 has shown the ability to successfully downregulate the production of MMP1 enzyme activity in cell culture.  Based on its performance in the lab, selected reduction of MMP1 may affirmatively treat skin aging disorders, arthritis, acne scarring, blistering skin disorders, corneal erosions, endometriosis and possible cancer metastasis.

Below, we summarize the development pipeline for RXi Pharmaceuticals which consists of six named assets.  The illustration shows multiple indications in scarring and warts, several oncology indications that are expected to advance to the clinic by next year and the cosmetics/consumer portfolio which consists of treatments for skin tone and wrinkles. 

Exhibit IV – Development Pipeline

Shifting Focus to Immuno-oncology

As highlighted in its January 16th release, RXi expects to partner its dermatology and ophthalmology programs and expects the transfer of rights will generate upfront funds that can support the immuno-oncology (IO) efforts.  RXi has identified several factors that support a renewed focus on the IO space.  These factors include higher valuations for companies with IO development programs and easier access to capital; a faster pathway to commercialization in IO allowing for expedited approval; and a greater willingness by regulatory agencies to work with development programs that are addressing cancer.  

This shift will reduce cash burn and reallocate resources towards developing RXI-762 and RXI-804 which target PD-1 and TIGIT respectively, and which are intended to treat solid tumors by downregulating checkpoints in adoptive cell therapies.  RXi has made strong progress developing relationships with IO-focused academic and research organizations, and expects that this effort will continue and help advance work in hematopoietic stem cells, natural killer (NK) cells, tumor infiltrating lymphocytes (TILs), chimeric antigen receptor (CAR) T-cells, T-cell receptor (TCR) and engineered NK cells.

Oncology Programs

In early 2017 RXi acquired MirImmune, recognizing the potential for sd-rxRNA in immuno-oncology.  In its preclinical work MirImmune had developed data in ex vivo cell-based cancer immunotherapies to target immune inhibitory pathways.  The environment for oncology combined with RNAi and adoptive cell therapies has improved substantially in the last two years with the Obama administration’s cancer moonshot, the 21st Century Cures Act which provided for expedited reviews, and the approval of Yescarta and Kymriah, as well as other gene therapy/cell therapy submissions to regulatory authorities.

Preclinical work performed by MirImmune demonstrated that sd-rxRNA could modify immune cells that were being processed ex vivo in adoptive cell therapy, including CAR T-cells, resulting in the downregulation of checkpoints on the cells. The result of this checkpoint downregulation is an improved anti-tumor efficacy of these immune cells, as shown by in-vitro and in-vivo testing.  This approach is compatible with many different kinds of immune cells including human T-cells, engineered T-cells, human NK cells and dendritic cells.  Initial success has prompted RXi to pursue collaborations and partnerships with industry and academia.  The company has recently announced relationships with Medigene, the Center for Cancer Immune Therapy (CCIT), the University of Minnesota and Gustave Roussy which are all pursuing cancer indications.  RXi anticipates that with the help of these partnerships it will have a candidate in human trials by mid-year 2019.  

Exhibit V – Partnerships

sd-rxRNA is particularly amenable to complement adoptive cell therapies as it has nearly 100% transfection efficiency and high cell viability.  The compound is also able to silence multiple genes and is currently pursuing PD-1, TIGIT and others in preclinical work.  RXi will be able to isolate immune cells from specific patients, allogenic immune cell banks, or engineered sources (e.g. CAR T) then expand the cells using sd-rxRNA to reprogram these cells.  The expanded and modified cells are then returned to the patient.  In vivo animal model efforts have shown a reduction in ovarian tumor growth one month after treatment as compared to control and in vitro work using tumor infiltrating lymphocytes (TILs) indicated greater cytotoxicity against melanoma cells in sd-rxRNA treated TILs.  

Benefits of sd-rxRNA in immuno-oncology:

• Competitive with antibodies as they block the same proteins prior to their formation
• Can target both intracelluar and extracellular proteins involved in any cell function, whereas antibodies only target extracellular proteins
• Can block multiple checkpoints in one ex vivo process
• Complementary to other cell therapies
• Potential for expanding efficacy of cell therapies to solid tumors


RXi has two candidates in Phase II and one in Phase I/II development.  The indications are in hypertrophic scarring, warts and retinal scarring.  There are few competing products in the scarring space, which has many applications beyond the current indication and RXI-109 should enjoy a dominant position in the market if approved by the FDA and EMA.  The treatment paradigm for warts is much more developed; however, the market is immense and existing treatments have only limited effectiveness suggesting a substantial opportunity.  RXi’s interference RNA is able to downregulate unwanted proteins in the cell, and prevent disease via this mechanism.  The company also in-licensed its wart program, Samcyprone, which it has taken through Phase II trials with results expected shortly.

RXi expects to partner these successful programs to a global dermatology and/or ophthalmology company, who will guide the candidates through the rest of the development process and obtain regulatory approval.  Our analysis anticipates that these programs will generate upfront cash and royalties once sales begin.  Since the details of the sale have not yet been determined, we assume that an upfront of $20 million will be received and that a royalty of 5% will be paid once sales begin.  RXi will in turn have to pay 1% of its RXi based royalty revenues to Advirna and we estimate 15% of its Samcyprone based royalty revenues to Hapten Pharmaceuticals.  

Our assumptions for RXI-109 in the hypertrophic scarring indications is for an additional Phase II and then Phase III trial to take place which are expected to last 1.5 years and 2.5 years respectively, followed by a new drug application (NDA) with the FDA which will take an additional year.  This suggests approval and first sales will take place in 2023.  The target population is currently forecast to be approximately 180,000 in the United States and we assume that the incidence in Europe is similar to the US, this generates an addressable population of 458,000, which we forecast to grow at a 1% annual rate.  In the first year of sales we anticipate 2% penetration into this population at a cost of $2,000 per treatment.  Penetration is forecasted to grow over several years to reach 20% of the market.  As this program will be partnered, we anticipate a 5% royalty rate for RXi.  RXi owes a royalty for sd-rxRNA products to Advirna of 1%, which will be deducted from RXi’s royalty revenues.

Our assumptions for RXI-109 in the retinal scarring indication are for an additional Phase II and Phase III trial to be conducted prior to submission of an NDA.  Similar to the dermal scarring indication, we anticipate a Phase II to be 1.5 years in duration and a Phase III to be 2.5 years, following by submission to the FDA.  We anticipate results from the current retinal trial to be promulgated shortly, and the follow-on Phase II to begin late 2018.  These assumptions place the retinal scarring indication in the market by 2024.  We estimate that there are eleven million persons with AMD of which 10% of this group will have wet AMD.  We also assume that the European population will have a similar prevalence of the disease, resulting in a total addressable population of 2.8 million who may pursue anti-VEGF therapy.  In its first year of launch we estimate a 5% penetration into the anti-VEGF therapy patient population, growing to 38% of the addressable market by 2029.  Pricing for RXI-109 is forecast to be about $5,000 per course of treatment, which is at the low end of pricing for anti-VEGF therapies when first launched.  As the program is expected to be launched by a partner, we expect that RXi will receive a royalty based on revenues of 5% given the stage of the program.  RXi owes a royalty for sd-rxRNA products to Advirna of 1%, which will be deducted from RXi’s royalty revenues.

Our assumptions for Samcyprone in the warts indication include a Phase III trial following the reporting of results for the in-process Phase IIa trial.  We anticipate that a registrational trial could take approximately three years followed by a year-long new drug application review and approval.  The addressable market for Samcyprone is estimated to be approximately one billion, representing the developed world and a portion of developing countries.  Warts are extremely common in the population and we estimate that the product can be made widely available for home use by a global health products company.  Penetration into this vast market is expected to be slight at 0.06% in the initial year of launch followed by growth to approximately 2.0% of the market over the next decade.  When approved by the FDA, Samcyprone will be given five years of exclusivity as it is a new chemical entity not previously approved by the agency.  We assume this will allow for premium pricing to other wart treatments of $250 per treatment unit over the exclusivity period.  Following the exclusivity period, we anticipate competition will bring the product price down to $150, after which the price is expected to grow at normal inflationary rates.  As this will be developed by a partner, we anticipate that the partner will pay a royalty on revenues of 5% to RXi.  RXi further owes a royalty to Hapten Pharmaceutical which has not been precisely disclosed and we estimate to be 15%.  

Our valuation methodology does not attach value to programs prior to their entry into the clinic.  Based on historical approval rates, we apply a 10% probability of approval to Phase I assets, a 15% probability of approval for Phase II assets and a 50% probability of approval for Phase III assets.  All of RXi’s Phase II assets are given a 15% likelihood of eventual approval and commercialization.  

While we do not calculate gross margin, sales or other development costs for the Phase II assets as they will be assumed by a partner, we do note that gross margin for sd-rxRNA products is expected to be approximately 75% to 95%, depending on the therapeutic area, given the low manufacturing costs anticipated as a result of the future competitive market for manufacturing oligonucleotides.  

RXi’s strategic goal is to use the proceeds from its dermatology and ophthalmology programs to support development of sd-rxRNA in immuno-oncology.  In the near term we anticipate annual research and development expenses to be approximately $5.5 million in 2018 and to grow by a million dollars per year over the next two years as the immuno-oncology programs move into the clinic.  General and administrative expenses are expected to fall in 2018 to $3.6 million as the company refines its focus on IO and does not incur the expense from the recently resigned Chief Business Officer.  Hiring is expected to pick up in 2019, and expenses will follow with anticipated G&A of $4.4 million.  Note that we do not attach any revenues in our DCF model to these expenses and only anticipate doing so after the projects have begun human trials.  

Based on current law, corporate tax rates are 21% for federal and 5% for state and local.  We anticipate that state taxes will rise as a function of increased shift of federal costs to the states and assume a higher long-term state and local rate of 10%, bringing the total rate to 31%.  This rate is anticipated to be paid following the company consuming its NOLs.

Our target price is generated using forecasts over the next 20 years after which we assume a terminal growth rate of 2%.  We use a discount rate of 15% in our NPV model and apply a 15% probability of FDA approval and ultimate commercialization for the Phase II assets based on the guidance provided in the Biomedtracker analysis.

Based on the assumptions above and after adjusting for shares, restricted stock and options outstanding, we generate a target price of $20.00.


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