RXi Pharmaceuticals — Update 25 October 2016

RXi Pharmaceuticals — Update 25 October 2016

RXi Pharmaceuticals

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RXi Pharmaceuticals

Expanding into immuno-oncology

Acquisition announcement

Pharma & biotech

25 October 2016

Price

US$1.15

Market cap

US$8m

Net cash ($m) at end September 2016

4.4

Shares in issue

6.56m

Free float

96%

Code

RXII

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(42.1)

(51.7)

(73.9)

Rel (local)

(41.7)

(51.1)

(74.8)

52-week high/low

US$4.46

US$0.94

Business description

RXi Pharmaceuticals is a clinical-stage RNAi company developing innovative therapeutics for unmet needs. Lead projects for RXI-109 in dermal indications (Phase II) and in wet AMD (Phase I/II) stem from its proprietary self-delivering (sd-rxRNA) platform. Licensed-in immunomodulator Samcyprone (Phase II) is initially being developed for warts, alopecia areata and melanoma.

Next events

Samcyprone Phase IIa enrollment completion

Q416

RXI-109 early data in retinal and dermal scarring

Q416

Samcyprone Phase IIa interim data

Q416

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

RXi recently announced that it has entered into an exclusive option agreement to acquire MirImmune, an early-stage private company focusing on immune checkpoint modulation, in exchange for a share amount equal to 19.99% of RXi’s outstanding stock plus milestones. MirImmune had previously licensed RXi’s sd-rxRNA technology in March 2015 and has since selected six lead compounds, which will be used alone or in combination to develop cell therapy to treat cancer. The first cell therapy will likely reach the clinic in 2018. RXi also announced a planned capital raise. If unable to raise capital, its cash runway extends only into Q217.

Year
end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/14

0.1

(7.0)

(4.25)

0.0

N/A

N/A

12/15

0.0

(8.5)

(1.70)

0.0

N/A

N/A

12/16e

0.0

(7.7)

(1.17)

0.0

N/A

N/A

12/17e

0.0

(11.1)

(1.62)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortization of acquired intangibles, exceptional items and share-based payments.

A new approach using validated targets

MirImmune had been focusing on developing sd-rxRNA compounds that target, among others, PD-1 and CTLA4, which have been validated by currently marketed compounds such as Keytruda (anti-PD-1) and Yervoy (anti-CTLA4). It has also demonstrated preclinically that CAR-T cells modified with anti-PD-1 targeted sd-rxRNA can significantly slow tumor growth in an ovarian cancer mouse model.

An attractively priced asset

MirImmune was founded in 2014 (co-founded by Tim Barberich, former chairman and CEO of Sepracor, which was sold in 2009 for $2.6bn) and is closely held, having yet to obtain VC funding. At current market valuations, it will be acquired for $2m upfront, putting the per-compound figure close to academic license levels.

Late-2016 and 2017 filled with potential catalysts

Data for RXi’s lead compound RXI-109, an sd-rxRNA compound targeting CTGF, being studied in Phase I/II for the prevention of retinal scarring and in Phase II for the prevention of dermal scarring, should start reading out later this year, with more complete data available in 2017. Also, the Phase IIa trial of Samcyprone in warts is expected to be fully enrolled and have initial data read-outs by the end of the year.

Valuation: $17.57 per share

We have increased our valuation slightly to $115.3m or $17.57 per basic share, from $111.5m or $17.06 per basic share, mainly due to rolling forward our NPV by a quarter. RXi announced a planned capital raise in order to fund both its current and acquired pipeline and we calculate a funding need of $20m through 2017 (cash as of 30 September was $4.4m). Given current share levels and the unfriendly fund-raising environment, an equity raise of that magnitude could lead to very significant dilution of existing shareholders and is not taken into account in our NPV value.

A potentially inexpensive route into a high-value area

RXi has announced that it has entered into an exclusive option agreement to acquire MirImmune, a small, closely-held private company founded in 2014, for a share amount equal to 19.99% of the RXi common stock outstanding at the time of the close, plus certain undisclosed milestones. The option can be exercised any time prior to April 5, 2017 and we believe it will be consummated once RXi raises additional capital (the company also announced it is planning an offering in a separate press release).

MirImmune had licensed RXi’s sd-rxRNA technology for use in cell-based cancer immunotherapy back in March 2015, in exchange for single-digit royalties, milestone payments, small annual fees and the right for RXi to acquire a double-digit stake. MirImmune had been focusing on developing compounds that hit a variety of targets, including PD-1 and CTLA4, which have been validated by currently marketed blockbuster compounds such as Keytruda (anti-PD-1) and Yervoy (anti-CTLA4). The knockdown of these proteins should enable the CAR-T cells to recognize and engage tumor cells that are otherwise masked from the immune system via expression of checkpoint ligands (for instance PD-L1 or CD80).

Since licensing RXi’s technology, MirImmune has selected six lead compounds against different extracellular and intracellular immune checkpoints. It also demonstrated the silencing of all six targets in preclinical studies both singly and in combination (see Exhibit 1). The ability to simultaneously silence multiple checkpoint genes and to target intracellular targets which antibodies cannot reach could be a competitive advantage.

Exhibit 1: MirImmune data suggesting ability to target multiple immune checkpoints at the same time

Source: RXi

MirImmune has also shown that mesothelin-targeted CAR-T cells modified with anti-PD-1 targeted sd-rxRNA silences PD-1 and also significantly slows tumor growth in an ovarian cancer model (see Exhibits 2 and 3).

Exhibit 2: MirImmune data on PD-1 silencing

Exhibit 3: MirImmune data demonstrating the gene silencing effect of CAR-T + anti-PD-1 sd-rxRNA

Source: RXi

RXi

Exhibit 2: MirImmune data on PD-1 silencing

Source: RXi

Exhibit 3: MirImmune data demonstrating the gene silencing effect of CAR-T + anti-PD-1 sd-rxRNA

RXi

MirImmune’s cell therapy program is quite early stage and the first cell therapy will likely not enter the clinic until 2018. However, at a cost of ~$2m in equity, based on today’s share price, they are inexpensive and further development can enhance their value substantially. However, until the deal closes and they start entering the clinic, we will not be including the MirImmune programs in our valuation of the company.

Valuation

We have increased our valuation slightly to $115.3m or $17.57 per basic share, from $111.5m or $17.06 per basic share, mainly due to rolling forward our NPV by a quarter. The company has announced a capital raise in order to continue funding both its current and acquired pipeline and we calculate a funding need of $20m through 2017. Given current share levels and the unfriendly fund-raising environment, an equity raise of that magnitude could lead to very significant dilution of existing shareholders. For example, if RXi raises $20m at $1.00 per share, that would require the issuance of an additional 20m shares and would reduce our value to around $5 per basic share, and would practically be a recapitalization of the company.

Upcoming catalysts that could alter our valuation for the company will include data for lead compound RXI-109. It is being studied in a Phase I/II for the prevention of retinal scarring and in a Phase II for the prevention of dermal scarring, with readouts later this year and more complete data available in 2017 (assuming it successfully raises capital). We also expect news from Samcyprone, which is in a Phase IIa for the treatment of warts. Enrolment is expected to complete by the end of the year with interim data expected in the same timeframe. Full data from the trial is expected in H117.

Exhibit 4: RXi valuation

Product

Launch

Peak sales ($m)

Risk adj.

Royalty rate

rNPV
($m)

rNPV/share
($)

RX-109 scarring

2021

1,453

20%

17.5%

78.4

11.95

RX-109 AMD

2022

1,077

10%

15%

11.7

1.79

Samcyprone

2020

177

40%

17.5%

17.7

2.70

RXI-231 and RXI185

2019

250

20%

4.0%

3.0

0.46

Implied enterprise value

110.9

16.90

Net cash (Sept 30)

4.4

0.67

Overall valuation

115.3

17.57

Source: Edison Investment Research

Financials

As of the end of Q316, RXi had $4.4m in cash and equivalents, an amount it recently pre-announced at an investor presentation. Its quarterly cash burn is around $2m per quarter. As the company is making capital preservation a priority we have decreased our estimates for R&D spending in 2016 from $7.5m to $5.2m, a decrease from the $6.9m in R&D spending in 2015. Our 2017 estimates have also decreased from $10m in R&D spending to $7.5m. The company has announced it is currently in the process of planning a capital raise to fund both the development of its current pipeline and the compounds it will be acquiring from MirImmune. Although the company has never incurred debt, for illustrative purposes our forecasts currently include $10m in long-term debt in our model in each of 2016 and 2017, ie a $20m near-term funding requirement, mainly to cover expected R&D costs. Once both the capital raise and the MirImmune acquisition are finalized, we may revisit our spending estimates as the fresh capital and additional programs may accelerate spending.

Exhibit 5: Financial summary

$000s

2013

2014

2015

2016e

2017e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

399

71

34

19

0

Cost of Sales

0

0

0

0

0

Gross Profit

399

71

34

19

0

Research and development

(5,401)

(5,680)

(6,925)

(5,201)

(7,500)

General & administrative

(3,697)

(3,217)

(3,346)

(3,517)

(3,868)

EBITDA

 

 

(6,819)

(7,067)

(8,551)

(7,779)

(10,406)

Operating Profit (before GW and except.)

 

 

(6,720)

(6,980)

(8,474)

(7,723)

(10,374)

Intangible Amortization

0

0

0

0

0

Exceptionals/Other

(12,250)

0

(228)

0

0

Share-based payments

(1,979)

(1,846)

(1,535)

(975)

(995)

Operating Profit

(18,970)

(6,980)

(8,702)

(7,723)

(10,374)

Net Interest

24

17

14

18

(749)

Other (includes change in fair value of warrants)

0

9

0

7

0

Profit Before Tax (norm)

 

 

(6,696)

(6,954)

(8,460)

(7,705)

(11,123)

Profit Before Tax (FRS 3)

 

 

(20,925)

(8,800)

(10,223)

(8,680)

(12,117)

Tax

0

0

0

0

0

Deferred tax

0

0

0

0

0

Profit After Tax (norm)

(6,696)

(6,954)

(8,460)

(7,705)

(11,123)

Profit After Tax (FRS 3)

(20,925)

(8,800)

(10,223)

(8,680)

(12,117)

Average Number of Shares Outstanding (m)

1.0

1.6

5.0

6.6

6.8

EPS - normalised fully diluted ($)

 

 

(6.52)

(4.25)

(1.70)

(1.17)

(1.62)

EPS - FRS 3 ($)

 

 

(28.78)

(7.90)

(2.10)

(1.32)

(1.77)

Dividend per share ($)

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

195

201

181

134

102

Intangible Assets

0

0

0

0

0

Tangible Assets

177

183

163

107

75

Other

18

18

18

27

27

Current Assets

 

 

14,743

8,988

10,978

12,617

12,209

Stocks

0

0

0

0

0

Debtors

0

0

0

0

0

Cash

14,440

8,546

10,667

12,140

11,732

Other

303

442

311

477

477

Current Liabilities

 

 

(2,076)

(1,334)

(2,269)

(1,559)

(2,243)

Creditors

(2,076)

(1,334)

(2,269)

(1,559)

(2,243)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

0

0

0

(10,000)

(20,000)

Long term borrowings

0

0

0

(10,000)

(20,000)

Other long term liabilities

0

0

0

0

0

Net Assets

 

 

12,862

7,855

8,890

1,192

(9,932)

CASH FLOW

Operating Cash Flow

 

 

(6,311)

(7,758)

(7,317)

(8,527)

(10,407)

Net Interest

0

0

0

0

0

Tax

0

0

0

0

0

Capex

(78)

(95)

(57)

0

0

Acquisitions/disposals

0

12

0

0

0

Financing

15,684

1,947

9,495

0

0

Dividends

0

0

0

0

0

Other

(35)

0

0

0

0

Net Cash Flow

9,260

(5,894)

2,121

(8,527)

(10,407)

Opening net debt/(cash)

 

 

(5,180)

(14,440)

(8,546)

(10,667)

(2,140)

HP finance leases initiated

0

0

0

0

0

Exchange rate movements

0

0

0

0

0

Other

0

0

0

0

300

Closing net debt/(cash)

 

 

(14,440)

(8,546)

(10,667)

(2,140)

7,968

Source: RXi Pharmaceuticals accounts, Edison Investment Research


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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

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Canadian Overseas Petroleum — Update 25 October 2016

Canadian Overseas Petroleum

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