I am a physician (currently practicing Child Psychiatry, also board certified in Pediatrics) and part-time investor. I invest in several biotech companies, including RXi Pharmaceuticals (NASDAQ:RXII), the main subject of this article. I look for the combination of good science, depth of pipeline, a market cap that appears undervalued, and a reasonably good technical stock profile. With the exception of pipeline depth, I believe that RXi Pharmaceuticals meets these criteria.
RXi and its RNAi Technology
RXi Pharmaceuticals is focused on an area of science called RNAi (RNA Interference) Technology. The basic idea of this technology is to selectively kill messenger RNA before it translates into proteins. Overexpression of proteins is involved in many different diseases, and thus, a mechanism that prevents the formation of these proteins could significantly reduce (or prevent) a given disease. RXi's full description of RNAi Technology can be found here.
RNAi technology was developed primarily by Andrew Fire and Craig Mello, who shared the 2006 Nobel Prize in Physiology or Medicine for this technology. Craig Mello was one of the founders of RXi Pharmaceuticals in its original form, and is still involved with the company.
RXi Pharmaceuticals utilizes a unique sub-strategy in RNAi technology called sd-rxRNA. This form of RNAi includes self-delivery mechanisms. By utilizing advantages of both RNAi technology and a related technology called antisense, RXi believes that these compounds will have improved uptake into cells, improved potency, and longer-lasting effects. This is accomplished without the need for an additional delivery mechanism. Further description of this can be found here.
The most significant/common disease thought to be a potential target of this technology is cancer. At this point, RXi does not have significant involvement in cancer-related therapies (with the exception of Retinoblastoma). Other significant potential targets of RNAi technology include cholesterol, blood disorders, liver disease, and autoimmune diseases. Again, none of these are currently primary interests for RXi.
Instead, RXi is focusing on two areas where it can use its technology for more direct delivery. The first of these is use on the skin to prevent/treat hypertrophic scars and keloids (tissue overgrowth). While this seems like a minor area on the surface, it has been estimated as a market of anywhere from $1 billion to $5 billion. To help make this number make sense, think of all of the times that you or someone you know have had stitches or a surgery. Then think of how many of these times that scarring or keloids have been a concern. If a company had a product that significantly reduced the formation of significant scars and/or keloids without significant side effects, would you consider it? This is what RXi is trying to provide, and the results have been promising thus far (see RXI-109 below).
In addition, RXi is focused on the use of RNAi technology in ophthalmology. While this use of RXI-109 is still in its infancy, RXi is targeting 3 diseases in particular. These are Proliferative Vitreoretinopathy (abbreviated PVR), Macular Degeneration, and Retinoblastoma. PVR is a complication of retinal detachment, and leads to very poor vision. Macular Degeneration is associated with blindness in the center of the visual field. Retinoblastoma is a cancer of the retina that can lead to removal of the eye, or death.
RXi's "Family Tree"
To understand both competitors and challenges, it is important to look at the "family tree" of RXi. RXi's closest "relative" is a stock with a controversial history, Galena Biopharma (NASDAQ:GALE). In a somewhat complicated spin-off, the former RXi Pharmaceuticals reorganized as Galena in 2011 and spun a "new" RXi Pharmaceuticals off of the company. RXi took all of the RNAi assets, and Galena kept the cancer-related therapies of the parent company. So, in essence, the current RXi is "RXi Junior", and is a spin-off of "RXi Senior", which formally changed its name to Galena. Moving further back, the "grandparent" company of RXi would be CytRx (NASDAQ:CYTR). CytRx spun-off the original RXi ("RXi Senior") in 2008, and then divested itself afterwards by allowing RXi to purchase the shares controlled by CytRx. The complex relationship of CYTR, GALE, and RXII over time has led these stocks to be tied together in the minds of investors, despite losing their financial relationships with each other. Once "RXi Junior" became more independent, it developed a partnership with Opko Health (NYSE:OPK). In doing so, RXi acquired the rights to Opko's complimentary RNAi technology and assets. In turn, Opko now owns about 12.5% of RXi, and gets milestone payments and royalties in the future on compounds that its technology is involved in. The most recent addition to RXi's "family" is Ethicor Ltd., a UK-based firm that specializes in "special" use of compounds prior to approval in countries other than the United States.
Related companies to RXi ("cousins") include other companies specializing in RNAi technology. The most prominent of these is Alnylam (NASDAQ:ALNY), which has been highly involved in the RNAi field. Alnylam has a current relationship with Sanofi (NYSE:SNY), has purchased RNAi assets from Merck (NYSE:MRK), and has prior relationships with Novartis (NYSE:NVS), Roche (OTCQX:RHHBY), and GlaxoSmithKline (NYSE:GSK). Alnylam is definitely the mover and shaker of the RNAi extended family. Other "cousins" of RXi include Isis Pharmaceuticals (ISIS), Dicerna Pharmaceuticals (NASDAQ:DRNA), Marina Biotech (OTCQB:MRNA), and Arrowhead Research (NASDAQ:ARWR).
The family tree of RXi is important, primarily due to some investors tying it to the issues at Galena. Galena has been criticized by many, including Adam Feuerstein, over its relationship with the Dream Team Group. Allegations have included that the Dream Team Group used ghostwriters to write articles about GALE stock. There is also evidence that CytRx was also involved with the Dream Team Group. Seeking Alpha has removed several articles about GALE and CYTR related to these allegations. Many have assumed that due to the family tree, RXi must have also been involved with the Dream Team Group. My research does show a link between Dream Team and "RXi Senior" (pre-split with Galena), but no relationship since the current RXi formed. In fact, it appears that current RXi management went in a different direction from GALE and CYTR, and uses a company called "Emerging Growth Corp." for marketing articles. Emerging Growth Corp's disclosure page (see link at bottom of this page) lists $19,500 in payments from RXi over the past year. While some find all relationships with stock marketing firms questionable, I am not aware of significant concerns with Emerging Growth Corp.'s tactics compared to those of Dream Team Group.
In addition, RXi's family tree is important due to the RNAi stocks (including all of the "cousins") sometimes reacting as a subsector. Almost all of the above RNAi stocks had parabolic runs up in late 2013 and early 2014. While some of this could be attributed to the biotech market in general, there does seem to be exaggerated reaction in RNAi stocks to each other. For example, many of ALNY's news-related moves have been followed by the other RNAi stocks.
RXI-109's Promise Thus Far
RXI-109 is RXi's lead drug candidate. It targets a protein called CTGF (Connective Tissue Growth Factor). This is a critical protein involved in wound healing and repair. In normal concentrations, it is a significant part of the reason that cuts heal as fast as they do. However, when overexpressed, CTGF is a part of the reason for the extra tissue growth of scars and keloids. Therefore, RXi used its sd-RNAi technology to target this protein for the prevention/treatment of scars and keloids. It is important to note that if RXi used too much gene knockdown (like Alnylam's 97% that is for other purposes), then the outcome would likely be no wound healing at all due to too little CTGF present. Therefore, RXi targets 50% gene knockdown to limit overexpression of CTGF but allow enough for the wound to heal.
RXI-109 has had two initial Phase 1 studies with positive results. The drug candidate was very safe, with very few side effects. Additionally, these studies showed that higher doses of RXI-109 led to lower expression of CTGF in a dose-dependent relationship. More importantly, this effect held up almost THREE MONTHS after a single dose of the medication in one study.
RXI-109 is currently involved in three Phase 2 studies. These are designed in a way that patients act as their own controls. For example, in one study, patients will electively have two similar scars or keloids removed surgically removed. One of these sites will be injected with RXI-109, and the other will be injected with placebo. Scar or keloid reformation at both sites will be monitored and compared. This should provide visual evidence of the difference between RXI-109 treatment vs. placebo. In addition, CTGF expression will also be monitored.
A key aspect of RXI-109's promise at this point is RXi's agreement with Ethicor. Ethicor is a company that specializes in the distribution of "special" medications. RXi has agreed to allow Ethicor to distribute RXI-109 in the European Union under the "Specials" provision. This allows physicians in the EU to request and use the medication even prior to regulatory approval. If Phase 2 studies are promising, I would suspect that this provision will be used by a good number of physicians in the EU. RXi and Ethicor will share the proceeds of all sales prior to regulatory approval. If and when the drug is approved in a given country, RXi will regain all rights to the medication, and the agreement will end for that country. RXi and Ethicor also have provisions in place to extend the agreement throughout most of the world. The United States is an exception, because it does not have a "Specials" provision. This does, however, include Canada and Mexico.
Additional promise of RXI-109 comes in pre-clinical areas related to its proposed ophthalmology indications. A recent study in monkeys included the injection of RXI-109 into the retina. It was found to decrease CTGF expression in a dose-dependent manner. CTGF is involved in the scarring with PVR and trauma to the eye, and can be a factor leading to blindness in these conditions. If this works in humans, it would be a way to attempt to prevent blindness associated with retinal detachment or trauma. In addition, RXI-109 led to decreased CTFG in the cornea as well. This could have positive implications in the treatment/prevention of corneal scarring from injury (foreign bodies, contacts, etc.) or corneal dystrophy. While this is pre-clinical research at this point, it shows promise for RXi's technology outside of its current primary indication. This provides some insurance against study failure for the scarring/keloid indications. Since the scarring/keloid studies of RXI-109 are RXi's only current clinical studies, any insurance against their failure is important.
Summary of Positives and Negatives
Possible Negative Factors
- Failure of RXI-109 Phase 2 Studies - While Phase 1 studies have been very promising and I do not expect Phase 2 studies to fail, this is always a possibility. If these studies did fail, it would have a significant negative impact on stock price. This is in part due to RXI-109 being RXi's only drug in current clinical studies.
- Relationship with Galena and CytRx - While I believe RXi has distanced themselves from its "family," it is clear that investors are leary of the relationship. Any negative publicity about either of these companies will likely negatively impact RXi stock.
- Failure of any trial in the RNAi space - Investors lump RNAi stocks together even though they use different versions of the technology. Therefore, any significant study failure of Alnylam, Isis, Dicerna, Marina, or Arrowhead will likely negatively impact RXi - although likely to varying degrees.
- Market and/or biotech sector weakness - RXi has a relatively small float, with only about 14 million shares outstanding. The public float is only about 11 million shares. RXII stock has shown that it is VERY susceptible to momentum trading. When the biotech sector weakened in March of April of this year, RXII stock lost around 50% of its value in a month (after a strong run-up prior to that). There was NO negative RXi news in that period, and I attribute that downswing solely to momentum trading. Price has since stabilized between 2.50-3, but any negative momentum can get quickly amplified due to the low float and low daily volume.
- Risk of returning to 52-week low - RXi's 52-week low is 2.21, which was an intraday low earlier this month. Its lowest daily close is 2.46, which it is currently near. Dropping to the 52-week low is certainly a risk, although I would expect a bounce off of these levels if they were touched (stabilization near 2.50 is consistent with the previous intraday low prior to early July).
- Dilution risk - RXi's cash position was $14 million at the end of 2013. Cash burn for 2013 was $21 million, although this included a 1-time fee of $12 million related to the Opko agreement. Therefore, there is some dilution risk near the end of 2014 or early 2015, if no partnerships are announced. RXi does have a new relationship with Lincoln Park Capital that provides financing, but this is tied to the Ophthalmology indications advancing. While this may delay RXi's need for dilution, it does not appear to eliminate it.
Possible Positive Factors
- Phase 2 success for RXI-109 - If RXI-109 does well in Phase 2 studies, then there will likely be visual evidence of its success in addition to biomarkers. While meeting endpoints is important to investors, I believe that there will be additional positive impact from the ability to see the results with regards to scars and keloids.
- RXI-109's use as a "Special" - Particularly if the Phase 2 study succeeds, I believe that physicians in the EU will begin to use RXI-109 as a "Special." This would provide a source of revenue to RXi, and potentially help prevent the need for future dilution.
- Potential partnerships - I believe that RXI-109 could be easily marketed to potential partners, particularly if Phase 2 is successful. Partnership with a company interested in both Ophthalmology and Dermatology would make the most sense. Of the six top Ophthalmology companies, I believe that Allergan (NYSE:AGN) has the most interest in Dermatology. However, Allergan is currently the subject of potential takeover itself, so other partners may be more likely.
- Additional Phase 1 trial initiation - RXi appears to be nearing the initiation of Phase 1 studies of RXI-109 in Proliferative Vitreoretinopathy. This would have a modest positive impact on the stock.
- Technical position - RXII currently is stabilized near its 52-week low. While a breach of this would be concerning, it has shown stability at this level. A break-up above 2.6 would likely find momentum and help it head back to 3. This would represent a 20% return. Prior to the sector downturn, RXII was trading in the 5.50-6.50 range. This area is around a $100-million market cap, which is not unreasonable for a company with ~$14 million in cash and a drug with a $1-$5 billion potential in Phase 2. Current market cap is $35 million. Return to the $5.50-$6.50 range would be a return of 120%-160%. It would certainly return there (if not higher) with positive Phase 2 results, but could do so even prior to these results due to momentum. Downside risk to the 2.21 level is 12%. Phase 2 failure would be a larger risk - potentially to the 1.5 or even 0.5 levels (which are the 2-year and all-time lows). This would represent a 40-80% loss in the event of Phase 2 failure.
- The first Phase 2a results should be available soon. While it is no certainty, I would be surprised if RXi released significantly negative results for the first study just after initiating a third study. While the study is blinded and results are not pooled yet, the visual results of the first study should be becoming evident if there is a significant visual difference. If there is not a significant visual difference at this point in the first study, I would question the judgment of the company in spending money on initiating a third study. Of course, more mild positive results could both warrant a third study and disappoint investors.
My Current Recommendation
I believe that potential positive factors significantly outweigh potential negative factors at this juncture. Therefore, I have been long RXII since July 2013. I sold a large portion of my position for profit in January at $4.38 and February at $6.28. I added to my position on March 26th at $4.71 and again on May 8th at $3.10. I may add to my position at these levels if there is sign of rebound above 2.6. I will likely maintain my core position through the Phase 2 results, although I would scale back if price returned to the $5.50-$6.50 area prior to results.
Disclosure: The author is long RXII. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am considering adding to my position in RXII within the next 72 hours. I have no position in the other stocks listed in this article. I have considered a position in CYTR and ISIS, but I am unlikely to initiate a position in these over the next 72 hours.
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