griffin rxii update report 25apr13

7/30/2019 Griffin RXII Update Report 25Apr13

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Griffin Securities, Inc., 17 State Street, New York, NY, 10004 www.GriffinSecurities.com 1Please 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 synthesisof connective tissue growth factor or CTGF. The cytokines central role in fibrosis offers multiple paths tocommercialization. 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 havesuggested the drug does not interfere with wound healing, may effectively lower CTGF expression, and couldminimize 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 differentformulation of RXI-109 has the potential to prevent and/or treat ophthalmic conditions marked by excessivefibrosis, including diabetic retinopathy, age-related macular degeneration, and macular edema. In addition, arelated compound designed for systemic delivery may prove effective for such fibrotic diseases of the liver ascirrhosis and hepatitis. Both drugs would enter large markets, not well served by todays medicines.

Investor support has provided a comfortable financial runway. RXi recently completed an equity offeringthat 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 siRNAtechnology based on the research of theChairman of its Scientific Advisory Board, NobelLaureate Dr. Craig Mello. The Company haspatents on basic siRNA structures, chemicalmodifications to stabilize the molecules, andself-delivery moieties to facilitate entry of thesiRNA into a cell.

RXis lead drug candidate targets a key player infibrosis called connective tissue growth factor, orCTGF. By inhibiting translation of the CTGFmRNA, the drug has the potential to combat awide range of diseases. The Companys primaryfocus is use of RXI-109 dermatologically toprevent or treat excessive scarring. Other usesmay include a variety of ophthalmic disordersthat 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

Estd 2013 Earns (Loss)/shr ($0.03)

Estd 2014 Earns (Loss)/shr ($0.03)


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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 blockingexpression of a central player in fibrotic diseases, connective tissue growth factor (CTGF). As a result, theCompany has multiple commercialization opportunities to pursue and several milestones approaching.

POISED TO LEAD WITH A PROPRIETARY DRUG-DESIGN PLATFORMThe endogenous RNA interference pathway that regulates gene expression has proven challenging toutilize for drug development since its discovery by Nobel Laureates Craig Mello (Chairman of RXisScientific Advisory Board) and Andrew Fire in 1998. Thanks to a patented, self-delivering construct, calledsd-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 inwhich gene silencing may succeed where traditional pharmaceutical development has failed.

DERMATOLOGY. The lead indication that the Company is pursuing with its sd-rxRNA construct forCTGF is dermal scarring. The drug, designated as RXI-109, has demonstrated an ability tosignificantly reduce levels of the cytokine during wound healing in preclinical models withoutinterfering 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 CTGFinhibitor. The final results will position RXi to initiate more than one Phase 2 clinical trial in the secondhalf 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 theindication(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 beout-licensed for clinical development and marketing by a specialty pharmaceutical company. Work isunder way to ready an IND submission to conduct a Phase 1 trial targeting proliferativevitreoretinopathy (PVR). That condition is the leading cause of the failure of retinal detachmentsurgery. The condition is characterized by a proliferation of fibroblast-like cells that contract and, in sodoing, tear the surgically repaired retina. PVR is an orphan indication, but RXI-109 may also proveeffective 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 liverdisorders 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 isadministered intravenously or subcutaneously. Infusion of an sd-rxRNA targeting the enzymesuperoxide dismutase-1 (SOD1) into the spinal column has provided proof of concept for treatingCNS 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 theCompany is contemplating a reverse stock split to make the stock more suitable for institutional investorsand to generate greater interest in the overall investment community. Several near-term milestonesshould lift awareness including data from ongoing dermatology clinical trials and the subsequent initiationof Phase 2 studies. Just as important, investors should appreciate that the share price constitutes acompelling 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.


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TableofContentsRecent & near-term milestones .................................................................................................................... 4RXis Product Pipeline ................................................................................................................................... 4Management Team ....................................................................................................................................... 5Board of Directors ......................................................................................................................................... 5Scientific Advisory Board .............................................................................................................................. 6The sd-rxRNA ............................................................................................................................................... 7RXis Molecular Target .................................................................................................................................. 8

Normal Healing versus Fibroproliferative Disorders .................................................................................. 9Post-surgical scars .................................................................................................................................... 9

An Anti-Scarring Medicine for Dermal Applications ................................................................................ 11CTGF & Dermal Scarring ..................................................................................................................... 11Preclinical Data on RXI-109 ................................................................................................................. 11Phase 1 Clinical Trials ......................................................................................................................... 13The Phase 2 Program .......................................................................................................................... 14

Ophthalmic Indications ................................................................................................................................ 14Preclinical Studies with RXI-109 ............................................................................................................. 15

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

Additional Indications .................................................................................................................................. 17Hepatology .............................................................................................................................................. 17Neurology ................................................................................................................................................ 17

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

Financial Forecasts & Valuation ................................................................................................................. 20Revenue Sources .................................................................................................................................... 20

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

Quarterly Income Statements .................................................................................................................. 21Annual Income Statements ..................................................................................................................... 21Balance Sheet ......................................................................................................................................... 22Valuation Analysis ................................................................................................................................... 23

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


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RECENT & NEAR-TERM MILESTONES

A brief history of RXi Pharmaceuticals is needed to understand the recent milestones. The Company wasoriginally formed in 2007 as a subsidiary of CytRx Corporation to commercialize drugs using discoveriesin inhibitory ribonucleic acid (RNAi) made by Nobel Laureate Craig Mello. In early 2008, CytRx distributed4.5 million RXi shares to its investors and RXII stock began trading on Nasdaq. RXi developed chemicallymodified versions of small inhibitory RNA (rxRNA) that were more stable and less susceptible toenzymatic degradation. Work continued in an effort to improve cellular uptake, resulting in self-deliveringrxRNA (sd-rxRNA

), which is the basic structure of the Companys lead candidate, RXI-109. Management

changes brought in a vaccine technology unrelated to RNAi in April 2011 and the corporate name waschanged 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 Companys 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.

RXIS PRODUCT PIPELINE

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


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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 2012with more than 25 years of experience in the pharmaceutical/biotechnology industry.

Founded and served as Chairman and Chief Executive Officer of Barrier Therapeutics and severalmanagement positions with Johnson & Johnson, including Vice President, Research andDevelopment for Johnson & Johnsons 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 dermatologyspace.

Pamela Pavco, Ph.D., Chief Development Officer

Joined the Company in 2007 and has more than 25 years of experience working with oligonucleotidesin such fields as oncology, angiogenesis, hepatitis, respiratory disease, and Huntingtons 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 CriticalTherapeutics, CytoMed, and UCB Pharma.

Has overseen projects through all stages of clinical development through marketing and life-cyclemanagement, 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 projectmanagement 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 onErnst & Youngs National Life Sciences Committee.

Is a member of the American Institute of CPAs and serves as a member of the Board of Directors ofEpicept 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, andChairman of the Nominating Committee

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

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

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


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H. Paul Dorman

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

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

Curtis Lockshin, Ph.D.

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

Serves as a Director of the Ruth K. Broad Biomedical Research Foundation, a Duke UniversitySupport Corporation, and has served on the boards of Sorrento Therapeutics and WinstonPharmaceuticals.

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 MedicalSchool, 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 ofthe Dr. Paul Janssen Award for Biomedical Research by Johnson & Johnson, co-recipient of the PaulEhrlich and Ludwig Darmstaedter Prize, co-recipient of the National Academy of Sciences Award inMolecular 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 pastPresident 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 oligonucleotideEXC-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 atthe Mount Sinai School of Medicine.

Independent consultant and advisory board member for a number of cosmetic and pharmaceuticalcompanies including RXi Pharmaceuticals Corporation, Neutrogena, Johnson & Johnson, RoC,

Allergan, Aveeno, Merz/Bioform and Medicis.


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THE SD-RXRNA

Craig Mello and his collaborator Andrew Fire opened the door to a new field in molecular biology withtheir discovery that small inhibitory RNA (siRNA) play a role in regulating the translation of messengerRNA (mRNA) into proteins. This added a level of complexity to the regulation of gene expression. Earlyattempts to take advantage of this discovery for drug development met with failures, as the optimal sizesof the molecules needed to be defined, the genetic targets had to be identified with exactness to avoidnon-specific inhibition, and the molecules had short half-lives, due in part to enzymatic degradation andimmune responses. Then, too, the siRNA did not penetrate cells well because they are highly chargedmolecules 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 siRNAconstructs for distinct purposes. One version, called rxRNAori is designed for incorporation into liposomesfor delivery to target cells. Another is the self-delivering siRNA, named sd-rxRNA, that is both resistant toenzymatic degradation and capable of penetrating the cell membrane. In creating this construct, theCompany combined its knowledge of siRNA with information gleaned from work in the related field ofantisense 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 intertwiningnucleotide chains (shown as gold ribbons) that have been chemically modified (depicted by the dots onthe 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 toimprove its stability, render it compatible with the immune system, and enhance its ability to penetrate cellmembranes. 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 itspassage 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, leavingbehind the longer strand that is designed specifically to bind with the mRNA of the targeted protein. Thatinteraction within the RISC results in a cleavage of the mRNA, thereby halting the creation of a proteinthat causes a disease.


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Figure 2. How the sd-rxRNA Inhibits Gene Expression


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

RXIS MOLECULAR TARGET

The Company has chosen a molecular target with a central role in fibrosis, called Connective TissueGrowth Factor (CTGF). This is a signaling protein produced by a wide variety of cells including endothelialcells, smooth muscle cells, and fibroblasts. During development, the cytokine helps to regulate theformation of connective tissues, bone, and blood vessels. Later, expression of this 349-amino acid proteinis increased by such stimuli as shear stress, hypoxia, and biomechanical deformation, and as such, itplays a key role in the normal healing process partly by pulling the damaged tissue together. (See Figure3.) However, it also participates in pathological fibrosis when cell proliferation, cell adhesion, andextracellular matrix formation go awry.

Figure 3. CTGFs 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.


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From Figure 3, it is apparent that a drug targeting CTGF has the potential to treat a broad range ofindications. RXi has chosen to pursue two avenues of development for RXI-109, dermal and ocularscarring. These applications were chosen well, in our opinion, because they provide ready access to thesite of fibrosis and an opportunity to easily monitor the effects of the drug. Such factors are importantbecause 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 ofdifferent cytokines. For instance, normal dermal repair is built upon an extracellular matrix that is invadedby inflammatory cells, newly forming blood vessels, and fibroblasts. Myofibroblasts, which are derivedfrom fibroblasts, figure importantly in the process by laying down the extracellular matrix, using contractilefibers to close the wound, and expressing various cytokines that attract other cells into the area. It iswhen this process malfunctions, leading to persistence of myofibroblasts in the wound area thatpathological scar formation occurs. Scar formation is part of the healing process for wounds that are atleast one-third the depth of the local skin.

2In 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 isCTGFs involvement. Indeed, even the widely recognized inflammatory cytokine transforming growthfactor- (TGF-) requires the presence of this protein to initiate fibrosis.3 It also interacts directly withother biochemical signals by virtue of its unique structure. CTGF consists of four modular segments, eachwith 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, andbone morphogenic protein (BMP). Moreover, the molecules N-terminal portion mediates myofibroblastdifferentiation 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.

4,5,6,7,8But even in patients with certain fibrotic conditions, the regulatory balance associated with normalcy is notcompletely lost. For instance, CTGF mRNA expression is elevated only in affected areas of the skin ofscleroderma patients.

9

POST-SURGICAL SCARS

Scars that form at incision sites comprise an important aspect of medicine that is not fully appreciated bythe general public, perhaps because they are not life-threatening. They do, however, take a toll on thepsychological well-being and quality of life of the patient. An estimated 42 million surgeries are performedannually in the United States and a similar number in Europe that could benefit from scar reductiontherapy. 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 humanvolunteers. Plast Reconstr Surg (2007); 119(6): 1722.3

Wang, Q, et al. Cooperative interaction of CTGF and TGF- 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 enzymeinhibition. 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 mononuclearclear 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 InvestDermatol (2002); 118: 402.


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Table 1. Surgical Skin Procedures (2008)


Attempts to treat scars are considered inadequate, as they are often invasive (e.g., surgical excision andcryotherapy), which may lead to a worse outcome, or have highly variable results (e.g., intralesionalcorticosteroid 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 gelsheeting attempt to provide an environment that favors healing, possibly through local fluid retention. Thismay sound simplistic, but data indicates that rapid epithelialization (in fewer than 10 to 14 days) isessential to avoid excessive scar formation.

10

Fortunately, the multiple steps involved in wound healing create an opportunity to intervenepharmacologically before scars form without interfering with the healing process. The stages of woundhealing 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. MolMed (2011); 17(1-2): 113.

Figure 4. The normal healing process occurs in three stages: In the first stage, inflammatory cytokines,including TGF- and interleukins 4 and 10, attract a variety of cells to the wound to halt the blood flow andprotect against infection. The second stage is marked by a proliferation of fibroblasts, keratinocytes, andendothelial cells that will lay the extracellular matrix for re-epithelialization and support the formation of newblood vessels. In the final period of wound healing, myofibroblasts help to physically close the wound andremodel 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, thoughregulatory abnormalities in earlier stages may create a pathological environment, for instance, viaexcessive inflammation and/or collagen formation. Indeed, keloids can form up to two years after the initialincident. Yet, experimental data suggests that pharmacological intervention prior to matrix remodeling canprevent hypertrophic scar formation without interfering with subsequent wound closure or tissueremodeling.

Source: Gauglitz,GG, et al.11


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AN ANTI-SCARRING MEDICINE FOR DERMAL APPLICATIONS

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

CTGF & Dermal Scarring: RXis decision to target CTGF is well founded on scientific research. Studieshave used antisense probes, siRNA, and neutralizing antibodies to investigate the role of this cytokine innormal and pathological conditions in a variety of tissues.

12,13,14,15Exposure of porcine fibroblasts to

CTGF siRNA inhibits the expression of proteins associated with the extracellular matrix and selectivelydown-regulates TGF- mediated increases in extracellular matrix components, types I and III collagen.16Moreover, antisense inhibition of CTGF mRNA was found to have no effect on early wound healing in apreclinical model, although it significantly limits subsequent hypertrophic scarring.17 This effect isassociated with fewer myofibroblasts and decreased expression of types I and III collagen, as well as thetissue-inhibitor of metalloproteinase-1. A study involving human fibroblasts corroborated the effect ofCTGF inhibition on collagen production.

18More important, the research also found differential responses

of normal and sclerodermic fibroblasts to a CTGF siRNA, as evidenced by an induction of matrixmetalloproteinase-1 and a reduction in its endogenous inhibitor (tissue-inhibitor of metalloproteinase-1) inabnormal 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. Anincrease in its expression, together with a drop in the level of endogenous inhibitor, probably creates anenvironment that favors a dampening, if not a reversal, of the pathological process. Indeed, normal agingis typified by low CTGF expression, which in turn causes the collagen content of the skin to decline.19

Preclinical Data on RXI-109: The Companys lead molecule is readily taken up by cells in the dermallayer, as shown in Figure 5. The sd-rxRNA molecule labeled with a fluorescent dye was administered viainjection and the tissue was examined via confocal microscopy 48 hours later. The pictures revealdistribution 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 mousemodels 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 oftype 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 withoutaffecting 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 filtrationsurgery 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 withoutaffecting 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 indermal 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 chronologicallyaged human skin. J Invest Dermatol (2010); 130: 415.

Photomicrographs

of dermal tissue atsequentially greatermagnification.

Blue = Hoechstnuclear stain

Red = sd-rxRNA


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A dose-response relationship, established in a cultured epithelial cell line (left panel of Figure 6), showeda 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 g or 600g 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 thewound 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 a10 mg/kg dose were about 3.5% of the peak levels observed after intravenous administration of the samedose. In other words, only a small fraction of the intradermally administered drug reaches systemiccirculation, thus minimizing the potential for serious side effects.

Figure 6. RXI-109 reducedexpression of CTGF incultured epithelial cells (leftpanel). As shown in the rightpanel, local administration ofthe drug two days prior to asurgical incision in apreclinical model and at thetime of the incisionsignificantly reduced CTGF atthe 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 excisionalwound (see upper left timeline) in an animal model. At various times after the excision, CTGF mRNA levels and thewound 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 consistentwith smaller wound widths measured on days 6, 7 and 8 post-excision (lower left chart). Finally, by day 15, thewounds of the drug-treated and control animals were fully healed. Moreover, a test of the time course of theinhibition of CTGF mRNA in these animals showed that RXI-109 was still effective in suppressing gene expression8 days after its administration (upper right panel).


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Phase 1 Clinical Trials: RXi is conducting two double-blind Phase 1 studies, one to test a single dose ofRXI-109 and the other to test multiple doses. Both are testing the effects of the drug on wound healing inindividuals scheduled for an elective surgery, abdominoplasty or tummy tuck. Since that procedureinvolves a removal of excess dermal tissue, these subjects provide the Company with an opportunity toassess the drug in tissue that will be removed by the elective procedure. Standard, objective methods 20will be used to evaluate scar formation, and the results should provide an insight into the drugs safetyand possibly, its effectiveness. In addition, tissue samples taken during the abdominoplasty will beanalyzed histologically to identify any impact of the drug on tissue structure at the site of the wound andsurrounding 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. Fourinjections and incisions were made at least 4 cm apart in all directions in each abdomen in two rows. (Themulti-dose trial uses a similar pattern, but with four incisions in each row.) Blinded injections of RXI-109and control solution were made according to a predetermined pattern, so that half received one or theother 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 wasfully enrolled in October 2012. In all, 15 subjects were divided into 5 groups that received 1 mg to10 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 notcompleted the post-operative testing, so the results are still blinded. Final data should beavailable this quarter.

Nonetheless, the study has already yielded some data. A pharmacokinetic analysis wascompleted showing that calculated relative systemic exposure in the 15 volunteers was between1% and 7% (mean 5%). No serious side effects were noted locally or systemically, and theobserved side effects (e.g., erythema and pain) were consistent with surgery. In addition, theresults have provided evidence suggesting that RXI-109 is effective in minimizing scar tissue, asshown in Figure 9.

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


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Multi-dose Study: In December 2012, RXi initiated this dose escalation trial, designated as study1202, to have 9 subjects in three groups of three individuals each. Dosing of RXI-109 (2.5, 5, and7.5 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 datawere assessed after the 1st and 3rd injections. Data collection should be completed in May, whichmeans 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 clinicaldevelopment of RXI-109. Potential indications include its use with scar revision surgery for individualswho have bilateral keloid scars or scars from a hysterectomy, Cesarean section, or cosmetic breastsurgery. The goals of these studies will be to determine the optimal dose and schedule, whiledemonstrating safety and efficacy.

OPHTHALMIC INDICATIONS

RXI is also developing its lead drug candidate for ophthalmic indications since the formulation for theseapplications 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 proveefficacious. The Companys 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.) RXis interest in pursuing this indication is thepossibility 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, unlikethe more common fibrotic diseases of the eye (summarized in Table 2) that are associated with suchpotentially confounding issues as diabetes and cellular dysfunction with aging.

Figure 9. A comparison of unblindedresults suggests that RXI-109 is effectivein minimizing scar tissue. Control andtreated incisions from the same patienthealed differently. The width of the scaron the left is narrower than the one onthe right and that difference correlateswell with the presence of CTGF inhistological sections taken at day 84.Moreover, trichrome staining, whichhelps to distinguish collagen from cells,shows a much smaller area of collagenassociated with the visible scar on theleft side. Staining for alpha-smoothmuscle actin, which is used as an indexof fibroblast presence, shows nodifference between the two test areas atday 84, indicating that both incisionshealed and that there is no lingeringfibrosis.



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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 mayattract 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 andreaching 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 intomouse and rabbit retina 24 hours after administration.

In addition, a dose-dependence study found that administration of 3 g sd-rxRNA in 1 L was sufficient toinhibit gene expression in the retina. A separate test determined that the mRNA silencing began within 2days of administration and persisted for three weeks, as shown in Figure 11. Moreover, retinalmorphology, blood vessel integrity, and the electrophysiological properties of the retina were not affectedby 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. InvestOphthalmol Vis Sci, 52, e-Abstract 1426 (2011).

Figure 10. An sd-rxRNAconstruct with a pink dye

attached shows that themolecule successfullypenetrates deeply withinthe mouse retina reachingeven the photoreceptors24 hours after intravitrealadministration.

Source: RXI Pharma


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

Proliferative Vitreoretinopathy: We believe PVR is an excellent clinical indication for the developmentof RXI-109 because the underlying cause appears to be abnormal healing that involves fibroblasts andthe formation of a scar-like membrane over the retina.23 The condition, which is vision threatening, occurssecondarily to a retinal detachment in which the juncture between the photoreceptors and the retinalpigment epithelium (see Figure 10) fails. That physical separation deprives the photoreceptors ofnutrients that, in turn, alters their metabolic state leading to retinal remodeling, a shortening of thephotoreceptor outer segments, and cell death within a few days.

24,25The detachment is accompanied by

an influx of macrophages, pigment epithelial cells, glia, and fibroblasts into the vitreous, at least partly inresponse 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 asurgically mended retina.

27,28That cellular covering interferes with vision. Worse, however, is that the

fibroblasts subsequently contract, much as they do during the normal wound-healing process, thustearing the repaired retina. As such, PVR is the most common reason for failure of operations to repairthe initial detachment. Indeed, one report found that PVR occurred in 52.9% of the patients undergoingthe 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 clinicaldevelopment of RXI-109 by a corporate partner experienced in ophthalmology. Discussions are underway 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 RetinEye 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 proteinexpression 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 butno previous vitreoretinal surgery. Am J Ophthalmol (2004); 137(6): 1105.

Figure 11. sd-rxRNA significantlyinhibits mRNA translation in the

retina for three weeks. In this test,3 g of anti-cyclophilin B (PPIB) ora non-targeting sd-rxRNA (NTC)were injected in 1 L volumeintravitreally. Phosphate bufferedsaline (PBS) served as an injectioncontrol. mRNA levels werequantified by Quantitative PCR andnormalized to -actin.



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ADDITIONAL INDICATIONS

The Company is focusing its resources primarily on the two programs discussed, but there are two othersthat 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 asystemically administered sd-rxRNA to reach the liver in meaningful quantities indicates that RXisplatform is suitable for other diseases.

RXi will likely seek a corporate partner to develop RXI-209 for liver disorders. This makes sense, in ouropinion, 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 lateralsclerosis (ALS). The research, which is funded by grants, may yield the first therapy for this progressiveneurological disease. As shown in Figure 13, infusion of an sd-rxRNA into the lumbar spine in apreclinical model results in good uptake into cells of the spinal cord with no observable uptake in thebrain.

0

20000

40000

60000

80000

100000

120000

140000

0 5 10

B

0

250000

500000

750000

1000000

0 5 10

Subcutaneous

I.V.

A

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) orintravenously (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 andsubcutaneous administration. Levels of the sd-rxRNA (ng/mL) at various times (in hours) after administration show thatsubcutaneous dosing (panels A & B) is associated with a slower uptake into the blood and liver than intravenous dosing (panelA). Nonetheless, both routes are effective in delivering the sd-rxRNA into the liver.

SC 24 hrs

IV 24 hrs

SC 6 hrs

IV 6 hrs


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We believe this collaboration could lay the foundation for the use of its sd-rxRNA platform to create drugsfor 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 adrug pump over 3 days resulted in good uptake into cells in the spinal cord, providing proof of concept intargeting SOD1 with an sd-rxRNA and an intrathecal delivery system.

Disorder Mutatedprotein(s)ALS(LouGehrigs) SOD1,Optineurin

Spinocerebellar ataxiatype1 Ataxin1

Huntingtonsdisease Huntingtin

Kennedysdisease Androgen receptor

AlzheimersdiseaseAmyloid precursor,

presenilin,BASE1

Parkinsonian dementia Tau, synuclein

DYT1dystonia Torsin A

Machado

Joseph

disease MJD IPrionbaseddisease Prion

Spinalcord injury Various


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INVESTMENT CONCERNS AND RISKS

For a complete description of risks and uncertainties related to RXi Pharmaceuticals business,see the Risk Factors section in RXis SEC filings, which can be accessed directly from the SECEdgar filings at www.sec.gov. Potential risks include:

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

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

Products still in development phases: RXis products are still at the discovery and clinical testingstages. Such products may appear to be promising, but may not reach commercialization for variousreasons, including failure to achieve regulatory approvals, safety concerns, and/or the inability to bemanufactured at a reasonable cost. And even if its products are commercialized, there can be noassurance that they will be accepted, which may prevent the Company from becoming profitable.

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

Regulatory risk: There is no guarantee that RXis products will be approved by the U.S. Food andDrug 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 RXiPharmaceuticals has licensed and/or filed for numerous patents to secure its right to commercializeits technology, not all of these patents have been challenged, and therefore some may not protect theCompanys rights adequately in a competitive marketplace.


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FINANCIAL FORECASTS &VALUATION

We have based our financial forecast and valuation analysis on the two indications that RXi is pursuinginternally 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 wherethe 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%, anupfront 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 beenreleased 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 asdefined 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 regulatoryapprovals.

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


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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 fordermal 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 theophthalmic 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

TotalRevenues $ $ 57$ 40$ 50$ 50$ 50$ 50$ 50$ 50$ 450$ 600$Operatingexpenses

R&Dexp en se 1,154$ 774$ 1,214$ 1,136$ 1,200$ 1,300$ 1,500$ 2,000$ 1,550$ 1,600$ 1,600$ 1,600$

G&Aexpense 751 716 539 615 725 750 750 775 775 800 800 800

Other

Totaloperatingcosts 1,905 1,490 1,753 1,751 1,925 2,050 2,250 2,775 2,325 2,400 2,400 2,400

Operatingprofit/(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)$Interestincome(ex pe ns e) (22) (6) (1) (1) 12 75 70 65 55 40 35 25

Other 1 70 53 1

Pretaxprofit/(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)$Incometaxes

Netprofit/(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)$Pfdstockdividends/accretion $ (9,618)$ (1,277)$ (1,920)$ (1,650)$ (1,650)$ (1,650)$ (1,650)$ (1,650)$ (1,650)$ (1,650)$ (1,650)$

Netprofit/(loss)forcommon (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)$ $ $ $ $ $ $ $ $ $ $

Netprofit/(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)$Earnings/(loss)pershare (0.04)$ (0.08)$ (0.02)$ (0.02)$ (0.01)$ (0.01)$ (0.01)$ (0.01)$ (0.01)$ (0.01)$ (0.01)$ (0.01)$

Discontin'd/nonrecurpersh $ (0.05)$ $ $ $ $ $ $ $ $ $ $

Sharesoutstanding 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

TotalRevenues $ 97$ 200$ 1,150$ 2,440$ 7,640$ 60,584$ 265,210$Operating

expenses

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

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

Totaloperatingcosts 12,770 6,899 9,000 9,525 9,750 10,000 10,000 35,825

Operatingprofit/(loss) (12,770)$ (6,802)$ (8,800)$ (8,375)$ (7,310)$ (2,360)$ 50,584$ 229,385$Interestincome/(expense) (30) 222 155 100 100 100 150

Otherincome/(expense) 2,551 125

Pretaxprofit/(loss) (10,219)$ (6,707)$ (8,578)$ (8,220)$ (7,210)$ (2,260)$ 50,684$ 229,535$Incometaxes 22,954

Netprofit/(loss) (10,219)$ (6,707)$ (8,578)$ (8,220)$ (7,210)$ (2,260)$ 50,684$ 206,582$Preferreddividends/accretion $ (12,815)$ (6,600)$ (6,600)$

Netprofit/(loss)forcommon (10,219)$ (19,522)$ (15,178)$ (14,820)$ (7,210)$ (2,260)$ 50,684$ 206,582$Earnings/(loss)pershare (0.28)$ (0.05)$ (0.03)$ (0.03)$ (0.02)$ (0.01)$ 0.15$ 0.61$

Commonsharesoutstanding 36,334 137,214 323,625 326,750 333,000 337,000 338,000 339,000


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The Company books an income tax liability in 2018 at a 10% rate, although tax-loss carryforwards minimize itscash 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 into73,127 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$


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VALUATION ANALYSIS

RXis drug candidates are at a relatively early stage, yet they have considerable potential value based onrecent deals completed in the RNAi field. We refer specifically to transactions involving IsisPharmaceuticals, 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 neurologicaldeal is presented as if the agreement covered a single drug, even though three drugs were involved at atotal price of $630 million.) In addition, the Isis-Roche contract is for a drug development program that hasa lead candidate and alternatives. All upfront fees were paid in cash, and the value of each deal reflectsonly 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 dealscompleted, the relatively early stages of the drugs involved, and the valuations placed on them. (Note thatthe stage of development shown reflects the status at the time of signing.) The average deal provided $21million 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 indicationsfor the drug involved.

Our analysis suggests that RXis drug development program has considerably greater value than theCompanys current market capitalization. Indeed, a licensing agreement for the PVR ophthalmicindication 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 aresult, our valuation analysis is based on an assumption that each of RXis programs yields licensingagreements equivalent to two drugs each.

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

Yet, if RXis two major programs are valued simply on the averages calculated from the table, RXII sharesoffer a compelling investment opportunity. For our valuation analysis, we have assumed theophthalmology formulation is out-licensed in the next 12 months and that all milestones are received as asingle payment upon commercialization. Since RXi intends to develop the dermatological formulationinternally at least through Phase 2, we have assumed the drugs 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 $0.42per share based on the estimated fully diluted shares outstanding at that time. Accordingly, we have setour 12 month price target at $0.40.

UpfrontFee ValueDeveloper Licensee Indication StageofDevelopment (inmillions) (inmillions)IsisPharmaceuticals RocheHoldings Huntington'sdisease Preclinical $30 $392

IsisPharmaceuticals BiogenIdec myotonicdystrophy1 Discovery $12 $271

IsisPharmaceuticals BiogenIdec Neurologicaldisease Discovery $10 $210

AlnylamPharmaceuticals TheMedicinesCo. cardiovasculardisease Phase1(completed) $25 $205

IsisPharmaceuticals BiogenIdec spinalmuscularatrophy Phase2(ongoing) $29 $299

Average: $21 $275

Ophthalmology Dermatology

Futurepayment: $508 $550

Yearsuntilpayment: 3 3

Discountrate: 25% 25%

Discountedvalue: $260 $280

Upfrontcash: $42

TotalValuein2014: $302 $280

Valuepershare: $0.15 $0.27


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DISCLOSURES

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

MEANINGS OF RATINGS: Our rating system is based upon 12 to 36 month price targets. BUY describesstocks that we expect to appreciate by more than 20%. HOLD/NEUTRAL describes stocks that weexpect to change plus or minus 20%. SELL describes stocks that we expect to decline by more than20%. SC describes stocks that Griffin Securities has Suspended Coverage of this Company and pricetarget, if any, for this stock, because it does not currently have a sufficient basis for determining a ratingor target and/or Griffin Securities is redirecting its research resources. The previous investment rating andprice target, if any, are no longer in effect for this stock and should not be relied upon. NR describesstocks 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% ofcompanies it covers, HOLD/NEUTRAL ratings on 17%, and SELL ratings on 0%. Griffin Securities hasprovided 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 thepast 12 months or has suspended coverage (SC) in the past 12 months.

COMPENSATION OR SECURITIES OWNERSHIP: The analyst(s) responsible for covering the securitiesin this report receive compensation based upon, among other factors, the overall profitability of GriffinSecurities, including profits derived from investment banking revenue. The analyst(s) that prepared theresearch report did not receive any compensation from the Company or any other companies mentionedin this report in connection with the preparation of this report. The analyst responsible for covering thesecurities in this report currently does not own common stock in the Company, but in the future may fromtime to time engage in transactions with respect to the Company or other companies mentioned in thereport. 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 thisreport. Griffin Securities expects to receive, or intends to seek, compensation for investment banking andnon-investment banking services from the Company in the next three months.

FORWARD-LOOKING STATEMENTS: This Report contains forward-looking statements, which involverisks 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 RiskFactors section in the SEC filings available in electronic format through SEC Edgar filings atwww.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)


25/25


PRICE CHART 2 Year

Source: BigCharts.com

We have been covering RXi Pharmaceuticals since September 2008. However, with the acquisition of a vaccineprogram and adoption of the name Galena in April 2011, RXi ceased to exist as a separate entity and our coverage

was effectively terminated. RXis spinoff from Galena in May 2012 restored the Company founded on RNAitechnology as an independent corporation. The chart above reflects trading activity since RXis 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) memberfirm with its principal office in New York, New York, USA is an investment banking firm providingcorporate finance, merger and acquisitions, brokerage, and investment opportunities for institutional,corporate, and private clients. The analyst(s) are employed by Griffin Securities. Our researchprofessionals provide important input into our investment banking and other business selectionprocesses. Our salespeople, traders, and other professionals may provide oral or written marketcommentary or trading strategies to our clients that reflect opinions that are contrary to the opinionsexpressed herein, and our proprietary trading and investing businesses may make investment decisionsthat are inconsistent with the recommendations expressed herein.

Griffin Securities may from time to time perform corporate finance or other services for some companiesdescribed herein and may occasionally possess material, nonpublic information regarding suchcompanies. This information is not used in preparation of the opinions and estimates herein. While theinformation contained in this report and the opinions contained herein are based on sources believed tobe reliable, Griffin Securities has not independently verified the facts, assumptions and estimatescontained 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 theinformation and opinions contained in this report.

The information contained herein is not a complete analysis of every material fact in respect to anycompany, industry or security. This material should not be construed as an offer to sell or the solicitationof an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Weare not soliciting any action based on this material. It is for the general information of clients of GriffinSecurities. 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 shouldconsider whether it is suitable for their particular circumstances and, if necessary, seek professionaladvice. Certain transactions - including those involving futures, options, and other derivatives as well asnon-investment-grade securities - give rise to substantial risk and are not suitable for all investors. Thematerial is based on information that we consider reliable, but we do not represent that it is accurate orcomplete, and it should not be relied on as such. The information contained in this report is subject tochange 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

griffin rxii update report 25apr13

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