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Griffin Securities, Inc., 17 State Street, New York, NY, 10004 www.GriffinSecurities.com 1 Please Review Disclosures on Page 24 of this Research Report

UPDATE REPORT

Pharmaceutical Industry ● April 25, 2013

KEITH A. MARKEY, PH.D., M.B.A. 212-514-7914

[email protected]

RXI PHARMACEUTICALS CORP. (OTCBB: RXII)

TARGETING LARGE FIBROTIC INDICATIONS Management has crafted a well-conceived corporate strategy. Since its separation from Galena last year,

RXi has focused its resources on a self-delivering RNAi compound, called RXI-109 that inhibits the synthesis of connective tissue growth factor or CTGF. The cytokine’s central role in fibrosis offers multiple paths to commercialization. And RXi Pharmaceuticals has decided to move forward in this space with a focus on dermatological and ophthalmologic applications with a combined U.S. market estimated to be over $10 billion.

The lead compound shows promise in an early clinical trial for disfiguring dermal scars. Data from single-and multi-dose Phase 1 trials evaluating RXI-109 as an anti-scarring agent for use with surgical wounds have suggested the drug does not interfere with wound healing, may effectively lower CTGF expression, and could minimize scars. The market for such an effective anti-scarring agent could exceed $4 billion in the U.S. alone.

Other CTGF-targeting drugs offer promise against blindness and life-threatening diseases. A different formulation of RXI-109 has the potential to prevent and/or treat ophthalmic conditions marked by excessive fibrosis, including diabetic retinopathy, age-related macular degeneration, and macular edema. In addition, a related compound designed for systemic delivery may prove effective for such fibrotic diseases of the liver as cirrhosis and hepatitis. Both drugs would enter large markets, not well served by today’s medicines.

Investor support has provided a comfortable financial runway. RXi recently completed an equity offering that resulted in about $20 million of cash on the balance sheet. We believe that will be sufficient to support operations into early 2015.

We give RXII shares a BUY recommendation with a 12-month price target of $0.40.

RXi Pharmaceuticals Corporation (OTCBB: RXII) is a leader in the development of siRNA technology based on the research of the Chairman of its Scientific Advisory Board, Nobel Laureate Dr. Craig Mello. The Company has patents on basic siRNA structures, chemical modifications to stabilize the molecules, and self-delivery moieties to facilitate entry of the siRNA into a cell.

RXi’s lead drug candidate targets a key player in fibrosis called connective tissue growth factor, or CTGF. By inhibiting translation of the CTGF mRNA, the drug has the potential to combat a wide range of diseases. The Company’s primary focus is use of RXI-109 dermatologically to prevent or treat excessive scarring. Other uses may include a variety of ophthalmic disorders that often lead to blindness.

Source: BigCharts.com

Share Price (4/24/2013) $0.20 52-Week Price Low / High $0.03 - $0.36 Mkt. Capitalization (issued) $207 million Shares Outstanding (pfd & com) 1,032 million 12-month Target Price $0.40 Average Daily Volume (3 mos.) 1,203,320 Website www.rxipharma.com Est’d 2013 Earn’s (Loss)/shr ($0.03) Est’d 2014 Earn’s (Loss)/shr ($0.03)

GRIFFIN SECURITIES EQUITIES RESEARCH 2

RXi Pharmaceuticals April 25, 2013

INVESTMENT THESIS RXi has turned its impressive expertise in small inhibitory RNA (siRNA) drug development to blocking expression of a central player in fibrotic diseases, connective tissue growth factor (CTGF). As a result, the Company has multiple commercialization opportunities to pursue and several milestones approaching.

POISED TO LEAD WITH A PROPRIETARY DRUG-DESIGN PLATFORM

The endogenous RNA interference pathway that regulates gene expression has proven challenging to utilize for drug development since its discovery by Nobel Laureates Craig Mello (Chairman of RXi’s Scientific Advisory Board) and Andrew Fire in 1998. Thanks to a patented, self-delivering construct, called sd-rxRNA®, the Company has a platform design for silencing specific genes that is applicable to a wide range of diseases. To its credit, management is focusing corporate resources on areas of medicine in which gene silencing may succeed where traditional pharmaceutical development has failed.

DERMATOLOGY. The lead indication that the Company is pursuing with its sd-rxRNA construct for CTGF is dermal scarring. The drug, designated as RXI-109, has demonstrated an ability to significantly reduce levels of the cytokine during wound healing in preclinical models without interfering with the healing process, yet effectively minimizing scar formation. Two early clinical trials, which are still blinded, should report out around the middle of the year. But one of the studies has already yielded data suggesting that the treated areas have responded as expected to the CTGF inhibitor. The final results will position RXi to initiate more than one Phase 2 clinical trial in the second half of this year to test RXI-109 as an adjunct treatment with scar revision surgery for a hysterectomy, Cesarean section, cosmetic breast alternations, and/or bilateral keloids. Depending on the indication(s), the potential market for this drug could exceed $4 billion.

OPHTHALMOLOGY. RXi is preparing a formulation of RXI-109 for eye conditions that will probably be out-licensed for clinical development and marketing by a specialty pharmaceutical company. Work is under way to ready an IND submission to conduct a Phase 1 trial targeting proliferative vitreoretinopathy (PVR). That condition is the leading cause of the failure of retinal detachment surgery. The condition is characterized by a proliferation of fibroblast-like cells that contract and, in so doing, tear the surgically repaired retina. PVR is an orphan indication, but RXI-109 may also prove effective against more common fibrotic conditions affecting the eye including diabetic retinopathy, age-related macular degeneration, and diabetic macular edema. Thus, the commercial potential of an ophthalmic indication is best measured by the millions of individuals in these patient populations.

HEPATOLOGY & ALS. The Company has an interest in developing a CTGF-targeting drug for liver disorders involving fibrosis. Research has already demonstrated that systemic administration of RXI-209, which is an sd-rxRNA related to RXI-109, results in significant uptake by the liver when it is administered intravenously or subcutaneously. Infusion of an sd-rxRNA targeting the enzyme superoxide dismutase-1 (SOD1) into the spinal column has provided proof of concept for treating CNS disorders, such as amyotrophic lateral sclerosis (ALS).

STRATEGIC PARTNERING INITIATIVES

RXi is pursuing development of the anti-fibrotic agent RXI-109 internally for dermatological applications, while seeking a partner(s) to pursue ophthalmic indications with another formulation. RXI-209 and the sd-rxRNA targeting SOD1 are available for licensing too. However, we believe the most likely partnering event will be an ophthalmology licensing agreement in the next 12 months.

AN OPPORTUNE TIME FOR INVESTORS

RXi has more than 1,032 million fully diluted shares outstanding and a $0.20 share price. We think the Company is contemplating a reverse stock split to make the stock more suitable for institutional investors and to generate greater interest in the overall investment community. Several near-term milestones should lift awareness including data from ongoing dermatology clinical trials and the subsequent initiation of Phase 2 studies. Just as important, investors should appreciate that the share price constitutes a compelling opportunity based largely on development of RXI-109 for dermal and ophthalmic indications. We give RXII shares a BUY recommendation with a price target of $0.40 on a fully diluted basis.



TableofContentsRecent & near-term milestones .................................................................................................................... 4

RXi’s Product Pipeline ................................................................................................................................... 4

Management Team ....................................................................................................................................... 5

Board of Directors ......................................................................................................................................... 5

Scientific Advisory Board .............................................................................................................................. 6

The sd-rxRNA ............................................................................................................................................... 7

RXi’s Molecular Target .................................................................................................................................. 8

Normal Healing versus Fibroproliferative Disorders .................................................................................. 9

Post-surgical scars .................................................................................................................................... 9

An Anti-Scarring Medicine for Dermal Applications ................................................................................ 11

CTGF & Dermal Scarring ..................................................................................................................... 11

Preclinical Data on RXI-109 ................................................................................................................. 11

Phase 1 Clinical Trials ......................................................................................................................... 13

The Phase 2 Program .......................................................................................................................... 14

Ophthalmic Indications ................................................................................................................................ 14

Preclinical Studies with RXI-109 ............................................................................................................. 15

Proliferative Vitreoretinopathy: ............................................................................................................. 16

Near-Term Ophthalmology Research: ................................................................................................. 16

Additional Indications .................................................................................................................................. 17

Hepatology .............................................................................................................................................. 17

Neurology ................................................................................................................................................ 17

Investment Concerns and Risks ................................................................................................................. 19

Financial Forecasts & Valuation ................................................................................................................. 20

Revenue Sources .................................................................................................................................... 20

RXI-109 for Dermal Scarring ............................................................................................................... 20

RXI-109 for Ophthalmic Indications ..................................................................................................... 20

Quarterly Income Statements .................................................................................................................. 21

Annual Income Statements ..................................................................................................................... 21

Balance Sheet ......................................................................................................................................... 22

Valuation Analysis ................................................................................................................................... 23

Disclosures ................................................................................................................................................ .24



RECENT & NEAR-TERM MILESTONES A brief history of RXi Pharmaceuticals is needed to understand the recent milestones. The Company was originally formed in 2007 as a subsidiary of CytRx Corporation to commercialize drugs using discoveries in inhibitory ribonucleic acid (RNAi) made by Nobel Laureate Craig Mello. In early 2008, CytRx distributed 4.5 million RXi shares to its investors and RXII stock began trading on Nasdaq. RXi developed chemically modified versions of small inhibitory RNA (rxRNA™) that were more stable and less susceptible to enzymatic degradation. Work continued in an effort to improve cellular uptake, resulting in self-delivering rxRNA (sd-rxRNA®), which is the basic structure of the Company’s lead candidate, RXI-109. Management changes brought in a vaccine technology unrelated to RNAi in April 2011 and the corporate name was changed to Galena Pharmaceuticals. What follows are the recent events related to the present Company:

√April,’12 RXi Pharmaceuticals Corporation was spun out of Galena Pharmaceuticals.

√May,’12 RXII stock began trading on the OTCBB on May 10, 2012.

√May,’12 Dr. Geert Cauwenbergh was appointed President, CEO, and Director.

√June,’12 Two new directors joined the Company’s Board of Directors.

√Sept,’12 RXi initiated a single-dose Phase 1 study of RXI-109 to prevent surgical wound scarring.

√Oct,’12 NIH awarded a $300,000 SBIR grant for developing sd-rxRNAs to treat retinoblastoma and other malignancies via a collaboration with Memorial Sloan-Kettering Cancer Center.

√Dec,’12 Multi-dose Phase 1 trial of RXI-109 started to tet its ability to prevent surgical wound scarring.

√Mar,’13 RXi completed a $16.4 million equity financing.

√Mar,’13 The Company acquired a broad patent portfolio from OPKO Health to expand its intellectual property in siRNA structures and gain protection biological targets involved in cancer, immune disorders, and eye and inflammatory diseases.

Q2,’13 Unblind single-dose Phase 1 study of RXI-109.

Mid-’13 Unblind multi-dose Phase 1 trial of RXI-109.

H2,’13 Initiate Phase 2 trials of RXI-109 for use in scar revision surgeries.

RXI’S PRODUCT PIPELINE The siRNA platform may be used to alter the expression of a variety of genes, each of which may play a role in a wide range of indications. The Company is presently focused on RXI-109, a drug that inhibits the production of connective tissue growth factor (CTGF). That cytokine plays a central role in a number of fibrotic pathologies, including the first five listed in the table below:



MANAGEMENT TEAM

Geert Cauwenbergh, Dr. Med Sci., President, Chief Executive Officer, Director

Appointed President and Chief Executive Officer of RXi Pharmaceuticals Corporation in April of 2012 with more than 25 years of experience in the pharmaceutical/biotechnology industry.

Founded and served as Chairman and Chief Executive Officer of Barrier Therapeutics and several management positions with Johnson & Johnson, including Vice President, Research and Development for Johnson & Johnson’s Skin Research Center.

Served on the board of directors of two European biotechnology companies, Ablynx and Euroscreen, and is currently on the board of directors of a European OTC company active in the dermatology space.

Pamela Pavco, Ph.D., Chief Development Officer

Joined the Company in 2007 and has more than 25 years of experience working with oligonucleotides in such fields as oncology, angiogenesis, hepatitis, respiratory disease, and Huntington’s disease.

Held management positions with Sirna before it was acquired by Merck, has authored numerous scientific publications, and holds 58 patents.

Lynn Libertine, M.D., Vice President Medical Affairs & Safety Assessment

Assumed her position with the Company in 2007 having worked in various capacities at Critical Therapeutics, CytoMed, and UCB Pharma.

Has overseen projects through all stages of clinical development through marketing and life-cycle management, including the re-branding of Cornerstone Therapeutics’ asthma drug Zyflo®.

Karen Bulock, Ph.D., Vice President Research

Joined the Company in 2007 with experience in assay development and discovery project management at CytRx and Essential Therapeutics.

Has authored numerous scientific publications and is a co-inventor on four patents.

BOARD OF DIRECTORS

Keith Brownlie, Chairman of the Audit Committee and Chairman of Corporate Governance

Joined the RXi Board in 2012 with 36 years of experience with Ernst & Young, including 20 years on Ernst & Young’s National Life Sciences Committee.

Is a member of the American Institute of CPAs and serves as a member of the Board of Directors of Epicept and Soligenix, where he serves as the chairman of the Audit Committees of both companies.

Robert Bitterman, Interim Chairman of the Board, Chairman of the Compensation Committee, and Chairman of the Nominating Committee

Joined the RXi Board in 2012 with more than 18 years of experience in the pharmaceutical and life sciences industry at Isolagen and Aventis’ Dermik Laboratories.

Serves as the President & CEO of Cutanea Life Sciences, Inc., a wholly owned subsidiary of Maruho Company, LTD., a specialty pharma development company focused on diseased and aging skin.

Geert Cauwenbergh, Dr. Med. Sci. , President, Chief Executive Officer, Director



H. Paul Dorman

Joined the RXi Board in April 2013 with nearly 30 years of experience in the pharmaceutical industry with Johnson & Johnson and Baxter International.

Currently serves as the Chairman and CEO of DFB Pharmaceuticals, a holding company that has invested in and operated several drug firms, three of which were turned profitable and sold to major pharmaceutical companies.

Curtis Lockshin, Ph.D.

Joined the RXi Board in April 2013 having served as a consultant and vice president of R&D for OPKO Health where he gained experience in RNAi technology.

Serves as a Director of the Ruth K. Broad Biomedical Research Foundation, a Duke University Support Corporation, and has served on the boards of Sorrento Therapeutics and Winston Pharmaceuticals.

SCIENTIFIC ADVISORY BOARD

Craig C. Mello, Ph.D., Founder and Scientific Advisory Board Chairman

Is the Blais University Chair in Molecular Medicine at the University of Massachusetts Medical School, a Howard Hughes Investigator, and a member of the National Academy of Sciences.

Co-recipient of the 2006 Nobel Prize in Medicine for RNAi, co-inventor RNAi therapeutics, recipient of the Dr. Paul Janssen Award for Biomedical Research by Johnson & Johnson, co-recipient of the Paul Ehrlich and Ludwig Darmstaedter Prize, co-recipient of the National Academy of Sciences’ Award in Molecular Biology and the Wiley Prize in the Biomedical Sciences from Rockefeller University.

Leroy Young, M.D., Scientific Advisory Board Member

Director of the Body Aesthetic Research Center in St. Louis, Missouri and the immediate past President of the Aesthetic Surgery Education and Research Foundation.

Board certified in General Surgery and Plastic Surgery, with more than 150 publications that included trials of botulinum toxin type A, sodium and deoxycholate injections, the antisense oligonucleotide EXC-001 for the treatment of scars and avotermin (Juvista) for scar management.

Jeannette Graf, M.D., Scientific Advisory Board Member

Board certified, clinical and research dermatologist and Assistant Clinical Professor of Dermatology at the Mount Sinai School of Medicine.

Independent consultant and advisory board member for a number of cosmetic and pharmaceutical companies including RXi Pharmaceuticals Corporation, Neutrogena, Johnson & Johnson, RoC, Allergan, Aveeno, Merz/Bioform and Medicis.



THE SD-RXRNA Craig Mello and his collaborator Andrew Fire opened the door to a new field in molecular biology with their discovery that small inhibitory RNA (siRNA) play a role in regulating the translation of messenger RNA (mRNA) into proteins. This added a level of complexity to the regulation of gene expression. Early attempts to take advantage of this discovery for drug development met with failures, as the optimal sizes of the molecules needed to be defined, the genetic targets had to be identified with exactness to avoid non-specific inhibition, and the molecules had short half-lives, due in part to enzymatic degradation and immune responses. Then, too, the siRNA did not penetrate cells well because they are highly charged molecules that are repulsed by similarly charged molecules comprising cell membranes.

RXi has addressed these issues in a stepwise fashion. Their work has resulted in different siRNA constructs for distinct purposes. One version, called rxRNAori is designed for incorporation into liposomes for delivery to target cells. Another is the self-delivering siRNA, named sd-rxRNA, that is both resistant to enzymatic degradation and capable of penetrating the cell membrane. In creating this construct, the Company combined its knowledge of siRNA with information gleaned from work in the related field of antisense nucleotides and with expertise in medicinal chemistry, as shown in Figure 1.

Figure 1. Elements Comprising the sd-rxRNA Molecule

Source: RXi Pharmaceuticals

As shown by the diagram, the sd-rxRNA consists of a conventional RNAi portion with two intertwining nucleotide chains (shown as gold ribbons) that have been chemically modified (depicted by the dots on the ribbons and the nucleotide pairs). In addition, there is also a single nucleotide strand (purple ribbon) that resembles conventional antisense molecules. This basic framework is also chemically modified to improve its stability, render it compatible with the immune system, and enhance its ability to penetrate cell membranes. It is this molecular construct that RXi has used to create its lead drug candidate, RXI-109.

How the sd-rxRNA functions is diagrammed in Figure 2. Hydrophobic groups on the molecule facilitate its passage through the cell membrane. Once inside, the molecule interacts with a regulatory element called the RNA induced silencing complex (RISC) where the shorter strand of the sd-rxRNA is removed, leaving behind the longer strand that is designed specifically to bind with the mRNA of the targeted protein. That interaction within the RISC results in a cleavage of the mRNA, thereby halting the creation of a protein that causes a disease.



Figure 2. How the sd-rxRNA Inhibits Gene Expression


A recent acquisition of assets from OPKO Health has expanded RXi’s siRNA designs and garnered patents on specific mRNA targets involved in eye, inflammatory, and immune diseases, as well as cancer.

RXI’S MOLECULAR TARGET The Company has chosen a molecular target with a central role in fibrosis, called Connective Tissue Growth Factor (CTGF). This is a signaling protein produced by a wide variety of cells including endothelial cells, smooth muscle cells, and fibroblasts. During development, the cytokine helps to regulate the formation of connective tissues, bone, and blood vessels. Later, expression of this 349-amino acid protein is increased by such stimuli as shear stress, hypoxia, and biomechanical deformation, and as such, it plays a key role in the normal healing process partly by pulling the damaged tissue together. (See Figure 3.) However, it also participates in pathological fibrosis when cell proliferation, cell adhesion, and extracellular matrix formation go awry.

Figure 3. CTGF’s Central Role in Fibrosis

Source: Bulock, KG.1

1 Bulock, KG. Local Delivery: Lessons Learned from ‘Self-Delivering’ RNAi Compounds. Presented at the AsiaTIDES Conference, February 26, 2013.



From Figure 3, it is apparent that a drug targeting CTGF has the potential to treat a broad range of indications. RXi has chosen to pursue two avenues of development for RXI-109, dermal and ocular scarring. These applications were chosen well, in our opinion, because they provide ready access to the site of fibrosis and an opportunity to easily monitor the effects of the drug. Such factors are important because history has shown that drug delivery is a major hurdle for siRNA therapies.

NORMAL HEALING VERSUS FIBROPROLIFERATIVE DISORDERS

Tissue healing is a multi-step process that requires a delicate balance and timing of the expression of different cytokines. For instance, normal dermal repair is built upon an extracellular matrix that is invaded by inflammatory cells, newly forming blood vessels, and fibroblasts. Myofibroblasts, which are derived from fibroblasts, figure importantly in the process by laying down the extracellular matrix, using contractile fibers to close the wound, and expressing various cytokines that attract other cells into the area. It is when this process malfunctions, leading to persistence of myofibroblasts in the wound area that pathological scar formation occurs. Scar formation is part of the healing process for wounds that are at least one-third the depth of the local skin.2 In contrast, aberrant scar tissue may form even in the absence of a wound.

As shown in Figure 3, numerous regulatory signals, as well as their relative abundances, determine whether a response to an insult is physiological or pathological. Regardless, a key commonality is CTGF’s involvement. Indeed, even the widely recognized inflammatory cytokine transforming growth factor-β (TGF-β) requires the presence of this protein to initiate fibrosis.3 It also interacts directly with other biochemical signals by virtue of its unique structure. CTGF consists of four modular segments, each with specific binding capabilities that enable it to interact with membrane-associated proteins, extracellular matrix components, and such cytokines as insulin-like growth factor (IGF-1), integrins, and bone morphogenic protein (BMP). Moreover, the molecule’s N-terminal portion mediates myofibroblast differentiation and collagen synthesis, while the C-terminal domain regulates fibroblast proliferation. Hence, it is not surprising that overexpression of CTGF is associated with certain pathological conditions, including diabetic retinopathy, keloids, muscular dystrophy, atherosclerosis, and systemic sclerosis.4,5,6,7,8 But even in patients with certain fibrotic conditions, the regulatory balance associated with normalcy is not completely lost. For instance, CTGF mRNA expression is elevated only in affected areas of the skin of scleroderma patients.9

POST-SURGICAL SCARS

Scars that form at incision sites comprise an important aspect of medicine that is not fully appreciated by the general public, perhaps because they are not life-threatening. They do, however, take a toll on the psychological well-being and quality of life of the patient. An estimated 42 million surgeries are performed annually in the United States and a similar number in Europe that could benefit from scar reduction therapy. This market consists of a number of different subgroups, as shown in Table 1.

2 Dunkin, CS, et al. Scarring occurs at a critical depth of skin injury: precise measurement in a graduated dermal scratch in human volunteers. Plast Reconstr Surg (2007); 119(6): 1722. 3 Wang, Q, et al. Cooperative interaction of CTGF and TGF-β in animal models of fibrotic disease. Fibrogenesis Tissue Repair (2011); 4(1): 4. 4 Tikellis, C, et al. Connective tissue growth factor is up-regulated in diabetic retina: amelioration by angiotensin-converting enzyme inhibition. Endocrinol (2004); 145(2): 860. 5 Haginoya, SG, et al. Connective tissue growth factor is overexpressed in muscles of human muscular dystrophy. J Neurol Sci (2008); 267(1-2): 48. 6 Sonnylal, S, et al. Selective expression of connective tissue growth factor in fibroblasts in vivo promotes systemic tissue fibrosis. Arthritis Rheum (2010); 62(5): 1523. 7 Manetti, M, et al. Severe fibrosis and increased expression of fibrogenic cytokines in the gastric wall of systemic sclerosis patients. Arthritis Rheum (2007); 56(10): 3442. 8 Cicha, I, et al, Connective tissue growth factor is overexpressed in complicated atherosclerotic plaques and induces mononuclear clear cell chemotaxis in vitro. Arterioscler Thromb Vasc Biol (2005); 25(5): 1008. 9 Quan, T, et al. Connective tissue growth factor: expression in human skin in vivo and inhibition by ultraviolet irradiation. J Invest Dermatol (2002); 118: 402.



Table 1. Surgical Skin Procedures (2008)


Attempts to treat scars are considered inadequate, as they are often invasive (e.g., surgical excision and cryotherapy), which may lead to a worse outcome, or have highly variable results (e.g., intralesional corticosteroid injections and laser therapy). The favored approach to post-surgical scarring is prevention, but the options available today leave ample room for improvement. Pressure therapy and silicone gel sheeting attempt to provide an environment that favors healing, possibly through local fluid retention. This may sound simplistic, but data indicates that rapid epithelialization (in fewer than 10 to 14 days) is essential to avoid excessive scar formation.10

Fortunately, the multiple steps involved in wound healing create an opportunity to intervene pharmacologically before scars form without interfering with the healing process. The stages of wound healing are diagramed in Figure 4.11

10 Mustoe, TA, et al. International clinical recommendations on scar management. Plast Reconstr Surg (2002); 110(2): 560. 11 Gauglitz, GG, et al. Hypertrophic scarring and keloids, pathomechanisms and current and emerging treatment strategies. Mol Med (2011); 17(1-2): 113.

Figure 4. The normal healing process occurs in three stages: In the first stage, inflammatory cytokines, including TGF-β and interleukins 4 and 10, attract a variety of cells to the wound to halt the blood flow and protect against infection. The second stage is marked by a proliferation of fibroblasts, keratinocytes, and endothelial cells that will lay the extracellular matrix for re-epithelialization and support the formation of new blood vessels. In the final period of wound healing, myofibroblasts help to physically close the wound and remodel the tissue structure, partly via apoptosis. The last stage can extend for days or months depending on the severity of the insult, and it is during this stage that pathological scar formation occurs, though regulatory abnormalities in earlier stages may create a pathological environment, for instance, via excessive inflammation and/or collagen formation. Indeed, keloids can form up to two years after the initial incident. Yet, experimental data suggests that pharmacological intervention prior to matrix remodeling can prevent hypertrophic scar formation without interfering with subsequent wound closure or tissue remodeling.

Source: Gauglitz,GG, et al. 11



AN ANTI-SCARRING MEDICINE FOR DERMAL APPLICATIONS

RXi’s leading drug candidate, RXI-109, is formulated for local administration to prevent dermatological scars. The following provides a brief review of the involvement of CTGF in dermal scarring, the effect of RXI-109 in preclinical models, and discusses the two ongoing Phase 1 trials.

CTGF & Dermal Scarring: RXi’s decision to target CTGF is well founded on scientific research. Studies have used antisense probes, siRNA, and neutralizing antibodies to investigate the role of this cytokine in normal and pathological conditions in a variety of tissues.12,13,14,15 Exposure of porcine fibroblasts to CTGF siRNA inhibits the expression of proteins associated with the extracellular matrix and selectively down-regulates TGF-β mediated increases in extracellular matrix components, types I and III collagen.16 Moreover, antisense inhibition of CTGF mRNA was found to have no effect on early wound healing in a preclinical model, although it significantly limits subsequent hypertrophic scarring.17 This effect is associated with fewer myofibroblasts and decreased expression of types I and III collagen, as well as the tissue-inhibitor of metalloproteinase-1. A study involving human fibroblasts corroborated the effect of CTGF inhibition on collagen production.18 More important, the research also found differential responses of normal and sclerodermic fibroblasts to a CTGF siRNA, as evidenced by an induction of matrix metalloproteinase-1 and a reduction in its endogenous inhibitor (tissue-inhibitor of metalloproteinase-1) in abnormal fibroblasts, but not normal cells. This is important since matrix metalloproteinase-1 is an enzyme that digests collagen in the extracellular matrix as a normal part of tissue remodeling. An increase in its expression, together with a drop in the level of endogenous inhibitor, probably creates an environment that favors a dampening, if not a reversal, of the pathological process. Indeed, normal aging is typified by low CTGF expression, which in turn causes the collagen content of the skin to decline.19

Preclinical Data on RXI-109: The Company’s lead molecule is readily taken up by cells in the dermal layer, as shown in Figure 5. The sd-rxRNA molecule labeled with a fluorescent dye was administered via injection and the tissue was examined via confocal microscopy 48 hours later. The pictures reveal distribution within the dermis and subcellular localization of sd-rxRNA in the cytoplasm.

Figure 5. In Vivo Uptake of sd-rxRNA Construct by Dermal Cells

12 Guha, M, et al. Specific down-regulation of connective tissue growth factor attenuates progression of nephropathy in mouse models of type 1 and type 2 diabetes. FASEB J (2007); 21: 3355. 13 Ponticos, M, et al. Pivotal role of connective tissue growth factor in lung fibrosis: MAPK-dependent transcriptional activation of type I collage. Arthritis Rheum (2009); 60(7): 2142. 14 Kryger, SM, et al. Antisense inhibition of connective tissue growth factor (CTGF/CCN2) mRNA limits hypertrophic scarring without affecting wound healing in vivo. Wound Repair Regen (2008); 16(5): 661. 15 Sherwood, MB. A sequential, multiple-treatment, targeted approach to reduce wound healing and failure of glaucoma filtration surgery in a rabbit model. Trans Am Ophthalmol Soc (2006); 104: 478. 16 Wang, JF, et al. Connective tissue growth factor siRNA modulates mRNA levels for a subset of molecules in normal and TGF-beta 1-stimulated porcine skin fibroblasts. Wound Repair Regen (2004); 12(2): 205. 17 Sisco, M, et al. Antisense inhibition of connective tissue growth factor (CTGF/CCN2) mRNA limits hypertrophic scarring without affecting wound healing in vivo. Wound Repair Regen (2008); 16(5): 661. 18 Ishibuchi, H, et al. Induction of matrix metalloproteinase-1 by small interfering RNA targeting connective tissue growth factor in dermal fibroblasts from patients with systemic sclerosis. Exp Dermatol (2010); 19: e111. 19 Quan, TH, et al. Reduced expression of connective tissue growth factor (CTGF/CCN2) medicates collagen loss in chronologically aged human skin. J Invest Dermatol (2010); 130: 415.

Photomicrographs of dermal tissue at sequentially greater magnification.

Blue = Hoechst nuclear stain

Red = sd-rxRNA



A dose-response relationship, established in a cultured epithelial cell line (left panel of Figure 6), showed a marked reduction in CTGF expression, versus no effect with a non-targeting sd-rxRNA control (NTC). Significant reductions in CTGF expression (right panel) were also observed five days after 300 μg or 600 μg of RXI-109 was administered locally into dermal wounds.

In another preclinical study, RXI-109 was found to have a long-lasting effect on CTGF expression in the wound site, but no dilatory impact on wound healing. (See Figure 7.) On the contrary, the drug accelerated wound healing as defined by expedited re-epithelialization and wound closure.

Preclinical research also determined that the dermal and systemic side effects in primates were minimal. A pharmacokinetic analysis showed that the peak blood levels obtained after an intradermal injection of a 10 mg/kg dose were about 3.5% of the peak levels observed after intravenous administration of the same dose. In other words, only a small fraction of the intradermally administered drug reaches systemic circulation, thus minimizing the potential for serious side effects.

Figure 6. RXI-109 reduced expression of CTGF in cultured epithelial cells (left panel). As shown in the right panel, local administration of the drug two days prior to a surgical incision in a preclinical model and at the time of the incision significantly reduced CTGF at the wound site five days later.

Source: RXI Pharmaceuticals

Figure 7. RXI-109 significantly reduced CTGF mRNA levels, but did not delay wound healing in a preclinical model. RXI-109 or a control solution (phosphate-buffered saline, PBS) were administered prior to and after an excisional wound (see upper left timeline) in an animal model. At various times after the excision, CTGF mRNA levels and the wound width and re-epithelialization were measured. The results show that on the 5th day after the excision, wound treated with RXI-109 had better re-epithelialization than the control wounds (lower right chart). This was consistent with smaller wound widths measured on days 6, 7 and 8 post-excision (lower left chart). Finally, by day 15, the wounds of the drug-treated and control animals were fully healed. Moreover, a test of the time course of the inhibition of CTGF mRNA in these animals showed that RXI-109 was still effective in suppressing gene expression 8 days after its administration (upper right panel).



Phase 1 Clinical Trials: RXi is conducting two double-blind Phase 1 studies, one to test a single dose of RXI-109 and the other to test multiple doses. Both are testing the effects of the drug on wound healing in individuals scheduled for an elective surgery, abdominoplasty or tummy tuck. Since that procedure involves a removal of excess dermal tissue, these subjects provide the Company with an opportunity to assess the drug in tissue that will be removed by the elective procedure. Standard, objective methods20 will be used to evaluate scar formation, and the results should provide an insight into the drug’s safety and possibly, its effectiveness. In addition, tissue samples taken during the abdominoplasty will be analyzed histologically to identify any impact of the drug on tissue structure at the site of the wound and surrounding area. Thus, the studies should provide a rather complete picture of the effects of RXI-109.

Figure 8 provides a diagram of the test area on the abdomen of each subject in the single-dose trial. Four injections and incisions were made at least 4 cm apart in all directions in each abdomen in two rows. (The multi-dose trial uses a similar pattern, but with four incisions in each row.) Blinded injections of RXI-109 and control solution were made according to a predetermined pattern, so that half received one or the other treatment. Thus, each patient had two control and two test sites.

Figure 8. Test Area for Phase 1 Trials


Single-dose Study: This trial, designated as Study 1201, was initiated in June 2012 and was fully enrolled in October 2012. In all, 15 subjects were divided into 5 groups that received 1 mg to 10 mg of drug per 2 cm incision site. The endpoints consisted of pharmacokinetic parameters, safety that was assessed throughout the 3 month trial period, and biomarker/histology analyses at the end of the trial (day 84) when the abdominoplasty was performed. The Company has not completed the post-operative testing, so the results are still blinded. Final data should be available this quarter.

Nonetheless, the study has already yielded some data. A pharmacokinetic analysis was completed showing that calculated relative systemic exposure in the 15 volunteers was between 1% and 7% (mean 5%). No serious side effects were noted locally or systemically, and the observed side effects (e.g., erythema and pain) were consistent with surgery. In addition, the results have provided evidence suggesting that RXI-109 is effective in minimizing scar tissue, as shown in Figure 9.

20 Vercelli, S, et al. How to assess postsurgical scars: a review of outcome measures. Disabil Rehabil (2009); 31(25): 2055.



Multi-dose Study: In December 2012, RXi initiated this dose escalation trial, designated as study 1202, to have 9 subjects in three groups of three individuals each. Dosing of RXI-109 (2.5, 5, and 7.5 mg/kg), which involved local injections over a two-week period, was completed in February. Endpoints are comparable to those of the single-dose trial, except that pharmacokinetic data were assessed after the 1st and 3rd injections. Data collection should be completed in May, which means the Company will be able to release the final results this summer.

So far, preliminary safety data identified mild erythema associated with the surgical incisions, which would be expected, but no adverse events greater than Grade 1 have been noted.

The Phase 2 Program: RXi will likely conduct two or three Phase 2 trials as the next step in the clinical development of RXI-109. Potential indications include its use with scar revision surgery for individuals who have bilateral keloid scars or scars from a hysterectomy, Cesarean section, or cosmetic breast surgery. The goals of these studies will be to determine the optimal dose and schedule, while demonstrating safety and efficacy.

OPHTHALMIC INDICATIONS RXI is also developing its lead drug candidate for ophthalmic indications since the formulation for these applications would differ from the preparation used to treat dermal scars. However, the Company intends to outlicense RXI-109 for eye-related diseases to a drug firm specializing in that field of medicine.

Within the ophthalmology market are a number of different indications for which RXI-109 may prove efficacious. The Company’s primary ophthalmic development program targets proliferative vitreo-retinopathy (PVR), which is an orphan indication associated with retinal detachment. (PVR affects 8% – 10% of the patients who develop a detached retina.) RXi’s interest in pursuing this indication is the possibility of gaining regulatory approval based on relatively small, less expensive clinical trials. Then, too, the condition seems to have a simpler etiology in that it develops following a physical insult, unlike the more common fibrotic diseases of the eye (summarized in Table 2) that are associated with such potentially confounding issues as diabetes and cellular dysfunction with aging.

Figure 9. A comparison of unblinded results suggests that RXI-109 is effective in minimizing scar tissue. Control and treated incisions from the same patient healed differently. The width of the scar on the left is narrower than the one on the right and that difference correlates well with the presence of CTGF in histological sections taken at day 84. Moreover, trichrome staining, which helps to distinguish collagen from cells, shows a much smaller area of collagen associated with the visible scar on the left side. Staining for alpha-smooth muscle actin, which is used as an index of fibroblast presence, shows no difference between the two test areas at day 84, indicating that both incisions healed and that there is no lingering fibrosis.




Table 2. Common Ophthalmic Diseases with a Fibrotic Component


It is apparent from Table 2 that there are several large ophthalmology markets for RXI-109 that may attract the interest of a large specialty pharmaceutical company.

PRECLINICAL STUDIES WITH RXI-109

RXi has determined that its sd-rxRNA construct is capable of penetrating retinal cells in culture and reaching multiple layers of the eye rendering it suitable to treat various retinal conditions.21 (See Figure 10.) This contrasts with results obtained with conventional siRNA, which failed to demonstrate uptake into mouse and rabbit retina 24 hours after administration.

In addition, a dose-dependence study found that administration of 3 μg sd-rxRNA in 1 μL was sufficient to inhibit gene expression in the retina. A separate test determined that the mRNA silencing began within 2 days of administration and persisted for three weeks, as shown in Figure 11. Moreover, retinal morphology, blood vessel integrity, and the electrophysiological properties of the retina were not affected by the sd-rxRNA construct.22

21 Libertine, L, et al. Novel self-delivering RNAi compounds (sd-rxRNA™) demonstrate robust ocular cell uptake in vitro and in vivo. Invest Ophthalmol Vis Sci, 51, e-Abstract 3097 (2010). 22 Pavco, PA, et al. Self-delivering RNAi compounds (sd-rxRNA™) demonstrate robust efficacy in vivo in the mouse eye. Invest Ophthalmol Vis Sci, 52, e-Abstract 1426 (2011).

Figure 10. An sd-rxRNA construct with a pink dye attached shows that the molecule successfully penetrates deeply within the mouse retina reaching even the photoreceptors 24 hours after intravitreal administration.

Source: RXI Pharma



RXi also found that the sd-rxRNA-mediated reduction in CTGF was accompanied by a decline in the level of vascular endothelial growth factor (VEGF). This finding is important because the cytokines appear to control two key processes associated with diseases of the retina, the formation of scar tissue and abnormal blood vessels. By reducing both of these cytokines, the Company’s drug candidate may reduce the risk of excessive fibrosis and aberrant angiogenesis.

Proliferative Vitreoretinopathy: We believe PVR is an excellent clinical indication for the development of RXI-109 because the underlying cause appears to be abnormal healing that involves fibroblasts and the formation of a scar-like membrane over the retina.23 The condition, which is vision threatening, occurs secondarily to a retinal detachment in which the juncture between the photoreceptors and the retinal pigment epithelium (see Figure 10) fails. That physical separation deprives the photoreceptors of nutrients that, in turn, alters their metabolic state leading to retinal remodeling, a shortening of the photoreceptor outer segments, and cell death within a few days.24,25 The detachment is accompanied by an influx of macrophages, pigment epithelial cells, glia, and fibroblasts into the vitreous, at least partly in response to elevated cytokines.26 Data indicate that the macrophage and retinal pigment epithelial cells transform into fibroblast-like cells and contribute to the formation of a membrane on the surface of a surgically mended retina.27,28 That cellular covering interferes with vision. Worse, however, is that the fibroblasts subsequently contract, much as they do during the normal wound-healing process, thus tearing the repaired retina. As such, PVR is the most common reason for failure of operations to repair the initial detachment. Indeed, one report found that PVR occurred in 52.9% of the patients undergoing the corrective surgery.29

Near-Term Ophthalmology Research: Preclinical work is being conducted in collaboration with Dr. Geoff Lewis at the University of California, Santa Barbara. The results should pave the way for clinical development of RXI-109 by a corporate partner experienced in ophthalmology. Discussions are under way to secure such a collaboration.

23 Machemer, R. Massive periretinal proliferation: a logical approach to therapy. Trans Am Ophthalmol Soc (1977); 75: 556. 24 El Ghrably, I, et al. Apoptosis in proliferative vitreoretinopathy. Invest Ophthalmol Vis Sci (2004); 45(5): 1473. 25 Fisher, SK, et al. Cellular remodeling in mammalian retina: results from studies of experimental retinal detachment. Prog Retin Eye Res (2005); 24(3): 395. 26 Newsome, DA, et al. Human massive periretinal proliferation. In vitro characteristics of cellular components. Arch Ophthalmol (1981); 99(5): 873. 27 Lin, ML, et al. Macrophages acquire fibroblast characteristics in a rat model of proliferative vitreoretinopathy. Ophthalmic Res (2011); 45(4): 180. 28 Casaroli-Marano, RP, et al. Epithelial-mesenchyma transition in proliferative vitreoretinopathy: Intermediate filament protein expression in retinal pigment epithelial cells. Invest Ophthalmol Vis Sci (1999); 40(9): 2062. 29 Tseng, W, et al. Prevalence and risk factors for proliferative bitreoretinopathy in eyes with rhegmatogenous retinal detachment but no previous vitreoretinal surgery. Am J Ophthalmol (2004); 137(6): 1105.

Figure 11. sd-rxRNA significantly inhibits mRNA translation in the retina for three weeks. In this test, 3 μg of anti-cyclophilin B (PPIB) or a non-targeting sd-rxRNA (NTC) were injected in 1 μL volume intravitreally. Phosphate buffered saline (PBS) served as an injection control. mRNA levels were quantified by Quantitative PCR and normalized to β-actin.




ADDITIONAL INDICATIONS The Company is focusing its resources primarily on the two programs discussed, but there are two others that are included in the R&D pipeline (see page 4).

HEPATOLOGY

RXi has demonstrated an ability to deliver sd-rxRNA constructs to the liver via systemic administration (i.e., subcutaneously and intravenously), as shown in Figure 12. The initial drug candidate, RXI-209, targets expression of CTGF and may prove effective against such liver diseases as cirrhosis, nonalcoholic fatty liver disease, and fibrosis associated with hepatitis infections. But the ability of a systemically administered sd-rxRNA to reach the liver in meaningful quantities indicates that RXi’s platform is suitable for other diseases.

RXi will likely seek a corporate partner to develop RXI-209 for liver disorders. This makes sense, in our opinion, since the hepatology market consists of multiple indications, many of which have large patient populations that would be best reached by an experienced marketer.

NEUROLOGY

The Company is collaborating with Dr. Robert Brown of the University of Massachusetts to test an sd-rxRNA targeting superoxide dismutase-1, an enzyme that has been implicated in amyotrophic lateral sclerosis (ALS). The research, which is funded by grants, may yield the first therapy for this progressive neurological disease. As shown in Figure 13, infusion of an sd-rxRNA into the lumbar spine in a preclinical model results in good uptake into cells of the spinal cord with no observable uptake in the brain.

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Figure 12. Systemic administration of an sd-rxRNA results in good uptake by liver cells. Left panel: Administrations of an sd-rxRNA construct with a red fluorescent label resulted in uptake into the liver when delivered subcutaneously (SC) or intravenously (IV). The sd-rxRNA was tagged with a red label, while cell nuclei were stained blue with Hoechst nuclear stain. Panels A & B: Uptake seen in the photomicrographs is consistent with blood levels of the sd-rxRNA after intravenous and subcutaneous administration. Levels of the sd-rxRNA (ng/mL) at various times (in hours) after administration show that subcutaneous dosing (panels A & B) is associated with a slower uptake into the blood and liver than intravenous dosing (panel A). Nonetheless, both routes are effective in delivering the sd-rxRNA into the liver.

SC 24 hrs

IV 24 hrs

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IV 6 hrs



We believe this collaboration could lay the foundation for the use of its sd-rxRNA platform to create drugs for a broad range of neurological conditions that are marked by overexpression of specific gene products. Many of the diseases, which are listed in Table 3, constitute significant unmet medical needs.

Table 3. Potential

Figure 13. Uptake of an sd-rxRNA into the spinal column. Infusion of a fluorescently labeled molecule via a drug pump over 3 days resulted in good uptake into cells in the spinal cord, providing proof of concept in targeting SOD1 with an sd-rxRNA and an intrathecal delivery system.

Disorder Mutated protein(s)

ALS (Lou Gehrig’s) SOD1, Optineurin

Spinocerebellar ataxia type 1 Ataxin‐1

Huntington’s disease Huntingtin

Kennedy’s disease Androgen receptor

Alzheimer’s diseaseAmyloid precursor, presenilin, BASE1

Parkinsonian dementia Tau, α‐synuclein

DYT1 dystonia Torsin A

Machado‐Joseph disease MJD I

Prion‐based disease Prion

Spinal cord injury Various



INVESTMENT CONCERNS AND RISKS For a complete description of risks and uncertainties related to RXi Pharmaceuticals’ business, see the “Risk Factors” section in RXi’s SEC filings, which can be accessed directly from the SEC Edgar filings at www.sec.gov. Potential risks include:

Stock risk and market risk: There is a limited trading market for the Company’s common stock. There can be no assurance that an active and liquid trading market will develop or, if developed, that it will be sustained, which could limit one’s ability to buy or sell the Company’s common stock at a desired price. Investors should also consider technical risks common to many small-cap or micro-cap stock investments, such as small float, risk of dilution, dependence upon key personnel, and the strength of competitors that may be larger and better capitalized.

Competitive risk: The pharmaceutical and biotechnology markets are rapidly evolving, and research and development are expected to continue at an accelerated pace. Other companies are also actively engaged in the development of therapies to directly or indirectly treat those disorders being pursued by RXi. These companies may have substantially greater research and development capabilities, as well as significantly greater marketing, financial, and human resources than RXi.

Products still in development phases: RXi’s products are still at the discovery and clinical testing stages. Such products may appear to be promising, but may not reach commercialization for various reasons, including failure to achieve regulatory approvals, safety concerns, and/or the inability to be manufactured at a reasonable cost. And even if its products are commercialized, there can be no assurance that they will be accepted, which may prevent the Company from becoming profitable.

Funding requirements: It is difficult to predict the Company’s future capital requirements. The Company may need additional financing to continue funding the research and development of its products and to expand its business. There is no guarantee that it can secure the desired future capital or, if sufficient capital is secured, that current shareholders will not suffer significant dilution.

Regulatory risk: There is no guarantee that RXi’s products will be approved by the U.S. Food and Drug Administration (FDA) or international regulatory bodies for marketing in the U.S. or abroad.

Patent risk: The field of RNAi pharmaceuticals is at an early stage of development, and although RXi Pharmaceuticals has licensed and/or filed for numerous patents to secure its right to commercialize its technology, not all of these patents have been challenged, and therefore some may not protect the Company’s rights adequately in a competitive marketplace.



FINANCIAL FORECASTS & VALUATION We have based our financial forecast and valuation analysis on the two indications that RXi is pursuing internally at this time, dermal scarring and PVR.

REVENUE SOURCES

RXI-109 for Dermal Scarring

Assumptions:

The formulation of RXI-109 for dermal scarring is launched in 2017 in the United States and Europe where the combined patient population numbers 84 million.

The market penetration rate is 0.5% initially and increases over 10 years to reach a peak of 20%.

The price per treatment is $400, each scar is treated twice, and only one scar is assumed per patient.

RXi outlicenses the drug after Phase 2 studies are completed in exchange for a royalty rate of 15%, an upfront fee of $8 million, and milestones of $5 million each for submission of the NDA and approval.

The probability of commercialization is 25% at this juncture, based on the favorable data that has been released to date from the single-dose Phase 1 trial.

RXI-109 for Ophthalmic Indications

Assumptions:

The formulation of RXI-109 for ophthalmic indications is launched in 2017 in more developed countries as defined by the United Nations for all patients treated for detached retina to prevent PVR.

The market penetration rate is 7% initially and increases over 5 years to reach a peak of 25%.

The price per treatment is $500, and each patient receives an average of three treatments.

RXi outlicenses the drug after preclinical research is completed in exchange for a royalty rate of 8%, an upfront fee of $3 million, and milestones totaling $4 million related to clinical development and regulatory approvals.

The probability of commercialization is 10% at this juncture, since the drug is currently in a preclinical stage of development.

Year penetration starts 2017 Incidence 130,835

Starting penetration rate 7% Percent addressable 100%

Years between penetration start and peak 5 Market growth rate 1%

Peak penetration 25% Price per patient $1,500

Duration of peak penetration in years 5 Treatment price growth 3%

Retention rate in decline years 90% Royalty rate 8%

Stage of development Preclinical Probability of commercialization 10%

Year penetration starts 2017 Incidence 84,000,000

Starting penetration rate 0.5% Percent addressable 100%

Years between penetration start and peak 10 Market growth rate 0%

Peak penetration 20% Price per patient $800

Duration of peak penetration in years 10 Treatment price growth 3%

Retention rate in decline years 90% Royalty rate 15%

Stage of development Phase 1 Probability of commercialization 25%



QUARTERLY INCOME STATEMENTS҂ (Fiscal year ends December 31st.)

҂ All data are in thousands, except for per-share figures. Estimates are in italics.

Assumptions:

R&D expenses increase in the second half of 2013 as the Company initiates Phase 2 clinical trials of RXI-109 for dermal scarring and enrollment rises.

General & administrative costs rise modestly through the 2013 and 2014.

The number of common shares increases as options/warrants are exercised.

ANNUAL INCOME STATEMENTS҂ (Fiscal year ends December 31st.)

҂ All data are in thousands, except for per-share figures. Estimates are in italics.

Assumptions:

RXi receives upfront and milestone payments from licensing agreements for its two formulations of RXI-109, starting in 2014. These payments are each recognized over 5-year periods.

Commercial revenues commence in 2017, with royalties from licensing agreements for dermal scarring and the ophthalmic indication PVR.

R&D expenses increase in the near term as RXi initiates Phase 2 clinical trials of its dermal scarring drug. Thereafter, we look for relatively stable levels of spending in support of other product initiatives.

General & administrative costs rise gradually over the next five years.

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Total Revenues ‐$ ‐$ 57$ 40$ 50$ 50$ 50$ 50$ 50$ 50$ 450$ 600$

Operating expenses

R&D expense 1,154$ 774$ 1,214$ 1,136$ 1,200$ 1,300$ 1,500$ 2,000$ 1,550$ 1,600$ 1,600$ 1,600$

G&A expense 751 716 539 615 725 750 750 775 775 800 800 800

Other ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Total operating costs 1,905 1,490 1,753 1,751 1,925 2,050 2,250 2,775 2,325 2,400 2,400 2,400

Operating profit/(loss) (1,905)$ (1,490)$ (1,696)$ (1,711)$ (1,875)$ (2,000)$ (2,200)$ (2,725)$ (2,275)$ (2,350)$ (1,950)$ (1,800)$

Interest income (expense) (22) (6) (1) (1) 12 75 70 65 55 40 35 25

Other 1 70 53 1 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Pretax profit/(loss) (1,926)$ (1,426)$ (1,644)$ (1,711)$ (1,863)$ (1,925)$ (2,130)$ (2,660)$ (2,220)$ (2,310)$ (1,915)$ (1,775)$

Income taxes ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Net profit/(loss) (1,926)$ (1,426)$ (1,644)$ (1,711)$ (1,863)$ (1,925)$ (2,130)$ (2,660)$ (2,220)$ (2,310)$ (1,915)$ (1,775)$

Pfd stock dividends/accretion ‐$ (9,618)$ (1,277)$ (1,920)$ (1,650)$ (1,650)$ (1,650)$ (1,650)$ (1,650)$ (1,650)$ (1,650)$ (1,650)$

Net profit/(loss) for common (1,926)$ (11,044)$ (2,921)$ (3,631)$ (3,513)$ (3,575)$ (3,780)$ (4,310)$ (3,870)$ (3,960)$ (3,565)$ (3,425)$

Discontinued/nonrecurring ‐$ (6,173)$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$

Net profit/(loss) (1,926)$ (17,217)$ (2,921)$ (3,631)$ (3,513)$ (3,575)$ (3,780)$ (4,310)$ (3,870)$ (3,960)$ (3,565)$ (1,775)$

Earnings/(loss) per share (0.04)$ (0.08)$ (0.02)$ (0.02)$ (0.01)$ (0.01)$ (0.01)$ (0.01)$ (0.01)$ (0.01)$ (0.01)$ (0.01)$

Discontin'd/nonrecur per sh ‐$ (0.05)$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$ ‐$

Shares outstanding 47,967 132,204 157,155 211,529 322,000 323,500 324,000 325,000 326,000 326,500 327,000 327,500

2012 2013 2014

2011 2012 2013 2014 2015 2016 2017 2018

Total Revenues ‐$ 97$ 200$ 1,150$ 2,440$ 7,640$ 60,584$ 265,210$

Operating expenses

R&D expense 6,624 4,278 6,000 6,350 6,500 6,500 6,500 31,825

SG&A expense 6,146 2,621 3,000 3,175 3,250 3,500 3,500 4,000

Total operating costs 12,770 6,899 9,000 9,525 9,750 10,000 10,000 35,825

Operating profit/(loss) (12,770)$ (6,802)$ (8,800)$ (8,375)$ (7,310)$ (2,360)$ 50,584$ 229,385$

Interest income/(expense) ‐ (30) 222 155 100 100 100 150

Other income/(expense) 2,551 125 ‐ ‐ ‐ ‐ ‐ ‐

Pretax profit/(loss) (10,219)$ (6,707)$ (8,578)$ (8,220)$ (7,210)$ (2,260)$ 50,684$ 229,535$

Income taxes ‐ ‐ ‐ ‐ ‐ ‐ ‐ 22,954

Net profit/(loss) (10,219)$ (6,707)$ (8,578)$ (8,220)$ (7,210)$ (2,260)$ 50,684$ 206,582$

Preferred dividends/accretion ‐$ (12,815)$ (6,600)$ (6,600)$

Net profit/(loss) for common (10,219)$ (19,522)$ (15,178)$ (14,820)$ (7,210)$ (2,260)$ 50,684$ 206,582$

Earnings/(loss) per share (0.28)$ (0.05)$ (0.03)$ (0.03)$ (0.02)$ (0.01)$ 0.15$ 0.61$

Common shares outstanding 36,334 137,214 323,625 326,750 333,000 337,000 338,000 339,000



The Company books an income tax liability in 2018 at a 10% rate, although tax-loss carryforwards minimize its cash liability.

The number of common shares increases with the exercise of options/warrants and external financing.

We have made no provision for preferred stock dividends or conversion beyond 2014, although preferred stockholders are entitled to up to a 9.9999% ownership stake in RXi and each preferred stock is convertible into 73,127 shares of common.

BALANCE SHEET҂ (Fiscal year ends December 31st.)

҂ All data are in thousands.

ASSETS 12/31/2012 12/31/2011

Current Assets

Cash & equivalents 5,127 503

Restricted cash 53 53

Account receivable - 597

Prepaid expense & other 212 186

Total Current Assets 5,392$ 1,339$

Property & equipment 198$ 355$

Other 2 -

Total Assets 5,592$ 1,694$

LIABILITIES

Current Liabilities

Accounts payable 1,183$ 931$

Debt due 5 29

Deferred revenue 491 816

Total Current Liabilities 1,679$ 1,776$

Convertible notes payable -$ 500$

Capital lease obligations - 5$

Other 27 -

Total Long-Term Liabilities 27$ 505$

Series A Convertible Preferred stock 9726 0

Common Shareholders Equity

Common Stock, par value 16$ 10$

Additional Paid-In Capital 11,301 3,680

Accumulated Deficit (17,157) (4,277)

Treasury Stock - -

Total Shareholders Equity (5,840)$ (587)$

Total liabilities & equity (4,134)$ 1,694$



VALUATION ANALYSIS

RXi’s drug candidates are at a relatively early stage, yet they have considerable potential value based on recent deals completed in the RNAi field. We refer specifically to transactions involving Isis Pharmaceuticals, Alnylam Pharmaceuticals, and major drug companies inked since January 1, 2012. Three involve rare disorders, the Alnylam deal targets a major indication, and the neurological disease agreement between Isis and Biogen Idec failed to identify the actual conditions. (Note the neurological deal is presented as if the agreement covered a single drug, even though three drugs were involved at a total price of $630 million.) In addition, the Isis-Roche contract is for a drug development program that has a lead candidate and alternatives. All upfront fees were paid in cash, and the value of each deal reflects only upfront and milestone fees without regard to royalties on commercial sales.

Recent Partnering Agreements

It is clear interest in targeting gene expression has increased recently based on the number of deals completed, the relatively early stages of the drugs involved, and the valuations placed on them. (Note that the stage of development shown reflects the status at the time of signing.) The average deal provided $21 million in upfront licensing fees and had a valuation of $275 million, excluding royalties. Interestingly, none of the programs in which the disease was identified specifically appears to offer multiple indications for the drug involved.

Our analysis suggests that RXi’s drug development program has considerably greater value than the Company’s current market capitalization. Indeed, a licensing agreement for the PVR ophthalmic indication alone would seem to merit an upfront fee of at least $10 million and a total valuation well above $200 million. But then, that formulation of RXI-109 would seem to warrant a higher than average valuation since it could be used to treat a number of common eye diseases as shown in Table 2 (page 15). As a result, our valuation analysis is based on an assumption that each of RXi’s programs yields licensing agreements equivalent to two drugs each.

We believe the Company’s strategy of developing RXI-109 internally for dermatological applications will increase that formulation’s value well above the average in the table above. The Phase 2 trials will be designed to yield clinical proof of concept for dermatological scarring, thereby de-risking the program. RXi will initiate the Phase 2 studies later this year, which means the results may be available by late 2014.

Yet, if RXi’s two major programs are valued simply on the averages calculated from the table, RXII shares offer a compelling investment opportunity. For our valuation analysis, we have assumed the ophthalmology formulation is out-licensed in the next 12 months and that all milestones are received as a single payment upon commercialization. Since RXi intends to develop the dermatological formulation internally at least through Phase 2, we have assumed the drug’s value would be recognized upon commercialization. We then discounted the future value of the programs back to 2014, as shown below. The final result indicates the two programs combined would have a value of $582 million in 2014, or $0.42 per share based on the estimated fully diluted shares outstanding at that time. Accordingly, we have set our 12 month price target at $0.40.

Upfront Fee Value

Developer Licensee Indication Stage of Development (in millions) (in millions)

Isis Pharmaceuticals Roche Holdings Huntington's disease Preclinical $30 $392

Isis Pharmaceuticals Biogen Idec myotonic dystrophy 1 Discovery $12 $271

Isis Pharmaceuticals Biogen Idec Neurological disease Discovery $10 $210

Alnylam Pharmaceuticals The Medicines Co. cardiovascular disease Phase 1 (completed) $25 $205

Isis Pharmaceuticals Biogen Idec spinal muscular atrophy Phase 2 (ongoing) $29 $299

Average: $21 $275

Ophthalmology Dermatology

Future payment: $508 $550

Years until payment: 3 3

Discount rate: 25% 25%

Discounted value: $260 $280

Upfront cash: $42

Total Value in 2014: $302 $280

Value per share: $0.15 $0.27



DISCLOSURES ANALYST(s) CERTIFICATION: The analyst(s) responsible for covering the securities in this report certify that the views expressed in this research report accurately reflect their personal views about RXi Pharmaceuticals (the “Company”) and its securities. The analyst(s) responsible for covering the securities in this report certify that no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation or view contained in this research report.

MEANINGS OF RATINGS: Our rating system is based upon 12 to 36 month price targets. BUY describes stocks that we expect to appreciate by more than 20%. HOLD/NEUTRAL describes stocks that we expect to change plus or minus 20%. SELL describes stocks that we expect to decline by more than 20%. SC describes stocks that Griffin Securities has Suspended Coverage of this Company and price target, if any, for this stock, because it does not currently have a sufficient basis for determining a rating or target and/or Griffin Securities is redirecting its research resources. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NR describes stocks that are Not Rated, indicating that Griffin Securities does not cover or rate this Company.

DISTRIBUTION OF RATINGS: Currently Griffin Securities has assigned BUY ratings on 83% of companies it covers, HOLD/NEUTRAL ratings on 17%, and SELL ratings on 0%. Griffin Securities has provided investment banking services for 15% of companies in which it has had BUY ratings in the past 12 months and 0% for companies in which it has had HOLD/NEUTRAL, SELL, NR, or no coverage in the past 12 months or has suspended coverage (SC) in the past 12 months.

COMPENSATION OR SECURITIES OWNERSHIP: The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Griffin Securities, including profits derived from investment banking revenue. The analyst(s) that prepared the research report did not receive any compensation from the Company or any other companies mentioned in this report in connection with the preparation of this report. The analyst responsible for covering the securities in this report currently does not own common stock in the Company, but in the future may from time to time engage in transactions with respect to the Company or other companies mentioned in the report. Griffin Securities from time to time in the future may request expenses to be paid for copying, printing, mailing and distribution of the report by the Company and other companies mentioned in this report. Griffin Securities expects to receive, or intends to seek, compensation for investment banking and non-investment banking services from the Company in the next three months.

FORWARD-LOOKING STATEMENTS: This Report contains forward-looking statements, which involve risks and uncertainties. Actual results may differ significantly from such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the “Risk Factors” section in the SEC filings available in electronic format through SEC Edgar filings at www.SEC.gov on the Internet.

OTHER COMPANIES MENTIONED IN THIS REPORT:

Alnylam Pharmaceuticals (Nasdaq: ALNY)

Biogen Idec (Nasdaq: BIIB)

CytRx Corporation (Nasdaq: CYTR)

Galena Biopharma (Nasdaq: GALE)

Isis Pharmaceuticals (Nasdaq: ISIS)

Roche Holdings (OTCQX: RHHBY)

The Medicines Company (Nasdaq: MDCO)



PRICE CHART – 2 Year

Source: BigCharts.com

We have been covering RXi Pharmaceuticals since September 2008. However, with the acquisition of a vaccine program and adoption of the name Galena in April 2011, RXi ceased to exist as a separate entity and our coverage was effectively terminated. RXi’s spinoff from Galena in May 2012 restored the Company founded on RNAi technology as an independent corporation. The chart above reflects trading activity since RXi’s spinoff. 4/24/13 – Resumption of Coverage: share price: $0.20; rating: BUY; 12-month price target: $0.40.

GENERAL: Griffin Securities, Inc. (“Griffin Securities”) a FINRA (formerly known as the NASD) member firm with its principal office in New York, New York, USA is an investment banking firm providing corporate finance, merger and acquisitions, brokerage, and investment opportunities for institutional, corporate, and private clients. The analyst(s) are employed by Griffin Securities. Our research professionals provide important input into our investment banking and other business selection processes. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein.

Griffin Securities may from time to time perform corporate finance or other services for some companies described herein and may occasionally possess material, nonpublic information regarding such companies. This information is not used in preparation of the opinions and estimates herein. While the information contained in this report and the opinions contained herein are based on sources believed to be reliable, Griffin Securities has not independently verified the facts, assumptions and estimates contained in this report. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information and opinions contained in this report.

The information contained herein is not a complete analysis of every material fact in respect to any company, industry or security. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Griffin Securities. It does not take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. Certain transactions - including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information contained in this report is subject to change without notice and Griffin Securities assumes no responsibility to update the report. In addition, regulatory, compliance, or other reasons may prevent us from providing updates.

BUY

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