e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
000-50743
ALNYLAM PHARMACEUTICALS,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0602661
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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300 Third Street, Cambridge, MA 02142
(Address of principal executive
offices) (Zip Code)
Registrants telephone number, including area code:
(617) 551-8200
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, $0.01 par value per share
Securities registered pursuant to Section 12(g) of the
Act: None
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting Common Stock held by
non-affiliates of the registrant, based on the last sale price
of the registrants Common Stock at the close of business
on June 30, 2006, was $466,921,226.
As of February 28, 2007, the registrant had
37,470,628 shares of Common Stock, $0.01 par value per
share, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III (except
for information required with respect to our executive officers,
which is set forth under Part I,
Item 1 Business Executive Officers
of the Registrant) and the information required by
Item 5 relating to our equity compensation plans have been
omitted from this report, as we expect to file with the
Securities and Exchange Commission, not later than 120 days
after the close of our fiscal year ended December 31, 2006,
a definitive proxy statement for our annual meeting of
stockholders. The information required by
Items 10, 11, 12, 13 and 14 of Part III and the
information required by Item 5 relating to our equity
compensation plans, which will appear in our definitive proxy
statement, is incorporated by reference into this report.
ALNYLAM
PHARMACEUTICALS, INC.
ANNUAL REPORT ON
FORM 10-K
For the Year Ended December 31, 2006
TABLE OF CONTENTS
1
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended, that involve risks and uncertainties. All statements
other than statements relating to historical matters should be
considered forward-looking statements. When used in this report
the words believe, expect,
anticipate, will, plan,
target, goal and similar expressions are
intended to identify forward-looking statements, although not
all forward-looking statements contain these words. Our actual
results could differ materially from those discussed in the
forward-looking statements as a result of a number of important
factors, including the factors discussed in this section and
elsewhere in this Annual Report on
Form 10-K,
including those discussed in Item 1A of this report under
the heading Risk Factors, and the risks discussed in
our other filings with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect managements
analysis, judgment, belief or expectation only as of the date
hereof. We assume no obligation to update these forward-looking
statements to reflect events or circumstances that arise after
the date hereof.
PART I
Overview
We are a biopharmaceutical company developing novel therapeutics
based on RNA interference, or RNAi. RNAi is a naturally
occurring biological pathway within cells for selectively
silencing and regulating specific genes. Since many diseases are
caused by the inappropriate activity of specific genes, the
ability to silence genes selectively through RNAi could provide
a new way to treat a wide range of human diseases. We believe
that drugs that work through RNAi have the potential to become a
new major class of drugs, like small molecule, protein and
antibody drugs. Using our intellectual property and the
expertise we have built in RNAi, we are developing a set of
biological and chemical methods and know-how that we expect to
apply in a systematic way to develop RNAi therapeutics for a
variety of diseases.
We are building a pipeline of RNAi therapeutics. Our lead
program is in Phase I clinical trials for the treatment of
human respiratory syncytial virus, or RSV, infection, which we
believe is the leading cause of hospitalization in infants in
the United States and occurs in the elderly and in immune
compromised adults.
In pre-clinical development programs, we are working on an RNAi
therapeutic for the treatment of another respiratory infection,
influenza, with Novartis Pharma AG, or Novartis. Independently,
we are also developing an RNAi therapeutic for the treatment of
hypercholesterolemia. We have additional pre-clinical discovery
programs for RNAi therapeutics for the treatment of a broad
range of diseases, including Parkinsons disease,
Huntingtons disease, neuropathic pain, progressive
multifocal leukoencephalopathy, or PML, Ebola virus infection
and cystic fibrosis, or CF. We are also working to extend our
delivery capabilities to enable the broad development of RNAi
therapeutics for the treatment of other diseases, including
cancer.
In addition, we have formed alliances with leading companies,
including Merck & Co., Inc., or Merck, Medtronic, Inc.,
or Medtronic, Novartis and Biogen Idec, Inc., or Biogen Idec. We
have also entered into contracts with government agencies,
including the National Institute of Allergy and Infectious
Diseases, or NIAID, a component of the National Institute of
Health, or NIH. Finally, we have also entered into over 20
license agreements with other biotechnology companies interested
in developing RNAi therapeutic products and research companies
that commercialize RNAi reagents or services.
RNA
Interference
RNAi is a recently discovered biological pathway that occurs
naturally within cells and can be harnessed to selectively
silence the activity of specific genes. The discovery of RNAi
first occurred in plants and worms, and two of the scientists
who made this discovery, Dr. Andrew Fire and Dr. Craig
Mello, received the 2006 Nobel Prize for Medicine or Physiology.
Genes provide cells with instructions for producing proteins.
Proteins perform many of the vital functions of the cell and of
the human body. Although the roles they play are generally
beneficial, in certain circumstances,
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proteins can be harmful. Many human diseases are caused by the
inappropriate behavior of proteins. A particular protein may,
for example, be present in too great a quantity, be too active
or appear in the wrong place or at the wrong time. In these
circumstances, the ability to stop or reduce production of the
protein by selectively silencing the gene that directs its
synthesis could be very beneficial for the treatment of the
disease.
Beginning in 1999, our scientific founders described and
provided evidence that the RNAi mechanism occurs in mammalian
cells and that its immediate trigger is a type of molecule known
as small interfering RNA, or siRNA. They showed that
laboratory-synthesized siRNAs could be introduced into the cell
and suppress production of specific target proteins. Because it
is possible, in theory, to design and synthesize siRNAs specific
to any gene of interest, we believe that RNAi therapeutics have
the potential to become a broad new class of drugs.
How
RNA Interference Works
RNA is a crucial intermediary in the process by which the cell
uses inherited genetic information. This information is passed
from one generation to the next in the form of genes, which are
made of a substance known as deoxyribonucleic acid, or DNA.
Generally, each gene contains the instructions that tell the
cell how to make one specific protein. These instructions are in
a coded form. The code is based on the four different chemical
building blocks from which DNA is made, usually designated by
the first letters of their chemical names, A, C, G and T. It is
the sequence in which these building blocks, or bases, occur in
a gene that tells the cell what protein to make. Most gene
sequences are thousands of bases long, and the variety possible
in such long sequences allows the cell to produce a large number
of different proteins.
One very important property of DNA is that it is
double-stranded, consisting of two separate strands intertwined
around each other in a double helix. The two strands are held
together by base pairs that form between bases on the opposite
strands. Strict rules govern the formation of these base pairs:
an A on one strand can pair with a T on the other, and a G can
pair with a C, but no other pairings are allowed. The
double-stranded nature of DNA and the strict rules governing
base-pairing are fundamental to ensuring that genetic
information is copied accurately when it is handed down from one
generation to the next.
Base-pairing rules are also fundamental to the process by which
the cell uses, or expresses, genetic information to make a
protein. To initiate this process, the cell makes a working copy
of the gene that encodes the protein. This working copy is made
not of DNA but of a closely related substance called ribonucleic
acid, or RNA. The working copy is known as messenger RNA, or
mRNA. Unlike DNA, mRNA has only one strand. However, the
application of base-pairing rules during synthesis of this
strand ensures that the sequence of bases in mRNA accurately
reflects the base sequence, and thus the genetic information, in
the gene being copied. This mRNA then associates with the
cells protein synthesis machinery, where it directs
synthesis of a protein in such a way that the structure of the
protein is directly determined by the sequence of bases in the
mRNA, and thus in the gene. The protein specified by a
particular gene or mRNA is said to be encoded by that gene or
mRNA. When this protein is made, the gene is said to be active
or expressed.
Although many RNA molecules, like mRNA, are single-stranded, RNA
is capable of forming double-stranded molecules analogous to
those formed by DNA. When it does so, base-pairing rules apply.
As a result, only RNA molecules with complementary sequences can
form double-stranded structures. Generally, every base on one
strand has to line up with its permitted base-pair partner on
the other strand, otherwise the double-stranded structure will
be unstable.
Double-stranded RNA, or dsRNA, is crucial to the phenomenon of
RNAi. A particular type of dsRNA interferes with the activity of
specific genes by triggering the breakdown of mRNAs copied from
these genes, preventing production of the proteins they encode.
Selection of mRNAs for breakdown is driven by base-pairing
between the target mRNAs and the separated strands of the dsRNA.
Thus, the mRNAs selected for breakdown are those which contain
base sequences identical to base sequences in one strand of the
dsRNA. As a result, RNAi leads to selective silencing of
specific genes with relatively little impact on other genes
whose mRNAs do not share base sequences with the dsRNA.
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In nature, the cell initiates RNAi by cutting longer dsRNAs into
smaller dsRNA pieces that have 25 or fewer base pairs. These
shorter dsRNAs are known as small interfering RNAs, or siRNAs.
siRNAs are double-stranded along most of their length but have
unpaired bases, or overhangs, at each end, which are important
for their activity. siRNAs are the molecules that actually
trigger RNA interference. They do so by a process that has three
main steps as shown in the figure below.
Step 1. siRNAs associate with several proteins to
form an assembly known as the RNA-induced silencing complex, or
RISC. The two strands of the siRNA become separated as the RISC
is formed, so that RISC contains an unpaired single-stranded RNA.
Step 2. The RISC then looks for mRNA molecules that
contain base sequences complementary to the single-stranded RNA
it contains that is, sequences within the mRNA whose
bases can pair up exactly, using base-pairing rules, with the
bases in the single-stranded RNA.
Step 3. Once this pairing occurs, the RISC complex
cuts the mRNA into two separate pieces at the base-paired
region, destroying its ability to direct protein synthesis. The
RISC complex is then available to cut additional mRNA molecules
that contain the appropriate base sequence.
Repetitive cycles through steps two and three lead to catalytic
degradation of mRNAs that contain a sequence complementary to
the siRNA strand in the RISC. The ability of each RISC complex
to cut multiple mRNA molecules consecutively in a catalytic
manner is one of the reasons why we believe RNAi will be
effective at silencing gene activity.
Opportunity
for Therapeutics Based on RNAi
In May 2001, one of our scientific founders, Dr. Thomas
Tuschl, published the first scientific paper demonstrating that
the siRNAs required to trigger RNA interference need not be
generated inside the cell. Instead, siRNAs can be synthesized in
the laboratory using chemical or biochemical methods and
introduced into cells to silence the activity of a specific
gene. As a result of the human genome project, complete base
sequences are available for most human genes. With the
sophisticated bioinformatics tools that were developed in
conjunction with the genome project, it is possible to scan
through the gene that encodes a particular protein and select
base sequences that are of the appropriate length for siRNAs and
unique to that gene. Several siRNAs targeted to the gene of
interest can then be synthesized. Each synthesized siRNA will
contain a sequence capable of base-pairing exactly with a short
stretch of the sequence of the mRNA copied from the target gene.
The synthetic siRNAs can then be tested to determine whether
they silence the activity of this gene and suppress the
synthesis of the protein it encodes.
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The use of siRNAs has been broadly adopted by academic and
industrial researchers for the fundamental study of the function
of genes. Important information about the function of a gene can
often be deduced by suppressing, or knocking-down, its activity
and examining the effect this has on the behavior of a cell or
animal. There are now many examples in which such suppression of
gene activity has been achieved, in whole or in part, using
synthetic siRNAs. In just a few years after siRNAs were
discovered, they have become the tools of choice for the
selective knock-down of gene function by research scientists,
and have largely displaced other methods previously used for
this purpose. Reflecting this, siRNAs are a growing portion of
the market for research reagents and related products and
services.
One important application of such knock-down studies is to
confirm the role of a particular gene or protein in a disease, a
process often referred to as target identification or target
validation. If silencing a gene with an siRNA leads to
improvements in disease symptoms in an experimental disease
model, this implies that the target gene or protein plays an
important role in the disease.
It also implies that the siRNA that suppresses the gene in the
model system may be a useful starting point for the development
of a drug. We believe that it will be possible to develop these
siRNAs into potent and specific drugs.
Broad
Potential of siRNAs as Therapeutics
The success of siRNAs in silencing gene activity in experimental
systems suggests that siRNAs could potentially be developed into
a broad new class of human therapeutics. We believe this new
class of drugs has the potential to become a major class of
drugs because RNAi therapeutics could offer the following
benefits:
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Ability to treat a broad range of
diseases. Given the availability of the base
sequence of the entire human genome, it could be possible, in
theory, to design siRNAs to suppress the production of virtually
any human protein whose presence or activity causes disease.
This suggests that RNAi therapeutics could potentially be used
to treat a broad range of diseases.
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Ability to target proteins that cannot be targeted
effectively by existing drug classes. Many
proteins that play important roles in disease cannot be targeted
effectively with small molecules or with therapeutic proteins
such as monoclonal antibodies. These proteins are commonly
referred to as non-druggable targets. In the case of small
molecule drugs, many proteins are non-druggable because it has
proved difficult to synthesize drug candidates with appropriate
specificity, potency and safety. In the case of protein drugs,
the range of available targets is limited to targets on the
surface of or outside the cell. These limitations on small
molecule and protein drugs should not apply to siRNAs, which, in
theory, can be synthesized to target any gene in the genome.
Therefore, we believe RNAi therapeutics will be able to target
proteins that small molecule and protein drugs cannot currently
target effectively.
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Inherently potent mechanism of action. One
molecule of siRNA could potentially do the work of thousands of
molecules of conventional drugs. With conventional drugs, one
drug molecule is typically required for every protein molecule
whose activity needs to be blocked. Accordingly, to block
several thousand protein molecules, several thousand drug
molecules are required. In contrast, a single siRNA molecule can
potentially block the synthesis of many protein molecules. This
is because each siRNA within a RISC complex can trigger
destruction of multiple mRNA molecules, each of which could
otherwise direct the synthesis of many protein molecules. This
inherent potency of the RNAi mechanism suggests a potentially
high degree of potency for RNAi therapeutics.
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Simplified discovery of drug
candidates. Identification of small molecule and
protein drug candidates typically requires screening of a large
number of potential candidates to find prospective leads. These
leads must then undergo significant optimization in order to
become drug candidates. Particularly in the case of small
molecule drug candidates, the optimization procedure can be very
challenging, and has to be almost entirely repeated for each
candidate. Identification of siRNA drug candidates has the
potential to be much simpler and take considerably less time
because, in theory, it will involve relatively standard
processes that can be applied in a similar fashion to many
successive product candidates.
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For these potential benefits of siRNA drugs to be realized, it
will be necessary to create chemically synthesized siRNAs that
are potent, specific, stable and safe and also capable of
reaching, or achieving delivery into, the appropriate tissues
and cells. The incorporation of such properties into siRNAs is
the focus of our product platform. We have reported on our
advances in developing siRNAs as potential drugs in a number of
peer-reviewed publications and meetings, including publications
by Alnylam scientists in the journals Nature, Nature
Medicine and Nature Chemical Biology.
Our
Business Strategy
Our business strategy is to develop and commercialize a pipeline
of proprietary RNAi therapeutic products and, in
parallel, to form alliances with pharmaceutical companies to
develop and commercialize a pipeline of partnered RNAi
therapeutic products. For our proprietary RNAi therapeutic
products, our aim is to develop these products to later stages
of clinical development and to commercialize them on our own or
through alliances formed at these later stages. For our
partnered RNAi therapeutic products, we have five discovery and
development alliances with four separate companies: Novartis,
Merck, Medtronic and Biogen Idec. Two of these alliances are
with Novartis. The first of our Novartis alliances, formed in
September 2005, is for the discovery, development and
commercialization of RNAi therapeutics for a significant but
defined number of targets in the Novartis research portfolio. In
this alliance, we are eligible to receive substantial early
funding in addition to future milestone and royalty payments. We
are also eligible to receive additional payments if Novartis
exercises a non-exclusive option to integrate our RNAi
therapeutics platform into its internal efforts, in which case
we would be eligible to receive future milestones and royalties
on products resulting from those efforts. Our second alliance
with Novartis, formed in February 2006, is for the discovery and
development of RNAi therapeutics for pandemic flu. In this
alliance, we and Novartis will jointly develop RNAi therapeutics
for pandemic flu in the United States, with Novartis leading
development outside the United States. Novartis will also lead
commercialization efforts worldwide, with Alnylam actively
involved, and in certain situations taking the lead, in
commercialization within the United States. Our alliance with
Merck was initiated in September 2003 and amended in July 2006,
and is focused on RNAi therapeutics directed toward ten Merck
proprietary targets. Our collaboration with Medtronic, formed in
February 2005, is focused on the development of novel
drug-device products incorporating RNAi therapeutics to treat
diseases caused by degeneration of the nervous system. Our
collaboration with Biogen Idec, formed in September 2006, is
focused on research on the potential use of RNAi technology to
discover and develop therapeutics to treat PML.
One of the key factors in our ability to form significant
alliances with pharmaceutical companies is the strength of our
intellectual property position relating to the development and
commercialization of siRNAs as therapeutics. This includes
ownership of, or exclusive rights to, issued patents and pending
patent applications claiming fundamental features of siRNAs and
RNAi therapeutics. The United States Patent and Trademark
Office, or USPTO, has issued two patents in the Tuschl II
patent series (U.S. Patent Nos. 7,056,704 and 7,078,196)
that broadly cover methods of making siRNAs that have certain
features that we believe are needed for their use as
therapeutics, which we refer to as fundamental features. These
issued Tuschl II patents are exclusively licensed to
Alnylam on a worldwide basis for therapeutic applications. The
European Patent Office, or EPO, has granted two patents from the
Kreutzer-Limmer I patent series (EP 1144623 and EP
1214945) that broadly cover siRNA compositions, methods and
uses. We own these granted Kreutzer-Limmer I patents, which stem
from our July 2003 acquisition of Ribopharma AG. Additional
patents and patent applications that relate to fundamental
features of siRNAs and RNAi therapeutics and for which we have
entered into licensing agreements include those called Crooke,
Glover, Tuschl I and Hannon. Our patent estate also includes a
broad portfolio of intellectual property relating to chemical
modifications of siRNAs licensed from Isis Pharmaceuticals,
Inc., or Isis, and a number of issued patents related to the
formulation and delivery of siRNAs licensed from Inex
Pharmaceuticals Corporation, or Inex. Finally, our patent estate
also includes patents and pending patent applications claiming
siRNAs directed to specific targets as treatments for particular
diseases.
To realize additional value from our intellectual property, we
also grant licenses to biotechnology companies with our
InterfeRxtm
program for the development and commercialization of RNAi
therapeutics for specified targets in which we have no direct
strategic interest. InterfeRx licensees include GeneCare
Research Institute Co., Ltd., or GeneCare, Quark Biotech, Inc.,
or Quark, Calando Pharmaceuticals, Inc., or Calando, and Nastech
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Pharmaceutical Company Inc., or Nastech. Inex and Benitec Ltd.,
or Benitec, have options to take InterfeRx licenses, subject to
certain conditions. We also license key aspects of our
intellectual property to companies active in the research
products and services market. As of February 28, 2007, we
had granted such licenses to eighteen companies. Our InterfeRx
and research product licenses aim to generate modest near-term
revenues that we can re-invest in the development of our
proprietary RNAi therapeutics pipeline.
We also seek funding for the development of our proprietary RNAi
therapeutics pipeline from foundations and government sources.
We have obtained initial government support for our pandemic flu
program from the Defense Advanced Research Projects Agency of
the United States Department of Defense, or DARPA, and the
NIAID. Further, the NIAID, awarded us a contract for up to
$23.0 million over four years to advance the development of
a broad spectrum RNAi anti-viral therapeutic against hemorrhagic
fever virus, including the Ebola virus. We have also obtained
funding for pre-clinical discovery programs from the Cystic
Fibrosis Foundation Therapeutics, Inc., or CFFT, and the Michael
J. Fox Foundation.
Alnylam
Product Platform
To realize the potential of RNAi therapeutics as a broad new
class of drugs, we are developing capabilities that we can apply
to any specific siRNA in a relatively standard fashion to endow
it with drug-like properties. We use the term product platform
to describe these capabilities because we believe they will
enable us to develop many products across a variety of
therapeutic areas. The concept for our product platform is that
it will provide a systematic approach to identifying RNAi drug
candidates with the following steps:
Sequence selection. Using sophisticated
bioinformatics tools, we scan through the entire sequence of a
target mRNA to identify sequences that are unique to that mRNA
and have few closely similar sequences in other mRNAs. From
these unique sequences we derive a list of potential siRNAs that
would match up exactly with the target mRNA and not with any
other mRNAs. We narrow this list down further by applying
filters for other important properties, such as the identity of
sequences in mRNAs across multiple species to facilitate
pre-clinical and clinical testing. This provides us with a
shorter list of siRNAs, each of which we then synthesize for
experimental evaluation.
Potency selection. The siRNAs synthesized in
the sequence selection step are tested in cell culture systems
to compare their potencies in suppressing production of the
target protein.
Stabilization by chemical modification. Each
of the most potent siRNAs is assessed to identify the sites
within its structure where it is most vulnerable to attack by
enzymes known as ribonucleases that could degrade the siRNA. A
minimal set of chemical modifications is then introduced into
the siRNA to protect these vulnerable sites, and the modified
siRNA is tested to confirm its stability and that it has
retained activity against the target mRNA.
Improvement of biodistribution by conjugation of additional
chemical groups. The stabilized siRNA is further
modified by the addition, or conjugation, of one or more
chemical groups designed to improve uptake of the siRNA into
cells and, if desired, to prolong the time it circulates in the
blood.
Formulation with appropriate delivery
reagents. In addition to, or instead of,
introducing chemical modifications into candidate siRNAs, we may
also investigate the effect of different formulation reagents on
the stability and biodistribution of these candidate siRNAs.
Examples of such formulation reagents include lipids that can be
used to form very small particles, known as liposomes or
lipoplexes, that contain the siRNAs of interest.
We expect this process to generate RNAi drug candidates that are
potent against and specific to a particular target, are
appropriately stable and are able to penetrate cells of target
tissues. Moreover, we expect this process for finding suitable
drug candidates to be simpler, faster and more productive than
the corresponding process for small molecule and protein drug
candidates. Therefore, we believe that with the progress we have
made and expect to make in the future in developing our product
platform, we will be well positioned to pursue multiple
therapeutic opportunities.
We believe that we have made considerable progress in developing
our product platform, as documented in a number of publications,
including papers in Nature, Nature Medicine and
Nature Chemical Biology. This progress has
enabled us to initiate and advance a number of discovery and
development programs for RNAi
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therapeutics that will be administered directly to diseased
parts of the body, which we refer to as Direct
RNAitm
therapeutics. Our progress in achieving delivery of RNAi
therapeutics following injection into the bloodstream, which we
call Systemic
RNAitm,
has enabled the initiation of pre-clinical development programs
for these applications as well. We recognize, however, that
considerable challenges remain with respect to delivery of
siRNAs to target cells and tissues, and we therefore regard
further development of our product platform as a continuing high
priority.
Product
Pipeline
The following is a summary of our product pipeline as of
February 28, 2007:
We consider a program to be a discovery program while we are
still at the stage of identifying and comparing potential drug
candidates but have not yet established the timing for human
clinical trials. Once such timing has been established, we
consider a program to have advanced to the development stage,
and to be a development program.
Two of our current development programs are focused on viruses
that infect the respiratory tract. The more advanced of these
programs is focused on RSV. We initiated Phase I human
clinical trials of ALN-RSV01, an RNAi therapeutic for the
treatment of RSV infection, in December 2005. Our second
development program, ALN-FLU01, which we are developing with
Novartis, is focused on pandemic flu. A third development
program, ALN-PCS01, is focused on the treatment of
hypercholesterolemia with an RNAi therapeutic that targets a
gene called proprotein convertase subtilisn/kexin type 9,
or PCSK9.
We have spent substantial funds over the past three years to
develop our product pipeline and expect to continue to do so in
the future. We incurred approximately $49.8 million in
2006, $35.3 million in 2005 and $24.6 million in 2004
in research and development costs.
Development
Programs
Respiratory
Syncytial Virus Infection
Market Opportunity. RSV is a highly contagious
virus that causes infections in both the upper and lower
respiratory tract. RSV infects nearly every child by the age of
two years and is responsible for a significant percentage of
hospitalizations of infants, children with lung or congenital
heart disease, the elderly and adults with immune-compromised
systems. RSV infection typically results in cold-like symptoms,
but can lead to more serious respiratory illnesses such as
croup, pneumonia and bronchiolitis, and in extreme cases, severe
illness and death. According to the Centers for Disease Control
and Prevention, or CDC, RSV is responsible for up to an
estimated
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100,000 pediatric hospitalizations each year in the United
States. As a result, there is a significant need for novel
therapeutics to treat patients who become infected with RSV.
Current Treatments. The only product currently
approved for the treatment of RSV infection is Ribavirin, which
is marketed as
Virazole®
by Valeant Pharmaceuticals International, or Valeant. This
product has limited utilization, as it is approved only for
treatment of hospitalized infants and young children with severe
lower respiratory tract infections due to RSV. Moreover,
administration of the drug is cumbersome and requires elaborate
environmental reclamation devices because of potential harmful
effects on healthcare personnel exposed to the drug.
Two products, a monoclonal antibody known as
Synagis®
and an immune globulin called
Respigam®,
have been approved for the prevention of severe lower
respiratory tract disease caused by RSV in infants at high risk
of such disease. Neither of these products is approved for
treatment of an existing RSV infection.
Alnylam Program. In our pre-clinical testing,
ALN-RSV01 was shown to be an RSV-specific siRNA that is
effective in both preventing and treating RSV infection in mice
when administered intranasally, or through the nose. ALN-RSV01
also showed no significant toxicities in IND-enabling toxicology
studies. We submitted an IND for ALN-RSV01 to the United States
Food and Drug Administration, or FDA, in November 2005, and
initiated Phase I clinical trials on this experimental drug
in December 2005 in both the United States and Europe and
presented results from these trials in April 2006. ALN-RSV01 was
found to be safe and well tolerated when administered
intranasally in these two Phase I clinical studies. In
October 2006, we initiated a Phase I study with an inhaled
formulation of ALN-RSV01, and in November 2006, we initiated a
human experimental infection study with an RSV strain designed
to establish a safe and reliable RSV infection of the upper
respiratory tract in adult volunteers.
Pandemic
Flu
Market Opportunity. An influenza pandemic is a
global outbreak that occurs when a new flu virus appears in the
human population, causes serious illness and spreads easily from
person to person. Over the last several years, a highly virulent
new strain of avian flu known as H5N1 has become prevalent in
the poultry population in Southeast Asia and caused significant
mortality in humans that have been infected. Over the last year,
H5N1 avian flu has also been detected in bird populations in
Europe and Africa. The World Health Organization and CDC have
expressed concern about the potential for this virus to mutate
into a form that could cause a global pandemic of human disease.
The market for pandemic flu therapies is expected to consist
primarily of stockpiling by governments in preparation for
possible future influenza pandemics.
Current Treatments. Current pharmaceutical
products for the control of influenza infection fall into two
main categories: vaccines and anti-viral drugs. Experts believe
that current vaccines and existing anti-viral agents may not be
sufficient to protect against newly emerging strains of
influenza virus.
Effective flu vaccines are difficult to manufacture for two main
reasons. First, the virus mutates constantly over time,
undergoing sufficient change between one flu season and the next
that a new vaccine must be manufactured each year. Second, the
manufacturing process is very labor-intensive and
time-consuming, requiring incubation of the virus in fertilized
chick eggs into which it has been injected. For both of these
reasons, experts are concerned that if a pandemic virus were to
emerge, a new vaccine would be required and there would not be
enough time to manufacture it.
There are four anti-viral flu drugs currently approved in the
United States for the treatment of influenza. Two of these
drugs,
Symmetrel®
(amantadine) and
Flumadine®
(rimantadine), are older drugs that belong to a class known as
ion channel inhibitors, and resistance is widespread. The other
two drugs,
Relenza®
(zanamivir) and
Tamiflu®
(oseltamivir), are newer drugs that are approved to prevent, as
well as to treat, influenza. Both function by blocking the
activity of the viral protein known as neuraminidase, whose role
is to promote release of newly replicated viruses from cells.
Resistance to Tamiflu has been reported, and it cannot be known
until a pandemic virus emerges how effective the current
neuraminidase inhibitors will be in controlling this virus due
to virus mutations.
Alnylam Program. The focus of our pandemic flu
program is to develop an RNAi therapeutic targeting gene
sequences that are highly conserved across known flu viruses.
Our lead RNAi therapeutic is called ALN-FLU01 and is comprised
of two siRNAs that target two distinct genes in the flu virus
genome. We anticipate that the sequences
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targeted by ALN-FLU01 would remain largely unchanged in any
newly emerging flu virus, so that our RNAi therapeutic could be
effective in preventing and treating infection by a pandemic
virus. We expect that ALN-FLU01 could be stockpiled by
governments as part of their preparations for a flu pandemic. In
December 2005, we were awarded initial funding for our pandemic
flu program from DARPA. In connection with this program, in
February 2006, we entered into a new collaboration with Novartis
to develop RNAi therapeutics for pandemic flu.
Hypercholesterolemia
Market Opportunity. Coronary artery disease,
or CAD, is the leading cause of mortality in the United States,
responsible for 40% of all deaths annually.
Hypercholesterolemia, measured as a high level of LDL
cholesterol (LDL-c) in the blood, is one of the major risk
factors for CAD. Although current therapies are effective in
many patients, a large number of patients do not achieve
adequate control of their high cholesterol level with existing
treatments such as a statin. Studies have shown that this occurs
in as many as 45% of patients. Currently in the United States
there are almost 500,000 patients with high cholesterol
levels not controlled by the use of existing lipid lowering
therapies. These patients are said to have refractory or poorly
controlled hypercholesterolemia and may constitute the target
population for our product candidate ALN-PCS01.
Current Treatments. The current standard of
care for patients with hypercholesterolemia includes the use of
several agents. The first treatment often prescribed is a drug
from the statin family. Commonly prescribed statins include
Lipitor®
(Atorvastatin),
Zocor®
(Simvastatin),
Crestor®
(Rosuvastatin) and
Pravachol®
(Pravastatin). A different type of drug such as
Zetia®
(Ezetimibe), which reduces dietary cholesterol uptake from the
gut is increasingly being used on its own or in combination with
a statin. Despite these therapies, there are many patients who
have refractory or poorly controlled hypercholesterolemia and
require more intensive treatment. In addition, some patients do
not tolerate current treatments and at least 5% of those treated
with a statin have to stop because of side-effects. In patients
with very high uncontrolled cholesterol levels, a procedure
called lipid apheresis is used that effectively removes
cholesterol from the blood using a machine specifically designed
for this process. However, this procedure is inconvenient and
uncomfortable, requiring regular weekly visits to a
doctors office.
Alnylam Program. Pro-protein convertase
subtilisn/kexin 9, otherwise known as PCSK9, is a widely
acknowledged target for the treatment of hypercholesterolemia by
lowering of LDL-c levels. PCSK9 is a protein that is produced by
the liver but circulates in the bloodstream. The liver
determines cholesterol levels, in part by taking up or absorbing
LDL-c from the bloodstream. PCSK9 reduces the liver capacity to
absorb LDL-c. Recent evidence indicates that if PCSK9 activity
could be reduced then the liver should increase its uptake of
LDL-c and blood cholesterol levels should decrease. In fact,
some individuals have been shown to have a genetic mutation in
PCSK9 that lowers its activity and results in increased liver
LDL-c uptake and lowered blood cholesterol levels. In turn,
these individuals have been shown to have a dramatically reduced
risk of CAD (e.g., myocardial infarction or heart attack). In
July 2006, we announced a collaboration with the University of
Texas Southwestern to develop RNAi therapeutics targeting PCSK9.
In mouse models, our RNAi therapeutic ALN-PCS01, directed
against PCSK9, has been shown to be effective at silencing the
human and mouse PCSK9 genes, as well as, blood cholesterol
levels.
Discovery
Programs
In addition to our development efforts on RSV, pandemic flu and
hypercholesterolemia, we are conducting research activities to
discover RNAi therapeutics to treat various diseases of the
respiratory system and the nervous system. The diseases for
which we have discovery programs include:
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Progressive Multifocal Leukoencephalopathy, or
PML. PML is caused by infection of the central
nervous system, or CNS, with a virus called JC virus
and can occur in certain immune-suppressed patients, including
those receiving immunomodulatory therapies. Under our
collaboration with Biogen Idec, we will initially conduct
investigative research into the potential of using RNAi
technology to discover and develop therapeutics to treat PML.
The goal of the program is to design and optimize an RNAi
therapeutic toward conserved regions of the JC viral genome to
harness the cells own capabilities to achieve an
anti-viral therapeutic effect.
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Ebola Virus. The Ebola virus is a type of
hemorrhagic fever virus that can cause severe, often fatal,
infection and poses a potential biological safety risk and
bioterrorism threat. Under our contract with the NIAID, we are
seeking to advance the development of a broad spectrum RNAi
anti-viral therapeutic against hemorrhagic fever virus,
including the Ebola virus.
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Cystic fibrosis, or CF. CF is an inherited
respiratory disorder caused by mutations in the gene for a
protein known as the cystic fibrosis transmembrane conductance
regulator, or CFTR. In most CF patients, potentially functional
CFTR protein is produced but does not reach the cell surface. We
are attempting to redirect this CFTR protein to the cell surface
using RNAi therapeutics to silence specific genes involved in
protein processing within the cell. We are conducting this work
in collaboration with, and with funding from, CFFT, the drug
discovery and development affiliate of the Cystic Fibrosis
Foundation.
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Spinal cord injury, or SCI. Our SCI program is
focused on a cellular system known as the Nogo pathway that
appears to play a key role in blocking the regeneration of
nerves in the spinal cord and brain after injury. In
collaboration with Merck, we are seeking to develop an RNAi
therapeutic that inhibits this pathway, thereby allowing nerves
to regenerate, and potentially reducing or treating paralysis,
after SCI.
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Huntingtons disease, or HD. HD is a
fatal, inherited and progressive brain disease that results in
uncontrolled movements, loss of intellectual faculties and
emotional disturbance. HD patients produce an altered form of a
protein known as huntingtin whose presence is believed to
trigger the death of important cells in the brain. In
collaboration with Medtronic, we are seeking to develop a novel
drug-device product incorporating an RNAi therapeutic that will
protect these cells by suppressing production of huntingtin.
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Parkinsons disease, or PD. PD is a
progressive brain disease characterized by uncontrollable
tremor, and in some cases, may result in dementia. Like HD, PD
is believed to result from the death of certain cells in the
brain, which in some cases is triggered by the presence of
abnormally large amounts of a protein called alpha-synuclein.
Our goal is to develop an RNAi therapeutic that will protect
these cells by suppressing production of alpha-synuclein.
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Neuropathic pain. Neuropathic pain is chronic
pain that results from injury or dysfunction of the nervous
system. A protein called NaV1.8 is believed to play an important
role in causing neuropathic pain. The goal of our program is to
develop an RNAi therapeutic that will suppress the production of
NaV1.8 and thereby alleviate neuropathic pain.
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In addition to these programs, as part of our collaborations
with Merck and Novartis, we have research activities to discover
RNAi therapeutics directed to a number of other undisclosed
targets.
microRNA
Technology Program
In addition to our efforts on siRNAs, we are adapting our
product platform to address the therapeutic possibilities
offered by microRNAs, a recently discovered class of small RNAs
that use the RNAi pathway to regulate genes and have been
implicated in various human diseases. In animal experiments
published in Nature in December 2005, we and our
collaborators demonstrated that we could silence microRNAs using
antagomirs, a potential new class of drugs we
designed for this purpose. We believe that antagomirs may become
an important component of our longer-term product platform for
the development of RNAi therapeutics.
Strategic
Alliances and Licenses
Strategic
Alliances
We have formed and intend to form strategic alliances to gain
access to the financial, technical, clinical and commercial
resources necessary to develop and market RNAi therapeutics. We
expect these alliances to provide us with financial support in
the form of upfront cash payments, equity investments, research
and development funding, license fees, milestone payments and
royalties or profit sharing based on sales of RNAi therapeutics.
Novartis. We have formed two alliances with
Novartis. We refer to the first of these, which was initiated in
September 2005, as the broad Novartis alliance, and to the
second, which was initiated in February 2006, as the Novartis
flu alliance.
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In connection with the broad Novartis alliance, we entered into
a series of transactions with Novartis beginning in September
2005. At that time, we and Novartis executed a stock purchase
agreement and an investor rights agreement. When the
transactions contemplated by the stock purchase agreement closed
in October 2005, the investor rights agreement became effective,
and we and Novartis executed a research collaboration and
license agreement. Under the terms of the stock purchase
agreement, in October 2005, Novartis purchased approximately
5.3 million shares of our common stock at a purchase price
of $11.11 per share for an aggregate purchase price of
approximately $58.5 million, which, immediately after such
issuance, represented 19.9% of our then outstanding common
stock. Novartis owned approximately 14% of our common stock as
of December 31, 2006.
Under the terms of the collaboration and license agreement, we
agreed with Novartis to work together on selected targets, as
defined in the collaboration and license agreement, to discover
and develop therapeutics based on RNAi. The collaboration and
license agreement has an initial term of three years and may be
extended for two additional one-year terms at the election of
Novartis. In addition, Novartis may terminate the collaboration
and license agreement after a period of two years under
specified circumstances or in the event that we materially
breach our obligations. We may terminate the agreement with
respect to particular programs, products
and/or
countries in the event of specified material breaches by
Novartis of its obligations, or in its entirety under specified
circumstances for multiple such breaches. In consideration for
rights granted to Novartis under the collaboration and license
agreement, Novartis made an upfront payment of
$10.0 million to us in October 2005, partly to reimburse
prior costs incurred by us to develop in vivo RNAi
technology. In addition, the collaboration and license agreement
includes terms under which Novartis will provide us with
research funding and milestone payments as well as royalties on
annual net sales of products resulting from the collaboration.
The collaboration and license agreement also provides Novartis
with a non-exclusive option to integrate our intellectual
property relating to RNAi technology into Novartis
operations under specified circumstances. In connection with the
exercise of the integration option, Novartis would be required
to make additional payments to us. Under the terms of the
collaboration and license agreement, we retain the right to
discover, develop, commercialize or manufacture compounds that
function through the mechanism of RNAi, or products that contain
such compounds as an active ingredient, with respect to targets
not selected by Novartis for inclusion in the collaboration,
provided that Novartis has a right of first offer in the event
that we propose to enter into an agreement with a third party
with respect to any such target.
Under the terms of the investor rights agreement, we granted
Novartis demand and piggyback registration rights under the
Securities Act of 1933 for the shares of our common stock held
by Novartis. We also granted to Novartis rights to acquire
additional equity securities in the event that we propose to
sell or issue any equity securities, subject to specified
exceptions, as described in the investor rights agreement, such
that Novartis would be able to maintain its ownership percentage
in us. Novartis agreed, until the later of
(1) October 12, 2008 and (2) the date of
termination or expiration of the selection term, as defined in
the collaboration and license agreement, not to acquire any of
our securities, other than an acquisition resulting in Novartis
and its affiliates beneficially owning less than 20% of our
total outstanding voting securities, participate in any tender
or exchange offer, merger or other business combination
involving us or seek to control or influence our management,
board of directors or policies, subject to specified exceptions
described in the investor rights agreement.
In February 2006, we entered into the Novartis flu alliance. The
agreement governing the flu alliance is structured as an
addendum to the collaboration and license agreement for the
broad Novartis alliance. This addendum supplements and, to the
extent described therein, supersedes in relevant part the
collaboration and license agreement for the broad Novartis
alliance. Under the terms of the addendum, we and Novartis have
joint responsibility for the development of RNAi therapeutics
for pandemic flu. Novartis will have primary responsibility for
commercialization of any such RNAi therapeutics worldwide, but
we will be actively involved, and may in certain circumstances
take the lead, in commercialization in the United States. We are
eligible to receive significant funding from Novartis for our
efforts on RNAi therapeutics for pandemic flu, and to receive a
significant share of any profits.
Merck. In July 2006, we amended and restated
our research collaboration and license agreement with Merck,
dated September 8, 2003, as amended. Our collaboration with
Merck is focused on developing RNAi therapeutics for targets
associated with human diseases and, under the terms of the
amended and restated license agreement, will focus on the nine
targets that then remained to be nominated by Merck under the
terms of the
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original license agreement. These nine programs are in addition
to the existing program directed to the Nogo pathway on which we
were already working with Merck under the terms of the original
agreement. We may select three of the nine additional programs
as joint development programs, which Merck will co-fund and
participate in from the outset. In October 2006, we selected a
co-development program from the first three targets presented by
Merck under the amended and restated license agreement. The
amended and restated license agreement provides funding from
Merck immediately for programs selected by us for
co-development, and provides that, in the United States, we will
have the right to co-promote RNAi therapeutic products developed
in these three co-development programs. Merck will assume
primary responsibility for the remaining six programs and we are
eligible to receive milestone payments and royalties on any RNAi
therapeutic products developed and commercialized by Merck in
these six programs. The initial term of the collaboration under
the amended and restated license agreement ends in September
2008 and, unless earlier terminated, will continue until the
date on which no product is being developed or commercialized
under the agreement. Unless earlier terminated, the amended and
restated license agreement shall continue in effect until the
expiration of all royalty obligations and profit-sharing
obligations under the agreement.
Also in July 2006, we and Merck agreed to terminate the
collaboration and license agreement, effective as of
June 29, 2004, pursuant to which we were collaborating in
the research, development and commercialization of RNAi products
directed to certain ocular targets, including but not limited
to, vascular endothelial growth factor, or VEGF. In connection
with the termination of the ocular collaboration agreement, and
subject to certain royalty and other obligations, we have
retained our rights to develop, manufacture and commercialize
ophthalmic products directed to VEGF and Merck has granted us a
license under certain of its technology solely to develop,
manufacture and commercialize RNAi products directed to VEGF.
Medtronic. In February 2005, we entered into a
collaboration with Medtronic to pursue the potential development
of therapeutic products for the treatment of neurodegenerative
disorders such as Parkinsons, Huntingtons and
Alzheimers disease. The collaboration is focused on
developing novel drug-device combinations incorporating RNAi
therapeutic products. Currently, we are engaged in a joint
technology development program with Medtronic through April
2007. This initial joint technology development program is
focused on delivering candidate RNAi therapeutic products to
specific areas of the brain using implantable infusion systems.
After successful completion of the initial joint technology
development program, the parties must jointly determine whether
to initiate product development. If the parties jointly decide
to initiate product development, we would be responsible for the
discovery and early development of candidate RNAi therapeutic
products, and Medtronic would be responsible for late-stage
development and commercialization of any drug-device products
that result. Medtronic also would adapt or develop medical
devices to deliver the candidate RNAi therapeutic products to
targeted locations in the nervous system.
After successful completion of the initial joint technology
development program and a joint decision to initiate product
development, Medtronic would make an initial equity investment
in us and could make additional investments upon successful
completion of specified milestones. The aggregate amount of our
common stock that Medtronic would purchase, if a joint decision
were made to initiate product development and the specified
milestones were successfully completed, would be
$21.0 million. The amount of the investment to be made at
the time of the joint decision to initiate product development
would be between $1.0 million and $8.0 million, as
determined by us, at the then-current market price, as
determined under the agreement. The remaining investments of
between $13.0 million and $20.0 million would be made
upon the achievement of the specified milestones at a purchase
price equal to 120% of the then-current market price, as
determined under the agreement. If either party decides not to
initiate product development under the collaboration agreement,
Medtronic would not be required to make any equity investment in
us. We would also be eligible to receive additional cash
milestone payments for each product developed and royalties on
sales of any RNAi therapeutic component of novel drug-device
combinations that result from the collaboration.
Biogen Idec. In September 2006, we entered
into a collaboration and license agreement with Biogen Idec. The
collaboration is focused on the discovery and development of
therapeutics based on RNAi for the potential treatment of PML.
We and Biogen Idec will initially conduct investigative research
into the potential of RNAi technology to develop therapeutics to
treat PML. Under the terms of the collaboration agreement with
Biogen Idec,
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we granted Biogen Idec an exclusive license to distribute,
market and sell certain RNAi therapeutics to treat PML and
Biogen Idec has agreed to fund all related research and
development activities. We also received an upfront
$5.0 million payment from Biogen Idec. In addition, upon
the successful development and utilization of a product
resulting from the collaboration, Biogen Idec would be required
to pay us milestone and royalty payments.
NIH. In September 2006, we were awarded a
contract to advance the development of a broad spectrum RNAi
anti-viral therapeutic against hemorrhagic fever virus,
including the Ebola virus, with the NIAID, a component of the
NIH. The federal contract will provide us with up to
$23.0 million in funding over a four-year period to develop
RNAi therapeutics as anti-viral drugs targeting the Ebola virus.
The Ebola virus can cause a severe, often fatal infection, and
poses a potential biological safety risk and bioterrorism
threat. Of the $23.0 million in funding, the government has
committed to pay us $14.2 million over the first two years
of the contract and, subject to the progress of the program and
budgetary considerations in future years, the remaining
$8.8 million over the last two years of the contract.
Isis. In March 2004, we entered into a
collaboration and license agreement with Isis, a leading
developer of antisense oligonucleotide drugs that target RNA.
The agreement enhanced our intellectual property position with
respect to RNA-based therapeutic products and our ability to
develop siRNAs for RNAi therapeutic products, and provided us
with the opportunity to defer investment in manufacturing
technology. Isis granted us licenses to its current and future
patents and patent applications relating to chemistry and to
RNA-targeting mechanisms for the research, development and
commercialization of siRNA products. We have the right to use
Isis technologies in our development programs or in
collaborations, and Isis has agreed not to grant licenses under
these patents to any other organization for any siRNA products
designed to work through an RNAi mechanism, except in the
context of a collaboration in which Isis plays an active role.
We granted Isis non-exclusive licenses to our current and future
patents and patent applications relating to RNA-targeting
mechanisms and to chemistry for research use. We also granted
Isis the exclusive or co-exclusive right to develop and
commercialize siRNA products against a limited number of
targets. In addition, we granted Isis non-exclusive rights to
our patents and patent applications for research, development
and commercialization of antisense RNA products.
Under the terms of our agreement, we agreed to pay Isis an
upfront license fee of $5.0 million, milestone payments
payable upon the occurrence of specified development and
regulatory events and royalties for each product that we or a
collaborator develop utilizing Isis intellectual property. In
addition, we agreed to pay to Isis a percentage of specified
fees from strategic collaborations we may enter into that
include access to the Isis intellectual property. In conjunction
with the agreement, Isis made a $10.0 million equity
investment in us. Isis also agreed to pay us a license fee,
milestone payments payable upon the occurrence of specified
development and regulatory events and royalties for each product
developed by Isis or a collaborator that utilizes our
intellectual property. The agreement also gives us an option to
use Isis manufacturing services for RNA-based therapeutic
products.
Our agreement with Isis also gives us the exclusive right to
grant
sub-licenses
for Isis technology to third parties with whom we are not
collaborating. We may include these
sub-licenses
in our InterfeRx licenses. If a license includes rights to
Isis intellectual property, we will share revenues from
that license equally with Isis.
If, by January 1, 2008, we or a collaborator have not
completed the studies required for an IND submission or similar
foreign filing for at least one product candidate involving the
patent rights covered by our agreement, Isis would have the
right to grant licenses to third parties for the patents and
patent applications licensed to us, thereby making our rights
non-exclusive.
Inex. In January 2007, Inex granted us an
exclusive license to its liposomal delivery formulation
technology for the discovery, development and commercialization
of RNAi therapeutics. In addition, we granted Inex an option for
three InterfeRx licenses, subject to our review and third party
obligations, to develop its own RNAi therapeutic products and
exclusive access to certain intellectual property to develop
oligonucleotide immune stimulatory drugs that do not function
through an RNAi mechanism.
In connection with Inexs license grant to us, we issued
Inex 361,990 shares of our common stock, valued at
$8.0 million, in a private placement in January 2007, and
in February 2007 we paid them an additional $0.4 million.
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We have also agreed to make available to Inex a
$5.0 million loan for capital equipment expenditures
related to manufacturing services performed by Inex for us. In
addition, we will be required to pay Inex up to
$13.0 million in development and commercialization
milestone payments for each product we develop utilizing
technology Inex has licensed to us.
Licenses
To generate revenues from our intellectual property rights, we
have established our InterfeRx program, and our research
reagents and services licensing program.
InterfeRx Program. Our InterfeRx program
consists of the licensing of our intellectual property to others
for the development and commercialization of RNAi therapeutic
products relating to specific targets outside our areas of
strategic focus. We expect to receive license fees, annual
maintenance fees, milestone payments and royalties on sales of
any resulting RNAi therapeutic products. Generally, we do not
expect to collaborate with our InterfeRx licensees in the
development of RNAi therapeutic products, but may do so in
appropriate circumstances. To date, we have granted InterfeRx
licenses to four companies: GeneCare in January 2005, Nastech in
July 2005, Calando in August 2006 and Quark in September 2006.
In the case of GeneCare, the license allows GeneCare to
discover, develop, and commercialize RNAi therapeutic products
directed against two DNA helicase genes associated with cancer.
We retained the right to negotiate co-development and
co-promotion arrangements with GeneCare for such products in the
United States. In the case of Nastech, the license allows
Nastech to discover, develop and commercialize RNAi therapeutic
products directed against tumor necrosis factor-alpha, or
TNF-alpha, the target of several drugs approved for the
treatment of rheumatoid arthritis and other conditions. In the
case of Calando, the license allows Calando to discover, develop
and commercialize RNAi therapeutic products directed against an
undisclosed cancer-associated gene target. In the case of Quark,
the license allows Quark to discover, develop and commercialize
RNAi therapeutic products targeting the p53 gene for the
treatment of renal failure and the RTP801 gene for the treatment
of macular degeneration. In each case, we received an upfront
cash payment, and expect to receive annual and milestone
payments, all in cash, and royalties on sales of any products
that result from the licensing agreement.
In April 2005, we entered into an agreement with Benitec, under
which we granted Benitec options to take up to five InterfeRx
exclusive licenses to pursue synthetic RNAi therapeutic products
against mutually agreed, specific targets in return for license
fees, milestone payments and royalties. Under the same
agreement, we also granted Benitec options to non-exclusively
license our intellectual property in the field of expressed
RNAi, that is, RNAi mediated by siRNAs generated from DNA
constructs introduced into cells. If Benitec were to exercise
any of these options, we would receive license fees and be
entitled to receive milestone payments and royalties on any
expressed RNAi products developed by Benitec or its licensees.
Research Reagents and Services. We have
granted licenses to our intellectual property for the
development and commercialization of research reagents and
services, and intend to enter into additional licenses on an
ongoing basis. Our target licensees are vendors that provide
siRNAs and related products and services for use in biological
research. We offer these licenses in return for an initial
license fee, annual renewal fees and royalties from sales of
siRNA research reagents and services. No single research reagent
or research services license is material to our business.
Patents
and Proprietary Rights
We have devoted considerable effort and resources to establish
what we believe to be a strong position in intellectual property
relevant to RNAi therapeutic products and delivery technologies.
In this regard, we have focused on patents, patent applications
and other intellectual property covering:
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fundamental aspects of the structure and uses of siRNAs,
including their use as therapeutics, and RNAi-related mechanisms;
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chemical modifications to siRNAs that improve their suitability
for therapeutic uses;
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siRNAs directed to specific targets as treatments for particular
diseases; and
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delivery technologies, such as in the field of cationic
liposomes.
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Intellectual
Property Related to Fundamental Aspects and Uses of siRNA and
RNAi-related Mechanisms
In this category, we include patents and patent applications
that claim key aspects of siRNA architecture and RNAi-related
mechanisms. Specifically, we include patents and patent
applications relating to targeted cleavage of mRNA directed by
RNAi-like oligonucleotides, double-stranded RNAs of particular
lengths and particular structural features of these dsRNAs, such
as overhanging ends and uses of these dsRNAs. Our strategy has
been to secure rights to the potentially key patents and patent
applications covering the fundamental aspects of siRNAs on an
exclusive basis where possible or appropriate. The following
table lists patents or patent applications to which we have
secured rights that we regard as being potentially fundamental
for the use of siRNAs as therapeutics.
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Licensor/Patent
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First
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Owner
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Subject Matter
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Priority Date
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Inventors
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|
Status*
|
|
Alnylam Rights
|
|
Isis
Pharmaceuticals
|
|
Inactivation of
target mRNA
|
|
6/6/1996
and
6/6/1997
|
|
S. Crooke
|
|
Issued in the U.S.
(U.S. Patent Nos. 5,898,031 & 6,107,094), pending
in the rest of world
|
|
Exclusive rights for
therapeutic
purposes related
to siRNAs**
|
Carnegie
Institution of
Washington
|
|
Double-stranded
RNAs to induce
RNAi
|
|
12/23/1997
|
|
A. Fire,
C. Mello
|
|
Issued in the
U.S. (U.S. Patent No. 6,506,559), pending in the
rest of world
|
|
Non-exclusive
rights for
therapeutic
purposes
|
Alnylam
|
|
Small double-
stranded RNAs as
therapeutic products
|
|
1/30/1999
|
|
R. Kreutzer,
S. Limmer
|
|
Granted in the EU (EP
1144623 & EP 1214945) and Australia (AU 778474),
granted in Germany (DE 20023125 U1) pending in the rest of world
|
|
Owned
|
Cancer
Research
Technology
Limited
|
|
RNAi uses in
mammalian cells
|
|
11/19/1999
|
|
M. Zernicka-Goetz,
M.J. Evans,
D.M. Glover
|
|
Granted in the EU (EP 1230375),
Singapore (89569) Australia (AU 774285) pending in the rest of
world
|
|
Exclusive rights
for therapeutic
purposes
|
Massachusetts
Institute of
Technology,
Whitehead
Institute,
Max Planck
Gesellschaft***
|
|
Mediation of
RNAi by
siRNAs
containing 21-23
base pairs
|
|
3/30/2000
|
|
D.P. Bartel,
P.A. Sharp,
T. Tuschl,
P.D. Zamore
|
|
Pending worldwide
|
|
Non-exclusive
rights for
therapeutic
purposes***
|
Max Planck
Gesellschaft
|
|
Synthetic
siRNAs as
therapeutic
products
|
|
12/01/2000
04/24/2004
and
04/27/2004
|
|
T. Tuschl,
S. Elbashir,
W. Lendeckel
|
|
Issued in the
U.S. (U.S. Patent Nos. 7,056,704 &
7,078,196), additional pending in the U.S. and rest of the world
|
|
Exclusive rights
for therapeutic
purposes
|
Cold Spring
Harbor
Laboratory
|
|
RNAi uses
in mammalian cells
|
|
3/16/2001
|
|
D. Beach,
G. Hannon
|
|
Pending worldwide
|
|
Non-exclusive
rights for
therapeutic
purposes
|
Stanford
University
|
|
RNAi uses
in vivo
|
|
7/23/2001
|
|
M.A. Kay,
A.P. McCaffrey
|
|
Pending worldwide
|
|
Co-exclusive
rights for
therapeutic
purposes
|
|
|
|
* |
|
The patent term generally is 20 years from the earliest
application filing date. However, under the Drug Price
Competition and Patent Term Extension Act of 1984, known as the
Hatch-Waxman Act, we may be able to apply for patent term
extensions for our U.S. patents. We cannot predict whether or
not any patent term extensions will be granted or the length of
any patent term extension that might be granted. |
|
** |
|
We hold co-exclusive therapeutic rights with Isis. However, Isis
has agreed not to license such rights to any third party, except
in the context of a collaboration in which Isis plays an active
role. |
|
*** |
|
We hold exclusive rights to the interest owned by three of four
co-owners. The fourth co-owner, the University of Massachusetts,
has licensed its interest separately to third parties. |
16
We believe we have a strong portfolio of broad and exclusive
rights to fundamental siRNA patents and patent applications. In
securing these rights, we have focused on obtaining the
strongest rights for those intellectual property assets we
believe will be most important in providing competitive
advantage with respect to RNAi therapeutic products. We note in
particular the first, third and sixth patents and patent
applications listed in the table above, those covering
inventions by Dr. Crooke, by Dr. Kreutzer and
Dr. Limmer and by Dr. Tuschl and his colleagues. We
believe that the so-called Crooke patent, issued worldwide, is a
broad patent covering the use of modified oligonucleotides to
achieve enzyme-mediated cleavage of a target mRNA and, as such,
has broad issued claims that cover RNAi. We have obtained rights
to the Crooke patent through a license agreement with Isis.
Under the terms of our license agreement, Isis agreed not to
grant licenses under this patent to any other organization for
siRNA products designed to work through an RNAi mechanism,
except in the context of a collaboration in which Isis plays an
active role. We believe the so-called Kreutzer-Limmer European
patent was the first patent granted that specifically covers the
use of small dsRNAs as therapeutics. Through our acquisition of
Ribopharma AG, now known as Alnylam Europe AG, we own this
patent, as well as corresponding patent applications in other
countries, including the United States. The patent applications
filed by Max Planck Gesellschaft zur Förderung der
Wissenschaften e.V, which we refer to as Max Planck
Gesellschaft, on the invention by Dr. Tuschl and his
colleagues, or the Tuschl II patent application, cover what
we believe are key structural features of siRNAs, namely the
presence of overhangs at the 3-end of each of the two
strands and the use of chemical modifications to stabilize
siRNAs. On June 6, 2006, the USPTO issued U.S. Patent
No. 7,056,704 and then on July 18, 2006 the USPTO
issued U.S. Patent No. 7,078,196, covering methods of
making dsRNAs having a 3 overhang structure. We have
obtained an exclusive license to claims in the Tuschl II
patent series uniquely covering the use of RNAi for therapeutic
purposes.
The Fire and Mello patent owned by the Carnegie Institution
covers the use of dsRNAs to induce RNAi. The Carnegie
Institution has made this patent broadly available for licensing
and we, like many companies, have taken a non-exclusive license
to the patent for therapeutic purposes. We believe, however,
that the Fire and Mello patent does not claim specific
structural features of dsRNAs that are important for the
biological activity of siRNAs in mammalian cells. These specific
features are the subjects of the Crooke patent, the
Kreutzer-Limmer patent and the Tuschl II patent application
for which we have secured exclusive rights.
A first Kreutzer-Limmer European patent, EP 1144623, was granted
by the EPO in 2002, by Australia IP in December 2004 (AU
778474) and is pending in other countries, including the
United States. In addition, a German Utility Model covering RNAi
composition was branched off the European patent application,
and was registered by the German Patent and Trademark Office in
2003. A German Utility Model is a form of patent that is
directed only to physical matter, such as medicines, and does
not cover methods.
The grant of a second European patent from the Kreutzer-Limmer
series, EP 1214945, originating from a divisional application of
EP 1144623, was published by the EPO on June 8, 2005. This
patent further extends the coverage of the first granted EP
patent covering critical aspects of dsRNA structure. Sirna,
which was acquired by Merck in December 2006, and SR Pharma
appealed the September 2006 decision of the Opposition Division
of the European Patent Office to uphold the Kreutzer-Limmer
patent (EP 1144623).
The other pending patent applications listed in the table above
either provide further coverage for structural features of
siRNAs or relate to the use of siRNAs in mammalian cells. For
some of these, we have exclusive rights, and for others, we have
non-exclusive rights. While we believe these pending patent
applications are important, we also believe that access to the
Crooke patent, the Kreutzer-Limmer patent and the Tuschl II
patent application will be of particular importance for
development and commercialization of RNAi therapeutic products,
which is why we have secured exclusive rights with respect to
these assets.
Intellectual
Property Related to Chemical Modifications
Our collaboration and license agreement with Isis provides us
with rights to use over 150 issued patents relating to chemical
modifications we may wish to incorporate into our RNAi
therapeutic products and rights based on future chemistry patent
applications filed in the next five years to which it has
rights. Under the terms of our license agreement, Isis agreed
not to grant licenses under these patents to any other
organization for dsRNA
17
products designed to work through an RNAi mechanism, except in
the context of a collaboration in which Isis plays an active
role.
In addition to licensing these intellectual property rights from
Isis, we are also working to develop our own proprietary
modifications that we can apply to siRNAs to endow them with
drug-like properties. We have filed a number of patent
applications relating to novel chemical modifications that we
may apply to siRNAs.
In addition, a patent in the Tuschl II patent series
(U.S. Patent No. 7,078,196) recently issued in the
United States includes claims that cover methods of making
siRNAs that incorporate any of various chemical modifications,
including the use of phosphorothioates, 2-O-methyl,
and/or
2-fluoro modifications, without any limitation on the
number of such modifications. These internal and backbone
modifications are believed to be important for achievement of
drug-like properties for RNAi therapeutics. We hold
exclusive worldwide rights to these claims for RNAi therapeutics.
Intellectual
Property Related to siRNAs Directed to Specific
Targets
We have also filed a number of patent applications claiming
specific siRNAs directed to a large number of targets as
treatments for specific diseases. We recognize, however, that
there may be a significant number of competing applications
filed by other organizations on similar siRNAs. Because our
subsidiaries, Alnylam Europe and Alnylam U.S., were among the
first companies to focus on RNAi therapeutics, we believe that a
number of our patent applications may predate competing
applications that others may have filed. Reflecting this, in
August 2005, the EPO granted a broad patent, which we call the
Kreutzer-Limmer II patent, with 103 allowed claims on
therapeutic compositions, methods and uses comprising siRNAs
that are complementary to all mRNA sequences in over 125 disease
target genes. These genes include targets that are part of our
development and pre-clinical programs, such as those expressed
by viral pathogens including RSV and influenza virus. In
addition, the claimed targets include oncogenes, cytokines, cell
adhesion receptors, angiogenesis targets, apoptosis and cell
cycle targets, and additional viral disease targets, such as
hepatitis C virus and HIV. Moreover, a patent in the
Tuschl II patent series (U.S. Patent
No. 7,078,196) recently issued in the United States claims
methods for preparing siRNAs which mediate cleavage of an mRNA
in mammalian cells, and therefore cover siRNAs directed toward
any and all target genes, including those derived from viruses,
expressed in mammalian cells. We hold exclusive worldwide rights
to these claims for RNAi therapeutics.
With respect to specific siRNAs, we believe that the most
important patent coverage will ultimately result from
demonstrating that particular compositions exert suitable
biological and therapeutic effects. Accordingly, we are focused
on achieving such demonstrations for siRNAs in key therapeutic
programs.
Intellectual
Property Related to the Delivery of siRNAs to
Cells
Recently, we have expanded our areas of focus to encompass more
aspects of the delivery of siRNAs to cells within a mammal. To
achieve this we have obtained an exclusive license from the
University of British Columbia and Inex in the field of RNAi
therapeutics to intellectual property covering cationic
liposomes and their use to deliver nucleic acid to cells. The
issued U.S. and foreign patents, including U.S. Patent Nos.
5,976,567, 6,815,432 and 6,858,225, cover compositions, methods
of making and methods of using cationic liposomes to deliver
agents, such as nucleic acid molecules to cells.
Competition
The pharmaceutical marketplace is extremely competitive, with
hundreds of companies competing to discover, develop and market
new drugs. We face a broad spectrum of current and potential
competitors, ranging from very large, global pharmaceutical
companies with significant resources to other biotechnology
companies with resources and expertise comparable to our own. We
believe that for most or all of our drug development programs,
there will be one or more competing programs in other companies.
In many cases, the companies with competing programs will have
access to greater resources and expertise than we do and may be
more advanced.
The competition we face can be grouped into three broad
categories:
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|
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|
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other companies working to develop RNAi therapeutic products;
|
18
|
|
|
|
|
companies developing technology known as antisense, which, like
RNAi, attempts to silence the activity of specific genes by
targeting the mRNAs copied from them; and
|
|
|
|
marketed products and development programs that compete with the
drugs we may try to develop.
|
Other
Companies Working to Develop RNAi Therapeutic
Products
We are aware of several other companies that are working to
develop RNAi therapeutic products. Some of these companies are
seeking, as we are, to develop chemically synthesized siRNAs as
drugs. Others are following a gene therapy approach, with the
goal of treating patients not with synthetic siRNAs but with
genes designed to produce siRNA-like molecules within cells.
Companies working on chemically synthesized siRNAs include
Sirna, a subsidiary of Merck, Acuity Pharmaceuticals, Inc., or
Acuity, Nastech, Calando, Quark, Nucleonics, SR Pharma, RXi
Pharmaceuticals Corporation, or RXi, a subsidiary of CytRx
Corporation, or CytRx, Protiva Biotherapeutics, Inc., or
Protiva, and Intradigm, Inc., or Intradigm. Many of these
companies have taken licenses to Alnylam intellectual property
on a
target-by-target
basis.
Sirna, which was acquired by Merck in December 2006, has
approximately ten years prior experience working to
develop RNA molecules as drugs. This experience was largely
gained with a different class of RNA molecules known as
ribozymes, but could potentially be relevant for siRNAs. During
2004, Sirna initiated Phase I human clinical trials related
to the development of Sirna-027, a candidate RNAi therapeutic
designed to treat age-related macular degeneration, or AMD, by
blocking VEGF activity. In September 2005, Sirna announced an
alliance with Allergan, Inc. to develop Sirna-027 and to
discover and develop other novel RNAi therapeutics against
select gene targets in ophthalmic diseases. In December 2005,
Sirna announced that it had selected a development candidate in
its program to develop RNAi therapeutics for the treatment of
hepatitis C infection. In April 2006, Sirna announced a
multi-year alliance with GlaxoSmithKline to discover, develop
and commercialize RNAi-based therapeutics for respiratory
diseases, such as asthma, COPD and viral infections, including
RSV.
Acuity initiated a Phase II human clinical trial in 2005
for a candidate RNAi therapeutic designed to treat AMD, formerly
called Cand5 and now termed bevasiranib, by blocking VEGF
activity. In June 2006, Acuity reported Phase II data
claiming bevasiranib appeared safe and well tolerated in human
subjects. Acuity has announced plans to initiate Phase III
studies.
Nastech is developing an RNAi therapeutic directed against
TNF-alpha under license from us. Separately, Nastech announced
in February 2006 a program to develop RNAi therapeutics for
pandemic flu and its acquisition of a flu RNAi program from
Galenea Corporation. Nastech has received federal grants from
the NIH to support further development of their flu program.
Calando, which is focused on RNAi therapeutics for the treatment
of cancer, announced in February 2006 that it has established a
collaborative development program relating to RNAi therapeutics
with the National Cancer Institute of the NIH, with the goal of
developing RNAi therapeutic products to target neuroblastoma. In
October 2006, Calando announced preclinical data from an
anti-cancer program targeting M2 subunit of ribonucleotide
reductase. Calando has a license from us to develop and
commercialize RNAi therapeutic products directed against an
undisclosed cancer-associated gene target.
Quark is working on discovering and developing RNAi therapeutic
products targeting the p53 gene for the treatment of renal
failure and the RTP801 gene for the treatment of macular
degeneration. Quark has licenses from us to develop and
commercialize these RNAi therapeutic programs.
RXi, a subsidiary of CytRx, is focusing on developing RNAi
therapeutics for various diseases including neurodegenerative
disease, type 2 diabetes and obesity. In January of 2007, CytRx
contributed all of its RNAi assets to RXi including licenses to
RNAi intellectual property from the University of Massachusetts
Medical School.
SR Pharma and its Atugen AG subsidiary are working on synthetic
siRNA molecules as therapeutics for oncology. SR Pharma
announced in January 2007 preclinical toxicology data on its
lead program, Atu027, for systemic cancer indications.
19
Protiva is developing RNAi therapeutics using a cationic
liposome delivery technology called SNALP (stable
nucleic acid-lipid particles). Alnylam and Protiva have
collaborated on delivery technologies for RNAi therapeutics.
Protiva is involved in a legal dispute with Inex regarding
ownership rights to certain Protiva intellectual property for
delivery of RNAi therapeutics with cationic liposomes.
Intradigm is developing RNAi therapeutics using a polymer
delivery technology. In November 2006, Intradigm announced that
it raised $16.0 million in a Series A financing.
Companies working on gene therapy approaches to RNAi
therapeutics include Nucleonics, Inc., Benitec and Cequent, Inc.
Other
Companies Working to Develop Antisense Technology
Antisense technology uses short, single-stranded, DNA-like
molecules known as oligonucleotides to block mRNAs encoding
specific proteins. An antisense oligonucleotide, or ASO,
contains a sequence of bases complementary to a sequence within
its target mRNA, enabling it to attach to the mRNA by
base-pairing. The attachment of the ASO may lead to breakdown of
the mRNA, or may physically block the mRNA from associating with
the protein synthesis machinery of the cell. In either case,
production of the protein encoded by the mRNA may be reduced.
Typically, the backbone of an ASO, the linkages that hold its
constituent bases together, will carry a number of chemical
modifications that do not exist in naturally occurring DNA.
These modifications are intended to improve the stability and
pharmaceutical properties of the ASO.
While we believe that RNAi drugs may potentially have
significant advantages over ASOs, including greater potency and
specificity, others are developing ASO drugs that are currently
at a more advanced stage of development than RNAi drugs. For
example, Isis has developed an ASO drug,
Vitravene®,
which is currently on the market, and has several ASO drug
candidates in clinical trials. This includes ISIS 301012,
which targets a gene called apolipoprotein B and is in
Phase II clinical testing for hypercholesterolemia. Isis
also has a pre-clinical program with ASOs targeting PCSK9 for
hypercholesterolemia. In addition, a number of other companies
have product candidates in various stages of pre-clinical and
clinical development. Included in these companies is Genta
Incorporated, which has a drug candidate known as
Genasense®,
a potential treatment for various forms of cancer. AVI
BioPharma, Inc. is developing ASOs based on a type of chemistry
called Morpholinos and is currently working on a program
targeting Ebola and influenza. Because of their later stage of
development, ASOs, rather than siRNAs, may become the preferred
technology for drugs that target mRNAs in order to turn off the
activity of specific genes.
Competing
Drugs for RSV
The only product currently approved for the treatment of RSV
infection is Ribavirin, which is marketed as
Virazole®
by Valeant. This is approved only for treatment of hospitalized
infants and young children with severe lower respiratory tract
infections due to RSV. However, Ribavirin has been reported to
have limited efficacy and limited anti-viral activity against
RSV. Moreover, administration of the drug is cumbersome and
requires elaborate environmental reclamation devices because of
potential harmful effects on health care personnel exposed to
the drug. According to published reports by Valeant, sales of
Virazole were $16.6 million in 2006. Other current RSV
therapies consist of primarily treating the symptoms or
preventing the viral infection by using the prophylactic drug
Synagis®
(palivizumab), which is marketed by MedImmune, Inc. Synagis is a
neutralizing monoclonal antibody that prevents the virus from
infecting the cell by blocking the RSV F protein. Synagis is
injected intramuscularly once a month during the RSV season to
prevent infection. According to published reports by MedImmune,
Synagis sales were $1.1 billion in 2006.
Competing
Drugs for Pandemic Flu
Four drugs are currently approved in the U.S. for the
treatment of influenza. Two of these drugs,
Symmetrel®
and
Flumadine®,
are older drugs that belong to a class known as ion channel
inhibitors. The other two drugs,
Relenza®
and
Tamiflu®,
were approved relatively recently and function by blocking the
activity of the viral neuraminidase protein. Flumadine, Relenza
and Tamiflu are approved to prevent as well as to treat
influenza.
20
Symmetrel and Flumadine are effective only against influenza A
viruses, and resistance is widespread. Tamiflu and Relenza are
effective against both influenza A and the other main type that
causes seasonal epidemics, influenza B. Resistance to Tamiflu
has been reported.
The manufacturer of Tamiflu, F. Hoffman-LaRoche Ltd, or Roche,
reported that 2005 sales of Tamiflu totaled 1.6 billion
Swiss francs, or approximately $1.2 billion. Roche reported
that these sales were driven by a severe influenza season in
Japan early in the year and increased orders for pandemic
readiness supplies, with over 60 countries having placed orders
for pandemic stocks of Tamiflu, in some cases purchasing enough
to cover 25% to 40% of their populations.
GlaxoSmithKline Plc, the manufacturer of Relenza, said in
February 2006 that it expects production of Relenza in 2007 to
exceed the 15 million dose output in 2006, all of which had
already been sold out.
Competing
Drugs for Hypercholesterolemia
The current standard of care for patients with
hypercholesterolemia includes the use of several agents. Front
line therapy consists of HMG CoA reductase inhibitors, commonly
known as statins, which block production of cholesterol by the
liver and increase clearance of LDL-c from the bloodstream.
These include
Lipitor®,
Zocor®,
Crestor®
and
Pravachol®.
A different class of compounds such as Zetia, function by
blocking cholesterol uptake from the diet and are utilized on
their own or in combination with statins. All of these competing
drugs had sales of greater than $1.0 billion during 2006,
according to published reports.
Competing
Drugs for Discovery Programs
For many of the diseases that are the subject of our RNAi
therapeutics discovery programs, there are already drugs on the
market or in development. These include:
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For PML: Several treatments for PML have been
tested without significant success. In HIV positive PML
patients, the prognosis has been significantly changed by the
advent of highly active anti-retroviral therapy, but 50% of
cases are fatal and rarely do patients improve.
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|
For Ebola Virus: No licensed vaccine,
prophylactic therapy or treatment exists for Ebola infection.
Multiple post-exposure treatments are under preclinical
investigation including recombinant viral vectors, siRNA,
antisense, and recombinant proteins. In the absence of effective
vaccines and therapeutics, the response to Ebola infection is
supportive patient care and case isolation to control disease
spread.
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For CF: Current pharmaceutical treatments for
CF fall into two categories. The first category consists of
antibiotics formulated to treat the lung infections to which CF
patients are prone. This category includes
TOBI®,
a tobramycin solution for inhalation marketed by Chiron
Corporation, a business of Novartis Vaccines and Diagnostics,
and azithromycin. The second category contains one drug,
Pulmozyme®
(dornase alfa) marketed by Genentech, Inc., that reduces the
viscosity of the mucus that builds up in the lungs of CF
patients.
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|
For SCI: There are currently no drugs approved
in the United States to repair the neuronal damage associated
with spinal cord injury. Patients are typically treated with
methylprednisolone, an anti-inflammatory steroid that reduces
the damage to neurons caused by activation of immune cells
around the injury.
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For Huntingtons disease: While certain
drugs are currently used to treat some of the symptoms of
Huntingtons, no drug has been approved in the United
States for the treatment of the underlying disease.
|
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For Parkinsons disease: Parkinsons
disease is caused by the death in a specialized region of the
brain of neurons that produce an important substance called
dopamine. Most current drugs for Parkinsons disease work
by boosting brain levels of dopamine or by mimicking its action.
The primary drug for treating Parkinsons disease is
typically carbidopa/levodopa, also sold as
Sinemet®
and
Atamet®.
Additional drugs include entacapone, seligiline,
Mirapaz®,
Perman®
and
Requip®.
Modulation of the dopamine system only affects the symptoms of
Parkinsons disease; there are no drugs approved for the
treatment of the underlying disease.
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21
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For neuropathic pain: A wide variety of drugs
have been used to treat neuropathic pain. These include topical
analgesics such as
Lidoderm®,
antidepressants such as amitryptyline,
Paxil®
and
Effexor®,
anticonvulsants such as carbamazepine,
Neurontin®
and most recently,
Lyrica®,
the muscle relaxant baclofen, anti-inflammatory drugs such as
ibuprofen, and opioids such as oxycodone. More recently, the
non-opioid drug ziconotide
(Prialt®),
which belongs to a new class of drugs known as N-type calcium
channel blockers, was approved for treating severe chronic pain.
Prialt must be administered directly into the spinal fluid using
a special infusion device.
|
Regulatory
Matters
The research, testing, manufacture and marketing of drug
products and their delivery systems are extensively regulated in
the United States and the rest of the world. In the United
States, drugs are subject to rigorous regulation by the FDA. The
Federal Food, Drug, and Cosmetic Act and other federal and state
statutes and regulations govern, among other things, the
research, development, testing, manufacture, storage, record
keeping, packaging, labeling, promotion and advertising,
marketing and distribution of pharmaceutical products. The
failure to comply with the applicable regulatory requirements
may subject a company to a variety of administrative or
judicially-imposed sanctions and the inability to obtain or
maintain required approvals or to market approved drug products.
These sanctions could include warning letters, product recalls,
product seizures, total or partial suspension of production or
distribution, clinical holds, injunctions, fines, civil
penalties or criminal prosecution.
The steps ordinarily required before a new pharmaceutical
product may be marketed in the United States include
non-clinical laboratory tests, animal tests and formulation
studies, the submission to the FDA of an IND, which must become
effective prior to commencement of clinical testing in adequate
and well-controlled clinical trials to establish that the drug
product is safe and effective for the indication for which FDA
approval is sought. Satisfaction of FDA pre-market approval
requirements typically takes several years and the actual time
taken may vary substantially depending upon the complexity of
the product and the nature of the disease. Government regulation
may delay or prevent marketing of potential products for a
considerable period of time and impose costly procedures on a
companys activities. Success in early stage clinical
trials does not necessarily assure success in later stage
clinical trials. Data obtained from clinical activities is not
always conclusive and may be subject to alternative
interpretations that could delay, limit or even prevent
regulatory approval. Even if a product receives regulatory
approval, later discovery of previously unknown problems with a
product, including new safety risks, may result in restrictions
on the product or even complete withdrawal of the product from
the market.
Non-clinical tests include laboratory evaluation of product
chemistry and formulation, as well as animal testing to assess
the potential safety and efficacy of the product. The conduct of
the non-clinical tests and formulation of compounds for testing
must comply with federal regulations and requirements. The
results of non-clinical testing are submitted to the FDA as part
of an IND, together with manufacturing information and
analytical and stability data.
A 30-day
waiting period after the filing of an IND is required prior to
such application becoming effective and the commencement of
clinical testing in humans. If the FDA has not commented on, or
questioned, the application during this
30-day
waiting period, clinical trials may begin. If the FDA has
comments or questions, these must be resolved to the
satisfaction of the FDA prior to commencement of clinical
trials. The IND process can result in substantial delay and
expense. The FDA may, at any time, impose a clinical hold on
ongoing clinical trials. If the FDA imposes a clinical hold,
clinical trials cannot commence or recommence without FDA
authorization and then only under terms authorized by the FDA.
Clinical trials involve the administration of the
investigational new drug to healthy volunteers or patients under
the supervision of a qualified investigator. Clinical trials
must be conducted in compliance with federal regulations and
requirements, under protocols detailing the objectives of the
trial and the safety and effectiveness criteria to be evaluated.
Each protocol involving testing on human subjects in the United
States, or in foreign countries if such tests are intended to
support approval in the United States, must be submitted to the
FDA as part of the IND. The study protocol and informed consent
information for patients in clinical trials must be submitted to
institutional review boards for approval prior to initiation of
the trial.
22
Clinical trials to support new drug applications, or NDAs, for
marketing approval are typically conducted in three sequential
phases, but the phases may overlap. In Phase I, the initial
introduction of the drug into healthy human subjects or
patients, the drug is tested to primarily assess safety,
tolerability, pharmacokinetics, pharmacological actions and
metabolism associated with increasing doses. Phase II
usually involves trials in a limited patient population, to
assess the optimum dosage, identify possible adverse effects and
safety risks, and provide preliminary support for the efficacy
of the drug in the indication being studied.
If a compound demonstrates evidence of effectiveness and an
acceptable safety profile in Phase II trials,
Phase III trials are undertaken to further evaluate
clinical efficacy and to further test for safety in an expanded
patient population, typically at geographically dispersed
clinical trial sites. Phase I, Phase II or
Phase III testing of any product candidates may not be
completed successfully within any specified time period, if at
all. After successful completion of the required clinical
testing, generally an NDA is prepared and submitted to the FDA.
We believe that any RNAi product candidate we develop, whether
for RSV, pandemic flu, hypercholesterolemia, neuropathic pain,
PD, SCI, Huntingtons, Ebola or CF will be regulated as a new
drug by the FDA. FDA approval of the NDA is required before
marketing of the product may begin in the United States. The NDA
must include the results of extensive clinical and other
testing, as described above, and a compilation of data relating
to the products pharmacology, chemistry, manufacture and
controls. In addition, an NDA for a new active ingredient, new
indication, new dosage form, new dosing regimen, or new route of
administration must contain data assessing the safety and
efficacy for the claimed indication in all relevant pediatric
subpopulations. In some circumstances, the FDA may grant
deferrals for the submission of pediatric data, or full or
partial waivers. The cost of preparing and submitting an NDA is
substantial. Under federal law, NDAs are subject to substantial
application user fees and the sponsor of an approved NDA is also
subject to annual product and establishment user fees.
The FDA has 60 days from its receipt of an NDA to determine
whether the application will be accepted for filing based on the
agencys threshold determination that the NDA is
sufficiently complete to permit substantive review. Once the
submission is accepted for filing, the FDA begins an in-depth
review of the NDA. The review process is often significantly
extended by FDA requests for additional information or
clarification regarding information already provided in the
submission. The FDA may also refer applications for novel drug
products or drug products which present difficult questions of
safety or efficacy to an advisory committee, typically a panel
that includes clinicians and other experts, for review,
evaluation and a recommendation as to whether the application
should be approved. The FDA is not bound by the recommendation
of an advisory committee. The FDA normally also will conduct a
pre-approval inspection to ensure the manufacturing facility,
methods and controls are adequate to preserve the drugs
identity, strength, quality, purity and stability, and are in
compliance with regulations governing current good manufacturing
practices, or CGMPs.
If the FDA evaluation of the NDA and the inspection of
manufacturing facilities are favorable, the FDA may issue an
approval letter or an approvable letter followed by an approval
letter. An approvable letter generally contains a statement of
specific conditions that must be met in order to secure final
approval of the NDA. If and when those conditions have been met
to the FDAs satisfaction, the FDA will typically issue an
approval letter. An approval letter authorizes commercial
marketing of the drug with specific prescribing information for
a specific indication. As a condition of NDA approval, the FDA
may require post approval testing, including phase trials, and
surveillance to monitor the drugs safety or efficacy and
may impose other conditions, including labeling restrictions,
which can materially impact the potential market and
profitability of the drug. Once granted, product approvals may
be withdrawn if compliance with regulatory standards is not
maintained or problems are identified following initial
marketing.
While we believe that any RNAi therapeutic we develop will be
regulated as a new drug under the Federal Food, Drug, and
Cosmetic Act, the FDA could decide to regulate certain RNAi
therapeutic products as biologics under the Public Health
Service Act. Biologics must have a biologics license
application, or BLA, approved prior to commercialization. Like
NDA, BLAs are subject to user fees. To obtain BLA approval, an
applicant must provide non-clinical and clinical evidence and
other information to demonstrate that the biologic product is
safe, pure and potent, and like NDAs, must complete clinical
trials that are typically conducted in three sequential phases
(Phase I, II and III). Additionally, the applicant
must demonstrate that the facilities in which the product is
manufactured, processed, packed or held meet standards,
including CGMPs and any additional standards in the
23
license designed to ensure its continued safety, purity and
potency. Biologics establishments are subject to pre-approval
inspections. The review process for BLAs is also time consuming
and uncertain, and BLA approval may be conditioned on post
approval testing and surveillance. Once granted, BLA approvals
may be suspended or revoked under certain circumstances, such as
if the product fails to conform to the standards established in
the license.
Once an NDA or BLA is approved, a product will be subject to
certain post-approval requirements, including requirements for
adverse event reporting and submission of periodic reports.
Additionally, the FDA also strictly regulates the promotional
claims that may be made about prescription drug products and
biologics. In particular, a drug or biologic may not be promoted
for uses that are not approved by the FDA as reflected in the
products approved labeling. In addition, the FDA requires
substantiation of any claims of superiority of one product over
another, including that such claims be proven by adequate and
well-controlled
head-to-head
clinical trials. To the extent that market acceptance of our
products may depend on their superiority over existing
therapies, any restriction on our ability to advertise or
otherwise promote claims of superiority, or requirements to
conduct additional expensive clinical trials to provide proof of
such claims, could negatively affect the sales of our products
or our costs. We must also notify the FDA of any change in an
approved product beyond variations already allowed in the
approval. Certain changes to the product, its labeling or its
manufacturing require prior FDA approval and may require the
conduct of further clinical investigations to support the
change. Such approvals may be expensive and time-consuming and,
if not approved, the product will not be allowed to be marketed
as modified.
If the FDAs evaluation of the NDA submission or
manufacturing facilities is not favorable, the FDA may refuse to
approve the NDA or issue a not approvable letter. The not
approvable letter outlines the deficiencies in the submission
and often requires additional testing or information in order
for the FDA to reconsider the application. Even after submitting
this additional information, the FDA ultimately may decide that
the application does not satisfy the regulatory criteria for
approval. With limited exceptions, the FDA may withhold approval
of an NDA regardless of prior advice it may have provided or
commitments it may have made to the sponsor.
Some of our drug candidates may need to be administered using
specialized drug delivery systems. We may rely on drug delivery
systems that are already approved to deliver drugs like ours to
similar physiological sites or, in some instances, we may need
to modify the design or labeling of the legally available device
for delivery of our product candidate. In such an event, the FDA
may regulate the product as a combination product or require
additional approvals or clearances for the modified device. In
addition, to the extent the delivery device is owned by another
company, we would need that companys cooperation to
implement the necessary changes to the device and to obtain any
additional approvals or clearances. Obtaining such additional
approvals or clearances, and cooperation of other companies,
when necessary, could significantly delay, and increase the cost
of obtaining marketing approval, which could reduce the
commercial viability of a drug candidate.
Once an NDA is approved, the product covered thereby becomes a
listed drug that can, in turn, be cited by potential competitors
in support of approval of an abbreviated new drug application,
or ANDA. An approved ANDA provides for marketing of a drug
product that has the same active ingredients in the same
strength, dosage form and route of administration as the listed
drug and has been shown through bioequivalence testing to be
therapeutically equivalent to the listed drug. There is no
requirement, other than the requirement for bioequivalence
testing, for an ANDA applicant to conduct or submit results of
non-clinical or clinical tests to prove the safety or
effectiveness of its drug product. Drugs approved in this way
are commonly referred to as generic equivalents to the listed
drug, are listed as such by the FDA, and can often be
substituted by pharmacists under prescriptions written for the
original listed drug.
Federal law provides for a period of three years of exclusivity
following approval of a listed drug that contains previously
approved active ingredients but is approved in a new dosage,
dosage form, route of administration or combination, or for a
new use, if the FDA deems that the approval of such drug was
required to be supported by new clinical trials conducted by or
for the sponsor. During such three-year exclusivity period, the
FDA cannot grant
24
approval of an abbreviated new drug application to commercially
distribute a generic version of the drug based on that listed
drug. However, the FDA can approve generic or other versions of
that listed drug, such as a drug that is the same in every way
but its indication for use, and thus the value of such
exclusivity may be undermined. Federal law also provides a
period of up to five years exclusively following approval of a
drug containing no previously approved active ingredients,
during which ANDAs for generic versions of those drugs cannot be
submitted unless the submission accompanies a challenge to a
listed patent, in which case the submission may be made four
years following the original product approval.
Additionally, in the event that the sponsor of the listed drug
has properly informed the FDA of patents covering its listed
drug, applicants submitting an ANDA referencing that drug, are
required to make one of four patent certifications, including
certifying that it believes one or more listed patents are
invalid or not infringed. If an applicant certifies invalidity
or non-infringement, it is required to provide notice of its
filing to the NDA sponsor and the patent holder. If the patent
holder then initiates a suit for patent infringement against the
ANDA sponsor within 45 days of receipt of the notice, the
FDA cannot grant effective approval of the ANDA until either
30 months have passed or there has been a court decision
holding that the patents in question are invalid, unenforceable
or not infringed. If the patent holder does not initiate a suit
for patent infringement within the 45 days, the ANDA may be
approved immediately upon successful completion of FDA review,
unless blocked by a regulatory exclusivity period. If the ANDA
applicant certifies that it does not intend to market its
generic product before some or all listed patents on the listed
drug expire, then the FDA cannot grant effective approval of the
ANDA until those patents expire. The first of the ANDA
applicants submitting substantially complete applications
certifying that one or more listed patents for a particular
product are invalid or not infringed may qualify for an
exclusivity period of 180 days running from when the
generic product is first marketed, during which subsequently
submitted ANDAs cannot be granted effective approval. The
180-day
generic exclusivity can be forfeited in various ways, including
if the first applicant does not market its product within
specified statutory timelines. If more than one applicant files
a substantially complete ANDA on the same day, each such first
applicant will be entitled to share the
180-day
exclusivity period, but there will only be one such period,
beginning on the date of first marketing by any of the first
applicants.
From time to time legislation is drafted and introduced in
Congress that could significantly change the statutory
provisions governing the approval, manufacturing and marketing
of drug products. In addition, FDA regulations and guidance are
often revised or reinterpreted by the agency in ways that may
significantly affect our business and our products. It is
impossible to predict whether legislative changes will be
enacted, or FDA regulations, guidance or interpretations
changed, or what the impact of such changes, if any, may be.
Foreign
Regulation of New Drug Compounds
Approval of a drug or biologic product by comparable regulatory
authorities will be necessary in all or most foreign countries
prior to the commencement of marketing of the product in those
countries, whether or not FDA approval has been obtained. The
approval procedure varies among countries and can involve
requirements for additional testing. The time required may
differ from that required for FDA approval. Although there are
some procedures for unified filings in the European Union, in
general, each country has its own procedures and requirements,
many of which are time consuming and expensive. Thus, there can
be substantial delays in obtaining required approvals from
foreign regulatory authorities after the relevant applications
are filed.
In Europe, marketing authorizations may be submitted under a
centralized or decentralized procedure. The centralized
procedure is mandatory for the approval of biotechnology and
many pharmaceutical products and provides for the grant of a
single marketing authorization that is valid in all European
Union member states. The decentralized procedure is a mutual
recognition procedure that is available at the request of the
applicant for medicinal products that are not subject to the
centralized procedure. We will strive to choose the appropriate
route of European regulatory filing to accomplish the most rapid
regulatory approvals. However, our chosen regulatory strategy
may not secure regulatory approvals on a timely basis or at all.
25
Hazardous
Materials
Our research and development processes involve the controlled
use of hazardous materials, chemicals and radioactive materials
and produce waste products. We are subject to federal, state and
local laws and regulations governing the use, manufacture,
storage, handling and disposal of hazardous materials and waste
products. We do not expect the cost of complying with these laws
and regulations to be material.
Manufacturing
We have no commercial manufacturing capabilities. We may
manufacture material for use in IND-enabling toxicology studies
in animals at our own facilities, but we do not anticipate
manufacturing the substantial portion of material for human
clinical use ourselves. We have contracted with several third
party contract manufacturing organizations for the supply of
certain amounts of material to meet our testing needs for
preclinical toxicology and clinical testing. Commercial
quantities of any drugs that we may seek to develop will have to
be manufactured in facilities, and by processes, that comply
with FDA regulations and other federal, state and local
regulations. We plan to rely on third parties to manufacture
commercial quantities of any product that we successfully
develop. Under our agreement with Isis, at our request, we may
negotiate a manufacturing services agreement with Isis for
double-stranded RNA products designated to work through an RNAi
mechanism.
Scientific
Advisors
We seek advice from our scientific advisory board, which
consists of a number of leading scientists and physicians, on
scientific and medical matters. Our scientific advisory board
meets regularly to assess:
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our research and development programs;
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the design and implementation of our clinical programs;
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our patent and publication strategies;
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new technologies relevant to our research and development
programs; and
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specific scientific and technical issues relevant to our
business.
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The current members of our scientific advisory board are:
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Name
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Position/Institutional Affiliation
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David P. Bartel, Ph.D.
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Professor/Whitehead Institute for
Medical Research
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Fritz Eckstein, Ph.D.
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Professor/Max Planck Institute
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Edward E. Harlow, Ph.D.
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Professor/Harvard Medical School
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Robert S. Langer, Ph.D.
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Germeshausen
Professor/Massachusetts Institute of Technology
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Judy
Lieberman, M.D., Ph.D.
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Senior Investigator/CBR Institute
for Biomedical Research
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Paul R. Schimmel, Ph.D.
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Ernest and Jean Hahn
Professor/Skaggs Institute for Chemical Biology
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Phillip A. Sharp, Ph.D.
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Institute Professor/MIT Center for
Cancer Research
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Markus
Stoffel, M.D., Ph.D.
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Professor/ Institute of Molecular
Systems Biology at the ETH Zurich
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Thomas H. Tuschl, Ph.D.
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Associate Professor/Rockefeller
University
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Phillip D. Zamore, Ph.D.
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Professor/University of
Massachusetts Medical School
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Employees
As of February 28, 2007, we had 122 full-time
equivalent employees, 101 of whom were engaged in research and
development. None of our employees is represented by a labor
union or covered by a collective bargaining agreement, nor have
we experienced work stoppages. We believe that relations with
our employees are good.
26
Financial
Information About Geographic Areas
See Note 2 to our Consolidated Financial Statements,
entitled Segment and Geographic Data, for financial
information about geographic areas. The Notes to our
Consolidated Financial Statements are contained herein in
Item 8.
Corporate
Information
Alnylam Pharmaceuticals, Inc. was incorporated in Delaware in
May 2003. Alnylam Europe AG, which was incorporated in Germany
in June 2000 under the name Ribopharma AG, and Alnylam U.S.,
Inc., which was incorporated in Delaware in June 2002, are
wholly owned subsidiaries of Alnylam Pharmaceuticals, Inc.
Alnylam Pharmaceuticals, Inc. acquired Alnylam Europe AG in July
2003. Our principal executive office is located at 300 Third
Street, Cambridge, Massachusetts 02142, and our telephone number
is
(617) 551-8200.
Investor
Information
We maintain an internet website at www.alnylam.com. The
information on our website is not incorporated by reference into
this Annual Report on
Form 10-K
and should not be considered to be a part of this Annual Report
on
Form 10-K.
Our website address is included in this Annual Report on
Form 10-K
as an inactive technical reference only. Our reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, including our annual reports on
Form 10-K,
our quarterly reports on
Form 10-Q
and our current reports on
Form 8-K,
and amendments to those reports, are accessible through our
website, free of charge, as soon as reasonably practicable after
these reports are filed electronically with, or otherwise
furnished to, the Securities and Exchange Commission, or SEC. We
also make available on our web site the charters of our audit
committee, compensation committee and nominating and corporate
governance committee, and our code of business conduct and
ethics. In addition, we intend to disclose on our web site any
amendments to, or waivers from, our code of business conduct and
ethics that are required to be disclosed pursuant to the SEC
rules.
Executive
Officers of the Registrant
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Name
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Age
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Position
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John M.
Maraganore, Ph.D.
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President, Chief Executive Officer
and Director
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Barry E. Greene
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Chief Operating Officer
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Patricia L. Allen
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Vice President of Finance and
Treasurer
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John M. Maraganore, Ph.D. has served as our
President and Chief Executive Officer and as a member of our
board of directors since December 2002. From April 2000 to
December 2002, Dr. Maraganore served as Senior Vice
President, Strategic Product Development for Millennium
Pharmaceuticals, Inc., a biopharmaceutical company.
Dr. Maraganore serves as a member of the board of directors
of the Biotechnology Industry Organization (BIO).
Barry E. Greene has served as our Chief Operating Officer
since he joined us in October 2003 and served as our Treasurer
from February 2004 through December 2005. From February 2001 to
September 2003, Mr. Greene served as General Manager of
Oncology at Millennium Pharmaceuticals, Inc., a
biopharmaceutical company. Mr. Greene serves as a member of
the board of directors of Acorda Therapeutics, Inc., a
biotechnology company.
Patricia L. Allen has served as our Vice President of
Finance since she joined us in May 2004 and as our Treasurer
since January 2006. From March 1992 to May 2004, Ms. Allen
held various positions at Alkermes, Inc., a biopharmaceutical
company, most recently as the Director of Finance.
Ms. Allen is a certified public accountant.
27
Our business is subject to numerous risks. We caution you
that the following important factors, among others, could cause
our actual results to differ materially from those expressed in
forward-looking statements made by us or on our behalf in
filings with the SEC, press releases, communications with
investors and oral statements. Any or all of our forward-looking
statements in this Annual Report on
Form 10-K
and in any other public statements we make may turn out to be
wrong. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many
factors mentioned in the discussion below will be important in
determining future results. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary
materially from those anticipated in forward-looking statements.
We undertake no obligation to update any forward-looking
statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any
further disclosure we make in our reports filed with the SEC.
Risks
Related to Our Business
Risks
Related to Being an Early Stage Company
Because
we have a short operating history, there is a limited amount of
information about us upon which you can evaluate our business
and prospects.
Our operations began in June 2002 and we have only a limited
operating history upon which you can evaluate our business and
prospects. In addition, as an early stage company, we have
limited experience and have not yet demonstrated an ability to
successfully overcome many of the risks and uncertainties
frequently encountered by companies in new and rapidly evolving
fields, particularly in the biopharmaceutical area. For example,
to execute our business plan, we will need to successfully:
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execute product development activities using an unproven
technology;
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build and maintain a strong intellectual property portfolio;
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gain acceptance for the development and commercialization of our
products;
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develop and maintain successful strategic relationships; and
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manage our spending as costs and expenses increase due to
clinical trials, regulatory approvals and commercialization.
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If we are unsuccessful in accomplishing these objectives, we may
not be able to develop product candidates, raise capital, expand
our business or continue our operations.
The
approach we are taking to discover and develop novel drugs is
unproven and may never lead to marketable
products.
We have concentrated our efforts and therapeutic product
research on RNAi technology, and our future success depends on
the successful development of this technology and products based
on RNAi technology. Neither we nor any other company has
received regulatory approval to market therapeutics utilizing
small interfering RNAs, or siRNAs, the class of molecule we are
trying to develop into drugs. The scientific discoveries that
form the basis for our efforts to discover and develop new drugs
are relatively new. The scientific evidence to support the
feasibility of developing drugs based on these discoveries is
both preliminary and limited. Skepticism as to the feasibility
of developing RNAi therapeutics has been expressed in scientific
literature. For example, there are potential challenges to
achieving safe RNAi therapeutics based on the so-called
off-target effects and activation of the interferon response.
There are also potential challenges to achieving effective RNAi
therapeutics based on the need to achieve efficient delivery
into cells and tissues in a clinically relevant manner and at
doses that are cost-effective.
Very few drug candidates based on these discoveries have ever
been tested in animals or humans. siRNAs may not naturally
possess the inherent properties typically required of drugs,
such as the ability to be stable in the body long enough to
reach the tissues in which their effects are required, nor the
ability to enter cells within these tissues in order to exert
their effects. We currently have only limited data, and no
conclusive evidence, to suggest that we
28
can introduce these drug-like properties into siRNAs. We may
spend large amounts of money trying to introduce these
properties, and may never succeed in doing so. In addition,
these compounds may not demonstrate in patients the chemical and
pharmacological properties ascribed to them in laboratory
studies, and they may interact with human biological systems in
unforeseen, ineffective or harmful ways. As a result, we may
never succeed in developing a marketable product. If we do not
successfully develop and commercialize drugs based upon our
technological approach, we may not become profitable and the
value of our common stock will decline.
Further, our focus solely on RNAi technology for developing
drugs as opposed to multiple, more proven technologies for drug
development, increases the risks associated with the ownership
of our common stock. If we are not successful in developing a
product candidate using RNAi technology, we may be required to
change the scope and direction of our product development
activities. In that case, we may not be able to identify and
implement successfully an alternative product development
strategy.
Risks
Related to Our Financial Results and Need for
Financing
We
have a history of losses and may never be
profitable.
We have experienced significant operating losses since our
inception. As of December 31, 2006, we had an accumulated
deficit of $140.5 million. To date, we have not developed
any products nor generated any revenues from the sale of
products. Further, we do not expect to generate any such
revenues in the foreseeable future. We expect to continue to
incur annual net operating losses over the next several years as
we expand our efforts to discover, develop and commercialize
RNAi therapeutics. We anticipate that the majority of any
revenue we generate over the next several years will be from
collaborations with pharmaceutical companies or funding from
contracts with the government, but cannot be certain that we
will be able to secure or maintain these collaborations or
contracts or to meet the obligations or achieve any milestones
that we may be required to meet or achieve to receive payments.
If we are unable to secure revenue from collaborations, we may
be unable to continue our efforts to discover, develop and
commercialize RNAi therapeutics without raising financing from
other sources.
To become and remain profitable, we must succeed in developing
and commercializing novel drugs with significant market
potential. This will require us to be successful in a range of
challenging activities, including pre-clinical testing and
clinical trial stages of development, obtaining regulatory
approval for these novel drugs, and manufacturing, marketing and
selling them. We may never succeed in these activities, and may
never generate revenues that are significant enough to achieve
profitability. Even if we do achieve profitability, we may not
be able to sustain or increase profitability on a quarterly or
annual basis. If we cannot become and remain profitable, the
market price of our common stock could decline. In addition, we
may be unable to raise capital, expand our business, diversify
our product offerings or continue our operations.
We
will require substantial additional funds to complete our
research and development activities and if additional funds are
not available we may need to critically limit, significantly
scale back or cease our operations.
We have used substantial funds to develop our RNAi technologies
and will require substantial funds to conduct further research
and development, including pre-clinical testing and clinical
trials of any product candidates, and to manufacture and market
any products that are approved for commercial sale. Because the
successful development of our products is uncertain, we are
unable to estimate the actual funds we will require to develop
and commercialize them.
Our future capital requirements and the period for which we
expect our existing resources to support our operations may vary
from what we expect. We have based our expectations on a number
of factors, many of which are difficult to predict or are
outside of our control, including:
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our progress in demonstrating that siRNAs can be active as drugs;
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our ability to develop relatively standard procedures for
selecting and modifying siRNA drug candidates;
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progress in our research and development programs, as well as
the magnitude of these programs;
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the timing, receipt and amount of milestone and other payments,
if any, from present and future collaborators, if any;
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the timing, receipt and amount of funding under current and
future government contracts, if any;
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our ability to establish and maintain additional collaborative
arrangements;
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the resources, time and costs required to initiate and complete
our pre-clinical and clinical trials, obtain regulatory
approvals, protect our intellectual property and obtain and
maintain licenses to third-party intellectual property; and
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the timing, receipt and amount of sales and royalties, if any,
from our potential products.
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If our estimates and predictions relating to these factors are
incorrect, we may need to modify our operating plan.
We will be required to seek additional funding in the future and
intend to do so through either collaborative arrangements,
public or private equity offerings or debt financings, or a
combination of one or more of these funding sources. Additional
funds may not be available to us on acceptable terms or at all.
In addition, the terms of any financing may adversely affect the
holdings or the rights of our stockholders. For example, if we
raise additional funds by issuing equity securities, further
dilution to our stockholders will result. In addition, our
investor rights agreement with Novartis provides Novartis with
the right generally to maintain its ownership percentage in
Alnylam. While the exercise of this right may provide us with
additional funding under some circumstances, Novartis
exercise of this right will also cause further dilution to our
stockholders. Debt financing, if available, may involve
restrictive covenants that could limit our flexibility in
conducting future business activities. If we are unable to
obtain funding on a timely basis, we may be required to
significantly curtail one or more of our research or development
programs. We also could be required to seek funds through
arrangements with collaborators or others that may require us to
relinquish rights to some of our technologies, product
candidates or products that we would otherwise pursue on our own.
If the
estimates we make, or the assumptions on which we rely, in
preparing our financial statements prove inaccurate, our actual
results may vary from those reflected in our projections and
accruals.
Our financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of
our assets, liabilities, revenues and expenses, the amounts of
charges accrued by us and related disclosure of contingent
assets and liabilities. We base our estimates on historical
experience and on various other assumptions that we believe to
be reasonable under the circumstances. We cannot assure you,
however, that our estimates, or the assumptions underlying them,
will be correct.
Risks
Related to Our Dependence on Third Parties
Our
collaboration with Novartis is important to our business. If
this collaboration is unsuccessful, Novartis terminates this
collaboration or this collaboration results in competition
between us and Novartis for the development of drugs targeting
the same diseases, our business could be adversely
affected.
In October 2005, we entered into a collaboration agreement with
Novartis. Under this agreement, Novartis will select disease
targets towards which the parties will collaborate to develop
drug candidates. Novartis will pay a portion of the costs to
develop these drug candidates and will commercialize and market
any products derived from this collaboration. In addition,
Novartis will pay us certain pre-determined amounts based on the
achievement of pre-clinical and clinical milestones as well as
royalties on the annual net sales of any products derived from
this collaboration. This collaboration has an initial term of
three years that may be extended by Novartis for two additional
one-year terms. Novartis may elect to terminate this
collaboration after two years under some circumstances or in the
event of a material uncured breach by us. We expect that a
substantial amount of the funding for our operations will come
from this collaboration. If this collaboration is unsuccessful,
or if it is terminated, our business could be adversely affected.
30
This agreement also provides Novartis with a non-exclusive
option to integrate our intellectual property into
Novartis operations and develop products without our
involvement for a pre-determined fee. If Novartis elects to
exercise this option, Novartis could become a competitor of ours
in the development of RNAi-based drugs targeting the same
diseases. Novartis has significantly greater financial resources
than we do and has far more experience in developing and
marketing drugs, which could put us at a competitive
disadvantage if we were to compete with Novartis in the
development of RNAi-based drugs targeting the same disease. The
exercise by Novartis of this option could adversely affect our
business.
Our agreement with Novartis allows us to continue to develop
products on our own with respect to targets not selected by
Novartis for inclusion in the collaboration. We may need to form
additional alliances to develop products. However, our agreement
with Novartis provides Novartis with a right of first offer in
the event that we propose to enter into an agreement with a
third party with respect to such targets. This right of first
offer may make it difficult for us to form future alliances with
other parties, which could impair development of our own
products. If we are unable to develop products independent of
Novartis, our business could be adversely affected.
We may
not be able to execute our business strategy if we are unable to
enter into alliances with other companies that can provide
capabilities and funds for the development and commercialization
of our drug candidates. If we are unsuccessful in forming or
maintaining these alliances on favorable terms, our business may
not succeed.
We do not have any capability for sales, marketing or
distribution and have limited capabilities for drug development.
Accordingly, we have entered into alliances with other companies
that can provide such capabilities and may need to enter into
additional alliances in the future. For example, we may enter
into alliances with major pharmaceutical companies to jointly
develop specific drug candidates and to jointly commercialize
them if they are approved. In such alliances, we would expect
our pharmaceutical collaborators to provide substantial
capabilities in clinical development, regulatory affairs,
marketing and sales. We may not be successful in entering into
any such alliances on favorable terms due to various factors
including Novartis right of first offer. Even if we do
succeed in securing such alliances, we may not be able to
maintain them if, for example, development or approval of a drug
candidate is delayed or sales of an approved drug are
disappointing. Furthermore, any delay in entering into
collaboration agreements could delay the development and
commercialization of our drug candidates and reduce their
competitiveness even if they reach the market. Any such delay
related to our collaborations could adversely affect our
business.
For certain drug candidates that we may develop, we have formed
collaborations to fund all or part of the costs of drug
development and commercialization, such as our collaborations
with Novartis, as well as collaborations with Merck, Medtronic,
Biogen Idec and the NIAID, a component of the NIH. We may not,
however, be able to enter into additional collaborations, and
the terms of any collaboration agreement we do secure may not be
favorable to us. If we are not successful in our efforts to
enter into future collaboration arrangements with respect to a
particular drug candidate, we may not have sufficient funds to
develop this or any other drug candidate internally, or to bring
any drug candidates to market. If we do not have sufficient
funds to develop and bring our drug candidates to market, we
will not be able to generate sales revenues from these drug
candidates, and this will substantially harm our business.
If any
collaborator terminates or fails to perform its obligations
under agreements with us, the development and commercialization
of our drug candidates could be delayed or
terminated.
Our dependence on collaborators for capabilities and funding
means that our business would be adversely affected if any
collaborator terminates its collaboration agreement with us or
fails to perform its obligations under that agreement. Our
current or future collaborations, if any, may not be
scientifically or commercially successful. Disputes may arise in
the future with respect to the ownership of rights to technology
or products developed with collaborators, which could have an
adverse effect on our ability to develop and commercialize any
affected product candidate.
Our current collaborations allow, and we expect that any future
collaborations will allow, either party to terminate the
collaboration for a material breach by the other party. If a
collaborator terminates its collaboration
31
with us, for breach or otherwise, it would be difficult for us
to attract new collaborators and could adversely affect how we
are perceived in the business and financial communities. In
addition, a collaborator could determine that it is in its
financial interest to:
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pursue alternative technologies or develop alternative products,
either on its own or jointly with others, that may be
competitive with the products on which it is collaborating with
us or which could affect its commitment to the collaboration
with us;
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pursue higher-priority programs or change the focus of its
development programs, which could affect the collaborators
commitment to us; or
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if it has marketing rights, choose to devote fewer resources to
the marketing of our product candidates, if any are approved for
marketing, than it does for product candidates of its own
development.
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If any of these occur, the development and commercialization of
one or more drug candidates could be delayed, curtailed or
terminated because we may not have sufficient financial
resources or capabilities to continue such development and
commercialization on our own.
We
depend on a government contract to partially fund our research
and development efforts and may enter into additional government
contracts in the future. If current or future government
funding, if any, is reduced or delayed, our drug development
efforts may be negatively affected.
In September 2006, the NIAID awarded us a contract for up to
$23 million over four years to advance the development of a
broad spectrum RNAi anti-viral therapeutic against hemorrhagic
fever virus, including the Ebola virus. Of the $23 million,
the government has committed to pay us $14.2 million over
the first two years of the contract and, subject to budgetary
considerations in future years, the remaining $8.8 million
over the last two years of the contract. We cannot be certain
that the government will appropriate the funds necessary for
this contract in future budgets. In addition, the government can
terminate the agreement in specified circumstances. If we do not
receive the $23 million we expect to receive under this
contract, we may not be able to develop therapeutics to treat
Ebola.
We
have very limited manufacturing experience or resources and we
must incur significant costs to develop this expertise or rely
on third parties to manufacture our products.
We have very limited manufacturing experience. Our internal
manufacturing capabilities are limited to small-scale production
of non-good manufacturing practice material for use in
in vitro and in vivo experiments. Our
products may also depend upon the use of specialized
formulations, such as liposomes, whose
scale-up and
manufacturing could also be very difficult. We also have very
limited experience of such
scale-up and
manufacturing, requiring us to depend on third parties, who
might not be able to deliver at all or in a timely manner. In
order to develop products, apply for regulatory approvals and
commercialize our products, we will need to develop, contract
for, or otherwise arrange for the necessary manufacturing
capabilities. We may manufacture clinical trial materials
ourselves or we may rely on others to manufacture the materials
we will require for any clinical trials that we initiate. Only a
limited number of manufacturers supply synthetic RNAi. We
currently rely on several contract manufacturers for our supply
of synthetic RNAi. There are risks inherent in pharmaceutical
manufacturing that could affect the ability of our contract
manufacturers to meet our delivery time requirements or provide
adequate amounts of material to meet our needs. Included in
these risks are synthesis and purification failures and
contamination during the manufacturing process, both of which
could result in unusable product and cause delays in our
development process. In addition, to fulfill our RNAi
requirements we may need to secure alternative suppliers of
synthetic RNAi. The manufacturing process for any products that
we may develop is an element of the U.S. Food and Drug
Administration, or FDA, approval process and we will need to
contract with manufacturers who can meet all applicable FDA
requirements on an ongoing basis. In addition, if we receive the
necessary regulatory approval for any product candidate, we also
expect to rely on third parties, including our commercial
collaborators, to produce materials required for commercial
production. We may experience difficulty in obtaining adequate
manufacturing capacity for our needs. If we are unable to obtain
or maintain contract manufacturing for these product candidates,
or to do so on commercially reasonable terms, we may not be able
to successfully develop and commercialize our products.
32
To the extent that we enter into manufacturing arrangements with
third parties, we will depend on these third parties to perform
their obligations in a timely manner and consistent with
regulatory requirements, including those related to quality
control and quality assurance. The failure of a third-party
manufacturer to perform its obligations as expected could
adversely affect our business in a number of ways, including:
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we may not be able to initiate or continue clinical trials of
products that are under development;
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we may be delayed in submitting applications for regulatory
approvals for our products;
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we may lose the cooperation of our collaborators;
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we may be required to cease distribution or recall some or all
batches of our products; and
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ultimately, we may not be able to meet commercial demands for
our products.
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If a third-party manufacturer with whom we contract fails to
perform its obligations, we may be forced to manufacture the
materials ourselves, for which we may not have the capabilities
or resources, or enter into an agreement with a different
third-party manufacturer, which we may not be able to do with
reasonable terms, if at all. In addition, if we are required to
change manufacturers for any reason, we will be required to
verify that the new manufacturer maintains facilities and
procedures that comply with quality standards and with all
applicable regulations and guidelines. The delays associated
with the verification of a new manufacturer could negatively
affect our ability to develop product candidates in a timely
manner or within budget. Furthermore, a manufacturer may possess
technology related to the manufacture of our product candidate
that such manufacturer owns independently. This would increase
our reliance on such manufacturer or require us to obtain a
license from such manufacturer in order to have another third
party manufacture our products.
We
have no sales, marketing or distribution experience and expect
to depend significantly on third parties who may not
successfully commercialize our products.
We have no sales, marketing or distribution experience. We
expect to rely heavily on third parties to launch and market
certain of our product candidates, if approved. We may have
limited or no control over the sales, marketing and distribution
activities of these third parties. Our future revenues may
depend heavily on the success of the efforts of these third
parties.
To develop internal sales, distribution and marketing
capabilities, we will have to invest significant amounts of
financial and management resources. For products where we decide
to perform sales, marketing and distribution functions
ourselves, we could face a number of additional risks, including:
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we may not be able to attract and build a significant marketing
or sales force;
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the cost of establishing a marketing or sales force may not be
justifiable in light of the revenues generated by any particular
product; and
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our direct sales and marketing efforts may not be successful.
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Risks
Related to Managing Our Operations
If we
are unable to attract and retain qualified key management and
scientists, staff consultants and advisors, our ability to
implement our business plan may be adversely
affected.
We are highly dependent upon our senior management and
scientific staff. The loss of the service of any of the members
of our senior management, including Dr. John Maraganore,
our President and Chief Executive Officer, may significantly
delay or prevent the achievement of product development and
other business objectives. Our employment agreements with our
key personnel are terminable without notice. We do not carry key
man life insurance on any of our key employees.
Although we have generally been successful in our recruiting
efforts, we face intense competition for qualified individuals
from numerous pharmaceutical and biotechnology companies,
universities, governmental entities and other research
institutions. We may be unable to attract and retain suitably
qualified individuals, and our failure to do so could have an
adverse effect on our ability to implement our business plan.
33
We may
have difficulty managing our growth and expanding our operations
successfully as we seek to evolve from a company primarily
involved in discovery and pre-clinical testing into one that
develops and commercializes drugs.
Since we commenced operations in 2002, we have grown to over 122
full time equivalent employees as of February 28, 2007,
with offices and laboratory space in both Cambridge,
Massachusetts and Kulmbach, Germany. This rapid and substantial
growth, and the geographical separation of our sites, has placed
a strain on our administrative and operational infrastructure,
and we anticipate that our continued growth will have a similar
impact. If drug candidates we develop enter and advance through
clinical trials, we will need to expand our development,
regulatory, manufacturing, marketing and sales capabilities or
contract with other organizations to provide these capabilities
for us. As our operations expand, we expect that we will need to
manage additional relationships with various collaborators,
suppliers and other organizations. Our ability to manage our
operations and growth will require us to continue to improve our
operational, financial and management controls, reporting
systems and procedures in at least two different countries. We
may not be able to implement improvements to our management
information and control systems in an efficient or timely manner
and may discover deficiencies in existing systems and controls.
If we
are unable to manage the challenges associated with our
international operations, the growth of our business could be
limited.
In addition to our operations in Cambridge, Massachusetts, we
operate an office and laboratory in Kulmbach, Germany. We are
subject to a number of risks and challenges that specifically
relate to these international operations. Our international
operations may not be successful if we are unable to meet and
overcome these challenges, which could limit the growth of our
business and may have an adverse effect on our business and
operating results. These risks include:
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fluctuations in foreign currency exchange rates that may
increase the U.S. dollar cost of our international
operations;
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difficulty managing operations in multiple locations, which
could adversely affect the progress of our product candidate
development program and business prospects;
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local regulations that may restrict or impair our ability to
conduct biotechnology-based research and development;
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foreign protectionist laws and business practices that favor
local competition; and
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failure of local laws to provide the same degree of protection
against infringement of our intellectual property, which could
adversely affect our ability to develop product candidates or
reduce future product or royalty revenues, if any, from product
candidates we may develop.
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Risks
Related to Our Industry
Risks
Related to Development, Clinical Testing and Regulatory Approval
of Our Drug Candidates
Any
drug candidates we develop may fail in development or be delayed
to a point where they do not become commercially
viable.
Pre-clinical testing and clinical trials of new drug candidates
are lengthy and expensive and the historical failure rate for
drug candidates is high. We are developing our most advanced
product candidate, ALN-RSV01, for the treatment of respiratory
syncytial virus, or RSV, infection. We recently completed two
Phase I clinical trials of ALN-RSV01 and began an
additional Phase I clinical trial in October 2006. In
addition, in November 2006, we announced that we had initiated a
human experimental infection study with RSV. We may not be able
to further advance this or any other product candidate through
clinical trials. If we successfully enter into clinical studies,
the results from pre-clinical testing of a drug candidate may
not predict the results that will be obtained in human clinical
trials. We, the FDA or other applicable regulatory authorities,
or an institutional review board, or IRB, may suspend clinical
trials of a drug candidate at any time for various reasons,
including if we or they believe the subjects
34
or patients participating in such trials are being exposed to
unacceptable health risks. Among other reasons, adverse side
effects of a drug candidate on subjects or patients in a
clinical trial could result in the FDA or foreign regulatory
authorities suspending or terminating the trial and refusing to
approve a particular drug candidate for any or all indications
of use.
Clinical trials of a new drug candidate require the enrollment
of a sufficient number of patients, including patients who are
suffering from the disease the drug candidate is intended to
treat and who meet other eligibility criteria. Rates of patient
enrollment are affected by many factors, including the size of
the patient population, the age and condition of the patients,
the nature of the protocol, the proximity of patients to
clinical sites, the availability of effective treatments for the
relevant disease and the eligibility criteria for the clinical
trial. Delays in patient enrollment can result in increased
costs and longer development times.
Clinical trials also require the review and oversight of IRBs,
which approve and continually review clinical investigations and
protect the rights and welfare of human subjects. Inability to
obtain or delay in obtaining IRB approval can prevent or delay
the initiation and completion of clinical trials, and the FDA
may decide not to consider any data or information derived from
a clinical investigation not subject to initial and continuing
IRB review and approval in support of a marketing application.
Our drug candidates that we develop may encounter problems
during clinical trials that will cause us or regulatory
authorities to delay, suspend or terminate these trials, or that
will delay the analysis of data from these trials. If we
experience any such problems, we may not have the financial
resources to continue development of the drug candidate that is
affected, or development of any of our other drug candidates. We
may also lose, or be unable to enter into, collaborative
arrangements for the affected drug candidate and for other drug
candidates we are developing.
Delays in clinical trials could reduce the commercial viability
of our drug candidates. Any of the following could delay our
clinical trials:
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delays in filing initial drug applications;
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conditions imposed on us by the FDA or comparable foreign
authorities regarding the scope or design of our clinical trials;
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problems in engaging IRBs to oversee trials or problems in
obtaining or maintaining IRB approval of studies;
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delays in enrolling patients and volunteers into clinical trials;
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high drop-out rates for patients and volunteers in clinical
trials;
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negative or inconclusive results from our clinical trials or the
clinical trials of others for drug candidates similar to ours;
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inadequate supply or quality of drug candidate materials or
other materials necessary for the conduct of our clinical trials;
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serious and unexpected drug-related side effects experienced by
participants in our clinical trials or by individuals using
drugs similar to our product candidate; or
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unfavorable FDA inspection and review of a clinical trial site
or records of any clinical or pre-clinical investigation.
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The
FDA approval process may be delayed for any drugs we develop
that require the use of specialized drug delivery
devices.
Some drug candidates that we develop may need to be administered
using specialized drug delivery devices that deliver RNAi
therapeutics directly to diseased parts of the body. We believe
that any product candidate we develop for Parkinsons
disease, or PD, Huntingtons disease, or HD, or other
central nervous system diseases may need to be administered
using such a device. For neurodegenerative diseases, we have
entered into a collaboration agreement with Medtronic to pursue
potential development of drug-device combinations incorporating
RNAi
35
therapeutics. We may not achieve successful development results
under this collaboration and may need to seek other
collaboration partners to develop alternative drug delivery
systems, or utilize existing drug delivery systems, for the
direct delivery of RNAi therapeutics for these diseases. While
we expect to rely on drug delivery systems that have been
approved by the FDA or other regulatory agencies to deliver
drugs like ours to similar physiological sites, we, or our
collaborator, may need to modify the design or labeling of such
delivery device for some products we may develop. In such an
event, the FDA may regulate the product as a combination product
or require additional approvals or clearances for the modified
delivery device. Further, to the extent the specialized delivery
device is owned by another company, we would need that
companys cooperation to implement the necessary changes to
the device, or its labeling, and to obtain any additional
approvals or clearances. In cases where we do not have an
ongoing collaboration with the company that makes the device,
obtaining such additional approvals or clearances and the
cooperation of such other company could significantly delay and
increase the cost of obtaining marketing approval, which could
reduce the commercial viability of our drug candidate. In
summary, we may be unable to find, or experience delays in
finding, suitable drug delivery systems to administer RNAi
therapeutics directly to diseased parts of the body, which could
negatively affect our ability to successfully commercialize
these RNAi therapeutics.
We may
be unable to obtain U.S. or foreign regulatory approval
and, as a result, be unable to commercialize our drug
candidates.
Our drug candidates are subject to extensive governmental
regulations relating to, among other things, research, testing,
development, manufacturing, safety, efficacy, recordkeeping,
labeling, marketing and distribution of drugs. Rigorous
pre-clinical testing and clinical trials and an extensive
regulatory approval process are required to be successfully
completed in the United States and in many foreign jurisdictions
before a new drug can be sold. Satisfaction of these and other
regulatory requirements is costly, time consuming, uncertain and
subject to unanticipated delays. It is possible that none of the
drug candidates we may develop will obtain the appropriate
regulatory approvals necessary for us or our collaborators to
begin selling them.
We have very little experience in conducting and managing the
clinical trials necessary to obtain regulatory approvals,
including approval by the FDA. The time required to obtain FDA
and other approvals is unpredictable but typically takes many
years following the commencement of clinical trials, depending
upon the complexity of the drug candidate. Any analysis we
perform of data from pre-clinical and clinical activities is
subject to confirmation and interpretation by regulatory
authorities, which could delay, limit or prevent regulatory
approval. We may also encounter unexpected delays or increased
costs due to new government regulations, for example, from
future legislation or administrative action, or from changes in
FDA policy during the period of product development, clinical
trials and FDA regulatory review.
Because the drugs we are intending to develop may represent a
new class of drug, the FDA has not yet established any
definitive policies, practices or guidelines in relation to
these drugs. While we expect any product candidates that we
develop will be regulated as a new drug under the Federal Food,
Drug, and Cosmetic Act, the FDA could decide to regulate them or
other products we may develop as biologics under the Public
Health Service Act. The lack of policies, practices or
guidelines may hinder or slow review by the FDA of any
regulatory filings that we may submit. Moreover, the FDA may
respond to these submissions by defining requirements we may not
have anticipated. Such responses could lead to significant
delays in the clinical development of our product candidates. In
addition, because there may be approved treatments for some of
the diseases for which we may seek approval, in order to receive
regulatory approval, we will need to demonstrate through
clinical trials that the product candidates we develop to treat
these diseases, if any, are not only safe and effective, but
safer or more effective than existing products.
Any delay or failure in obtaining required approvals could have
a material adverse effect on our ability to generate revenues
from the particular drug candidate. Furthermore, any regulatory
approval to market a product may be subject to limitations on
the indicated uses for which we may market the product. These
limitations may limit the size of the market for the product and
affect reimbursement by third-party payors.
We are also subject to numerous foreign regulatory requirements
governing the conduct of clinical trials, manufacturing and
marketing authorization, pricing and third-party reimbursement.
The foreign regulatory
36
approval process includes all of the risks associated with FDA
approval described above as well as risks attributable to the
satisfaction of local regulations in foreign jurisdictions.
Approval by the FDA does not assure approval by regulatory
authorities outside the United States.
If our
pre-clinical testing does not produce successful results or our
clinical trials do not demonstrate safety and efficacy in
humans, we will not be able to commercialize our drug
candidates.
Before obtaining regulatory approval for the sale of our drug
candidates, we must conduct, at our own expense, extensive
pre-clinical tests and clinical trials to demonstrate the safety
and efficacy in humans of our drug candidates. Pre-clinical and
clinical testing is expensive, difficult to design and
implement, can take many years to complete and is uncertain as
to outcome. Success in pre-clinical testing and early clinical
trials does not ensure that later clinical trials will be
successful, and interim results of a clinical trial do not
necessarily predict final results.
A failure of one of more of our clinical trials can occur at any
stage of testing. We may experience numerous unforeseen events
during, or as a result of, pre-clinical testing and the clinical
trial process that could delay or prevent our ability to receive
regulatory approval or commercialize our drug candidates,
including:
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regulators or IRBs may not authorize us to commence a clinical
trial or conduct a clinical trial at a prospective trial site;
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our pre-clinical tests or clinical trials may produce negative
or inconclusive results, and we may decide, or regulators may
require us, to conduct additional pre-clinical testing or
clinical trials, or we may abandon projects that we expect to be
promising;
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enrollment in our clinical trials may be slower than we
currently anticipate or participants may drop out of our
clinical trials at a higher rate than we currently anticipate,
resulting in significant delays;
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our third party contractors may fail to comply with regulatory
requirements or meet their contractual obligations to us in a
timely manner;
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we might have to suspend or terminate our clinical trials if the
participants are being exposed to unacceptable health risks;
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IRBs or regulators, including the FDA, may require that we hold,
suspend or terminate clinical research for various reasons,
including noncompliance with regulatory requirements;
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the cost of our clinical trials may be greater than we
anticipate;
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the supply or quality of our drug candidates or other materials
necessary to conduct our clinical trials may be insufficient or
inadequate; and
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effects of our drug candidates may not be the desired effects or
may include undesirable side effects or the drug candidates may
have other unexpected characteristics.
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Even
if we obtain regulatory approvals, our marketed drugs will be
subject to ongoing regulatory review. If we fail to comply with
continuing U.S. and foreign regulations, we could lose our
approvals to market drugs and our business would be seriously
harmed.
Following any initial regulatory approval of any drugs we may
develop, we will also be subject to continuing regulatory
review, including the review of adverse drug experiences and
clinical results that are reported after our drug products are
made commercially available. This would include results from any
post-marketing tests or vigilance required as a condition of
approval. The manufacturer and manufacturing facilities we use
to make any of our drug candidates will also be subject to
periodic review and inspection by the FDA. The discovery of any
new or previously unknown problems with the product,
manufacturer or facility may result in restrictions on the drug
or manufacturer or facility, including withdrawal of the drug
from the market. We do not have, and currently do not intend to
develop, the ability to manufacture material for our clinical
trials or on a commercial scale. We may manufacture clinical
trial materials or we may contract a third party to manufacture
these materials for us. Reliance on third-party manufacturers
entails risks to which we would not be subject if we
manufactured products ourselves,
37
including reliance on the third-party manufacturer for
regulatory compliance. Our product promotion and advertising is
also subject to regulatory requirements and continuing
regulatory review.
If we fail to comply with applicable continuing regulatory
requirements, we may be subject to fines, suspension or
withdrawal of regulatory approval, product recalls and seizures,
operating restrictions and criminal prosecution.
Even
if we receive regulatory approval to market our product
candidates, the market may not be receptive to our product
candidates upon their commercial introduction, which will
prevent us from becoming profitable.
The product candidates that we are developing are based upon new
technologies or therapeutic approaches. Key participants in
pharmaceutical marketplaces, such as physicians, third-party
payors and consumers, may not accept a product intended to
improve therapeutic results based on RNAi technology. As a
result, it may be more difficult for us to convince the medical
community and third-party payors to accept and use our product,
or to provide favorable reimbursement.
Other factors that we believe will materially affect market
acceptance of our product candidates include:
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the timing of our receipt of any marketing approvals, the terms
of any approvals and the countries in which approvals are
obtained;
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the safety, efficacy and ease of administration of our product
candidates;
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the willingness of patients to accept relatively new routes of
administration;
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the success of our physician education programs;
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the availability of government and third-party payor
reimbursement;
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the pricing of our products, particularly as compared to
alternative treatments; and
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availability of alternative effective treatments for the
diseases that product candidates we develop are intended to
treat and the relative risks
and/or
benefits of the treatments.
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Even
if we develop RNAi therapeutic products for the prevention or
treatment of infection by pandemic flu virus
and/or
Ebola, governments may not elect to purchase such products,
which could adversely affect our business.
We expect that governments will be the only purchasers of any
products we may develop for the prevention or treatment of
pandemic flu or Ebola. In the future, we may also initiate
additional programs for the development of product candidates
for which governments may be the only or primary purchasers.
However, governments will not be required to purchase any such
products from us and may elect not to do so, which could
adversely affect our business. For example, although the focus
of our flu program is to develop RNAi therapeutic targeting gene
sequences that are highly conserved across known flu viruses, if
the sequence of any flu virus that emerges is not sufficiently
similar to those we are targeting, any product candidate that we
develop may not be effective against that virus. Accordingly,
while we expect that any RNAi therapeutic we develop for the
treatment of pandemic flu could be stockpiled by governments as
part of their preparations for a flu pandemic, they may not
elect to purchase such product.
If we
or our collaborators, manufacturers or service providers fail to
comply with regulatory laws and regulations, we or they could be
subject to enforcement actions, which could affect our ability
to market and sell our products and may harm our
reputation.
If we or our collaborators, manufacturers or service providers
fail to comply with applicable federal, state or foreign laws or
regulations, we could be subject to enforcement actions, which
could affect our ability to develop,
38
market and sell our products under development successfully and
could harm our reputation and lead to reduced acceptance of our
products by the market. These enforcement actions include:
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warning letters;
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product recalls or public notification or medical product safety
alerts to healthcare professionals;
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restrictions on, or prohibitions against, marketing our products;
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restrictions on importation or exportation of our products;
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suspension of review or refusal to approve pending applications;
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suspension or withdrawal of product approvals;
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product seizures;
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injunctions; and
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civil and criminal penalties and fines.
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Any
drugs we develop may become subject to unfavorable pricing
regulations, third-party reimbursement practices or healthcare
reform initiatives, thereby harming our business.
The regulations that govern marketing approvals, pricing and
reimbursement for new drugs vary widely from country to country.
Some countries require approval of the sale price of a drug
before it can be marketed. In many countries, the pricing review
period begins after marketing or product licensing approval is
granted. In some foreign markets, prescription pharmaceutical
pricing remains subject to continuing governmental control even
after initial approval is granted. Although we intend to monitor
these regulations, our programs are currently in the early
stages of development and we will not be able to assess the
impact of price regulations for a number of years. As a result,
we might obtain regulatory approval for a product in a
particular country, but then be subject to price regulations
that delay our commercial launch of the product and negatively
impact the revenues we are able to generate from the sale of the
product in that country.
Our ability to commercialize any products successfully also will
depend in part on the extent to which reimbursement for these
products and related treatments will be available from
government health administration authorities, private health
insurers and other organizations. Even if we succeed in bringing
one or more products to the market, these products may not be
considered cost-effective, and the amount reimbursed for any
products may be insufficient to allow us to sell our products on
a competitive basis. Because our programs are in the early
stages of development, we are unable at this time to determine
their cost effectiveness and the level or method of
reimbursement. Increasingly, the third-party payors who
reimburse patients, such as government and private insurance
plans, are requiring that drug companies provide them with
predetermined discounts from list prices, and are challenging
the prices charged for medical products. If the price we are
able to charge for any products we develop is inadequate in
light of our development and other costs, our profitability
could be adversely affected.
We currently expect that any drugs we develop may need to be
administered under the supervision of a physician. Under
currently applicable law, drugs that are not usually
self-administered may be eligible for coverage by the Medicare
program if:
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they are incident to a physicians services;
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they are reasonable and necessary for the diagnosis
or treatment of the illness or injury for which they are
administered according to accepted standard of medical practice;
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they are not excluded as immunizations; and
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they have been approved by the FDA.
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There may be significant delays in obtaining coverage for
newly-approved drugs, and coverage may be more limited than the
purposes for which the drug is approved by the FDA. Moreover,
eligibility for coverage does not imply that any drug will be
reimbursed in all cases or at a rate that covers our costs,
including research,
39
development, manufacture, sale and distribution. Interim
payments for new drugs, if applicable, may also not be
sufficient to cover our costs and may not be made permanent.
Reimbursement may be based on payments allowed for lower-cost
drugs that are already reimbursed, may be incorporated into
existing payments for other services and may reflect budgetary
constraints or imperfections in Medicare data. Net prices for
drugs may be reduced by mandatory discounts or rebates required
by government health care programs or private payors and by any
future relaxation of laws that presently restrict imports of
drugs from countries where they may be sold at lower prices than
in the United States. Third party payors often rely upon
Medicare coverage policy and payment limitations in setting
their own reimbursement rates. Our inability to promptly obtain
coverage and profitable reimbursement rates from both
government-funded and private payors for new drugs that we
develop could have a material adverse effect on our operating
results, our ability to raise capital needed to commercialize
products, and our overall financial condition.
We believe that the efforts of governments and third-party
payors to contain or reduce the cost of healthcare will continue
to affect the business and financial condition of pharmaceutical
and biopharmaceutical companies. A number of legislative and
regulatory proposals to change the healthcare system in the
United States and other major healthcare markets have been
proposed in recent years. These proposals have included
prescription drug benefit legislation recently enacted in the
United States and healthcare reform legislation recently enacted
by certain states. Further federal and state legislative and
regulatory developments are possible and we expect ongoing
initiatives in the United States to increase pressure on drug
pricing. Such reforms could have an adverse effect on
anticipated revenues from drug candidates that we may
successfully develop.
Another development that may affect the pricing of drugs is
Congressional action regarding drug reimportation into the
United States. The Medicare Prescription Drug Plan legislation,
which became law in December 2003, required the Secretary of
Health and Human Services to promulgate regulations for drug
reimportation from Canada into the United States under some
circumstances, including when the drugs are sold at a lower
price than in the United States. The Secretary, however,
retained the discretion not to implement a drug reimportation
plan if he finds that the benefits do not outweigh the costs,
and has so far declined to approve a reimportation plan.
Proponents of drug reimportation may attempt to pass legislation
that would directly allow reimportation under certain
circumstances. Legislation or regulations allowing the
reimportation of drugs, if enacted, could decrease the price we
receive for any products that we may develop, negatively
affecting our anticipated revenues and prospects for
profitability.
Some states and localities have established drug importation
programs for their citizens, and federal drug import legislation
has been introduced in Congress. The FDA has warned that
imported drugs may be unsafe or illegal. If such programs become
more widespread or the federal government changes its position
against drug importation, prices we receive for any products
that we may develop may decrease, negatively affecting our
anticipated revenues and prospects for profitability.
There
is a substantial risk of product liability claims in our
business. If we are unable to obtain sufficient insurance, a
product liability claim against us could adversely affect our
business.
Our business exposes us to significant potential product
liability risks that are inherent in the development,
manufacturing and marketing of human therapeutic products.
Product liability claims could delay or prevent completion of
our clinical development programs. If we succeed in marketing
products, such claims could result in an FDA investigation of
the safety and effectiveness of our products, our manufacturing
processes and facilities or our marketing programs, and
potentially a recall of our products or more serious enforcement
action, limitations on the indications for which they may be
used, or suspension or withdrawal of approvals. We currently
have product liability insurance that we believe is appropriate
for our stage of development and may need to obtain higher
levels prior to marketing any of our drug candidates. Any
insurance we have or may obtain may not provide sufficient
coverage against potential liabilities. Furthermore, clinical
trial and product liability insurance is becoming increasingly
expensive. As a result, we may be unable to obtain sufficient
insurance at a reasonable cost to protect us against losses
caused by product liability claims that could have a material
adverse effect on our business.
40
If we
do not comply with laws regulating the protection of the
environment and health and human safety, our business could be
adversely affected.
Our research and development involves the use of hazardous
materials, chemicals and various radioactive compounds. We
maintain quantities of various flammable and toxic chemicals in
our facilities in Cambridge and Germany that are required for
our research and development activities. We are subject to
federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of these hazardous
materials. We believe our procedures for storing, handling and
disposing these materials in our Cambridge facility comply with
the relevant guidelines of the City of Cambridge and the
Commonwealth of Massachusetts and the procedures we employ in
our German facility comply with the standards mandated by
applicable German laws and guidelines. Although we believe that
our safety procedures for handling and disposing of these
materials comply with the standards mandated by applicable
regulations, the risk of accidental contamination or injury from
these materials cannot be eliminated. If an accident occurs, we
could be held liable for resulting damages, which could be
substantial. We are also subject to numerous environmental,
health and workplace safety laws and regulations, including
those governing laboratory procedures, exposure to blood-borne
pathogens and the handling of biohazardous materials.
Although we maintain workers compensation insurance to
cover us for costs and expenses we may incur due to injuries to
our employees resulting from the use of these materials, this
insurance may not provide adequate coverage against potential
liabilities. We do not maintain insurance for environmental
liability or toxic tort claims that may be asserted against us
in connection with our storage or disposal of biological,
hazardous or radioactive materials. Additional federal, state
and local laws and regulations affecting our operations may be
adopted in the future. We may incur substantial costs to comply
with, and substantial fines or penalties if we violate, any of
these laws or regulations.
Risks
Related to Competition
The
pharmaceutical market is intensely competitive. If we are unable
to compete effectively with existing drugs, new treatment
methods and new technologies, we may be unable to commercialize
successfully any drugs that we develop.
The pharmaceutical market is intensely competitive and rapidly
changing. Many large pharmaceutical and biotechnology companies,
academic institutions, governmental agencies and other public
and private research organizations are pursuing the development
of novel drugs for the same diseases that we are targeting or
expect to target. Many of our competitors have:
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much greater financial, technical and human resources than we
have at every stage of the discovery, development, manufacture
and commercialization of products;
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more extensive experience in pre-clinical testing, conducting
clinical trials, obtaining regulatory approvals, and in
manufacturing and marketing pharmaceutical products;
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product candidates that are based on previously tested or
accepted technologies;
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products that have been approved or are in late stages of
development; and
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collaborative arrangements in our target markets with leading
companies and research institutions.
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We will face intense competition from drugs that have already
been approved and accepted by the medical community for the
treatment of the conditions for which we may develop drugs. We
also expect to face competition from new drugs that enter the
market. We believe a significant number of drugs are currently
under development, and may become commercially available in the
future, for the treatment of conditions for which we may try to
develop drugs. For instance, we are currently evaluating RNAi
therapeutics for RSV, flu, hypercholesterolemia, PML, Ebola, HD,
PD, neuropathic pain, and CF. Virazole is currently marketed for
the treatment of certain RSV patients,
Tamiflu®
and
Relenza®
are marketed for the treatment of flu patients, numerous drugs
are currently marketed for the treatment of
hypercholesterolemia, PD and neuropathic pain and two drugs,
TOBI®
and
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Pulmozyme®,
are currently marketed for the treatment of CF. These drugs, or
other of our competitors products, may be more effective,
safer, less expensive or marketed and sold more effectively,
than any products we develop.
If we successfully develop drug candidates, and obtain approval
for them, we will face competition based on many different
factors, including:
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the safety and effectiveness of our products;
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the ease with which our products can be administered and the
extent to which patients accept relatively new routes of
administration;
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the timing and scope of regulatory approvals for these products;
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the availability and cost of manufacturing, marketing and sales
capabilities;
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price;
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reimbursement coverage; and
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patent position.
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Our competitors may develop or commercialize products with
significant advantages over any products we develop based on any
of the factors listed above or on other factors. Our competitors
may therefore be more successful in commercializing their
products than we are, which could adversely affect our
competitive position and business. Competitive products may make
any products we develop obsolete or noncompetitive before we can
recover the expenses of developing and commercializing our drug
candidates. Furthermore, we also face competition from existing
and new treatment methods that reduce or eliminate the need for
drugs, such as the use of advanced medical devices. The
development of new medical devices or other treatment methods
for the diseases we are targeting could make our drug candidates
noncompetitive, obsolete or uneconomical.
We
face competition from other companies that are working to
develop novel drugs using technology similar to ours. If these
companies develop drugs more rapidly than we do or their
technologies are
more effective, our ability to successfully commercialize drugs
will be adversely affected.
In addition to the competition we face from competing drugs in
general, we also face competition from other companies working
to develop novel drugs using technology that competes more
directly with our own. We are aware of several other companies
that are working in the field of RNAi, including Sirna, a
subsidiary of Merck, Acuity, Nastech, Calando, Quark,
Nucleonics, SR Pharma, RXi, a subsidiary of CytRx, Inc., Protiva
and Intradigm. In addition, we granted licenses to Isis,
GeneCare, Benitec, Nastech, Calando, Quark as well as others
under which these companies may independently develop RNAi
therapeutics against a limited number of targets. Any of these
companies may develop its RNAi technology more rapidly and more
effectively than us. Merck is currently one of our collaborators
and a licensee under our intellectual property for specified
disease targets. However, as a result of its acquisition of
Sirna in December 2006, Merck, which has substantially more
resources and experience in developing drugs than we do, could
become a direct competitor.
We also compete with companies working to develop
antisense-based drugs. Like RNAi product candidates, antisense
drugs target mRNAs in order to suppress the activity of specific
genes. Isis is currently marketing an antisense drug and has
several antisense drug candidates in clinical trials, and
another company, Genta Inc., has multiple antisense drug
candidates in late-stage clinical trials. The development of
antisense drugs is more advanced than that of RNAi therapeutics,
and antisense technology may become the preferred technology for
drugs that target mRNAs to silence specific genes.
Risks
Related to Patents, Licenses and Trade Secrets
If we
are not able to obtain and enforce patent protection for our
discoveries, our ability to develop and commercialize our
product candidates will be harmed.
Our success depends, in part, on our ability to protect
proprietary methods and technologies that we develop under the
patent and other intellectual property laws of the United States
and other countries, so that we can prevent others from
unlawfully using our inventions and proprietary information.
However, we may not hold proprietary
42
rights to some patents required for us to commercialize our
proposed products. Because certain U.S. patent applications
are confidential until patents issue, such as applications filed
prior to November 29, 2000, or applications filed after
such date which will not be filed in foreign countries, third
parties may have filed patent applications for technology
covered by our pending patent applications without our being
aware of those applications, and our patent applications may not
have priority over those applications. For this and other
reasons, we may be unable to secure desired patent rights,
thereby losing desired exclusivity. Further, we may be required
to obtain licenses under third-party patents to market our
proposed products or conduct our research and development or
other activities. If licenses are not available to us on
acceptable terms, we will not be able to market the affected
products or conduct the desired activities.
Our strategy depends on our ability to rapidly identify and seek
patent protection for our discoveries. In addition, we will rely
on third-party collaborators to file patent applications
relating to proprietary technology that we develop jointly
during certain collaborations. The process of obtaining patent
protection is expensive and time-consuming. If our present or
future collaborators fail to file and prosecute all necessary
and desirable patent applications at a reasonable cost and in a
timely manner, our business will be adversely affected. Despite
our efforts and the efforts of our collaborators to protect our
proprietary rights, unauthorized parties may be able to obtain
and use information that we regard as proprietary. The issuance
of a patent does not guarantee that it is valid or enforceable.
Any patents we have obtained, or obtain in the future, may be
challenged, invalidated, unenforceable or circumvented.
Moreover, the USPTO, may commence interference proceedings
involving our patents or patent applications. Any challenge to,
finding of unenforceability or invalidation or circumvention of,
our patents or patent applications would be costly, would
require significant time and attention of our management and
could have a material adverse effect on our business.
Our pending patent applications may not result in issued
patents. The patent position of pharmaceutical or biotechnology
companies, including ours, is generally uncertain and involves
complex legal and factual considerations. The standards that the
USPTO and its foreign counterparts use to grant patents are not
always applied predictably or uniformly and can change. There is
also no uniform, worldwide policy regarding the subject matter
and scope of claims granted or allowable in pharmaceutical or
biotechnology patents. Accordingly, we do not know the degree of
future protection for our proprietary rights or the breadth of
claims that will be allowed in any patents issued to us or to
others.
We also rely on trade secrets, know-how and technology, which
are not protected by patents, to maintain our competitive
position. If any trade secret, know-how or other technology not
protected by a patent were to be disclosed to or independently
developed by a competitor, our business and financial condition
could be materially adversely affected.
We
license patent rights from third party owners. If such owners do
not properly maintain or enforce the patents underlying such
licenses, our competitive position and business prospects will
be harmed.
We are a party to a number of licenses that give us rights to
third party intellectual property that is necessary or useful
for our business. In particular, we have obtained licenses from
Isis, Idera Pharmaceuticals, Inc., Carnegie Institution of
Washington, Cancer Research Technology Limited, the
Massachusetts Institute of Technology, the Whitehead Institute
for Biomedical Research, Max Planck Innovation GmbH, which was
formerly known as Garching Innovation GmbH, which we refer to as
Max Planck Innovation, Stanford University, Cold Spring Harbor
Laboratory, the University of South Alabama, CBR Institute for
Biomedical Research, University of British Columbia and Inex. We
also intend to enter into additional licenses to third party
intellectual property in the future.
Our success will depend in part on the ability of our licensors
to obtain, maintain and enforce patent protection for our
licensed intellectual property, in particular, those patents to
which we have secured exclusive rights. Our licensors may not
successfully prosecute the patent applications to which we are
licensed. Even if patents issue in respect of these patent
applications, our licensors may fail to maintain these patents,
may determine not to pursue litigation against other companies
that are infringing these patents, or may pursue such litigation
less aggressively than we would. Without protection for the
intellectual property we license, other companies might be able
to offer
43
substantially identical products for sale, which could adversely
affect our competitive business position and harm our business
prospects.
Other
companies or organizations may assert patent rights that prevent
us from developing and commercializing our
products.
RNA interference is a relatively new scientific field that has
generated many different patent applications from organizations
and individuals seeking to obtain important patents in the
field. These applications claim many different methods,
compositions and processes relating to the discovery,
development and commercialization of RNAi therapeutics. Because
the field is so new, very few of these patent applications have
been fully processed by government patent offices around the
world, and there is a great deal of uncertainty about which
patents will issue, when, to whom, and with what claims. It is
likely that there will be significant litigation and other
proceedings, such as interference and opposition proceedings in
various patent offices, relating to patent rights in the RNAi
field. Others may attempt to invalidate our intellectual
property rights. Even if our rights are not directly challenged,
disputes among third parties could lead to the weakening or
invalidation of our intellectual property rights. Any attempt to
circumvent or invalidate our intellectual property rights would
be costly, would require significant time and attention of our
management and could have a material adverse effect on our
business.
After the grant by the European Patent Office, or EPO, of the
Kreutzer-Limmer patent, published under publication number EP
1144623B9, several oppositions to the issuance of the European
patent were filed with the EPO, a practice that is allowed under
the European Patent Convention, or EPC. In oral proceedings in
June 2006, the EPO opposition division in charge of the
opposition proceedings upheld the patent with amended claims.
This decision has been appealed by two of the opponents,
including Sirna, which was recently acquired by Merck and SR
Pharma. Based on the appeal, the Boards of Appeal of the EPO may
choose to uphold, further amend or revoke the patent it in its
entirety. However, because a European Patent represents a bundle
of national patents for each of the designated member states and
must be enforced on a country-by country-basis, even if upheld,
a National Court in one or more of the EPC member states could
subsequently rule the patent invalid or unenforceable. In
addition, National Courts in different countries could come to
differing conclusions in interpreting the scope of the upheld
claims.
In addition, four parties have filed Notices of Opposition in
the EPO against the Kreutzer-Limmer patent, published under the
publication number EP 1214945, and one party has given notice to
the Australian Patent Office, IP Australia, that it opposes the
grant of our patent AU 778474, which derives from the same
parent international patent application that gave rise to EP
1144623 and EP 1214945. The proceedings in the EPO and
Australian Patent Office may take several years before an
outcome becomes final.
In addition, there are many issued and pending patents that
claim aspects of oligonucleotide chemistry that we may need to
apply to our siRNA drug candidates. There are also many issued
patents that claim genes or portions of genes that may be
relevant for siRNA drugs we wish to develop. Thus, it is
possible that one or more organizations will hold patent rights
to which we will need a license. If those organizations refuse
to grant us a license to such patent rights on reasonable terms,
we will not be able to market products or perform research and
development or other activities covered by these patents.
If we
become involved in patent litigation or other proceedings
related to a determination of rights, we could incur substantial
costs and expenses, substantial liability for damages or be
required to stop our product development and commercialization
efforts.
Third parties may sue us for infringing their patent rights.
Likewise, we may need to resort to litigation to enforce a
patent issued or licensed to us or to determine the scope and
validity of proprietary rights of others. In addition, a third
party may claim that we have improperly obtained or used its
confidential or proprietary information. Furthermore, in
connection with a license agreement, we have agreed to indemnify
the licensor for costs incurred in connection with litigation
relating to intellectual property rights. The cost to us of any
litigation or other proceeding relating to intellectual property
rights, even if resolved in our favor, could be substantial, and
the litigation would divert our managements efforts. Some
of our competitors may be able to sustain the costs of complex
patent litigation more effectively than we can because they have
substantially greater resources.
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Uncertainties resulting from the initiation and continuation of
any litigation could limit our ability to continue our
operations.
If any parties successfully claim that our creation or use of
proprietary technologies infringes upon their intellectual
property rights, we might be forced to pay damages, potentially
including treble damages, if we are found to have willfully
infringed on such parties patent rights. In addition to
any damages we might have to pay, a court could require us to
stop the infringing activity or obtain a license. Any license
required under any patent may not be made available on
commercially acceptable terms, if at all. In addition, such
licenses are likely to be non-exclusive and, therefore, our
competitors may have access to the same technology licensed to
us. If we fail to obtain a required license and are unable to
design around a patent, we may be unable to effectively market
some of our technology and products, which could limit our
ability to generate revenues or achieve profitability and
possibly prevent us from generating revenue sufficient to
sustain our operations. Moreover, we expect that a number of our
collaborations will provide that royalties payable to us for
licenses to our intellectual property may be offset by amounts
paid by our collaborators to third parties who have competing or
superior intellectual property positions in the relevant fields,
which could result in significant reductions in our revenues
from products developed through collaborations.
If we
fail to comply with our obligations under any licenses or
related agreements, we could lose license rights that are
necessary for developing and protecting our RNAi technology and
any related product candidates that we develop, or we could lose
certain exclusive rights to grant sublicenses.
Our current licenses impose, and any future licenses we enter
into are likely to impose, various development,
commercialization, funding, royalty, diligence, sublicensing,
insurance and other obligations on us. If we breach any of these
obligations, the licensor may have the right to terminate the
license or render the license non-exclusive, which could result
in us being unable to develop, manufacture and sell products
that are covered by the licensed technology or enable a
competitor to gain access to the licensed technology. In
addition, while we cannot currently determine the amount of the
royalty obligations we will be required to pay on sales of
future products, if any, the amounts may be significant. The
amount of our future royalty obligations will depend on the
technology and intellectual property we use in products that we
successfully develop and commercialize, if any. Therefore, even
if we successfully develop and commercialize products, we may be
unable to achieve or maintain profitability.
For two important patents, owned in part or solely by Max Planck
Gesellschaft, our amended licenses with Max Planck Innovation,
representing Max Planck Gesellschaft, require us to maintain a
minimum level of employees in Germany. If we fail to comply with
this condition, the owners of the patents that are the subject
of these licenses may have the right to grant a similar license
to one other company. We regard these patents as significant
because they relate to important aspects of the structure of
siRNA molecules and their use as therapeutics.
We have an agreement with Isis under which we were granted
licenses to over 150 patents and patent applications that we
believe will be useful to the development of RNAi therapeutics.
If, by January 1, 2008, we or a collaborator have not
completed the studies required for an investigational new drug
application filing or similar foreign filing for at least one
product candidate involving these patent rights, Isis would have
the right to grant licenses to third parties for these patents
and patent applications, thereby making our rights non-exclusive.
Confidentiality
agreements with employees and others may not adequately prevent
disclosure of trade secrets and other proprietary
information.
In order to protect our proprietary technology and processes, we
rely in part on confidentiality agreements with our
collaborators, employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors.
These agreements may not effectively prevent disclosure of
confidential information and may not provide an adequate remedy
in the event of unauthorized disclosure of confidential
information. In addition, others may independently discover
trade secrets and proprietary information, and in such cases we
could not assert any trade secret rights against such party.
Costly and time-consuming litigation could be necessary to
enforce and determine the scope of our proprietary rights, and
failure to obtain or maintain trade secret protection could
adversely affect our competitive business position.
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Risks
Related to Our Common Stock
If our
stock price fluctuates, purchasers of our common stock could
incur substantial losses.
The market price of our common stock may fluctuate significantly
in response to factors that are beyond our control. The stock
market in general has recently experienced extreme price and
volume fluctuations. The market prices of securities of
pharmaceutical and biotechnology companies have been extremely
volatile, and have experienced fluctuations that often have been
unrelated or disproportionate to the operating performance of
these companies. These broad market fluctuations could result in
extreme fluctuations in the price of our common stock, which
could cause purchasers of our common stock to incur substantial
losses.
We may
incur significant costs from class action litigation due to our
expected stock volatility.
Our stock price may fluctuate for many reasons, including as a
result of public announcements regarding the progress of our
development efforts, the addition or departure of our key
personnel, variations in our quarterly operating results and
changes in market valuations of pharmaceutical and biotechnology
companies. Recently, when the market price of a stock has been
volatile as our stock price may be, holders of that stock have
occasionally brought securities class action litigation against
the company that issued the stock. If any of our stockholders
were to bring a lawsuit of this type against us, even if the
lawsuit is without merit, we could incur substantial costs
defending the lawsuit. The lawsuit could also divert the time
and attention of our management.
Novartis
ownership of our common stock could delay or prevent a change in
corporate control.
Novartis held approximately 14% of our outstanding common stock
as of December 31, 2006. This concentration of ownership
may harm the market price of our common stock by:
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delaying, deferring or preventing a change in control of our
company;
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impeding a merger, consolidation, takeover or other business
combination involving our company; or
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discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company.
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Anti-takeover
provisions in our charter documents and under Delaware law and
our stockholder rights plan could make an acquisition of us,
which may be beneficial to our stockholders, more difficult and
may prevent attempts by our stockholders to replace or remove
our current management.
Provisions in our certificate of incorporation and our bylaws
may delay or prevent an acquisition of us or a change in our
management. In addition, these provisions may frustrate or
prevent any attempts by our stockholders to replace or remove
our current management by making it more difficult for
stockholders to replace members of our board of directors.
Because our board of directors is responsible for appointing the
members of our management team, these provisions could in turn
affect any attempt by our stockholders to replace current
members of our management team. These provisions include:
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a classified board of directors;
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a prohibition on actions by our stockholders by written consent;
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limitations on the removal of directors; and
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advance notice requirements for election to our board of
directors and for proposing matters that can be acted upon at
stockholder meetings.
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In addition our board of directors has adopted a stockholder
rights plan, the provisions of which could make it difficult for
a potential acquirer of Alnylam to consummate an acquisition
transaction.
Moreover, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits a person who owns in
excess of 15% of our outstanding voting stock from merging or
combining with us for a period of three years after the date of
the transaction in which the
46
person acquired in excess of 15% of our outstanding voting
stock, unless the merger or combination is approved in a
prescribed manner. These provisions would apply even if the
proposed merger or acquisition could be considered beneficial by
some stockholders.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS.
|
We have not received written comments from the staff of the SEC
regarding our periodic or current reports that remain unresolved.
Our operations are based primarily in Cambridge, Massachusetts
and Kulmbach, Germany. As of February 28, 2007, the
properties we lease are listed below:
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Square
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Location
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Feet
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Type
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Lease Expires
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Cambridge, MA
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62,000
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Office & laboratory
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September 2011
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Kulmbach, Germany
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18,000
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Office & laboratory
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June 2008
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We believe that the total space available to us under our
current leases and options will meet our needs for the
foreseeable future, and that additional space would be available
to us on commercially reasonable terms if it were required.
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ITEM 3.
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LEGAL
PROCEEDINGS
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We are currently not a party to any material legal proceedings.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of our security holders
during the fourth quarter of 2006.
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our common stock began trading on the NASDAQ Global Market on
May 28, 2004 under the symbol ALNY. Prior to
that time, there was no established public trading market for
our common stock. The following table sets forth the high and
low sale prices per share for our common stock on the NASDAQ
Global Market for the period indicated:
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Year Ended December 31, 2005:
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High
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Low
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First Quarter
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$
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11.00
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$
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6.76
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Second Quarter
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$
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9.00
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$
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6.90
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Third Quarter
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$
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15.22
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$
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6.90
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Fourth Quarter
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$
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14.85
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$
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9.06
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Year Ended December 31, 2006:
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High
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Low
|
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First Quarter
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$
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18.39
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$
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11.48
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Second Quarter
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$
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17.63
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$
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12.82
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Third Quarter
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$
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15.52
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$
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11.29
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Fourth Quarter
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$
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24.46
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$
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13.77
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47
Holders
of record
As of February 28, 2007, there were approximately 72
holders of record of our common stock. Because many of our
shares are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of
individual stockholders represented by these record holders.
Dividends
We have never paid or declared any cash dividends on our common
stock. We currently intend to retain any earnings for future
growth and, therefore, do not expect to pay cash dividends in
the foreseeable future.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Information relating to our equity compensation plans will be
included in our proxy statement in connection with our 2007
Annual Meeting of Stockholders, under the caption Equity
Compensation Plan Information. That portion of our proxy
statement is incorporated herein by reference.
48
Stock
Performance Graph
The following performance graph and related information shall
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
we specifically incorporate it by reference into such filing.
The comparative stock performance graph below compares the
cumulative total stockholder return (assuming reinvestment of
dividends, if any) from investing $100 on May 28, 2004, the
date on which our common stock was first publicly traded, to the
close of the last trading day of 2006, in each of (i) our
common stock, (ii) the NASDAQ Stock Market (U.S.) Index and
(iii) the NASDAQ Pharmaceutical Index.
Comparison
of Cumulative Total Return*
Among Alnylam Pharmaceuticals, Inc.,
NASDAQ Stock Market (U.S.) Index and NASDAQ Pharmaceuticals
Index
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5/28/2004
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12/31/2004
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12/31/2005
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12/31/2006
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Alnylam Pharmaceuticals, Inc.
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$
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100.00
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$
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124.29
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$
|
222.30
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$
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356.07
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Nasdaq Stock Market (U.S.) Index
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$
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100.00
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$
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109.70
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$
|
112.03
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$
|
123.08
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|
Nasdaq Pharmaceutical Index
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$
|
100.00
|
|
|
|
$
|
103.32
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|
|
$
|
113.77
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$
|
111.36
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* |
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$100 invested on May 28, 2004, the date on which Alnylam
common stock was first publicly traded, in Alnylam common stock,
the NASDAQ Stock Market (U.S.) Index or the NASDAQ
Pharmaceutical Index, including reinvestment of dividends. |
49
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ITEM 6.
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SELECTED
CONSOLIDATED FINANCIAL DATA
|
The following selected consolidated financial data are derived
from our financial statements. The historical results presented
are not necessarily indicative of future results. The
consolidated statement of operations data for the years ended
December 31, 2006, 2005 and 2004 and the consolidated
balance sheet data as of December 31, 2006 and 2005 have
been derived from our audited consolidated financial statements
included elsewhere in this Annual Report on
Form 10-K.
The selected consolidated financial data set forth below should
be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and the financial statements, and the related
Notes, included elsewhere in this Annual Report on
Form 10-K.
In July 2003, we acquired Ribopharma AG, now called Alnylam
Europe AG, an RNAi company based in Kulmbach, Germany. As a
result, the operations of Alnylam Europe AG were consolidated
beginning with the quarter ended September 30, 2003.
Selected
Consolidated Financial Data
(In thousands, except per share data)
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Period from
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Inception
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(June 14,
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2002)
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through
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Year Ended December 31,
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December 31,
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2006
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2005
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2004
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2003
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2002
|
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|
Statement of Operations
Data:
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Net revenues
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$
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26,930
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$
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5,716
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$
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4,278
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$
|
176
|
|
|
$
|
|
|
Operating expenses(1)
|
|
|
66,431
|
|
|
|
49,188
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|
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36,542
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|
|
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25,233
|
|
|
|
4,222
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|
Loss from operations
|
|
|
(39,501
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)
|
|
|
(43,472
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)
|
|
|
(32,264
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)
|
|
|
(25,057
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)
|
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|
(4,222
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)
|
Net loss
|
|
|
(34,608
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)
|
|
|
(42,914
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)
|
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|
(32,654
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)
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(25,033
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)
|
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|
(4,136
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)
|
Net loss attributable to common
stockholders
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|
$
|
(34,608
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)
|
|
$
|
(42,914
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)
|
|
$
|
(35,367
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)
|
|
$
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(27,939
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)
|
|
$
|
(4,884
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)
|
Net loss per common
share basic and diluted
|
|
$
|
(1.09
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)
|
|
$
|
(1.96
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)
|
|
$
|
(2.98
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)
|
|
$
|
(29.64
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)
|
|
$
|
(14.74
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)
|
Weighted average shares
outstanding basic and diluted
|
|
|
31,890
|
|
|
|
21,949
|
|
|
|
11,886
|
|
|
|
943
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1) Non-cash stock-based
compensation included in
operating expenses
|
|
$
|
8,304
|
|
|
$
|
4,597
|
|
|
$
|
4,106
|
|
|
$
|
3,455
|
|
|
$
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash, cash equivalents and
marketable securities
|
|
$
|
217,260
|
|
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$
|
80,002
|
|
|
$
|
46,046
|
|
|
$
|
23,193
|
|
|
$
|
15,477
|
|
Working capital
|
|
|
199,859
|
|
|
|
63,930
|
|
|
|
41,606
|
|
|
|
20,345
|
|
|
|
12,846
|
|
Total assets
|
|
|
240,006
|
|
|
|
98,348
|
|
|
|
66,107
|
|
|
|
35,183
|
|
|
|
16,111
|
|
Notes payable
|
|
|
9,136
|
|
|
|
7,395
|
|
|
|
7,201
|
|
|
|
1,859
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,189
|
|
|
|
18,084
|
|
Total stockholders equity
(deficit)
|
|
|
201,174
|
|
|
|
61,779
|
|
|
|
46,142
|
|
|
|
(26,707
|
)
|
|
|
(4,646
|
)
|
50
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
We are a biopharmaceutical company developing novel therapeutics
based on RNA interference, or RNAi. RNAi is a naturally
occurring biological pathway within cells for selectively
silencing and regulating specific genes. Since many diseases are
caused by the inappropriate activity of specific genes, the
ability to silence genes selectively through RNAi could provide
a new way to treat a wide range of human diseases. We believe
that drugs that work through RNAi have the potential to become a
new major class of drugs, like small molecule, protein and
antibody drugs. Using our intellectual property and the
expertise we have built in RNAi, we are developing a set of
biological and chemical methods and know-how that we expect to
apply in a systematic way to develop RNAi therapeutics for a
variety of diseases.
We are building a pipeline of RNAi therapeutics. Our lead
program is in Phase I clinical trials for the treatment of
human respiratory syncytial virus, or RSV, infection, which we
believe is the leading cause of hospitalization in infants in
the United States and occurs in the elderly and in immune
compromised adults.
In pre-clinical development programs, we are also working on
another respiratory infection, influenza, with Novartis and an
RNAi therapeutic targeting a gene called PCSK9 for the treatment
of hypercholesterolemia. We have pre-clinical discovery programs
focused on central nervous system, or CNS, diseases including
Parkinsons disease, Huntingtons disease, neuropathic
pain, spinal cord injury and progressive multifocal
leukoencephalopathy, or PML, a CNS disease caused by viral
infection in immune compromised patients. We also have a program
to treat the inherited respiratory disease known as cystic
fibrosis, or CF, as well as a program for Ebola virus infection.
We are also working to extend our capabilities to enable the
development of RNAi therapeutics that travel through the
bloodstream to reach diseased parts of the body, which we refer
to as Systemic
RNAitm,
and are developing technology to achieve efficient and safe
systemic delivery. In addition, we have formed alliances with
leading companies, including Novartis, Merck, Biogen Idec and
Medtronic.
We commenced operations in June 2002. We have focused our
efforts since inception primarily on business planning, research
and development, acquiring intellectual property rights,
recruiting management and technical staff, and raising capital.
Since our inception, we have generated significant losses. As of
December 31, 2006, we had an accumulated deficit of
$140.5 million. Through December 31, 2006, we have
funded our operations primarily through the net proceeds from
the sale of equity securities. Through December 31, 2006, a
substantial portion of our total net revenues have been
collaboration revenue derived from our strategic alliances with
Novartis and Merck. We expect our revenues to continue to be
derived primarily from strategic alliances, such as our
collaborations with Novartis, Merck and Biogen Idec, government
and foundation funding and license fee revenues.
We currently have programs focused in a number of therapeutic
areas, however, we are unable to predict when, if ever, we will
be able to commence sales of any product. We have not achieved
profitability on a quarterly or annual basis and we expect to
incur significant additional losses over the next several years.
We expect our net losses to increase primarily due to research
and development activities relating to our collaborations, drug
development programs and other general corporate activities. We
anticipate that our operating results will fluctuate for the
foreseeable future. Therefore,
period-to-period
comparisons should not be relied upon as predictive of the
results in future periods. Our sources of potential funding for
the next several years are expected to include proceeds from the
sale of equity, license and other fees, funded research and
development payments, proceeds from equipment lines of credit
and milestone payments under existing and future collaborative
arrangements.
Research
and Development
Since our inception, we have focused on drug discovery and
development programs. Research and development expenses
represent a substantial percentage of our total operating
expenses. We have initiated programs to identify specific RNAi
therapeutics that will be administered directly to diseased
parts of the body, which we refer to as direct RNAi
therapeutics, and we expect to initiate additional programs as
the capabilities of our product platform evolve. Included in our
current programs are development programs, those programs for
which we have
51
established targeted timing for human clinical trials, and
discovery programs, those programs for which we have yet to
establish programs for targeted timing for human clinical
trials. Our most advanced development program is focused on RSV.
In November 2005, we filed an IND related to our RSV program and
initiated human clinical trials of ALN-RSV01 in December 2005.
Our other development programs are focused on another lung
infection, influenza, or flu and on the treatment of
hypercholesterolemia. We also have discovery programs to develop
direct RNAi therapeutics for the treatment of the genetic
respiratory disease CF, central nervous system disorders such as
spinal cord injury, Parkinsons disease, Huntingtons
disease, neuropathic pain; viral disease such as Ebola; PML and
several other diseases that are the subject of collaborations
with Merck and Novartis.
There is a risk that any drug discovery and development program
may not produce revenue because of the risks inherent in drug
discovery and development. Moreover, there are uncertainties
specific to any new field of drug discovery, including RNAi. The
successful development of any product candidate we develop is
highly uncertain. Due to the numerous risks associated with
developing drugs, we cannot reasonably estimate or know the
nature, timing and estimated costs of the efforts necessary to
complete the development of, or the period in which material net
cash inflows are expected to commence from, any potential
product candidate. These risks include the uncertainty of:
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|
our ability to progress any product candidates into pre-clinical
and clinical trials;
|
|
|
|
the scope, rate and progress of our pre-clinical trials and
other research and development activities;
|
|
|
|
the scope, rate of progress and cost of any clinical trials we
commence;
|
|
|
|
clinical trial results;
|
|
|
|
the cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights;
|
|
|
|
the terms and timing of any collaborative, licensing and other
arrangements that we may establish;
|
|
|
|
the cost and timing of regulatory approvals;
|
|
|
|
the cost and timing of establishing sales, marketing and
distribution capabilities;
|
|
|
|
the cost of establishing clinical and commercial supplies of any
products that we may develop; and
|
|
|
|
the effect of competing technological and market developments.
|
Any failure to complete any stage of the development of any
potential products in a timely manner could have a material
adverse effect on our operations, financial position and
liquidity. A discussion of some of the risks and uncertainties
associated with completing our projects on schedule, or at all,
and the potential consequences of failing to do so, are set
forth in Item 1A above under the heading Risk
Factors.
Strategic
Alliances
A significant component of our business strategy is to enter
into strategic alliances and collaborations with pharmaceutical
and biotechnology companies, academic institutions, research
foundations and others, as appropriate, to gain access to
funding, technical resources and intellectual property to
further our development efforts and to generate revenues. We
have entered into license agreements with Max Planck Innovation
and Isis, as well as a number of other entities, to obtain
rights to important intellectual property in the field of RNAi.
We have entered into collaborations with (1) Novartis to
discover and develop therapeutics based on RNAi and to develop
an RNAi therapeutic for pandemic flu, (2) Merck to develop
RNAi technology and therapeutics, (3) Medtronic to develop
novel drug-device products incorporating RNAi therapeutics to
treat diseases caused by degeneration of the nervous system and
(4) Biogen Idec to perform investigative research into the
potential of using RNAi technology to discover and develop
therapeutics to treat PML. We have also entered into contracts
with government agencies, such as the NIAID. In addition, we
have entered into an agreement with CFFT to obtain funding and
technical resources for our CF program.
Novartis. We have formed two alliances with
Novartis. We refer to the first of these, which was initiated in
September 2005, as the broad Novartis alliance, and to the
second, which was initiated in February 2006, as the
52
Novartis flu alliance. In October 2005, Novartis purchased
approximately 5.3 million shares of our common stock at a
purchase price of $11.11 per share for an aggregate
purchase price of approximately $58.5 million, which,
immediately after such issuance, represented 19.9% of our then
outstanding common stock. Novartis owned approximately 14% of
our common stock as of December 31, 2006.
Under the terms of the collaboration and license agreement, the
parties agreed to work together on selected targets, as defined
in the collaboration and license agreement, to discover and
develop therapeutics based on RNAi. In consideration for rights
granted to Novartis under the collaboration and license
agreement, Novartis made an upfront payment of
$10.0 million to us in October 2005, partly to reimburse
prior costs incurred by us to develop in vivo RNAi
technology. In addition, the collaboration and license agreement
includes terms under which Novartis agreed to provide us with
research funding and milestone payments as well as royalties on
annual net sales of products resulting from the collaboration.
The collaboration and license agreement also provides Novartis
with a non-exclusive option to integrate our intellectual
property relating to RNAi technology into Novartis
operations under specified circumstances. In connection with the
exercise of the integration option, Novartis will be required to
make additional payments to us.
In February 2006, we entered into the Novartis flu alliance. The
agreement governing the flu alliance is structured as an
addendum to the collaboration and license agreement for the
broad Novartis alliance. We are eligible to receive significant
funding from Novartis for our efforts on RNAi therapeutics for
pandemic flu, and to receive a significant share of any profits.
Merck. In July 2006, we amended and restated
our research collaboration and license agreement with Merck,
from September 2003, as amended. Our collaboration with
Merck is focused on developing RNAi therapeutics for targets
associated with human diseases and, under the terms of the
amended and restated license agreement, will focus on the nine
targets that then remained to be nominated by Merck under the
terms of the original license agreement. These nine programs are
in addition to the existing program directed to the NOGO pathway
on which we were already collaborating with Merck under the
original agreement. We may select three of the nine additional
programs as joint development programs, which Merck will co-fund
and participate in from the outset. In October 2006, we selected
a co-development program from the first three targets presented
by Merck under the amended and restated license agreement. Under
the original license agreement, the collaboration was structured
such that co-funding by Merck would not begin until after the
completion of defined pre-clinical work. The amended and
restated license agreement provides funding from Merck
immediately for programs selected by us for co-development, and
provides that, in the United States, we will have the right to
co-promote RNAi therapeutic products developed in these three
co-development programs. Merck will assume primary
responsibility for the remaining six programs and we are
eligible to receive milestone payments and royalties on any RNAi
therapeutic products developed and commercialized by Merck in
these six programs.
Also in July 2006, we and Merck agreed to terminate our
collaboration and license agreement, effective as of
June 29, 2004, pursuant to which we were collaborating in
the research, development and commercialization of RNAi products
directed to certain targets, including but not limited to,
vascular endothelial growth factor or VEGF.
Medtronic. In February 2005, we entered into a
collaboration with Medtronic to pursue the potential development
of therapeutic products for the treatment of neurodegenerative
disorders such as Parkinsons, Huntingtons and
Alzheimers disease. The collaboration is focused on
developing novel drug-device combinations incorporating RNAi
therapeutic products. Currently, we are engaged in a joint
technology development program with Medtronic through
April 2007. This initial joint technology development
program is focused on delivering candidate RNAi therapeutic
products to specific areas of the brain using implantable
infusion systems.
After successful completion of the initial joint technology
development program, the parties must jointly determine whether
to initiate product development. If we make a joint decision to
initiate product development, Medtronic would make an initial
equity investment in us and could make additional investments
upon successful completion of specified milestones. The
aggregate amount of our common stock that Medtronic would
purchase, if a joint decision were made to initiate product
development and the specified milestones were successfully
53
completed, would be $21.0 million. The amount of the
investment to be made at the time of the joint decision to
initiate product development would be between $1.0 million
and $8.0 million, as determined by us, at the then-current
market price. For the purpose of this investment, the
then-current market price would be equal to the
twenty-day
trailing average of the closing price of our common stock on the
Nasdaq Global Market at the end of the trading day two trading
days prior to the date of the decision to initiate product
development. The remaining investments of between
$13.0 million and $20.0 million would be made upon the
achievement of the specified milestones at a purchase price
equal to 120% of the then-current market price, calculated in
the same manner as described above. If either party decides not
to initiate product development under the collaboration
agreement, Medtronic would not be required to make any equity
investment in us. We would also be eligible to receive
additional cash milestone payments for each product developed
and royalties on sales of any RNAi therapeutic component of
novel drug-device combinations that result from the
collaboration.
Biogen Idec. In September 2006, we entered
into a collaboration and license agreement with Biogen Idec
focused on the discovery and development of therapeutics based
on RNAi for the potential treatment of PML. Under the terms of
the collaboration agreement with Biogen Idec, we granted an
exclusive license to distribute, market and sell certain RNAi
therapeutics to treat PML and Biogen Idec has agreed to fund all
related research and development activities. We also received an
upfront $5.0 million payment from Biogen Idec. In addition,
upon the successful development and utilization of a product
resulting from the collaboration, Biogen Idec would be required
to pay us milestone and royalty payments.
NIH. In September 2006, we were awarded a
contract to advance the development of a broad spectrum RNAi
anti-viral therapeutic against hemorrhagic fever virus,
including the Ebola virus, with the National Institute of
Allergy and Infectious Diseases, or NIAID, a component of the
National Institutes of Health, or NIH. The federal contract will
provide us with up to $23.0 million in funding over a
four-year period to develop, as anti-viral drugs targeting the
Ebola virus. The Ebola virus can cause a severe, often fatal
infection, and poses a potential biological safety risk and
bioterrorism threat. Of the $23.0 million, the government
has committed to pay us $14.2 million over the first two
years of the contract and, subject to the progress of the
program and budgetary considerations in future years, the
remaining $8.8 million over the last two years of the
contract.
Isis. In March 2004, we entered into a
collaboration and license agreement with Isis, a leading
developer of single-stranded antisense oligonucleotide drugs
that target RNA. The agreement enhanced our intellectual
property position with respect to RNA-based therapeutic products
and our ability to develop double-stranded RNA for RNAi
therapeutic products, and provided us with the opportunity to
defer investment in manufacturing technology. Under the terms of
our agreement, we agreed to pay Isis an upfront license fee of
$5.0 million, $3.0 million of which was paid upon
signing of the agreement and the remaining $2.0 million of
which was paid in January 2005. We also agreed to pay milestone
payments, payable upon the occurrence of specified development
and regulatory events, and royalties to Isis for each product
that we or a collaborator develop utilizing Isis intellectual
property. In addition, we agreed to pay to Isis a percentage of
specified fees from strategic collaborations we may enter into
that include access to the Isis intellectual property. In
conjunction with the agreement, Isis made a $10.0 million
equity investment in us. Isis also agreed to pay us a license
fee, milestone payments, payable upon the occurrence of
specified development and regulatory events, and royalties for
each product developed by Isis or a collaborator that utilizes
our intellectual property. The agreement also gives us an option
to use Isis manufacturing services for RNA-based
therapeutic products.
Our agreement with Isis also gives us the exclusive right to
grant
sub-licenses
for Isis technology to third parties with whom we are not
collaborating. We may include these
sub-licenses
in our InterfeRx licenses. If a license includes rights to
Isis intellectual property, we will share revenues from
that license equally with Isis.
If, by January 1, 2008, we or a collaborator have not
completed the studies required for an IND submission or similar
foreign filing for at least one product candidate involving
these patent rights, Isis would have the right to grant licenses
to third parties for the patents and patent applications
licensed to us, thereby making our rights non-exclusive.
Inex. In January 2007, Inex granted us an
exclusive license to its liposomal delivery formulation
technology for the discovery, development and commercialization
of RNAi therapeutics. We granted Inex an option for three
InterfeRxtm
licenses, subject to our review and third party obligations, to
develop their own RNAi therapeutic
54
products and exclusive access to our intellectual property to
develop oligonucleotide drugs that do not function through an
RNAi mechanism. In connection with Inexs license grant to
us, we issued Inex 361,990 shares of our common stock,
valued at $8.0 million, in a private placement on
January 16, 2007 and on February 23, 2007, we paid
them an additional $0.4 million. We have also agreed to
make available to Inex a $5.0 million loan for capital
equipment expenditures related to manufacturing services
performed by Inex for us. In addition, we will be required to
pay Inex up to $13.0 million in milestone payments for each
product we develop utilizing technology Inex has licensed to us.
Critical
Accounting Policies and Estimates
While our significant accounting policies are more fully
described in the notes to our consolidated financial statements
included in this Annual Report on
Form 10-K,
we believe the following accounting policies to be the most
critical in understanding the judgments and estimates we use in
preparing our consolidated financial statements:
Use of
Estimates
Our discussion and analysis of our financial condition and
results of operations is based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of our consolidated financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates and judgments,
including those related to revenue recognition, stock based
compensation and accrued expenses. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions and could
have a material impact on our reported results.
Revenue
Recognition
We recognize revenue in accordance with the Securities and
Exchange Commissions Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial
Statements. Revenues from our collaboration agreements with
Merck and Novartis may include nonrefundable license fees,
milestones, cost reimbursements research and development funding
and royalties. When evaluating multiple element arrangements, we
consider whether the components of the arrangement represent
separate units of accounting as defined in EITF Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables, or EITF
00-21.
Application of these standards requires subjective
determinations and requires management to make judgments about
the value of the individual elements and whether it is separable
from the other aspects of the contractual relationship. To date,
we have determined that our upfront non-refundable license fees
cannot be separated from our ongoing collaborative activities,
and accordingly, do not treat them as a separate element.
Nonrefundable license fees are recognized as revenue as we
perform under the collaboration agreement. Where our level of
effort is relatively constant over the performance period, we
recognize revenues on a straight-line basis over the estimated
period of performance under the contract, unless evidence
suggests that revenue is earned in a different pattern, in which
case that pattern is followed.
We recognize milestone payments as revenue upon achievement of
the milestone only if (1) the milestone payments are
nonrefundable; (2) substantive effort is involved in
achieving the milestone; and (3) the amount of the
milestone is reasonable in relation to the effort expended or
the risk associated with achievement of the milestone. If
55
any of these conditions are not met, we defer the milestone
payments and recognize them as revenue over the term of the
contract as we complete our performance obligations.
Novartis. In consideration for rights granted
to Novartis under the collaboration and license agreement,
Novartis made an up-front payment of $10.0 million to us in
October 2005 to partly reimburse costs previously incurred by us
to develop in vivo RNAi technology. In addition, the
collaboration and license agreement includes terms under which
Novartis agreed to provide us with research funding and
milestone payments as well as royalties on annual net sales of
products resulting from the collaboration and license agreement.
We initially recorded as deferred revenue the non-refundable
$10.0 million up-front payment and $6.4 million
premium that represents the difference between the purchase
price and the closing price of our common stock on the date of
the stock purchase from Novartis. In addition to these payments,
research funding and certain milestone payments will be
amortized into revenue using the proportional performance method
over the estimated duration of the Novartis agreement or ten
years. Under this method, we estimate the level of effort to be
expended over the term of the agreement and recognize revenue
based on the lesser of the amount calculated based on the
proportional performance of total expected revenue or the amount
of non-refundable payments earned.
We believe the estimated term of the Novartis agreement includes
the three-year term of the agreement, two one-year extensions at
the election of Novartis and limited support as part of a
technology transfer until the fifth anniversary of the
termination of the agreement. Therefore, an expected term of ten
years is used in the proportional performance model. We will
evaluate the expected term when new information is known that
could affect our estimate. In the event our period of
involvement is different than we estimated, revenue recognition
will be adjusted on a prospective basis.
Merck. We recognize revenues from reimbursable
research and development activities at the time these activities
are performed under the terms of the related agreement, when the
collaborator is obligated to pay and when no future performance
obligations exist. In revenue arrangements where both parties
reimburse each other for research costs, such as our prior
collaboration agreement with Merck for the co-development of
RNAi therapeutics for the treatment of ocular diseases, in which
both parties reimbursed each other for 50% of the costs
incurred, as defined by the agreement, we followed EITF Issue
No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendors Products), or EITF
01-9, in
determining the proper accounting for amounts owed to Merck in
reimbursement for our portion of Mercks costs under the
agreement. In accordance with EITF
01-9, we
recorded revenues equal to the amount we were due to receive for
costs incurred under the agreement less amounts reimbursable to
the other party during the same accounting period unless we
received a separable and identifiable benefit in exchange for
the payments made to the other party under the arrangement and
we could reasonably estimate the fair value of the benefit
received.
Accounting
for Stock-Based Compensation
Effective January 1, 2006, we adopted the fair value
recognition provisions of Financial Accounting Standards Board,
or FASB, Statement of Financial Accounting Standards, or SFAS,
No. 123R, Share-Based Payment, or SFAS 123R, using the
modified prospective transition method. Under that transition
method, stock-based compensation expense is recognized beginning
in 2006 for all stock-based payments granted prior to, but not
yet vested as of, January 1, 2006, based on the grant-date
fair value estimated in accordance with the original provisions
of SFAS No. 123, Accounting for Stock Based
Compensation, or SFAS 123, and compensation cost for all
stock-based payments granted subsequent to January 1, 2006,
based on the grant-date fair value estimated in accordance with
the provisions of SFAS 123R. Such amounts are reduced by
our estimate of forfeitures of all unvested awards. Results for
prior periods have not been restated.
Prior to January 1, 2006, we accounted for employee stock
awards granted under our compensation plans in accordance with
Accounting Principles Board, or APB, Opinion No. 25,
Accounting for Stock Issued to Employees, or
APB 25, and related interpretations. Under APB 25,
when the exercise price of options granted to employees under
these plans equals the market price of the common stock on the
date of grant, no compensation expense is recorded. When the
exercise price of options granted to employees under these plans
is less than the market price of the common stock on the date of
grant, compensation expense is recognized on a straight-line
basis over the vesting period. All stock-based awards granted to
non-employees are accounted for at their fair value in
56
accordance with SFAS 123, as amended, and Emerging Issues
Task Force, or EITF, Issue
No. 96-18,
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, or
EITF 96-18,
under which compensation expense is generally recognized over
the vesting period of the award.
Determining the amount of stock-based compensation to be
recorded requires us to develop estimates of fair values of
stock options as of the grant date. We calculate the grant date
fair values using the Black-Scholes valuation model. Our
expected stock price volatility assumption is based on a
combination of implied volatilities of similar entities whose
share or option prices are publicly available as well as the
historical volatility of our publicly traded stock. For stock
option grants issued during the year ended December 31,
2006, we used a weighted-average expected stock-price volatility
assumption of 67%. Due to our short history of being a public
company, we estimated the expected life of option grants made
during the year ended December 31, 2006 using the
simplified method prescribed under Staff Accounting
Bulletin No. 107 since the grants qualify as
plain-vanilla options, which averages the
contractual term of the stock options (10 years) with the
vesting term (2.2 years) for an average of 6.1 years
for most stock options. The dividend yield of zero is based on
the fact that we have never paid cash dividends and have no
present intention to pay cash dividends. The risk-free interest
rate used for each grant is based on the U.S. Treasury
yield curve in effect at the time of grant for instruments with
a similar expected life.
As of December 31, 2006, the estimated fair value of
unvested employee awards was $17.1 million, net of
estimated forfeitures. This amount will be recognized over the
weighted average remaining vesting period of approximately
1.5 years for these awards. Stock-based employee
compensation was $6.1 million for the year ended
December 31, 2006. However, the total amount of
stock-compensation expense recognized in any future period
cannot be predicted at this time because it will depend on
levels of stock-based payments granted in the future as well as
the portion of the awards that actually vest. SFAS 123R
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The term
forfeitures is distinct from
cancellations or expirations and
represents only the unvested portion of the surrendered option.
We currently expect, based on an analysis of our historical
forfeitures, that approximately 84% of our options will actually
vest, and therefore have applied an annual forfeiture rate of
4.35% to all unvested options as of December 31, 2006.
Ultimately, the actual expense recognized over the vesting
period will only be for those shares that vest.
Results
of Operations
The following data summarizes the results of our operations for
the periods indicated, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues
|
|
$
|
26,930
|
|
|
$
|
5,716
|
|
|
$
|
4,278
|
|
Operating expenses
|
|
|
66,431
|
|
|
|
49,188
|
|
|
|
36,542
|
|
Loss from operations
|
|
|
(39,501
|
)
|
|
|
(43,472
|
)
|
|
|
(32,264
|
)
|
Net loss
|
|
$
|
(34,608
|
)
|
|
$
|
(42,914
|
)
|
|
$
|
(32,654
|
)
|
57
Discussion
of Results of Operations for 2006 and 2005
The following table summarizes our total consolidated net
revenues for the periods indicated, in thousands:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Novartis
|
|
$
|
21,775
|
|
|
$
|
746
|
|
Other research collaborators
|
|
|
3,294
|
|
|
|
4,423
|
|
InterfeRx program and research
reagent licenses
|
|
|
1,439
|
|
|
|
422
|
|
Other
|
|
|
422
|
|
|
|
125
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
26,930
|
|
|
$
|
5,716
|
|
|
|
|
|
|
|
|
|
|
Novartis. The increase in revenues relates to
a full year of activity for our main collaboration with Novartis
compared to only one quarter of activity during 2005. In
addition, the increase also resulted from our February 2006
alliance with Novartis for the development of RNAi therapeutics
for pandemic flu which provides for the reimbursement of
research costs incurred under this agreement as well as a share
of any future profits.
Other research collaborators. Other research
collaborators revenues consist of revenues from Biogen Idec,
Merck, the NIH and other government and foundation revenues. The
decrease in revenues from other research collaborators was
related to a $2.7 million decrease in revenues primarily
related to our Merck ocular disease collaboration, for which
development was suspended in September 2005 based on portfolio
management and commercial factors. The decrease in other
research collaborator revenues was partially offset by NIH
revenues as well as Biogen Idec revenues during 2006, which
consisted of research and development funding and amortization
revenues of the $5.0 million up-front payment.
InterfeRx. In addition to our collaboration
agreements, we have an InterfeRx program under which we have
licensed our intellectual property to others for the development
and commercialization of RNAi therapeutics in narrowly defined
therapeutic areas in which we are not currently engaged. We have
also granted licenses to our intellectual property to others for
the development and commercialization of research reagents and
services. We expect these programs to provide revenues from
license fees and royalties on sales by the licensees, subject to
limitations under our agreements with Novartis. The increase in
InterfeRx revenues and research reagent licenses revenue was due
primarily to $0.8 million payment from Quark during 2006.
Deferred Revenue. Total deferred revenue of
$17.9 million at December 31, 2006 consists of
payments received from our collaborators pursuant to our license
agreements that we have yet to earn pursuant to our revenue
recognition policy.
For the foreseeable future, we expect our revenues to continue
to be derived primarily from strategic alliances, collaborations
and licensing activities.
Operating
Expenses
The following tables summarize our operating expenses for the
periods indicated, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
Operating
|
|
|
Increase
|
|
|
|
2006
|
|
|
Expenses
|
|
|
2005
|
|
|
Expenses
|
|
|
$
|
|
|
%
|
|
|
Research and development
|
|
$
|
49,798
|
|
|
|
75
|
%
|
|
$
|
35,319
|
|
|
|
72
|
%
|
|
$
|
14,479
|
|
|
|
41
|
%
|
General and administrative
|
|
|
16,633
|
|
|
|
25
|
%
|
|
|
13,869
|
|
|
|
28
|
%
|
|
|
2,764
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
$
|
66,431
|
|
|
|
100
|
%
|
|
$
|
49,188
|
|
|
|
100
|
%
|
|
$
|
17,243
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
Research and development. The following table
summarizes the components of our research and development
expenses for the periods indicated, in thousands and as a
percentage of total research and development expenses, together
with the changes in thousands and percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
Expense
|
|
|
(Decrease)
|
|
|
|
2006
|
|
|
Category
|
|
|
2005
|
|
|
Category
|
|
|
$
|
|
|
%
|
|
|
Research and
development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and related
|
|
$
|
10,666
|
|
|
|
21
|
%
|
|
$
|
6,895
|
|
|
|
20
|
%
|
|
$
|
3,771
|
|
|
|
55
|
%
|
Clinical trial and manufacturing
expenses
|
|
|
10,019
|
|
|
|
20
|
%
|
|
|
537
|
|
|
|
2
|
%
|
|
|
9,482
|
|
|
|
1766
|
%
|
Facilities-related expenses
|
|
|
6,315
|
|
|
|
13
|
%
|
|
|
4,668
|
|
|
|
13
|
%
|
|
|
1,647
|
|
|
|
35
|
%
|
External services
|
|
|
6,001
|
|
|
|
12
|
%
|
|
|
8,924
|
|
|
|
25
|
%
|
|
|
(2,923
|
)
|
|
|
(33
|
)%
|
Lab supplies and materials
|
|
|
5,462
|
|
|
|
11
|
%
|
|
|
3,672
|
|
|
|
10
|
%
|
|
|
1,790
|
|
|
|
49
|
%
|
Non-cash stock-based compensation
|
|
|
5,006
|
|
|
|
10
|
%
|
|
|
2,431
|
|
|
|
7
|
%
|
|
|
2,575
|
|
|
|
106
|
%
|
License fees
|
|
|
4,040
|
|
|
|
8
|
%
|
|
|
6,904
|
|
|
|
20
|
%
|
|
|
(2,864
|
)
|
|
|
(41
|
)%
|
Other
|
|
|
2,289
|
|
|
|
5
|
%
|
|
|
1,288
|
|
|
|
3
|
%
|
|
|
1,001
|
|
|
|
78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
expenses
|
|
$
|
49,798
|
|
|
|
100
|
%
|
|
$
|
35,319
|
|
|
|
100
|
%
|
|
$
|
14,479
|
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2006, our research and
development expenses increased primarily due to the expansion of
our research and development organization in support of the
growth of our programs.
As indicated in the table above, the increase in research and
development expenses in 2006 as compared to the previous year
was primarily due to clinical trial and manufacturing related
expenses in support of our RSV clinical program, which began in
December 2005. The increase in compensation related expenses and
lab supplies and materials expenses was due to additional
research and development headcount over the past year to support
our alliances and expanding product pipeline. The increase in
stock-based compensation for the year ended December 31,
2006 was primarily due to our adoption of SFAS 123R on
January 1, 2006. We expect to continue to devote a
substantial portion of our resources to research and development
expenses and that research and development expenses will
increase as we continue development of our and our
collaborators product candidates and technologies.
We do not track most of our research and development costs or
our personnel and personnel-related costs on a
project-by-project
basis, because all of our programs are in the early stages of
development. However, our collaboration agreements contain cost
sharing arrangements whereby certain costs incurred under the
project are reimbursed. Costs reimbursed under the agreements
typically include certain direct external costs and a negotiated
full-time equivalent labor rate for the actual time worked on
the project. As a result, although a significant portion of our
research and development expenses are not tracked on a
project-by-project
basis, we do track direct external costs attributable to, and
the actual time our employees worked on, our collaborations.
59
General and administrative. The following
table summarizes the components of our general and
administrative expenses for the periods indicated, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
Expense
|
|
|
(Decrease)
|
|
|
|
2006
|
|
|
Category
|
|
|
2005
|
|
|
Category
|
|
|
$
|
|
|
%
|
|
|
General and
administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting and professional
services
|
|
$
|
4,624
|
|
|
|
28
|
%
|
|
$
|
3,780
|
|
|
|
27
|
%
|
|
$
|
844
|
|
|
|
22
|
%
|
Compensation and related
|
|
|
3,546
|
|
|
|
21
|
%
|
|
|
3,339
|
|
|
|
24
|
%
|
|
|
207
|
|
|
|
6
|
%
|
Non-cash stock-based compensation
|
|
|
3,298
|
|
|
|
20
|
%
|
|
|
2,166
|
|
|
|
16
|
%
|
|
|
1,132
|
|
|
|
52
|
%
|
Facilities related
|
|
|
2,736
|
|
|
|
16
|
%
|
|
|
1,893
|
|
|
|
14
|
%
|
|
|
843
|
|
|
|
45
|
%
|
Insurance
|
|
|
652
|
|
|
|
4
|
%
|
|
|
616
|
|
|
|
4
|
%
|
|
|
36
|
|
|
|
6
|
%
|
Other
|
|
|
1,777
|
|
|
|
11
|
%
|
|
|
2,075
|
|
|
|
15
|
%
|
|
|
(298
|
)
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and
administrative expenses
|
|
$
|
16,633
|
|
|
|
100
|
%
|
|
$
|
13,869
|
|
|
|
100
|
%
|
|
$
|
2,764
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As indicated in the table above, the increase in general and
administrative expenses in 2006 was primarily due to higher
stock-based compensation expenses related to our adoption of
SFAS No. 123R on January 1, 2006, higher
facilities related costs due to the expansion of our facilities
during 2006, as well as an increase in legal and professional
service fees due to increased business activities during 2006.
Interest income was $6.2 million in 2006 compared to
$1.5 million in 2005. The increase was due to our higher
average cash, cash equivalent and marketable securities
balances, primarily from our January and December 2006 public
offerings of common stock, as well as higher average interest
rates during 2006.
Interest expense was $1.0 million in each of 2006 and 2005.
Interest expense in each year related to borrowings under our
lines of credit used to finance capital equipment purchases. We
expect that our interest expense will increase as we finance
additional capital expenditures.
Discussion
of Results of Operations for 2005 and 2004
Net
revenues from research collaborators
The following table summarizes our total consolidated net
revenues for the periods indicated, in thousands:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Merck
|
|
$
|
3,579
|
|
|
$
|
4,066
|
|
CFFT
|
|
|
800
|
|
|
|
|
|
Novartis
|
|
|
746
|
|
|
|
|
|
InterfeRx
|
|
|
350
|
|
|
|
|
|
Other
|
|
|
241
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
$
|
5,716
|
|
|
$
|
4,278
|
|
|
|
|
|
|
|
|
|
|
Merck. Under our September 2003 collaboration
and license agreement with Merck, we have received upfront and
license payments which have been deferred and are being
recognized as revenue over six years, the estimated period of
performance under this agreement. In September 2003, we received
a $2.0 million payment and, in both September 2004 and
September 2005, we received additional payments of
$1.0 million. We recognized revenues of $0.9 million
and $0.6 million from the amortization of these payments in
2005 and 2004.
In December 2004, we achieved a scientific milestone, as defined
by this agreement, resulting in a $2.0 million milestone
payment from Merck. In connection with the achievement of this
scientific milestone, Merck made a $5.0 million equity
investment in our common stock. The purchase price of this
common stock, as defined by the agreement, was determined based
on the average trading price of our common stock during the
twenty days prior to
60
the purchase, which was $7.04. The price of our common stock on
the date of the purchase was $7.40 and resulted in an actual
value of $5.3 million for the common stock issued to Merck.
As a result, we recorded a reduction of $0.3 million to the
revenue recorded from Merck during 2004.
Under the terms of our agreement with Merck relating to ocular
targets, in 2004 we received a $2.0 million license fee, as
well as $1.0 million representing reimbursement of prior
research and development costs, which we incurred on our
pre-existing ocular disease program. Prior to the termination of
this agreement in July 2006, these amounts were being amortized
into revenues over the then-estimated period of performance
under the collaboration agreement of eight years. As such, we
recorded revenues of $0.5 million in 2005 and
$0.2 million in 2004 from the amortization of these
payments. In addition to upfront and milestone payments, this
agreement provided for the sharing of research costs incurred
under this agreement. We recorded net revenues of
$2.2 million in 2005 and $1.5 million in 2004 from
these cost sharing activities.
CFFT. Under the collaboration agreement we
entered into with CFFT in March 2005, CFFT provided us with an
initial payment of $0.5 million and a milestone payment of
$0.3 million, which we recorded as revenue.
Novartis. Under our October 2005 collaboration
and license agreement with Novartis, we received an upfront
payment totaling $10.0 million in consideration for rights
granted to Novartis under our collaboration and to partly
reimburse costs previously incurred by us to develop in vivo
RNAi technology. In addition, in October 2005, Novartis
purchased approximately 5.3 million shares at a purchase
price of $11.11 per share for an aggregate purchase price
of approximately $58.5 million. The closing price of our
common stock on the date of purchase was $9.90. We recorded the
difference between the purchase price and the closing price of
$6.4 million as deferred revenue. We recognized revenues of
$0.7 million under our Novartis collaboration during 2005.
InterfeRx Licenses. In 2005, we began
licensing our intellectual property to others under our
InterfeRx program. Under existing programs, we recognized
revenues of $0.4 million in 2005.
Deferred Revenue. Deferred revenue of
$20.8 million at December 31, 2005 represents payments
received from our collaborators pursuant to our license
agreements with them which we have yet to earn pursuant to our
revenue recognition policy.
Operating
Expenses
The following tables summarize our operating expenses for the
periods indicated, in thousands and as a percentage of total
expenses, together with the changes in thousands and percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
Operating
|
|
|
Increase
|
|
|
|
2005
|
|
|
Expenses
|
|
|
2004
|
|
|
Expenses
|
|
|
$
|
|
|
%
|
|
|
Research and development
|
|
$
|
35,319
|
|
|
|
72
|
%
|
|
$
|
24,603
|
|
|
|
67
|
%
|
|
$
|
10,716
|
|
|
|
44
|
%
|
General and administrative
|
|
|
13,869
|
|
|
|
28
|
%
|
|
|
11,939
|
|
|
|
33
|
%
|
|
|
1,930
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
$
|
49,188
|
|
|
|
100
|
%
|
|
$
|
36,542
|
|
|
|
100
|
%
|
|
$
|
12,646
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
Research and development. The following table
summarizes the components of our research and development
expenses for the periods indicated, in thousands and as a
percentage of total research and development expenses, together
with the changes in thousands and percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
Expense
|
|
|
Increase
|
|
|
|
2005
|
|
|
Category
|
|
|
2004
|
|
|
Category
|
|
|
$
|
|
|
%
|
|
|
Research and
development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External services
|
|
$
|
9,461
|
|
|
|
27
|
%
|
|
$
|
3,489
|
|
|
|
14
|
%
|
|
$
|
5,972
|
|
|
|
171
|
%
|
License and patent fees
|
|
|
6,904
|
|
|
|
20
|
%
|
|
|
5,833
|
|
|
|
24
|
%
|
|
|
1,071
|
|
|
|
18
|
%
|
Compensation and related
|
|
|
6,895
|
|
|
|
20
|
%
|
|
|
5,925
|
|
|
|
24
|
%
|
|
|
970
|
|
|
|
16
|
%
|
Facilities-related expenses
|
|
|
4,668
|
|
|
|
13
|
%
|
|
|
3,055
|
|
|
|
12
|
%
|
|
|
1,613
|
|
|
|
53
|
%
|
Lab supplies and materials
|
|
|
3,672
|
|
|
|
10
|
%
|
|
|
3,057
|
|
|
|
12
|
%
|
|
|
615
|
|
|
|
20
|
%
|
Stock-based compensation
|
|
|
2,431
|
|
|
|
7
|
%
|
|
|
2,087
|
|
|
|
9
|
%
|
|
|
344
|
|
|
|
16
|
%
|
Other
|
|
|
1,288
|
|
|
|
3
|
%
|
|
|
1,157
|
|
|
|
5
|
%
|
|
|
131
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
expenses
|
|
$
|
35,319
|
|
|
|
100
|
%
|
|
$
|
24,603
|
|
|
|
100
|
%
|
|
$
|
10,716
|
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2005, our research and
development expenses increased due to the expansion of our
research and development organization in support of the growth
of our programs.
As indicated by the table above, the most significant increase
in our research and development expenses in 2005 was external
services. External services includes pre-clinical expenses,
clinical expenses and consulting expenses related to the
development of our RSV program, which began in December 2005,
and our ocular disease program, for which development was
suspended in September 2005 based on changing clinical
development and commercial factors. License and patent fees for
2005 included $3.7 million in payments to certain entities
as a result of the Novartis agreement, as well as a
$2.1 million non-cash charge in the second quarter of 2005
resulting from the issuance of 270,000 shares of our common
stock in connection with the June 2005 amendment to our license
agreements with Max Planck Innovation. Our facilities-related
research and development expenses increased in 2005 due to the
occupation of our new facility for all of 2005 compared to only
half of 2004.
General and administrative. The following
tables summarize the components of our general and
administrative expenses for the periods indicated, in thousands
and as a percentage of total general and administrative
expenses, together with the changes in thousands and percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Increase
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
Expense
|
|
|
(Decrease)
|
|
|
|
2005
|
|
|
Category
|
|
|
2004
|
|
|
Category
|
|
|
$
|
|
|
%
|
|
|
General and
administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting and professional
services
|
|
$
|
3,780
|
|
|
|
27
|
%
|
|
$
|
2,891
|
|
|
|
24
|
%
|
|
$
|
889
|
|
|
|
31
|
%
|
Compensation and related
|
|
|
3,339
|
|
|
|
24
|
%
|
|
|
3,316
|
|
|
|
28
|
%
|
|
|
23
|
|
|
|
1
|
%
|
Stock-based compensation
|
|
|
2,166
|
|
|
|
16
|
%
|
|
|
2,019
|
|
|
|
17
|
%
|
|
|
147
|
|
|
|
7
|
%
|
Facilities related
|
|
|
1,893
|
|
|
|
14
|
%
|
|
|
2,135
|
|
|
|
18
|
%
|
|
|
(242
|
)
|
|
|
(11
|
)%
|
Insurance
|
|
|
616
|
|
|
|
4
|
%
|
|
|
388
|
|
|
|
3
|
%
|
|
|
228
|
|
|
|
59
|
%
|
Other
|
|
|
2,075
|
|
|
|
15
|
%
|
|
|
1,190
|
|
|
|
10
|
%
|
|
|
885
|
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and
administrative expenses
|
|
$
|
13,869
|
|
|
|
100
|
%
|
|
$
|
11,939
|
|
|
|
100
|
%
|
|
$
|
1,930
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As indicated in the table above, the most significant increase
in general and administrative expenses in 2005 was an increase
in consulting and professional services, which was due primarily
to increases in expenses associated with business development
activities and Sarbanes-Oxley compliance efforts. Increased
insurance costs in 2005 were a result of our operation for a
full year as a publicly traded company.
62
Interest income was $1.5 million in 2005 compared to
$0.5 million in 2004. The increase was due to our higher
average cash, cash equivalent and marketable securities balances
in 2005, as well as higher average interest rates.
Interest expense was $1.0 million in 2005 compared to
$0.7 million in 2004. Interest expense for 2005 is the
result of increased borrowings under our line of credit with
Lighthouse used to finance capital equipment purchases.
Liquidity
and Capital Resources
The following table summarizes our cash flow activities for the
periods indicated, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net loss
|
|
$
|
(34,608
|
)
|
|
$
|
(42,914
|
)
|
|
$
|
(32,654
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities
|
|
|
12,633
|
|
|
|
9,672
|
|
|
|
6,599
|
|
Changes in operating assets and
liabilities
|
|
|
(2,655
|
)
|
|
|
16,757
|
|
|
|
6,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(24,630
|
)
|
|
|
(16,485
|
)
|
|
|
(19,570
|
)
|
Net cash used in investing
activities
|
|
|
(30,046
|
)
|
|
|
(40,418
|
)
|
|
|
(34,222
|
)
|
Net cash provided by financing
activities
|
|
|
166,631
|
|
|
|
52,617
|
|
|
|
50,604
|
|
Effect of exchange rate on cash
|
|
|
243
|
|
|
|
(229
|
)
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
112,198
|
|
|
|
(4,515
|
)
|
|
|
(2,921
|
)
|
Cash and cash equivalents,
beginning of period
|
|
|
15,757
|
|
|
|
20,272
|
|
|
|
23,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
127,955
|
|
|
$
|
15,757
|
|
|
$
|
20,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since we commenced operations in June 2002, we have generated
significant losses. As of December 31, 2006, we had an
accumulated deficit of $140.5 million. As of
December 31, 2006, we had cash, cash equivalents and
marketable securities of $217.3 million, compared to cash,
cash equivalents and marketable securities of $80.0 million
as of December 31, 2005. This cash balance includes
approximately $163.3 million of net proceeds from our
follow-on public offerings in January and December 2006. We
invest primarily in cash equivalents, U.S. government
obligations, high-grade corporate notes and commercial paper.
Our investment objectives are primarily, to assure liquidity and
preservation of capital and, secondarily, to obtain investment
income. All of our investments in debt securities are recorded
at fair value and are available for sale. Fair value is
determined based on quoted market prices.
Operating
activities
We have required significant amounts of cash to fund our
operating activities as a result of net losses since our
inception. This trend continued in 2006 as our use of cash in
our operating activities increased as compared to the year ended
December 31, 2005. The main components of our use of cash
in operating activities are the net loss and changes in our
operating assets and liabilities. Cash used in operating
activities is adjusted for non-cash items to reconcile net loss
to net cash used in operating activities. These non-cash
adjustments primarily consist of stock-based compensation,
depreciation and amortization. Non-cash stock-based compensation
increased due primarily to our adoption of SFAS 123R on
January 1, 2006 as well as to a lesser extent the increase
of the fair value of non-employee stock options. In addition, we
received $1.1 million in proceeds from our landlord for
tenant improvements at our Cambridge facility. These increases
were offset by a net accounts receivable increase of
$3.2 million and amortization of deferred revenue of
$2.9 million for the year ended December 31, 2006. Our
cash utilization is expected to continue throughout 2007 and
thereafter as we continue to develop and advance our research
and development initiatives. The actual amount of overall
expenditures will depend on numerous factors, including the
timing of expenses, the timing and terms of collaboration
agreements or other strategic transactions, if any, and the
timing and progress of our research and development efforts.
63
Investing
activities
For the year ended December 31, 2006, net cash used in
investing activities of approximately $30.0 million
resulted from net purchases of marketable securities of
$25.1 million as well as purchases of property and
equipment of $5.0 million related to the expansion of our
Cambridge facility. For the year ended December 31, 2005,
net cash provided by investing activities resulted from net
sales of marketable securities of approximately
$38.5 million, partially offset by purchases of property
and equipment of approximately $1.9 million.
Financing
activities
Since our inception, we have funded our operations primarily
through the sale of equity securities. Through 2006, we raised
approximately $54.8 million in net proceeds from the sale
of redeemable convertible preferred stock and approximately
$256.8 million from the sale of common stock, including
$29.9 million from the sale of 5.75 million shares of
our common stock in our initial public offering, which was
completed in June 2004, $58.4 million from the sale of
approximately 5.3 million shares of our common stock to
Novartis, which was completed in October 2005, and
$163.3 million of net proceeds from our follow-on public
offerings in January and December 2006.
In addition to sales of equity securities, we have financed a
portion of our property and equipment purchases through the
establishment of equipment lines of credit. In March 2006, we
entered into an agreement with Oxford Finance Corporation to
establish an equipment line of credit for up to
$7.0 million to help support capital expansion of our
facility in Cambridge, Massachusetts and capital equipment
purchases. During 2006, we borrowed an aggregate of
$4.2 million from Oxford pursuant to the agreement. Of such
amount, $1.3 million bears interest at fixed rates ranging
from 10.1% to 10.4% and is being repaid in 48 monthly
installments of principal and interest. The remainder of such
amount, approximately $2.9 million, bears interest at fixed
rates ranging from 10.0% to 10.4% and is being repaid in
36 monthly installments of principal and interest.
In March 2004, we entered into an equipment line of credit with
Lighthouse Capital Partners to finance leasehold improvements
and equipment purchases of up to $10.0 million. The
outstanding principal bears interest at a fixed rate of 9.25%,
except for the drawdown made in December 2005 which bears
interest at a fixed rate of 10.25%, maturing at various dates
through December 2009. We were required to make interest-only
payments on all draw-downs made during the period from
March 26, 2004 through June 30, 2005, at which point
all draw-downs began to be repaid over 48 months. On the
maturity of each equipment advance under the line of credit, we
are required to pay, in addition to the paid principal and
interest, an additional amount of 11.5% of the original
principal. This amount is being accrued over the applicable
borrowing period as additional interest expense.
At December 31, 2006, we had an aggregate outstanding
principal balance of $9.1 million under all of our loan
agreements.
Based on our current operating plan, we believe that our
existing resources, together with the cash we expect to generate
under our collaborations, will be sufficient to fund our planned
operations for at least the next several years, during which
time we expect to extend the capabilities of our technology
platform, further the development of our products, conduct
clinical trials and continue to prosecute patent applications
and otherwise build and maintain our patent portfolio. However,
we may require significant additional funds earlier than we
currently expect in order to develop, and commence clinical
trials for, any product candidates.
We may seek additional funding through collaborative
arrangements and public or private financings. Additional
funding may not be available to us on acceptable terms or at
all. In addition, the terms of any financing may adversely
affect the holdings or the rights of our stockholders. For
example, if we raise additional funds by issuing equity
securities, further dilution to our existing stockholders may
result. If we are unable to obtain funding on a timely basis, we
may be required to significantly curtail one or more of our
research or development programs. We also could be required to
seek funds through arrangements with collaborators or others
that may require us to relinquish rights to some of our
technologies or product candidates that we would otherwise
pursue.
64
Even if we are able to raise additional funds in a timely
manner, our future capital requirements may vary from what we
expect and will depend on many factors, including the following:
|
|
|
|
|
our progress in demonstrating that siRNAs can be active as drugs;
|
|
|
|
our ability to develop relatively standard procedures for
selecting and modifying siRNA drug candidates;
|
|
|
|
progress in our research and development programs, as well as
the magnitude of these programs;
|
|
|
|
the timing, receipt, and amount of milestone and other payments,
if any, from present and future collaborators, if any;
|
|
|
|
our ability to establish and maintain additional collaborative
arrangements;
|
|
|
|
the resources, time and costs required to successfully initiate
and complete our pre-clinical and clinical trials, obtain
regulatory approvals, protect our intellectual property and
obtain and maintain licenses to third-party intellectual
property;
|
|
|
|
the cost of preparing, filing, prosecuting, maintaining, and
enforcing patent claims; and
|
|
|
|
the timing, receipt and amount of sales and royalties, if any,
from our potential products.
|
Off-Balance
Sheet Arrangements
In connection with certain license agreements, we are required
to indemnify the licensor for certain damages arising under the
agreement. In addition, we are a party to a number of agreements
entered into in the ordinary course of business, which contain
typical provisions, which obligate us to indemnify the other
parties to such agreements upon the occurrence of certain
events. These indemnification obligations are considered
off-balance sheet arrangements in accordance with FASB
Interpretation 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. To date, we have not
encountered material costs as a result of such obligations and
have not accrued any liabilities related to such obligations and
have not accrued any liabilities related to such obligations in
our financial statements. See Note 6 to our consolidated
financial statements included in this Annual Report on
Form 10-K
for further discussion of these indemnification agreements.
Contractual
Obligations
Set forth below is a description of our contractual cash
obligations as of December 31, 2006, in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
2008 and
|
|
|
2010 and
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
2007
|
|
|
2009
|
|
|
2011
|
|
|
After 2011
|
|
|
Total
|
|
|
Operating lease obligations(1)
|
|
$
|
2,675
|
|
|
$
|
4,757
|
|
|
$
|
3,881
|
|
|
$
|
|
|
|
$
|
11,313
|
|
Short and long-term debt(2)
|
|
|
3,942
|
|
|
|
7,129
|
|
|
|
234
|
|
|
|
|
|
|
|
11,305
|
|
Purchase obligations(3)
|
|
|
495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
495
|
|
Fixed license payments(4)
|
|
|
488
|
|
|
|
991
|
|
|
|
1,045
|
|
|
|
5,630
|
|
|
|
8,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
7,600
|
|
|
$
|
12,877
|
|
|
$
|
5,160
|
|
|
$
|
5,630
|
|
|
$
|
31,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating lease obligations include our Cambridge, Massachusetts
and Kulmbach, Germany non-cancelable operating lease agreements |
|
(2) |
|
Relates to our line of credit with Oxford Financial Corporation,
entered into in March 2006, and our line of credit with
Lighthouse Capital Partners V, LP., entered into in March
2004 |
|
(3) |
|
Relates primarily to non-cancellable purchase orders |
|
(4) |
|
Fixed license payments relates to our payment commitments for
the rights to use certain technologies in our research and in
any products we may develop that include these technologies |
65
We in-license technology from a number of sources. Pursuant
to these in-license agreements, we will be required to make
additional payments if and when we achieve specified development
and regulatory milestones.
Recent
Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Instruments, or SFAS 155,
which is an amendment to SFAS No. 133 and
SFAS No. 140. SFAS 155 allows financial
instruments which have embedded derivatives to be accounted for
as a whole (eliminating the need to bifurcate the derivative
from its host) if the holder elects to account for the
instrument as a whole instrument on a fair value basis. This
statement is effective for all financial instruments acquired or
issued after the beginning of an entitys first fiscal year
that begins after September 15, 2006. We do not believe the
adoption of this statement will have a material impact on our
consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, or FIN 48,
which clarifies the accounting for uncertainty in income taxes
recognized in a companys financial statements in
accordance with FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 requires a company to recognize, in
its financial statements, the impact of a tax position only if
that position is more likely than not of being
sustained on an audit basis solely on the technical merit of the
position. In addition, FIN 48 requires qualitative and
quantitative disclosures including a discussion of reasonably
possible changes that might occur in the recognized tax benefits
over the next 12 months as well as a roll-forward of all
unrecognized tax benefits. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We intend to adopt
FIN 48 beginning January 2007 and are currently evaluating
the impact FIN 48 might have on our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements, or SFAS 157, which addresses how
companies should measure fair value when they are required to do
so for recognition or disclosure purposes. The standard provides
a common definition of fair value and is intended to make the
measurement of fair value more consistent and comparable as well
as improving disclosures about those measures. The standard is
effective for financial statements for fiscal years beginning
after November 15, 2007. This standard formalizes the
measurement principles to be utilized in determining fair value
for purposes such as derivative valuation and impairment
analysis. We are still evaluating the implications of
SFAS 157, but do not currently expect it to have a
significant impact on our consolidated financial statements.
In February 2007, the FASB issued FAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities-including an amendment of FAS 115
(FAS No. 159). The new statement allows
entities to choose, at specified election dates, to measure
eligible financial assets and liabilities at fair value that are
not otherwise required to be measured at fair value. If a
company elects the fair value option for an eligible item,
changes in that items fair value in subsequent reporting
periods must be recognized in current earnings.
FAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We are currently evaluating the
potential impact of FAS No. 159 on our financial
position and results of operations.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
As part of our investment portfolio, we own financial
instruments that are sensitive to market risks. The investment
portfolio is used to preserve our capital until it is required
to fund operations, including our research and development
activities. Our marketable securities consist of
U.S. government obligations, corporate debt and commercial
paper. All of our investments in debt securities are classified
as
available-for-sale
and are recorded at fair value. Our
available-for-sale
investments are sensitive to changes in interest rates. Interest
rate changes would result in a change in the net fair value of
these financial instruments due to the difference between the
market interest rate and the market interest rate at the date of
purchase of the financial instrument. A 10% decrease in market
interest rates at December 31, 2006 would impact the net
fair value of such interest-sensitive financial instruments by
approximately $0.2 million.
Foreign
Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate risk. Our
European operations are based in Kulmbach, Germany and the
functional currency of these operations is the Euro. We provide
funding to our European
66
operations to pay for obligations denominated in Euros. The
effect that fluctuations in the exchange rate between the Euro
and the United States Dollar have on the amounts payable to fund
our European operations are recorded in our consolidated
statements of operations as other income or expense. We do not
enter into any foreign exchange hedge contracts.
Assuming the amount of expenditures by our European operations
were consistent with 2006 and the timing of the funding of these
operations were to remain consistent during the remainder of
2007, a constant increase or decrease in the exchange rate
between the Euro and the United States Dollar during the
remainder of 2007 of 10% would result in a foreign exchange gain
or loss of approximately $0.1 million.
67
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
69
|
|
|
|
|
70
|
|
|
|
|
72
|
|
|
|
|
73
|
|
|
|
|
74
|
|
|
|
|
75
|
|
|
|
|
76
|
|
68
Managements
Annual Report on Internal Control Over Financial
Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is defined
in
Rule 13a-15(f)
or 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers and effected by the companys board of directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that:
|
|
|
|
|
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and
directors of the Company; and
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2006. In making this assessment, the
Companys management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
Based on our assessment, management concluded that, as of
December 31, 2006, the Companys internal control over
financial reporting is effective based on those criteria.
The Companys independent registered public accounting firm
has issued an audit report on our assessment of the
Companys internal control over financial reporting. This
report appears on page 70.
69
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Alnylam
Pharmaceuticals, Inc:
We have completed integrated audits of Alnylam Pharmaceuticals,
Incs. 2006 and 2005 consolidated financial statements and
of its internal control over financial reporting as of
December 31, 2006 and an audit of its 2004 consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial statements and financial statement schedule:
In our opinion, the consolidated financial statements listed in
the accompanying index appearing under Item 15(a)(1)
present fairly, in all material respects, the financial position
of Alnylam Pharmaceuticals, Inc. and its subsidiaries at
December 31, 2006 and 2005 and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 8 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in 2006.
Internal
control over financial reporting:
Also, in our opinion, managements assessment, included in
Managements Annual Report on Internal Control over
Financial Reporting appearing under Item 8, that the
Company maintained effective internal control over financial
reporting as of December 31, 2006 based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly
stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on criteria
established in Internal Control Integrated
Framework issued by the COSO. The Companys management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express opinions on managements assessment and on
the effectiveness of the Companys internal control over
financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an
understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating
the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable
70
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 9, 2007
71
ALNYLAM
PHARMACEUTICALS, INC.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
127,955
|
|
|
$
|
15,757
|
|
Marketable securities
|
|
|
89,305
|
|
|
|
64,245
|
|
Collaboration receivables
|
|
|
3,829
|
|
|
|
609
|
|
Related party notes receivable
|
|
|
|
|
|
|
146
|
|
Prepaid expenses and other current
assets
|
|
|
1,695
|
|
|
|
1,657
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
222,784
|
|
|
|
82,414
|
|
Property and equipment, net
|
|
|
12,173
|
|
|
|
10,580
|
|
Intangible assets, net
|
|
|
1,933
|
|
|
|
2,491
|
|
Restricted cash
|
|
|
2,313
|
|
|
|
2,313
|
|
Other assets
|
|
|
803
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
240,006
|
|
|
$
|
98,348
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,085
|
|
|
$
|
1,975
|
|
Accrued expenses
|
|
|
4,479
|
|
|
|
3,899
|
|
Current portion of notes payable
|
|
|
3,217
|
|
|
|
1,876
|
|
Deferred revenue
|
|
|
11,144
|
|
|
|
10,734
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
22,925
|
|
|
|
18,484
|
|
Deferred revenue, net of current
portion
|
|
|
6,786
|
|
|
|
10,099
|
|
Deferred rent
|
|
|
3,202
|
|
|
|
2,467
|
|
Notes payable, net of current
portion
|
|
|
5,919
|
|
|
|
5,519
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
38,832
|
|
|
|
36,569
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 6)
|
|
|
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par
value, 5,000,000 shares authorized and no shares issued and
outstanding at December 31, 2006 and December 31, 2005
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value, 125,000,000 shares authorized;
37,050,631 shares issued and outstanding at
December 31, 2006; 26,721,149 shares issued and
26,638,255 shares outstanding at December 31, 2005
|
|
|
371
|
|
|
|
267
|
|
Additional paid-in capital
|
|
|
340,779
|
|
|
|
170,033
|
|
Deferred stock compensation
|
|
|
(89
|
)
|
|
|
(2,460
|
)
|
Accumulated other comprehensive
income (loss)
|
|
|
640
|
|
|
|
(142
|
)
|
Accumulated deficit
|
|
|
(140,527
|
)
|
|
|
(105,919
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
201,174
|
|
|
|
61,779
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
240,006
|
|
|
$
|
98,348
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
72
ALNYLAM
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues from research
collaborators
|
|
$
|
26,930
|
|
|
$
|
5,716
|
|
|
$
|
4,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)
|
|
|
49,798
|
|
|
|
35,319
|
|
|
|
24,603
|
|
General and administrative(1)
|
|
|
16,633
|
|
|
|
13,869
|
|
|
|
11,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
66,431
|
|
|
|
49,188
|
|
|
|
36,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(39,501
|
)
|
|
|
(43,472
|
)
|
|
|
(32,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
6,177
|
|
|
|
1,549
|
|
|
|
504
|
|
Interest expense
|
|
|
(1,029
|
)
|
|
|
(969
|
)
|
|
|
(661
|
)
|
Other expense
|
|
|
(255
|
)
|
|
|
(22
|
)
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
4,893
|
|
|
|
558
|
|
|
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(34,608
|
)
|
|
|
(42,914
|
)
|
|
|
(32,654
|
)
|
Accretion of redeemable
convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
(2,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(34,608
|
)
|
|
$
|
(42,914
|
)
|
|
$
|
(35,367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(34,608
|
)
|
|
$
|
(42,914
|
)
|
|
$
|
(32,654
|
)
|
Foreign currency translation
|
|
|
665
|
|
|
|
(534
|
)
|
|
|
399
|
|
Unrealized gain (loss) on
marketable securities
|
|
|
117
|
|
|
|
(28
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(33,826
|
)
|
|
$
|
(43,476
|
)
|
|
$
|
(32,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common
share basic and diluted
|
|
$
|
(1.09
|
)
|
|
$
|
(1.96
|
)
|
|
$
|
(2.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
used to compute basic and diluted net loss per common share
|
|
|
31,890
|
|
|
|
21,949
|
|
|
|
11,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-cash stock-based compensation expense included in these
amounts are as follows: |
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
5,006
|
|
$
|
2,431
|
|
$
|
2,087
|
General and administrative
|
|
|
3,298
|
|
|
2,166
|
|
|
2,019
|
The accompanying notes are an integral part of these
consolidated financial statements.
73
ALNYLAM
PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS EQUITY (DEFICIT)
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
Redeemable Convertible
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
Stockholders
|
|
|
|
Preferred Stock
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
(Loss) Income
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance at December 31,
2003
|
|
|
21,066,680
|
|
|
$
|
55,189
|
|
|
|
|
2,251,482
|
|
|
$
|
|
|
|
$
|
7,416
|
|
|
$
|
(4,681
|
)
|
|
$
|
76
|
|
|
$
|
(29,518
|
)
|
|
$
|
(26,707
|
)
|
Adjustment to reflect change in par
value of common stock (Note 8.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock options
|
|
|
|
|
|
|
|
|
|
|
|
255,075
|
|
|
|
3
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168
|
|
Issuance of convertible preferred
stock
|
|
|
1,666,667
|
|
|
|
10,557
|
|
|
|
|
|
|
|
|
|
|
|
|
833
|
|
|
|
|
|
|
|
|
|
|
|
(833
|
)
|
|
|
|
|
Accretion of preferred stock
|
|
|
|
|
|
|
1,880
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,880
|
)
|
Repurchase of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
(82,890
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation related to
stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,056
|
|
|
|
(3,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation expense related to stock options and restricted
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
4,040
|
|
|
|
|
|
|
|
|
|
|
|
4,105
|
|
Conversion of redeemable
convertible preferred stock into common stock upon initial
public offering
|
|
|
(22,733,347
|
)
|
|
|
(67,626
|
)
|
|
|
|
11,964,908
|
|
|
|
120
|
|
|
|
67,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,626
|
|
Issuance of common stock upon
initial public offering, net of offering costs of $4,616
|
|
|
|
|
|
|
|
|
|
|
|
5,750,000
|
|
|
|
57
|
|
|
|
29,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,884
|
|
Issuance of common stock pursuant
to collaboration agreement
|
|
|
|
|
|
|
|
|
|
|
|
710,273
|
|
|
|
7
|
|
|
|
5,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,256
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399
|
|
|
|
|
|
|
|
399
|
|
Unrealized loss on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55
|
)
|
|
|
|
|
|
|
(55
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,654
|
)
|
|
|
(32,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
20,848,848
|
|
|
|
208
|
|
|
|
112,216
|
|
|
|
(3,697
|
)
|
|
|
420
|
|
|
|
(63,005
|
)
|
|
|
46,142
|
|
Exercise of common and restricted
stock options and warrants
|
|
|
|
|
|
|
|
|
|
|
|
199,750
|
|
|
|
2
|
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
186
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
5,589,657
|
|
|
|
57
|
|
|
|
54,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,330
|
|
Deferred compensation related to
stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,661
|
|
|
|
(2,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation expense related to stock options and restricted
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
699
|
|
|
|
3,898
|
|
|
|
|
|
|
|
|
|
|
|
4,597
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(534
|
)
|
|
|
|
|
|
|
(534
|
)
|
Unrealized loss on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
(28
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,914
|
)
|
|
|
(42,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
26,638,255
|
|
|
|
267
|
|
|
|
170,033
|
|
|
|
(2,460
|
)
|
|
|
(142
|
)
|
|
|
(105,919
|
)
|
|
|
61,779
|
|
Exercise of common stock options
and warrants
|
|
|
|
|
|
|
|
|
|
|
|
539,425
|
|
|
|
5
|
|
|
|
998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,003
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
56,990
|
|
|
|
1
|
|
|
|
591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
592
|
|
Deferred compensation related to
stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,614
|
|
|
|
(467
|
)
|
|
|
|
|
|
|
|
|
|
|
1,147
|
|
Amortization of deferred
compensation expense related to stock options and restricted
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,318
|
|
|
|
2,838
|
|
|
|
|
|
|
|
|
|
|
|
7,156
|
|
Issuance of common stock upon
public offerings, net of offering costs of $6,586
|
|
|
|
|
|
|
|
|
|
|
|
9,815,961
|
|
|
|
98
|
|
|
|
163,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,323
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
665
|
|
|
|
|
|
|
|
665
|
|
Unrealized gain on marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
|
|
|
|
|
|
|
|
117
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,608
|
)
|
|
|
(34,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2006
|
|
|
|
|
|
$
|
|
|
|
|
|
37,050,631
|
|
|
$
|
371
|
|
|
$
|
340,779
|
|
|
$
|
(89
|
)
|
|
$
|
640
|
|
|
$
|
(140,527
|
)
|
|
$
|
201,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
74
ALNYLAM
PHARMACEUTICALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(34,608
|
)
|
|
$
|
(42,914
|
)
|
|
$
|
(32,654
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,815
|
|
|
|
3,119
|
|
|
|
2,444
|
|
Loss on disposal of equipment
|
|
|
|
|
|
|
|
|
|
|
49
|
|
Non-cash stock-based compensation
|
|
|
8,304
|
|
|
|
4,597
|
|
|
|
4,106
|
|
Realized foreign currency losses
(gains)
|
|
|
255
|
|
|
|
(137
|
)
|
|
|
|
|
Non-cash license expense
|
|
|
130
|
|
|
|
2,093
|
|
|
|
|
|
Charge for 401(k) company stock
match
|
|
|
129
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and
liabilities, net of effects of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from landlord tenant
improvements
|
|
|
1,106
|
|
|
|
|
|
|
|
3,003
|
|
Collaboration receivables
|
|
|
(3,220
|
)
|
|
|
243
|
|
|
|
(859
|
)
|
Prepaid expenses and other assets
|
|
|
(336
|
)
|
|
|
(256
|
)
|
|
|
(637
|
)
|
Accounts payable
|
|
|
2,088
|
|
|
|
1,025
|
|
|
|
(615
|
)
|
Accrued expenses
|
|
|
611
|
|
|
|
(12
|
)
|
|
|
2,399
|
|
Deferred revenue
|
|
|
(2,904
|
)
|
|
|
15,757
|
|
|
|
3,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(24,630
|
)
|
|
|
(16,485
|
)
|
|
|
(19,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(4,986
|
)
|
|
|
(1,947
|
)
|
|
|
(9,006
|
)
|
Increase in restricted cash
|
|
|
|
|
|
|
|
|
|
|
373
|
|
Proceeds from sale of equipment
|
|
|
|
|
|
|
|
|
|
|
185
|
|
Purchases of marketable securities
|
|
|
(172,303
|
)
|
|
|
(70,882
|
)
|
|
|
(33,499
|
)
|
Sales of marketable securities
|
|
|
147,243
|
|
|
|
32,411
|
|
|
|
7,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(30,046
|
)
|
|
|
(40,418
|
)
|
|
|
(34,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock, net of issuance costs
|
|
|
164,890
|
|
|
|
52,423
|
|
|
|
35,308
|
|
Proceeds from issuance of preferred
stock, net of issuance costs
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Proceeds from notes payable
|
|
|
4,000
|
|
|
|
1,037
|
|
|
|
7,201
|
|
Repayments of notes payable
|
|
|
(2,259
|
)
|
|
|
(843
|
)
|
|
|
(1,859
|
)
|
Deferred financing costs incurred
in connection with the equipment line of credit
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
166,631
|
|
|
|
52,617
|
|
|
|
50,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash
|
|
|
243
|
|
|
|
(229
|
)
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
112,198
|
|
|
|
(4,515
|
)
|
|
|
(2,921
|
)
|
Cash and cash equivalents,
beginning of period
|
|
|
15,757
|
|
|
|
20,272
|
|
|
|
23,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
127,955
|
|
|
$
|
15,757
|
|
|
$
|
20,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
726
|
|
|
$
|
633
|
|
|
$
|
487
|
|
Supplemental disclosure of
non-cash financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to Max Planck
Innovation
|
|
$
|
130
|
|
|
$
|
2,093
|
|
|
$
|
|
|
Fair value of warrant issued in
connection with equipment line of credit included as deferred
financing costs
|
|
|
|
|
|
|
|
|
|
|
557
|
|
Conversion of redeemable
convertible preferred stock into common stock
|
|
|
|
|
|
|
|
|
|
|
67,626
|
|
Accretion of redeemable convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
|
2,713
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
75
ALNYLAM
PHARMACEUTICALS, INC.
Alnylam Pharmaceuticals, Inc. (the Company or
Alnylam) commenced operations on June 14, 2002
as a biopharmaceutical company seeking to develop and
commercialize new drugs that work through a recently discovered
system in cells known as RNA interference, or RNAi. Alnylam is
focused on discovering, developing and commercializing RNAi
therapeutics by establishing strategic alliances with leading
pharmaceutical and biotechnology companies, establishing and
maintaining a strong intellectual property position in the RNAi
field and generating revenues through licensing agreements. The
Company has devoted substantially all of its efforts to business
planning, research and development, acquiring intellectual
property rights, recruiting management and technical staff, and
raising capital.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation and Principles of Consolidation
The Company comprises four entities, Alnylam Pharmaceuticals,
Inc. (the parent company) and three subsidiaries (Alnylam U.S.,
Inc., Alnylam Europe AG and Alnylam Securities Corporation).
Alnylam Pharmaceuticals, Inc. is a Delaware corporation that was
formed on May 8, 2003. Alnylam U.S. is also a Delaware
corporation that was formed on June 14, 2002. Alnylam
Securities Corporation is a Massachusetts corporation that was
formed on December 19, 2006.
The accompanying consolidated financial statements reflect the
operations of the Company and its wholly-owned subsidiaries
Alnylam U.S., Inc., Alnylam Europe AG and Alnylam Securities
Corporation. All significant intercompany accounts and
transactions have been eliminated.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Concentrations
of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and marketable securities. As of December 31,
2006 and 2005, substantially all of the Companys cash,
cash equivalents and marketable securities were invested in
money market mutual funds, commercial paper, corporate notes and
government securities through highly rated financial
institutions.
To date, the Companys revenue has been generated from
primarily Merck and Novartis. Novartis owned approximately 14%
of the Companys outstanding common stock as of
December 31, 2006. In 2006 the Company had revenue from
Novartis and Merck, which accounted for 81% and 3%,
respectively, of the Companys total revenue. In 2005 the
Company had significant revenue from Merck and Novartis, which
accounted for 63% and 13%, respectively, of the Companys
total revenue. In 2004, the Company had significant revenue from
only Merck, which accounted for 95% of revenues recorded.
Receivables from Novartis represented approximately 70% of the
Companys collaboration receivables balance at
December 31, 2006. Receivables from Novartis and Merck
represented approximately 72% and 28%, respectively, of the
Companys collaboration receivables balance at
December 31, 2005. Deferred revenue from Novartis, Biogen
Idec and Merck represented approximately 51%, 26% and 22%,
respectively, of the Companys deferred revenue balance at
December 31, 2006. Deferred revenue from Novartis and Merck
represented approximately 77% and 23%, respectively, of the
Companys deferred revenue balance at December 31,
2005.
76
ALNYLAM
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Financial Instruments
The carrying amounts of the Companys financial
instruments, which include cash equivalents, collaboration
receivable, accounts payable, accrued expenses and notes
payable, approximate their fair values at December 31, 2006
and 2005. At December 31, 2006, the Company had no
investments with maturities of greater than one year classified
as short-term in its balance sheet. Unrealized gains or losses
are included as a component of accumulated other comprehensive
income, included in stockholders equity in the
consolidated balance sheets. The following table summarizes the
Companys marketable securities at December 31, 2006
and 2005 in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Commercial paper
|
|
$
|
69,787
|
|
|
$
|
33
|
|
|
$
|
|
|
|
$
|
69,820
|
|
Corporate notes
|
|
|
19,483
|
|
|
|
2
|
|
|
|
|
|
|
|
19,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89,270
|
|
|
$
|
35
|
|
|
$
|
|
|
|
$
|
89,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Commercial paper
|
|
$
|
2,024
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
2,025
|
|
Asset backed securities
|
|
|
14,752
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
14,736
|
|
Corporate notes
|
|
|
47,552
|
|
|
|
|
|
|
|
(68
|
)
|
|
|
47,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
64,328
|
|
|
$
|
1
|
|
|
$
|
(84
|
)
|
|
$
|
64,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Recognition
The Company recognizes revenue in accordance with the Securities
and Exchange Commissions (SEC) Staff
Accounting Bulletin No. 104, Revenue Recognition in
Financial Statements. The Company has entered into collaboration
agreements with Merck and Novartis Pharma and its affiliate,
Novartis Institutes for BioMedical Research, Inc. (collectively
Novartis) and Biogen Idec. Revenues from these
collaboration agreements may include nonrefundable license fees,
milestones, research and development funding, cost
reimbursements and royalties. When evaluating multiple element
arrangements, the Company considers whether the components of
the arrangement represents separate units of accounting as
defined in Emerging Issues Task Force (EITF) Issue
No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF
00-21).
Application of these standards requires subjective
determinations and requires management to make judgments about
the value of the individual elements and whether it is separable
from the other aspects of the contractual relationship.
Nonrefundable license fees are recognized as revenue as the
Company performs under the collaboration agreements. Where the
Companys level of effort is relatively constant over the
performance period, the Company recognizes total fixed or
determined contract revenues on a straight-line basis over the
estimated period of performance under the contract unless
evidence suggests that revenue is earned in a different pattern,
in which case that pattern is followed.
The Company recognizes milestone payments as revenue upon
achievement of the milestone only if (1) the milestone
payments are nonrefundable; (2) substantive effort is
involved in achieving the milestone; and (3) the amount of
the milestone is reasonable in relation to the effort expended
or the risk associated with achievement of the milestone. If any
of these conditions are not met, the Company defers the
milestone payments and recognizes them as revenue over the
estimated period of performance under the contract as the
Company completes its performance obligations.
77
ALNYLAM
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Novartis
In consideration for rights granted to Novartis under the
collaboration and license agreement, Novartis made an upfront
payment of $10.0 million to the Company in October 2005, to
partly reimburse prior costs incurred by the Company to develop
in vivo RNAi technology. In addition, the collaboration
and license agreement includes terms under which Novartis agreed
to provide the Company with research funding and milestone
payments as well as royalties on annual net sales of products
resulting from the collaboration and license agreement. The
Company initially deferred the non-refundable $10.0 million
upfront payment and the $6.4 million premium received that
represents the difference between the purchase price and the
closing price of the common stock of the Company on the date of
the stock purchase from Novartis. These payments, in addition to
research funding and certain milestone payments, are amortized
into revenue using the proportional performance method over the
estimated duration of the Novartis agreement or ten years. Under
this model, the Company estimates the level of effort to be
expended over the term of the agreement and recognize revenue
based on the lesser of the amount calculated based on
proportional performance of total expected revenue or the amount
of non-refundable payments earned.
The Company believes the estimated term of the Novartis
agreement includes the three-year term of the agreement, two
one-year extensions at the election of Novartis and limited
support as part of a technology transfer until the fifth
anniversary of the termination of the agreement. Therefore, an
expected term of ten years is used in the proportional
performance model. The Company will evaluate the expected term
when new information is known that could affect the
Companys estimate. In the event the Companys period
of performance is different than estimated, revenue recognition
will be adjusted on a prospective basis.
Merck
The Company recognizes revenues from reimbursable research and
development activities at the time these activities are
performed under the terms of the related agreement, when the
collaborator is obligated to pay and when no future performance
obligations exist. In revenue arrangements where both parties
reimburse each other for research costs, such as the
Companys June 2004 collaboration agreement with Merck for
the co-development of RNAi therapeutics for the treatment of
ocular diseases, in which both parties reimbursed each other for
50% of the costs incurred, as set forth in the agreement, the
Company followed EITF Issue
No. 01-9,
Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors
Products)
(EITF 01-9)
in determining the proper accounting for these costs. In
accordance with
EITF 01-9,
revenue recognized by the Company for costs reimbursed by the
Companys customer were reduced by amounts reimbursable to
the other party during the same accounting period unless the
Company received a separable and identifiable benefit in
exchange for the payments made to the other party under the
arrangement and the Company could reasonably estimate the fair
value of the benefit received.
Income
Taxes
The Company uses the asset and liability method of accounting
for income taxes. Under the liability method, deferred tax
assets and liabilities reflect the impact of temporary
differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured under
enacted tax laws. A valuation allowance is required to offset
any net deferred tax assets if, based upon the available
evidence, it is more likely than not that some or all of the
deferred tax asset will not be realized.
Research
and Development Costs
Research and development costs are expensed as incurred.
Included in research and development costs are wages, benefits
and other operating costs such as legal expenses to secure and
defend patents (which are expensed as incurred), facilities,
supplies and overhead directly related to the Companys
research and development department as well as costs to acquire
technology licenses.
78
ALNYLAM
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the years ended December 31, 2006, 2005 and 2004,
the Company included approximately $0.6 million,
$0.3 million and $1.3 million, respectively, of legal
patent costs in research and development costs and expenses.
The Company has entered into several license agreements for
rights to utilize certain technologies. The terms of the
licenses may provide for upfront payments, annual maintenance
payments, milestone payments based upon certain specified events
being achieved and royalties on product sales. Costs to acquire
and maintain licensed technology that has not reached
technological feasibility and does not have alternative future
use are charged to research and development expense as incurred.
During the years ended December 31, 2006, 2005 and 2004,
the Company charged to research and development expense
$4.0 million, $6.1 million and $5.8 million,
respectively, of costs associated with license fees.
Accounting
for Stock-Based Compensation
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS 123R,
Share-Based
Payment, using the modified-prospective-transition
method. Under that transition method, stock-based compensation
expense recognized for the year ended December 31, 2006
includes compensation for all stock-based payments granted prior
to, but not yet vested as of, January 1, 2006, based on the
grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123),
and compensation cost for all stock-based payments granted
subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of
SFAS 123R. Such amounts have been reduced by the
Companys estimate of forfeitures of all unvested awards.
Results for prior periods have not been restated.
Prior to January 1, 2006, the Company accounted for its
stock-based compensation plans under the recognition and
measurement provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25),
and related interpretations for all awards granted to employees.
Under APB 25, when the exercise price of options granted to
employees under these plans equals the market price of the
common stock on the date of grant, no compensation expense is
recorded. When the exercise price of options granted to
employees under these plans is less than the market price of the
common stock on the date of grant, compensation expense is
recognized over the vesting period of the award.
For stock options granted to non-employees, the Company
recognizes compensation expense in accordance with the
requirements of SFAS 123 and Emerging Issues Task Force
Issue
No. 96-18,
Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services under which compensation
expense is generally recognized over the vesting period of the
award, which is generally the period during which services are
rendered by such non-employees. Stock options granted by the
Company to non-employees, other than members of our Board of
Directors, generally vest over a four-year service period. The
Company has two equity instruments that are required to be
evaluated under SFAS 123R, stock option plans and an
employee stock purchase plan. The Company accounts for
non-employee grants as an expense over the vesting period of the
underlying stock options using the method prescribed by FASB
Interpretation No. 28.
Foreign
Currency
The Companys foreign subsidiary, Alnylam Europe AG (a
German-based company), has designated its local currency, the
Euro, as its functional currency. Financial statements of this
foreign subsidiary are translated to United States dollars for
consolidation purposes using current rates of exchange for
assets and liabilities; equity is translated using historical
exchange rates; and revenue and expense amounts are translated
using the average exchange rate for the period. Net unrealized
gains and losses resulting from foreign currency translation are
included in other comprehensive income (loss) which is a
separate component of stockholders equity. The Company
also records a charge or a credit to stockholders equity
for exchange gains or losses on intercompany balances that are
of a long-term nature. Net realized gains and losses from
foreign currency transactions are
79
ALNYLAM
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
included in the consolidated statement of operations. The
Company recognized a loss of $0.3 million during 2006, a
gain of $0.1 million during 2005 and a loss of
$0.2 million during 2004 from foreign currency transactions.
Comprehensive
Loss
Comprehensive loss is comprised of net loss and certain changes
in stockholders equity that are excluded from net loss.
The Company includes foreign currency translation adjustments in
other comprehensive loss for Alnylam Europe AG as the functional
currency is not the United States dollar.
Net
Loss Per Common Share
The Company accounts for and discloses net loss per common share
in accordance with SFAS No. 128 Earnings per
Share. Basic net loss per common share is computed by
dividing net loss attributable to common stockholders by the
weighted average number of common shares outstanding. Diluted
net loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted average
number of common shares and dilutive potential common share
equivalents then outstanding. Potential common shares consist of
shares issuable upon the exercise of stock options and warrants
(using the treasury stock method), unvested restricted stock
awards and the weighted average conversion of the preferred
stock into shares of common stock (using the if-converted
method) for periods prior to the Companys initial public
offering, which was completed in June 2004. Because the
inclusion of potential common stock would be anti-dilutive for
all periods presented, diluted net loss per share is the same as
basic net loss per share.
The following table sets forth the potential common stock
excluded from the calculation of net loss per share because
their inclusion would be anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Options to purchase common stock
|
|
|
4,649,959
|
|
|
|
3,907,127
|
|
|
|
2,851,967
|
|
Warrants to purchase common stock
|
|
|
|
|
|
|
52,630
|
|
|
|
52,630
|
|
Unvested restricted common stock
|
|
|
|
|
|
|
55,063
|
|
|
|
331,567
|
|
Options that were exercised before
vesting
|
|
|
40,288
|
|
|
|
72,796
|
|
|
|
118,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,690,247
|
|
|
|
4,087,616
|
|
|
|
3,354,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Information
The Company has two operating segments, United States and
Germany, which management aggregates into one reporting segment
in determining how to allocate resources and assess financial
performance. The majority of the Companys net revenues
from research collaborators was derived in the United States.
The following table presents total long-lived tangible assets by
geographic area at December 31, 2006 and 2005, in thousands:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Long-lived tangible assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
10,077
|
|
|
$
|
8,207
|
|
Germany
|
|
|
2,096
|
|
|
|
2,373
|
|
|
|
|
|
|
|
|
|
|
Total long-lived tangible assets
|
|
$
|
12,173
|
|
|
$
|
10,580
|
|
|
|
|
|
|
|
|
|
|
80
ALNYLAM
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent
Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain
Hybrid Instruments
(SFAS 155), which is an amendment
to SFAS No. 133 and SFAS No. 140.
SFAS 155 allows financial instruments which have embedded
derivatives to be accounted for as a whole (eliminating the need
to bifurcate the derivative from its host) if the holder elects
to account for the instrument as a whole instrument on a fair
value basis. This statement is effective for all financial
instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after
September 15, 2006. The Company does not believe the
adoption of this statement will have a material impact on its
consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertain Tax Provisions, an
Interpretation of SFAS Statement 109
(FIN 48). FIN 48 clarifies the accounting
for uncertain tax positions as described in
SFAS No. 109, Accounting for Income
Taxes, and requires a company to recognize, in its
financial statements, the impact of a tax position only if that
position is more likely than not of being sustained
on an audit basis solely on the technical merit of the position.
In addition, FIN 48 requires qualitative and quantitative
disclosures including a discussion of reasonably possible
changes that might occur in the recognized tax benefits over the
next twelve months as well as a roll-forward of all unrecognized
tax benefits. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company intends to
adopt FIN 48 beginning January 2007 and is currently
evaluating the impact of FIN 48 and does not expect that it
will have a material impact on its consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, which addresses how
companies should measure fair value when they are required to do
so for recognition or disclosure purposes. The standard provides
a common definition of fair value and is intended to make the
measurement of fair value more consistent and comparable as well
as improving disclosures about those measures. The standard is
effective for financial statements for fiscal years beginning
after November 15, 2007. This standard formalizes the
measurement principles to be utilized in determining fair value
for purposes such as derivative valuation and impairment
analysis. The Company is still evaluating the implications of
this standard, but does not currently expect it to have a
significant impact on its consolidated financial statements.
In February 2007, the FASB issued FAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities-including an amendment of
FAS 115 (FAS No. 159). The
new statement allows entities to choose, at specified election
dates, to measure eligible financial assets and liabilities at
fair value that are not otherwise required to be measured at
fair value. If a company elects the fair value option for an
eligible item, changes in that items fair value in
subsequent reporting periods must be recognized in current
earnings. FAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently
evaluating the potential impact of FAS No. 159 on its
consolidated financial statements.
81
ALNYLAM
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
ACQUISITION
OF RIBOPHARMA AG
|
Intangible assets at December 31, 2006 and 2005 are as
follows, in thousands:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Core Technology
|
|
$
|
3,054
|
|
|
$
|
3,197
|
|
Workforce
|
|
|
437
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,491
|
|
|
|
3,634
|
|
|
|
|
|
|
|
|
|
|
Less accumulated
amortization:
|
|
|
|
|
|
|
|
|
Core Technology
|
|
|
(1,185
|
)
|
|
|
(879
|
)
|
Workforce
|
|
|
(373
|
)
|
|
|
(264
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated amortization
|
|
|
(1,558
|
)
|
|
|
(1,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,933
|
|
|
$
|
2,491
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2006, 2005 and 2004,
the Company recorded $0.4 million, $0.5 million and
$0.5 million, respectively, of amortization expense related
to the core technology and workforce intangibles, of which the
entire amount is included in research and development expenses.
The Company expects annual amortization expense related to the
core technology intangible asset to be $0.3 million through
2012 and $0.2 million in 2013. Core technology and
workforce are being amortized over their estimated useful lives
of ten years and four years, respectively. During 2006, the
Company reduced its intangible assets by $0.1 million
related to the utilization of pre-acquisition deferred tax
assets associated with net operating losses.
|
|
4.
|
PROPERTY
AND EQUIPMENT
|
Property and equipment consist of the following at
December 31, 2006 and 2005, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Useful Life
|
|
|
2006
|
|
|
2005
|
|
|
Laboratory equipment
|
|
|
5 years
|
|
|
$
|
9,903
|
|
|
$
|
7,799
|
|
Computer equipment and software
|
|
|
3 years
|
|
|
|
2,065
|
|
|
|
1,265
|
|
Furniture and fixtures
|
|
|
5 years
|
|
|
|
914
|
|
|
|
571
|
|
Leasehold improvements
|
|
|
|
*
|
|
|
7,056
|
|
|
|
6,010
|
|
Construction in progress
|
|
|
|
|
|
|
1,127
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,065
|
|
|
|
15,677
|
|
Less: accumulated depreciation and
amortization
|
|
|
|
|
|
|
(8,892
|
)
|
|
|
(5,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,173
|
|
|
$
|
10,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
shorter of asset life or lease term |
Depreciation expense was $3.4 million, $2.6 million
and $2.0 million for the years ended December 31,
2006, 2005 and 2004, respectively.
82
ALNYLAM
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Equipment
Lines of Credit
In March 2006, the Company entered into an agreement with Oxford
Finance Corporation (Oxford) to establish an
equipment line of credit for up to $7.0 million to help
support capital expansion of the Companys facility in
Cambridge, Massachusetts and capital equipment purchases. All
borrowings under this line of credit are collateralized by the
assets financed and the agreement contains certain provisions
that restrict the Companys ability to dispose of or
transfer these assets. During 2006, the Company borrowed an
aggregate of approximately $4.2 million from Oxford
pursuant to the agreement. Of such amount, approximately
$1.3 million bears interest at fixed rates ranging from
10.1% to 10.4% and is being repaid in 48 monthly
installments of principal and interest. The remainder of such
amount, approximately $2.9 million, bears interest at fixed
rates ranging from 10.0% to 10.4% and is being repaid in
36 monthly installments of principal and interest.
In March 2004, the Company entered into an agreement with
Lighthouse Capital Partners V, L.P.
(Lighthouse) to establish an equipment line of
credit for $10.0 million. In June 2005, the parties amended
the agreement to allow the Company the ability to draw down
amounts under the line of credit through December 31, 2005
upon adherence to certain conditions. All borrowings under the
line of credit are collateralized by the assets financed and the
agreement contains certain provisions that restrict the
Companys ability to dispose of or transfer these assets.
The outstanding principal bears interest at a fixed rate of
9.25%, except for the drawdown made in December 2005, which
bears interest at a fixed rate of 10.25%, maturing at various
dates through December 2009. On the maturity of each equipment
advance under the line of credit, the Company is required to
pay, in addition to the paid principal and interest, an
additional amount of 11.5% of the original principal. This
amount is being accrued over the applicable borrowing period as
additional interest expense. As of December 31, 2006, there
was $5.5 million outstanding under this line of credit with
Lighthouse.
In connection with the agreement, the Company issued to
Lighthouse and an affiliate of Lighthouse warrants to purchase
redeemable convertible preferred stock, which were converted
into warrants to purchase 52,630 shares of the
Companys common stock at an exercise price of
$9.50 per share upon the closing of the Companys
initial public offering in June 2004. The Company recorded the
fair value of these warrants of $0.6 million as a deferred
financing cost which is being amortized to interest expense over
the 63-month
repayment term of the first advance. The fair value of the
warrants was calculated using the Black-Scholes option pricing
model with the following assumptions: 100% volatility, risk-free
interest rate of 3.49%, no dividend yield and a seven-year term.
Lighthouse and its affiliate net-exercised these warrants in
full during the second quarter of 2006 and the Company issued an
aggregate of 18,072 shares in connection with such
exercises.
At December 31, 2006, future cash payments under the notes
payable to Lighthouse and Oxford, including interest, are as
follows, in thousands:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2007
|
|
$
|
3,942
|
|
2008
|
|
|
3,942
|
|
2009
|
|
|
3,187
|
|
2010
|
|
|
234
|
|
|
|
|
|
|
Total through 2010
|
|
|
11,305
|
|
Less: portion representing interest
|
|
|
2,169
|
|
|
|
|
|
|
Principal
|
|
|
9,136
|
|
Less: current portion
|
|
|
3,217
|
|
|
|
|
|
|
Long-term notes payable
|
|
$
|
5,919
|
|
|
|
|
|
|
83
ALNYLAM
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
COMMITMENTS
AND CONTINGENCIES
|
Indemnifications
Licensor indemnification In connection with a
certain license agreement, the Company is required to indemnify
the licensor for certain damages arising in connection with the
intellectual property rights licensed under the agreement. The
Company believes that the probability of receiving a claim is
remote and, as such, no amounts have been accrued related to
this indemnification at December 31, 2006 and 2005.
The Company is also a party to a number of agreements entered
into in the ordinary course of business, which contain typical
provisions, which obligate the Company to indemnify the other
parties to such agreements upon the occurrence of certain
events. Such indemnification obligations are usually in effect
from the date of execution of the applicable agreement for a
period equal to the applicable statute of limitations. The
aggregate maximum potential future liability of the Company
under such indemnification provisions is uncertain. Since its
inception, the Company has not incurred any expenses as a result
of such indemnification provisions. Accordingly, the Company has
determined that the estimated aggregate fair value of its
potential liabilities under such indemnification provisions is
minimal and has not recorded any liability related to such
indemnification provisions at December 31, 2006 and 2005.
Technology
License Commitments
The Company has licensed the rights to use certain technologies
in its research process as well as in any products the Company
may develop including these licensed technologies. In accordance
with the related license agreements, the Company is required to
make certain fixed annual payments to the licensor or a designee
of the licensor over various agreement terms. Many of these
agreement terms are consistent with the remaining lives of the
underlying intellectual property that the Company has licensed.
At December 31, 2006, the Company was committed to make the
following fixed license payments under existing license
agreements, in thousands:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2007
|
|
$
|
488
|
|
2008
|
|
|
493
|
|
2009
|
|
|
498
|
|
2010
|
|
|
520
|
|
2011
|
|
|
525
|
|
Thereafter
|
|
|
5,630
|
|
|
|
|
|
|
Total
|
|
$
|
8,154
|
|
|
|
|
|
|
Operating
Leases
The Company leases office and laboratory space in Cambridge,
Massachusetts and Kulmbach, Germany under non-cancelable
operating lease agreements. Total rent expense, including
operating expenses, under these operating leases was
$2.6 million, $1.9 million and $2.2 million, for
the years ended December 31, 2006, 2005 and 2004,
respectively.
In September 2003, the Company entered into an operating lease
to rent 33,453 square feet of laboratory and office space
in Cambridge, Massachusetts through September 2011. Rental
payments began in April 2004. Under the original terms of the
lease agreement, the Company began paying rent on an additional
10,605 square feet in this same facility in September 2005.
In March 2006, the Company amended its lease agreement and began
paying rent on an additional 17,823 square feet in this
same facility on July 1, 2006, bringing the total square
feet leased in Cambridge to 61,881 square feet. The Company
has the option to extend the lease for two successive five-year
extensions.
84
ALNYLAM
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pursuant to the terms of the lease agreement, the Company
secured a $2.3 million letter of credit as security for its
leased facility. The underlying cash securing this letter of
credit has been classified as long-term restricted cash in the
accompanying consolidated balance sheets.
The Company also leases 15,024 square feet of laboratory
and office space in Kulmbach, Germany through June 2008 under a
non-cancelable operating lease. The Company began paying rent on
an additional 2,661 square feet in the same facility in
July 2006. The Company has the option to extend its lease of
this facility for two successive three-year extensions.
Future minimum lease payments under these non-cancelable leases
are approximately as follows, in thousands:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2007
|
|
$
|
2,675
|
|
2008
|
|
|
2,539
|
|
2009
|
|
|
2,218
|
|
2010
|
|
|
2,218
|
|
2011
|
|
|
1,663
|
|
|
|
|
|
|
Total
|
|
$
|
11,313
|
|
|
|
|
|
|
Related
Party Notes Receivable
In connection with the acquisition of Ribopharma AG, the Company
agreed to provide two shareholders of Ribopharma AG who received
cash and common stock in the acquisition with non-recourse loans
to cover any tax contingencies the shareholders may incur as a
result of the acquisition. These loans bear interest at four
percent per annum and are payable upon certain liquidity events.
In addition to the loan commitment, the Company entered into an
indemnity agreement whereby the Company has indemnified these
shareholders for any taxes payable as a result of making the
loan to the Ribopharma shareholders up to a maximum of
approximately $0.2 million for each shareholder. With
respect to the indemnity, the Company issued a letter of credit
in 2003 to the two shareholders amounting to $0.4 million
related to the potential indemnity that the Company has with the
two shareholders. The required amount of the letter of credit is
collateralized by restricted funds maintained by the Company at
the bank issuing the letter of credit. As a result, the Company
classified this amount as restricted cash in its consolidated
balance sheet as of December 31, 2003. In June 2004, loans
totaling approximately $0.3 million were provided to these
shareholders and each shareholder subsequently released the
Company from its indemnity obligation. As a result, the Company
cancelled its letter of credit and removed this restriction of
its cash. During December 2005, one of the notes for
$0.1 million was paid in full. The remaining related party
note receivable was paid in full in February 2006. At
December 31, 2006, there were no amounts remaining under
the related party note receivable.
In connection with the employment agreements of the same two
Ribopharma AG employees, the Company has committed to paying a
one-time payment to each employee of $0.3 million upon the
issuance of a specific patent in the United States of America.
This contingent payment will be paid and expensed upon the
issuance of the patent.
Legal
Proceedings
The Company may periodically become subject to legal proceedings
and claims arising in connection with on-going business
activities, including being subject to claims or disputes
related to patents that have been issued or are pending in the
field of research the Company is focused on. The Company does
not believe that there were any material claims against the
Company at December 31, 2006.
85
ALNYLAM
PHARMACEUTICALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preferred
Stock
Prior to the Companys initial public offering in June
2004, the Companys primary source of funding was from
sales of preferred stock, both convertible and redeemable
convertible. During the year ended December 31, 2004, the
Company recorded accretion of preferred stock of
$2.7 million. In connection with the Companys initial
public offering in June 2004, and in accordance with the
preferred stock agreements, all outstanding shares of preferred
stock converted into 11,964,908 of the Companys common
stock. At December 31, 2006 there were no shares of
preferred stock outstanding.
The Company has authorized up to 5,000,000 shares of
preferred stock, $0.01 par value per share, for issuance.
The preferred stock will have such rights, preferences,
privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the board of directors
upon its issuance.