RXi Pharmaceuticals to Write Off and Spin Out RNAi Assets

If you just blinked, you may have missed it: RXi Pharmaceuticals, now re-named Galena Biopharma, is to be a cancer vaccine company. As you may remember, when RNAi was still a hot technology in 2007, the parent company of RXi, small molecule biopharma CytRx, under the helm of corporate maverick Steven Kriegsman, acquired and then spun out RNAi assets in the form of RXi to be a pure-play RNAi Therapeutics company and cash cow for CytRx.

The financial details provided today on the transaction reveal that RXi has pretty much written off the value of its RNAi assets, chiefly among them the self-delivering RNAi trigger platform and the anti-scarring candidate RXI-109 which is about to enter clinical development, with the incoming investors taking over the lion's share of the company (83% of the shares) for their $9.5M in cash. Before RXi decided to be a cancer vaccine company, that is before the acquisition of Apthera in April, the then pure-play RNAi Therapeutics company had about 20 million shares outstanding, $10M in cash and was trading between $1.0-1.5, giving it an enterprise value of $10-20M. 5 months later, the net value of the same assets has become perhaps $2M.

On the other hand, the revaluation of the seemingly dead breast cancer vaccine candidate NeuVax was remarkably positive. From a value of essentially zero, it is now largely responsible for sustaining a market cap of ~$40M. Subtract about $20 in contributed cash, this still leaves a remarkable gain of ~100% for the asset (ignoring the value of the warrants and milestones). Having said that, it was definitely not the shareholders that profited from all that. Indeed, all these transactions make it difficult to follow where the money ended up.

For RNAi Therapeutics, there is still a hopeful message in all of this. The $9.5M in new investments is considerable. The confidence seems justified by the fact that RXi has found itself a nice niche by focusing on interesting self-delivering RNAi triggers, particularly for local and localized gene knockdown. The anti-scarring program also has potential to be an opportunity for the RNAi Therapeutics field to show relatively rapidly its clinical potential, especially since it can be measured against a promising late-stage antisense compound by ISIS satellite company Excaliard, EXC 001. So on the face of it the new investors seem to have gotten a good deal, although it is unclear how toxic the $45M in potential milestones to Galena are.

Today’s news shows how arbitrary the valuations of pre-clinical biotech assets can be and how fashion trends and promotion are often their main drivers. I’m so ready for the new season.

Will Market Turmoil Accelerate Consolidation of Core RNAi Therapeutics Companies?

I know that I am vulnerable to accusations that I take a very pro-Alnylam view. But you have to admit that history thus far has supported this view and that I have been pointing out some of the dangers Alnylam faces as well. With that out of the way, another shameless pro-Alnylam posting:

One striking observation from the recent volatile trading is that while the bellwether of RNAi Therapeutics, Alnylam, almost seemed oblivious to the economic troubles around it, smaller second-tier players such as Silence Therapeutics, CytRx, and Nastech were being severely punished by the markets. Part of this may be explained by the solid financial position of Alnylam which may not have to return to the capital markets for years, while the likelihood increases that Nastech and CytRx have no choice but to exercise their shelves and dilute shareholder equity at a time when share prices are sinking ever more.

Shareholders of Nastech and CytRx may have both hoped that a successful spin-out of their RNAi units MDRNA and RXi, respectively, would avoid a secondary offering at the most inopportune times. But as the spin-outs take time to materialize and bad partnering and clinical news keep coming in, this appears less likely by the day. The latest developments (today):

- Nastech “announced” in an SEC filing that Novo Nordisk would be joining Merck and P&G in walking away from a co-development program relating to Nastech’s nasal delivery program. This was followed by a $50M shelf registration, quite sizeable for a company with a $72M market cap.

- CytRx suffered a clinical halt by the FDA for their lead small molecule phase II ALS program.

In both cases, the problem for RNAi Therapeutics investors has been their exposure to the non-RNAi parts of the parent companies which, unlike Sirna Therapeutics’ financially successful total makeover before, chose to nurture RNAi divisions within a non pure-play environment. Additionally, both developments were preceded by re-shuffling of their financial management structures and significant share price declines.

The situation at Silence Therapeutics, where share prices have fallen by more than half in a matter of two month, is slightly different, but also emphasizes that second-tier companies have a hard time attracting interest as their IP position is under scrutiny. In this case, progress in the US patent application for their AtuRNAi design or a validating Big Pharma partnership is needed.

I would not be surprised that Alnylam’s strong IP position plays a critical role in all these delays as it should make any potential partner or investor think twice about investing. It will now be interesting whether current market conditions accelerate the consolidation of the core RNAi Therapeutics space. My real concern, however, is how will a recession affect funding of scientific research, particularly for RNAi delivery and safety.

Alnylam should also be careful that their cash pile is not melted away by hyperinflation, as policy makers have come to the conclusion that the best way to save the economy is to print more money and please the Big Banks on Wall Street by slashing interest rates. Never mind that it was overspending encouraged by low interest rates that got us into the mess in the first place.

Did Alnylam Patent News Send CytRx Shares Down 14%?

It should not come as a surprise that Alnylam today announced that the previously allowed Tuschl II covering siRNAs was granted in Europe. The fact, however, that another year has passed and Tuschl II keeps on sailing through the worldwide patent offices while the Tuschl I patent application is being delayed, further cements the impression that it is Tuschl II that is the key patent for siRNAs, not the related Tuschl I.

Tuschl I, co-exclusive to CytRx, Sirna/Merck, and Alnylam, is thought to have been a major motivation for Merck to buy Sirna in late 2006. Like Tuschl II, it covers gene silencing in mammalian cells, but interestingly the classical siRNA features, 19-21 base-pair double-stranded RNAs with 3’ overhangs, are claimed only in Tuschl II, whereas Tuschl I generally claims ~21-23 nucleotide silencing RNAs and their precursors, thus somewhat landing it in between antisense and RNAi.

Needless to say, the perceived value and potential of CytRx, or its RNAi spin-out RXi for that matter, as a Sirna-like takeover candidate by Big Pharma much depends on the fate of Tuschl I. So today’s 14% fall in CytRx shares on expanded volume, while those of Alnylam gained 2%, may be directly linked to today's patent announcement. Further delays in the registration of RXi as a publicly listed company and the recent shelf offering should have contributed to the sinking feeling CytRx shareholders must have felt today.

It then looks like 2008 could also be a defining year in terms of who owns the IP in RNAi, as the number of core RNAi Therapeutics companies is about to peak and funding gets directed to those with strong IP positions as investors become more discerning in their RNAi investment decisions. CytRx, Nastech, Benitec, and Silence Therapeutics will be under particular pressure to prove themselves as they return to the markets for funding.

Tuschl I patent application:
http://www.wipo.int/pctdb/en/wo.jsp?wo=2001075164&IA=WO2001075164&DISPLAY=STATUS

Tuschl II patent:
http://www.wipo.int/pctdb/en/wo.jsp?WO=2002%2F044321&IA=WO2002%2F044321&DISPLAY=STATUS

A Tumultuous Week for RNAi Therapeutics Companies

Credit worries, earnings calls, a new significant biodefense contract, and flu RNAi news all combined to produce a highly volatile week for RNAi Therapeutics companies, both financially and scientifically.

It all started with Nastech’s announcement on Monday morning of a Friday webinar to discuss their flu RNAi development strategy. Coupled with hedge fund troubles, margin calls and short covering, this created the perfect scenario for an impressive run-up of more than 35% run-up in Nastech’s share price at the close on Thursday. In my last blog, I cautioned, however, that the press release accompanying Nastech’s earnings call on Wednesday contained a mere reference to positive in vitro data on flu RNAi, something that had already been demonstrated by various groups before.

Flu RNAi then received some more attention on Thursday when Alnylam announced that their flu RNAi program, in collaboration with Novartis, would be delayed due to in vivo efficacy and safety issues. An IND that had been scheduled to be filed by the end of this year will now be postponed until at least 2008. Apparently, Alnylam’s own data and data from the literature suggest difficulties in obtaining sequence-specific viral knockdown with current flu animal models. This does not come totally unexpected since there has been discussion in the field on the merits of purposefully combining the innate immune responses elicited by some, particularly liposomally formulated unmodified siRNAs with the sequence-specific inhibition of viruses such as HCV, RSV, and flu.

While I fully agree with Alnylam’s decision to ensure the highest quality and safety of their pipeline at an early stage, it would be interesting to know the exact nature of the siRNAs in question (modified or unmodified), delivery methods used (formulated or naked), and the types of animal models that were used. This is particularly relevant given that the company’s most advanced clinical program for RSV targets another virus of the respiratory tract. It should be kept in mind, however, that safe and potent pre-clinical RNAi efficacy has been demonstrated for RSV. Moreover, we should not be surprised to see such differences since although both viruses infect similar tissues, the exact biological distribution and viral kinetics may significantly differ between any two viruses.

The in vivo efficacy/safety issues were compounded by the reduced support from the US government for novel treatments in preparation of a pandemic avian flu. While federal support for RNAi addressing public health threats continues to benefit the development of the RNAi Therapeutics platform in general, this demonstrates once again that due to changing political climates, the government cannot be relied upon for direct commercial benefit. However, political interest in preparing for a possible avian flu pandemic is particularly strong in some of the emerging economies in Asia, particularly China, and only yesterday a study by a Chinese group was published in an advance online article of the journal “Antiviral Research” on the in vitro and in vivo efficacy of RNAi for H5N1 (Zhou et al.: “Effective small interfering RNAs targeting matrix and nucleocapsid protein gene inhibit influenza A virus replication in cells and mice.”)

Ironically, on the same day that the delay was announced, Alnylam reported that it had been awarded another significant US government contract of $38.6M over 33 months for the development of RNAi antivirals for the treatment of hemorrhagic fever viruses. Currently, there is no effective treatment for these viruses which are perceived as a threat to national security. RNAi meanwhile has proven to be the most promising treatment in animal models so far.

This announcement on Thursday seemed to have further stoked the fantasies in Nastech shares and the whole sector which recorded significant gains in the face of a big drop in the major indexes. However, expectations were somewhat disappointed by the Nastech webinar on Friday morning which failed to uncover major breakthroughs in flu RNAi. Also, an analyst question related to sequence-specific in vivo knockdown was not directly addressed. While I certainly appreciate the educational aspect of this webinar, it left me, and probably others, scratching my head why this company went out of its way to present these data at 5am Pacific Time as if market-sensitive data were about to be disclosed. Nastech shares gave up almost 8% that day.

Here are some more interesting bits and pieces from this busy week:

1) ISIS stated that no fatty liver (steatosis) was observed in pre-clinical animal models with their apoB100 antisense compound. This should be reassuring news for ISIS’ lead compound given the concern raised by other reports of fatty liver in mice following apoB100 knockdown.

2) Alnylam’s phase II RSV studies for naturally infected patients was postponed to the first half of 2008 after phase II experimental infection data are available. These are expected by the end of this year. This certainly makes a lot of scientific sense and illustrates Alnylam’s scientific data-driven flexible pipeline management approach.

3) On the patent front, Alnylam announced the issuance of Kreutzer-Limmer I in Canada, and Tuschl I in Australia. Given the complexity in the ownership of this particular patent, especially with regard to CytRx and the University of Massachusetts, I wonder why the Press Release failed to mention UMass as a licensor for Tuschl I to Alnylam while acknowledging Max Planck Innovation Gmbh, the MIT, and the Whitehead Institute for Biomedical Research.

4) Alnylam management states continued interest by Big Pharma and biotech for a piece of the RNAi platform. More significant deals are possible, if not certain. Also, Novartis is more likely than not to exercise its adoption license for Alnylam’s IP. Such deals should strengthen the company’s balance sheet beyond their guidance of over $435M in cash at the end of this year.

What a week!