As filed with the Securities and Exchange Commission on January 10, 2008

Registration No. 333-147009

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 2

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

RXi PHARMACEUTICALS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

 

One Innovation Drive

Worcester, Massachusetts 01605

(508) 767-3861

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

Tod Woolf, Ph.D.

Chief Executive Officer

RXi Pharmaceuticals Corporation

One Innovation Drive

Worcester, Massachusetts 01605

Phone: (508) 767-3861

Fax: (508) 767-3862

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

 

 

Copies to:

 

 

 

 

 

Approximate date of commencement of proposed sale to public:  As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  þ

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  o

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  o

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box:  o

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

EXPLANATORY NOTES

 

This Registration Statement contains three prospectuses, as set forth below:

 

 

 

The Award Prospectus and the Resale Prospectus are substantively identical to the Distribution Prospectus, except for the following principal differences:

 

 

 

 

 

 

 

 

The Registrant has included in this registration statement, after the Distribution Prospectus, the Award Prospectus and the Resale Prospectus, which reflect the foregoing principal differences as compared to the Distribution Prospectus. In addition, the RXi Pharmaceuticals Corporation and Predecessor Carve-Out Financial Statements beginning on page F-1 of the Distribution Prospectus will also be included in the final versions of both the Award Prospectus and the Resale Prospectus.

 

SUBJECT TO COMPLETION, DATED JANUARY 10, 2008

 

PROSPECTUS

 

 

RXi PHARMACEUTICALS CORPORATION

 

Shares of Common Stock

 

This prospectus is being furnished to the holders of common stock of CytRx Corporation, or CytRx, in connection with the distribution by CytRx to its stockholders of 4,526,624 outstanding shares of common stock of RXi Pharmaceuticals Corporation, or RXi, held by CytRx. The RXi shares being distributed under this prospectus will constitute approximately 36% of RXi’s outstanding shares immediately following the distribution. Concurrently with the distribution, CytRx is awarding approximately 83,714 additional outstanding shares of RXi common stock held by CytRx to some of its directors, officers and employees. The award of RXi shares by CytRx is being made pursuant to a separate award prospectus dated the date of this prospectus. Immediately following the distributions made under this prospectus and the award made under the award prospectus, CytRx will own approximately 49% of the outstanding shares of RXi common stock, which shares, along with shares of RXi common stock held by another stockholder, are concurrently being registered for future resale by such stockholders at such times and prices as each of them may choose pursuant to a separate resale prospectus also dated the date of this prospectus.

 

CytRx currently holds approximately 86% of RXi’s outstanding common stock, and there is no current trading market for RXi common stock. We have applied for listing of our common stock on the NASDAQ Capital Market under the symbol “RXIP.” We anticipate that a limited market, commonly known as a “when-issued” trading market, for our common stock will develop on or shortly before the record date for the distribution and will continue up to and through the distribution date, and we anticipate that “regular-way” trading of our common stock will begin on the first trading day following the date of the distribution. For a further explanation of “when-issued” and “regular-way” trading, see “The Distribution — Trading Between the Record Date and the Distribution Date.”

 

In reviewing this prospectus, you should carefully consider the matters described under the heading “Risk Factors” beginning on page 10.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The information in this prospectus is not complete and may be changed.

 

 

The date of this prospectus is          , 2008.

 

Table of Contents

 

 

All references to “RXi,” “we,” “our,” “us,” and similar terms in this prospectus refer to RXi Pharmaceuticals Corporation. All references to “CytRx” in this prospectus refer to CytRx Corporation. References to the “award prospectus” and the “resale prospectus” mean the separate prospectuses relating to the concurrent award by CytRx of shares of RXi common stock to some of its directors, officers and employees of CytRx and registration for future resale of shares of RXi common stock by certain stockholders, respectively, described in this prospectus.

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

Some of the industry data contained in this prospectus are derived from data from various third-party sources. We have not independently verified any of this information and cannot assure you of its accuracy or completeness. While we are not aware of any misstatements regarding any industry data presented herein, such data is subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus.

 

Neither RXi nor CytRx will receive any consideration for the shares of RXi common stock that are being distributed pursuant to this prospectus. The registration fee that is set forth in the registration statement of which this prospectus is a part was calculated based on our book value and does not reflect any assessment of the market value of our common stock.

	•	Neurology.  Initially, we are pursuing research in ALS (amyotrophic lateral sclerosis, commonly known as Lou Gehrig’s Disease). Some forms of ALS are caused by defects in a gene called SOD1. Early preclinical studies conducted by RXi advisors, Dr. Tariq Rana and Dr. Zuoshang Xu at UMMS, showed promising results in animals using an RNAi compound to selectively inhibit the SOD1 gene.

	•	Metabolic disease.  We have in-licensed intellectual property developed by Dr. Czech (one of our scientific co-founders and scientific advisory board members) on genes that appear to be important regulators of metabolism. Studies conducted in Dr. Czech’s laboratory at UMMS and by others at Imperial College of London have demonstrated that inactivation of one of these genes, called RIP140, can cause fat cells to metabolize rather than store fat. Mice in these studies that did not express RIP140 remained lean and non-diabetic even when maintained on a high-fat diet. We are currently designing RNAi compounds targeting RIP140 as a potential treatment for obesity and obesity-related type 2 diabetes.

	•	Oncology.  We are initiating a program to develop RNAi drugs for use in oncology, which is led by key RXi scientific advisors, Dr. Greg Hannon and Dr. Nicholas Dean.

	•	We intend to finance the initial development of a limited number of RNAi drug candidates in the areas of neurology, metabolic disease and oncology, with our own capital resources and any financial resources that we may obtain from capital markets and partners.

	•	We intend to seek partnerships with large pharmaceutical and biotechnology companies to leverage our intellectual property and expand our development pipeline.

	•	We intend to maintain and continue to develop and enhance our RNAi technology platform by expanding our intellectual property position in RNAi compound chemistry, delivery and target sequences through in-licensing in combination with internal and collaborative research and development programs.

	•	We intend to develop future RNAi technology improvements and believe we are well positioned to do so, as our management and advisors have developed much of the core technology in the field of oligonucleotide therapeutics, and more specifically RNAi. Our advisors and scientists routinely meet to discuss novel approaches and improvements in our RNAi technology platforms to enhance our intellectual property portfolio.

	•	We may also seek to collaborate with government and charitable institutions through grants and funded research for our development programs.

	•	we may be unable to achieve some or all of the benefits that we expect to achieve from our separation from CytRx;

	•	we may not be able to obtain sufficient funding and may not be able to develop our product candidates;

	•	the approach we are taking to discover and develop novel therapeutics using RNAi is unproven and may never lead to marketable products;

	•	we may not be able to maintain the third-party relationships that are necessary to develop or potentially commercialize some or all of our product candidates;

	•	we currently have no compounds in pre-clinical toxicology studies, and we may not be able to advance any product candidate through the pre-clinical stage into clinical trials;
	•	if our pre-clinical testing does not produce successful results or our clinical trials do not demonstrate safety and efficacy in humans, our products may not receive approval by the FDA or similar foreign governmental agencies and we will not be able to commercialize our drug candidates;
	•	even if we receive regulatory approval to market our product candidates, our product candidates may not be accepted commercially, which may prevent us from becoming profitable; and
	•	we are dependent on technologies we license, and if we lose the right to license such technologies or we fail to license new technologies in the future, our ability to develop new products would be harmed.

Distributing Company		CytRx Corporation, a Delaware corporation.
Distributed Company		RXi Pharmaceuticals Corporation, a Delaware corporation.

Securities to be Distributed		A fixed number of 4,526,624 shares of our common stock will be distributed to CytRx stockholders, which constitutes approximately 36% of the outstanding shares of our common stock.

Reasons for the Distribution		CytRx’s lead therapeutic programs are based on small molecule drugs, while ours are focused on RNAi. The discovery and development of small molecule drugs requires skills, patents and management expertise that are different from the skills, patents and management expertise that are required for RNAi drug development and discovery. Because of the difference in focus with respect to therapeutic programs, and the difficulties that arise in adequately funding and managing programs in both of these areas, the CytRx board of directors determined that the best strategy for realizing the potential value of CytRx’s RNAi assets was to contribute them to us, with our concentration on developing and the potential commercialization of RNAi therapeutics. In order to enhance the stand-alone character of our business and operations, the board of directors of CytRx also determined to divest itself of control of RXi. To underscore its strategy, CytRx agreed with our principal RNAi collaborator, UMMS, and our scientific advisors and other founding shareholders to reduce its ownership of our shares to less than 50% within a reasonable period of time following our initial funding. The distribution is intended, among other things, to satisfy CytRx’s obligations to reduce its ownership of RXi to less than 50%. The CytRx board believes that the partial distribution of our common stock will:

•		allow us direct access to public capital markets to finance our RNAi drug development activities,

•		establish us as one of only a small number of companies primarily focused on developing proprietary RNAi therapeutics and enhance our ability to compete with other companies in this field,

•		allow our management and management of CytRx to each pursue their own separate business strategies and strategic relationships,
•		enhance the ability of CytRx and us to attract advisors and collaborators, including collaborators who may be competitors of the other company,
•		facilitate acquisitions, joint ventures and partnerships by CytRx and us with other companies focusing on the same or complementary technologies,
•		provide CytRx stockholders with a direct ownership interest in us in addition to the approximately 49% indirect interest in us that they will have as CytRx stockholders immediately following the distribution under this prospectus and the award under the award prospectus,

•		enhance public disclosures regarding CytRx and us and improve investor understanding of the two companies, and
•		allow for our own common stock options and other equity securities in order to enable us to provide incentives for management and other key employees that are directly related to the market performance of our publicly traded shares.

Distribution Ratio		Based on           shares of CytRx common stock outstanding on the date of this prospectus, holders of CytRx common stock as of the close of business (Eastern time) on          , 2008, the record date for the distribution, which we anticipate will be approximately twenty days after the effectiveness of the registration statement of which this prospectus is a part, will receive a dividend of one share of our common stock for approximately every          shares of CytRx common stock they hold. This distribution ratio assumes that no outstanding common stock options or stock purchase warrants of CytRx will be exercised between the date of this prospectus and the record date. The actual distribution ratio may be less than one-for-          , depending on the number of shares of CytRx common stock outstanding on the record date.

Manner of Effecting the Distribution		The distribution will consist of CytRx’s payment of a dividend to CytRx stockholders in the form of shares of RXi common stock. No vote or approval of CytRx stockholders is required in connection with the distribution. You will not be required to make any payment or to surrender or exchange your shares of CytRx common stock or take any other action to receive your shares of our common stock. If you own CytRx common stock as of the close of business on the record date, CytRx, with the assistance of Computershare, the distribution agent, will electronically issue shares of our common stock to you or to your brokerage firm on your behalf by way of direct registration in book-entry form. Computershare will mail to you a book-entry account statement that reflects your shares of RXi common stock, or your bank or brokerage firm will credit your account for the shares. If you sell shares of CytRx common stock in the “regular-way” market up to and including through the distribution date, you will be selling your right to receive shares of RXi common stock in the distribution. Following the distribution, stockholders whose shares of RXi common stock are held in book-entry form may request that their shares be transferred to a brokerage or other account at any time, without charge. Please see “The Distribution — Direct Registration System” for a more detailed description of the direct registration system and how shares of CytRx common stock may be sold and transferred.
Fractional Shares		No fractional shares of RXi common stock will be distributed to CytRx shareholders. Instead, fractional shares will be sold in the public market by the distribution agent. The aggregate net proceeds of these sales will be distributed ratably, after making certain deductions, to those CytRx stockholders who would otherwise have received fractional shares. For additional information, see “The Distribution — Treatment of Fractional Shares.”

Record Date		The record date for distribution is the close of business (Eastern time) on          , 2008 which we anticipate will be

		approximately ten days after the effectiveness of the registration statement of which this prospectus is a part.

Expected Distribution Date		, 2008.

Distribution Agent, Transfer Agent and Registrar for the Shares		Computershare Investor Services will be the distribution agent for the distribution and the transfer agent and registrar for RXi common stock following the distribution.
United States Federal Income Tax Consequences of the Distribution		CytRx expects that the distribution will be treated as a taxable distribution in an amount equal to the sum of the fair market value of our shares on the distribution date and any cash received in lieu of fractional shares. This sum will be treated as a dividend to the extent of any current year earnings and profits of CytRx, including gain resulting from the distribution, with the excess treated as a non-taxable return of capital to the extent of a holder’s tax basis in CytRx common stock and any remaining excess treated as capital gain. For a discussion of the tax consequences to CytRx and CytRx stockholders of the distribution, see the “Material United States Federal Income Tax Considerations” section of this prospectus. CytRx stockholders should consult with their own individual tax advisors regarding the tax consequences of the distribution.

Stock Exchange Listing		There is not currently a public market for our common stock. We have applied for listing of our common stock on the NASDAQ Capital Market under the symbol “RXIP.” We anticipate that trading will commence on          , 2008. We cannot predict the trading prices for our common stock before or after the distribution date.

Other Transactions		Concurrently with the distribution, CytRx is awarding approximately 83,714 outstanding shares of RXi common stock to some of its directors, officers and employees by means of the award prospectus. Immediately following the distribution made under this prospectus and the award made under the award prospectus, CytRx will own 6,212,861 shares of our common stock, or approximately 49% of our outstanding shares, all of which shares will be available for resale by CytRx by means of the resale prospectus. The purpose of the resale prospectus is to permit CytRx, if it desires, to sell or dispose of some or all of its shares of our common stock at such times and at such prices as it may choose. The resale prospectus also is intended to facilitate the sale by CytRx of our shares if it becomes necessary or advisable in light of Investment Company Act of 1940 considerations described in the “Risk Factors” section of this prospectus. Whether sales of shares will be made, and the timing and amount of any sale made, is within the sole discretion of CytRx. CytRx has no present plan or arrangement with respect to any resales of its shares of our common stock, and there is no assurance as to whether, or when, CytRx may dispose of our shares following the distribution. In addition, we are registering 462,112 shares owned by UMMS for resale pursuant to the resale prospectus, which may be sold by UMMS in its sole discretion at such time or times as it chooses.

Relationship With CytRx After the Distribution		Immediately following the distribution made under this prospectus and the award made under the award prospectus, CytRx will own approximately 49% of our common stock which are concurrently being registered for resale and may be disposed of from time to time by CytRx at such prices as it may choose. We are a party to a number of agreements with CytRx relating to its ownership of our common stock and other matters. Please see “Arrangements With CytRx Corporation.”

Post-Distribution Dividend Policy		RXi has never declared a dividend on its common stock and does not plan to do so for the foreseeable future.
Risk Factors		You should carefully consider the matters discussed under the heading “Risk Factors.”
Where CytRx Stockholders Can Obtain More Information		If you have any questions relating to the separation of RXi from CytRx, you should contact:
		Benjamin S. Levin General Counsel, Vice President — Legal Affairs CytRx Corporation 11726 San Vicente Boulevard, Suite 650 Los Angeles, California 90049 Tel: (310) 826-5648 x313 Fax: (310) 826-6139
		If you have any questions relating to the distribution of the RXi shares to CytRx stockholders, you should contact:
		Computershare Investor Services 250 Royall Street Canton, MA 02021 Tel: (781) [          ] Fax: (781) [          ]

														Period from
		Period from												January 1, 2003
		April 3, 2006												(Date of
		(Date of												Inception)
		Incorporation)				Nine Months Ended								through
		through September 30,				September 30,								December 31,				Years Ended December 31,
		2007				2007				2006				2006				2006				2005				2004
		(Successor)				(Successor)				(Predecessor)				(Predecessor)				(Predecessor)
		(Unaudited)				(Unaudited)
		(All amounts in thousands, except share and earnings per share data)
Statements of Expenses Data:
Revenue		$	—			$	—			$	—			$	—			$	—			$	—			$	—
Expenses:
Research and development			5,380				5,380				1,346				8,541				1,772				2,080				2,814
General and administrative			3,291				3,291				293				1,500				633				129				458
Operating loss			(8,671	)			(8,671	)			(1,639	)			(10,041	)			(2,405	)			(2,209	)			(3,272	)
Interest income			304				304				—				—				—				—				—
Loss before income taxes			(8,367	)			(8,367	)			(1,639	)			(10,041	)			(2,405	)			(2,209	)			(3,272	)
Income taxes			—				—				—				—				—				—				—
Net loss		$	(8,367	)		$	(8,367	)		$	(1,639	)		$	(10,041	)		$	(2,405	)		$	(2,209	)		$	(3,272	)
Basic and diluted loss per share		$	(0.79	)		$	(0.79	)			NA				NA				NA				NA				NA
Weighted average shares, basic and diluted			10,599,992				10,599,992				NA				NA				NA				NA				NA
Cash Flows Data:
Cash flows used in operating activities		$	(3,537	)		$	(3,537	)		$	(1,826	)		$	(6,712	)		$	(2,112	)		$	(2,527	)		$	(1,280	)
Cash flows used in investing activities		$	(11,830	)		$	(11,830	)		$	—			$	(50	)		$	—			$	(50	)		$	—
Cash flows provided by financing activities		$	17,719			$	17,719			$	1,826			$	6,762			$	2,112			$	2,577			$	1,280

		As of								As of
		September 30,								December,				As of December 31,
		2007				2006				2006				2006				2005				2004
		(Successor)				(Predecessor)				(Successor)								(Predecessor)
		(Unaudited)
		(In thousands)
Balance Sheets and Statements of Assets, Liabilities and Parent Company’s Net Deficit:
Cash and cash equivalents		$	2,354			$	—			$	2			$	—			$	—			$	—
Total current assets		$	14,242			$	—			$	2			$	—			$	—			$	—
Equipment and furnishings, net		$	88			$	—			$	—			$	—			$	—			$	—
Total assets		$	14,395			$	50			$	2			$	57			$	50			$	—
Total current liabilities		$	1,713			$	156			$	—			$	325			$	500			$	968
Total stockholders’ equity		$	12,682			$	—			$	2			$	—			$	—			$	—
Total liabilities and stockholders’ equity		$	14,395			$	50			$	2			$	57			$	50			$	—
Parent company’s net deficit		$	—			$	(106	)		$	—			$	(268	)		$	(450	)		$	(968	)

 

RISK FACTORS

 

You should carefully consider the following risk factors and all the other information contained in this prospectus in evaluating us and our common stock. If any of the following risks and uncertainties develop into actual events, they could have a material adverse effect on our business, financial condition or results of operations. In that case, the trading price of our common stock also could be adversely affected.

 

Risks Relating to Establishing RXi as Separate from CytRx and as an Independent Public Company

 

We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from CytRx or to maintain the benefits we currently have as a combined company.

 

As a separate company, we believe that our business will benefit from, among other things, an enhanced ability to compete with other companies dedicated to developing proprietary RNAi therapeutics. However, we may not be able to achieve some or all of the benefits that we expect to achieve as a separate company. For example, we may not be able to raise funds as a separate company that might have been available to a combined company which may have offered a broader investment opportunity to a wider range of potential investors. Nor will we have the direct benefit of CytRx’s relationships with sources of financing. Furthermore, in the past, the business risks associated with our RNAi research and development activities were mitigated, to some extent, by the other technologies and research and development activities of CytRx. Following the distribution, we will be more susceptible to specific risks relating to RNAi technologies, and will not have the benefit of the diversification of business risks.

 

In addition, as we have prepared to operate as a separate company, we have had to bear the cost of establishing our own accounting, human resources and other administrative functions. We may not be able to continue to perform or engage third parties to provide these functions with the same level of expertise and on the same or more favorable terms as they were provided by CytRx in the past. As a result, we could incur additional expenses for such services, and in such event, our business and operations may be adversely affected.

 

You may have difficulty evaluating our business, because we have no history as a separate company and our historical financial information may not be representative of our results as a separate company.

 

The historical financial information included in this prospectus does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate company during the periods presented or those that we will achieve in the future. Prior to the contribution of our RNAi assets from CytRx, our RNAi research and development activities were conducted by CytRx as part of its broader operations, rather than as an independent division or subsidiary, and were primarily conducted through sponsored research arrangements rather than through internal activities. CytRx also performed various corporate functions relating to our business, as discussed above. Our historical financial information reflects allocations of corporate expenses from CytRx for these and similar functions. We believe that these allocations are comparable to the expenses we would have incurred had we operated as a separate company, although we may incur higher expenses as a separate company.

 

We may not be able to effectively operate as a separate company.

 

We are a discovery-stage company with limited operating history. We will focus solely on developing and, if we obtain regulatory approval for our product candidates, commercializing therapeutic products based upon RNAi technologies, and there is no assurance that we will be able to successfully implement our business plan. While our management collectively possesses substantial business experience, there is no assurance that, as a separate company, we will be able to manage our business effectively, or that we will be able to identify, hire and retain any needed additional management or scientific personnel to develop and implement our product development plans, obtain third-party contracts or any needed financing, or achieve the other components of our business plan.

 

The obligations associated with being an independent public company will require significant resources and management attention.

 

In connection with the distribution of our common stock, we will become subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002. In addition, the Exchange Act requires that we file annual, quarterly and current reports. Our failure to prepare and disclose this information in a timely manner could subject us to penalties under federal securities laws, expose us to lawsuits and restrict our ability to access financing. The Sarbanes-Oxley Act requires that we, among other things, establish and maintain effective internal controls and procedures for financial reporting and we are presently evaluating our existing internal controls in light of the standards adopted by the Public Company Accounting Oversight Board. During the course of our evaluation, we may identify areas requiring improvement and may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant cost to us and require us to divert substantial resources, including management time, from other activities.

 

Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with our 2008 annual report that we will file with the SEC in 2009. In preparation for this, we may identify deficiencies that we may not be able to remediate in time to meet the deadline for compliance with the requirements of Section 404. Our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could have a material adverse effect on our business and our common stock.

 

Once our stock is freely traded on the open market, its market value and the price at which it trades may be less than the estimates of such values determined prior to the distribution under this prospectus and the award under the award prospectus.

 

As described below in “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Critical Accounting Policies and Estimates — Valuation of Common Stock,” CytRx and our board have at various times made certain estimates as to the aggregate value of the assets contributed to us and as to the fair market value of our common stock. We cannot assure you that these estimated values (which were based on various assumptions and certain valuation methodologies) will be reflected in the price of our common stock after the distribution under this prospectus and the award under the award prospectus. The combined market value of the common stock of CytRx and our common stock after the distribution under this prospectus and the award under the award prospectus may be less than the market value of CytRx’s common stock prior to the distribution and the award. Additionally, the price at which our common stock trades on the market may be less than our estimates of the fair market value of the common stock prior to the distribution and the award.

 

We may not be able to obtain sufficient financing, and may not be able to develop our product candidates.

 

We believe that we have sufficient working capital to fund our currently planned expenditures through the first quarter of 2009; however, in the future we may need to incur debt or issue equity in order to fund these expenditures as well as to make acquisitions and other investments. We cannot assure you that debt or equity financing will be available to us on acceptable terms or at all. If we cannot or are limited in the ability to incur debt, issue equity or enter in strategic collaborations, we may be unable to fund discovery and development of our product candidates, address gaps in our product offerings or improve our technology.

 

We anticipate that we will need to raise substantial amounts of money to fund a variety of future activities integral to the development of our business, which may include but are not limited to the following:

 

 

 

We cannot assure you that any needed financing will be available to us on acceptable terms or at all. If we cannot obtain additional financing in the future, our operations may be restricted and we may ultimately be unable to continue to develop and potentially commercialize our product candidates.

 

Future financing may be obtained through, and future development efforts may be paid for by, the issuance of debt or equity, which may have an adverse effect on our stockholders or may otherwise adversely affect our business.

 

If we raise funds through the issuance of debt or equity, any debt securities or preferred stock issued will have rights, preferences and privileges senior to those of holders of our common stock in the event of a liquidation. In such event, there is a possibility that once all senior claims are settled, there may be no assets remaining to pay out to the holders of common stock. In addition, if we raise funds through the issuance of additional equity, whether through private placements or public offerings, such an issuance would dilute your ownership in us.

 

The terms of debt securities may also impose restrictions on our operations, which may include limiting our ability to incur additional indebtedness, to pay dividends on or repurchase our capital stock, or to make certain acquisitions or investments. In addition, we may be subject to covenants requiring us to satisfy certain financial tests and ratios, and our ability to satisfy such covenants may be affected by events outside of our control.

 

We expect to continue to incur significant research and development expenses, which may make it difficult for us to attain profitability, and may lead to uncertainty about or as to our ability to continue as a going concern.

 

Substantial funds were expended to develop our RNAi technologies, and additional substantial funds will be required for further research and development, including pre-clinical testing and clinical trials of any product candidates, and to manufacture and market any products that are approved for commercial sale. Because the successful development of our products is uncertain, we are unable to precisely estimate the actual funds we will require to develop and potentially commercialize them. In addition, we may not be able to generate enough revenue, even if we are able to commercialize any of our product candidates, to become profitable.

 

In the event that we are unable to achieve or sustain profitability or to secure additional financing, we may not be able to meet our obligations as they come due, raising substantial doubts as to our ability to continue as a going concern. Any such inability to continue as a going concern may result in our common stock holders losing their entire investment. There is no guaranty that we will become profitable or secure additional financing. Our financial statements contemplate that we will continue as a going concern and do not contain any adjustments that might result if we were unable to continue as a going concern. Changes in our operating plans, our existing and anticipated working capital needs, the acceleration or modification of our expansion plans, increased expenses, potential acquisitions or other events will all affect our ability to continue as a going concern.

Risks Relating to RXi’s Business and Industry

 

The approach we are taking to discover and develop novel therapeutics using RNAi is unproven and may never lead to marketable products.

 

The scientific discoveries that form the basis for our efforts to discover and develop new drugs are relatively new. The RNAi technologies that we have licensed and that we intend to develop have not yet been clinically tested by us, nor are we aware of any clinical trials for efficacy having been completed by third parties involving similar technologies. To date, neither we nor any other company has received regulatory approval to market therapeutics utilizing RNAi. The scientific evidence to support the feasibility of developing drugs based on these discoveries is both preliminary and limited. Successful development of RNAi-based products by us will require solving a number of issues, including providing suitable methods of stabilizing the RNAi material and delivering it into target cells in the human body. We may spend large amounts of money trying to solve these issues and never succeed in doing so. In addition, any compounds that we develop may not demonstrate in patients the chemical and pharmacological properties ascribed to them in laboratory studies, and they may interact with human biological systems in unforeseen, ineffective or even harmful ways.

 

Further, our exclusive focus on RNAi technology for developing products as opposed to multiple, more proven technologies for drug development, increases the risk associated with our business. If we are not successful in developing a product candidate using RNAi technology, we may not be able to identify and successfully implement an alternative product development strategy.

 

We will be subject to competition and may not be able to compete successfully.

 

A number of medical institutions and pharmaceutical companies are seeking to develop therapeutic products based on RNA interference technologies. Companies working in this area include Alnylam Pharmaceuticals, Sirna Therapeutics (which was recently acquired by Merck & Co.), Nastech Pharmaceutical Company Inc., Cequent Pharmaceuticals Inc., Nucleonics, Inc., Tacere Therapeutics Inc., Benitec Ltd., Opko Corp., Silence Therapeutics plc (formerly SR Pharma plc), Quark Pharmaceuticals, Inc., Rosetta Genomics Ltd., Calando Pharmaceuticals, Inc., and Isis Pharmaceuticals, Inc, as well as a number of the multinational pharmaceutical companies. In addition, a number of companies are developing therapeutics for the same diseases we are targeting using technologies other than RNA interference. Most of these competitors have substantially greater research and development capabilities and financial, scientific, technical, manufacturing, marketing, distribution, and other resources than us, and we may not be able to successfully compete with them. In addition, even if we are successful in developing our product candidates, in order to compete successfully we may need to be first to market or to demonstrate that our RNAi-based products are superior to therapies based on different technologies. If we are not first to market or are unable to demonstrate such superiority, any products for which we are able to obtain approval may not be successful. For example, Isis Pharmaceuticals, Inc. has begun pre-clinical toxicology studies for an antisense-based therapeutic product candidate, for which the FDA has granted orphan drug status, that targets the same gene for ALS that we intend to target (see the description of this gene under the heading “Business — Therapeutic Programs and Markets — Neurology — Our ALS Program”). If Isis is able to successfully bring this treatment to market before we are able to complete the development of an RNAi therapeutic in this area, even if our development efforts are successful, we may not receive any market advantages that we would have benefited from if ours were the first such therapeutic product available on the market.

 

We may not be able to maintain the third party relationships that are necessary to develop or potentially commercialize some or all of our product candidates.

 

We expect to depend on collaborators, partners, licensees, clinical research organizations and other third parties to support our discovery efforts, to formulate product candidates, and to conduct clinical trials for some or all of our product candidates. We cannot guarantee that we will be able to successfully negotiate agreements for or maintain relationships with collaborators, partners, licensees, clinical investigators and other third parties on favorable terms, if at all. If we are unable to obtain or maintain these agreements, we may not be able to clinically develop, formulate, obtain regulatory approvals for or commercialize our product candidates. Under certain license agreements that we have already entered into, we have minimum dollar amounts per calendar year that we are

obligated to spend on the development of the technology we have licensed from our contract partners. If we fail to meet this requirement under any of our licenses, we may be in breach of our obligations under such agreement which may result in the loss of the technology licensed. We cannot necessarily control the amount or timing of resources that our contract partners will devote to our research and development programs, product candidates or potential product candidates, and we cannot guarantee that these parties will fulfill their obligations to us under these arrangements in a timely fashion.

 

We will rely upon third parties for the manufacture of our clinical product candidates.

 

We do not have the facilities or expertise to manufacture supplies of any of our potential product candidates. Accordingly, we will be dependent upon contract manufacturers for these supplies. We have no manufacturing supply arrangements for any of our product candidates, and there can be no assurance that we will be able to secure needed supply arrangements on attractive terms, or at all. Our failure to secure these arrangements as needed could have a materially adverse effect on our ability to complete the development of our product candidates or, if we obtain regulatory approval for our product candidates, to commercialize them.

 

We will seek to engage a specialty organic chemistry synthesis company, which we have not yet selected, to manufacture nanotransporters for which we have an exclusive license from UMMS for delivery of our product candidates, once they are determined. The synthesis methods for nanotransporters are described in the patent applications which we have licensed from UMMS. It is anticipated that refinement and scale-up in the synthesis methods will be performed under contract with this manufacturer. However, as the nanotransporters are unique chemicals, the costs of synthesis are not currently known and there is potential for technical challenges with respect to scale-up.

 

Our current plans call for the manufacture of our RNAi compounds by contract manufacturers offering research grade, Good Laboratory Practices toxicology studies and Good Manufacturing Practices grade RNAi for clinical use. The chemistry, manufacturing and controls for RNAi active pharmaceutical ingredient will be addressed by our clinical development team in close collaboration with a contract manufacturer with extensive experience in RNA drug synthesis. RNA is a complex molecule requiring many synthesis steps, which may lead to challenges with purification and scale-up. These challenges could result in increased costs and delays in manufacturing. Additionally, although we are not currently aware of any such litigation or threatened litigation or challenge, if we have litigation or threatened litigation for or challenge to the composition of our products candidates in the future, manufacturers may refuse to manufacture such compounds.

 

Any drug candidates we develop may fail in development or be delayed or may not be commercially viable.

 

All of our products in development must be approved by the FDA or similar foreign governmental agencies before they can be marketed. The process for obtaining FDA approval is both time-consuming and costly, with no certainty of a successful outcome. This process typically includes the conduct of extensive pre-clinical and clinical testing, which may take longer or cost more than we anticipate, and may prove unsuccessful due to numerous factors. Product candidates that may appear to be promising at early stages of development may not successfully reach the market for a number of reasons. The results of pre-clinical and initial clinical testing of these products may not necessarily indicate the results that will be obtained from later or more extensive testing. Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials.

 

We, the FDA or other applicable regulatory authorities, or an institutional review board (“IRB”), an independent committee under the oversight of the U.S. Department of Health and Human Services, or HHS, which has been formally registered with HHS and functions to approve, monitor and review biomedical and behavioral research involving humans, may suspend clinical trials of a drug candidate at any time for various reasons, including if we or they believe the subjects or patients participating in such trials are being exposed to unacceptable health risks. Among other reasons, adverse side effects of a drug candidate on subjects or patients in a clinical trial could result in the FDA or other regulatory authorities suspending or terminating the trial and refusing to approve a particular drug candidate for any or all indications of use.

Clinical trials of a new drug candidate require the enrollment of a sufficient number of patients, including patients who are suffering from the disease the drug candidate is intended to treat and who meet other eligibility criteria. Rates of patient enrollment are affected by many factors, and delays in patient enrollment can result in increased costs and longer development times.

 

Clinical trials also require the review and oversight of IRBs, which approve and continually review clinical investigations and protect the rights and welfare of human subjects. An inability or delay in obtaining IRB approval could prevent or delay the initiation and completion of clinical trials and the FDA may decide not to consider any data or information derived from a clinical investigation not subject to initial and continuing IRB review and approval.

 

Numerous factors could affect the timing, cost or outcome of our drug development efforts, including the following:

 

 

The substances we are intending to develop may represent a new class of drug, and the FDA has not yet established any definitive policies, practices or guidelines in relation to these drugs. While we expect any product candidates that we develop will be regulated as a new drug under the Federal Food, Drug, and Cosmetic Act, the FDA could decide to regulate them or other products we may develop as biologics under the Public Health Service Act. The lack of policies, practices or guidelines may hinder or slow review by the FDA of any regulatory filings that we may submit. Moreover, the FDA may respond to these submissions by defining requirements that we may not have anticipated.

 

It is possible that none of the product candidates that we develop will obtain the appropriate regulatory approvals necessary for us to begin selling them or that any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may market the product. The time required to obtain FDA and other approvals is unpredictable but often can take years following the commencement of clinical trials, depending upon the complexity of the drug candidate. Any analysis we perform of data from clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. Any delay or failure in obtaining required approvals could have a material adverse effect on our ability to generate revenue from the particular drug candidate.

 

We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above as well as risks

attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by the FDA does not assure approval by regulatory authorities outside of the United States.

 

The FDA approval process may be delayed for any drugs we develop that require the use of specialized drug delivery devices or vehicles.

 

Some drug candidates that we develop may need to be administered using specialized vehicles that deliver RNAi therapeutics directly to diseased parts of the body. For example, we anticipate using an implantable pump to deliver drug candidates to the nervous system. While we expect to rely on drug delivery vehicles that have been approved by the FDA or other regulatory agencies to deliver our drug candidates, we may need to modify the design or labeling of these delivery vehicles for some products we may develop. In such an event, the FDA may regulate the product as a combination product of a drug and a device or require additional approvals or clearances for the modified delivery. Additionally, it has been observed in at least one previous clinical trial, conducted by another company, that delivery vehicles similar to the delivery device in-licensed from UMMS may cause toxicity, which could delay or prevent approval of this delivery vehicle. Further, to the extent the specialized delivery vehicle is owned by another company, we would need that company’s cooperation to implement the necessary changes to the vehicle, or its labeling, and to obtain any additional approvals or clearances. Any delays in finding suitable drug delivery vehicles to administer RNAi therapeutics directly to diseased parts of the body could negatively affect our ability to successfully develop our RNAi therapeutics.

 

If we are not successful in developing pre-clinical product candidates, we will not be able to commence clinical trials in humans or obtain approval for our product candidates.

 

We are in the new drug discovery phase and we have not yet identified any lead compounds for therapeutic development in our initial areas of focus. RNA interference is a relatively new scientific field, and the technologies are still in the early stage of development. We have no compounds in pre-clinical toxicology studies, and we may not be able to advance any product candidate through the pre-clinical stage into clinical trials. Additionally, our development efforts may never result in the identification of a pre-clinical candidate which we are able to successfully develop into a drug. Even if we are able to designate a lead candidate, we may not be able to identify data that would support entering such a candidate into clinical trials. Furthermore, even if we successfully enter into clinical studies, the results from pre-clinical testing of a drug candidate may not predict the results that will be obtained on human clinical trials.

 

If our pre-clinical testing does not produce successful results or our clinical trials do not demonstrate safety and efficacy in humans, we will not be able to commercialize our drug candidates.

 

Before obtaining regulatory approval for the sale of our drug candidates, we must conduct, at our own expense, extensive pre-clinical tests and clinical trials to demonstrate the safety and efficacy in humans of our drug candidates. However, we are required to do extensive testing in animal models with our product candidates before we can be approved by the FDA to initiate clinical trials in humans. Furthermore, we cannot be sure that our product candidates will be safely tolerated by humans or be efficacious. Pre-clinical and clinical testing is expensive, difficult to design and implement, can take many years to complete and is uncertain as to outcome. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results.

 

A failure of one or more of our pre-clinical studies or clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, the pre-clinical testing and the clinical trial process that could delay or prevent our ability to receive regulatory approval or potentially commercialize our drug candidates, including:

 

 

 

Even if we obtain regulatory approvals, our marketed drugs will be subject to ongoing regulatory review. If we fail to comply with continuing U.S. and foreign regulations, we could lose our approvals to market drugs and our business would be materially adversely affected.

 

Following any initial regulatory approval of any drugs we may develop, we will also be subject to continuing regulatory review, including the review of adverse drug experiences and clinical results that are reported after our drug products are made available to patients. This would include results from any post-marketing tests or vigilance required as a condition of approval. The manufacturer and manufacturing facilities we use to make any of our drug candidates will also be subject to periodic review and inspection by the FDA. The discovery of any new or previously unknown problems with the product, manufacturer or facility may result in restrictions on the drug or manufacturer or facility, including withdrawal of the drug from the market. Our product promotion and advertising also will be subject to regulatory requirements and continuing regulatory review. If we fail to comply with applicable continuing regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and other adverse consequences.

 

Even if we receive regulatory approval to market our product candidates, our product candidates may not be accepted commercially, which may prevent us from becoming profitable.

 

The product candidates that we are developing are based on new technologies and therapeutic approaches. RNAi products are expected to be substantially more expensive to manufacture than traditional small molecule drugs, which may make them more costly than competing small molecule drugs. Additionally, RNAi products are likely to require injection or implantation, and do not readily cross the so-called blood brain barrier, which will make them less convenient to administer than drugs administered orally. Key participants in the pharmaceutical marketplace, such as physicians, medical professionals working in large reference laboratories, public health laboratories and hospitals, third-party payors and consumers, may not accept products intended to improve therapeutic results based on RNAi technology. As a result, it may be more difficult for us to convince the medical community and third-party payors to accept and use our product, or to provide favorable reimbursement. And if medical professionals working with large reference laboratories, public health laboratories and hospitals choose not to adopt and use our RNAi technology, our products may not achieve broader market acceptance.

Other factors that we believe will materially affect market acceptance of our product candidates include:

 

 

We may be unable to protect our intellectual property rights licensed from UMMS or others, our intellectual property rights may be inadequate to prevent third parties from using our technologies or developing competing products, and we may need to license additional intellectual property from others.

 

We have a non-exclusive license to the Mello and Fire foundational RNAi patent owned by UMMS and the Carnegie Institution of Washington, which claims various aspects of RNAi or genetic inhibition by double-stranded RNA. This license continues to be available to third parties, and as such it does not provide us with the ability to exclude others from its use or protect us from competition. Therapeutic applications of gene silencing technology and other technologies that we license from UMMS are also claimed in a number of UMMS pending patent applications, but there can be no assurance that these applications will result in any issued patents or that those patents would withstand possible legal challenges or protect RXi’s technologies from competition. United States Patent and Trademark Office and patent granting authorities in other countries have upheld stringent standards for the RNAi patents that have been prosecuted so far. Consequently, pending patents that we have licensed may continue to experience long and difficult prosecution challenges and may ultimately issue with much narrower claims than those in the pending applications. We are aware of a number of issued patents covering various particular forms and compositions of RNAi-mediating molecules and therapeutic methods that we do not currently expect to use. Third parties may, however, hold or seek to obtain additional patents that could make it more difficult or impossible for us to develop products based on the gene silencing technology that we have licensed.

 

In addition, others may challenge the patent owned by UMMS and the Carnegie Institution of Washington or other patents that we currently license or may license in the future and, as a result, these patents could be narrowed, invalidated or rendered unenforceable, which would negatively affect our ability to exclude others from use of RNAi technologies described in these patents. There can be no assurance that these patent or other pending applications or issued patents we licensed in will withstand possible legal challenges. Moreover, the laws of some foreign countries may not protect our proprietary rights to the same extent as do the laws of the United States. Any patents issued to us or our licensors may not provide us with any competitive advantages, and there can be no assurance that the patents of others will not have an adverse effect on our ability to do business or to continue to use our technologies freely. Our efforts to enforce and maintain our intellectual property rights may not be successful and may result in substantial costs and diversion of management time. Even if our rights are valid, enforceable and broad in scope, competitors may develop products based on technology that is not covered by our licenses.

 

We have entered into an invention disclosure agreement with UMMS under which UMMS has agreed to disclose to us certain inventions it makes and to give us the exclusive right to negotiate licenses to the disclosed technologies. There can be no assurance, however, that any such inventions will arise, that we will be able to negotiate licenses to any inventions on satisfactory terms, or at all, or that any negotiated licenses will prove commercially successful.

We may need to license additional intellectual property rights from third parties in order to be able to complete the development or enhance the efficacy of our product candidates or avoid possible infringement of the rights of others. Additionally, many of our UMMS licenses are limited to ALS, obesity, diabetes and cancer, and in order to pursue other diseases against proprietary gene targets, we may need licenses from UMMS or other third parties that may be unavailable. Accordingly, there is no assurance that we will be able to acquire any additional intellectual property rights on satisfactory terms, or at all.

 

In addition to our licenses, we also rely on copyright and trademark protection, trade secrets, know-how, continuing technological innovation and licensing opportunities. In an effort to maintain the confidentiality and ownership of our trade secrets and proprietary information, we require our employees, consultants, advisors and others to whom we disclose confidential information to execute confidentiality and proprietary information agreements. However, it is possible that these agreements may be breached, invalidated or rendered unenforceable, and if so, there may not be an adequate corrective remedy available. Furthermore, like many companies in our industry, we may from time to time hire scientific personnel formerly employed by other companies involved in one or more areas similar to the activities we conduct. In some situations, our confidentiality and proprietary information agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Although we require our employees and consultants to maintain the confidentiality of all confidential information of previous employers, we or these individuals may be subject to allegations of trade secret misappropriation or other similar claims as a result of their prior affiliations. Finally, others may independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to our trade secrets. Our failure to protect our proprietary information and techniques may inhibit or limit our ability to exclude certain competitors from the market and execute our business strategies.

 

Other companies or organizations may assert patent rights that prevent us from developing our products.

 

RNA interference is a relatively new scientific field that has generated many different patent applications from organizations and individuals seeking to obtain important patents in the field. These applications claim many different methods, compositions and processes relating to the discovery, development and commercialization of RNAi therapeutics. Because the field is so new, very few of these patent applications have been fully processed by government patent offices around the world, and there is a great deal of uncertainty about which patents will issue, when, to whom, and with what claims. While we are not aware of any litigation, threatened litigation or challenge to our intellectual property rights, it is likely that there will be significant litigation and other proceedings, such as interference and opposition proceedings in various patent offices, relating to patent rights in the RNAi field. Others may attempt to invalidate our intellectual property rights or those of our licensors. Even if our rights, or those of our licensors, are not directly challenged, disputes among third parties could lead to the weakening or invalidation of our intellectual property rights. Any attempt by third parties to circumvent or invalidate our intellectual property rights could be costly to defend, require significant time and attention of our management and have a material adverse effect on our business.

 

We are dependent on technologies we license, and if we lose the right to license such technologies or we fail to license new technologies in the future, our ability to develop new products would be harmed.

 

We currently are dependent on licenses from third parties for our key technologies, including licenses from UMMS and from Cold Spring Harbor Laboratory, relating to fundamental RNAi technologies. Our current licenses impose, and any future licenses we enter are likely to impose, various development, funding, royalty, diligence, sublicensing, insurance and other obligations on us. If our license with respect to any of these technologies is terminated for any reason, the development of the products contemplated by the licenses would be delayed, or suspended altogether, while we seek to license similar technology or develop new non-infringing technology. The costs of obtaining new licenses are high, and many patents in the RNAi field have already been exclusively licensed to third parties, including our competitors. If any of our existing licenses is terminated, the development of the products contemplated by the licenses could be delayed or terminated and we may not be able to negotiate additional licenses on acceptable terms, if at all, which would have a material adverse effect on our business.

We are subject to potential liabilities from clinical testing and future product liability claims.

 

If any of our future products are alleged to be defective, they may expose us to claims for personal injury by patients in clinical trials of our products or by patients using our commercially marketed products. Even if the marketing of one or more of our products is approved by the FDA, users may claim that such products caused unintended adverse effects. We will seek to obtain clinical trial insurance for clinical trials that we conduct, as well as liability insurance for any products that we market. There can be no assurance that we will be able to obtain insurance in the amounts we seek, or at all. We anticipate that licensees who develop our products will carry liability insurance covering the clinical testing and marketing of those products. There is no assurance, however, that any insurance maintained by us or our licensees will prove adequate in the event of a claim against us. Even if claims asserted against us are unsuccessful, they may divert management’s attention from our operations and we may have to incur substantial costs to defend such claims.

 

Any drugs we develop may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which could have a material adverse effect on our business.

 

We intend to sell our products primarily to hospitals which receive reimbursement for the health care services they provide to their patients from third-party payors, such as Medicare, Medicaid and other domestic and international government programs, private insurance plans and managed care programs. Most third-party payors may deny reimbursement if they determine that a medical product was not used in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Third-party payors also may refuse to reimburse for experimental procedures and devices. Furthermore, because our programs are in the early stages of development, we are unable at this time to determine their cost-effectiveness and the level or method of reimbursement. Increasingly, the third-party payors who reimburse patients are requiring that drug companies provide them with predetermined discounts from list prices, and are challenging the prices charged for medical products. If the price we are able to charge for any products we develop is inadequate in light of our development and other costs, our profitability could be adversely effected.

 

We currently expect that any drugs we develop may need to be administered under the supervision of a physician. Under currently applicable law, drugs that are not usually self-administered may be eligible for coverage by the Medicare program if:

 

 

There may be significant delays in obtaining insurance coverage for newly-approved drugs, and insurance coverage may be more limited than the purpose for which the drug is approved by the FDA. Moreover, eligibility for insurance coverage does not imply that any drug will be reimbursed in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim payments for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement may be based on payments for other services and may reflect budgetary constraints or imperfections in Medicare data. Net prices for drugs may be reduced by mandatory discounts or rebates required by government health care programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates. Our inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and private payors for new drugs that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to develop products, and our overall financial condition.

Additionally, third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for medical products and services. A number of legislative and regulatory proposals to change the healthcare system in the United States and other major healthcare markets have been proposed in recent years. These proposals have included prescription drug benefit legislation recently enacted in the United States and healthcare reform legislation enacted by certain states. Levels of reimbursement may decrease in the future, and future legislation, regulation or reimbursement policies of third-party payors may adversely affect the demand for and price levels of our products. If our customers are not reimbursed for our products, they may reduce or discontinue purchases of our products, which could have a material adverse effect on our business, financial condition and results of operations.

 

Some states and localities have established drug importation programs for their citizens, and federal drug import legislation has been introduced in Congress. The Medicare Prescription Drug Plan legislation, which became law in December 2003, required the Secretary of Health and Human Services to promulgate regulations for drug reimportation from Canada into the United States under some circumstances, including when the drugs are sold at a lower price than in the United States. The Secretary, however, retained the discretion not to implement a drug reimportation plan if he finds that the benefits do not outweigh the costs, and has so far declined to approve a reimportation plan. Proponents of drug reimportation may attempt to pass legislation that would directly allow reimportation under certain circumstances. Legislation or regulations allowing the reimportation of drugs, if enacted, could decrease the price we receive for any products that we may develop and adversely affect our future revenues and prospects for profitability.

 

If we fail to attract, hire and retain qualified personnel, we may not be able to design, develop, market or sell our products or successfully manage our business.

 

We are highly dependent on our named executive officers and the SAB Members. The continued service of our named executive officers and SAB Members is critical to our success. We have entered into employment agreements with our named executive officers, all of which can be terminated by such persons on short or no notice. The loss of any of our named executive officers or SAB Members, or our inability to identify, attract, retain and integrate additional qualified key personnel, could make it difficult for us to manage our business successfully and achieve our business objectives.

 

Competition for skilled research, product development, regulatory and technical personnel also is intense, and we may not be able to recruit and retain the personnel we need. The loss of the services of any key research, product development, regulatory, and technical personnel, or our inability to hire new personnel with the requisite skills, could restrict our ability to develop our product candidates.

 

We use biological and hazardous materials and if we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.

 

Our research and development activities involve the controlled use of potentially harmful biological materials as well as hazardous materials, chemicals and various radioactive compounds. We cannot completely eliminate the risk of accidental contamination or injury; we could be held liable for any damages that result, and any liability could exceed our resources. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specific waste products. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. The cost of compliance with these laws and regulations could be significant and may adversely affect capital expenditures to the extent we are required to procure expensive capital equipment to meet regulatory requirements.

 

We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. We maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of these materials. The limits of our workers’ compensation insurance are mandated by state law, and our workers’ compensation liability is capped

at these state-mandated limits. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials. Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate any of these laws or regulations.

 

Risks Related to Ownership of Our Common Stock

 

The distribution of our common stock to CytRx’s stockholders is expected to be taxable, and CytRx’s stockholders may be required to pay U.S. federal income taxes.

 

CytRx expects that the distribution will be taxable to holders of CytRx common stock. An amount equal to the sum of the fair market value of our common stock on the distribution date and any cash received in lieu of fractional shares will be treated as a dividend to the extent of any current year earnings and profits of CytRx, including gain resulting from the distribution, with the excess treated as non-taxable return of capital to the extent of a holder’s tax basis in CytRx common stock and any remaining excess treated as capital gain. Although CytRx will be ascribing a value to our shares in this distribution for tax purposes, this valuation is not binding on the Internal Revenue Service or any state taxation agency. These taxing authorities could ascribe a higher valuation to our shares, particularly if our stock trades at prices significantly above the value ascribed to our shares by CytRx in the period immediately following the distribution. CytRx stockholders should consult with their own tax advisors regarding the tax consequences of the distribution.

 

Because there has not been any public market for our common stock, the market price and trading volume of our common stock may be volatile, and you may not be able to sell your shares at or above the initial market price of our stock following the distribution.

 

Prior to the distribution made under this prospectus and the award made under the award prospectus, there will have been no trading market for our common stock. We cannot predict the extent to which investors’ interest will lead to a liquid trading market or whether the market price of our common stock will be volatile. The market price of our common stock could fluctuate significantly for many reasons, including the following factors discussed elsewhere in this prospectus:

 

 

 

 

 

 

 

 

 

In addition, factors beyond our control may also have an impact on the price of our stock. For example, to the extent that other large companies within our industry experience declines in their stock price, our stock price may decline as well. In addition, when the market price of a company’s common stock drops significantly, stockholders often institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.

 

Our shares distributed to CytRx stockholders will be eligible for immediate sale, which may adversely affect our stock price.

 

The shares of our common stock that CytRx distributes to its stockholders generally may be sold immediately in the public market. Any sales of substantial amounts of our common stock in the public market, or the perception that such sales might occur, whether as a result of the distribution or otherwise, may cause the market price of our common stock to decline. We are unable to predict the extent to which common stock will be sold in the open market following the distribution or whether a sufficient number of buyers for our common stock will be in the market at that time.

 

Future sales of our shares by CytRx or UMMS, or the possibility of such sales, could adversely affect our stock price.

 

CytRx will own approximately 6,212,861 shares of our common stock, or approximately 49% of our outstanding shares, immediately following the distribution made under this prospectus and the award made under the award prospectus. In connection with the distribution, we agreed to include in the registration statement filed by us relating to the distribution the shares being registered for resale from time to time by CytRx and UMMS pursuant to the resale prospectus. We further agreed, subject to some exceptions, to keep the registration statement effective until the shares being offered thereby are eligible to be sold under Rule 144(k) under the Securities Act of 1933, as amended, or the “Securities Act,” or such earlier date as of which all of the shares have been sold. We also have granted CytRx what are commonly known as “piggyback” registration rights to include our shares currently owned by CytRx, or owned by CytRx in the future as a result of a dividend or distribution with respect to shares currently owned by CytRx, in other registration statements that we may file with the SEC on behalf of our company or our security holders. The availability of our shares held by CytRx and UMMS for resale publicly, as well as any actual sales of these shares, could adversely affect the market price of our shares following the distribution made under this prospectus and the award under the award prospectus.

 

If the value of our shares owned by CytRx from time to time were to exceed 40% of the value of CytRx’s total assets, CytRx may be deemed an “investment company” within the meaning of the Investment Company Act of 1940 and become subject to the stringent regulations applicable to investment companies. In this event, CytRx would likely seek to promptly sell or otherwise dispose of shares of our common stock in order to avoid becoming an inadvertent investment company. Any such sales or other disposition by CytRx of our shares, or the possibility of such sales or disposition, could adversely affect the market price of our shares.

 

We have granted CytRx preemptive rights to acquire shares that we may sell in the future, which may impair our ability to raise funds.

 

Under our agreement with CytRx and our founding stockholders, with some exceptions, CytRx will have preemptive rights to acquire a portion of any new securities sold or issued by us so as to maintain its percentage ownership of us at the time of any such sale and issuance. CytRx’s percentage ownership will be approximately 49% immediately following the distribution made under this prospectus and the award made under the award prospectus. The exercise by CytRx of its preemptive rights may impair our ability to raise funds, or adversely affect the terms on which we are able to raise funds, as we may not be able to offer to new investors the quantity of our stock that they may desire to purchase.

 

CytRx’s ownership of our common stock could delay or prevent a change in corporate control.

 

CytRx will hold approximately 49% of our common stock immediately after the distribution made under this prospectus and the award made under the award prospectus, and will have preemptive rights, as described above, to maintain its percentage ownership. CytRx has agreed with UMMS, us and our other founding stockholders to vote its shares of our common stock so that a majority of the members of our board of directors are not affiliated (as defined) with CytRx. However, by virtue of its stock ownership immediately following the distributions made under this prospectus and the award made under the award prospectus, CytRx may be able to significantly influence the outcome of matters required to be submitted to a vote of our stockholders, including any proposed amendments to

our certificate of incorporation and approval of mergers and other significant corporate transactions. This concentration of ownership may adversely affect the market price of our common stock by:

 

 

CytRx could unilaterally effect a change of control of our company by selling or disposing of our shares owned by it.

 

Immediately following the distributions made under this prospectus and the award made under the award prospectus, CytRx will own approximately 49% of the outstanding shares of RXi common stock, all of which are being concurrently registered for resale by means of the resale prospectus. If CytRx were to sell or otherwise dispose of all or a significant portion of our shares owned by it to a single buyer or group of affiliated buyers, it could effect a change of control of our company without the advice or participation by our board of directors or other stockholders, since transferees of the shares owned by CytRx will not be bound by CytRx’s agreements with UMMS, us and our other founding stockholders not to vote our shares owned by it for the election of a majority of our board of directors who are affiliated with CytRx.

 

Anti-takeover provisions of our certificate of incorporation and by-laws and provisions of Delaware law could delay or prevent a change of control that you may favor.

 

Anti-takeover provisions of our certificate of incorporation and by-laws and provisions of Delaware law may discourage, delay or prevent a merger or other change of control that stockholders may consider favorable, or may impede the ability of the holders of our common stock to change our management. The provisions of our certificate of incorporation and by-laws, among other things, will:

 

 

In addition, Section 203 of the Delaware General Corporation Law provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation such as our company shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares for a three-year period following the date on which that person or its affiliate crosses the 15% stock ownership threshold. Section 203 could operate to delay or prevent a change of control of our company.

 

We may acquire other businesses or form joint ventures that may be unsuccessful and could adversely dilute your ownership of our company.

 

As part of our business strategy, we may pursue future acquisitions of other complementary businesses and technology licensing arrangements. We also may pursue strategic alliances. We have no experience with respect to acquiring other companies and limited experience with respect to the formation of collaborations, strategic alliances and joint ventures. If we were to make any acquisitions, we may not be able to integrate these acquisitions successfully into our existing business and we could assume unknown or contingent liabilities. We also could experience adverse effects on our reported results of operations from acquisition-related charges, amortization of acquired technology and other intangibles and impairment charges relating to write-offs of goodwill and other intangible assets from time to time following the acquisition. Integration of an acquired company also may require management resources that otherwise would be available for ongoing development of our existing business. We may not identify or complete these transactions in a timely manner,

on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition, technology license or strategic alliance.

 

To finance acquisitions, we may choose to issue shares of our common stock as consideration, which would dilute your ownership interest in us. Alternatively, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us and, in the case of equity financings, may result in dilution to our stockholders. Any future acquisitions by us also could result in large and immediate write-offs, the incurrence of contingent liabilities or amortization of expenses related to acquired intangible assets, any of which could harm our operating results.

 

FORWARD-LOOKING STATEMENTS

 

Any statements in this prospectus about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common stock and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement.

 

Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this prospectus. Some of the risks, uncertainties and assumptions that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include but are not limited to:

 

 

The foregoing list sets forth some, but not all, of the factors that could affect our ability to achieve results described in any forward-looking statements. Stockholders are cautioned not to place undue reliance on such statements, which speak only as of today’s date. We assume no obligation and expressly disclaim any duty to update any forward-looking statement to reflect events or circumstances after the date of this prospectus or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements contained in this prospectus.

 

All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

 

THE DISTRIBUTION

 

Reasons for Distribution

 

The CytRx board of directors periodically reviews and assesses strategic alternatives to ensure that all of its technologies and other assets are being utilized in the best manner to create value for CytRx and its stockholders. The CytRx board determined that the best strategy for realizing the potential value of CytRx’s RNAi assets was to contribute them to us, with our focus on developing and potentially commercializing RNAi therapeutics. In order to enhance the stand-alone character of our business and operations, the board of directors of CytRx also determined to divest itself of control of RXi. To underscore its strategy, CytRx agreed with our principal RNAi collaborator, UMMS, and our scientific advisors and other founding shareholders to reduce its ownership of our shares to less than 50% within a reasonable period of time following our initial funding. The distribution is intended, among other things, to satisfy CytRx’s obligations to reduce its ownership of RXi to less than 50%.

 

The CytRx board believes that the partial distribution to its stockholders of our common stock will:

 

 

 

 

The CytRx board considered a number of potentially negative factors in evaluating the separation of RXi from CytRx, including the risks of being unable to achieve the expected benefits of the partial distribution, as well as the transaction costs and increased future aggregate general and administrative costs of the two companies relative to CytRx’s historical general and administrative costs and the tax implications to CytRx and its stockholders. After careful consideration, the CytRx board concluded that the potential benefits of the separation outweighed these factors.

 

In considering the separation of RXi from CytRx, the CytRx board was aware that Steven A. Kriegsman, CytRx’s President and Chief Executive Officer, will serve as a director of RXi, and that CytRx’s directors and executive officers who own CytRx shares will receive RXi shares on the same terms as other stockholders.

The CytRx board determined that these interests in the separation held by directors and executive officers are consistent with the interests of CytRx’s stockholders generally.

 

In view of the numerous factors considered in connection with the evaluation of the separation and the complexity of these matters, the CytRx board did not find it useful to, and did not attempt to, quantify, rank or otherwise assign relative weights to the factors considered. The individual members of the CytRx board likely may have given different weights to different factors.

 

The distribution is not being underwritten by an investment bank or otherwise. We will pay any fees and expenses incurred in connection with the distribution and listing of our common stock on the NASDAQ Capital Market. We anticipate that the aggregate of these fees and expenses will be approximately $     .

 

The Founding and Initial Funding of RXi

 

We were incorporated as Argonaut Pharmaceuticals, Inc. in Delaware on April 3, 2006 and changed our name to RXi Pharmaceuticals Corporation on November 28, 2006. At our inception, we issued to CytRx approximately 356,200 shares of common stock. On January 8, 2007, we entered into a Contribution Agreement with CytRx under which CytRx assigned and contributed to us substantially all of its RNAi-related technologies and assets, or the “initial contribution.” The assigned assets consisted primarily of CytRx’s licenses from UMMS and from the Carnegie Institution of Washington relating to fundamental RNAi technologies, as well as equipment situated at its Worcester, Massachusetts, laboratory. In connection with the initial contribution, we assumed primary responsibility for all payments to UMMS and other obligations under the contributed licenses and assets. In addition, we issued approximately 7,040,000 of our shares of common stock to CytRx. On April 30, 2007, we issued approximately 3,273,000 additional shares of our common stock to CytRx at $5.00 per share, based in part, upon the advice of the third-party valuation advisor and assuming the issuance of 462,112 shares to UMMS pursuant to our license agreements with them, in exchange for CytRx’s additional contribution of $17,000,000. On September 25, 2007, we issued an additional 188,387 shares of common stock to CytRx at $5.00 per share to satisfy in full certain reimbursement amounts owed to CytRx by us. As a result of these issuances, as well as shares of common stock issued to CytRx in connection with our formation, CytRx currently owns approximately 86% of our common stock. The remaining 14% of our common stock is owned by UMMS, SAB Members and our executive officers and directors. For more information regarding these transactions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates.”

 

Manner of the Distribution

 

CytRx expects to effect the distribution on or about          , 2008 by distributing shares of RXi common stock to CytRx’s common stock holders at the close of business on          , 2008, the record date for the distribution. To be entitled to receive shares of our common stock in the distribution, CytRx stockholders must be registered stockholders at the close of business (Eastern time) on the record date,          , 2008 which we anticipate will be approximately twenty days after the effectiveness of the registration statement of which this prospectus is a part.

 

Based on            shares of CytRx common stock outstanding as of the date of this prospectus, each holder of CytRx common stock will receive one share of RXi common stock for each           shares of CytRx common stock held at the close of business on the record date. This distribution ratio assumes that no outstanding common stock options or stock purchase warrants of CytRx will be exercised between the date of this prospectus and the record date. The actual distribution ratio may be less than one-for-          , depending on the number of shares of CytRx common stock outstanding on the record date.

 

For CytRx stockholders as of the record date whose shares are held in their own names, our transfer agent will credit their shares of RXi common stock to book entry direct registration accounts established to hold their RXi common stock. Our distribution agent will send these stockholders a statement reflecting their RXi common stock ownership. Book entry refers to a method of recording stock ownership in our records in which no physical certificates are used. For CytRx stockholders who own CytRx common stock through a broker or other nominee that is a member of (or has a correspondent relationship with) the Depository Trust Company,

their shares of RXi common stock will be credited to the stockholders’ accounts by the broker or other nominee.

 

CytRx common stock holders will not be required to pay for shares of our common stock received in the distribution or to surrender or exchange shares of CytRx common stock to receive our common stock.

 

Treatment of Fractional Shares

 

No fractional shares of our common stock will be distributed to CytRx stockholders as part of the distribution nor credited to book-entry accounts. The distribution agent will aggregate all of the fractional shares and sell them in the open market at then prevailing prices on behalf of these stockholders. These stockholders will receive cash payments in the amount of their proportionate share of the net sale proceeds from the sale of the aggregated fractional shares, based upon the average gross selling price per share of our common stock after making appropriate deductions for required withholdings for U.S. federal income tax purposes, if any, and after deducting an amount equal to all brokerage charges, commissions and transfer taxes attributed to the sale of fractional shares. See “Material United States Federal Income Tax Considerations” for a discussion of the U.S. federal income tax treatment of the proceeds received from the sale of fractional shares. We anticipate that these sales will occur as soon after the distribution date as practicable as determined by the distribution agent. None of CytRx, us or the distribution agent will guarantee any minimum sale price for the fractional shares. The distribution agent will have the sole discretion to select the broker-dealers through which to sell the shares and to determine when, how and at what price to sell the shares.

 

Direct Registration System

 

We will have a direct registration (book entry) program with respect to record ownership of our common stock. Direct registration is a service that allows shares to be owned, reported and transferred electronically without having a physical stock certificate issued. Persons who acquire shares of our common stock will not receive a physical stock certificate (unless certificates are specifically requested); rather, ownership of the shares is recorded in the names of such persons electronically on our books and records. Direct registration is intended to alleviate problems relating to stolen, misplaced or lost stock certificates and to reduce the paperwork relating to the transfer of ownership of our common stock. Under direct registration, the voting, dividend and other rights and benefits of holders of our common stock remain the same as with holders of stock certificates.

 

Upon completion of the distribution, CytRx stockholders as of the record date whose shares are registered in their own names will receive a statement confirming the issuance to them of the appropriate number of shares of our common stock through direct registration, rather than issuing a physical stock certificate, unless such stockholders give specific instructions to our transfer agent to do so. For stockholders who hold CytRx common stock through a broker or other nominee that is a member of (or has a correspondent relationship with) the Depository Trust Company, their shares of RXi common stock will be credited to these stockholders’ accounts by the broker or other nominee.

 

To utilize the services of a stockbroker to sell their shares, a stockholder holding his shares through direct registration must first add the appropriate stockbroker information to the direct registration account maintained by the transfer agent. Thereafter, such stockholder may transfer our common stock by telephone to a brokerage account and then may sell or transfer such shares by giving instructions to the broker.

 

Results of the Distribution

 

After the distribution, we will be a publicly traded company. Immediately after the distribution made under this prospectus and the award made under the award prospectus, we expect to have approximately           record holders of shares of our common stock and 12,684,432 shares of our common stock outstanding. CytRx will own 6,212,861 shares of our common stock, representing an approximate 49% ownership interest in us, immediately after the distribution made under this prospectus and the award made under the award prospectus.

Other Transactions

 

Concurrently with the distribution of our shares to CytRx stockholders pursuant to this prospectus, CytRx is awarding approximately 83,714 outstanding shares of our common stock owned by it to some of its directors, officers and other employees pursuant to the award prospectus. CytRx will award each of its directors, officers and other employees who hold stock options to purchase CytRx common stock as of the date of this prospectus the number of RXi shares that such individual would have received in the distribution of RXi shares to CytRx stockholders, assuming such individual had, on the record date for the distribution, exercised in full, on a “net-exercise” basis, all such stock options to the extent then exercisable. The award will be based on the market price of CytRx common stock as of the record date for the distribution and the actual distribution ratio in the distribution. Based on the market price of CytRx common stock of $      as reported on the NASDAQ Capital Market on          , 2008 and the estimated distribution ratio is one share of RXi common stock for each           shares of CytRx common stock held by CytRx stockholders, CytRx expects to award a total of up to approximately           shares of RXi by means of the award prospectus. The market price of CytRx common stock on the record date for the distribution may be different than $     , and the actual distribution ratio may be less than one-for-          , depending on the number of shares of CytRx common stock outstanding on the record date. For these reasons, the actual number of shares awarded by CytRx may be different than 83,714.

 

We are also concurrently registering for resale by CytRx pursuant to the resale prospectus up to 6,212,861 RXi shares that will be owned by it immediately after the distribution made under this prospectus and the award made under the award prospectus, representing all of our shares owned by CytRx at such time. In addition, we are registering 462,112 shares owned by UMMS for resale pursuant to the resale prospectus, which comprise all of our shares owned by UMMS. Pursuant to the resale prospectus, CytRx and UMMS, if each so desires, may dispose of some or all of their respective shares covered by the resale prospectus at such times and at such prices as each may choose. The resale prospectus also is intended to facilitate the sale by CytRx of our shares if it becomes necessary or advisable in light of Investment Company Act of 1940 considerations described in the “Risk Factors” section of this prospectus. Whether sales of shares will be made by CytRx or UMMS, and the timing and amount of any sale made, is within the sole discretion of CytRx and UMMS, respectively. Under the resale prospectus, CytRx and UMMS, and their respective pledgees, assignees and successors-in-interest may, from time to time, sell any or all of its shares of our common stock on the NASDAQ Capital Market, or any other stock exchange, market or trading facility on which the shares may be traded, or in private transactions. These sales may be at fixed or negotiated prices. Neither CytRx nor UMMS has informed us of a present plan or arrangement with respect to any resales of its shares of our common stock, and there is no assurance as to whether, or when, CytRx or UMMS may dispose of our shares following the distribution and award.

 

Trading Market

 

CytRx currently owns approximately 86% of our outstanding shares of common stock, and there has been no public market for our common stock. We have applied to list our common stock on the NASDAQ Capital Market under the symbol “RXIP;” however, an active trading market may not develop or be sustained in the future. We expect that a limited market for shares of our common stock, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution.

 

We cannot predict the prices at which our common stock may trade before the distribution on a “when-issued” basis or after the distribution. “When-issued” trading refers to a transaction made conditionally because the security has been authorized but not yet issued. On the first trading day after the distribution date, any “when-issued” trading in respect of our common stock will end and “regular-way” trading will begin. Prices will be determined by the marketplace and may bear no relationship to the book value per share or other common indicators of the value of our common stock. The future prices at which trading in shares of our common stock occurs may fluctuate significantly. These prices may be influenced by many factors, including quarter-to-quarter variations in our actual or anticipated financial results or those of our company in the industries or the markets that we serve, investor perception of our company and the RNAi-based therapeutics industry, and general economic and market conditions. In addition, the stock market in general

has experienced extreme price and volume fluctuations that have affected the market price of many stocks and that have often been unrelated or disproportionate to the operating performance of these companies. These are just some factors that may adversely affect the market price of our common stock.

 

Shares of our common stock that you will receive in the distribution will be freely tradable, except if you are considered an “affiliate” of ours under Rule 144 of the Securities Act. Persons who can be considered our affiliates after the distribution generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with us, and may include our directors, executive officers and principal stockholders. Our affiliates may only sell common stock received in the distribution under:

 

 

 

The number of options to purchase shares of our common stock that will be outstanding immediately after the distribution is 1,404,229. Shares of our common stock issued upon exercise of these options will be registered on a Form S-8 under the Securities Act shortly after the distribution and will, therefore, be freely transferable under the securities laws, subject, in the case of affiliates, to certain limitations described above. Immediately following the distribution made under this prospectus and the award made under the award prospectus, and without considering the other transactions described in this prospectus, based upon the record number of shares of CytRx common stock held as of          , 2008, our affiliates that are known to us, including CytRx, will hold approximately           shares of our common stock.

 

Trading Between the Record Date and Distribution Date

 

Beginning on or shortly before the record date and continuing up to and including the distribution date, there will be two markets in CytRx common stock: a “regular-way” market and an “ex-distribution” market. Shares of CytRx common stock that trade on the “regular-way” market will trade with an entitlement to our shares of common stock distributed pursuant to the distribution. Shares that trade on the “ex-distribution” market will trade without an entitlement to our shares of common stock distributed pursuant to the distribution. Therefore, if you sell shares of CytRx common stock in the “regular-way” market up to and including the distribution date, you will be selling your right to receive shares of our common stock in the distribution. If you own shares of CytRx common stock at the close of business on the record date and sell those shares on the “ex-distribution” market, up to and including through the distribution date, you will still receive the shares of our common stock that you would be entitled to receive pursuant to your ownership of the shares of CytRx common stock.

 

Furthermore, beginning on or shortly before the record date and continuing up to and including through the distribution date, there will be a “when-issued” market in our common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of our common stock that will be distributed to CytRx stockholders on the distribution date. If you owned shares of CytRx common stock at the close of business on the record date, you would be entitled to shares of our common stock distributed pursuant to the distribution. You may trade this entitlement to shares of our common stock, without the shares of CytRx common stock you own, on the “when-issued” market. On the first trading day following the distribution date, “when-issued” trading with respect to our common stock will end and “regular-way” trading will begin.

 

Reason for Furnishing this Prospectus

 

This prospectus is being furnished to provide information to CytRx stockholders who are entitled to receive shares of RXi common stock in the distribution of such shares by CytRx. The prospectus is not, and is not to be construed as, an inducement or encouragement to buy, hold or sell RXi common stock or CytRx common stock.

 

We believe that the information in this prospectus is accurate as of the date set forth on the cover page. Changes may occur after that date, and neither we nor CytRx undertakes any obligation to update such information except in the normal course of its respective public disclosure obligations.

 

USE OF PROCEEDS

 

We will not receive any proceeds as a result of the distribution of our shares by CytRx.

 

DIVIDEND POLICY

 

We do not anticipate paying any dividends on our common stock in the foreseeable future. We expect to retain future earnings, if any, for use in our development activities and the operation of our business. The payment of any future dividends will be subject to the discretion of our board of directors and will depend, among other things, upon our results of operations, financial condition, cash requirements, prospects and other factors that our board of directors may deem relevant. Additionally, our ability to pay future dividends may be restricted by the terms of any debt financing.

 

SELECTED HISTORICAL FINANCIAL INFORMATION

 

The following selected historical financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and corresponding notes to financial statements included elsewhere in this prospectus.

 

RXi was incorporated as Argonaut Pharmaceuticals, Inc., in Delaware, on April 3, 2006 by CytRx and our four scientific founders, and we changed our name to RXi Pharmaceuticals Corporation on November 28, 2006. From April 3, 2006 (date of incorporation) until January 8, 2007, no activities were conducted at the RXi level.

 

The financial statements of RXi included in this prospectus for the periods through December 31, 2006 have been disaggregated, or “carved-out,” of the financial statements of CytRx, as our “predecessor,” which were audited by BDO Seidman, LLP, an independent registered public accounting firm. These carved-out financial statements form what we refer to herein as the financial statements of the predecessor, and include both direct and indirect expenses. The historical direct expenses consist primarily of the various costs for technology license agreements, sponsored research agreements and fees paid to scientific advisors. Indirect expenses represent expenses incurred by CytRx on behalf of RXi that have been allocated to RXi. The indirect expenses are based upon (1) estimates of the percentage of time spent by individual CytRx employees working on RXi matters by year and (2) allocations of various expenses associated with each employee including salary, benefits, rent associated with an employee’s office space, accounting and other general and administrative expenses. The percentage of time spent by individual CytRx employees was then multiplied by the allocation of various expenses associated with those employees to develop an allocation of expense per employee and the sum of such allocations for these employees equals the total expense allocation for the year. RXi’s financial information as of December 31, 2006, and September 30, 2007 and for the period ended September 30, 2007 are referred to in this prospectus as the financial information of the successor, and includes expenses incurred by RXi in its RNAi therapeutic programs, as well as an allocation of corporate services provided by CytRx. In addition, the net intercompany activities between the predecessor and CytRx have been accumulated into a single caption entitled “Parent Company’s Net Deficit.”

 

The periods ended December 31, 2006, 2005 and 2004 as well as the cumulative financial information for the period from January 1, 2003 (date of inception) through December 31, 2006 for our predecessor and the financial information of the successor as of December 31, 2006 and for the period from April 3, 2006 (date of incorporation) to December 31, 2006 have been audited by our independent registered public accounting firm, BDO Seidman, LLP, which also previously audited CytRx’s consolidated financial statements for the years ended December 31, 2006, 2005 and 2004. The information presented as of and for the nine-month periods ended September 30, 2007 and 2006 as well as the cumulative financial information for the period from April 3, 2006 (date of incorporation) through September 30, 2007 is unaudited and has been prepared on the same basis as the audited financial statements and includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of this information in all material respects. The results of any interim period are not necessarily indicative of the results of operations to be expected for a full fiscal year.

 

In 2003, CytRx entered into several technology license agreements with UMMS related to RNAi technologies. CytRx subsequently entered into other RNAi-related technology agreements with UMMS and other parties, as well as four sponsored research agreements pursuant to which CytRx funded RNAi research activities. Three of these sponsored research agreements were with UMMS and one of the sponsored research agreements was with Massachusetts General Hospital. On January 8, 2007, RXi entered into a contribution agreement with CytRx under which CytRx assigned and contributed to RXi substantially all of its RNAi-related technologies and assets, and we commenced operations in January 2007.

 

Management believes the assumptions underlying the carve-out financial information are reasonable; however, RXi’s financial position, results of operations and cash flows may have been materially different if it was operated as a stand-alone entity as of and for the periods presented.

 

We generated no revenues during the years ended December 31, 2006, 2005 or 2004 or for the nine-month periods ended September 30, 2007 and 2006. We also anticipate that no revenue will be generated

for the year ending December 31, 2007. Accordingly, for accounting purposes we are considered a development stage company.

 

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion in conjunction with the RXi and predecessor carve-out financial statements and the notes to financial statements included elsewhere in this prospectus. The carved-out financial statements were derived from the consolidated financial statements of CytRx to include the historical operations being transferred to RXi and have been labeled as “predecessor” throughout this prospectus. This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contains forward-looking statements. Please see “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed below and elsewhere in this prospectus, particularly under the heading “Risk Factors.”

 

Overview

 

We are a discovery-stage biopharmaceutical company pursuing proprietary therapeutics based on RNA interference, or RNAi, a naturally occurring cellular mechanism that has the potential to effectively and selectively interfere with, or “silence,” expression of targeted disease-associated genes. We intend to initially focus on certain neurodegenerative diseases, metabolic diseases, and cancer. By utilizing our expertise in RNAi and the RNAi technology platform we have licensed from prominent researchers, we believe we will be able to discover and develop lead compounds and move them into and through development for potential commercialization more efficiently than traditional drug development approaches.

 

We were formed in 2006 by CytRx and four prominent RNAi researchers, including Dr. Craig Mello, who was awarded the 2006 Nobel Prize in Medicine for his co-discovery of RNAi. From 2003 through 2006, CytRx sponsored therapeutic RNAi research at UMMS and Massachusetts General Hospital. We commenced operations in January 2007 after CytRx contributed to us its portfolio of RNAi therapeutic assets in exchange for approximately 7.04 million shares of our common stock on January 8, 2007. These assets consisted primarily of RNAi licenses and related intellectual property, and a nominal amount of fixed assets. The cost of the licenses had previously been expensed by CytRx as in-process research and development and were recorded in the predecessor financial statements at cost.

 

To date, our principal activities have consisted of recruiting an RNAi-focused management and scientific and clinical advisory team which has focused on assessing and acquiring additional RNAi technologies, performing discovery and pre-clinical research, developing clinical strategies, exploring potential development partnerships and completing our organizational activities.

 

We have not generated revenue to date and may not generate revenue in the foreseeable future, if ever. We expect to incur significant operating losses as we advance our product candidates through the drug development and regulatory process. In addition to increasing research and development expenses, we expect general and administrative costs to increase as we add personnel and begin to operate as a public company. We will need to generate significant revenues to achieve profitability and might never do so. In the absence of product revenues, our potential sources of operational funding are expected to be the proceeds from the sale of equity, funded research and development payments and payments under collaborative agreements. We believe that we have sufficient cash and cash equivalents to fund our currently planned business activities through the first quarter of 2009.

 

The Founding and Funding of RXi

 

On April 30, 2007, we issued approximately 3,273,000 additional shares of our common stock to CytRx at $5.00 per share, based in part, upon the advice of the third-party valuation advisor and assuming the issuance of 462,112 shares to UMMS pursuant to our license agreements with them, in exchange for CytRx’s additional contribution of $17,000,000. On September 25, 2007, we issued an additional 188,387 shares of common stock to CytRx at $5.00 per share to satisfy in full certain reimbursement amounts owed to CytRx by us. CytRx will own approximately 49% of our outstanding shares of common stock immediately following the distribution made under this prospectus and the award made under the award prospectus. In the event that we

propose to sell or issue shares of RXi common stock in the future, CytRx will have the right to purchase a portion of such shares sufficient to maintain its percentage ownership at the time of such sale or issuance. This right will terminate on the earlier of January 8, 2012 or the first date at which CytRx owns less than 10% of our outstanding shares.

 

Research and Development

 

We are currently focusing on the areas of neurological disease, metabolic disease, and oncology. In order to support the advancement of RNAi compounds into these therapeutic areas, our initial research programs, which we intend to pursue over the course of the next 12 months, are designed (1) to directly deliver the RNAi compound into a compartment, such as into the cerebral spinal fluid of the spinal cord for our initial disease target, ALS, and (2) to optimize the delivery method and technology necessary to make RNAi compounds available at the appropriate disease site by systemic administration, as for our programs in diabetes, obesity or cancer. Since we commenced operations, research and development has comprised a significant proportion of our total operating expenses and is expected to comprise the majority of our spending for the foreseeable future.

 

There are risks in any new field of drug discovery that preclude certainty regarding the successful development of a product. We cannot reasonably estimate or know the nature, timing and costs of the efforts necessary to complete the development of, or the period in which material net cash inflows are expected to commence from, any product candidate. Our inability to make these estimates results from the uncertainty of numerous factors, including but not limited to:

 

 

Failure to complete any stage of the development of our product candidates in a timely manner could have a material adverse effect on our operations, financial position and liquidity. A discussion of the risks and uncertainties associated with completing our projects on schedule, or at all, and the potential consequences of failing to do so, are set forth under the heading “Risk Factors” in this prospectus.

 

Licenses

 

We have entered into relationships with academic institutions and research foundations and may seek to enter into additional licenses with pharmaceutical and biotechnology companies. We also may enter into strategic alliances to expand our RNAi intellectual property portfolio and to potentially accelerate our development programs by gaining access to technology and funding, including equity sales, license fees and

other revenues. For each product that we develop that is covered by the patents licensed to us pursuant to one of the license agreements we have entered into, including the material licenses discussed below, we are obligated to make additional payments upon the attainment of certain specified product development milestones. While we have not yet identified a lead product candidate, we have determined, based on a likely product candidate resulting from our current research, that the aggregate potential milestone payments for such likely product candidate, upon the attainment of all possible product development milestones, is $36,480,000.

 

University of Massachusetts Medical School and Imperial College

 

As part of the January 8, 2007 contribution of assets by CytRx, we became a party to a number of exclusive and non-exclusive license agreements with UMMS. The exclusive license agreements from UMMS cover potential applications of proprietary RNAi technology in the treatment of ALS, obesity, type 2 diabetes and cancer. As consideration for these licenses, CytRx made cash payments to UMMS totaling $171,000 and issued a total of approximately 1,548,000 shares of CytRx common stock at the fair market price on the date of the transaction of approximately $0.99 per share, or $1.5 million, for financial statement purposes. Pursuant to these licenses assigned from CytRx, we have assumed the obligation to pay annual license maintenance fees in an aggregate amount of $130,000. Additionally, we were assigned from CytRx a license from the Imperial College of Science, Technology & Medicine. This license provides the exclusive rights to intellectual property covering a drug screening method using RIP 140, which, according to a June 2004 study published in the Proceedings of the National Academy of Sciences of the United States of America, is a nuclear hormone co-repressor believed to regulate fat accumulation. As consideration for the license, CytRx made cash payments to Imperial College totaling $87,000 and issued a total of 75,000 shares of CytRx common stock, valued at the market price of CytRx common stock at the date of the transaction of $1.44 per share for financial statement purposes, or $108,000. Pursuant to this license we have assumed the obligation to make royalty payments based on sales of products developed using this technology.

 

The drug screening technology licensed from Imperial College and the RNAi technology licensed from UMMS had not yet achieved technological feasibility at the time of their license by CytRx, had no alternative future uses and, therefore, no separate economic value and, accordingly, the total value of the consideration was expensed by CytRx as research and development for the year ended December 31, 2004. In accordance with accounting for transfers between entities under common control, such licenses were transferred onto our books and records with a zero cost basis.

 

Further, we have directly entered into one non-exclusive license agreement, three exclusive license agreements and an invention disclosure agreement with UMMS for which we paid cash of $453,000 and issued 462,112 shares of our common stock valued at $2.3 million. The invention disclosure agreement has an initial term of three years and provides the option to negotiate licenses to certain RNAi technologies discovered at UMMS. Pursuant to the four license agreements, we paid up-front fees in an aggregate amount of $77,500 and additional license fees in an aggregate amount of $175,000 upon the completion of the $17 million financing from CytRx. Further, we have agreed to pay annual license maintenance fees in an aggregate amount of $42,500 commencing on January 1, 2008.

 

Additionally, in connection with all of our licenses with UMMS, including those assigned to us by CytRx as well as those entered into directly between us and UMMS, we are obligated to pay specified royalties on net sales of products covered by the licensed patents, subject to minimum annual royalties. Beginning on January 1, 2012, the minimum annual royalty payments for all UMMS licenses, in the aggregate, will be $210,000 and beginning on January 1, 2016, the minimum annual royalty payments for all UMMS licenses, in the aggregate, will be $365,000. Furthermore, in connection with all of our licenses with UMMS, we are obligated to expend at least $3,300,000 per year, in the aggregate, for the development of products in connection with the licensed technology. For the licenses we entered into directly with UMMS, this obligation continues until the earlier of three years after the effective date of the licenses or the commencement of a Phase II clinical trial on a product developed in connection with the licensed technology.

Cold Spring Harbor

 

We have also directly entered into a license agreement with Cold Spring Harbor Laboratory (“CSHL”) for shRNA (small hairpin RNA), for which we paid $50,000 and agreed to make future milestone and royalty payments upon successful development and commercialization of products. CSHL has also agreed to grant a non-exclusive license in the research field to up to three companies that qualify as bona fide collaborators with us, provided that, each such additional licensee shall pay CSHL an additional license fee of $100,000 and an annual license maintenance fee of $100,000. Furthermore, CSHL has agreed to grant a non-exclusive license in the therapeutic field to up to three companies that qualify as co-marketers, except that each such co-marketer licensee shall pay to CSHL an additional license fee of $250,000 and an annual license maintenance fee of $75,000.

 

As consideration for the license granted to us by CSHL, we agreed to pay $50,000 and an additional $50,000 upon the earlier of the granting of a specified patent application or the one year anniversary of the effective date of the license agreement with CSHL. Additionally, beginning on the one year anniversary of the effective date of the license agreement with CSHL, and continuing on each anniversary thereafter during the term of the agreement, we agreed to pay to CSHL a one time fee of $75,000. Finally, we agreed to pay CSHL a royalty payment dependent on net sales of the products covered by the license agreement with CSHL.

 

Basis of Presentation

 

RXi was incorporated as Argonaut Pharmaceuticals, Inc., in Delaware, on April 3, 2006 (date of incorporation) by CytRx and our four scientific founders, and we changed our name to RXi Pharmaceuticals Corporation on November 28, 2006. From April 3, 2006 until January 8, 2007, no activities were conducted at the RXi level.

 

The financial statements of RXi included in this prospectus for the periods through December 31, 2006 have been disaggregated, or “carved-out,” of the financial statements of CytRx, as our “predecessor,” which were audited by BDO Seidman, LLP, an independent registered public accounting firm. These carved-out financial statements form what we refer to herein as the financial statements of the predecessor, and include both direct and indirect expenses. The historical direct expenses consist primarily of the various costs for technology license agreements, sponsored research agreements and fees paid to scientific advisors. Indirect expenses represent expenses incurred by CytRx on behalf of RXi that have been allocated to RXi. The indirect expenses are based upon (1) estimates of the percentage of time spent by individual CytRx employees working on RXi matters by year and (2) allocations of various expenses associated with each employee including salary, benefits, rent associated with an employee’s office space, accounting and other general and administrative expenses. The percentage of time spent by individual CytRx employees was then multiplied by the allocation of various expenses associated with those employees to develop an allocation of expense per employee and the sum of such allocations for these employees equals the total expense allocation for the year. RXi’s financial information as of December 31, 2006 and September 30, 2007 and for the nine-month period ended September 30, 2007 are referred to in this prospectus as the financial information of the successor, and includes expenses incurred by RXi in its RNAi therapeutic programs, as well as an allocation of corporate services provided by CytRx. In addition, the net intercompany activities of the predecessor and CytRx have been accumulated into a single caption entitled “Parent Company’s Net Deficit.”

 

In 2003, CytRx entered into several technology license agreements with UMMS related to RNAi technologies. CytRx subsequently entered into other RNAi-related technology agreements with UMMS and other parties, as well as four sponsored research agreements pursuant to which CytRx funded RNAi research activities. Three of these sponsored research agreements were with UMMS and one of the sponsored research agreements was with Massachusetts General Hospital. On January 8, 2007, RXi entered into a contribution agreement with CytRx under which CytRx assigned and contributed to RXi substantially all of its RNAi-related technologies and assets, and we commenced operations in January 2007.

 

Management believes the assumptions underlying the carve-out financial information are reasonable; however, RXi’s financial position, results of operations and cash flows may have been materially different if it was operated as a stand-alone entity as of and for the periods presented.

Financial Information

 

The periods ended December 31, 2006, 2005 and 2004 as well as the cumulative financial information for the period from January 1, 2003 (date of inception) through December 31, 2006 for our predecessor, and our balance sheet as of December 31, 2006 and statement of stockholders’ equity for the period from April 3, 2006 (date of incorporation) to December 31, 2006, have been audited by our independent registered public accounting firm, BDO Seidman, LLP, which also audited CytRx’s consolidated financial statements for the years ended December 31, 2006, 2005 and 2004. The information presented for the periods ended September 30, 2007 and 2006 as well as the cumulative financial information for the period from April 3, 2006 (date of incorporation) through September 30, 2007 is unaudited and has been prepared on the same basis as the audited financial statements and includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of this information in all material respects. The results of any interim period are not necessarily indicative of the results of operations to be expected for a full fiscal year.

 

Critical Accounting Policies and Estimates

 

Use of Estimates

 

Management’s discussion and analysis of our financial condition and results of operations include the predecessor’s financial statements for the periods through December 31, 2006, and the successor’s financial statements for the period ended September 30, 2007. The preparation of these financial statements requires management to make estimates, allocations and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to impairment of long-lived assets, accrued liabilities and certain expenses. We base our estimates about the carrying values of assets and liabilities that are not readily apparent from other sources on historical experience and on other assumptions believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. Additionally, the financial information included here may not necessarily reflect the financial position, operating results, changes in our invested equity and cash flows in the future or what they would have been had we been a separate, stand-alone entity during the periods presented.

 

Our significant accounting policies are summarized in Note 2 to our financial statements. We believe the following critical accounting policies involve significant judgments and estimates used in the preparation of our financial statements.

 

Revenue Recognition

 

To date, we have not recognized any revenue. Nonrefundable license fee revenue is recognized when collection is reasonably assured, when no continuing involvement on our part is required and payment of the license fee represents the culmination of the earnings process. Nonrefundable license fees received subject to future performance by us, or credited against future payments due us, are deferred and recognized when we have met our performance obligations, or upon termination of the agreement and all related obligations thereunder. Our revenue recognition policy may require us in the future to defer significant amounts of revenue.

 

Research and Development Expenses

 

Research and development costs are expensed as incurred and consist of direct and overhead-related expenses. Expenditures to acquire technologies, including licenses, which are utilized in research and development and that have no alternative future use are expensed when incurred. Technology we develop for use in our products is expensed as incurred until technological feasibility has been established after which it is capitalized and depreciated.

Stock-based Compensation

 

Prior to January 1, 2006, CytRx accounted for its stock based compensation plans under the recognition and measurement provisions of Accounting Principles Board No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations for all awards granted to employees. Under APB 25, when the exercise price of options granted to employees equals the market price of the common stock on the date of grant, no compensation expense is recorded. When the exercise price of options granted to employees is less than the market price of the common stock on the date of grant, compensation expense is recognized over the vesting period. CytRx did not allocate any APB No. 25 stock compensation expense to the predecessor for the years ended December 31, 2005 and 2004.

 

The statement of expenses for our predecessor as of and for the year ended December 31, 2006 reflects the impact of Statement of Accounting Standard (“SFAS”) 123(R) “Share-Based Payment (Revised 2004)” (“SFAS 123(R)”) on CytRx. Share-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was $46,000 and was part of the allocable general and administrative expenses of CytRx. Such amounts have been reduced by our estimate of forfeitures of all unvested awards. Results for periods prior to January 1, 2006 have not been restated to retrospectively apply SFAS 123(R).

 

We have adopted SFAS 123(R), and compensation cost for all share-based payments, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R), is recognized as an expense over the requisite service period.

 

The fair value of each option grant is estimated using the Black-Scholes option-pricing model, with the following weighted average assumptions used for grants during the nine-month period ended September 30, 2007: risk-free interest rates of 4.39% to 4.57%; expected volatility of 108.7% to 109.5%; expected life of the options of 6.0 years; and no dividend. Based on CytRx’s historical experience, we estimated an annualized forfeiture rate of 5.3% for options granted to employees and 2.7% for options granted to senior management and no forfeiture rate for options issued to directors. Any change in actual forfeitures from our historical experience could result in a corresponding change in the amount of compensation expenses recorded in any single quarterly or annual period.

 

We account for equity instruments issued to non-employees in accordance with the provisions of SFAS 123(R), Emerging Issues Task Force Issue (“EITF”) No. 96-18, Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services and EITF 00-18, Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees, as amended, which require that such equity instruments be recorded at their fair value on the measurement date. The measurement of share-based compensation generally is subject to periodic adjustment as the underlying equity instruments vest.

 

Non-employee share-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances, option grants to non-employees are immediately vested and have no future performance requirements by the non-employee and the total share-based compensation charge is recorded in the period of the measurement date.

 

Valuation of Common Stock

 

Management of CytRx determined that the aggregate fair value of the technologies and assets contributed to us was approximately $17.2 million as of January 8, 2007 based, in part, upon the advice of Sanli Pastore & Hill, Inc., an independent third-party valuation advisor engaged by management of CytRx for this purpose. The actual fair value of the contributed technologies and assets as of January 8, 2007 may have been different. Based on this valuation by CytRx, CytRx was issued a total of 7,040,318 shares, at a price of approximately $2.45 per share. For financial reporting purposes, we recorded the technologies and assets contributed to us at the historical cost basis of CytRx as of January 8, 2007 of $48,000.

 

In determining the value of the assets of RXi, management of CytRx considered the definition of fair market value, as: “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell,

both parties having reasonable knowledge of the relevant facts.” CytRx management relied primarily upon the “reproduction cost valuation method,” which included analysis of five components of cost: (i) material, (ii) labor, (iii) overhead, (iv) developer’s profit, and (v) entrepreneurial incentive. CytRx management also considered the “market approach valuation method,” which included analysis of the increase in the market stock price of CytRx common stock on the date of the announcement that CytRx had contributed its RNAi assets to us and the current market conditions for RNAi-based companies, but accorded less weight (10%) to this method than to the cost valuation method (90%).

 

Subsequently, on April 30, 2007, we issued 3,273,292 additional shares of our common stock to CytRx in exchange for CytRx’s contribution to us of $17.0 million. Management of CytRx and RXi determined that the fair market value of RXi as of April 30, 2007 was approximately $45 million and the value of our common stock as of this date was $5.00 per share, based in part, upon the further advice of the third-party valuation advisor originally engaged by management of CytRx in connection with the January 8, 2007 contribution and assuming the issuance of 462,112 shares to UMMS pursuant to our license agreements with them. The fair market value was determined based on a combination of the reproduction cost approach discussed above, as well as the “market capitalization increase approach” and the “guidelines public company method — book value multiplier approach” discussed below.

 

Due to the fact that we are a discovery stage company and the amounts, if any, of future revenues remained uncertain and projected revenues and profits could not be made, it was determined that the reproduction cost approach was one appropriate analysis to undertake as cost approach methods are generally applicable when the subject intangible asset is new and when it is a fungible property. The reproduction cost valuation method was selected, which estimates the cost to construct, at current market price as of the date of the analysis, an exact duplicate or replica of the subject intangible asset, using the same materials, production standards, design layout, and quality of workmanship as the subject intangible asset. As stated above, the reproduction intangible asset will include the same adequacies, superadequacies, and obsolescence as the subject intangible asset. The reproduction cost valuation method includes analysis of five components of cost: (i) material, (ii) labor, (iii) overhead, (iv) developer’s profit and (v) entrepreneurial incentive. Because the reproduction cost approach may not reflect the earning power of new technology or the ultimate market share that may be obtained, it was determined that only limited consideration should be given to this approach and its value was weighted at 10%

 

The CytRx market capitalization increase analysis included an analysis of the increase in market capitalization since January 8, 2007 and a comparison of CytRx’s market capitalization to three other RNAi-based companies, as well as significant public announcements by CytRx occurring since January 8, 2007 and general public news announcements relating to RNAi technology since January 8, 2007. Based on these factors and taking into account potential market overreaction and other news in non-RNAi operations, only limited consideration to this approach to valuation was given and its value was weighted at 10%.

 

The guideline public company method — book value multiplier valuation approach involves an evaluation of market transactions in business securities that can provide objective, empirical data for developing valuation ratios to apply in a business valuation. The valuation process for RXi applied a comparative analysis of RXi with the following publicly traded companies in the same industry: Sirna Therapeutics, Inc., Alnylam Pharmaceuticals, Inc. and Nastech Pharmaceuticals Co Inc. The relationship of the market value of invested capital of each guideline company was applied to each company’s respective underlying net asset value in order to obtain market value of invested capital to book value multiple. The market value of invested capital to book value multiple calculated from the guideline companies method was then applied to obtain a pre-money fair market value of our total assets. Because this method of valuation is most appropriate when comparing companies with similar operations when no future income-stream projections are available, management weighted this approach’s value at 80%.

 

Once the common stock of RXi is registered and is publicly traded, the value of a common share may be materially different than the fair value per share determined using any of the prior valuations discussed above.

 

As of September 30, 2007 and December 15, 2007, we had outstanding a total of 1,248,229 and 1,404,229, respectively, of common stock options to various employees, directors, consultants and scientific

advisory board members pursuant to our 2007 Incentive Plan, which is described above and in Note 9 of the Notes to Financial Statements included in this prospectus. On May 23, 2007, we granted a total of 1,176,797 options to purchase common stock to certain employees, directors and scientific advisory board members. These options have an exercise price of $5.00 per share, as the RXi Board of Directors determined that the fair market value of the shares had not changed since the April 30, 2007 determination discussed above. On July 11, 2007, we granted to another employee an option to purchase 105,561 shares of common stock at an exercise price of $5.00 per share, as again, the RXi Board of Directors determined that the fair market value of the shares had not changed since the April 30, 2007 determination. Additionally, on August 16, 2007, we granted to certain employees a total of 58,335 shares of common stock upon the exercise of stock options with an exercise price of $5.00 per share, as upon such grant the RXi Board of Directors determined that the fair market value of the shares had not changed since the April 30, 2007 determination. Finally, on October 18, 2007, we granted certain employees a total of 146,000 options to purchase common stock at an exercise price of $5.00 per share, as the RXi Board of Directors determined that the fair market value of the shares had not changed since the April 30, 2007 determination.

 

Impairment of Long-Lived Assets

 

We review long-lived assets for impairment on an annual basis, as of December 31, or on an interim basis if an event occurs that might reduce the fair value of such assets below their carrying values. An impairment loss would be recognized based on the difference between the carrying value of the asset and its estimated fair value, which would be determined based on either discounted future cash flows or other appropriate fair value methods.

 

Discussion of Results of Operations

 

Results of Operations

 

For the nine-month period ended September 30, 2007, our actual loss was $8.4 million, compared to a loss of $1.6 million for the nine-month period ended September 30, 2006. The loss between the two nine-month periods increased by $6.8 million or approximately 425.0%. We incurred net losses of approximately $2.4 million, $2.2 million and $3.3 million for the years ended December 31, 2006, 2005 and 2004, respectively, based on the methodology used in carving out our financial information from CytRx as described elsewhere in this prospectus. Reasons for the variations in the losses between the periods are discussed below.

 

Revenue

 

We generated no revenues during the years ended December 31, 2006, 2005 or 2004 or for the nine-month periods ended September 30, 2007 and 2006. We also anticipate that no revenue will be generated for the year ended December 31, 2007 and that we will not generate revenue from sales of products for the foreseeable future. Accordingly, for accounting purposes we consider ourselves to be a development stage company.

Research and Development Expense

 

 

Research and development expense consists primarily of costs related to (i) the UMMS license agreements, (ii) the collaboration and invention disclosure agreements pursuant to which UMMS agreed to disclose certain inventions to CytRx and us and to provide CytRx and us with the right to acquire an option to negotiate exclusive licenses for those disclosed technologies, (iii) the sponsored research agreements with both UMMS and Massachusetts General Hospital and (iv) the compensation for our scientific advisory board (“SAB”). We expect research and development expenses to increase substantially for the foreseeable future as we engage in discovery and development activities for RNAi therapeutics.

 

Total research and development expenses for the nine-month period ended September 30, 2007, were $5.4 million of our total expenses incurred. For the nine-month period ended September 30, 2006, total research and development expenses were $1.3 million of total expenses. The $4.1 million increase in total research and development expense between the two nine-month periods are explained below.

 

Research and Development Expense

 

Research and development expense increased $755,000, or 63.5%, from $1.2 million in the nine-month period ended September 30, 2006, to $2.0 million in the nine-month period ended September 30, 2007. This increase was due to the start up costs of setting up the RXi laboratory in Worcester, Massachusetts, and fees to UMMS and Cold Spring Harbor which were partially offset by a $828,000 decrease in expenses for sponsored research agreements. In the nine-month period ended September 30, 2007, we made no payments for sponsored research agreements, while in the nine-month period ended September 30, 2006, we spent $828,000 on such agreements. In addition, acquired in-process research and development expense was $430,000 for the nine-month period ended September 30, 2007, compared to the nine months ended September 30, 2006, when we had no similar expense. This expense consisted of $430,000 in cash (and which does not include the additional expense of $2.3 million in stock referred to in “Fair value of RXi common stock issued in exchange for licensing rights”) paid to UMMS for the right to additional intellectual property.

 

Research and development expenses decreased $631,000, or 32.7%, from $1.9 million for the year ended December 31, 2005, to $1.3 million for the year ended December 31, 2006. The decrease was due to a $609,000 decrease in sponsored research agreements expense partially offset by increases in other research and development expenses.

 

Research and development expenses increased $229,000, or 13.5%, from $1.7 million for the year ended December 31, 2004 to $1.9 million for the year ended December 31, 2005. The increase was due principally to a $294,000 increase in sponsored research agreement expense, which was partially offset by a $56,000 decrease in cash scientific advisory board compensation expense and a decrease in other research and development expense.

Research and Development Non-Employee Stock-Based Compensation Expense

 

As compensation to members of CytRx’s RNAi scientific advisory board and consultants, and in connection with the acquisition of RNAi technology, CytRx issued shares of common stock, stock options and warrants to purchase shares of CytRx’s common stock. For financial statement purposes, CytRx valued these shares of common stock, stock options, and warrants at their fair value. Fluctuation in SAB stock-based compensation expense results from variations in the quantity, vesting and valuation of common stock options granted to SAB Members.

 

Non-cash research and development expenses for the nine-month period ended September 30, 2007 was $1,043,000, compared to non-cash research and development expenses of $157,000 for the same period in the prior year. The increase in research and development expense between the two nine-month periods of $886,000, or 564.3%, was due to a $886,000 increase in stock option expense for scientific advisory board members.

 

Non-cash research and development expenses increased $61,000, or 40.4%, from $151,000 for the year ended December 31, 2005, to $212,000 for the year ended December 31, 2006. The increase was due to a $61,000 increase in stock option expense for scientific advisory board members.

 

Non-cash research and development expenses decreased $855,000, or 85.0%, from $1.0 million for the year ended December 31, 2004 to $151,000 for the year ended December 31, 2005. The decrease was due to a $855,000 decrease in stock option expense for scientific advisory board members between the two periods.

 

Fair Value of Common Stock Issued in Exchange for Licensing Rights

 

Fair value of RXi common stock issued in exchange for licensing rights increased $2.3 million for the nine-month period ended September 30, 2007, compared to the nine-month period ended September 30, 2006, when we had no similar expense. This expense consisted of $2.3 million in stock, valued for financial statement purposes at $5.00 per share, referred to above in “Research and Development Expense” paid to UMMS for the right to additional intellectual property.

 

Fair value of CytRx common stock issued in exchange for licensing rights increased $262,000 for the year ended December 31, 2006, compared to the year ended December 31, 2005, when we had no similar expense. The increase was due to a common stock grant to UMMS for a new license agreement in the year ended December 31, 2006, which was valued at $262,000, or $1.75 per share. No similar grant was made in the year ended December 31, 2005.

 

Fair value of CytRx common stock issued in exchange for licensing rights decreased $108,000 or 100.0% from $108,000 for the year ended December 31, 2004, to the year ended December 31, 2005, when there was no expense. The decrease was due to a common stock grant valued at $108,000, or $1.44 per share, to Imperial College for intellectual property in the year ended December 31, 2004. No similar grant was made in the year ended December 31, 2005.

 

General and Administrative Expense

 

 

General and administrative expenses include all direct and indirect administrative salaries and general corporation expenses. Indirect expenses have been allocated based upon (1) estimates of the percentage of time spent by individual CytRx employees working on our matters and (2) allocations of various expenses

associated to each employee including salary, benefits, rent associated with an employees office space, accounting and other general and administrative expenses. The percentage of time spent by individual CytRx employees was then multiplied by the amount of various expenses associated to the various employees to develop an allocation of expense per employee. The expense allocation per individual employee is then summed to come to the total expense allocation for the year. In addition, general and administrative expense include certain expenses incurred with the formation of RXi which are directly associated with us, such as legal expenses and similar expenses.

 

General and administrative expense increased $3.0 million, or 1,000%, from $0.3 million in the nine-month period ended September 30, 2006, to $3.3 million in the nine-month period ended September 30, 2007. This increase resulted from the expense of our set up as a separate company, including the hiring of a separate management team and rent expense for our office ($1,266,000), legal expenses involved in acquiring intellectual property ($700,000), and Board of Directors fees and expenses ($166,000). The allocation of CytRx expense increased $291,000, or 202.1%, from $144,000 in the nine-month period ended September 30, 2006, to $435,000 in the nine-month period ended September 30, 2007. The increase in the allocation of expense was directly due to the increased time CytRx’s management spent on our matters.

 

The expense of common stock and stock options issued for general and administrative costs increased $654,000 in the nine-month period ended September 30, 2007, compared to the same period in 2006, when the expense was zero. This increase was due to the issuance of stock options to our employees and directors.

 

General and administrative expense increased $504,000, or 390.7%, from $129,000 in the year ended December 31, 2005 to $633,000 in the year ended December 31, 2006. This increase was related to positioning us to function as a stand-alone company and included increased legal expense ($195,000) for general corporate matters and additional expense allocations (based upon estimates of additional time spent by certain CytRx management) of CytRx management’s expense of $89,000, or 100%, from $89,000 in the year ended December 31, 2005, to $178,000 in the year ended December 31, 2006.

 

General and administrative expense decreased $329,000, or 71.8%, from $458,000 in the year ended December 31, 2004 to $129,000 in the year ended December 31, 2005. The decrease in general and administrative expense was due principally to a decrease in the expenses related to legal expenses incurred to negotiate and obtain intellectual property in the year ended December 31, 2004 consisting of a license from Imperial College and a Collaboration and Disclosure Agreement with UMMS. No similar intellectual property was obtained in 2005; accordingly, similar expenses were not incurred. Due to the lower level of licensing activity, CytRx’s management expense allocation decreased $38,000, or 29.9%, from $127,000 in the year ended December 31, 2004, to $89,000 in the year ended December 31, 2005.

 

The higher percentage of general and administrative expense as a percentage of the overall expense allocated to RXi in the nine-month period ended September 30, 2007 compared to the nine-month period ended September 30, 2006 is reflective of our beginning to operate on a stand-alone basis. Total general and administrative expense was $633,000 in the year ended December 31, 2006, $129,000 in the year ended December 31, 2005 and $458,000 in the year ended December 31, 2004. General and administrative expense as a percentage of total expense for the years ended December 31, 2006, 2005 and 2004 was 26.3%, 5.8% and 14.0%, respectively, of the predecessor’s total expense. The relatively low general and administrative expense levels are indicative of the fact that the research activities were performed by independent third parties, which required less managerial oversight and administrative activity during the predecessor period as compared to the successor period. We expect general and administrative expense to increase for the foreseeable future as we operate as an independent public company.

 

From time to time, we expect to issue shares of our common stock or warrants or options to purchase shares of our common stock to consultants and other service providers in exchange for services. For financial statement purposes, we will value these shares of common stock, common stock options, and warrants at the fair value, or at the value of the services received, whichever is more reliably measurable.

Interest Income

 

Interest income for the nine-month period ended September 30, 2007 was $304,000 due to the interest earned on the net $15.0 million of cash paid to us for additional equity. In prior periods we had no interest income because CytRx met our funding requirements and we had no separate cash or cash equivalents. We expect to have interest income in future periods based on our account balances from our funding by CytRx, and potentially from additional capital we may raise in the public markets or that we may receive from partners.

 

Income Taxes

 

Prior to January 2007, we operated as an integral part of CytRx. The tax benefits and associated research tax credits related to the carved-out expenses benefit CytRx since the carved-out RXi activities are recorded in the financial statements of CytRx. Because the carve-out tax benefits belong to CytRx, we are not given credit for the tax losses or research and development tax credits in the accompanying financial statements. RXi, the successor company, has incurred tax losses since it began operations. A tax benefit would have been recorded for losses incurred since January 8, 2007; however, due to the uncertainty of realizing these assets, a valuation allowance was recognized which fully offset the deferred tax assets.

 

Liquidity and Capital Resources

 

In April 2007, we issued 3,273,292 shares of common stock to CytRx (valued at approximately $5.00 per share, based in part, upon the advice of the third-party valuation advisor and assuming the issuance of 462,112 shares to UMMS pursuant to our license agreements with them) in exchange for $15.0 million in cash from CytRx and the settlement of our inter-company account payable due to CytRx of approximately $2.0 million. To date, we have relied exclusively upon equity financing from CytRx and short term temporary (for periods of approximately a month) advances from CytRx to finance our business and operations. We have not had any revenue since inception nor are any revenues expected for the foreseeable future; however, it will be necessary for us to fund our operations, including general and administrative expenses as well as expenditures for research and development. We believe that we have adequate capital, in the form of cash on hand and short-term investments, to support our currently planned level of operations through the first quarter of 2009 during which time we expect to expend approximately $7.1 million on research and development activities and approximately $4.7 million on general and administrative expenses. In the future, we will be dependent on obtaining financing from third parties in order to maintain our operations and to meet our obligations to UMMS and other licensors. We currently have no commitments from any third parties to provide us with capital or additional funding. We cannot assure that additional debt or equity or other funding will be available to us on acceptable terms, or at all. If we fail to obtain additional funding when needed, we would be forced to scale back, or terminate, our operations, or to seek to merge with or to be acquired by another company.

 

Contractual Obligations

 

We acquire assets still in development and enter into research and development arrangements with third parties that often require milestone and royalty payments to the third party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone payments may be required, contingent upon the successful achievement of an important point in the development life-cycle of the pharmaceutical product (e.g., approval of the product for marketing by a regulatory agency). If required by the arrangement, we may have to make royalty payments based upon a percentage of the sales of the pharmaceutical product in the event that regulatory approval for marketing is obtained. Because of the contingent nature of these payments, they are not included in the table of contractual obligations.

 

These arrangements may be material individually, and in the event that milestones for products covered by these arrangements are reached, the aggregate charge to expense could be material to the results of operations in any one period. In addition, these arrangements often give us the discretion to unilaterally terminate development of the product, which would allow us to avoid making the contingent payments;

however, we are unlikely to cease development if the compound successfully achieves clinical testing objectives. Contractual obligations that will require future cash payments as of December 31, 2006 are as follows:

 

 

 

 

 

 

We apply the disclosure provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), to its agreements that contain guarantee or indemnification clauses. We provide (i) indemnification of varying scope and size to certain investors and other parties for certain losses suffered or incurred by the indemnified party in connection with various types of third-party claims; and (ii) indemnifications of varying scope and size to officers and directors against third party claims arising from the services they provide to us. These indemnifications give rise only to the disclosure provisions of FIN 45. To date, we have not incurred costs as a result of these obligations and we do not expect to incur material costs in the future. Accordingly, we have not accrued any liabilities in our financial statements related to these indemnifications.

 

Recently Issued Accounting Standards

 

On July 13, 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN No. 48”), to create a single model to address accounting for uncertainty in tax positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold in which a tax position be reached before financial statement recognition. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN No. 48 as of January 1, 2007, as required. The adoption of FIN No. 48 did not have an impact on our financial position and results of operations.

 

On September 15, 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for fiscal years

beginning after November 15, 2007, and interim periods within those fiscal years. We are currently assessing the impact of SFAS No. 157 on our financial results.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS No. 159 on our financial results.

 

In June 2007, the FASB ratified the consensus on EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”). EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for non-vested equity-classified employee share-based payment awards as an increase to additional paid-in capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. We are currently assessing the impact of the adoption of EITF 06-11 on our financial results.

 

In June 2007, the FASB ratified the consensus reached on EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF 07-3”), which requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and amortized over the period that the goods are delivered or the related services are performed, subject to an assessment of recoverability. EITF 07-3 will be effective for fiscal years beginning after December 15, 2007. We are currently assessing the impact of the adoption of EITF 07-3 on our financial results.

 

In December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 110 which expresses the views of the Staff regarding use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of expected term of “plain vanilla” share options in accordance with Statement of Financial Accounting Standards No. 123, Share Based Payment. SAB No. 110 will allow, under certain circumstances, the use of the simplified method beyond December 31, 2007 when a company is unable to rely on the historical exercise data. We are currently assessing the impact of the adoption of SAB No. 110 on our financial results.

 

Off-Balance Sheet Arrangements

 

We have not entered into off-balance sheet financing arrangements, other than operating leases.

 

Quantitative and Qualitative Disclosures About Market Risk

 

The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of cash equivalents and investments in a variety of securities of high credit quality. As such, our primary exposure to market risk is interest income sensitivity, which is affected by the general levels of U.S. interest rates particularly because a significant portion of our investments are in short-term debt securities issued by the U.S. government and institutional money market funds. As of September 30, 2007, we had cash and cash equivalents and short-term investments of $14.2 million. We actively monitor changes in interest rates. We have no foreign currency or commodity investments. Due to the short-term duration of our investments in cash and cash equivalents and the low risk associated with our investments in high credit quality securities, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. If interest rates had varied by 100 basis points in the nine-month period ended September 30, 2007, it would not have had a material effect on our results of operations or cash flows for the period.

 

BUSINESS

 

Overview

 

We are a discovery-stage biopharmaceutical company pursuing the development and potential commercialization of proprietary therapeutics based on RNA interference (RNAi) for the treatment of human diseases. We believe RNAi-based therapeutics have the potential to effectively treat a broad array of diseases by interfering with (sometimes referred to as silencing) the expression of targeted disease-associated genes. Our initial focus is on the treatment of neurological diseases, metabolic diseases and cancer.

 

RXi was founded by CytRx and four prominent researchers in the field of RNAi, including Dr. Craig Mello, recipient of the 2006 Nobel Prize for Medicine for his co-discovery of RNAi, and Blais University Chair of Molecular Medicine at the University of Massachusetts Medical School, or UMMS. We began operations as a majority-owned subsidiary of CytRx Corporation in January 2007 for the purpose of accelerating the discovery of RNAi therapeutics previously sponsored by CytRx.

 

RNAi is a naturally occurring mechanism for the regulation of gene expression that has the potential to be harnessed to selectively inhibit the activity of any human gene. As evidenced by Kim and Rossi’s review published in March 2007 in Nature Reviews Genetics, it is believed that this inhibition may potentially treat human diseases by “turning off” genes that lead to disease. While no therapeutic RNAi products have been approved to date, there has been significant growth in the field of RNAi development and potential therapeutic applications. This growth is driven by the potential ability to use RNAi to rapidly develop lead compounds that specifically and selectively inhibit a target gene. By utilizing our expertise in RNAi and the RNAi technology platform we have licensed from prominent researchers, we intend to identify lead compounds and advance towards pre-clinical and clinical development programs in the following four therapeutic areas:

 

 

 

 

 

We believe that we possess a strong intellectual property portfolio. We have secured exclusive and non-exclusive licenses from academic institutions under certain issued and pending patents and patent applications covering RNAi technologies in the following three categories: (i) therapeutic targets, (ii) chemistry and configurations of RNAi and (iii) delivery of RNAi within the body.

 

We have an accomplished Scientific Advisory Board which includes Craig C. Mello, Ph.D., Tariq Rana, Ph.D., Gregory Hannon, Ph.D., Michael Czech, Ph.D., Nicholas Dean, Ph.D., and Nassim Usman, Ph.D. (collectively, “SAB Members”). SAB Members participate in scientific planning meetings which are typically held every three to six months. During such meetings, our management team and SAB Members review the progress of our research and licensing efforts and provide technological input including suggestions for new experiments, suggestions regarding the therapeutic relevance of target genes and suggestions regarding new technologies we may want to consider licensing. SAB Members also provide input on potential academic collaborators as well as updates on the latest scientific advances in the RNAi field. In addition to regularly held scientific planning meetings, we also hold scientific planning meetings on specific topics related to our discovery programs. For example, during a meeting scheduled to discuss the design of the chemical configuration of RNAi compounds, Drs. Mello, Rana, Hannon and Dean provided input regarding what designs might be the most effective and patents were filed on potentially novel design aspects that arose from this discussion.

 

Further, along with our management team, SAB Members participate in conferences and discussions with potential alliance partners, during which they respond to technological inquiries and field questions in their areas of expertise regarding licensed technology they helped to develop.

 

SAB Members have other primary commitments to their respective institutions or corporations, and their participation in our business, through the meetings and conferences discussed above, is balanced accordingly.

 

Our Competitive Strengths

 

We believe we are well positioned to compete successfully in the RNAi-based therapeutics market due to the following strengths we possess:

 

 

 

 

 

 

 

Introduction to the Field of RNAi Therapeutics

 

RNAi is a naturally-occurring phenomenon where short double-stranded RNA molecules interfere with the expression of targeted genes. RNAi technology takes advantage of this phenomenon and potentially allows us to effectively interfere with particular genes within living cells by designing RNA-derived molecules targeting those genes. RNAi is regarded as a significant advancement, as evidenced by the journal Science’s selection of RNAi as the “Breakthrough of the Year” in 2002, and by the awarding of the 2006 Nobel Prize in Medicine to the co-discoverers of RNAi, including Dr. Craig Mello, an RXi founder and scientific advisory board member.

 

RNAi offers a novel approach to the drug development process because RNAi compounds can potentially be designed to target any one of the thousands of human genes. In contrast, we believe that only a subset of the proteins encoded in the genome can be targeted efficiently by traditional medicinal chemistry or antibody-based approaches. The specificity of RNAi is achieved by an intrinsic well-understood biological mechanism based on designing the sequence of an RNAi compound to match the sequence of the targeted gene. The specificity of RNAi may be sufficient to permit therapeutic targeting of only a single gene and, importantly, may even selectively destroy expression from a single abnormal copy of a gene while preserving expression from a normal copy (“allele-specific” targeting). This is critical in diseases such as cancer and neurodegenerative disorders that are often caused by abnormal copies of genes.

 

The RNAi Mechanism

 

The human genetic code (human genome) is made of a double-strand of DNA (the double helix) that acts as an instruction manual for the production of the roughly 50,000 human proteins. Proteins are the molecular parts that allow cells and organisms to live and function. With rare exceptions, each cell in the human body has the entire complement of genes. However, only a subset of these genes directs the production of proteins in any particular cell type. For example, a muscle cell produces muscle-specific protein, whereas a skin cell does not.

 

In order for a gene to guide the production of a protein, it must first be copied into a single-stranded chemical messenger (messenger RNA) and then translated into protein. RNA interference (RNAi) is a naturally occurring process by which a particular messenger RNA can be destroyed before it is translated into protein. The process of RNAi can be artificially induced by introducing a double-stranded fragment of RNA corresponding to a particular messenger RNA into a cell. A complex set of proteins within the cell called RISC (RNA-Induced Silencing Complex) recognizes this double-stranded RNA fragment and splits the double-strands apart. One of the strands of RNA then binds to its corresponding cellular messenger RNA and destroys this targeted RNA. Thus, RNAi provides a method to potentially block the creation of the proteins that cause disease, as depicted in the following figure.

 

Figure 1 — Mechanism of RNA interference within a cell

 

Since gene expression controls most cellular processes, the ability to inhibit gene expression provides a potentially powerful tool to treat human diseases. Furthermore, since the human genome has already been decoded, and based on numerous gene-silencing reports, we believe that RNAi compounds can readily be designed to interfere with the expression of any specific gene.

 

A 2007 independently researched report published by Business Insights Ltd. indicates that the potential market for RNAi therapeutics is substantial. We believe that the RNAi platform will create a successful new class of potent and specific therapeutics with significant advantages over traditional drug development methods. These advantages include: