RXi Pharmaceuticals Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparison is with FY2011. The filing is by RXi Pharmaceuticals Corporation, which operated independently after its April 27, 2012 spin-off from Galena Biopharma. FY2011 figures include carved-out predecessor operations and are not fully comparable with RXi’s stand-alone results. The filing does not provide a separate Q4 income statement.
Business context
RXi was a development-stage biotechnology company developing RNA interference (RNAi) therapies. Its lead candidate, RXI-109, targets connective tissue growth factor (CTGF) and is being studied to reduce surgical scarring. The company had no commercial products or product sales.
Financial results and liquidity
| Metric | FY2012 / Dec. 31, 2012 | FY2011 / Dec. 31, 2011 |
|---|---|---|
| Revenue | $97,000, all from grants | $0 |
| Research and development expense | $10.451 million | $6.624 million |
| General and administrative expense | $2.621 million | $6.146 million |
| Operating loss | $12.975 million | $12.770 million |
| Net loss | $12.880 million | $10.219 million |
| Net loss applicable to common stockholders | $25.695 million | $10.219 million |
| Cash used in operating activities | $5.062 million | $9.989 million |
| Cash and cash equivalents | $5.127 million | $503,000 |
| Total assets | $5.592 million | $1.694 million |
| Total liabilities | $1.706 million | $2.281 million |
R&D expense increased 58%, principally reflecting a $6.173 million noncash charge for common stock issued for patent and technology rights; underlying personnel and laboratory costs declined. G&A expense fell 57%, mainly due to lower personnel, board, professional-service, and stock-compensation costs. The $25.695 million common-stockholder loss includes $9.5 million of preferred-stock accretion and $3.315 million of preferred dividends; these amounts are not the same as operating cash outflows.
Operating cash use declined year over year, while financing provided $9.670 million, principally from the Series A preferred-stock financing. At year-end, current assets were $5.392 million and current liabilities $1.679 million. Convertible notes payable were zero; capital-lease obligations totaled approximately $5,000. Deferred revenue was $518,000 in total, primarily grant funding not yet recognized. The company reported no operating margin or product-revenue margin that would be meaningful for a pre-revenue development-stage business.
Material changes and subsequent events
- RXi began its first two Phase 1 trials of RXI-109 in 2012. Study 1201 enrolled 15 subjects and Study 1202 enrolled nine. The company reported that RXI-109 was well tolerated in Study 1201, with no serious local or systemic side effects observed; these were early, small studies and did not establish efficacy.
- In March 2013, RXi acquired substantially all of OPKO Health’s RNAi-related assets, issuing 50 million common shares and agreeing to potential development and commercialization milestone payments of up to $50 million per qualified drug, plus royalties. The acquired assets were at an early stage.
- A March 2013 common-stock financing issued 112,956,011 shares at $0.145 per share, producing approximately $16.4 million gross and $16.0 million net proceeds. As of March 15, 2013, 321,627,134 common shares were outstanding.
- Management said cash on hand, including the March financing proceeds, was expected to fund planned operations, including the RXI-109 Phase 2 program, into fiscal 2015.
Outlook, risks, and unusual items
Management expected topline Study 1201 results in Q2 2013, Study 1202 results in mid-2013, and to begin Phase 2 trials after scar-revision surgery in the second half of 2013. These are forward-looking expectations, not reported outcomes. The company expected continued significant operating losses and no near-term product revenue.
- Funding and dilution: Continued development depends on future financing, grants, or partnerships. Additional funding may not be available on acceptable terms; equity issuance can dilute existing holders. Preferred stock carries a 7% cumulative annual dividend and conversion rights.
- Clinical and regulatory uncertainty: RXI-109’s safety and efficacy remained unproven in humans; trial results, enrollment, FDA requirements, and approval timing are uncertain. RNAi therapeutics are a relatively new approach with limited clinical validation.
- Competition and intellectual property: Competitors include companies pursuing anti-scarring and RNAi treatments. RXi disclosed a letter from Alnylam alleging that a license may be needed; RXi stated it believed its activities did not infringe valid Alnylam rights, but no resolution was assured. RXi’s own platform portfolio had pending applications and no issued patents at the time described.
- Supply and execution: RXI-109 supply depended on a single supplier, and the company relied on third parties for manufacturing and clinical work.
- Unusual accounting and comparability: The 2012 results include the $6.173 million noncash technology-rights charge and $12.815 million of preferred-stock accretion and dividends. Historical results include carved-out allocations from Galena and may differ from results had the business operated independently.
- Contingencies: The company disclosed customary indemnification obligations without accrued liabilities, and contingent license milestones and royalties that could become material if development succeeds.
The independent auditor issued an unmodified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the company was not required to obtain an auditor attestation on internal controls.
Most important facts for investors to verify
- Whether the Phase 1 studies produced results consistent with management’s stated expectations, and whether Phase 2 trials began and met their objectives.
- Whether the March 2013 financing and projected runway proved sufficient, including the cash burn after the reporting date.
- The fully diluted share count and potential conversion or dilution from preferred stock, options, the OPKO share issuance, and subsequent financing.
- The accounting, development obligations, milestone exposure, and royalty terms associated with the OPKO assets and existing licenses.
- The status and scope of RXi’s patent applications and any resolution of the Alnylam claim or other intellectual-property disputes.