0001178670
2009-01-01
2009-12-31
0001178670
2008-12-31
0001178670
2009-06-30
0001178670
2010-07-30
0001178670
2010-06-30
0001178670
2009-12-31
0001178670
2010-04-01
2010-06-30
0001178670
2009-04-01
2009-06-30
0001178670
2009-01-01
2009-06-30
0001178670
2010-01-01
2010-06-30
iso4217:USD
xbrli:shares
xbrli:shares
iso4217:USD
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<div align="left" style="font-family: 'Times New Roman',Times,serif">
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<div align="left">
</div>
<div align="center" style="font-size: 10pt; margin-top: 0pt"><b>
</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b><i>Basis of Presentation and Principles of Consolidation</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The accompanying condensed consolidated financial statements of Alnylam Pharmaceuticals, Inc.
(the “Company” or “Alnylam”) are unaudited and have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) applicable to interim
periods and, in the opinion of management, include all normal and recurring adjustments that are
necessary to present fairly the results of operations for the reported periods. The Company’s
condensed consolidated financial statements have also been prepared on a basis substantially
consistent with, and should be read in conjunction with, the Company’s audited consolidated
financial statements for the year ended December 31, 2009, which were included in the Company’s
Annual Report on Form 10-K that was filed with the Securities and Exchange Commission (the “SEC”)
on February 26, 2010. The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by GAAP. The results of the Company’s
operations for any interim period are not necessarily indicative of the results of the Company’s
operations for any other interim period or for a full fiscal year.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The accompanying condensed consolidated financial statements reflect the operations of the
Company and its wholly-owned subsidiaries, Alnylam U.S., Inc., Alnylam Europe AG (“Alnylam Europe”)
and Alnylam Securities Corporation. All significant intercompany accounts and transactions have
been eliminated. The Company uses the equity method of accounting to account for its investment in
Regulus Therapeutics Inc. (“Regulus”).
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Use of Estimates</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The preparation of financial statements in conformity with GAAP 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 condensed consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Net Loss Per Common Share</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          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 (using the
treasury stock method), and unvested restricted stock awards. Because the inclusion of potential
common shares would be anti-dilutive for all periods presented, diluted net loss per common share
is the same as basic net loss per common share.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The following table sets forth for the periods presented the potential common shares (prior to
consideration of the treasury stock method) excluded from the calculation of net loss per common
share because their inclusion would be anti-dilutive, in thousands:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="7"><b>Three and Six Months Ended</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="7" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2009</b></td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Options to purchase common stock
</div></td>
<td> </td>
<td> </td>
<td align="right">7,872</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">7,071</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Unvested restricted common stock
</div></td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">29</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td align="right">7,872</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">7,100</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td> </td>
<td align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td> </td>
<td align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Fair Value Measurements</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The following tables present information about the Company’s assets that are measured at fair
value on a recurring basis as of June 30, 2010 and December 31, 2009, and indicate the fair value
hierarchy of the valuation techniques the Company utilized to determine such fair value. In
general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active
markets for
identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points
that are observable, such as quoted prices (adjusted), interest rates and yield curves. Fair values
determined by Level 3 inputs utilize unobservable data points for the asset or liability, and
include situations where there is little, if any, market activity for the asset or liability.
Financial assets measured at fair value on a recurring basis are summarized as follows, in
thousands:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="45%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="9%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Quoted</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Prices in</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Significant</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Significant</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>As of</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Active</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Observable</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Unobservable</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Markets</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Inputs</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Inputs</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000"><b>Description</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>(Level 1)</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>(Level 2)</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>(Level 3)</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Cash equivalents
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">65,073</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">31,579</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">33,494</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Marketable securities (fixed income)
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Government obligations
</div></td>
<td> </td>
<td> </td>
<td align="right">157,685</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">157,685</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Corporate notes
</div></td>
<td> </td>
<td> </td>
<td align="right">137,623</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">137,623</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Commercial paper
</div></td>
<td> </td>
<td> </td>
<td align="right">30,942</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">30,942</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Municipal notes
</div></td>
<td> </td>
<td> </td>
<td align="right">1,802</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,802</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Marketable securities (equity holdings)
</div></td>
<td> </td>
<td> </td>
<td align="right">2,684</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,684</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Total
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">395,809</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">31,579</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">364,230</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr style="font-size: 18pt">
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Quoted</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"> </td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Prices in</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Significant</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Significant</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>As of</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Active</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Observable</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Unobservable</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>December 31,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Markets</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Inputs</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2"><b>Inputs</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td nowrap="nowrap" align="left" style="border-bottom: 1px solid #000000"><b>Description</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2009</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>(Level 1)</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>(Level 2)</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>(Level 3)</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Cash equivalents
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">129,113</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">129,113</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Marketable securities (fixed income)
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Government obligations
</div></td>
<td> </td>
<td> </td>
<td align="right">185,087</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">185,087</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Corporate notes
</div></td>
<td> </td>
<td> </td>
<td align="right">89,220</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">89,220</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Commercial paper
</div></td>
<td> </td>
<td> </td>
<td align="right">12,994</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">12,994</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Municipal notes
</div></td>
<td> </td>
<td> </td>
<td align="right">8,700</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">8,700</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Marketable securities (equity holdings)
</div></td>
<td> </td>
<td> </td>
<td align="right">1,847</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,847</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:30px; text-indent:-15px">Total
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">426,961</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">129,113</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">297,848</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">—</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     The carrying amounts reflected in the Company’s condensed consolidated balance sheets for
cash, collaboration receivables, other current assets, accounts payable and accrued expenses
approximate fair value due to their short-term maturities.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Subsequent Events</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     The Company evaluated all events or transactions that occurred after June 30, 2010 up through
the date these condensed consolidated financial statements were issued. During this period, the
Company did not have any material recognizable or unrecognizable subsequent events.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Recent Accounting Pronouncements</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     In April 2010, the Financial Accounting Standards Board (“FASB”) issued a new accounting
standard, which provides guidance in applying the milestone method of revenue recognition to
research or development arrangements. Under this guidance, management may recognize revenue
contingent upon the achievement of a milestone in the period in which the milestone is achieved
only if the milestone meets all the criteria within the guidance to be considered substantive. This
standard is effective on a prospective basis for research and development milestones achieved in
fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the potential
impact of this accounting standard on its condensed consolidated financial statements, however the
Company does not believe it will have a significant impact.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     In October 2009, the FASB issued a new accounting standard, which amends existing revenue
recognition accounting pronouncements and provides accounting principles and application guidance
on whether multiple deliverables exist, how the arrangement should be separated, and the
consideration allocated. This standard eliminates the requirement to establish the fair value of
undelivered products and services and instead provides for separate revenue recognition based upon
management’s estimate of the selling price for an undelivered item when there is no other means to
determine the fair value of that undelivered item. Previously,
accounting principles required that the fair value of the undelivered item be the price of the
item either sold in a separate transaction between unrelated third parties or the price charged for
each item when the item is sold separately by the vendor. Determining the fair value using these
methods was difficult when the product was not individually sold because of its unique features. If
the fair value of all of the elements in the arrangement was not determinable, then revenue was
deferred until all of the items were delivered or fair value was determined. This new approach is
effective prospectively for revenue arrangements entered into or materially modified in fiscal
years beginning on or after June 15, 2010. The Company is currently evaluating the potential impact
of this accounting standard on its condensed consolidated financial statements.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     In June 2009, the FASB issued a new accounting standard, which amends previously issued
accounting guidance for the consolidation of a variable interest entity (“VIE”) to require an
enterprise to determine whether its variable interest or interests give it a controlling financial
interest in a VIE. This amended consolidation guidance for VIEs also replaces the existing
quantitative approach for identifying which enterprise should consolidate a VIE, which was based on
which enterprise was exposed to a majority of the risks and rewards, with a qualitative approach,
based on which enterprise has both (1) the power to direct the economically significant activities
of the entity and (2) the obligation to absorb losses of the entity that could potentially be
significant to the VIE or the right to receive benefits from the entity that could potentially be
significant to the VIE. This new accounting standard has broad implications and may affect how the
Company accounts for the consolidation of common structures, such as joint ventures, equity method
investments, collaboration and other agreements, and purchase arrangements. Under this revised
consolidation guidance, more entities may meet the definition of a VIE, and the determination about
which entity should consolidate a VIE is required to be evaluated continuously. The Company adopted
this standard effective January 1, 2010 and has determined that
the adoption did not
have an impact on its condensed consolidated financial statements.
</div>
</div>
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<div align="left" style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>2. SIGNIFICANT AGREEMENTS</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     The following table summarizes the Company’s total consolidated net revenues from research
collaborators, for the periods indicated, in thousands:
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="52%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Three Months Ended June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>Six Months Ended June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2009</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2009</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Roche
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">13,994</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">13,967</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">27,988</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">27,795</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Takeda
</div></td>
<td> </td>
<td> </td>
<td align="right">5,489</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">5,419</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">10,923</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">10,836</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Novartis
</div></td>
<td> </td>
<td> </td>
<td align="right">2,614</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,243</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">4,973</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">4,922</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Government contract
</div></td>
<td> </td>
<td> </td>
<td align="right">1,521</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,930</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3,087</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3,734</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Cubist
</div></td>
<td> </td>
<td> </td>
<td align="right">591</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">714</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,181</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,367</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Other
</div></td>
<td> </td>
<td> </td>
<td align="right">2,408</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">328</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">3,029</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">1,004</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:30px; text-indent:-15px">Total net revenues from research collaborators
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">26,617</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">24,601</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">51,181</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">49,658</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Platform Alliances</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     <i>Roche Alliance</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In July 2007, the Company and, for limited purposes, Alnylam Europe, entered into a license
and collaboration agreement (the “LCA”) with F. Hoffmann-La Roche Ltd (“Roche Basel”) and
Hoffmann-La Roche Inc. (together with Roche Basel, “Roche”). Under the LCA, which became effective
in August 2007, the Company granted Roche a non-exclusive license to the Company’s intellectual
property to develop and commercialize therapeutic products that function through RNA interference
(“RNAi”), subject to the Company’s existing contractual obligations to third parties. The license
is initially limited to the therapeutic areas of oncology, respiratory diseases, metabolic diseases
and certain liver diseases, and may be expanded to include up to 18 additional therapeutic areas,
comprising substantially all other fields of human disease, as identified and agreed upon by the
parties, upon payment to the Company by Roche of an additional $50.0 million for each additional
therapeutic area, if any.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In consideration for the rights granted to Roche under the LCA, Roche paid the Company $273.5
million in upfront cash payments. In addition, in exchange for the Company’s contributions under
the LCA, for each RNAi therapeutic product developed by Roche, its affiliates or sublicensees under
the LCA, the Company is entitled to receive milestone payments upon achievement of specified
development and sales events, totaling up to an aggregate of $100.0 million per therapeutic target,
together with royalty payments based on worldwide annual net sales, if any.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Under the LCA, the Company and Roche also agreed to collaborate on the discovery of RNAi
therapeutic products directed to one or more disease targets (“Discovery Collaboration”), subject
to the Company’s existing contractual obligations to third parties. In October 2009, the Company
and Roche advanced their alliance to initiate this therapeutic collaboration stage, which is
focused on advancing specific disease targets to develop RNAi therapeutics. Under this Discovery
Collaboration, the Company and Roche are collaborating on the discovery and development of specific
RNAi therapeutic products and each party is contributing key delivery technologies in this effort.
The Company and Roche intend to co-develop and co-commercialize RNAi therapeutic products in the
U.S. market and the Company is eligible to receive additional milestone and royalty payments for
products developed in the rest of the world, if any. After a pre-specified period of collaborative
activities, each party will have the option to opt-out of the day-to-day development activities in
exchange for reduced milestones and royalty payments in the future. The Discovery Collaboration is
governed by the joint steering committee that is comprised of an equal number of representatives
from each party.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In July 2007, the Company executed a common stock purchase agreement (the “Common Stock
Purchase Agreement”) with Roche Finance Ltd, an affiliate of Roche (“Roche Finance”). Under the
terms of the Common Stock Purchase Agreement, on August 9, 2007, Roche Finance purchased 1,975,000
shares of the Company’s common stock at $21.50 per share, for an aggregate purchase price of $42.5
million. The Company recorded this issuance using the closing price of the Company’s common stock
on August 9, 2007, the date the shares were issued to Roche. Based on the closing price of $25.98,
the fair value of the shares issued was $51.3 million, which was $8.8 million in excess of the
proceeds received from Roche for the issuance of the Company’s common stock. As a result, the
Company allocated $8.8 million of the upfront payment from the LCA to the common stock issuance.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Under the terms of the Common Stock Purchase Agreement, in the event the Company proposes to
sell or issue any of its equity securities, subject to specified exceptions, it agreed to grant to
Roche Finance the right to acquire, at fair value, additional securities, such that Roche Finance
would be able to maintain its ownership percentage in the Company.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In connection with the execution of the LCA and the Common Stock Purchase Agreement, the
Company also executed a share purchase agreement (the “Alnylam Europe Purchase Agreement”) with
Alnylam Europe and Roche Beteiligungs GmbH, an affiliate of Roche (“Roche Germany”). Under the
terms of the Alnylam Europe Purchase Agreement, which became effective in August 2007, the Company
created a new, wholly-owned German limited liability company (“Roche Kulmbach”) into which
substantially all of the non-intellectual property assets of Alnylam Europe were transferred, and
Roche Germany purchased from the Company all of the issued and outstanding shares of Roche Kulmbach
for an aggregate purchase price of $15.0 million. The Alnylam Europe Purchase Agreement also
included transition services that were performed by Roche Kulmbach employees at various levels
through August 2008. The Company reimbursed Roche for these services at an agreed-upon rate.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In summary, the Company received upfront payments totaling $331.0 million under the Roche
alliance, which included an upfront payment under the LCA of $273.5 million, $42.5 million under
the Common Stock Purchase Agreement and $15.0 million for the Roche Kulmbach shares under the
Alnylam Europe Purchase Agreement. The Company initially recorded $278.2 million of these proceeds
as deferred revenue in connection with the Roche alliance. The Company allocated $51.3 million and
$1.5 million to the common stock issuance and the net book value of Alnylam Europe, respectively.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          When evaluating multiple element arrangements, the Company considers whether the components of
the arrangement represent separate units of accounting. The accounting guidance specifically
requires that the delivered components must have value to the customer on a standalone basis and
that there is objective and reliable evidence of the fair value of the undelivered components.
Application of this standard requires subjective determinations and requires management to make
judgments about the value of each individual element and whether it is separable from the other
aspects of the contractual relationship. The Company has determined that the deliverables under
the Roche alliance include the license, the Alnylam Europe assets and employees, the steering
committees (joint steering committee and future technology committee) and the services that the
Company is obligated to perform under the Discovery Collaboration. The Company has determined that,
pursuant to the accounting guidance governing revenue recognition on multiple element arrangements,
the license and assets of Alnylam Europe are not separable from the undelivered services (i.e., the
steering committees and Discovery Collaboration) and, accordingly the license and the services are
being treated as a single unit of accounting. When multiple deliverables are accounted for as a
single unit of accounting, the Company bases its revenue recognition pattern on the final
deliverable. Under the Roche alliance, the steering committee services and the Discovery
Collaboration services are the final deliverables and all such services will end, contractually,
five years from the effective date of the LCA.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Company is recognizing the Roche-related revenue on a straight-line basis over five years
because the Company cannot reasonably estimate the total level of effort required to complete its
service obligations under the LCA in order to utilize a proportional performance model. As future
substantive milestones are achieved, a portion of the milestone payment equal to the percentage of
the
performance period completed when the milestone is achieved, multiplied by the amount of the
milestone payment, will be recognized as revenue upon achievement of such milestone. The remaining
portion of the milestone will be recognized over the remaining performance period on a
straight-line basis.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt">     <i>Takeda Alliance</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In May 2008, the Company entered into a license and collaboration agreement (the “Takeda
Collaboration Agreement”) with Takeda Pharmaceutical Company Limited (“Takeda”) to pursue the
development and commercialization of RNAi therapeutics. Under the Takeda Collaboration Agreement,
the Company granted Takeda a non-exclusive, worldwide, royalty-bearing license to the Company’s
intellectual property to develop, manufacture, use and commercialize RNAi therapeutics, subject to
the Company’s existing contractual obligations to third parties. The license initially is limited
to the fields of oncology and metabolic disease and may be expanded at Takeda’s option to include
other therapeutic areas, subject to specified conditions. Under the Takeda Collaboration Agreement,
Takeda will be the Company’s exclusive platform partner in the Asian territory, as defined in the
Takeda Collaboration Agreement, for a period of five years.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In consideration for the rights granted to Takeda under the Takeda Collaboration Agreement,
Takeda agreed to pay the Company $150.0 million in upfront and near-term technology transfer
payments. In addition, the Company has the option, exercisable until the start of Phase III
development, to opt-in under a 50-50 profit sharing agreement to the development and
commercialization in the United States of up to four Takeda licensed products, and would be
entitled to opt-in rights for two additional products for each additional field expansion, if any,
elected by Takeda under the Takeda Collaboration Agreement. In June 2008, Takeda paid the Company
an upfront payment of $100.0 million and agreed to pay an additional $50.0 million to the Company
upon achievement of specified technology transfer milestones (the “Technology Transfer
Milestones”). Of this $50.0 million, $20.0 million was paid in October 2008, $20.0 million was paid
in March 2010, and $10.0 million is due upon achievement of the last specified technology transfer
activities, but no later than the second quarter of 2011. If Takeda elects to expand its license to
additional therapeutic areas, Takeda will be required to pay the Company $50.0 million for each of
up to approximately 20 total additional fields selected, if any, comprising substantially all other
fields of human disease, as identified and agreed upon by the parties. In addition, for each RNAi
therapeutic product developed by Takeda, its affiliates and sublicensees, the Company is entitled
to receive specified development and commercialization milestones, totaling up to $171.0 million
per product, together with royalty payments based on worldwide annual net sales, if any.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Pursuant to the Takeda Collaboration Agreement, the Company and Takeda are also collaborating
on the research of RNAi therapeutics directed to one or two disease targets agreed to by the
parties (the “Research Collaboration”), subject to the Company’s existing contractual obligations
with third parties. Takeda also has the option, subject to certain conditions, to collaborate with
the Company on the research and development of RNAi drug delivery technology for targets agreed to
by the parties. In addition, Takeda has a right of first negotiation for the development and
commercialization of the Company’s RNAi therapeutic products in the Asian territory, excluding the
Company’s ALN-RSV program. In addition to the 50-50 profit sharing option, the Company has a
similar right of first negotiation to participate with Takeda in the development and
commercialization in the United States of licensed products. The collaboration between the Company
and Takeda is governed by a joint technology transfer committee (the “JTTC”), a joint research
collaboration committee (the “JRCC”) and a joint delivery collaboration committee (the “JDCC”),
each of which is comprised of an equal number of representatives from each party.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Company has determined that the deliverables under the Takeda Collaboration Agreement
include the license, the joint committees (the JTTC, JRCC and JDCC), the technology transfer
activities and the services that the Company will be obligated to perform under the Research
Collaboration. The Company has determined that, pursuant to the accounting guidance governing
revenue recognition on multiple element arrangements, the license and undelivered services (i.e.,
the joint committees and the Research Collaboration) are not separable and, accordingly, the
license and services are being treated as a single unit of accounting. When multiple deliverables
are accounted for as a single unit of accounting, the Company bases its revenue recognition pattern
on the final deliverable. Under the Takeda Collaboration Agreement, the last elements to be
delivered are the JDCC and JTTC services, each of which has a life of no more than seven years.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Company is recognizing the upfront payment of $100.0 million, the first and second
Technology Transfer Milestones of $40.0 million, and the remaining Technology Transfer Milestone of
$10.0 million, the receipt of which the Company believes is probable, on a straight-line basis over
seven years because the Company is unable to reasonably estimate the level of effort to fulfill
these obligations in order to utilize a proportional performance model, primarily because the
effort required under the Research Collaboration is largely unknown. As future substantive
milestones are achieved, a portion of the milestone payment equal to the percentage of the
performance period completed when the milestone is achieved, multiplied by the amount of the
milestone payment,
will be recognized as revenue upon achievement of such milestone. The remaining portion of the
milestone will be recognized over the remaining performance period on a straight-line basis.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Discovery and Development Alliances</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     <i>Isis Collaboration and License Agreement</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In April 2009, the Company and Isis Pharmaceuticals, Inc. (“Isis”) amended and restated their
existing strategic collaboration and license agreement (as amended and restated, the “Amended and
Restated Isis Agreement”), originally entered into in March 2004, to extend the broad
cross-licensing arrangement regarding double-stranded RNAi that was established in 2004, pursuant
to which Isis granted the Company 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 double-stranded RNA (“dsRNA”) products. The Company has the right to use
Isis technologies in its development programs or in collaborations and Isis has agreed not to grant
licenses under these patents to any other organization for the discovery, development or
commercialization of dsRNA products designed to work through an RNAi mechanism, except in the
context of a collaboration in which Isis plays an active role. The Company granted Isis
non-exclusive licenses to its current and future patents and patent applications relating to
RNA-targeting mechanisms and to chemistry for research use. The Company also granted Isis the
non-exclusive right to develop and commercialize dsRNA products developed using RNAi technology
against a limited number of targets. In addition, the Company granted Isis non-exclusive rights to
research, develop and commercialize single-stranded RNA products.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Under the terms of the Isis agreement, the Company paid Isis an upfront license fee of $5.0
million. The Company also agreed to pay Isis milestone payments, totaling up to approximately $3.4
million, upon the occurrence of specified development and regulatory events, and royalties on
sales, if any, for each product that the Company or a collaborator develops using Isis intellectual
property. In addition, the Company agreed to pay to Isis a percentage of specified fees from
strategic collaborations the Company may enter into that include access to Isis’ intellectual
property.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Isis agreed to pay the Company, per therapeutic target, a license fee of $0.5 million, and
milestone payments totaling approximately $3.4 million, payable upon the occurrence of specified
development and regulatory events, and royalties on sales, if any, for each product developed by
Isis or a collaborator that utilizes the Company’s intellectual property. Isis has the right to
elect up to ten non-exclusive target licenses under the agreement and has the right to purchase one
additional non-exclusive target per year during the term of the collaboration.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          As part of the Amended and Restated Isis Agreement, the Company and Isis established a new
collaborative effort focused on the development of single-stranded RNAi (“ssRNAi”) technology.
Under the Amended and Restated Isis Agreement, the Company obtained from Isis a co-exclusive,
worldwide license to Isis’ current and future patents and patent applications relating to chemistry
and RNA-targeting mechanisms to research, develop and commercialize ssRNAi products. Each of the
Company and Isis has the opportunity to discover and develop drugs employing the ssRNAi technology.
Under the terms of the Amended and Restated Isis Agreement, the Company will potentially pay Isis
up to an aggregate of $31.0 million in license fees, payable in four tranches, that include $11.0
million paid on signing, $10.0 million payable in October 2010, or if and when <i>in vivo </i>efficacy in
rodents is demonstrated, if sooner, $5.0 million upon achievement of <i>in vivo </i>efficacy in non-human
primates, and $5.0 million upon initiation of the first clinical trial with an ssRNAi drug, subject
to the Company’s right to unilaterally terminate the ssRNAi research program. The Company is
funding research activities at a minimum of $3.0 million each year for three years with research
and development activities conducted by both the Company and Isis. If the Company develops and
commercializes drugs utilizing ssRNAi technology on its own or with a partner, the Company would be
required to make milestone payments to Isis, totaling up to $18.5 million per product, as well as
royalties. Also, Isis initially is eligible to receive up to 50% of any sublicense payments due to
the Company from a third party based on the Company’s partnering of ssRNAi products, which amount
will decline over time as the Company’s investment in the technology and drugs increases. In turn,
the Company is eligible to receive up to five percent of any sublicense payments due to Isis from a
third party based on Isis’ partnering of ssRNAi products.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Company has the unilateral right to terminate the ssRNAi research program before September
30, 2010, in which event any licenses to ssRNAi products granted by Isis to the Company under the
Amended and Restated Isis Agreement, and any obligation thereunder by
the Company to pay additional license fees, milestone
payments, royalties or sublicense payments to Isis for such ssRNAi products, would also terminate.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The
Company’s accounting policy is to classify license fees, milestone payments
and sublicense payments made to Isis as research and development
expenses.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt">     <i>Novartis Broad Alliance</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In the second half of 2005, the Company entered into a series of transactions with Novartis
Pharma AG and its affiliate,
Novartis Institutes for BioMedical Research, Inc. (collectively, “Novartis”). In September
2005, the Company and Novartis executed a stock purchase agreement (the “Stock Purchase Agreement”)
and an investor rights agreement (the “Investor Rights Agreement”). In October 2005, in connection
with the closing of the transactions contemplated by the Stock Purchase Agreement, the Investor
Rights Agreement became effective and the Company and Novartis executed a research collaboration
and license agreement (the “Collaboration and License Agreement”). The Collaboration and License
Agreement had an initial term of three years, with an option for two additional one-year extensions
at the election of Novartis. In July 2009, Novartis elected to further extend the term for the
fifth and final planned year, through October 2010.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Under the terms of the Stock Purchase Agreement, in October 2005, Novartis purchased 5,267,865
shares of the Company’s common stock at a purchase price of $11.11 per share for an aggregate
purchase price of $58.5 million, which, after such issuance, represented 19.9% of the Company’s
outstanding common stock as of the date of issuance. In addition, under the Investor Rights
Agreement, the Company granted Novartis rights to acquire additional equity securities in the event
that the Company proposes 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
then-current ownership percentage in the Company’s outstanding common stock. Pursuant to terms of
the Investor Rights Agreement, in May 2009, Novartis purchased 65,922 shares of the Company’s
common stock at a purchase price of $17.50 per share, resulting in an aggregate payment to the
Company of $1.2 million. In April 2010, Novartis purchased 55,223 shares of the Company’s common
stock at a purchase price of $17.99 per share, resulting in an aggregate payment to the Company of
$1.0 million. These purchases have allowed Novartis to maintain its ownership position of
approximately 13.4% of the Company’s outstanding common stock. The exercises of this right did not
result in any changes to existing rights or any additional rights to Novartis. Further, during the
term described in the Investor Rights Agreement, Novartis is permitted to own no more than 19.9% of
the Company’s outstanding shares.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Under the terms of the Collaboration and License Agreement, the Company and Novartis are
working together on a defined number of selected targets, as defined in the Collaboration and
License Agreement, to discover and develop therapeutics based on RNAi. In consideration for the
rights granted to Novartis under the Collaboration and License Agreement, Novartis made upfront
payments totaling $10.0 million to the Company in October 2005, partly to reimburse prior costs
incurred by the Company to develop <i>in vivo </i>RNAi technology. Pursuant to the Collaboration and
License Agreement, Novartis is providing the Company with research funding and development
milestone payments, and may provide the Company in the future with sales milestone payments as well
as royalties on annual net sales of products resulting from the Collaboration and License
Agreement, if any. The amount of research funding provided by Novartis under the Collaboration and
License Agreement during the research term is dependent upon the number of active programs on which
the Company is collaborating with Novartis at any given time and the number of Company employees
that are working on those programs, in respect of which Novartis reimburses the Company at an
agreed upon rate. Under the terms of the Collaboration and License Agreement, Novartis has the
right to select up to 30 exclusive targets to include in the collaboration, which number may be
increased to 40 under certain circumstances and upon additional payments. For RNAi therapeutic
products developed under the Collaboration and License Agreement, if any, the Company would be
entitled to receive milestone payments upon achievement of certain specified development and annual
net sales events, up to an aggregate of $75.0 million per therapeutic product.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Under the terms of the Collaboration and License Agreement, the Company retains the right to
discover, develop, commercialize and 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 with respect to an exclusive license for additional targets before the Company partners
any of those additional targets with third parties.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Collaboration and License Agreement also provides Novartis with a non-exclusive option to
integrate into its operations the Company’s intellectual property relating to RNAi technology,
excluding any technology related to delivery of nucleic acid based molecules (the “Integration
Option”). Novartis may exercise this Integration Option at any point during the research term,
which term is currently expected to expire in the fourth quarter of 2010. In connection with the
exercise of the Integration Option, Novartis would be required to make additional payments to the
Company totaling $100.0 million, payable in full at the time of exercise, which would include an
option exercise fee, a milestone payment based on the overall success of the collaboration, and
pre-paid milestone and royalty payments that could become due as a result of future development of
products using the Company’s technology. This amount would be offset by any license fees payable to
the Company’s licensors in accordance with the applicable license agreements with those parties. In
addition, under this license grant, Novartis may be required to make milestone and royalty payments
to the Company in connection with the development and commercialization of RNAi therapeutic
products, if any. The license grant under the Integration Option, if exercised by Novartis, would
be structured similarly to the Company’s non-exclusive platform licenses with Roche and Takeda.
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Company initially deferred the non-refundable $10.0 million upfront payment and the
$6.4 million premium received that represented 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, the receipt of
which is considered probable, together total $64.6 million, and are being amortized into revenue
using the proportional performance method over the estimated duration of the Collaboration and
License Agreement, or ten years. Under this model, the Company estimates the level of effort to be
expended over the term of the agreement and recognizes 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.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          As future substantive milestones are achieved, and to the extent they are within the period of
performance, milestone payments will be recognized as revenue on a proportional performance basis
over the contract’s entire performance period, starting with the contract’s commencement. A portion
of the milestone payment equal to the percentage of total performance completed when the milestone
is achieved, multiplied by the milestone payment, will be recognized as revenue upon achievement of
the milestone. The remaining portion of the milestone will be recognized over the remaining
performance period under the proportional performance method.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Company believes the estimated period of performance under the Collaboration and License
Agreement is ten years, which includes the three-year initial term of the agreement, two one-year
extensions elected by Novartis and limited support as part of a technology transfer until 2015, the
fifth anniversary of the termination of the Collaboration and License Agreement. The Company
continues to use an expected term of ten years in its proportional performance model. The Company
reevaluates the expected term when new information is known that could affect the Company’s
estimate. In the event the Company’s period of performance is different than estimated, revenue
recognition will be adjusted on a prospective basis.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Product Alliances</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     <i>Kyowa Hakko Kirin Alliance</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In June 2008, the Company entered into a license and collaboration agreement (the “Kyowa Hakko
Kirin Agreement”) with Kyowa Hakko Kirin Co., Ltd. (“Kyowa Hakko Kirin”). Under the Kyowa Hakko
Kirin Agreement, the Company granted Kyowa Hakko Kirin an exclusive license to its intellectual
property in Japan and other markets in Asia (the “Licensed Territory”) for the development and
commercialization of an RNAi therapeutic for the treatment of respiratory syncytial virus (“RSV”)
infection. The Kyowa Hakko Kirin Agreement covers ALN-RSV01, as well as additional RSV-specific
RNAi therapeutic compounds that comprise the ALN-RSV program (“Additional Compounds”). The Company
retains all development and commercialization rights worldwide outside of the Licensed Territory,
subject to its agreement with Cubist Pharmaceuticals, Inc. (“Cubist”) described below.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Under the terms of the Kyowa Hakko Kirin Agreement, in June 2008, Kyowa Hakko Kirin paid the
Company an upfront cash payment of $15.0 million. In addition, Kyowa Hakko Kirin is required to
make payments to the Company upon achievement of specified development and sales milestones
totaling up to $78.0 million, and royalty payments based on annual net sales, if any, of RNAi
therapeutics for RSV by Kyowa Hakko Kirin, its affiliates and sublicensees in the Licensed
Territory.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The collaboration between Kyowa Hakko Kirin and the Company is governed by a joint steering
committee that is comprised of an equal number of representatives from each party. Under the
agreement, Kyowa Hakko Kirin is establishing a development plan for the ALN-RSV program relating to
the development activities to be undertaken in the Licensed Territory, with the initial focus on
Japan. Kyowa Hakko Kirin is responsible, at its expense, for all development activities under the
development plan that are reasonably necessary for the regulatory approval and commercialization of
an RNAi therapeutic for the treatment of RSV in Japan and the rest of the Licensed Territory. The
Company is responsible for supply of the product to Kyowa Hakko Kirin under a supply agreement
unless Kyowa Hakko Kirin elects, prior to the first commercial sale of the product in the Licensed
Territory, to manufacture the product itself or arrange for a third party to manufacture the
product.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Company has determined that the deliverables under the Kyowa Hakko Kirin Agreement include
the license, the joint steering committee, the manufacturing services and any Additional Compounds.
The Company has determined that, pursuant to the accounting guidance governing revenue recognition
on multiple element arrangements, the individual deliverables are not separable and, accordingly,
must be accounted for as a single unit of accounting. When multiple deliverables are accounted for
as a single unit of accounting, the Company bases its revenue recognition pattern on the final
deliverable. The Company is currently unable to reasonably estimate its period of performance
under the Kyowa Hakko Kirin Agreement, as it is unable to estimate the timeline of its deliverables
related to the fixed-price option granted to Kyowa Hakko Kirin for any Additional Compounds.
The Company is
deferring all revenue under the Kyowa Hakko Kirin Agreement until it is able to
reasonably estimate its period of performance. The
Company will continue to reassess whether it can reasonably estimate the period of performance
to fulfill its obligations under the Kyowa Hakko Kirin Agreement.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt">     <i>Cubist Alliance</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In January 2009, the Company entered into a license and collaboration agreement with Cubist
(the “Cubist Agreement”) to develop and commercialize therapeutic products (“Licensed Products”)
based on certain of the Company’s RNAi technology for the treatment of RSV infection. Licensed
Products initially included ALN-RSV01, as well as several other second-generation RNAi-based RSV
inhibitors. In November 2009, the Company and Cubist entered into an amendment to the Cubist
Agreement (the “Amendment”), which provides that the Company and Cubist will focus their
collaboration and joint development efforts on ALN-RSV02, a second-generation compound intended for
use in pediatric patients. Consistent with the original Cubist Agreement, the Company and Cubist
each bears one-half of the related development costs for ALN-RSV02. Pursuant to the terms of the
Amendment, the Company is also continuing to develop ALN-RSV01 for adult transplant patients at its
sole discretion and expense. Cubist has the right to resume the collaboration on ALN-RSV01 in the
future, which right may be exercised for a specified period of time following the completion of the
Company’s Phase IIb clinical trial of ALN-RSV01 in adult lung transplant patients infected with
RSV, subject to the payment by Cubist of an opt-in fee representing reimbursement of an agreed upon
percentage of certain of the Company’s development expenses for ALN-RSV01.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Under the terms of the Cubist Agreement, the Company and Cubist share responsibility for
developing Licensed Products in North America and each bears one-half of the related development
costs, subject to the terms of the Amendment. The Company’s collaboration with Cubist for the
development of Licensed Products in North America is governed by a joint steering committee
comprised of an equal number of representatives from each party. Cubist will have the sole right to
commercialize Licensed Products in North America with costs associated with such activities and any
resulting profits or losses to be split equally between the Company and Cubist. Throughout the rest
of the world (the “Royalty Territory”), excluding Asia, where the Company has previously partnered
its ALN-RSV program with Kyowa Hakko Kirin, Cubist has an exclusive, royalty-bearing license to
develop and commercialize Licensed Products.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In consideration for the rights granted to Cubist under the Cubist Agreement, in January 2009,
Cubist made a $20.0 million upfront cash payment to the Company. Cubist also has an obligation
under the Cubist Agreement to pay the Company milestone payments, totaling up to an aggregate of
$82.5 million, upon the achievement of specified development and sales events in the Royalty
Territory. In addition, if Licensed Products are successfully developed, Cubist will be required to
pay to the Company royalties on net sales of Licensed Products in the Royalty Territory, if any,
subject to offsets under certain circumstances. Upon achievement of certain development milestones,
the Company will have the right to convert the North American co-development and profit sharing
arrangement into a royalty-bearing license and, in addition to royalties on net sales in North
America, will be entitled to receive additional milestone payments totaling up to an aggregate of
$130.0 million upon achievement of specified development and sales events in North America, subject
to the timing of the conversion by the Company and the regulatory status of Licensed Products at
the time of conversion. If the Company makes the conversion to a royalty-bearing license with
respect to North America, then North America becomes part of the Royalty Territory.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          During the term of the Cubist Agreement, neither party nor its affiliates may develop,
manufacture or commercialize anywhere in the world, outside of Asia, a therapeutic or prophylactic
product that specifically targets RSV, except for Licensed Products developed, manufactured or
commercialized pursuant to the Cubist Agreement.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Company has determined that the deliverables under the Cubist Agreement include the
licenses, technology transfer related to the ALN-RSV program, the joint steering committee and the
development and manufacturing services that the Company is obligated to perform during the
development period. The Company also has determined that, pursuant to the accounting guidance
governing revenue recognition on multiple element arrangements, the licenses and undelivered
services are not separable and, accordingly, the licenses and services are being treated as a
single unit of accounting. When multiple deliverables are accounted for as a single unit of
accounting, the Company bases its revenue recognition pattern on the final deliverable. Under the
Cubist Agreement, the last element to be delivered is the development and manufacturing services,
which have an expected life of approximately eight years.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Company is recognizing the upfront payment of $20.0 million on a straight-line basis over
approximately eight years because the Company is unable to reasonably estimate the level of effort
to fulfill its performance obligations in order to utilize a proportional performance model. As
future substantive milestones are achieved, a portion of the milestone payment, equal to the
percentage of the performance period completed when the milestone is achieved, multiplied by the
amount of the milestone payment,
will be recognized as revenue upon achievement of such milestone. The remaining portion of the
milestone will be recognized over the remaining performance period on a straight-line basis.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Under the terms of the Cubist Agreement, the Company and Cubist share responsibility for
developing Licensed Products in North America and each bears one-half of the related development
costs, provided that under the terms of the Amendment, the Company is funding the advancement of
ALN-RSV01 for adult lung transplant patients and Cubist retains an opt-in right. For revenue
generating arrangements that involve cost sharing between the parties, the Company presents the
results of activities for which it acts as the principal on a gross basis and reports any payments
received from (made to) other collaborators based on other applicable GAAP or, in the absence of
other applicable GAAP, analogy to authoritative accounting literature or a reasonable, rational and
consistently applied accounting policy election. As the Company is not considered the principal
under the Cubist Agreement, the Company records any amounts due from Cubist as a reduction of
research and development expense. For the three and six months ended June 30, 2010, the Company and
Cubist incurred costs of $0.4 million and $1.0 million, respectively, under the Cubist Agreement,
of which $0.4 million and $0.9 million, respectively, was incurred by the Company. For the three
and six months ended June 30, 2009, the Company and Cubist incurred costs of $3.2 million and $7.0
million, respectively, of which $3.1 million and $6.8 million, respectively, was incurred by the
Company. During the three and six months ended June 30, 2010, amounts due from Cubist of $0.2
million and $0.4 million, respectively, were recorded by the Company as a reduction to research and
development expense. During the three and six months ended June 30, 2009, amounts due from Cubist
of $1.5 million and $3.3 million, respectively, were recorded by the Company as a reduction to
research and development expense. As such, the Company recorded net research and development
expenses in its condensed consolidated statements of operations of $0.2 million and $0.5 million
for the three and six months ended June 30, 2010, respectively, and $1.6 million and $3.5 million
for the three and six months ended June 30, 2009, respectively.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In connection with the Cubist Agreement, during 2009, the Company paid $1.0 million of license
fees to the Company’s licensors, primarily Isis, in accordance with the applicable license
agreements with those parties. These fees were charged to research and development expense.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Government Funding</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">     <i>NIH Contract</i>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In September 2006, the National Institute of Allergy and Infectious Diseases (“NIAID”), a
component of the National Institutes of Health (“NIH”), awarded the Company a contract for up to
$23.0 million over four years to advance the development of a broad spectrum RNAi anti-viral
therapeutic for hemorrhagic fever virus, including the Ebola virus. As a result of the continued
progress of this program, the NIAID has appropriated the entire $23.0 million over the four-year
term of the contract, which is expected to be completed in September 2010. The Company recognizes
revenue under government cost reimbursement contracts as it performs the underlying research and
development activities. At June 30, 2010, there was $1.1 million of remaining funds available under
the NIAID contract.
</div>
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>3. INCOME TAXES</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          During
each of the three and six months ended June 30, 2010, the Company recorded a benefit from
income taxes of $0.2 million. During the three and six months ended
June 30, 2009, the Company recorded a provision for income taxes of $0.9 million and $1.6 million,
respectively. The benefit from income taxes at June 30, 2010 was the result of the Company’s
recognition of a corresponding income tax expense associated with the increase in the value of
certain securities that the Company carried at fair market value during the six months ended June
30, 2010. This income tax expense was recorded in accumulated other comprehensive income in the Company’s
condensed consolidated balance sheets. The provision for income taxes in 2009 was due primarily to
taxable income in 2009 as a result of the Company’s alliances with Roche and Takeda. The Company
expects to generate U.S. taxable losses during 2010. The Company’s 2010 U.S. taxable losses are
expected to be carried back to 2008 and 2009 to offset taxable income generated to the extent of
the federal alternative minimum taxable income in those years.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          At December 31, 2009, the Company recorded net deferred tax assets to the extent it is more
likely than not that the assets will be utilized. These deferred tax assets were related to the
recognition of Roche and Takeda revenue for tax purposes. The Company expects to generate net
operating losses in 2010 and 2011 that will be carried back to 2008 and 2009 to offset taxable
income. The remaining deferred tax assets are subject to a valuation allowance as it is more likely
than not that those assets will not be realized. If the Company does not generate sufficient tax
losses, it could affect the realizability of its deferred tax assets.
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 6pt">          At December 31, 2009, the state net operating loss carryforward was $8.6 million. This
attribute is available to reduce the Company’s future California state tax liability and expires at
various dates through 2018. Ownership changes, as defined in the Internal Revenue Code, including
those resulting from the issuance of common stock in connection with the Company’s public
offerings, may limit the amount of net operating loss that can be utilized to offset future taxable
income or tax liability. The Company has determined that there is no limitation on the utilization
of net operating loss carryforwards in 2009 in accordance with Section 382 of the Internal Revenue
Code.
The
Company is currently under audit by the Internal Revenue Service for the 2008 tax year.
The Company believes that it has provided sufficiently for all
significant audit exposures.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In January 2007, the Company adopted a newly issued accounting standard which required
additional accounting and disclosure about uncertain tax positions. The implementation of this
accounting standard did not require any adjustment to the Company’s beginning tax positions. The
Company continues to recognize fully its tax benefits which are offset by a valuation allowance to
the extent that it is more likely than not that the deferred tax assets will not be realized. At
June 30, 2010, the Company had no unrecognized tax benefits.
</div>
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>4. REGULUS</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In September 2007, the Company and Isis established Regulus, a company focused on the
discovery, development and commercialization of microRNA therapeutics, a potential new class of
drugs to treat the pathways of human disease. Regulus, which initially was established as a limited
liability company, converted to a C corporation in January 2009 and changed its name to Regulus
Therapeutics Inc.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In consideration for the Company’s and Isis’ initial interests in Regulus, each party granted
Regulus exclusive licenses to its intellectual property for certain microRNA therapeutic
applications as well as certain patents in the microRNA field. In addition, the Company made an
initial cash contribution to Regulus of $10.0 million, resulting in the Company and Isis making
approximately equal aggregate initial capital contributions to Regulus. In March 2009, the Company
and Isis each purchased $10.0 million of Series A preferred stock of Regulus under a founder’s
investor rights agreement (the “Investor Rights Agreement”). The Company and Isis currently own
approximately 49% and 51%, respectively, of Regulus and there are
currently no other third-party
investors in Regulus.
Therefore, the Company has concluded that Regulus is a related party.
Regulus continues to operate as an independent company with a separate board
of directors, scientific advisory board and management team, some of whom have options to purchase
common stock of Regulus. Members of the board of directors of Regulus who are employees of the
Company or Isis are not eligible to receive options to purchase Regulus common stock.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In April 2008, Regulus entered into a worldwide strategic alliance with GlaxoSmithKline
(“GSK”) to discover, develop and commercialize up to four novel microRNA-targeted therapeutics to
treat inflammatory diseases such as rheumatoid arthritis and inflammatory bowel disease. In
connection with this alliance, Regulus received $20.0 million in upfront payments from GSK,
including a $15.0 million option fee and a loan of $5.0 million (guaranteed by Isis and the
Company) that will convert into Regulus common stock under certain specified circumstances. Regulus
could be eligible to receive development, regulatory and sales milestone payments for each of the
microRNA-targeted therapeutics discovered and developed as part of the alliance. Regulus would also
receive royalty payments on worldwide sales of products resulting from the alliance, if any.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In February 2010, Regulus and GSK established a new collaboration to develop and commercialize
microRNA therapeutics targeting miR-122 in all fields, with the treatment of hepatitis C virus
infection as the lead indication. Under the terms of this new collaboration, Regulus received $8.0
million in upfront payments from GSK, including a $3.0 million license fee and a loan of $5.0
million (guaranteed by Isis and the Company) that will convert into Regulus common stock under
certain specified circumstances. Consistent with the original GSK alliance, Regulus could be
eligible to receive development, regulatory and sales milestone payments, as well as royalty
payments on worldwide sales of products resulting from the alliance, if any, as Regulus and GSK
advance microRNA therapeutics targeting miR-122.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In June 2010, Regulus entered into a global, strategic alliance with sanofi-aventis to
discover, develop and commercialize microRNA therapeutics on up to four microRNA targets. Under the
terms of this new alliance, Regulus received $25.0 million in upfront fees and is entitled to
annual research support for three years with the option to extend research support for two
additional years. Sanofi-aventis will also make an additional $10.0 million equity investment in
Regulus, subject to mutual agreement on company valuation. In addition, Regulus is eligible to
receive royalties on microRNA therapeutic products commercialized by sanofi-aventis, if any.
Sanofi-aventis will support 100% of the costs of clinical development and commercialization of each
program. The
alliance will initially focus on the therapeutic area of fibrosis. Regulus and
sanofi-aventis will collaborate on up to four microRNA
targets, including Regulus’ lead fibrosis program targeting microRNA-21. Sanofi-aventis also
received an option for a broader technology alliance with Regulus that provides Regulus certain
rights to participate in development and commercialization of resulting products. If exercised,
this option is worth up to an additional $50.0 million to Regulus. The Company and Isis are each
eligible to receive 7.5% of all potential milestone payments in addition to royalties on product
sales, if any. During the three months ended June 30, 2010, the Company recognized revenue of $1.9
million from Regulus in connection with this alliance, representing 7.5% of the $25.0 million
upfront payment from sanofi-aventis to Regulus.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Company has reviewed the consolidation guidance that defines a VIE and concluded that
Regulus currently qualifies as a VIE.
The Company does not consolidate Regulus as the Company lacks
the power to direct the activities that could significantly impact the economic success of this
entity. At June 30, 2010, the total carrying value of the Company’s investment in joint venture
(Regulus Therapeutics Inc.) in its condensed consolidated balance
sheets is $1.2 million under the
equity method. The Company’s maximum exposure to loss related to this VIE is limited to the
carrying value of the Company’s investment, as well the portion
of Regulus’ debt, including accrued interest, guaranteed by the
Company which was $5.2 million at June 30, 2010. Under new consolidation guidance effective January
1, 2010, Isis is no longer consolidating Regulus’ financials. In addition, for the six months ended June 30, 2010, the Company has recognized $1.9 million in related party
revenues in its condensed consolidated statements of operations, in connection with
the Regulus and sanofi-aventis alliance described above.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The Company accounts for its investment in Regulus using the equity method of accounting.
Through December 31, 2008, the Company was recognizing the first $10.0 million of losses of Regulus
as equity in loss of joint venture (Regulus Therapeutics Inc.) in its condensed consolidated
statements of operations because the Company was responsible for funding those losses through its
initial $10.0 million cash contribution. Beginning in January 2009, in connection with the
conversion of Regulus to a C corporation, the Company is recognizing approximately 49% of the
income and losses of Regulus. The carrying value of the Company’s investment in joint venture
(Regulus Therapeutics Inc.), immediately prior to the conversion to a C corporation exceeded 49% of
the net assets of Regulus by approximately $0.8 million. Upon conversion, this amount was allocated
to the intellectual property of Regulus and, because the intellectual property was determined to be
in-process research and development, the $0.8 million was recorded as a charge to expense. This
charge is included in equity in loss of joint venture (Regulus
Therapeutics Inc.) in the Company’s condensed
consolidated statements of operations for the six months ended June 30, 2009. Under the equity
method, the reimbursement of expenses to the Company is recorded as a reduction to research and
development expenses. Summary results of Regulus’ operations for the three and six months ended
June 30, 2010 and 2009 and balance sheets as of June 30, 2010 and December 31, 2009 are presented
below, in thousands (unaudited):
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="52%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
<td width="5%"> </td>
<td width="1%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Three Months Ended</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6"><b>Six Months Ended</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="6" style="border-bottom: 1px solid #000000"><b>June 30,</b></td>
<td> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2009</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2009</b></td>
<td> </td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Statement of Operations Data:</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Net revenues
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">809</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,125</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,495</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">1,763</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Operating expenses (1)
</div></td>
<td> </td>
<td> </td>
<td align="right">8,685</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">2,852</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">12,439</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">5,367</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Loss from operations
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(7,876</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(1,727</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(10,944</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(3,604</td>
<td nowrap="nowrap">)</td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Other (expense) income
</div></td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(54</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(7</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left"> </td>
<td align="right">(84</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td> </td>
<td align="right">12</td>
<td> </td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 1px solid #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Net loss
</div></td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(7,930</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(1,734</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(11,028</td>
<td nowrap="nowrap">)</td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(3,592</td>
<td nowrap="nowrap">)</td>
</tr>
<tr style="font-size: 1px">
<td>
<div style="margin-left:15px; text-indent:-15px"> 
</div></td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
<td> </td>
<td nowrap="nowrap" colspan="2" align="right" style="border-top: 3px double #000000"> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div align="left">
<div style="font-size: 3pt; margin-top: 13pt; width: 18%; border-bottom: 1px solid #000000"> 
</div>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:18px; text-indent:-18px">(1)   Non-cash stock-based
compensation expenses
included in operating
expenses
</div></td>
<td> </td>
<td align="left">$</td>
<td align="right">139</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">89</td>
<td> </td>
<td> </td>
<td align="left">$</td>
<td align="right">301</td>
<td> </td>
<td> </td>
<td nowrap="nowrap" align="left">$</td>
<td align="right">(221</td>
<td nowrap="nowrap">)</td>
</tr>
<!-- End Table Body -->
</table>
</div>
<div align="center">
<table style="font-size: 10pt; text-align: left" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<tr valign="bottom">
<td width="76%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
<td width="5%"> </td>
<td width="3%"> </td>
<td width="1%"> </td>
<td width="3%"> </td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>June 30,</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3"><b>December 31,</b></td>
</tr>
<tr style="font-size: 8pt" valign="bottom">
<td> </td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2010</b></td>
<td> </td>
<td nowrap="nowrap" align="center" colspan="3" style="border-bottom: 1px solid #000000"><b>2009</b></td>
</tr>
<!-- End Table Head -->
<!-- Begin Table Body -->
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px"><b>Balance Sheet Data:</b>
</div></td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Cash, cash equivalents and marketable securities
</div></td>
<td> </td>
<td align="right">$</td>
<td align="right">31,174</td>
<td> </td>
<td> </td>
<td align="right">$</td>
<td align="right">30,708</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Working capital
</div></td>
<td> </td>
<td> </td>
<td align="right">19,039</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">25,115</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Total assets
</div></td>
<td> </td>
<td> </td>
<td align="right">34,445</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">32,930</td>
<td> </td>
</tr>
<tr valign="bottom" style="background: #cceeff">
<td>
<div style="margin-left:15px; text-indent:-15px">Notes payable
</div></td>
<td> </td>
<td> </td>
<td align="right">11,267</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">6,291</td>
<td> </td>
</tr>
<tr valign="bottom">
<td>
<div style="margin-left:15px; text-indent:-15px">Total stockholders’ equity
</div></td>
<td> </td>
<td> </td>
<td align="right">2,212</td>
<td> </td>
<td> </td>
<td> </td>
<td align="right">12,939</td>
<td> </td>
</tr>
<!-- End Table Body -->
</table>
</div>
<!-- Folio -->
<!-- /Folio -->
</div>
<!-- PAGEBREAK -->
<div style="font-family: 'Times New Roman',Times,serif">
</div>
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<div style="font-family: 'Times New Roman',Times,serif">
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b>5. COMMITMENTS AND CONTINGENCIES</b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt"><b><i>Operating Lease</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In May 2010, the Company entered into an amendment to its lease with ARE-MA Region No. 28 LLC
(the “Landlord”), dated as of September 26, 2003, as amended (the “Amended Lease”), pursuant to
which the Company will rent approximately 34,000 square feet of additional laboratory and office
space located at 300 Third Street, Cambridge, Massachusetts (the “Premises”), effective as of
October 1, 2010. The Company will lease a total of approximately 129,000 square feet of office and
laboratory space at the Premises under the Amended Lease. The term of the Amended Lease expires in
September 2016. The Company has the option to extend the Amended Lease for two successive five-year
extensions. The Company has separately agreed to sublease the first floor of the
Premises through the end of 2011.
Therefore, the Company’s operating lease obligations through 2016 increased by an
aggregate of $8.9 million as a result of the Amended Lease, partially offset by future
sublease payments to the Company of $1.7 million, resulting in a net increase of $7.2
million.
</div>
<div align="left" style="font-size: 10pt; margin-top: 12pt"><b><i>Litigation</i></b>
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In June 2009, the Company joined with Max-Planck-Gesellschaft Zur Forderung Der Wissenschaften
E.V. and Max-Planck-Innovation GmbH (collectively, “Max Planck”), in taking legal action against
the Whitehead Institute for Biomedical Research (“Whitehead”), the Massachusetts Institute of
Technology (“MIT”) and the Board of Trustees of the University of Massachusetts (“UMass”). The
complaint, initially filed in Suffolk County Superior Court in Boston, Massachusetts and
subsequently removed to the U.S. District Court for the District of Massachusetts, alleges, among
other things, that the defendants have improperly prosecuted the so-called “Tuschl I” patent
applications and wrongfully incorporated inventions covered by the so-called “Tuschl II” patent
applications into the Tuschl I patent applications, thereby potentially damaging the value of
inventions reflected in the Tuschl I and Tuschl II patent applications. In the field of RNAi
therapeutics, the Company is the exclusive licensee of the Tuschl I patent applications from Max
Planck, MIT and Whitehead, and of the Tuschl II patent applications from Max Planck.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          The complaint seeks, among other things, a declaratory judgment regarding the prosecution of
the Tuschl I patent family and unspecified monetary damages. In August 2009, the court denied the
Company’s motion for a preliminary injunction. In addition, in August 2009, Whitehead and UMass
filed counterclaims against the Company and Max Planck, including for breach of contract. In
January 2010, the Company and Max Planck filed an amended complaint expanding upon the allegations
in the original complaint. The Company currently expects a jury trial
to start in late 2010 or
early 2011. In February 2010, the Company and Max Planck released MIT from any claims seeking
monetary damages, and MIT has stipulated that it will be bound by any declaratory, injunctive, or
equitable relief granted by the court.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          In addition, in September 2009, the U.S. Patent and Trademark Office (“USPTO”), granted Max
Planck’s petition to revoke power of attorney in connection with the prosecution of the Tuschl I
patent application. This action prevents the defendants from filing any papers with the USPTO in
connection with further prosecution of the Tuschl I patent application without the agreement of Max
Planck. Whitehead’s petition to overturn this ruling was denied.
</div>
<div align="left" style="font-size: 10pt; margin-top: 6pt">          Although the Company, along with Max Planck, are vigorously asserting their rights in this
case, litigation is subject to inherent uncertainty and a court could ultimately rule against the
Company and Max Planck. In addition, litigation is costly and may divert the attention of the
Company’s management and other resources that would otherwise be engaged in running the Company’s
business. The Company has not recorded an estimated liability associated with the legal proceedings
described above due to the uncertainties related to both the likelihood and the amount of any
potential loss.
</div>
</div>
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false
--12-31
Q2
2010
2010-06-30
10-Q
0001178670
42096731
Yes
Large Accelerated Filer
916012936
ALNYLAM PHARMACEUTICALS, INC.
No
No
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Non-cash stock-based compensation expenses included in operating expenses are as follows: