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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission File Number 000-50743
ALNYLAM PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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77-0602661 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
300 Third Street, Cambridge, MA 02142
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
(617) 551-8200
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the
registrant’s knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the voting Common Stock held by
non-affiliates of the registrant, based on the last sale price
of the registrant’s Common Stock at the close of business
on June 30, 2004, was $62,229,838.
As of March 1, 2005, the registrant had
20,908,408 shares of Common Stock, $0.01 par value per
share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III (except
for information required with respect to our executive officers,
which is set forth under “Part I —
Business — Executive Officers of the Registrant”)
and the information required by Item 5 relating our equity
compensation plans have been omitted from this report, as we
expect to file with the Securities and Exchange Commission, not
later than 120 days after the close of our fiscal year
ended December 31, 2004, a definitive proxy statement for
our annual meeting of stockholders. The information required by
Items 10, 11, 12, 13 and 14 of Part III and the
information required by Item 5 relating to our equity
compensation plans, which will appear in our definitive proxy
statement, is incorporated by reference into this report.
ALNYLAM PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2004
TABLE OF CONTENTS
1
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, that involve risks
and uncertainties. All statements other than statements relating
to historical matters (including statements to the effect that
we “believe,” “expect,”
“anticipate,” “plan,” “target” and
similar expressions) should be considered forward-looking
statements. Our actual results could differ materially from
those discussed in the forward-looking statements as a result of
a number of important factors, including the factors discussed
in this section and elsewhere in this Annual Report on
Form 10-K, including those discussed in
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Certain Factors
That May Affect Future Results,” and the risks discussed in
our other filings with the Securities and Exchange Commission.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management’s
analysis, judgment, belief or expectation only as of the date
hereof. We assume no obligation to update these forward-looking
statements to reflect events or circumstances that arise after
the date hereof.
PART I
Overview
We are a biopharmaceutical company seeking to develop and
commercialize new drugs that work through a recently discovered
system in cells known as RNA interference, or RNAi. We believe
that drugs that work through RNA interference, or RNAi
therapeutics, have the potential to become a major class of
drugs, like small molecule, protein and antibody drugs. Using
our intellectual property and the expertise we have built in
RNAi, we are developing a set of biological and chemical methods
and know-how that we expect to apply in a systematic way to
develop RNAi therapeutics for a variety of diseases. We refer to
these methods and their systematic application as our
“product engine”. Using our current capabilities, we
have initiated programs to develop RNAi therapeutics that will
be administered directly to diseased parts of the body, which we
refer to as Direct
RNAitm
therapeutics. We believe there are multiple opportunities for
Direct RNAi therapeutics. Our current Direct RNAi development
programs are focused on an eye disease known as age-related
macular degeneration, or AMD, and on a lung infection caused by
a virus known as human respiratory syncytial virus, or RSV. We
have additional pre-clinical programs in Direct RNAi focused on
a central nervous system disorder known as Parkinson’s
disease, or PD, spinal cord injury, or SCI, and a genetic
disease known as cystic fibrosis, or CF. We expect to initiate a
clinical trial for our lead AMD product candidate in the second
half of 2005 and for our RSV program in the first half of 2006.
We are also working to extend our capabilities to enable the
development of RNAi therapeutics that travel through the
bloodstream to reach diseased parts of the body, which we refer
to as Systemic
RNAitm
therapeutics. We believe Systemic RNAi will be used to treat a
broad range of diseases, including cancer and metabolic and
autoimmune diseases.
RNAi is a recently discovered natural mechanism for selectively
silencing genes. Genes provide cells with coded instructions for
making proteins, and silencing a gene refers to stopping or
reducing production of the protein specified, or encoded, by
that gene. Our goal is to develop new drugs that use the RNAi
mechanism to selectively silence genes encoding proteins that
play harmful roles in disease. We intend to develop drugs based
on a type of molecule known as a short interfering RNA, or
siRNA. siRNAs are the molecules within cells that directly
trigger RNAi. We expect that our RNAi therapeutics will
generally consist of chemically modified siRNAs designed to
silence specific genes. Given the recent availability of the
nucleotide sequence of the entire human genome, RNAi
therapeutics can be designed, in theory, to silence any gene
that encodes a protein involved in disease, even if currently
this protein cannot be adequately controlled by conventional
drugs.
We believe that we have a strong intellectual property position
relating to the development and commercialization of siRNAs as
therapeutics, consisting of:
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a concentration of intellectual property rights claiming
fundamental features of siRNAs and their use as therapeutics,
which includes our ownership of, or exclusive rights to, several
issued patents and pending patent applications; |
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a broad portfolio of intellectual property relating to chemical
modifications of siRNAs, including over 150 patents licensed
from Isis Pharmaceuticals, Inc.; and |
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a number of pending patent applications claiming siRNAs directed
to specific targets as treatments for particular diseases. |
We have filed or licensed over 200 patents and patent
applications in the RNAi field.
Our goal is to develop and commercialize RNAi therapeutics. To
access the substantial funding and expertise required to develop
and commercialize RNAi therapeutics, we intend to form strategic
collaborations with pharmaceutical companies or other relevant
healthcare companies, such as medical device companies. In many
of the collaborations we form, we expect to take the lead role
in discovery and early preclinical development of specific RNAi
therapeutics, and to share responsibilities with our
collaborators in later-stage development and commercialization
of these RNAi therapeutics. We expect that our collaborators
will provide us with significant funding and technology for the
work we perform, access to their development and
commercialization capabilities, and a share of revenues from
products that are commercialized. In some collaborations, we may
choose to focus only on the discovery and early preclinical
phases and depend on our collaborators to continue through
development, clinical trials and commercialization. We currently
have two strategic alliances with Merck & Co., Inc., or
Merck. The first alliance is focused on development of RNAi
technology for use in live animals and on specific therapeutic
targets proposed by Merck. The second alliance with Merck is
focused on developing drugs for diseases of the eye. We also
have a collaboration with Medtronic, Inc., or Medtronic. This
collaboration will pursue therapies designed to treat
neurodegenerative disorders such as Parkinson’s,
Huntington’s and Alzheimer’s diseases using novel
combinations of medical devices and RNAi therapeutics.
Neurodegenerative diseases are diseases caused by the death of
nerve cells in the brain. We also have a collaboration with
Cystic Fibrosis Foundation Therapeutics, Inc., or CFFT, that is
focused on developing drugs for the treatment of CF.
Over time, as we expand our capabilities and resources, we
expect the nature of the collaborations we form will evolve, so
that we take on progressively more responsibility for
development and commercialization of products we originate, and
retain a greater share of the revenues these products generate.
In the longer term, we expect to develop and commercialize RNAi
therapeutics independently.
RNAi is a recently discovered mechanism that occurs naturally
within cells and selectively silences the activity of specific
genes. Genes provide cells with instructions for producing
proteins. Proteins perform many of the vital functions of the
cell and of the human body. Although the roles they play are
generally beneficial, in certain circumstances, proteins can be
harmful. Many human diseases are caused by the inappropriate
behavior of proteins. A particular protein may, for example, be
present in too great a quantity, be too active or appear in the
wrong place or at the wrong time. In these circumstances, the
ability to stop or reduce production of the protein by
selectively silencing the gene that directs its synthesis could
be very beneficial towards the treatment of the disease.
Beginning in 1999, our scientific founders described and
provided evidence that the RNAi mechanism occurs in mammalian
cells and that its immediate trigger is a type of molecule known
as short interfering RNA, or siRNA. They showed that
laboratory-synthesized siRNAs could be introduced into the cell
and suppress production of specific target proteins. Because it
is possible, in theory, to design and synthesize siRNAs specific
for any gene of interest, we believe that RNAi therapeutics have
the potential to become a broad new class of drugs.
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How RNA interference Works |
RNA is a crucial intermediary in the process by which the cell
uses inherited genetic information. This information is passed
from one generation to the next in the form of genes, which are
made of a substance known as deoxyribonucleic acid, or DNA.
Generally, each gene contains the instructions that tell the
cell how to make one specific protein. These instructions are in
a coded form. The code is based on the four different
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chemical building blocks from which DNA is made, usually
designated by the first letters of their chemical names, A, C, G
and T. It is the sequence in which these building blocks, or
bases, occur in a gene that tells the cell what protein to make.
Most gene sequences are thousands of bases long, and the variety
possible in such long sequences allows the cell to produce a
large number of different proteins.
One very important property of DNA is that it is
double-stranded, consisting of two separate strands intertwined
around each other in a double helix. The two strands are held
together by base pairs that form between bases on the opposite
strands. Strict rules govern the formation of these base pairs:
an A on one strand can pair with a T on the other, and a G can
pair with a C, but no other pairings are allowed. The
double-stranded nature of DNA and the strict rules governing
base-pairing are fundamental to ensuring that genetic
information is copied accurately when it is handed down from one
generation to the next.
Base-pairing rules are also fundamental to the process by which
the cell uses, or expresses, genetic information to make a
protein. To initiate this process, the cell makes a working copy
of the gene that encodes the protein. This working copy is made
not of DNA but of a closely related substance called ribonucleic
acid, or RNA. The working copy is known as messenger RNA, or
mRNA. Unlike DNA, mRNA has only one strand. However, the
application of base-pairing rules during synthesis of this
strand ensures that the sequence of bases in mRNA accurately
reflects the base sequence, and thus the genetic information, in
the gene being copied. This mRNA then associates with the
cell’s protein synthesis machinery, where it directs
synthesis of a protein in such a way that the structure of the
protein is directly determined by the sequence of bases in the
mRNA, and thus in the gene. The protein specified by a
particular gene or mRNA is said to be encoded by that gene or
mRNA. When this protein is made, the gene is said to be active
or expressed.
Although many RNA molecules, like mRNA, are single-stranded, RNA
is capable of forming double-stranded molecules analogous to
those formed by DNA. When it does so, base-pairing rules apply.
As a result, only RNA molecules with complementary sequences can
form double-stranded structures. Generally, most or all bases on
one strand have to line up with their permitted base-pair
partners on the other strand, otherwise the double-stranded
structure will be unstable.
Double-stranded RNA, or dsRNA, is crucial to the phenomenon of
RNAi. A particular type of dsRNA interferes with the activity of
specific genes by triggering the breakdown of mRNAs copied from
these genes, preventing production of the proteins they encode.
Selection of mRNAs for breakdown is driven by base-pairing
between the target mRNAs and the separated strands of the dsRNA.
Thus, the mRNAs selected for breakdown are those which contain
base sequences identical to base sequences in one strand of the
dsRNA. As a result, RNAi leads to selective silencing of
specific genes with relatively little impact on other genes
whose mRNAs do not share base sequences with the dsRNA.
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In nature, the cell initiates RNAi by cutting longer dsRNAs into
smaller dsRNA pieces that have 25 or fewer base pairs. These
shorter dsRNAs are known as short interfering RNAs, or siRNAs.
siRNAs are double-stranded along most of their length but have
unpaired bases, or overhangs, at each end, which are important
for their activity. siRNAs are the molecules that actually
trigger RNA interference. They do so by a process that has three
main steps as shown in the figure below.
Step 1. siRNAs associate with
several proteins to form an assembly known as the RNA-induced
silencing complex, or RISC. The two strands of the siRNA become
separated as the RISC is formed, so that RISC contains an
unpaired single-stranded RNA.
Step 2. The RISC then looks for
mRNA molecules that contain base sequences complementary to the
single-stranded RNA it contains — that is, sequences
within the mRNA whose bases can pair up exactly, using
base-pairing rules, with the bases in the single-stranded RNA.
Step 3. Once this pairing occurs,
the RISC complex cuts the mRNA into two separate pieces at the
base-paired region, destroying its ability to direct protein
synthesis. The RISC complex is then available to cut additional
mRNA molecules that contain the appropriate base sequence.
Repetitive cycles through steps two and three lead to catalytic
degradation of mRNAs that contain a sequence complementary to
the siRNA strand in the RISC. The ability of each RISC complex
to cut multiple mRNA molecules consecutively in a catalytic
manner is one of the reasons why we believe RNAi is effective at
silencing gene activity.
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Opportunity for Therapeutics Based on RNAi |
In May 2001, one of our scientific founders published the first
scientific paper demonstrating that the siRNAs required to
trigger RNA interference need not be generated inside the cell.
Instead, siRNAs can be synthesized in the laboratory using
chemical or biochemical methods and introduced into cells to
silence the activity of a specific gene. As a result of the
human genome project, complete base sequences are available for
most human genes. With the sophisticated bioinformatics tools
that were developed in conjunction with the genome project, it
is possible to scan through the gene that encodes a particular
protein and select base sequences that are of the appropriate
length for siRNAs and unique to that gene. Several siRNAs
targeted to the gene of interest can then be synthesized. Each
synthesized siRNA will contain a sequence capable of
base-pairing exactly with a short stretch of the sequence of the
mRNA copied from the target gene. The synthetic siRNAs can then
be tested to determine whether they silence the activity of this
gene and suppress the synthesis of the protein it encodes.
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The use of siRNAs has been broadly adopted by academic and
industrial researchers for the fundamental study of the function
of genes. Important information about the function of a gene can
often be deduced by suppressing, or knocking-down, its activity
and examining the effect this has on the behavior of a cell or
animal. There are now many examples in which such suppression of
gene activity has been achieved, in whole or in part, using
synthetic siRNAs. In just a few years after siRNAs were
discovered, they have become the tools of choice for the
selective knock-down of gene function by research scientists,
and have largely displaced other methods previously used for
this purpose. Reflecting this, siRNAs are a growing portion of
the market for research reagents and related products and
services.
One important application of such knock-down studies is to
confirm the role of a particular gene or protein in a disease, a
process often referred to as target identification or target
validation. If silencing a gene with an siRNA leads to
improvements in disease symptoms in an experimental disease
model, this implies that the target gene or protein plays an
important role in the disease. It also implies that the siRNA
that suppresses the gene in the model system may be a useful
starting point for the development of a drug. We believe that it
will be possible to develop these siRNAs into potent and
specific drugs.
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Broad Potential of siRNAs as Therapeutics |
The success of siRNAs in silencing gene activity in experimental
systems suggests that siRNAs could potentially be developed into
a broad class of human therapeutics. We believe this new class
of drugs has the potential to become a major class of drugs
because RNAi therapeutics could offer the following benefits:
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Ability to treat a broad range of diseases. Given the
availability of the base sequence of the entire human genome, in
theory, it could be possible to design siRNAs to suppress the
production of virtually any human protein whose presence or
activity causes disease. This suggests that RNAi therapeutics
could potentially be used to treat a broad range of diseases. |
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Ability to target proteins that cannot be targeted
effectively by existing drug classes. Many proteins that
play important roles in disease cannot be targeted effectively
with small molecules or therapeutic proteins, a class of drugs
that includes monoclonal antibodies. These proteins that are
difficult to target are commonly referred to as non-druggable
targets. In the case of small molecule drugs, many proteins are
non-druggable because it has proved difficult to synthesize drug
candidates with appropriate specificity, potency and safety. In
the case of protein drugs, the range of available targets is
limited to targets outside the cell. These limitations on small
molecule and protein drugs should not apply to siRNAs, which, in
theory, can be synthesized to target any gene in the genome.
Therefore, we believe RNAi therapeutics will be able to target
proteins that small molecule and protein drugs cannot currently
target. |
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Inherently potent mechanism of action. One molecule of
siRNA could potentially do the work of thousands of molecules of
conventional drugs. With conventional drugs, one drug molecule
is typically required for every protein molecule whose activity
needs to be blocked. Accordingly, to block several thousand
protein molecules, several thousand drug molecules are required.
In contrast, a single siRNA molecule can potentially block the
synthesis of many protein molecules. This is because each siRNA
within a RISC complex can trigger destruction of multiple mRNA
molecules, each of which could otherwise direct the synthesis of
many protein molecules. This inherent potency of the RNAi
mechanism suggests a potentially high degree of potency for RNAi
therapeutics. |
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Simplified discovery of drug candidates. Identification
of small molecule and protein drug candidates typically requires
screening of a large number of potential candidates to find
prospective leads. These leads must then undergo significant
optimization in order to become drug candidates. Particularly in
the case of small molecule drug candidates, the optimization
procedure can be very challenging, and has to be almost entirely
repeated for each candidate. Identification of siRNA drug
candidates has the potential to be much simpler and take
considerably less time because, in theory, it will involve
relatively standard processes that can be applied in a similar
fashion to many successive product candidates. |
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For these potential benefits of siRNA drugs to be realized, it
will be necessary to create chemically synthesized siRNAs that
are potent, specific, stable and safe and also capable of
reaching the appropriate tissues and cells. The incorporation of
such properties into siRNAs is the focus of our product engine.
We have reported on our advances in developing siRNAs into drugs
in a number of peer-reviewed publications and meetings,
including a publication by our scientists in the journal
Nature.
Our Business Strategy
Our strategy is to use our intellectual property and expertise
in RNAi to develop and commercialize RNAi therapeutics. The key
elements of our business strategy are as follows:
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Pursue product opportunities in a phased approach based on
the capabilities of our product engine. With the goal of
accelerating the development of RNAi therapeutics, we are
implementing a phased approach to product development. Using the
current capabilities of our product engine, we are focusing
initially on the development of Direct RNAi therapeutics. We
believe there are multiple opportunities for Direct RNAi
therapeutics. As we extend the capabilities of our product
engine, we intend to initiate development of Systemic RNAi
products. |
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Direct RNAi therapeutics. We intend to utilize the
current capabilities of our product engine by focusing our
efforts on developing RNAi therapeutics that can be administered
directly to diseased parts of the body, such as the eye, the
lungs or the brain. As part of this phase, we have initiated
Direct RNAi programs focused on AMD, RSV, PD, SCI and CF. |
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Systemic RNAi therapeutics. As we extend the capabilities
of our product engine, we intend to develop RNAi therapeutics
that can reach diseased parts of the body by traveling through
the bloodstream after injection. We believe achievement of this
objective could permit us to develop Systemic RNAi therapeutics
for a broad range of diseases, such as cancer and metabolic and
autoimmune diseases. |
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Maintain a strong intellectual property position in the RNAi
field. We believe we have a strong intellectual property
position relating to the development and commercialization of
siRNAs as therapeutics. To build upon our existing intellectual
property position, we are focusing on patent and patent
applications covering: |
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fundamental aspects of the structure and uses of siRNAs,
including their use as therapeutics; |
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chemical modifications to siRNAs that improve their suitability
for therapeutic uses; and |
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siRNAs directed to specific targets as treatments for particular
diseases. |
In March 2004, we entered into a collaboration with Isis that
provides us with rights to over 150 issued patents covering
chemical modifications that may enhance the pharmaceutical
properties of siRNA molecules as well as fundamental aspects of
the mechanism by which these molecules work. Isis agreed that it
will not grant corresponding rights to any third party for any
dsRNA products designed to work through an RNAi mechanism,
except in the context of a collaboration in which Isis plays an
active role.
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Capitalize on our expertise in RNAi and our intellectual
property position to gain access to additional resources to
develop and commercialize RNAi therapeutics. We believe that
we can use our expertise and the strength of our intellectual
property to drive the formation of strategic alliances that will
provide us with significant funding and access to important
additional resources. We expect these resources to include
significant additional capital as well as expertise in the
development, manufacturing and commercialization of novel
therapeutics. We intend to take an active role in these
alliances, including maintaining certain development and
commercialization rights. We also intend to use our early
alliances to expand our own capabilities so that in the future
we will be able to develop and commercialize our therapeutic
products independently. |
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Leverage our intellectual property position by licensing our
technology to generate revenues. Through our InterfeRx
Program, we have licensed and intend to further license our
intellectual |
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property to third parties for the development and
commercialization of RNAi therapeutics outside our areas of
strategic focus. To date, we have granted one InterfeRx license
to GeneCare Research Institute Co., Ltd., a Japanese
biotechnology firm. The license allows GeneCare to discover,
develop, and commercialize RNAi therapeutics directed against
two DNA helicase genes associated with cancer. We earned an
upfront cash payment, and expect to receive annual and milestone
payments, all in cash, and royalties on sales of any products
that result from the licensing agreement. In addition, we
retained the right to negotiate co-development and co-promotion
arrangements for such products in the United States. We expect
to grant additional InterfeRx licenses in which we will receive
license fees, annual maintenance fees, milestone payments and
royalties on sales of any resulting RNAi therapeutics. We also
intend to grant further licenses to our intellectual property
for the development and commercialization of research reagents
and services. We offer licenses for an initial license fee,
annual renewal fees and royalties on sales of siRNA research
reagents and services. |
Alnylam Product Engine
To realize the potential of RNAi therapeutics as a broad new
class of drugs, we are developing capabilities that we can apply
to any specific siRNA in a relatively standard fashion to endow
it with drug-like properties. We use the term product engine to
describe these capabilities because we believe they will enable
us to develop many products across a variety of therapeutic
areas. The concept for our product engine is that it will
provide a systematic approach to identifying RNAi drug
candidates, with the following steps:
Sequence selection. Using sophisticated bioinformatics
tools we scan through the entire sequence of a target mRNA to
identify sequences that are unique to that mRNA and have few
closely similar sequences in other mRNAs. From these unique
sequences we derive a list of potential siRNAs that would match
up exactly with the target mRNA and not with any other mRNAs. We
narrow this list down further by applying filters for other
important properties, such as the identity of sequences in mRNAs
across multiple species to facilitate pre-clinical and clinical
testing. This provides us with a shorter list of siRNAs, each of
which we then synthesize for experimental evaluation.
Potency selection. The siRNAs synthesized in the sequence
selection step are tested in cell culture systems to compare
their potencies in suppressing production of the target protein.
Stabilization by chemical modification. Each of the most
potent siRNAs is assessed to identify the sites within its
structure where it is most vulnerable to attack by enzymes known
as ribonucleases that could degrade the siRNA. A minimal set of
chemical modifications is then introduced into the siRNA to
protect these vulnerable sites, and the modified siRNA is tested
to confirm its stability and that it has retained activity
against the target mRNA.
Improvement of biodistribution by conjugation of additional
chemical groups. The stabilized siRNA is further modified by
the addition, or conjugation, of one or more chemical groups
designed to improve uptake of the siRNA into cells and, if
desired, to prolong the time it circulates in the blood.
We expect the output of this process to be RNAi drug candidates
that are potent against and specific for a particular target,
are appropriately stable and are able to penetrate cells of
target tissues. Moreover, we expect that this process for
finding suitable drug candidates will be simpler, faster and
more productive than the corresponding process for small
molecule and protein drug candidates. Therefore, we believe that
any significant success in the development of our product engine
will place us in a position to pursue multiple therapeutic
opportunities.
Progress in the Development of Product Engine
We have made considerable progress in establishing capabilities
suitable for Direct RNAi drugs, and believe on the basis of
early results that we will be able to develop capabilities
suitable for Systemic RNAi drugs. In judging our progress, we
focus on six key attributes that are important for any drug
molecule: potency, specificity, stability, safety,
biodistribution and efficacy.
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The more potent a drug is, the lower the dose required for a
therapeutic effect, and the lower the risk of side effects.
Because siRNAs harness the catalytic activity of a natural
mechanism to block the synthesis of undesirable proteins, we
expect siRNA drugs to be potent at this task. Current data that
we and others have generated support this expectation. We have
designed and synthesized siRNAs that are highly effective at low
concentrations in suppressing target protein production in
cultured cells. A frequently used measure of the potency of
potential drug candidates is the parameter known as
IC50, which is the concentration of the drug
candidate required to reduce the activity of the target protein
by 50% of its normal level. The lower the IC50 value,
the more potent the drug candidate. We have made siRNAs that
suppress target protein production in cultured cells with
IC50 values similar to, or lower than, the values
typically observed for other types of drugs in analogous
experiments. Further, a number of the siRNAs we have made and
tested in cell culture experiments have demonstrated greater
potency than siRNAs others have tested against the same targets
in published experiments. Further, we have also demonstrated
that suppression of gene activity by an siRNA can continue for
at least seven days after cells are exposed to low
concentrations of the siRNA. Although these observations need to
be extended further by tests in animals and then in humans, they
lead us to believe that we will be able to identify siRNAs with
potency that is sufficient for therapeutic use.
To maximize beneficial effects and minimize harmful ones, a drug
should be highly selective for its intended target and have
minimal activity against unintended targets. For siRNAs, careful
selection of an appropriate base sequence can provide a high
degree of specificity for the target mRNA. Some evidence has
been reported of off-target effects with certain siRNAs, meaning
that these siRNAs affected mRNAs other than their intended
targets. However, we believe that such effects can be minimized
by the use of sophisticated bioinformatics tools to improve
selection of siRNA sequences and by judicious incorporation of
chemical modifications at appropriate positions within the siRNA
molecule. Therefore, we believe we will be able to identify
siRNA molecules that are sufficiently specific to the target
mRNAs.
To be effective, drugs must be stable in the body long enough to
reach the tissues in which their effects are required and then
to exert those effects. To endow siRNA molecules with
appropriate stability, we are introducing a series of chemical
modifications into siRNAs to protect them against enzymes called
ribonucleases that would otherwise degrade them. We have also
identified certain sequence motifs that help to stabilize the
siRNAs that contain them, and which we can incorporate by design
into the siRNAs we make. We use various experimental systems to
assess the impact of sequence selection or chemical
modifications on the stability of siRNAs. These systems include
incubation of modified siRNAs at body temperature in samples of
animal or human serum or in extracts made from animal tissues,
such as the liver, the eye or the lung. We also assess the
stability of siRNAs by injecting them into animals and analyzing
samples of serum or tissues for the presence of intact siRNA.
These analyses are performed using radioactive labels to trace
the fate of the siRNAs or using a biochemical test known as a
ribonuclease protection assay to detect the presence of the
siRNAs. Using these analytical procedures, we have
systematically evaluated the impact of various chemical
modifications within siRNA molecules. As a result, we have
developed a series of rules enabling us to synthesize siRNAs
that are more resistant to breakdown in our experimental systems
than unmodified siRNAs but which also retain sufficient potency
in cell culture experiments. We have shown that a modified siRNA
can maintain stability for at least 24 hours, whereas many
unmodified siRNAs are largely degraded within minutes.
All drugs carry the risk of side effects. These effects may have
a variety of causes, including incomplete specificity of the
drug for its intended target or an adverse interaction between
the drug and the body’s systems for monitoring and
disposing of foreign materials. In the case of RNAi drugs, our
ability to choose siRNAs that are potent and selective for their
targets should help to minimize side effects caused by lack of
specificity.
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Moreover, we are deliberately minimizing the number of chemical
modifications we are introducing into siRNAs to enhance
stability and other properties and believe that this will help
minimize potential adverse effects on the body’s disposal
systems.
Because siRNAs are dsRNAs, one further potential side effect is
activation of the so-called interferon response, which can be
provoked by dsRNAs and causes influenza-like symptoms. In
collaboration with Dr. Gunther Hartmann at Ludwig
Maximilian University Munich, our researchers have identified
specific motifs of siRNAs that can stimulate the interferon
response. By enabling the design of siRNAs that do not contain
them, the identification of these motifs should help avoid
interferon induction, an important goal for achieving safe RNAi
therapeutics. Our approach also includes experimental testing of
siRNAs we are considering as drug candidates to identify and
select siRNAs that do not trigger an interferon response. The
results of our work with Dr. Hartman were published in the
journal Nature Medicine in February 2005.
Biodistribution refers to the ability of drugs to reach
different tissues within the body and to enter cells within
these tissues. Because RNA molecules are typically unable to
enter cells without the use of special delivery agents,
biodistribution is considered to be one of the key issues to be
addressed before siRNAs can be developed into drugs. We believe
we have made considerable progress addressing biodistribution
for siRNAs. For example, we have demonstrated that:
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The attachment of a chemical structure such as cholesterol to
one end of an siRNA molecule can enable that molecule to enter
cultured cells without any other delivery agent. To demonstrate
entry of a cholesterol-linked siRNA into cells, we incubated
cultured cells with various concentrations of the modified siRNA
or of an siRNA having the same base sequence but lacking the
cholesterol modification. Activity of the target protein was
reduced to about 20% of its normal level in the cells incubated
with the modified siRNA, but was essentially unaffected in the
cells incubated with the siRNA lacking the cholesterol
modification. |
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A cholesterol-linked siRNA remains in the circulation of a mouse
and a rat for longer than a similar siRNA that has not been
modified with cholesterol. In a test to measure the lifetime of
injected siRNA, we demonstrated that a cholesterol-linked siRNA
was detectable in the circulation of a mouse and a rat
12 hours after injection, whereas an unmodified siRNA was
barely detectable after one hour. |
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A cholesterol-linked siRNA can make its way into tissues after
injection into the tail vein of a mouse. We made extracts from
various tissues of mice that had been injected with a variety of
siRNAs and used the ribonuclease protection assay to analyze
these extracts for the presence of siRNA. Significant levels of
siRNAs were observed in extracts from liver, heart, kidney,
adipose, and lung tissue, but only if the injected siRNAs had
been modified by attachment of cholesterol. No siRNAs were
observed in corresponding tissue extracts from mice that had not
been injected or had been injected with siRNAs lacking the
cholesterol group. |
Efficacy refers to the ability of drugs to exert their desired
effects in live animals and, ultimately, human patients. On the
basis of recent results, we believe we have made significant
progress in demonstrating that we will be able to develop siRNAs
with appropriate efficacy for use as drugs. These results
include:
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Demonstration that a cholesterol-linked siRNA injected into a
mouse can significantly reduce the levels of its target mRNA and
the corresponding protein. This finding was reported by our
scientists in the journal Nature in November 2004. They
showed that injection of a cholesterol-linked siRNA reduced the
levels of the target mRNA by almost 60% in the liver and more
than 70% in the jejunum, which is part of the gut. Moreover,
bloodstream levels of the protein encoded by the target mRNA
were also reduced, by almost 70%. The protein in question was
apolipoprotein B, or apoB, which was selected for these
experiments because it plays an important part in regulating
cholesterol levels in the |
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bloodstream. Significantly, animals treated with the modified
siRNA also had reduced levels of bloodstream cholesterol. |
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Demonstration that in live animals, a cholesterol-linked
siRNA causes its target mRNA to be cut within the region
complementary to the siRNA. This finding was also reported
by our scientists in their Nature paper, and to our
knowledge represents the first published evidence that RNA
interference in a live animal takes place by the mechanism
assumed for it. Specifically, our scientists demonstrated that
apoB mRNA was cleaved, or cut, in the middle of the region
complementary to the cholesterol-linked apoB-specific siRNA. |
Taken together, our results to date with respect to potency,
specificity, stability, safety, biodistribution and efficacy
lead us to believe that we will be successful in identifying
siRNAs with appropriate properties for use as drugs.
Our Research Programs
Given our progress in developing our product engine we have
begun work on Direct RNAi drug candidates and believe that we
will also be able to move forward with Systemic RNAi drug
candidates in the future. Using the current capabilities of the
product engine, we have initiated five programs to identify
specific siRNAs for potential further development as Direct RNAi
drug candidates. Included in these are our development programs
focused on AMD and RSV, for which we have targeted the
initiation of human clinical trials during the second half of
2005 and during the first half of 2006, respectively. Also
included in these programs are our pre-clinical programs focused
on PD, SCI and CF, for which we have yet to establish the likely
timing of human clinical trials. In addition to these programs,
we have also initiated a program in collaboration with Medtronic
to develop technology for the treatment of neurodegenerative
diseases using novel combinations of medical devices and RNAi
therapeutics.
Age-Related Macular Degeneration
AMD can cause severe deterioration of vision and may ultimately
cause blindness. The National Eye Institute estimates that over
1.6 million adults over 50 in the United States suffer from
AMD. The siRNAs we are exploring would treat wet AMD, a subtype
of AMD that affects over 1.5 million people in the United
States and is responsible for approximately 90% of the severe
vision loss due to AMD. According to AMD Alliance International,
approximately 200,000 new cases of wet AMD are diagnosed in
North America each year and approximately 500,000 new cases of
wet AMD are diagnosed worldwide each year.
The macula is the central area of the retina, and is the area
most responsible for visual acuity, or sharpness of vision. The
macular degeneration that occurs in wet AMD is a complex process
involving the growth of new blood vessels immediately behind the
retina and invasion of these new vessels into the retinal space.
These newly formed vessels tend to be relatively fragile, and to
leak blood and fluid into the surrounding tissue. The presence
of leaked fluids and new blood vessels behind the retina
physically disrupts the integrity of the macula and the
photoreceptors contained therein, resulting in blurring of
central vision, and ultimately blindness.
Until recently there were only two available treatments, of
limited effectiveness, for wet AMD: the drug Visudyne, sold by
Novartis AG, and laser treatment. Visudyne is used in a two-step
process known as photodynamic therapy whose goal is to seal
newly formed blood vessels behind the retina so that they
neither grow nor leak. However, Visudyne is only approved for
the treatment of certain subtypes of wet AMD, and its beneficial
effects are frequently modest and of limited duration. The only
alternative to photodynamic therapy was, until recently,
treatment with a laser to burn out newly formed blood vessels.
Unfortunately, this treatment can also cause irreversible damage
to the retina, resulting in significant blind spots, and its
beneficial effects appear to be of limited duration.
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In December 2004, the United States Food and Drug
Administration, or FDA, approved a new drug known as
Macugen® for the treatment of all types of wet AMD. Macugen
belongs to a class of compounds known as aptamers and blocks the
activity of a protein known as vascular endothelial growth
factor, or VEGF. There is evidence that VEGF promotes both the
growth and the leakage of new blood vessels behind the retina in
AMD. Macugen was developed by Eyetech Pharmaceuticals, Inc.
Several other companies are developing drugs for the treatment
of wet AMD that target VEGF or its activity. The most advanced
of these drug candidates is Lucentis, an antibody fragment being
developed by Genentech, Inc. that binds specifically to VEGF.
Regeneron, Inc. is developing a product called VEGF Trap,
designed to block the activity and effects of VEGF, that is in
the early stages of clinical testing for AMD. Two other
companies are in the early stages of developing siRNA products
to block VEGF activity. One of these products, being developed
by Acuity Pharmaceuticals, Inc., is intended to limit production
of VEGF by suppressing the activity of the VEGF gene. The other,
being developed by Sirna Therapeutics, Inc., is intended to
limit production of a protein known as VEGF-receptor, which is
the protein on cell surfaces that VEGF must bind to in order to
exert its effects. Acuity and Sirna both initiated Phase I
human clinical trials of their siRNA products in the latter half
of 2004.
We are developing an RNAi therapeutic, which we refer to as VEGF
Production Inhibitor, for the treatment of wet AMD. We believe
that an RNAi therapeutic that suppresses VEGF gene activity,
thereby cutting off VEGF production, could have significant
advantages over drugs that bind to VEGF once it has been
produced or that limit production of the VEGF-receptor. We have
identified siRNAs that suppress the activity of the VEGF gene
potently and specifically in cultured cells. We believe that the
siRNAs we have identified are significantly more potent and
effective than VEGF-directed siRNAs reported by others, and that
we can apply the current capabilities of our product engine to
develop them into competitive drug candidates. We are currently
evaluating these siRNAs in animal models relevant to wet AMD and
expect to begin a clinical trial for a wet AMD product candidate
during the second half of 2005. Any siRNA we develop for wet AMD
will be a Direct RNAi drug administered by direct injection into
the eye, the method of administration for Macugen and Lucentis.
We have filed patent applications relating to the use of siRNAs
to suppress VEGF production for therapeutic purposes, and in
August 2004, we obtained an exclusive license from Hybridon,
Inc., under a number of issued patents covering the treatment of
ocular diseases with siRNAs targeting VEGF.
Respiratory Syncytial Virus Infection
Respiratory syncytial virus, or RSV, is a highly contagious
virus that causes infections in both the upper and lower
respiratory tract. RSV infects nearly every child by the age of
two years and, in several populations, is responsible for a
significant percentage of all hospitalizations. These
populations include infants born prematurely, children with lung
or congenital heart disease, the elderly, and other adult
immune-compromised populations. RSV infection typically results
in cold-like symptoms but can lead to more serious respiratory
illness such as croup, pneumonia and bronchiolitis, and in
extreme cases severe illness and death. According to the Centers
for Disease Control and Prevention, RSV is responsible for up to
an estimated 125,000 pediatric hospitalizations each year in the
United States. As a result, there is a significant need for
novel therapeutics to treat patients who become infected with
RSV.
The only product currently approved for the treatment of RSV
infection is Ribavirin, which is marketed as Virazole® by
Valeant Pharmaceuticals International. This product has limited
utility as it is approved only for treatment of hospitalized
infants and young children with severe RSV infections of the
lower respiratory tract. Moreover, administration of the drug is
cumbersome and requires elaborate environmental reclamation
devices because of potential harmful effects on healthcare
personnel exposed to the drug.
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Two products have been approved for the prevention of
severe lower respiratory tract disease caused by RSV in infants
at high risk of such disease. One of these is a monoclonal
antibody known as Synagis®. The other, earlier, product is
an immune globulin called Respigam®. Neither of these
products is approved for treatment of an existing RSV
infection.
The goal of our program is to develop an RNAi therapeutic that
can be used to treat RSV infection. Experiments conducted by and
with our collaborators have demonstrated that siRNAs specific
for RSV can block RSV infection in mice. The siRNAs used in
these experiments were administered intranasally, that is, in
the nose. We are currently conducting animal tests of several
siRNAs that are highly potent in blocking RSV infection in mice,
and expect to begin human clinical trials for treatment of RSV
infection during the first half of 2006. Most likely, any siRNA
we develop for RSV infection will be a Direct RNAi drug
administered via inhalation of an aerosol into the lungs, a
current mode of administration for many drugs. We have licensed
and filed patent applications relating to the use of siRNAs to
inhibit infection with the RSV virus.
Parkinson’s Disease
PD is a disorder of the nervous system that, according to the
American Parkinson Disease Association, afflicts more than
1.5 million people in the United States and, according to
the World Health Organization, afflicts approximately four
million people worldwide. In its early stages PD is
characterized by uncontrollable tremors that gradually increase
in severity. As the disease progresses it can lead to severe
loss of mobility and dementia. According to Decision Resources,
sales of drugs for treating PD in major pharmaceutical markets
are expected to grow to approximately $3 billion by 2012.
The symptoms of PD are caused by a shortage of a substance
called dopamine in a key region of the brain. Dopamine plays an
important role in transmitting signals between nerve cells and
in regulating movement. The shortage of dopamine in PD is caused
by the death of dopamine-producing cells in a region of the
brain known as the substantia nigra.
Currently approved treatments address the symptoms of PD rather
than its cause and largely rely on drugs that replace the
function of the missing dopamine. These drugs act in a variety
of ways, including mimicking dopamine, boosting the amount of
dopamine in the brain, enhancing the activity of dopamine
boosters or mimics, slowing down the breakdown of dopamine and
compensating for diminished dopamine activity. Over time,
however, patients cease to respond to these drugs, and there are
no effective treatments for advanced PD.
The leading treatment for Parkinson’s disease is
Sinemet®, which was developed by DuPont in the 1970’s.
Sinemet combines two drugs — levodopa and a second
component, carbidopa, that makes the product more effective by
delaying the conversion of levodopa into dopamine until the drug
passes into the brain. Sinemet is manufactured by Merck and
marketed and distributed by Bristol-Myers Squibb.
Several companies are currently seeking to develop drugs that
treat PD by altering the course of the disease. These
investigational drugs include CEP-1347, which is being developed
by Cephalon, Inc. in collaboration with H. Lundbeck A/S,
TCH-346, which is being developed by Novartis AG,
rasagiline, which is being developed jointly by Teva
Pharmaceutical Industries Ltd. and H. Lundbeck A/S, and
GPI-1485, which is being developed jointly by Guilford
Pharmaceuticals, Inc. and Symphony Neuro Development Company.
The goal of our program is to develop an RNAi therapeutic that
will slow or halt the progress of PD. Instead of replacing the
function of missing dopamine in persons with PD, the siRNAs we
have begun to
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explore as potential treatments of PD would attempt to prevent
the shortage of dopamine by preventing the death of
dopamine-producing cells that causes this shortage. Based on
recent scientific findings, we believe that it may be possible
to prevent the death of those cells by using an siRNA to
suppress production of a protein known as alpha-synuclein.
Recent evidence suggests that the presence of excessive amounts
of alpha-synuclein in dopamine-producing cells contributes to
their death.
In 2003 we entered into a collaboration with the Mayo Foundation
for Medical Education and Research and the Mayo Clinic
Jacksonville, which we refer to collectively as the Mayo Clinic.
In this collaboration we have identified siRNAs that suppress
the activity of the alpha-synuclein gene in cultured cells.
Studies are ongoing to explore whether these siRNAs can suppress
alpha-synuclein gene activity in vivo in animal models of PD.
The collaboration was established with an initial one-year
period, which has been extended through September 2005, to
explore whether an siRNA could be effective in treating PD and
allows for further extension if the results are positive. We
have secured an option for an exclusive license to a patent
application filed by the Mayo Clinic relating to the use of
siRNAs to suppress production of alpha-synuclein for therapeutic
purposes. We expect that any resulting RNAi therapeutic would be
a Direct RNAi drug administered using a specialized medical
device to infuse the drug into the appropriate region of the
brain. Accordingly, in February 2005, we entered into a
collaboration with Medtronic for the development of technology
suitable for delivering RNAi therapeutics to specific areas of
the brain using implantable devices.
Spinal Cord Injury
According to the National Spinal Cord Injury Association,
approximately 250,000 - 400,000 individuals in the United
States have SCIs, and about 11,000 people sustain new SCIs each
year. Most SCIs occur in automobile and sports accidents, falls,
and industrial mishaps. An estimated 60 percent of people
sustaining SCIs are 30 years old or younger, and the
majority of them are men. SCI has a sudden and profound impact
on the affected individual, typically resulting in partial or
almost complete paralysis.
Many organs and tissues in the body can recover after injury
without intervention. Unfortunately, some cells of the central
nervous system are so specialized that they cannot divide and
create new cells. As a result, recovery from a brain or SCI is
much more difficult. One important type of damage that occurs as
a result of SCI is the severance of axons, the long extended
portions of nerve cells that transfer nerve impulses from one
cell to another. Specialized molecules that inhibit regrowth of
severed axons appear to be produced at the site of damage.
Possible interventions to promote recovery from SCI include
blocking the production or activity of these molecules that
prevent nerve regrowth.
Methylprednisolone, a steroid, has become standard treatment for
acute spinal cord injury since 1990, when a large-scale clinical
trial showed significantly better recovery in patients who began
treatment with this drug within eight hours of their injury.
Methylprednisolone reduces the damage to cellular membranes that
contribute to neuronal death after injury. It also reduces
inflammation near the injury and suppresses the activation of
immune cells that appear to contribute to neuronal damage.
Preventing this damage helps spare some nerve fibers that would
otherwise be lost, improving the patient’s recovery.
However, there are currently no approved drugs to treat the
nerve damage associated with SCI.
Early in 2005 we initiated a program to develop siRNAs to block
a regulatory mechanism in the nervous system known as the Nogo
pathway. This pathway appears to play a key role in preventing
regeneration of nerves after injury, such as SCI. Potentially,
therefore, an RNAi therapeutic that inhibits this pathway could
reduce or prevent paralysis caused by SCI. We are currently in
the early stages of designing and testing siRNAs specific for a
protein in the Nogo pathway, which we are developing in
conjunction with our first strategic alliance with Merck.
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Cystic Fibrosis
Cystic fibrosis, or CF, is a genetic disease in which a
defective protein known as the Cystic Fibrosis Transmembrane
conductance Regulator, or CFTR, causes the body to produce an
abnormally thick, sticky mucus, or secretion, that clogs the
lungs and leads to life-threatening lung infections. This thick
mucus also obstructs the pancreas, preventing digestive enzymes
from reaching the intestines to help break down and absorb food.
According to the Cystic Fibrosis Foundation, CF affects
approximately 30,000 people in the United States and occurs in
approximately one of every 3,500 live births. Approximately
1,000 new cases of CF are diagnosed each year and more than
80 percent of patients are diagnosed by age three.
According to the Cystic Fibrosis Foundation’s National
Patient Registry, the median age of survival for a person with
CF is in the mid 30s. As more advances have been made in the
treatment of CF, the number of adults with CF has steadily
grown. Adults, however, may experience additional health
challenges including CF-related diabetes and osteoporosis.
No therapeutics are approved today to treat what are believed to
be the root causes of CF. Currently, the treatment of CF depends
upon the stage of the disease and the organs involved. Clearing
mucus from the lungs is an important part of the daily CF
treatment regimen. Chest physical therapy is a form of airway
clearance that involves vigorous clapping on the back and chest
to dislodge the thick mucus from the lungs. Other types of
treatments include TOBI®, a tobramycin solution for
inhalation, which is an aerosolized antibiotic used to treat
lung infections that is marketed by Chiron Corporation;
Pulmozyme®, a mucus-thinning drug shown to reduce the
number of lung infections and improve lung function, which is
marketed by Genentech, Inc.; and azithromycin, an antibiotic
recently proven to be effective in people with CF whose lungs
are chronically infected with the common bacteria known as
Pseudomonas aeruginosa. Clinical trials focused on gene
therapy are currently being conducted by other companies but all
are in early stages.
In March 2005, we initiated a collaborative program with CFFT,
the drug discovery and development affiliate of the Cystic
Fibrosis Foundation. The goal of our program is to develop an
RNAi therapeutic that can be used to treat the cause rather than
the consequences of CF. In most patients with CF, potentially
functional CFTR protein is produced but does not reach the cell
surface. In our program with CFFT we will conduct research
activities to determine if the CFTR protein can be redirected to
the cell surface through the use of RNAi-based technologies to
silence specific genes. Most likely, any RNAi therapeutic that
we develop for CF will be a Direct RNAi drug administered via
inhalation of an aerosol into the lungs, a current mode of
administration for many drugs.
Strategic Alliances and Licenses
We intend to form strategic alliances to gain access to the
financial, technical, clinical and commercial resources
necessary to develop and market RNAi therapeutics. We expect
these alliances to provide us with financial support in the form
of equity investments, research and development funding, license
fees, milestone payments and royalties or profit-sharing based
on sales of RNAi therapeutics. We currently have two distinct
strategic alliances with Merck, as well as alliances with
Medtronic and CFFT.
In September 2003, we entered into a five-year strategic
alliance with Merck to develop advanced RNAi technology and RNAi
therapeutics. For technology development, both parties committed
to devote significant human resources and expertise to the
collaborative development of advanced RNAi technology. Merck
will have exclusive rights to use our RNAi technology and the
RNAi technology developed jointly under the
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collaboration solely for the identification and validation of
drug targets. We will have rights to use this technology for all
internal research purposes and in collaborations in which the
primary purpose is the development of therapeutic products using
RNAi. For therapeutics development, Merck agreed to provide us
with twelve proprietary drug targets over the course of the
collaboration that have well-validated roles in disease and that
appear attractive as potential targets for RNAi therapeutics. We
have the right, but not the obligation, to develop siRNA drug
candidates against each target provided by Merck. If we advance
a candidate to a defined point in preclinical development, the
parties will then decide whether we, Merck or the two companies
together will proceed with the further development and
commercialization of that candidate. For each drug candidate
that Merck decides to develop, whether by itself or jointly with
us, Merck will pay us a fee at the time of its decision, and
will also reimburse us for one-half of the costs we incurred
previously on that candidate. If the parties agree to develop a
drug candidate together, we will share development expenses and
co-promote the products upon terms to be determined by mutual
agreement. If it is determined that Merck will develop the drug
candidate without our further involvement, Merck will bear all
development expenses and will pay us a royalty on product sales.
Likewise, if it is determined that we will develop the drug
candidate without further Merck involvement, we will bear all
development expenses and will pay Merck a royalty on product
sales. In that event, we would retain the right to collaborate
with a third party on the development and commercialization of
that drug candidate.
In connection with this alliance, Merck made a $2.0 million
cash payment and purchased $5.0 million of our equity
during 2003. Merck made additional cash payments of
$1.0 million in September 2004 and $2.0 million in
December 2004 as well as an equity investment of
$5.0 million in December 2004 in recognition of our having
developed RNAi technology for use in live animals to a
pre-specified level of performance. An additional
$1.0 million cash payment is due from Merck in September
2005.
In early 2005, we initiated a therapeutic discovery and
development program associated with this alliance. The new
program focuses on a specific drug target proposed by Merck, and
we will proceed with preclinical development of an RNAi
therapeutic for this target. The drug target is in the Nogo
pathway, which plays a key role in preventing regeneration of
nerves after injury, such as SCIs. An RNAi therapeutic that
inhibits this pathway could potentially reduce or prevent
paralysis caused by such injuries.
In June 2004, we entered into a second collaboration and license
agreement with Merck. The agreement is a multi-year
collaboration to develop and commercialize RNAi therapeutics for
ocular diseases. This collaboration will focus on AMD and other
ocular diseases caused by abnormal growth or leakage of small
blood vessels in the eye. Our existing program to develop a
Direct RNAi therapeutic targeting VEGF for the treatment of AMD
was incorporated into the new collaboration. Under the terms of
the agreement, in 2004 we received a $2.0 million license
fee from Merck as well as $1.0 million representing
reimbursement of prior research and development costs we had
incurred. The agreement also provides for us to work with Merck
on two mutually agreed ocular targets in addition to VEGF. The
parties will jointly fund the development of, and share the
profits from, any RNAi therapeutics for the United States market
that result from the collaboration. We will also have the option
to co-promote these RNAi therapeutics in the United States.
Marketing and sales outside of the United States will be
conducted by Merck, with us receiving royalties.
In February 2005, we entered into a collaboration with Medtronic
to pursue the potential development of therapeutics for the
treatment of neurodegenerative disorders such as
Parkinson’s, Huntington’s and Alzheimer’s
disease. The collaboration will focus on developing novel
drug-device combinations incorporating RNAi therapeutics.
Initially, the parties will engage in a joint technology
development program for a period of two years, which can be
extended by mutual agreement. This initial joint technology
development program will focus on delivering candidate RNAi
therapeutics to specific areas of the brain using an implantable
infusion system.
After successful completion of the initial joint technology
development program, the parties must jointly determine whether
to initiate product development. If the parties jointly decide
to initiate product development, we would be responsible for the
discovery and early development of candidate RNAi therapeutics,
and
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Medtronic would be responsible for late-stage development and
commercialization of any drug-device products that result.
Medtronic also would adapt or develop medical devices to deliver
the candidate RNAi therapeutics to targeted locations in the
nervous system.
After successful completion of the initial joint technology
development program and a joint decision to initiate product
development, Medtronic would make an initial equity investment
in us and could make additional investments upon successful
completion of specified milestones. The aggregate amount of our
common stock that Medtronic would purchase if a joint decision
were taken to initiate product development and the specified
milestones were successfully completed would be
$21 million. The amount of the investment to be made at the
time of the joint decision to initiate product development would
be between $1.0 million and $8.0 million, as
determined by us, at the then-current market price. For the
purpose of this investment, the then-current market price would
be equal to the twenty-day trailing average of the closing price
of our common stock on the Nasdaq National Market at the end of
the trading day two trading days prior to the date of the
decision to initiate product development. The remaining
investments of between $13.0 million and $20.0 million
would be made upon the achievement of the specified milestones
at a purchase price equal to 120% of the then-current market
price, calculated as just described. If either party decides not
to initiate product development under the collaboration
agreement, Medtronic would not be required to make any equity
investment in us.
After successful completion of the initial joint technology
development program and a joint decision to initiate product
development, we would also be eligible to receive additional
cash milestone payments for each product developed and royalties
on sales of any RNAi therapeutic component of novel drug-device
combinations that result from the collaboration.
In March 2005, we entered into a collaboration with CFFT to
investigate the potential for RNAi therapeutics to treat CF.
Under this collaboration, CFFT will provide us with an initial
payment of $0.5 million and make additional payments
totaling an aggregate of $1.0 million in the event that
certain scientific milestones are achieved. In addition to
funding, CFFT will provide us with access to certain scientific
resources to support our siRNA discovery and development
efforts. If the discovery and development efforts under this
collaboration result in the identification of siRNAs that are
candidates for further development, the parties may negotiate a
mutually agreeable support arrangement for further phases of
development. In the event that we develop a marketable
therapeutic for the treatment of CF, we will be required to pay
CFFT certain pre-determined royalties.
We intend to enter into licensing arrangements with third
parties to enhance our intellectual property position and to
generate revenues from our intellectual property rights. In
March 2004, we entered into a collaboration and license
agreement with Isis under which we obtained rights to a broad
portfolio of intellectual property relating to chemical
modifications that may be required to introduce drug-like
properties into siRNA molecules and to the mechanism by which
such molecules work. To generate revenues from our intellectual
property rights, we have established our InterfeRx program and
our research reagents and services licensing program.
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Isis Pharmaceuticals, Inc. |
In March 2004, we entered into a collaboration and license
agreement with Isis, a leading developer of single-stranded
antisense oligonucleotide drugs that target RNA. The agreement
further enhances our intellectual property position with respect
to RNA-based therapeutics and our ability to develop
double-stranded RNA for RNAi therapeutics, and provides us with
the opportunity to defer investment in manufacturing technology.
Isis granted us licenses to its current and future patents and
patent applications relating to chemistry and to RNA-targeting
mechanisms for the research, development and commercialization
of double-stranded RNA products. We have the right to use Isis
technologies in our development programs or
17
in collaborations, and Isis has agreed not to grant licenses
under these patents to any other organization for any dsRNA
products designed to work through an RNAi mechanism, except in
the context of a collaboration in which Isis plays an active
role. We granted Isis non-exclusive licenses to our current and
future patents and patent applications relating to RNA-targeting
mechanisms and to chemistry for research use. We also granted
Isis the exclusive or co-exclusive right to develop and
commercialize double-stranded RNA products against a limited
number of targets. In addition, we granted Isis non-exclusive
rights to our patents and patent applications for research,
development and commercialization of single-stranded RNA
products.
Under the terms of our agreement, we agreed to pay Isis an
upfront license fee of $5 million, $3 million of which
was paid upon signing of the agreement and the remaining
$2 million of which was paid in January 2005. In connection
with the Merck ocular collaboration signed in June 2004
discussed above, we recorded $0.5 million in license fee
expense related to payments due to Isis. We also agreed to pay
milestone payments (totaling $3.4 million payable upon the
occurrence of specified development and regulatory events) and
royalties to Isis for each product that we or a collaborator
develop utilizing Isis intellectual property. In addition, we
agreed to pay to Isis a percentage of some fees from strategic
collaborations we may enter into that include access to the Isis
intellectual property. In conjunction with the agreement, Isis
made a $10.0 million equity investment in us. Isis also
agreed to pay us a license fee, milestone payments (totaling
$3.4 million payable upon the occurrence of specified
development and regulatory events) and royalties for each
product developed by Isis or a collaborator that utilizes our
intellectual property. The agreement also gives us an option to
use Isis’ manufacturing services for RNA-based therapeutics.
Our agreement with Isis also gives us the exclusive right to
grant sub-licenses for Isis technology to third parties with
whom we are not collaborating. We may include these sub-licenses
in our InterfeRx licenses. If a license includes rights to
Isis’ intellectual property, we will share revenues from
that license equally with Isis.
If, by January 1, 2008, we or a collaborator have not
completed the studies required for an investigational new drug
application filing or similar foreign filing for at least one
product candidate involving these patent rights, Isis would have
the right to grant licenses to third parties for the patents and
patent applications licensed to us, thereby making our rights
non-exclusive.
Our InterfeRx program consists of the licensing of our
intellectual property to others for the development and
commercialization of RNAi therapeutics relating to specific
protein targets outside our areas of strategic focus. We expect
to receive license fees, annual maintenance fees, milestone
payments and royalties on sales of any resulting RNAi
therapeutics. Generally, we do not expect to collaborate with
our InterfeRx licensees in the development of RNAi therapeutics,
but may do so in appropriate circumstances. To date, we have
granted one InterfeRx license to GeneCare Research Institute
Co., Ltd., a Japanese biotechnology firm. The license allows
GeneCare to discover, develop, and commercialize RNAi
therapeutics directed against two DNA helicase genes associated
with cancer. We earned an upfront cash payment, and expect to
receive annual and milestone payments, all in cash, and
royalties on sales of any products that result from the
licensing agreement. In addition, we retained the right to
negotiate co-development and co-promotion arrangements for such
products in the United States.
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Research Reagents and Services |
We have granted licenses to our intellectual property for the
development and commercialization of research reagents and
services, and intend to enter into additional licenses on an
ongoing basis. Our target licensees are vendors that provide
siRNAs and related products and services for use in biological
research. We offer these licenses in return for an initial
license fee, annual renewal fees and royalties from sales of
siRNA research reagents and services. No single research reagent
or research services license is material to our business.
18
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|
Research Collaboration — Mayo Clinic |
In 2003 we entered into a collaboration with the Mayo Foundation
for Medical Education and Research and the Mayo Clinic
Jacksonville, which we refer to collectively as the Mayo Clinic.
In this collaboration we have identified siRNAs that suppress
the activity of the alpha-synuclein gene in cultured cells.
Studies are ongoing to explore whether these siRNAs can suppress
alpha-synuclein gene activity in vivo in animal models of PD.
The collaboration was established to explore whether an siRNA
could be effective in treating PD and allows for an extension of
the collaboration if the results are positive. We expect that
any resulting RNAi therapeutic would be a Direct RNAi drug
administered using a specialized medical device to infuse the
drug into the appropriate region of the brain. Accordingly, we
would anticipate collaborating with a manufacturer of such
devices, for example in the collaboration we recently initiated
with Medtronic, to develop appropriate procedures for delivery.
We have secured an option for an exclusive license to a patent
application filed by the Mayo Clinic relating to the use of
siRNAs to suppress production of alpha-synuclein for therapeutic
purposes.
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Patents and Proprietary Rights |
We have devoted considerable effort and resources to establish
what we believe to be a strong position in intellectual property
relevant to RNAi therapeutics. In this regard, we have focused
on patents, patent applications and other intellectual property
covering:
|
|
|
| |
• |
fundamental aspects of the structure and uses of siRNAs,
including their use as therapeutics, and RNAi-related mechanisms; |
| |
| |
• |
chemical modifications to siRNAs that improve their suitability
for therapeutic uses; and |
| |
| |
• |
siRNAs directed to specific targets as treatments for particular
diseases. |
19
|
|
|
Intellectual Property Related to Fundamental Aspects and Uses
of siRNA and RNAi-related Mechanisms |
In this category, we include patents and patent applications
that claim key aspects of RNAi-related mechanisms. Specifically,
we include patents and patent applications relating to targeted
cleavage of mRNA directed by RNA-like oligonucleotides,
double-stranded RNAs of particular lengths, particular
structural features of these dsRNAs, such as overhanging ends,
and uses of these dsRNAs. Our strategy has been to secure rights
to the potentially key patents and patent applications covering
the fundamental aspects of siRNAs on an exclusive basis where
possible or appropriate. The following table lists patents or
patent applications to which we have secured rights that we
regard as being potentially fundamental for the use of siRNAs as
therapeutics.
| |
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| |
| Licensor/Patent |
| Owner |
|
Subject Matter |
|
Priority Date | |
|
Inventors |
|
Status |
|
Alnylam Rights |
| |
|
Isis Pharmaceuticals |
|
Inactivation of target mRNA |
|
|
6/6/1997 |
|
|
S. Crooke |
|
Issued in the United States, pending in the EU |
|
Exclusive rights for therapeutic purposes related to dsRNAs* |
| |
|
Carnegie Institution of Washington |
|
Double-stranded RNAs to induce RNAi |
|
|
12/23/1997 |
|
|
A. Fire,
C. Mello |
|
Issued in the United States, pending elsewhere |
|
Non-exclusive rights for therapeutic purposes |
| |
|
Alnylam |
|
Short double- stranded RNAs as therapeutics |
|
|
1/30/1999 |
|
|
R. Kreutzer, S. Limmer |
|
Granted in the EU, issued in Germany and South Africa, pending
in the United States and elsewhere; allowed in Australia |
|
Owned |
| |
|
Cancer Research Technology Limited |
|
RNAi uses in mammalian cells |
|
|
11/19/1999 |
|
|
M. Zernicka-Goetz, M.J. Evans, D.M. Glover |
|
Granted in Singapore, Australia, pending rest of world |
|
Exclusive rights for therapeutic purposes |
| |
Massachusetts Institute of Technology, Whitehead Institute,
Max Planck organization** |
|
Mediation of RNAi by siRNAs containing 21-23 base pairs |
|
|
3/30/2000 |
|
|
D.P. Bartel,
P.A. Sharp,
T. Tuschl,
P.D. Zamore |
|
Pending worldwide |
|
Non-exclusive rights for therapeutic purposes** |
| |
|
Max Planck organization |
|
siRNAs with
3’-overhangs as therapeutics |
|
|
12/1/2000 |
|
|
T. Tuschl, S. Elbashir, W. Lendeckel |
|
Pending worldwide |
|
Exclusive rights for therapeutic purposes |
| |
|
Cold Spring Harbor Laboratory |
|
RNAi uses in mammalian cells |
|
|
3/16/2001 |
|
|
D. Beach, G. Hannon |
|
Pending worldwide |
|
Non-exclusive rights for therapeutic purposes |
| |
|
Stanford University |
|
RNAi uses in vivo |
|
|
7/23/2001 |
|
|
M.A. Kay, A.P. McCaffrey |
|
Pending worldwide |
|
Co-exclusive rights for therapeutic purposes |
| |
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| |
* |
We hold co-exclusive therapeutic rights with Isis. However, Isis
has agreed not to license such rights to any third party, except
in the context of a collaboration in which Isis plays an active
role. |
|
|
| ** |
We hold exclusive rights to the interest owned by three of four
co-owners. The fourth co-owner, the University of Massachusetts,
has licensed its interest separately to third parties. |
20
We believe we have a strong portfolio of broad and exclusive
rights to fundamental siRNA patents and patent applications. In
securing these rights, we have focused on obtaining the
strongest rights for those intellectual property assets we
believe will be most important in providing competitive
advantage with respect to RNAi therapeutics. We note in
particular the first, third and sixth patents and patent
applications listed in the table above, those covering
inventions by Dr. Crooke, Dr. Kreutzer and
Dr. Limmer and by Dr. Tuschl and his colleagues. We
believe that the so-called Crooke patent is a broad patent
covering the use of modified oligonucleotides to achieve
enzyme-mediated cleavage of a target mRNA and, as such, has
broad issued claims that cover RNAi. We have obtained rights to
the Crooke patent through a license agreement with Isis. Under
the terms of our license agreement, Isis agreed not to grant
licenses under this patent to any other organization for dsRNA
products designed to work through an RNAi mechanism, except in
the context of a collaboration in which Isis plays an active
role. We believe the so-called Kreutzer-Limmer European patent
is the only patent so far granted that specifically covers the
use of short dsRNAs as therapeutics. Through our acquisition of
Alnylam Europe in 2003, we own this patent outright, as well as
corresponding patent applications in other countries, including
the United States. The pending patent application filed by the
Max Planck organization on the invention by Dr. Tuschl and
his colleagues, or the Tuschl II patent application, covers
a key structural feature of siRNAs, namely the presence of
overhangs at the 3’-end of each of the two strands. We have
obtained an exclusive license to claims in the Tuschl II
patent application uniquely covering the use of such siRNAs for
therapeutic purposes. The application contains claims relating
to therapeutic uses of siRNAs with or without concomitant gene
therapy. Our exclusive rights are to the claims that do not
require concomitant gene therapy.
The Fire and Mello patent owned by the Carnegie Institution
covers the use of dsRNAs to induce RNAi. The Carnegie
Institution has made this patent broadly available for licensing
and we, like many companies, have taken a non-exclusive license
to the patent for therapeutic purposes. We believe, however,
that the Fire and Mello patent does not claim specific
structural features of dsRNAs that are important for the
biological activity of siRNAs in mammalian cells. These specific
features are the subjects of the Kreutzer-Limmer patent and the
Tuschl II patent application for which we have secured
exclusive rights.
The Kreutzer-Limmer patent was granted by the European Patent
Office, or EPO, in 2002 and in South Africa in 2003 and is
pending in other countries, including the United States. In
addition, a German Utility Model covering RNAi composition was
branched off the European patent application, and was registered
by the German Patent and Trademark Office in 2003. A German
Utility Model is a form of patent that is directed only to
physical matter, such as medicines, and does not cover methods.
The German Utility Model is valid for ten years from the time of
the filing of its parent European patent application and is thus
in effect until 2010. The issuance of the European patent is
currently being opposed by several other companies under a
provision of the European Patent Convention that allows such
opposition. It may be several years before the outcome of this
opposition is decided by the EPO.
In 2004, the Enlarged Board of Appeal, or Enlarged Board, at the
EPO rendered a decision in an unrelated case covering what is
known as “disclaimer practice”. With a disclaimer, a
patent applicant gives up, or disclaims, part of the originally
claimed invention in a patent application in order to overcome
prior art and adds a limitation to the claims which may have no
basis in the original disclosure. The Enlarged Board determined
that disclaimer practice is allowed under the European Patent
Convention under a defined set of circumstances. We believe that
the use of disclaimer practice as part of the prosecution of the
Kreutzer-Limmer patent does fall within the allowable
circumstances from the Enlarged Board. This will now be
determined as part of the opposition proceedings regarding the
Kreutzer-Limmer patent. Determination by the EPO opposition
division that the use of the disclaimer in this case does not
fall under one of the allowed circumstances could result in the
invalidation of the currently-granted claims of the
Kreutzer-Limmer patent. Even if the EPO opposition division
determines that the use of a disclaimer is permissible, the
Kreutzer-Limmer patent would remain subject to the other issues
raised in the opposition. In the event that the Kreutzer-Limmer
patent is invalidated, there are pending claims in continuing
applications before the EPO based on the original
Kreutzer-Limmer priority application filings that do not have a
disclaimer in them. These pending claims have the potential of
issuing as a patent that could give significant coverage to
structural features of siRNAs.
21
The other pending patent applications listed in the table either
provide further coverage for structural features of siRNAs or
relate to the use of siRNAs in mammalian cells. For some of
these we have exclusive rights, and for others, we have
non-exclusive rights. While we believe these pending patent
applications are important, we also believe that access to the
Crooke patent, the Kreutzer-Limmer patent and the Tuschl II
patent application will be of particular importance for
development and commercialization of RNAi therapeutics, which is
why we have secured exclusive positions with respect to these
assets. However, because RNAi is a relatively new field, few
patents have been issued, and many potentially key patent
applications are still pending.
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Intellectual Property Related to Chemical Modifications |
Over the last fifteen years a large amount of effort has been
devoted by academics and other biotechnology companies to two
other technologies with the potential to selectively turn off
gene activity. These technologies are known as antisense
oligonucleotides and ribozymes. Both involve using short DNA or
RNA molecules to intercept specific mRNAs so as to reduce
production of proteins encoded by these mRNAs. Scientists and
companies working on antisense oligonucleotides and ribozymes
have developed a variety of chemical modifications that can be
applied to short DNA and RNA molecules to endow them with
drug-like properties. A number of patents have been issued to
these scientists and companies claiming the chemical
modifications they have developed. Isis has been very successful
in obtaining such patents. In March 2004, we entered into a
collaboration and license agreement with Isis that provides us
with rights to use over 150 issued patents relating to chemical
modifications we may wish to incorporate into our RNAi
therapeutics. Isis also granted us rights based on future
chemistry patent applications filed in the five years following
the date of our agreement to which it has rights. We believe
that access to this intellectual property from Isis could
accelerate our development of RNAi therapeutics by enabling us
to capitalize on proprietary chemistry developed by Isis instead
of designing around this chemistry. Under the terms of our
license agreement, Isis agreed not to grant licenses under these
patents to any other organization for dsRNA products designed to
work through an RNAi mechanism, except in the context of a
collaboration in which Isis plays an active role.
In addition to licensing these intellectual property rights from
Isis, we are also working to develop our own proprietary
modifications that we can apply to siRNAs to endow them with
drug-like properties. We have filed a number of patent
applications relating to novel chemical modifications that we
may apply to siRNAs. We filed these applications relatively
recently, and are still evaluating which chemical modifications
we may incorporate into siRNA drugs. We may not know for a
number of years whether the modifications we use will be
patentable or free of patents held by others.
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|
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Intellectual Property Related to siRNAs Directed to Specific
Targets |
We have also filed a number of patent applications claiming
specific siRNAs directed to a large number of targets as
treatments for specific diseases. We recognize, however, that
there may be a significant number of competing applications
filed by other organizations on similar siRNAs. Because our
subsidiaries, Alnylam Europe and Alnylam U.S., were among the
first companies to focus on RNAi therapeutics, we believe that a
number of our patent applications may predate competing
applications that others may have filed. With respect to
specific siRNAs, we believe that the most important patent
coverage will ultimately result from demonstrating that
particular compositions exert suitable biological and
therapeutic effects. Accordingly, we are focused on achieving
such demonstrations for siRNAs in key therapeutic areas.
Because the work we and others are performing to develop siRNAs
as drugs is at a relatively early stage, and because many patent
applications on specific siRNAs are pending but very few, to our
knowledge, have been issued, we may not know for a number of
years whether any siRNA drugs we develop will be patentable and
free of patents held by others.
Competition
The pharmaceutical marketplace is extremely competitive, with
hundreds of companies competing to discover, develop and market
new drugs. We face a broad spectrum of current and potential
competitors,
22
ranging from very large, global pharmaceutical companies with
significant resources to other biotechnology companies with
resources and expertise comparable to our own. We believe that
for most or all of our drug development programs, there will be
one or more competing programs in other companies. In many cases
the companies with competing programs will have access to
greater resources and expertise than we do and may be more
advanced.
The competition we face can be grouped into three broad
categories:
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| |
• |
Other companies working to develop RNAi therapeutics; |
| |
| |
• |
Companies developing technology known as antisense, which, like
RNAi, attempts to silence the activity of specific genes by
targeting the mRNAs copied from them; and |
| |
| |
• |
Marketed products and development programs that compete with the
drugs we may try to develop. |
|
|
|
Other Companies Working to Develop RNAi Therapeutics |
We are aware of several other companies that are working to
develop RNAi therapeutics. Some of these companies are seeking,
as we are, to develop chemically synthesized siRNAs as drugs.
Others are following a gene therapy approach, with the goal of
treating patients not with synthetic siRNAs but with genes
designed to produce siRNA molecules within cells.
Companies working on chemically synthesized siRNAs include Sirna
Therapeutics, Inc., and Acuity Pharmaceuticals, Inc. Sirna
Therapeutics has approximately ten years’ prior experience
working to develop RNA molecules as drugs. This experience was
largely gained with a different class of RNA molecules known as
ribozymes, but could potentially be relevant for siRNAs. During
2004, both Acuity Pharmaceuticals and Sirna Therapeutics
initiated Phase I human clinical trials related to the
development of products designed to block VEGF activity.
Companies working on gene therapy approaches to RNAi
therapeutics include Nucleonics, Inc. and Benitec Ltd. In
addition, CytRx Corporation is developing RNAi therapeutics.
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|
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Other Companies Working to Develop Antisense Technology |
Antisense technology uses short, single-stranded, DNA-like
molecules known as oligonucleotides to block mRNAs encoding
specific proteins. An antisense oligonucleotide, or ASO,
contains a sequence of bases complementary to a sequence within
its target mRNA, enabling it to attach to the mRNA by
base-pairing. The attachment of the ASO may lead to breakdown of
the mRNA, or may physically block the mRNA from associating with
the protein synthesis machinery of the cell. In either case,
production of the protein encoded by the mRNA may be reduced.
Typically, the backbone of an ASO, the linkages that hold its
constituent bases together, will carry a number of chemical
modifications that do not exist in naturally occurring DNA.
These modifications are intended to improve the stability and
pharmaceutical properties of the ASO.
While we believe that RNAi drugs may potentially have
significant advantages over ASOs, including greater potency and
specificity, others are developing ASO drugs that are currently
at a more advanced stage of development than RNAi drugs. For
example, Isis has developed an ASO drug, Vitravene, which is
currently on the market, and has several ASO drug candidates in
clinical trials. In addition, a number of other companies have
product candidates in various stages of preclinical and clinical
development. Included in these companies is Genta Inc., which
has a drug candidate known as Genasense, a potential treatment
for various forms of cancer. ASOs, rather than siRNAs, may
become the preferred technology for drugs that target mRNAs in
order to turn off the activity of specific genes.
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Competing Drugs for Age-Related Macular Degeneration |
We are currently evaluating siRNAs that suppress VEGF gene
activity as potential drug candidates for the treatment of wet
AMD. VEGF is believed to play a major role in wet AMD by
stimulating the growth and leakage of new blood vessels that
disrupt the retina. siRNAs that reduce production of VEGF may
potentially suppress the growth and leakage of these vessels.
Visudyne, which until recently was the only marketed drug for
wet AMD, targets these blood vessels. According to published
reports by Novartis, worldwide sales of
23
Visudyne were approximately $448 million in 2004. Visudyne
is used in a two-step process known as photodynamic therapy. The
first step in this therapy is to administer the drug by infusing
it into a vein. The second step, after sufficient time has been
allowed for the drug to reach the eye, is to shine laser light
of the right color into the patient’s eye. This activates
the drug, which then damages the walls of new blood vessels
behind the retina, sealing these vessels. Visudyne is only
approved for treating certain subtypes of wet AMD, and its
beneficial effects may only last for a few months. We believe
that an RNAi therapeutic that blocks production of VEGF may be
more effective than photodynamic therapy in preventing the
growth and leakage of new blood vessels behind the retina. In
December 2004, Macugen, a drug developed by Eyetech
Pharmaceuticals, Inc. in collaboration with Pfizer, Inc. was
approved by the FDA for the treatment of wet AMD. Macugen is
intended to work by binding to VEGF molecules and blocking their
function. Conceptually, this approach requires one molecule of
drug for every molecule of VEGF. We believe that an siRNA that
blocks production of VEGF could be more effective at lower
concentrations, because each siRNA molecule could potentially
block production of many VEGF molecules. This is because each
siRNA can potentially trigger degradation of multiple VEGF mRNA
molecules, each of which could otherwise direct synthesis of
multiple VEGF protein molecules.
We are also aware of other experimental drugs in various stages
of clinical development for the treatment of wet AMD. These
include Lucentis, which is being developed by Genentech, Inc. in
collaboration with Novartis AG, and VEGF Trap, which is being
developed by Regeneron, Inc. Like Macugen, Lucentis is intended
to work by binding to VEGF molecules and blocking their
function. In addition, during 2004, both Acuity Pharmaceuticals
and Sirna Therapeutics initiated Phase I human clinical
trials related to the development of siRNA-based products
designed to block VEGF activity.
The only product currently approved for the treatment of RSV
infection is Ribavirin, which is marketed as Virazole® by
Valeant Pharmaceuticals International. This is approved only for
treatment of hospitalized infants and young children with severe
lower respiratory tract infections due to RSV. However,
Ribavirin has been reported to have limited efficacy and limited
antiviral activity against RSV. Moreover, administration of the
drug is cumbersome and requires elaborate environmental
reclamation devices because of potential harmful effects on
healthcare personnel exposed to the drug. According to published
reports by Valeant Pharmaceuticals, sales of Virazole were
$13.8 million in 2004. Current RSV therapies consist of
primarily treating the symptoms or preventing the viral
infection by using the prophylactic drug Synagis®, which is
marketed by MedImmune. Synagis is a neutralizing monoclonal
antibody that prevents the virus from infecting lung cells by
blocking the RSV F protein important for this process. Synagis
is injected intramuscularly once a month during the RSV season
to prevent infection. According to published reports by
MedImmune, Synagis sales were $942.3 million in 2004.
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Competing Drugs for Parkinson’s Disease |
In collaboration with the Mayo Clinic, we are currently
evaluating the potential of siRNAs directed against
alpha-synuclein gene activity for the treatment of PD. The goal
of our program is to find an RNAi therapeutic that will slow or
halt the progress of the disease. Should we decide to pursue
development of an alpha-synuclein siRNA for this disease, we
would face competition from a number of marketed and
investigational drugs. Many of the currently marketed drugs for
PD work by boosting the levels of dopamine in the brain or by
mimicking the action of dopamine. Dopamine is an important
substance that is depleted in the brains of PD patients. Current
drugs for PD include:
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• |
Carbidopa/levodopa, also sold as Sinemet and Atamet®. The
levodopa component of this combination drug is converted to
dopamine in the brain. The carbidopa component helps to prevent
the levodopa component from being used up before it reaches the
brain. According to the on-line publication DrugTopics.com,
sales of carbidopa/levodopa in the United States were
approximately $174.5 million in 2004. |
24
|
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|
| |
• |
Entacapone, sold as Comtess®/ Comtan® and
Stalevo®. Entacapone is another drug that prevents the
breakdown of levodopa, further helping to increase dopamine
levels in patients who take the carbidopa/levodopa combination.
According to its developer, Orion Pharma of Finland, worldwide
sales of Comtan/ Comtess and Stalevo totaled approximately
€115.6 million
in 2004. |
| |
| |
• |
Selegiline, also sold as Eldepryl® and Deprenyl®.
Selegiline slows the breakdown of dopamine, which is another
strategy to boost depleted levels of dopamine in the brains of
PD patients. |
| |
| |
• |
Mirapex®, Perman® and Requip®, trade names for
the drugs pramipexole, pergolide and ropinirole. These drugs are
known as dopamine agonists, which mimic dopamine rather than
boost dopamine levels. |
By boosting or mimicking dopamine levels, all of these drugs
help to treat the symptoms of PD, but none address the
underlying cause of the disease, which is the death of brain
cells that produce dopamine. Recently published scientific
findings suggest that the death of these cells may be caused by
over-production of the protein known as alpha-synuclein. We
therefore believe that an RNAi therapeutic that reduces
alpha-synuclein production could prevent the death of
dopamine-producing cells, and thereby slow or halt progression
of PD. An RNAi therapeutic with this capability would be
expected to offer significant benefits over drugs that simply
help alleviate the symptoms of PD.
We expect that any RNAi therapeutic we succeed in developing for
PD would require administration using a specialized medical
device to deliver it to the appropriate region of the brain.
This requirement could make any RNAi therapeutic we develop less
competitive than orally administered drugs for PD, such as the
dopamine-boosting drugs described above.
In addition to marketed drugs, there are a number of
investigational drugs for PD currently undergoing clinical
development that are intended to alter the course of the
disease, including the investigational drugs known as CEP-1347,
TCH-346 and rasagiline. If one or more of these are developed
and marketed successfully before an RNAi therapeutic reaches the
marketplace, they could be strong competition for any RNAi
therapeutic we may develop to treat PD.
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Competing Drugs for Spinal Cord Injury |
There are currently no approved drugs to treat the nerve damage
associated with spinal cord injury. Methylprednisolone, a
steroid, has become standard treatment for acute spinal cord
injury since 1990, when a large-scale clinical trial showed
significantly better recovery in patients who began treatment
with this drug within eight hours of their injury.
Methylprednisolone reduces the damage to cellular membranes that
contributes to neuronal death after injury. It also reduces
inflammation near the injury and suppresses the activation of
immune cells that appear to contribute to neuronal damage.
Preventing this damage helps spare some nerve fibers that would
otherwise be lost, improving the patient’s recovery.
|
|
|
Competing Drugs for Cystic Fibrosis |
No therapeutics are approved today to treat the root causes of
CF. Currently, the treatment of CF depends upon the stage of the
disease and the organs involved. Clearing mucus from the lungs
is an important part of the daily CF treatment regimen. Chest
physical therapy is a form of airway clearance that involves
vigorous clapping on the back and chest to dislodge the thick
mucus from the lungs. Other types of treatments include TOBI, a
tobramycin solution for inhalation, which is an aerosolized
antibiotic used to treat lung infections that is marketed by
Chiron Corporation; Pulmozyme, a mucus-thinning drug shown to
reduce the number of lung infections and improve lung function,
which is marketed by Genentech, Inc.; and azithromycin, an
antibiotic recently proven to be effective in people with CF
whose lungs are chronically infected with the common bacteria
known as Pseudomonas aeruginosa. Clinical trials focused
on gene therapy are currently being conducted by other companies
but all are in early stages. According to published reports by
Chiron, sales of TOBI were approximately $212.9 million in
2004. According to published reports by Genentech, sales of
Pulmozyme were approximately $177.7 million in 2004.
25
Regulatory Matters
The research, testing, manufacture and marketing of drug
products and their delivery systems are extensively regulated in
the United States and the rest of the world. In the United
States, drugs are subject to rigorous regulation by the FDA. The
Federal Food, Drug, and Cosmetic Act and other federal and state
statutes and regulations govern, among other things, the
research, development, testing, manufacture, storage, record
keeping, packaging, labeling, promotion and advertising,
marketing and distribution of pharmaceutical products. Failure
to comply with the applicable regulatory requirements may
subject a company to a variety of administrative or
judicially-imposed sanctions and the inability to obtain or
maintain required approvals or to market approved drug products.
The steps ordinarily required before a new pharmaceutical
product may be marketed in the United States include preclinical
laboratory tests, animal tests and formulation studies, the
submission to the FDA of an investigational new drug
application, which must become effective prior to commencement
of clinical testing, and adequate and well-controlled clinical
trials to establish that the drug product is safe and effective
for the indication for which FDA approval is sought.
Satisfaction of FDA pre-market approval requirements typically
take several years and the actual time taken may vary
substantially depending upon the complexity of the product or
the disease. Government regulation may delay or prevent
marketing of potential products for a considerable period of
time and impose costly procedures on a company’s
activities. Success in early stage clinical trials does not
necessarily assure success in later stage clinical trials. Data
obtained from clinical activities is not always conclusive and
may be subject to alternative interpretations that could delay,
limit or even prevent regulatory approval. Even if a product
receives regulatory approval, later discovery of previously
unknown problems with a product may result in restrictions on
the product or even complete withdrawal of the product from the
market.
Preclinical tests include laboratory evaluation of product
chemistry and formulation, as well as animal trials to assess
the potential safety and efficacy of the product. The conduct of
the preclinical tests and formulation of compounds for testing
must comply with federal regulations and requirements. The
results of preclinical testing are submitted to the FDA as part
of an investigational new drug application.
A 30-day waiting period after the filing of an investigational
new drug application is required prior to such application
becoming effective and the commencement of clinical testing in
humans. If the FDA has not commented on, or questioned, the
application during this 30-day waiting period, clinical trials
may begin. If the FDA has comments or questions these must be
resolved to the satisfaction of the FDA prior to commencement of
clinical trials. The investigational new drug application
process can result in substantial delay and expense. The FDA
may, at any time, impose a clinical hold on ongoing clinical
trials. If the FDA imposes a clinical hold, clinical trials
cannot commence or recommence without FDA authorization and then
only under terms authorized by the FDA.
Clinical trials involve the administration of the
investigational new drug to healthy volunteers or patients under
the supervision of a qualified investigator. Clinical trials
must be conducted in compliance with federal regulations and
requirements, under protocols detailing the objectives of the
trial, the parameters to be used in monitoring safety and the
safety and effectiveness criteria to be evaluated. Each protocol
involving testing on subjects in the United States must be
submitted to the FDA as part of the investigational new drug
application. The study protocol and informed consent information
for patients in clinical trials must be submitted to
institutional review boards for approval.
Clinical trials to support new drug applications for marketing
approval are typically conducted in three sequential phases, but
the phases may overlap. In Phase I, the initial
introduction of the drug into healthy human subjects or
patients, the drug is tested to assess metabolism,
pharmacokinetics and pharmacological actions and safety,
including side effects associated with increasing doses.
Phase II usually involves trials in a limited patient
population, to determine dosage tolerance and optimum dosage,
identify possible adverse effects and safety risks, and provide
preliminary support for the efficacy of the drug in the
indication being studied.
26
If a compound demonstrates evidence of effectiveness and an
acceptable safety profile in Phase II evaluations,
Phase III trials are undertaken to further evaluate
clinical efficacy and to further test for safety within an
expanded patient population, typically at geographically
dispersed clinical trial sites. Phase I, Phase II or
Phase III testing of any product candidates may not be
completed successfully within any specified time period, if at
all. After successful completion of the required clinical
testing, generally a new drug application is prepared and
submitted to the FDA.
We believe that any Direct RNAi product candidate we develop for
AMD, RSV, PD, SCI or CF will be regulated as a new drug by the
FDA. FDA approval of the new drug application would be required
before marketing of the product may begin in the United States.
The new drug application must include the results of extensive
clinical and other testing and a compilation of data relating to
the product’s pharmacology, chemistry, manufacture and
controls. The cost of preparing and submitting a new drug
application is substantial. Under Federal law, new drug
applications are additionally subject to substantial application
user fees, currently exceeding $500,000, and the sponsor of an
approved new drug application is also subject to annual product
and establishment user fees, currently exceeding $30,000 per
product and $200,000 per establishment. These fees are typically
increased annually.
The FDA has 60 days from its receipt of a new drug
application to determine whether the application will be
accepted for filing based on the agency’s threshold
determination that the new drug application is sufficiently
complete to permit substantive review. Once the submission is
accepted for filing, the FDA begins an in-depth review of the
new drug application. The review process is often significantly
extended by FDA requests for additional information or
clarification regarding information already provided in the
submission. The FDA may also refer applications for novel drug
products or drug products which present difficult questions of
safety or efficacy to an advisory committee, typically a panel
that includes clinicians and other experts, for review,
evaluation and a recommendation as to whether the application
should be approved. The FDA is not bound by the recommendation
of an advisory committee. The FDA normally also will conduct a
preapproval inspection to ensure the manufacturing facility,
methods and controls are adequate to preserve the drug’s
identity, strength, quality, purity and stability, and are in
compliance with regulations governing current good manufacturing
practices.
If FDA evaluations of the new drug application and the
manufacturing facilities are favorable, the FDA may issue an
approval letter or an approvable letter followed by an approval
letter. An approvable letter generally contains a statement of
specific conditions that must be met in order to secure final
approval of the new drug application. If and when those
conditions have been met to the FDA’s satisfaction, the FDA
will typically issue an approval letter. An approval letter
authorizes commercial marketing of the drug with specific
prescribing information for specific indications. As a condition
of new drug application approval, the FDA may require
post-approval testing and surveillance to monitor the
drug’s safety or efficacy and may impose other conditions,
including labeling restrictions which can materially impact the
potential market and profitability of the drug. Once granted,
product approvals may be withdrawn if compliance with regulatory
standards is not maintained or problems are identified following
initial marketing.
While we believe that any RNAi therapeutic we develop will be
regulated as a new drug under the Federal Food, Drug, and
Cosmetics Act, the FDA could decide to regulate RNAi
therapeutics as biologics under the Public Health Service Act.
Biologics must have a biologics license application, or BLA,
approved prior to commercialization. Like new drug applications,
BLAs are subject to user fees. To obtain BLA approval, an
applicant must provide preclinical and clinical evidence and
other information to demonstrate that the biologic product is
safe, pure and potent, and that the facilities in which it is
manufactured, processed, packed or held meet standards,
including drug good manufacturing practices and any additional
standards in the license designed to ensure its continued
safety, purity and potency. Biologics establishments are subject
to preapproval inspections. The review process for BLAs is
time-consuming and uncertain, and BLA approval may be
conditioned on post-approval testing and surveillance. Once
granted, BLA approvals may be suspended or revoked under certain
circumstances, such as if the product fails to conform to the
standards established in the license.
27
Once a new drug application or biologics license application is
approved, a product will be subject to certain post-approval
requirements, including requirements for adverse event reporting
and submission of periodic reports. Additionally, the FDA also
strictly regulates the promotional claims that may be made about
prescription drug products and biologics. In particular, the FDA
requires substantiation of any claims of superiority of one
product over another, including that such claims be proven by
adequate and well controlled head-to-head clinical trials. To
the extent that market acceptance of our products may depend on
their superiority over existing therapies, any restriction on
our ability to advertise or otherwise promote claims of
superiority, or requirements to conduct additional expensive
clinical trials to provide proof of such claims, could
negatively affect the sales of our products or our costs. We
must also notify the FDA of any change in an approved product
beyond variations already allowed in the approval. Certain
changes to the product, its labeling or its manufacturing
require prior FDA approval and may require conduct of further
clinical investigations to support the change. Such approvals
may be expensive and time-consuming and, if not approved, the
product will not be allowed to be marketed as modified.
If the FDA’s evaluation of the new drug application
submission or manufacturing facilities is not favorable, the FDA
may refuse to approve the new drug application or issue a
not-approvable letter. The not-approvable letter outlines the
deficiencies in the submission and often requires additional
testing or information in order for the FDA to reconsider the
application. Even after this additional information has been
submitted, the FDA ultimately may decide that the application
does not satisfy the regulatory criteria for approval. With
limited exceptions, the FDA may withhold approval of a new drug
application regardless of prior advice it may have provided or
commitments it may have made to the sponsor.
Some of our drug candidates may need to be administered using
specialized drug delivery systems. We may rely on drug delivery
systems that are already approved to deliver drugs like ours to
similar physiological sites or, in some instances, we may need
to modify the design or labeling of the legally available device
for delivery of our product candidate. In such an event, the FDA
may regulate the product as a combination product or require
additional approvals or clearances for the modified device.
Further, to the extent the delivery device is owned by another
company, we would need that company’s cooperation to
implement the necessary changes to the device and to obtain any
additional approvals or clearances. Obtaining such a additional
approvals or clearances, and cooperation of other companies,
when necessary, could significantly delay, and increase the cost
of obtaining, marketing approval, which could reduce the
commercial viability of a drug candidate. We recently entered
into a collaboration with the medical device company Medtronic
to pursue the potential development of drug-device combinations
for the treatment of neurodegenerative diseases.
Once a new drug application is approved, the product covered
thereby becomes a listed drug that can, in turn, be cited by
potential competitors in support of approval of an abbreviated
new drug application. An abbreviated new drug application
provides for marketing of a drug product that has the same
active ingredients in the same strengths and dosage form as the
listed drug and has been shown through bioequivalence testing to
be therapeutically equivalent to the listed drug. There is no
requirement, other than the requirement for bioequivalence
testing, for an abbreviated new drug application applicant to
conduct or submit results of preclinical or clinical tests to
prove the safety or effectiveness of its drug product. Drugs
approved in this way are commonly referred to as generic
equivalents to the listed drug, are listed as such by the FDA,
and can often be substituted by pharmacists under prescriptions
written for the original listed drug. Federal law provides for a
period of three years of exclusivity following approval of a
listed drug that contains previously approved active ingredients
but is approved in a new dosage, dosage form, route of
administration or combination, or for a new use, the approval of
which was required to be supported by new clinical trials
conducted by or for the sponsor. During such three-year
exclusivity period the FDA cannot grant approval of an
abbreviated new drug application to commercially distribute a
generic version of the drug based on that listed drug. However,
the FDA can approve generic equivalents of that listed drug
based on other listed drugs, such as a generic that is the same
in every way but its indication for use, and thus the value of
such exclusivity may be undermined. Federal law also provides a
period of five years following approval of a drug containing no
previously approved active ingredients, during which abbreviated
new drug applications for generic versions of those drugs cannot
be submitted unless the submission accompanies a challenge to a
listed patent, in which case the submission may be made four
years following the original product approval. Additionally, in
the event that the sponsor of the listed drug has properly
28
informed the FDA of patents covering its listed drug, applicants
submitting an abbreviated new drug application referencing that
drug, are required to make one of four certifications, including
certifying that it believes one or more listed patents are
invalid or not infringed. If an applicant certifies invalidity
or non-infringement it is required to provide notice of its
filing to the new drug application sponsor and the patent
holder. If the patent holder then initiates a suit for patent
infringement against the abbreviated new drug application
sponsor within 45 days of receipt of the notice, the FDA
cannot grant effective approval of the abbreviated new drug
application until either 30 months has passed or there has
been a court decision holding that the patents in question are
invalid or not infringed. If the abbreviated new drug
application applicant certifies that it does not intend to
market its generic product before some or all listed patents on
the listed drug expire, then the FDA cannot grant effective
approval of the abbreviated new drug application until those
patents expire. The first of the abbreviated new drug applicants
submitting substantially complete applications certifying that
listed patents for a particular product are invalid or not
infringed may qualify for an exclusivity period of 180 days
running from when the generic product is first marketed, during
which subsequently submitted abbreviated new drug applications
cannot be granted effective approval.
From time to time legislation is drafted and introduced in
Congress that could significantly change the statutory
provisions governing the approval, manufacturing and marketing
of drug products. In addition, FDA regulations and guidance are
often revised or reinterpreted by the agency in ways that may
significantly affect our business and our products. It is
impossible to predict whether legislative changes will be
enacted, or FDA regulations, guidance or interpretations
changed, or what the impact of such changes, if any, may be.
Foreign Regulation of New Drug Compounds
Approval of a product by comparable regulatory authorities may
be necessary in foreign countries prior to the commencement of
marketing of the product in those countries, whether or not FDA
approval has been obtained. The approval procedure varies among
countries and can involve requirements for additional testing.
The time required may differ from that required for FDA
approval. Although there are some procedures for unified filings
for some European countries with the sponsorship of the country
which first granted marketing approval, in general, each country
has its own procedures and requirements, many of which are time
consuming and expensive. Thus, there can be substantial delays
in obtaining required approvals from foreign regulatory
authorities after the relevant applications are filed.
In Europe, marketing authorizations may be submitted at a
centralized, a decentralized or a national level. The
centralized procedure is mandatory for the approval of
biotechnology products and provides for the grant of a single
marketing authorization that is valid in all European Union
member states. As of January 1995, a mutual recognition
procedure is available at the request of the applicant for all
medicinal products that are not subject to the centralized
procedure. We will choose the appropriate route of European
regulatory filing to accomplish the most rapid regulatory
approvals. However, our chosen regulatory strategy may not
secure regulatory approvals on a timely basis or at all.
Hazardous Materials
Our research and development processes involve the controlled
use of hazardous materials, chemicals and radioactive materials
and produce waste products. We are subject to federal, state and
local laws and regulations governing the use, manufacture,
storage, handling and disposal of hazardous materials and waste
products. We do not expect the cost of complying with these laws
and regulations to be material.
Manufacturing
We have no commercial manufacturing capabilities. We may
manufacture materials for clinical trials ourselves or rely on
third parties to manufacture bulk compounds and finished
investigational medicines for clinical trials. We recently
contracted with Dowpharma, a division of The Dow Chemical
Company, for supply of certain amounts of material to meet our
testing needs for future toxicology and clinical testing.
Commercial quantities of any drugs that we may seek to develop
will have to be manufactured in facilities and by processes that
comply with FDA and other regulations. We plan to rely on third
parties to manufacture commercial
29
quantities of any products that we successfully develop. Under
our agreement with Isis, at our request, we may negotiate a
manufacturing services agreement with Isis for double-stranded
RNA products designed to work through an RNAi mechanism.
Executive Officers of the Registrant
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John M. Maraganore, Ph.D.
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President, Chief Executive Officer and Director |
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Barry E. Greene
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Chief Operating Officer and Treasurer |
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Vincent J. Miles, Ph.D.
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Senior Vice President of Business Development |
John M. Maraganore, Ph.D. has served as our
President and Chief Executive Officer and as a member of our
board of directors since December 2002. From April 2000 to
December 2002, Dr. Maraganore served as Senior Vice
President, Strategic Product Development for Millennium
Pharmaceuticals, Inc., a biopharmaceutical company.
Barry E. Greene has served as our Chief Operating Officer
since he joined us in October 2003 and as our Treasurer since
February 2004. From February 2001 to September 2003,
Mr. Greene served as General Manager of Oncology at
Millennium Pharmaceuticals, Inc., a biopharmaceutical company.
From January 2000 to February 2001, Mr. Greene served as
Executive Vice President and Chief Business Officer for
Mediconsult.com, a medical internet company.
Vincent J. Miles, Ph.D. has served as our Senior
Vice President of Business Development since he joined us in
July 2003. From May 1997 to July 2003, Dr. Miles held
various positions at Millennium Pharmaceuticals, Inc., a
biopharmaceutical company, including vice president positions in
business development, strategic planning and scientific affairs.
Scientific Advisors
We seek advice from our scientific advisory board, which
consists of a number of leading scientists and physicians, on
scientific and medical matters. Our scientific advisory board
meets regularly to assess:
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our research and development programs; |
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the design and implementation of our clinical programs; |
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our patent and publication strategies; |
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new technologies relevant to our research and development
programs; and |
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specific scientific and technical issues relevant to our
business. |
The current members of our scientific advisory board are:
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Dennis A. Ausiello, M.D.
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Physician-in-Chief/Massachusetts General Hospital |
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David P. Bartel, Ph.D.
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Associate Professor/Whitehead Institute for Medical Research |
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Fritz Eckstein, Ph.D.
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Professor/Max Planck Institute |
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Edward E. Harlow, Ph.D.
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Professor/Harvard Medical School |
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Robert S. Langer, Ph.D.
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Germeshausen Professor/Massachusetts Institute of Technology |
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Paul R. Schimmel, Ph.D.
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Professor/Skaggs Institute for Chemical Biology |
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Phillip A. Sharp, Ph.D.
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Institute Professor/MIT Center for Cancer Research |
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Markus Stoffel, M.D., Ph.D.
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Heilbrunn Professor/Rockefeller University |
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Thomas H. Tuschl, Ph.D.
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Associate Professor/Rockefeller University |
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Phillip D. Zamore, Ph.D.
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Associate Professor/University of Massachusetts Medical School |
30
Employees
As of March 1, 2005, we had 71 full-time employees, 53
of whom were engaged in research and development and 18 of whom
were engaged in management, administration and finance. Of our
employees, 36 hold M.D. or Ph.D. degrees. None of our employees
is represented by a labor union or covered by a collective
bargaining agreement, nor have we experienced work stoppages. We
believe that relations with our employees are good.
Financial Information About Geographic Areas
See Note 2 to our Consolidated Financial Statements, under
the section entitled “Segment Information”, for
financial information about geographic areas. The Notes to our
Consolidated Financial Statements are contained herein in
Item 8.
Corporate Information
Alnylam Pharmaceuticals, Inc. was incorporated in Delaware in
May 2003. Alnylam Europe AG, which was incorporated in Germany
in June 2000 under the name Ribopharma AG, and Alnylam U.S.,
Inc., which was incorporated in Delaware in June 2002, are
wholly owned subsidiaries of Alnylam Pharmaceuticals, Inc.
Alnylam Pharmaceuticals, Inc. acquired Alnylam Europe AG in July
2003. Our principal executive office is located at 300 Third
Street, Cambridge, Massachusetts 02142, and our telephone number
is (617) 551-8200.
Website Access to SEC Reports
We maintain an internet website at www.alnylam.com. The
information on our website is not incorporated by reference into
this Annual Report on Form 10-K and should not be
considered to be a part of this Annual Report on Form 10-K.
Our website address is included in this Annual Report on
Form 10-K as an inactive technical reference only. Our
reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (including our
annual reports on Form 10-K, our quarterly reports on
Form 10-Q and our current reports on Form 8-K, and
amendments to those reports) are accessible through our website,
free of charge, as soon as reasonably practicable after these
reports are filed electronically with, or otherwise furnished
to, the Securities and Exchange Commission.
Our operations are based in Cambridge, Massachusetts and
Kulmbach, Germany. The properties we lease are listed below:
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Lease Payments | |
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Cambridge, MA
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33,000 |
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Office & laboratory |
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September 2011 |
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$ |
116,000 |
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Kulmbach, Germany
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14,000 |
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Office & laboratory |
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June 2008 |
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33,000 |
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We also hold a lease on expansion space of 10,600 square
feet within the Cambridge, Massachusetts facility, for which
payment in the amount of $37,000 per month will begin by
September 1, 2005, and options to lease an additional
21,100 square feet of office and laboratory space. We
believe that the total space available to us under our current
leases and options will meet our needs for the foreseeable
future, and that additional space would be available to us on
commercially reasonable terms if it were required.
31
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| ITEM 3. |
LEGAL PROCEEDINGS |
We are currently not a party to any material legal proceedings.
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| ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of security holders during
the fourth quarter of 2004.
PART II
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| ITEM 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock began trading on the NASDAQ National Market on
May 28, 2004 under the symbol “ALNY”. Prior to
that time there was no established public trading market for our
common stock. The following table sets forth the high and low
closing sales prices per share for our common stock on the
NASDAQ National Market for the period indicated:
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2004 | |
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Low | |
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Second Quarter (May 28 to June 30)
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$ |
9.50 |
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$ |
5.26 |
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Third Quarter
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$ |
8.00 |
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$ |
3.65 |
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Fourth Quarter
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$ |
8.60 |
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$ |
5.00 |
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As of March 1, 2005, there were approximately 72 holders of
record of our common stock. Because many of such shares are held
by brokers and other institutions on behalf of stockholders, we
are unable to estimate the total number of individual
stockholders represented by these record holders.
We have never paid or declared any cash dividends on our common
stock. We currently intend to retain any earnings for future
growth and, therefore, do not expect to pay cash dividends in
the foreseeable future.
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Securities Authorized for Issuance Under Equity Compensation
Plans |
Information relating to our equity compensation plans will be
included in our proxy statement in connection with our 2005
Annual Meeting of Stockholders, under the caption “Equity
Compensation Plan Information.” That portion of our proxy
statement is incorporated herein by reference.
We registered shares of our common stock in connection with our
initial public offering under the Securities Act. Our
Registration Statement on Form S-1 (Reg.
No. 333-113162) in connection with our initial public
offering was declared effective by the SEC on May 27, 2004.
The offering commenced as of May 27, 2004. The offering did
not terminate before any securities were sold. The offering has
terminated and we sold 5,000,000 shares of our common stock
in the initial public offering and an additional
750,000 shares of our common stock in connection with the
exercise of an over-allotment option by the underwriters. The
underwriters of the offering were Banc of America Securities
LLC, Citigroup Global Markets Inc., Piper Jaffray & Co.
and ThinkEquity Partners LLC. All 5,750,000 shares of our
common stock registered in the offering were sold at the initial
public offering price per share of $6.00. The aggregate purchase
price of the
32
offering was $34,500,000. The net offering proceeds to us after
deducting total expenses were $29,884,000. We incurred total
expenses in connection with the offering of $4,616,000, which
consisted of direct payments of:
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(i) $1,929,000 in legal, accounting and printing fees; |
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(ii) $2,415,000 in underwriters discounts, fees and
commissions; and |
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(iii) $272,000 in miscellaneous expenses. |
No payments for such expenses were made directly or indirectly
to (i) any of our directors, officers or their associates,
(ii) any person(s) owning 10% or more of any class of our
equity securities or (iii) any of our affiliates. The net
offering proceeds have been invested into short-term
investment-grade securities and money market accounts. There has
been no material change in the planned use of proceeds from our
initial public offering as described in our final prospectus
filed with the SEC pursuant to Rule 424(b). As of
December 31, 2004, none of the net proceeds of our initial
public offering had been utilized.
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| (f) |
Issuer Purchases of Equity Securities |
Neither we nor any affiliated purchaser or anyone acting on
behalf of us or an affiliated purchaser made any purchases of
shares of our common stock in the fourth quarter of 2004.
33
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| ITEM 6. |
SELECTED CONSOLIDATED FINANCIAL DATA |
The following selected consolidated financial data are derived
from our financial statements. The historical results presented
are not necessarily indicative of future results. The
consolidated statement of operations data for the years ended
December 31, 2004 and 2003 and the period from inception
(June 14, 2002) through December 31, 2002 and the
consolidated balance sheet data as of December 31, 2004 and
2003 have been derived from our audited consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K. The selected consolidated financial data set
forth below should be read in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the financial
statements, and the related Notes, included elsewhere in this
Annual Report on Form 10-K.
On May 7, 2004, we completed a reverse 1-for-1.9 split of
all outstanding shares of our common stock. All common share and
per share data presented in the selected consolidated financial
data, accompanying consolidated financial statements and the
notes thereto have been retroactively restated to reflect this
event.
In July 2003, we acquired Ribopharma AG, now called Alnylam
Europe AG, an RNAi company based in Kulmbach, Germany. As a
result, the quarter ended September 30, 2003 was the first
quarter that included the operations of Alnylam Europe AG in our
consolidated results. As such, the presentation of historical
financial information and any discussion regarding the
comparison of historical financial information to financial
information for the year ended December 31, 2003, does not
include any financial information for Alnylam Europe AG prior to
July 31, 2003, unless otherwise indicated.
Forward-looking statements made regarding our expected future
operating results are on a consolidated basis and include the
expected results of Alnylam Europe AG.
Selected Consolidated Financial Data
(In thousands, except share and per share data)
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Inception | |
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(June 14, | |
| |
|
|
|
2002) | |
| |
|
Year Ended December 31, | |
|
through | |
| |
|
| |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net revenues
|
|
$ |
4,278 |
|
|
$ |
176 |
|
|
$ |
— |
|
|
Operating expenses(1)
|
|
|
36,542 |
|
|
|
25,233 |
|
|
|
4,222 |
|
|
Loss from operations
|
|
|
(32,264 |
) |
|
|
(25,057 |
) |
|
|
(4,222 |
) |
|
Net loss
|
|
|
(32,654 |
) |
|
|
(25,033 |
) |
|
|
(4,136 |
) |
|
Net loss attributable to common stockholders
|
|
$ |
(35,367 |
) |
|
$ |
(27,939 |
) |
|
$ |
(4,884 |
) |
|
Net loss per common share — basic and diluted
|
|
$ |
(2.98 |
) |
|
$ |
(29.64 |
) |
|
$ |
(14.74 |
) |
|
Weighted average shares outstanding — basic and diluted
|
|
|
11,886,126 |
|
|
|
942,665 |
|
|
|
331,341 |
|
|
(1)Non-cash stock-based compensation included in operating
expenses
|
|
$ |
4,106 |
|
|
$ |
3,455 |
|
|
$ |
172 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$ |
46,046 |
|
|
$ |
23,193 |
|
|
$ |
15,477 |
|
|
Working capital
|
|
|
41,606 |
|
|
|
20,345 |
|
|
|
12,846 |
|
|
Total assets
|
|
|
66,107 |
|
|
|
35,183 |
|
|
|
16,111 |
|
|
Note payable
|
|
|
7,201 |
|
|
|
1,859 |
|
|
|
— |
|
|
Redeemable convertible preferred stock
|
|
|
— |
|
|
|
55,189 |
|
|
|
18,084 |
|
|
Total stockholders’ equity (deficit)
|
|
|
46,142 |
|
|
|
(26,707 |
) |
|
|
(4,646 |
) |
34
|
|
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with the financial statements and related notes
appearing elsewhere in this Annual Report on
Form 10-K. This Annual Report on Form 10-K
contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Annual Report on
Form 10-K that are not purely historical are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Without
limiting the foregoing, the words “may,”
“will,” “should,” “could,”
“expects,” “plans,” “intends,”
“anticipates,” “believes,”
“estimates,” “predicts,”
“potential,” “continue,” “target”
and similar expressions are intended to identify forward-looking
statements. All forward-looking statements included in this
Annual Report on Form 10-K are based on information
available to us up to, and including the date of this documents,
and we assume no obligation to update any such forward-looking
statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a
result of certain important factors, including those set forth
below under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and
“Certain Factors That May Affect Future Results” and
elsewhere in this Annual Report on Form 10-K. You should
carefully review those factors and also carefully review the
risks outlined in other documents that we file from time to time
with the Securities and Exchange Commission.
Overview
We are a biopharmaceutical company that is seeking to develop
and commercialize new drugs that work through a recently
discovered mechanism in cells known as RNA interference, or
RNAi. We believe that RNAi therapeutics have the potential to
become a major class of drugs with applications in a wide range
of therapeutic areas. We have initiated programs to develop RNAi
therapeutics that will be administered directly to diseased
parts of the body. In order to treat a broad range of diseases,
we are also working to extend our capabilities by investing in
RNAi therapeutics that will be administered systemically. To
realize the potential of RNAi therapeutics, we are developing
capabilities that we can apply to any specific short interfering
RNA, or siRNA, in a systematic way to endow it with drug-like
properties. We use the term “product engine” to
describe these capabilities because we believe they will enable
us to develop many products across a variety of therapeutic
areas.
We commenced operations in June 2002. To date, our revenues have
primarily been derived from our two strategic alliances with
Merck and Co., or Merck. In September 2003, we began working
with Merck under a collaboration agreement for the development
of RNAi technology and RNAi therapeutics. Through
December 31, 2004, we have recognized revenues of
$2.4 million related to this agreement from the
amortization of up-front and recurring payments from Merck and
the recognition of revenues upon the achievement of a milestone.
These revenues are net of $0.3 million related to an
adjustment to reflect the fair value of common stock issued to
Merck in December 2004. In addition, Merck has made equity
investments in Alnylam totaling approximately $10.0 million
since the commencement of this collaboration. In June 2004, we
began working with Merck under a cost-sharing collaboration
agreement for the co-development of Direct
RNAitm
therapeutics for the treatment of ocular diseases. Through
December 31, 2004, we have recognized net revenues of
$1.5 million from the amortization of up-front payments
received from Merck and from Merck’s reimbursement of a
portion of our research and development costs under this
agreement. This revenue is net of $0.3 million of research
and development costs incurred by Merck under this
collaboration. We expect our revenues to continue to be derived
primarily from strategic alliances and license fee revenues.
Since our inception, we have generated significant losses. As of
December 31, 2004, we had an accumulated deficit of
$63.0 million. We have funded our operations primarily
through the proceeds of $89.9 million from the sale of
equity securities, including approximately $29.9 million in
net proceeds from the sale of 5.75 million shares of our
common stock from our initial public offering in June 2004. We
have yet to submit any drug applications to any regulatory
authority. We have focused our efforts since inception primarily
on business planning, research and development, acquiring
intellectual property rights, recruiting management and
technical staff, forming strategic alliances and raising
capital. We are unable to predict when, if ever, we
35
will be able to commence sales of any product. We have not
achieved profitability on a quarterly or annual basis and we
expect to incur significant additional losses over the next
several years. We expect our net losses to increase primarily
due to research and development activities relating to our
collaborations, drug development programs and other general
corporate activities. We anticipate that our operating results
will fluctuate for the foreseeable future. Therefore,
period-to-period comparisons should not be relied upon as
predictive of the results in future periods. Our sources of
potential funding for the next several years are expected to
include proceeds from the sale of equity, license and other
fees, funded research and development payments, and milestone
payments under existing and future collaborative arrangements.
Prior to the quarter ended June 30, 2004, we operated as a
development-stage enterprise. During the quarter ended
June 30, 2004, we emerged from the development stage
because our research collaboration activities became significant
with the addition of our second collaboration with Merck.
Since our inception, we have focused on drug discovery and
development programs. Research and development expenses
represented approximately 67%, 70% (including 18% purchased
in-process research and development) and 79% of our total
operating expenses for the years ended December 31, 2004
and 2003 and the period from inception (June 14, 2002)
through December 31, 2002, respectively. Prior to the three
months ended July 1, 2004 we did not track any of our
research and development costs or our personnel and
personnel-related costs on a project-by-project basis, since the
majority of our efforts were focused on the development of
capabilities associated with our product engine rather than on
specific projects. We began tracking direct external costs
attributable to our agreement with Merck for the co-development
of RNAi therapeutics for ocular diseases in July 2004 as well as
the actual time worked by our employees on this collaboration.
We have initiated programs to identify specific RNAi
therapeutics that will be administered directly to diseased
parts of the body, which we refer to as Direct RNAi drug
candidates, and we expect to initiate additional programs as the
capabilities of our product engine evolve. Included in our
current programs are development programs, those for which we
have established targeted timing for human clinical trials, and
preclinical programs, those for which we have yet to establish
targeted timing for human clinical trials. Our current
development programs are focused on age-related macular
degeneration, or AMD, and human respiratory syncytial virus, or
RSV. Included in our preclinical programs are programs focused
on Parkinson’s disease, or PD, spinal cord injury, or SCI,
and cystic fibrosis, or CF.
In conjunction with Merck, we are currently evaluating several
candidate RNAi therapeutics for AMD in animal models and, in
conjunction with Merck, expect to begin a clinical trial for an
AMD product candidate in the second half of 2005. These
activities are being conducted under a collaboration and license
agreement we entered into with Merck in June 2004. The agreement
covers a multi-year collaboration to develop and commercialize
RNAi therapeutics for ocular diseases. This collaboration, the
second strategic alliance between us and Merck, will focus on
AMD and other ocular diseases caused by abnormal growth or
leakage of small blood vessels in the eye. Our existing program
to develop a Direct RNAi therapeutic for the treatment of AMD
was incorporated into the new collaboration. In addition, we are
working on a number of internal development projects related to
Direct RNAi drug candidates.
In 2004 we initiated a program to develop RNAi therapeutics for
the treatment of RSV infections of the lung. We have since
evaluated a number of candidate RNAi therapeutics in animal
models of RSV infection, and expect to begin a clinical trial
for a candidate RNAi therapeutic in the first half of 2006.
We entered into a collaboration with the Mayo Foundation for
Medical Education and Research and the Mayo Clinic Jacksonville
to explore the potential of a PD treatment by initiating testing
in animal models. We began animal model testing under this
collaboration during 2004.
In addition, we are working on a number of internal development
projects related to Direct RNAi drug candidates.
There is a risk that any drug discovery and development program
may not produce revenue because of the risks inherent in drug
discovery and development. Moreover, there are uncertainties
specific to any new field of
36
drug discovery, including RNAi. The successful development of
any product candidate we develop is highly uncertain. Due to the
numerous risks associated with developing drugs, we cannot
reasonably estimate or know the nature, timing and estimated
costs of the efforts necessary to complete the development of,
or the period in which material net cash inflows are expected to
commence from, any potential product candidate. These risks
include the uncertainty of:
|
|
|
| |
• |
our ability to progress any product candidates into preclinical
and clinical trials; |
| |
| |
• |
the scope, rate and progress of our preclinical trials and other
research and development activities; |
| |
| |
• |
the scope, rate of progress and cost of any clinical trials we
commence; |
| |
| |
• |
clinical trial results; |
| |
| |
• |
the cost of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights; |
| |
| |
• |
the terms and timing of any collaborative, licensing and other
arrangements that we may establish; |
| |
| |
• |
the cost and timing of regulatory approvals; |
| |
| |
• |
the cost and timing of establishing sales, marketing and
distribution capabilities; |
| |
| |
• |
the cost of establishing clinical and commercial supplies of any
products that we may develop; and |
| |
| |
• |
the effect of competing technological and market developments. |
Any failure to complete any stage of the development of any
potential products in a timely manner could have a material
adverse effect on our operations, financial position and
liquidity. A discussion of some of the risks and uncertainties
associated with completing our projects on schedule, or at all,
and the potential consequences of failing to do so, are set
forth in “Certain Factors That May Affect Future
Results” below.
In July 2003, we acquired a development-stage enterprise called
Ribopharma AG, now called Alnylam Europe AG, an RNAi
therapeutics company based in Kulmbach, Germany. To effect the
acquisition, we paid $1.5 million in cash and transaction
costs of $0.4 million and issued common shares with a fair
value of $1.9 million. In addition, we assumed
$7.1 million in debt, of which $3.0 million was
subsequently paid in cash and $4.1 million was settled
through the issuance of shares of Series B redeemable
convertible preferred stock. As a result of the acquisition, we
expensed $4.6 million in 2003 of purchased in-process
research and development and allocated $5.8 million to
long-lived assets representing the value ascribed to the Alnylam
Europe work force, core technology and fixed assets acquired in
the transaction. The results of Alnylam Europe are included in
our consolidated results from the date of acquisition.
Critical Accounting Policies and Estimates
While our significant accounting policies are more fully
described in the notes to our consolidated financial statements
included in this Annual Report on Form 10-K, we believe the
following accounting policies to be the most critical in
understanding the judgments and estimates we use in preparing
our consolidated financial statements:
Our discussion and analysis of our financial condition and
results of operations is based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of our consolidated financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses.
On an ongoing basis, we evaluate our estimates and judgments,
including those related to revenue recognition and accrued
expenses. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for
making judgments
37
about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions
and could have a material impact on our reported results.
With respect to our estimates involved in the determination of
the fair value of our common stock, during 2003 the board of
directors evaluated several events that provided indicators of
the fair value of our common stock including (1) a
valuation that was performed in connection with the acquisition
of Alnylam Europe in July 2003, (2) the fair value of our
Series B and Series C convertible preferred stock that
was issued in July, September and October 2003, and its relation
to the value of our common stock, and (3) the impact of our
initial public offering of common stock. These factors indicated
that the options granted to employees during 2003 and prior to
our initial public offering in 2004 had a deemed fair value that
was higher than the exercise price. This caused us to record
deferred compensation of $3.7 million and $3.3 million
during 2004 and 2003, respectively, and related compensation
expense of $3.1 million and $0.7 million in 2004 and
2003, respectively. Deferred compensation is amortized as an
expense over the vesting period of the underlying stock options
in accordance with the method prescribed by the Financial
Accounting Standards Board, or FASB, Interpretation No. 28,
“Accounting for Stock Appreciation Rights and Other
Variable Stock Options and Award Plans”, or
FIN 28, as this method appropriately matches the
compensation expense related to the services performed by the
option holder with the period over which each of the options
vest from the date of grant. We expect to record amortization of
this deferred compensation of $1.7 million in 2005,
$0.9 million in 2006, $0.4 million in 2007 and less
than $0.1 million in 2008, subject to employee
terminations, which result in the cancellation of stock options
and the reversal of related un-amortized deferred compensation.
In connection with stock options granted to non-employees for
services during 2003 and 2004 and our determination of the fair
value of our common stock, we have recorded cumulative deferred
compensation of approximately $1.6 million, which
represents the fair value of non-employee grants. The deferred
compensation is recorded as an expense over the vesting period
of the underlying stock options in accordance with the method
prescribed by FIN 28. At the end of each financial
reporting period prior to vesting, the value of these options,
as calculated using the Black-Scholes option pricing model, is
re-measured using the then-current fair value of our common
stock. At that point, deferred compensation and the non-cash
compensation recognized during that period is adjusted
accordingly. Stock-based compensation expense related to these
non-employee options for 2004 and 2003 was $0.7 million and
$0.5 million, respectively. The deferred compensation
balance at December 31, 2004 related to these awards was
$0.4 million. Since the fair value of the common stock
issued to non-employees is subject to change in the future, the
compensation expense recognized during the year ended
December 31, 2004 and prior years may not be indicative of
future compensation charges.
We have also recorded cumulative deferred compensation of
$3.1 million related to restricted stock awards that were
issued to non-employees in 2002. Shares remaining unvested or
subject to forfeiture for non-employees still providing services
are subject to a mark-to-market adjustment during each reporting
period prior to vesting in full. The deferred compensation is
recorded as an expense over the vesting period of the underlying
restricted stock in accordance with the method prescribed by
FIN 28. We recorded non-cash stock-based compensation
expense of $0.2 million, $2.2 million and
$0.2 million during the years ended December 31, 2004
and 2003 and the period from inception (June 14, 2002)
through December 31, 2002, respectively, related to the
amortization of the deferred compensation. The deferred
compensation balance at December 31, 2004 related to these
awards was $0.4 million. Since the fair value of the common
stock issued to non-employees is subject to change in the
future, the compensation expense recognized during the year
ended December 31, 2004 and prior years may not be
indicative of future compensation charges.
|
|
|
Acquired and Licensed Technology |
We have licensed technology that we expect to utilize in our
research and development activities. The terms of the licenses
may provide for up-front payments, annual maintenance payments,
milestone payments based upon the achievement of specified
events and royalties based on product sales. We account for the
costs associated with obtaining licenses in accordance with FASB
Statement No. 2, “Accounting for Research and
Development Costs”. Under this standard, we determine
whether the technology we are licensing relates to a particular
research and development project with no alternative use. If it
is determined that there are no
38
alternative uses, the amount is expensed as incurred.
Alternatively, the costs are capitalized and amortized over
their estimated useful life. Through December 31, 2004, we
have expensed $14.2 million of acquired and licensed
technology, including $4.6 million of purchased in-process
research and development that is believed to have no alternative
uses. We have capitalized $3.6 million of core technology,
with a 10-year estimated useful life, which was acquired in 2003
as part of the Alnylam Europe acquisition.
We generally depreciate property and equipment using the
straight-line method over the asset’s estimated economic
life, which ranges from two years to eight years. Determining
the economic lives of property and equipment requires us to make
significant judgments that can materially impact our operating
results. As of December 31, 2004, there was approximately
$3.4 million of intangible assets on our consolidated
balance sheet, including $3.1 million of core technology
and $0.3 million related to the Alnylam Europe workforce.
We amortize acquired intangible assets using the straight-line
method over their estimated economic lives, which range from
four years to 10 years. Determining the economic lives of
acquired intangible assets requires us to make significant
judgment and estimates, and can materially impact our operating
results. If our estimates require adjustment, it could have a
material impact on our reported results.
Our policy regarding long-lived assets is to evaluate the
recoverability or usefulness of these assets when the facts and
circumstances suggest that these assets may be impaired. This
analysis relies on a number of factors, including changes in
strategic direction, business plans, regulatory developments,
economic and budget projections, technological improvements and
operating results. The test of recoverability or usefulness is a
comparison of the asset value to the undiscounted cash flow of
its expected cumulative net operating cash flow over the
asset’s remaining useful life. Any write-downs would be
treated as permanent reductions in the carrying amount of the
asset and an operating loss would be recognized. To date, we
have had recurring operating losses and the recoverability of
our long-lived assets is contingent upon executing our business
plan that includes obtaining significant revenue from research
collaborations. If we are unable to execute our business plan,
we may be required to write down the value of our long-lived
assets in future periods.
In accounting for the acquisition of Alnylam Europe, we
allocated the purchase price to the fair value of the acquired
tangible and intangible assets, including purchased in-process
research and development, which requires us to make several
significant judgments and estimates. In preparing the
allocation, we used a discounted cash flow model to value the
intangibles of Alnylam Europe, which requires us to make
assumptions and estimates about, among other things:
(1) the time and investment that will be required to
develop the projects and related technologies; (2) the
amount of revenues, royalties and milestone payments that will
be derived from the projects; and (3) the appropriate
discount rates to be used in the analysis. Use of different
estimates and judgments could yield materially different results
in our analysis, and could result in materially different asset
values and purchased in-process research and development charges.
We recognize revenue in accordance with the Securities and
Exchange Commission’s Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial
Statements. We have entered into collaboration agreements with
Merck. Revenues from these collaboration agreements may include
nonrefundable license fees, milestones, cost reimbursements,
research and development funding and royalties. When evaluating
multiple element arrangements, we consider whether the
components of the arrangement represents separate units of
accounting as defined in Emerging Issues Task Force, or EITF,
Issue No. 00-21, “Revenue Arrangements with
Multiple Deliverables”, or EITF 00-21. Application
of these standards requires subjective determinations and
requires management to make judgments about the value of the
individual elements and whether it is separable from the other
aspects of the contractual relationship. To date, we have
determined that our upfront non-refundable license fees cannot
be separated from our ongoing collaborative activities, and
accordingly, do not treat them as a separate element.
Nonrefundable license fees are recognized as revenue as we
perform under the collaboration agreement. Where our level of
effort is relatively constant over the performance period, we
recognize total fixed or determined contract revenues on a
straight-line basis over the estimated period of performance
under the contract.
39
We recognize milestone payments as revenue upon achievement of
the milestone only if (1) the milestone payments are
nonrefundable; (2) substantive effort is involved in
achieving the milestone; and (3) the amount of the
milestone is reasonable in relation to the effort expended or
the risk associated with achievement of the milestone. If any of
these conditions are not met, we defer the milestone payments
and recognize them as revenue over the term of the contract as
we complete our performance obligations. In December 2004, we
recognized revenue related to the receipt of a $2.0 million
technology milestone from Merck under our collaboration
agreement for the development of RNAi technology and RNAi
therapeutics.
We recognize revenues from reimbursable research and development
activities at the time these activities are performed under the
terms of the related agreement, when the collaborator is
obligated to pay and when no future performance obligations
exist. In revenue arrangements where both parties reimburse each
other for research costs, such as our collaboration agreement
with Merck for the co-development of RNAi therapeutics for the
treatment of ocular diseases, in which both parties reimburse
each other for 50% of the costs incurred, as defined by the
agreement, we follow EITF Issue No. 01-9,
“Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor’s
Products)”, or EITF 01-9, in determining the
proper accounting for amounts owed to Merck in reimbursement for
our portion of Merck’s costs under the agreement. In
accordance with EITF 01-9, our policy is to record revenues
equal to the amount we are due to receive for costs incurred
under the agreement less amounts reimbursable to the other party
during the same accounting period unless both of the following
conditions exist:
|
|
|
| |
• |
we receive a separable and identifiable benefit in exchange for
the payments made to the other party under the
arrangement and |
| |
| |
• |
we can reasonably estimate the fair value of the benefit
received. |
We have recorded revenues under our collaboration agreement with
Merck for the co-development of RNAi therapeutics for the
treatment of ocular diseases equal to $1.8 million, which
represents amounts that we have earned for costs incurred under
this agreement. As the above conditions do not exist with regard
to this agreement, we have recorded a reduction to our revenues
of $0.3 million, which represents amounts owed to Merck for
reimbursement of 50% of the costs incurred by Merck under the
agreement.
In 2004, we began investing a portion of our available cash and
cash equivalent resources in marketable securities with
maturities of greater than one year. We have classified these
investments as “available for sale” and have
determined that these investments, which total $4.9 million
at December 31, 2004, are properly classified as short-term
investments in our consolidated balance sheet. This
determination is a result of our decision that these investments
represent the investment of funds that are available for current
operations.
Results of Operations
The following data summarizes the results of our operations for
the periods indicated, in thousands:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Period from | |
| |
|
Year Ended December 31, | |
|
inception (June 14, | |
| |
|
| |
|
2002) through | |
| |
|
2004 | |
|
2003 | |
|
December 31, 2002 | |
| |
|
| |
|
| |
|
| |
|
Net revenues
|
|
$ |
4,278 |
|
|
$ |
176 |
|
|
$ |
— |
|
|
Operating expenses
|
|
|
36,542 |
|
|
|
25,233 |
|
|
|
4,222 |
|
|
Loss from operations
|
|
|
(32,264 |
) |
|
|
(25,057 |
) |
|
|
(4,222 |
) |
|
Net loss
|
|
|
(32,654 |
) |
|
|
(25,033 |
) |
|
|
(4,136 |
) |
40
Discussion of Results of Operations for 2004 and 2003
The following table summarizes the payments received by us under
our strategic research collaboration agreements with Merck as
well as our total consolidated revenues in the periods
indicated, in thousands:
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Up-front payments received from research collaborator
|
|
$ |
3,000 |
|
|
$ |
2,000 |
|
|
License payment received from research collaborator
|
|
|
1,000 |
|
|
|
— |
|
|
Milestone payment received from research collaborator
|
|
|
2,000 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
Total up-front and milestone payments received
|
|
$ |
6,000 |
|
|
$ |
2,000 |
|
| |
|
|
|
|
|
|
|
Revenues recorded from the amortization of up-front and license
payments
|
|
$ |
806 |
|
|
$ |
111 |
|
|
Revenues recorded from cost reimbursement research collaboration
agreement
|
|
|
1,775 |
|
|
|
— |
|
|
Cost reimbursements to Merck under research collaboration
agreement
|
|
|
(259 |
) |
|
|
— |
|
|
Revenues recorded upon receipt of milestone
|
|
|
2,000 |
|
|
|
— |
|
|
Adjustment to reflect fair value of equity issued to Merck
|
|
|
(256 |
) |
|
|
— |
|
|
Other revenues
|
|
|
212 |
|
|
|
65 |
|
| |
|
|
|
|
|
|
| |
Total revenues recorded
|
|
$ |
4,278 |
|
|
$ |
176 |
|
| |
|
|
|
|
|
|
We received a $2.0 million license fee from our first
agreement with Merck in September 2003, which has been deferred
and is being recognized as revenue over six years, the estimated
period of performance under the collaboration agreement. In
September 2004, we received an additional license fee of
$1.0 million from Merck related to this agreement. We
recognized revenues of $0.6 million and $0.1 million
from the amortization of these payments in 2004 and 2003,
respectively. The increase in these revenues is due to a full
year of amortization of the payment received in September 2003
and the amortization of the additional payment received in
September 2004.
In December 2004, we achieved a scientific milestone, as defined
by this agreement, resulting in a $2.0 million milestone
payment from Merck. In connection with the achievement of this
scientific milestone, Merck made a $5.0 million equity
investment in our common stock. The purchase price of this
common stock, as defined by the agreement, was determined based
on the average trading price of our common stock during the
twenty days prior to the purchase, which was $7.04. The price of
our common stock on the date of the purchase was $7.40 and
resulted in an actual value of $5.3 million for the common
stock issued to Merck. As a result, we recorded a reduction of
$0.3 million to the revenue recorded from Merck.
In June 2004, we entered into an additional collaboration and
license agreement with Merck for the co-development of RNAi
therapeutics for the treatment of ocular diseases. Under the
terms of the agreement, we received a $2.0 million license
fee from Merck as well as $1.0 million representing
reimbursement of prior research and development costs which we
incurred on our AMD program targeting vascular endothelial
growth factor, or VEGF. These amounts are being amortized into
revenues over the estimated period of performance under the
collaboration agreement of six years. As such, we recorded
$0.2 million of revenues in 2004 from the amortization of
these payments. In addition to up-front and milestone payments,
our collaboration agreement with Merck related to RNAi
therapeutics for ocular diseases provides for the sharing of
costs incurred under this agreement. In 2004, we recorded net
revenues of $1.5 million from these cost sharing activities
related to the AMD program.
For the foreseeable future, we expect our revenues to continue
to be derived primarily from strategic alliances. In addition,
we have established license programs for research reagents and
services, which are expected to provide revenues from license
fees and from royalties on sales by the licensees.
41
The following table summarizes our operating expenses for the
periods indicated, in thousands and as a percentage of total
expenses:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
% of | |
|
|
|
% of | |
|
Increase | |
| |
|
|
|
Total | |
|
|
|
Total | |
|
(Decrease) | |
| |
|
|
|
Operating | |
|
|
|
Operating | |
|
| |
| |
|
2004 | |
|
Expenses | |
|
2003 | |
|
Expenses | |
|
$ | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Research and development
|
|
$ |
24,603 |
|
|
|
67 |
% |
|
$ |
13,097 |
|
|
|
52 |
% |
|
$ |
11,506 |
|
|
|
88 |
% |
|
General and administrative
|
|
|
11,939 |
|
|
|
33 |
% |
|
|
7,527 |
|
|
|
30 |
% |
|
|
4,412 |
|
|
|
59 |
% |
|
Purchased in-process research and development
|
|
|
— |
|
|
|
— |
|
|
|
4,609 |
|
|
|
18 |
% |
|
|
(4,609 |
) |
|
|
(100 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total operating expenses
|
|
$ |
36,542 |
|
|
|
100 |
% |
|
$ |
25,233 |
|
|
|
100 |
% |
|
$ |
11,309 |
|
|
|
45 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the most significant components
of our research and development expenses for the periods
indicated, in thousands and as a percentage of total research
and development expenses and provides the changes in thousands
and percentages:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Increase | |
| |
|
|
|
% of | |
|
|
|
% of | |
|
(Decrease) | |
| |
|
|
|
Expense | |
|
|
|
Expense | |
|
| |
| |
|
2004 | |
|
Category | |
|
2003 | |
|
Category | |
|
$ | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Compensation and related
|
|
$ |
5,925 |
|
|
|
24 |
% |
|
$ |
3,043 |
|
|
|
23 |
% |
|
$ |
2,882 |
|
|
|
95 |
% |
| |
External services
|
|
|
3,489 |
|
|
|
14 |
% |
|
|
2,153 |
|
|
|
17 |
% |
|
|
1,336 |
|
|
|
62 |
% |
| |
License fees
|
|
|
5,833 |
|
|
|
24 |
% |
|
|
1,720 |
|
|
|
13 |
% |
|
|
4,113 |
|
|
|
239 |
% |
| |
Lab supplies and materials
|
|
|
3,057 |
|
|
|
12 |
% |
|
|
1,628 |
|
|
|
12 |
% |
|
|
1,429 |
|
|
|
88 |
% |
| |
Facilities-related expenses
|
|
|
3,055 |
|
|
|
12 |
% |
|
|
1,197 |
|
|
|
9 |
% |
|
|
1,858 |
|
|
|
155 |
% |
| |
Stock-based compensation
|
|
|
2,087 |
|
|
|
9 |
% |
|
|
2,833 |
|
|
|
22 |
% |
|
|
(746 |
) |
|
|
(26 |
)% |
| |
Other
|
|
|
1,157 |
|
|
|
5 |
% |
|
|
523 |
|
|
|
4 |
% |
|
|
634 |
|
|
|
121 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total research and development
|
|
$ |
24,603 |
|
|
|
100 |
% |
|
$ |
13,097 |
|
|
|
100 |
% |
|
$ |
11,506 |
|
|
|
88 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the past year our research and development expenses have
increased due to the expansion of our research and development
organization in support of the growth of our programs.
As indicated by the table above, the most significant increase
in our research and development expenses in 2004 was additional
license fees. This increase was primarily due to
$5.5 million in license fees incurred in connection with
our license agreement with Isis. In addition, our research and
development expenses increased in 2004 due to increased
compensation and related costs as a result of the timing and
size of the expansion of our research and development
organization, which increased from 42 employees at
December 31, 2003 to 51 at December 31, 2004. In
addition to the increase in employees in our research
organization, we improved our research infrastructure by moving
into new facilities during 2004, which resulted in increased
facilities related costs. The expansion of our research
organization was in support of both the growth of existing
research programs such as AMD and PD as well the addition of new
research programs initiated during 2004, including RSV. This
growth resulted in increased external service costs including
consulting and contracted research with third parties. We expect
to continue to devote a substantial portion of our resources to
research and development expenses.
Prior to July 1, 2004, we did not track any of our research
and development costs or our personnel and personnel-related
costs on a project-by-project basis, because the majority of our
efforts were focused on the development of capabilities
associated with our product engine rather than on specific
projects. In July 2004, we began work under our agreement with
Merck for the co-development of RNAi ocular therapeutics. This
42
agreement is a cost sharing arrangement whereby each party
reimburses the other for 50% of the costs incurred under the
project, as defined by the agreement. Costs reimbursed under the
agreement include certain direct external costs and a negotiated
full-time equivalent labor rate for the actual time worked on
the project. As a result, we began tracking direct external
costs attributable to this agreement and the actual time worked
by our employees on this agreement in July 2004. However, a
significant portion of our research and development expenses are
not tracked on a project-by-project basis. Direct external costs
incurred in 2004 under our agreement with Merck for the
co-development of RNAi ocular therapeutics were
$0.9 million, including $0.3 million billed to us by
Merck and recorded as a reduction of revenue. In addition, all
of our research programs are currently in the preclinical phase
meaning that we are conducting formulation, efficacy,
pharmacology and/or toxicology testing of compounds in animal
models or biochemical assays.
|
|
|
General and administrative |
The following table summarizes the most significant components
of our general and administrative expenses for the periods
indicated, in thousands and as a percentage of total general and
administrative expenses and provides the changes in thousands
and percentages:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
% of | |
|
|
|
% of | |
|
Increase | |
| |
|
|
|
Expense | |
|
|
|
Expense | |
|
| |
| |
|
2004 | |
|
Category | |
|
2003 | |
|
Category | |
|
$ | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Compensation and related
|
|
$ |
3,316 |
|
|
|
28 |
% |
|
$ |
2,490 |
|
|
|
33 |
% |
|
$ |
826 |
|
|
|
33 |
% |
| |
Consulting and professional services
|
|
|
2,891 |
|
|
|
24 |
% |
|
|
2,816 |
|
|
|
38 |
% |
|
|
75 |
|
|
|
3 |
% |
| |
Facilities related
|
|
|
2,135 |
|
|
|
18 |
% |
|
|
682 |
|
|
|
9 |
% |
|
|
1,453 |
|
|
|
213 |
% |
| |
Stock-based compensation
|
|
|
2,019 |
|
|
|
17 |
% |
|
|
623 |
|
|
|
8 |
% |
|
|
1,396 |
|
|
|
224 |
% |
| |
Insurance
|
|
|
388 |
|
|
|
3 |
% |
|
|
35 |
|
|
|
0 |
% |
|
|
353 |
|
|
|
1,009 |
% |
| |
Other
|
|
|
1,190 |
|
|
|
10 |
% |
|
|
881 |
|
|
|
12 |
% |
|
|
309 |
|
|
|
35 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total general and administrative
|
|
$ |
11,939 |
|
|
|
100 |
% |
|
$ |
7,527 |
|
|
|
100 |
% |
|
$ |
4,412 |
|
|
|
59 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As indicated in the table above, the most significant increase
in general and administrative expenses in 2004 was increased
facilities related costs as a result of our relocation into our
new headquarters in Cambridge, Massachusetts in April 2004.
Additionally, another significant component of the increase in
general and administrative expenses was non-cash stock-based
compensation, which increased as a result of the amortization of
additional deferred compensation recorded as a result of stock
option grants to employees prior to our initial public offering.
|
|
|
Purchased in-process research and development |
In July 2003, in connection with our acquisition of Alnylam
Europe, we allocated $4.6 million of the purchase price to
purchased in-process research and development, which we recorded
as an expense in our consolidated statement of operations in
2003. During 2004, we did not incur any such charges.
|
|
|
Interest income, interest expense and other |
Interest income increased to $0.5 million in 2004 from
$0.2 million in 2003. This increase was due to our higher
average cash, cash equivalent and marketable securities balances
in 2004, which was primarily a result of the net proceeds of
approximately $29.9 million from our initial public
offering in June 2004 and from the issuance of
$10.0 million of our Series D preferred stock in March
2004.
Interest expense increased to $0.7 million in 2004 from
$0.1 million in 2003. This increase was due primarily to
our establishment of a $10.0 million equipment line of
credit in March 2004. During 2004 we drew down approximately
$7.2 million under this line of credit.
43
Other expenses increased to $0.2 million in 2004 from less
than $0.1 million in 2003. This increase is due primarily
to realized foreign currency losses as a result of the increase
in the conversion rate of the Euro against the U.S. Dollar.
Discussion of Results of Operations for 2003 and the Period
from Inception (June 14, 2002) through December 31,
2002
We commenced operations in June 2002 and initially operated as a
development-stage enterprise. In September 2003, we entered into
a collaboration agreement with Merck for the development of
RNAi-based technology and therapeutics. As a result of this
agreement, Merck paid us an initial up-front payment of
$2.0 million, which we began amortizing into revenues over
six years, the estimated period of performance under this
agreement. The amortization of this payment resulted in
$0.1 million of revenues in 2003. In addition, we acquired
Ribopharma AG, now operating as Alnylam Europe AG, in July 2003.
Alnylam Europe AG had existing technology license agreements,
which resulted in less than $0.1 million of revenues from
the date of our acquisition through December 31, 2003. No
revenues were recorded during the period from inception
(June 14, 2002) through December 31, 2002.
The following table summarizes our operating expenses for the
periods indicated, in thousands and as a percentage of total
expenses:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Period from | |
|
|
|
|
|
|
| |
|
|
|
|
|
Inception | |
|
|
|
|
|
|
| |
|
|
|
|
|
(June 14, | |
|
|
|
|
|
|
| |
|
|
|
% of | |
|
2002) | |
|
% of | |
|
|
| |
|
|
|
Total | |
|
through | |
|
Total | |
|
Increase | |
| |
|
|
|
Operating | |
|
December 31, | |
|
Operating | |
|
| |
| |
|
2003 | |
|
Expenses | |
|
2002 | |
|
Expenses | |
|
$ | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Research and development
|
|
$ |
13,097 |
|
|
|
52 |
% |
|
$ |
3,342 |
|
|
|
79 |
% |
|
$ |
9,755 |
|
|
|
292 |
% |
|
General and administrative
|
|
|
7,527 |
|
|
|
30 |
% |
|
|
880 |
|
|
|
21 |
% |
|
|
6,647 |
|
|
|
755 |
% |
|
Purchased in-process research and development
|
|
|
4,609 |
|
|
|
18 |
% |
|
|
— |
|
|
|
— |
|
|
|
4,609 |
|
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total operating expenses
|
|
$ |
25,233 |
|
|
|
100 |
% |
|
$ |
4,222 |
|
|
|
100 |
% |
|
$ |
21,011 |
|
|
|
498 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
The following table summarizes the most significant components
of our research and development expenses for the periods
indicated, in thousands and as a percentage of total research
and development expenses and provides the changes in thousands
and percentages:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Period from | |
|
|
|
|
|
|
| |
|
|
|
|
|
Inception | |
|
|
|
|
|
|
| |
|
|
|
|
|
(June 14, | |
|
|
|
|
| |
|
|
|
% of | |
|
2002) | |
|
|
|
Increase | |
| |
|
|
|
Total | |
|
through | |
|
% of | |
|
(Decrease) | |
| |
|
|
|
Operating | |
|
December 31, | |
|
Expense | |
|
| |
| |
|
2003 | |
|
Expenses | |
|
2002 | |
|
Category | |
|
$ | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Compensation and related
|
|
$ |
3,043 |
|
|
|
23 |
% |
|
$ |
299 |
|
|
|
9 |
% |
|
$ |
2,744 |
|
|
|
918 |
% |
| |
External services
|
|
|
2,153 |
|
|
|
17 |
% |
|
|
585 |
|
|
|
18 |
% |
|
|
1,568 |
|
|
|
268 |
% |
| |
Stock-based compensation
|
|
|
2,833 |
|
|
|
22 |
% |
|
|
172 |
|
|
|
5 |
% |
|
|
2,661 |
|
|
|
1,547 |
% |
| |
License fees
|
|
|
1,720 |
|
|
|
13 |
% |
|
|
1,918 |
|
|
|
57 |
% |
|
|
(198 |
) |
|
|
(10 |
)% |
| |
Lab supplies and materials
|
|
|
1,628 |
|
|
|
12 |
% |
|
|
138 |
|
|
|
4 |
% |
|
|
1,490 |
|
|
|
1,080 |
% |
| |
Facilities-related expenses
|
|
|
1,197 |
|
|
|
9 |
% |
|
|
73 |
|
|
|
2 |
% |
|
|
1,124 |
|
|
|
1,540 |
% |
| |
Other
|
|
|
523 |
|
|
|
4 |
% |
|
|
157 |
|
|
|
5 |
% |
|
|
366 |
|
|
|
233 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total research and development
|
|
$ |
13,097 |
|
|
|
100 |
% |
|
$ |
3,342 |
|
|
|
100 |
% |
|
$ |
9,755 |
|
|
|
292 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because we commenced operations in June 2002, research and
development expenses in 2002 represent a partial year of
research activities. The acquisition of Alnylam Europe AG in
July 2003 resulted in a significant increase in research and
development costs in the second half of 2003. Each of these
factors contributed significantly to the overall growth in
research and development expenses in 2003. As indicated in the
table above, the most significant component of the increase in
research and development expenses in 2003 was compensation and
related costs. This increase was due to the growth we
experienced through 2003 as we expanded our research
organization and added employees engaged in research activities
through our acquisition of Ribopharma AG, now Alnylam Europe AG,
in July 2003. These factors resulted in the increase of our
research organization from five employees at December 31,
2002 to 42 at December 31, 2003. Another significant
component of the increase in research and development expenses
in 2003 was non-cash stock based compensation, which increased
as a result of the amortization of deferred compensation
recorded in connection with the issuance of restricted stock and
stock options to non-employees as well as the amortization of
deferred compensation recorded in connection with stock options
issued to employees. The growth of our research organization was
in support of our increased research activities, including our
September 2003 collaboration with Merck and other development
projects, which resulted in increased external service costs,
which include consulting and contracted research with third
parties, increased lab supplies and materials and increased
facilities-related costs.
45
|
|
|
General and administrative |
The following table summarizes the most significant components
of our general and administrative expenses for the periods
indicated, in thousands and as a percentage of total general and
administrative expenses and provides the changes in thousands
and percentages:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Period from | |
|
|
|
|
|
|
| |
|
|
|
|
|
Inception | |
|
|
|
|
|
|
| |
|
|
|
|
|
(June 14, | |
|
|
|
|
|
|
| |
|
|
|
|
|
2002) | |
|
|
|
|
| |
|
|
|
% of | |
|
through | |
|
% of | |
|
Increase | |
| |
|
|
|
Expense | |
|
December 31, | |
|
Expense | |
|
| |
| |
|
2003 | |
|
Category | |
|
2002 | |
|
Category | |
|
$ | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Compensation and related
|
|
$ |
2,490 |
|
|
|
33 |
% |
|
$ |
268 |
|
|
|
30 |
% |
|
$ |
2,222 |
|
|
|
829 |
% |
| |
Consulting and professional services
|
|
|
2,816 |
|
|
|
38 |
% |
|
|
398 |
|
|
|
45 |
% |
|
|
2,418 |
|
|
|
608 |
% |
| |
Facilities related
|
|
|
682 |
|
|
|
9 |
% |
|
|
100 |
|
|
|
12 |
% |
|
|
582 |
|
|
|
582 |
% |
| |
Stock-based compensation
|
|
|
623 |
|
|
|
8 |
% |
|
|
— |
|
|
|
0 |
% |
|
|
623 |
|
|
|
100 |
% |
| |
Other
|
|
|
916 |
|
|
|
12 |
% |
|
|
114 |
|
|
|
13 |
% |
|
|
802 |
|
|
|
704 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total general and administrative
|
|
$ |
7,527 |
|
|
|
100 |
% |
|
$ |
880 |
|
|
|
100 |
% |
|
$ |
6,647 |
|
|
|
755 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Because we commenced operations in June 2002, general and
administrative expenses in 2002 represent a partial year of
activities. The acquisition of Alnylam Europe AG in July 2003
resulted in an increase in general and administrative costs in
the second half of 2003. Each of these factors contributed
significantly to the overall growth in general and
administrative expenses in 2003. As indicated by the table
above, the most significant component of the increase in general
and administrative expenses in 2003 was increased consulting and
professional service costs. These costs include legal,
accounting and other professional service fees, which increased
in 2003 due to the expansion of our organization. Another
significant component of the increase in general and
administrative expenses was compensation and related costs These
costs increased as a result of the expansion of our general and
administrative organization, which grew from four employees at
December 31, 2002 to nine at December 31, 2003. Also,
non-cash stock-based compensation in 2003 resulted from the
amortization of deferred compensation recorded in connection
with the issuance of stock options to employees and
non-employees.
|
|
|
Purchased in-process research and development |
In July 2003, in connection with our acquisition of Alnylam
Europe, we allocated $4.6 million of the purchase price to
purchased in-process research and development, which we recorded
as an expense in our consolidated statement of operations in
2003. During 2002, we did not incur any such charges.
|
|
|
Interest income, interest expense and other |
Interest income increased to $0.2 million in 2003 from
$0.1 million in the period from inception (June 14,
2002) through December 31, 2002. This increase was due to
our higher average cash and cash equivalent balances in 2003,
which was a result of net proceeds of approximately
$27.5 million from our issuance of redeemable convertible
preferred stock during 2003.
Interest expense increased to $0.1 million in 2003 from
none in the period from inception (June 14, 2002) through
December 31, 2002. This increase was due primarily to our
establishment of a $2.5 million equipment line of credit in
December 2002. During 2003 we drew down approximately
$2.1 million under this line of credit.
Other expenses were immaterial in both the period from inception
(June 14, 2002) through December 31, 2002 and 2003.
46
Liquidity and Capital Resources
The following table summarizes our cash flow activities for the
periods indicated, in thousands:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Period from | |
| |
|
|
|
|
|
Inception | |
| |
|
|
|
|
|
(June 14, | |
| |
|
|
|
2002) | |
| |
|
Year Ended December 31, | |
|
through | |
| |
|
| |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(32,654 |
) |
|
$ |
(25,033 |
) |
|
$ |
(4,136 |
) |
|
Non-cash adjustments to net loss
|
|
|
6,599 |
|
|
|
9,299 |
|
|
|
208 |
|
|
Tenant improvement reimbursements
|
|
|
3,003 |
|
|
|
— |
|
|
|
— |
|
|
Changes in operating assets and liabilities
|
|
|
3,482 |
|
|
|
2,906 |
|
|
|
2,650 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(19,570 |
) |
|
|
(12,828 |
) |
|
|
(1,278 |
) |
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(9,006 |
) |
|
|
(3,119 |
) |
|
|
(562 |
) |
|
Purchases of marketable securities
|
|
|
(33,499 |
) |
|
|
— |
|
|
|
— |
|
|
Sales of marketable securities
|
|
|
7,725 |
|
|
|
— |
|
|
|
— |
|
|
Other
|
|
|
185 |
|
|
|
(121 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(34,595 |
) |
|
|
(3,240 |
) |
|
|
(562 |
) |
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of common stock
|
|
|
35,308 |
|
|
|
21 |
|
|
|
9 |
|
|
Issuances of preferred stock
|
|
|
10,000 |
|
|
|
27,459 |
|
|
|
17,336 |
|
|
Proceeds from debt
|
|
|
7,201 |
|
|
|
2,098 |
|
|
|
— |
|
|
Repayments of debt
|
|
|
(1,859 |
) |
|
|
(3,203 |
) |
|
|
— |
|
|
Changes in restricted cash
|
|
|
373 |
|
|
|
(2,667 |
) |
|
|
(19 |
) |
|
Deferred financing costs
|
|
|
(46 |
) |
|
|
— |
|
|
|
(9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
50,977 |
|
|
|
23,708 |
|
|
|
17,317 |
|
|
Effect of exchange rate on cash
|
|
|
267 |
|
|
|
76 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(2,921 |
) |
|
|
7,716 |
|
|
|
15,477 |
|
|
Cash and cash equivalents at beginning of year
|
|
|
23,193 |
|
|
|
15,477 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
20,272 |
|
|
$ |
23,193 |
|
|
$ |
15,477 |
|
| |
|
|
|
|
|
|
|
|
|
We commenced operations in June 2002. Since our inception, we
have generated significant losses. As of December 31, 2004,
we had an accumulated deficit of $63.0 million. As of
December 31, 2004, we had cash and cash equivalents and
marketable securities of $46.0 million, compared to cash
and cash equivalents of $23.2 million as of
December 31, 2003. We invest in cash equivalents,
U.S. government obligations, high-grade corporate notes and
commercial paper. Our investment objectives are primarily, to
assure liquidity and preservation of capital and, secondarily,
to obtain investment income. All of our investments in debt
securities are recorded at fair value. Fair value is determined
based on quoted market prices.
Since our inception, our use of cash in our operating activities
has increased each year. Our increased use of cash in our
operating activities is primarily due to increasing net losses
as a result of the growth in our research activities and the
expansion of our infrastructure through the addition of
technical personnel, management, new facilities and the
acquisition of intellectual property rights. Non-cash
adjustments to reconcile net loss to net cash used in operating
activities primarily consist of stock-based compensation,
47
depreciation and amortization and, in 2003, purchased in-process
research and development. Non-cash stock-based compensation has
increased due to the amortization of additional deferred
compensation recorded in connection with our issuance of stock
options and restricted stock. Depreciation expenses have
increased as a result of additional property and equipment we
have acquired to expand our research capacity and support the
growth of our infrastructure, mainly in our new facilities in
Cambridge, Massachusetts, which we moved into in April 2004. In
connection with our acquisition of Ribopharma AG, now Alnylam
Europe AG, we purchased intangible assets, which represent
acquired technology and the workforce of Alnylam Europe AG, and
in-process research and development, which represents the value
of certain research projects in process at the time of the
acquisition. We capitalized the intangible assets and are
amortizing them over their useful lives and expensed the value
of the in-process research and development, which was
$4.6 million, at the time of the acquisition. In addition,
changes in our operating assets and liabilities have offset our
net losses since our inception. The increase in these changes is
primarily due to higher accrued liabilities and the addition of
deferred revenue in 2003 and 2004 as a result of license
payments received from Merck under our collaboration agreements
with Merck. We are amortizing this deferred revenue over the
estimated period of performance under these agreements of six
years.
Our primary investing activities since our inception have been
purchases of property and equipment to expand our research
capacity and support the growth of our organization and, in
2004, purchases and sales of marketable securities. Our
purchases of property and equipment increased significantly in
2004 due to the expansion of our operations into new facilities
in Cambridge, Massachusetts in April 2004. In connection with
this expansion, we invested approximately $6.0 million in
leasehold improvements. In addition, in 2004 we began investing
the proceeds from our initial public offering and other equity
financing proceeds in marketable securities.
Since our inception, we have funded our operations primarily
through the sale of equity securities. Through December 31,
2004, we raised approximately $54.8 million in net proceeds
from the sale of redeemable convertible preferred stock and
approximately $35.3 million from the sale of common stock,
including $29.9 million from the sale of 5.75 million
shares of our common stock in our initial public offering, which
was completed in June 2004.
Certain of our sales of equity securities have been in
connection with our strategic collaboration and licensing
agreements. In connection with our March 2004 collaboration and
license agreement with Isis, Isis purchased
1,666,667 shares of our Series D preferred stock for
$10.0 million, in March 2004, which were converted into
877,193 shares of our common stock upon the closing of our
initial public offering in June 2004. In September 2003, we
entered into a collaboration and license agreement with Merck
for the development of RNAi-based technology and therapeutics.
In connection with this agreement, Merck purchased
1,000,000 shares of our Series C preferred stock for
$5.0 million, in September 2003, which were converted into
526,315 shares of our common stock upon the closing of our
initial public offering and 710,273 shares of our common
stock for $5.0 million in December 2004.
In addition to sales of equity securities, we have financed a
portion of our property and equipment purchases through the
establishment of equipment lines of credit. In December 2002, we
established a $2.5 million equipment line of credit under
which we drew down approximately $2.1 million in 2003, all
of which has been repaid.
On March 26, 2004, we entered into an equipment line of
credit with Lighthouse Capital Partners to finance equipment
purchases of up to $10.0 million. The borrowings bear
interest at 3% over the prime rate of interest plus an
additional 11.5% due at the end of the term of each borrowing.
We are required to make interest only payments on all draw-downs
through June 30, 2005, at which point all draw-downs under
the line of credit will be repaid over 48 months. The
borrowings are collateralized by the assets financed. At
48
December 31, 2004, we had an outstanding balance of
$7.2 million under this facility. The terms of the
Lighthouse agreement include covenants which limit our ability
to sell or transfer certain assets or businesses.
Based on our current operating plan, we believe that our
existing resources will be sufficient to fund our planned
operations through at least the end of 2006, during which time
we expect to extend the capabilities of our product engine,
further the development of products for the treatment of AMD,
RSV, PD, SCI and CF and continue to prosecute patent
applications and otherwise build and maintain our patent
portfolio. However, we may require significant additional funds
earlier than we currently expect in order to develop and
commence clinical trials for any product candidates we identify.
We expect to seek additional funding through collaborative
arrangements and public or private financings. Additional
funding may not be available to us on acceptable terms or at
all. In addition, the terms of any financing may adversely
affect the holdings or the rights of our stockholders. For
example, if we raise additional funds by issuing equity
securities, further dilution to our existing stockholders may
result. If we are unable to obtain funding on a timely basis, we
may be required to significantly curtail one or more of our
research or development programs. We also could be required to
seek funds through arrangements with collaborators or others
that may require us to relinquish rights to some of our
technologies or product candidates that we would otherwise
pursue.
Even if we are able to raise additional funds in a timely
manner, our future capital requirements may vary from what we
expect and will depend on many factors, including the following:
|
|
|
| |
• |
our progress in demonstrating that siRNAs can be active as drugs; |
| |
| |
• |
our ability to develop relatively standard procedures for
selecting and modifying siRNA drug candidates; |
| |
| |
• |
progress in our research and development programs, as well as
the magnitude of these programs; |
| |
| |
• |
the timing, receipt, and amount of milestone and other payments,
if any, from present and future collaborators, if any; |
| |
| |
• |
our ability to establish and maintain additional collaborative
arrangements; |
| |
| |
• |
the resources, time and costs required to successfully initiate
and complete our preclinical and clinical trials, obtain
regulatory approvals, protect our intellectual property and
obtain and maintain licenses to third-party intellectual
property; |
| |
| |
• |
the cost of preparing, filing, prosecuting, maintaining, and
enforcing patent claims; and |
| |
| |
• |
the timing, receipt and amount of sales and royalties, if any,
from our potential products. |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities.
Contractual Obligations and Commitments
Set forth below is a description of our contractual cash
obligations as of December 31, 2004, in thousands.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period | |
| |
|
| |
| |
|
|
|
2006 and | |
|
2008 and | |
|
After | |
|
|
| Contractual Obligations |
|
2005 | |
|
2007 | |
|
2009 | |
|
2009 | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Operating lease obligations
|
|
$ |
2,555 |
|
|
$ |
5,179 |
|
|
$ |
4,785 |
|
|
$ |
4,058 |
|
|
$ |
16,577 |
|
|
Short and long-term debt
|
|
|
1,301 |
|
|
|
6,240 |
|
|
|
1,868 |
|
|
|
— |
|
|
|
9,409 |
|
|
Fixed license payments
|
|
|
2,155 |
|
|
|
310 |
|
|
|
310 |
|
|
|
1,650 |
|
|
|
4,425 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$ |
6,011 |
|
|
$ |
11,729 |
|
|
$ |
6,963 |
|
|
$ |
5,708 |
|
|
$ |
30,411 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
We in-license technology from a number of sources. Pursuant to
these in-license agreements, we will be required to make
additional payments if and when we achieve specified development
and regulatory milestones. If we successfully commercialize
products that utilize technology licensed under these
agreements, we will be required to pay aggregate milestone
payments ranging from $0.3 million to $4.2 million per
product under each of these agreements in addition to fixed
license payments under these agreements included in the above
table.
On March 26, 2004, we entered into an equipment line of
credit with Lighthouse Capital Partners to finance equipment
purchases of up to $10.0 million. The borrowings bear
interest at 3% over the prime rate of interest plus an
additional 11.5% due at the end of the term of each borrowing.
We are required to make interest only payments on all draw-downs
through June 30, 2005, at which point all draw-downs under
the line of credit will be repaid over 48 months. The
borrowings are collateralized by the assets financed. At
December 31, 2004, we had an outstanding balance of
$7.2 million under this facility. The terms of the
Lighthouse agreement include covenants which limit our ability
to sell or transfer certain assets or businesses.
On March 26, 2004, we entered into an agreement with Perini
Building Company, Inc., or Perini, for the build out of our new
facility in Cambridge, Massachusetts. The contract contains a
guaranteed maximum price of $5.6 million, $5.0 million
of which was paid by us in 2004 and $0.3 million was paid
on our behalf directly to Perini by our landlord in 2004. These
payments represent payment in full through the completion of the
project. As part of the lease agreement that we entered into
with the landlord of this facility, the landlord agreed to
reimburse us for up to approximately $3.0 million of
certain of the costs of the tenant improvements. Through
December 31, 2004, we received approximately
$3.0 million from the landlord, which represent all of the
reimbursements due to us under the agreement. These
reimbursements have been recorded as long-term deferred rent in
our balance sheet and are being amortized against rent expense
over the remaining lease term.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment”, or FAS 123R, which
revises Statement of Financial Accounting Standard No. 123,
“Accounting for Stock-based Compensation” and
requires companies to expense the fair value of employee stock
options and other forms of stock-based compensation. Under
FAS 123R, the most significant change in practice would be
treating the fair value of stock based payment awards that are
within its scope as compensation expense in the income statement
beginning on the date that a company grants the awards to
employees. This pronouncement is effective for the first fiscal
period beginning after June 15, 2005. We are currently
assessing the impact that the adoption of this standard will
have on our financial position and results of operations.
In April 2004, the Emerging Issues Task Force, or EITF, issued
Statement No. 03-06, “Participating Securities and
the Two-Class Method Under Financial Accounting Standards
Board or FASB Statement No. 128, Earnings Per
Share.” EITF 03-06 addresses a number of questions
regarding the computation of earnings per share by a company
that has issued securities other than common stock that
contractually entitle the holder to the right to participate in
dividends when, and if, declared. The issue also provides
further guidance in applying the two-class method of calculating
earnings per share, clarifying the definition of a participating
security and how to apply the two-class method. EITF 03-06
was effective for fiscal periods beginning after March 31,
2004, which was our second quarter, and was required to be
retroactively applied. There was no impact from the adoption of
EITF 03-06 on our earnings per share as we have incurred
net operating losses during each period presented in the
consolidated financial statements and the effect would be
anti-dilutive.
50
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Risks Related to Our Business
Risks Related to Being an Early Stage Company
|
|
|
Because we have a short operating history, there is a
limited amount of information about us upon which you can
evaluate our business and prospects. |
Our operations began in June 2002 and we have only a limited
operating history upon which you can evaluate our business and
prospects. In addition, as an early stage company, we have
limited experience and have not yet demonstrated an ability to
successfully overcome many of the risks and uncertainties
frequently encountered by companies in new and rapidly evolving
fields, particularly in the biopharmaceutical area. For example,
to execute our business plan, we will need to successfully:
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execute product development activities using an unproven
technology; |
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build and maintain a strong intellectual property portfolio; |
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gain acceptance for the development and commercialization of our
products; |
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develop and maintain successful strategic relationships; and |
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manage our spending as costs and expenses increase due to
clinical trials, regulatory approvals and commercialization. |
If we are unsuccessful in accomplishing these objectives, we may
not be able to develop product candidates, raise capital, expand
our business or continue our operations.
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The approach we are taking to discover and develop novel
drugs is unproven and may never lead to marketable
products. |
We have concentrated our efforts and therapeutic product
research on RNAi technology, and our future success depends on
the successful development of this technology and products based
on RNAi technology. Neither we nor any other company has
received regulatory approval to market therapeutics utilizing
siRNAs. The scientific discoveries that form the basis for our
efforts to discover and develop new drugs are relatively new.
The scientific evidence to support the feasibility of developing
drugs based on these discoveries is both preliminary and
limited. Skepticism as to the feasibility of developing RNAi
therapeutics has been expressed in scientific literature. For
example, there are potential challenges to achieving safe RNAi
therapeutics based on the so-called off-target effects and
activation of the interferon response. There are also potential
challenges to achieving effective RNAi therapeutics based on the
need to achieve efficient delivery into cells and tissues in a
clinically relevant manner and at doses that are cost-effective.
Very few drug candidates based on these discoveries have ever
been tested in animals or humans. siRNAs, the class of molecule
we are trying to develop into drugs, do not naturally possess
the inherent properties typically required of drugs, such as the
ability to be stable in the body long enough to reach the
tissues in which their effects are required, nor the ability to
enter cells within these tissues in order to exert their
effects. We currently have only limited data, and no conclusive
evidence, to suggest that we can introduce these drug-like
properties into siRNAs. We may spend large amounts of money
trying to introduce these properties, and may never succeed in
doing so. In addition, these compounds may not demonstrate in
patients the chemical and pharmacological properties ascribed to
them in laboratory studies, and they may interact with human
biological systems in unforeseen, ineffective or harmful ways.
As a result, we may never succeed in developing a marketable
product. If we do not successfully develop and commercialize
drugs based upon our technological approach, we will not become
profitable and the value of our common stock will decline.
Further, our focus solely on RNAi technology for developing
drugs as opposed to multiple, more proven technologies for drug
development increases the risks associated with the ownership of
our common stock. If we are not successful in developing a
product candidate using RNAi technology, we may be required to
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change the scope and direction of our product development
activities. In that case, we may not be able to identify and
implement successfully an alternative product development
strategy.
Risks Related to Our Financial Results and Need for
Financing
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We have a history of losses and may never be
profitable. |
We have experienced significant operating losses since our
inception. As of December 31, 2004, we had an accumulated
deficit of $63.0 million. To date, we have not developed
any products nor generated any revenues from the sale of
products. Further, we do not expect to generate any such
revenues in the foreseeable future. We expect to continue to
incur annual net operating losses over the next several years as
we expand our efforts to discover, develop and commercialize
RNAi therapeutics. We anticipate that the majority of any
revenue we generate over the next several years will be from
collaborations with pharmaceutical companies, but cannot be
certain that we will be able to secure additional collaborations
or to meet the obligations or achieve any milestones that we may
be required to meet or achieve to receive payments. To date, our
collaboration and license agreements have provided us with
minimal revenue. If we are unable to secure revenue from
collaborations, we may be unable to continue our efforts to
discover, develop and commercialize RNAi therapeutics without
raising financing from other sources.
To become and remain profitable, we must succeed in developing
and commercializing novel drugs with significant market
potential. This will require us to be successful in a range of
challenging activities that we have yet to perform, including
preclinical testing and clinical trial stages of development,
obtaining regulatory approval for these novel drugs, and
manufacturing, marketing and selling them. We may never succeed
in these activities, and may never generate revenues that are
significant enough to achieve profitability. Even if we do
achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis. If we cannot
become and remain profitable, the market price of our common
stock could decline. In addition, we may be unable to raise
capital, expand our business, diversify our product offerings or
continue our operations.
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We will require substantial additional funds to complete
our research and development activities and if additional funds
are not available we may need to critically limit, significantly
scale back or cease our operations. |
We have used substantial funds to develop our RNAi technologies
and will require substantial funds to conduct further research
and development, including preclinical testing and clinical
trials of any product candidates, and to manufacture and market
any products that are approved for commercial sale. Because the
successful development of our products is uncertain, we are
unable to estimate the actual funds we will require to develop
and commercialize them.
Our future capital requirements and the period for which we
expect the net proceeds from our initial public offering and our
existing resources to support our operations may vary from what
we expect. We have based our expectations on a number of
factors, many of which are difficult to predict or are outside
of our control, including:
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our progress in demonstrating that siRNAs can be active as drugs; |
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our ability to develop relatively standard procedures for
selecting and modifying siRNA drug candidates; |
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progress in our research and development programs, as well as
the magnitude of these programs; |
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the timing, receipt, and amount of milestone and other payments,
if any, from present and future collaborators, if any; |
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our ability to establish and maintain additional collaborative
arrangements; |
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the resources, time and costs required to initiate and complete
our preclinical and clinical trials, obtain regulatory
approvals, protect our intellectual property and obtain and
maintain licenses to third-party intellectual property; and |
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the timing, receipt and amount of sales and royalties, if any,
from our potential products. |
If our estimates and predictions relating to these factors are
incorrect, we may need to modify our operating plan.
We will be required to seek additional funding in the future and
intend to do so through collaborative arrangements and public or
private equity offerings and debt financings. Additional funds
may not be available to us on acceptable terms or at all. In
addition, the terms of any financing may adversely affect the
holdings or the rights of our stockholders. For example, if we
raise additional funds by issuing equity securities, further
dilution to our stockholders will result. Debt financing, if
available, may involve restrictive covenants that could limit
our flexibility in conducting future business activities. If we
are unable to obtain funding on a timely basis, we may be
required to significantly curtail one or more of our research or
development programs. We also could be required to seek funds
through arrangements with collaborators or others that may
require us to relinquish rights to some of our technologies,
product candidates or products that we would otherwise pursue on
our own.
Risks Related to Our Dependence on Third Parties
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We may not be able to execute our business strategy if we
are unable to enter into alliances with other companies that can
provide capabilities and funds for the development and
commercialization of our drug candidates. If we are unsuccessful
in forming or maintaining these alliances on favorable terms,
our business may not succeed. |
We do not have any capability for sales, marketing or
distribution and have limited capabilities for drug development.
Accordingly, we must enter into alliances with other companies
that can provide such capabilities. For example, we may enter
into alliances with major pharmaceutical companies to jointly
develop specific drug candidates and to jointly commercialize
them if they are approved. In such alliances, we would expect
our pharmaceutical collaborators to provide substantial
capabilities in clinical development, regulatory affairs,
marketing and sales. We may not be successful in entering into
any additional alliances on favorable terms. Even if we do
succeed in securing such alliances, we may not be able to
maintain them if, for example, development or approval of a drug
candidate is delayed or sales of an approved drug are
disappointing. Furthermore, any delay in entering into
collaboration agreements could delay the development and
commercialization of our drug candidates and reduce their
competitiveness even if they reach the market. Any such delay
related to our collaborations could adversely affect our
business.
In addition, we expect that we will need to enter into alliances
with other companies to provide substantial additional cash for
development and potential commercialization of our drug
candidates. We entered into a collaboration agreement with Merck
in September 2003, under which Merck may elect to pay a portion
of the costs to develop and market certain drug candidates that
we may initially develop based on information and materials
provided by Merck. Merck is under no obligation to pay any of
the development and commercialization costs for any of these
drug candidates, and they may elect not to do so. For drug
candidates from our Merck collaboration that Merck does not
elect to fund, and for drug candidates we may develop outside of
this collaboration, we expect to seek additional collaborations
with other pharmaceutical companies to fund all or part of the
costs of drug development and commercialization, such as the
second collaboration and license agreement we entered into with
Merck for ocular disease, including our current VEGF program. We
may not, however, be able to enter into additional
collaborations, and the terms of any collaboration agreement we
do secure may not be favorable to us. If we are not successful
in our efforts to enter into future collaboration arrangements
with respect to a particular drug candidate, we may not have
sufficient funds to develop this or any other drug candidate
internally, or to bring any drug candidates to market. If we do
not have sufficient funds to develop and bring our drug
candidates to market, we will not be able to generate sales
revenues from these drug candidates, and this will substantially
harm our business.
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Our collaboration with Medtronic was established to pursue
development of drug-device combinations incorporating RNAi
therapeutics. We will engage in a joint technology development
program for two years. After completion of this initial two-year
period, we and Medtronic must jointly determine whether to
initiate product development. Neither party is obligated to do
so. We may not be successful in the joint technology development
program, in initiating any product development under our
collaboration with Medtronic, or in completing any such product
development.
Our collaboration with CFFT was established to research the
potential development of RNAi-based therapeutics for the
treatment of CF. Under this collaboration, CFFT will provide us
with funding and scientific guidance to assist in our efforts to
develop siRNAs for evaluation as potential therapeutic
treatments for CF. The funding by CFFT is comprised of an
up-front payment and milestone payments upon our successful
achievement of certain scientific milestones, as defined by the
agreement. We may not be successful in meeting the defined
milestones and receiving the associated milestone payments.
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If any collaborator terminates or fails to perform its
obligations under agreements with us, the development and
commercialization of our drug candidates could be delayed or
terminated. |
Our expected dependence on collaborators for capabilities and
funding means that our business would be adversely affected if
any collaborator terminates its collaboration agreement with us
or fails to perform its obligations under that agreement. Our
current or future collaborations, if any, may not be
scientifically or commercially successful. Disputes may arise in
the future with respect to the ownership of rights to technology
or products developed with collaborators, which could have an
adverse effect on our ability to develop and commercialize any
affected product candidate.
Our current collaborations allow, and we expect that any future
collaborations will allow, either party to terminate the
collaboration for a material breach by the other party. In some
of our current collaborations, other circumstances are also
defined that would permit one or the other party, or either
party, to terminate the collaboration. If a collaborator
terminates its collaboration with us, for breach or otherwise,
it would be difficult for us to attract new collaborators and
could adversely affect how we are perceived in the business and
financial communities. In addition, a collaborator could
determine that it is in its financial interest to:
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pursue alternative technologies or develop alternative products,
either on its own or jointly with others, that may be
competitive with the products on which it is collaborating with
us or which could affect its commitment to the collaboration
with us; |
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pursue higher-priority programs or change the focus of its
development programs, which could affect the collaborator’s
commitment to us; or |
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if it has marketing rights, choose to devote fewer resources to
the marketing of our product candidates, if any are approved for
marketing, than it does for product candidates of its own
development. |
If any of these occur, the development and commercialization of
one or more drug candidates could be delayed, curtailed or
terminated because we may not have sufficient financial
resources or capabilities to continue such development and
commercialization on our own.
In addition, we have entered into a research collaboration
agreement with the Mayo Foundation for Medical Education and
Research and the Mayo Clinic Jacksonville, which we refer to
collectively as the Mayo Clinic, in connection with our PD
program and we may enter into similar agreements in the future.
Either party may terminate this research collaboration agreement
upon a breach by the other party. The agreement provides us with
an option to acquire an exclusive license to any intellectual
property or inventions developed in connection with the
collaboration. However, in order to secure any such license, we
and the Mayo Clinic must agree on terms within 90 days of
the exercise of the option. We may not be able to enter into any
such license on reasonable terms, if at all.
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We have no manufacturing experience or resources and we
must incur significant costs to develop this expertise or rely
on third parties to manufacture our products. |
We have no manufacturing experience. In order to develop
products, apply for regulatory approvals and commercialize our
products, we will need to develop, contract for, or otherwise
arrange for the necessary manufacturing capabilities. We may
manufacture clinical trial materials ourselves or we may rely on
others to manufacture the materials we will require for any
clinical trials that we initiate. Only a limited number of
manufacturers can supply synthetic RNAi. We have contracted with
Dowpharma, a division of The Dow Chemical Company, for supply of
certain amounts of material to meet our testing needs for future
toxicology and clinical testing. There are risks inherent in
pharmaceutical manufacturing that could affect Dowpharma’s
ability to meet our delivery time requirements or provide
adequate amounts of material to meet our needs. Included in
these risks are synthesis failures and contamination during the
manufacturing process, both of which could result in unusable
product and cause delays in our development process. The
manufacturing process for any products that we may develop is an
element of the FDA approval process and we will need to contract
with manufacturers who can meet the FDA requirements on an
ongoing basis. In addition, if we receive the necessary
regulatory approval for any product candidate, we also expect to
rely on third parties, including our collaborators, to produce
materials required for commercial production. We may experience
difficulty in obtaining adequate manufacturing capacity for our
needs. If we are unable to obtain or maintain contract
manufacturing for these product candidates, or to do so on
commercially reasonable terms, we may not be able to
successfully develop and commercialize our products.
To the extent that we enter into manufacturing arrangements with
third parties, we will depend on these third parties to perform
their obligations in a timely manner and consistent with
regulatory requirements. The failure of a third-party
manufacturer to perform its obligations as expected could
adversely affect our business in a number of ways, including:
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we may not be able to initiate or continue clinical trials of
products that are under development; |
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we may be delayed in submitting applications for regulatory
approvals for our products; |
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we may lose the cooperation of our collaborators; |
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we may be required to cease distribution or recall some or all
batches of our products; and |
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ultimately, we may not be able to meet commercial demands for
our products. |
If a third-party manufacturer with whom we contract fails to
perform its obligations, we may be forced to manufacture the
materials ourselves, for which we may not have the capabilities
or resources, or enter into an agreement with a different
third-party manufacturer, which we may not be able to do on
reasonable terms, if at all. In addition, if we are required to
change manufacturers for any reason, we will be required to
verify that the new manufacturer maintains facilities and
procedures that comply with quality standards and with all
applicable regulations and guidelines. The delays associated
with the verification of a new manufacturer could negatively
affect our ability to develop product candidates in a timely
manner or within budget. Furthermore, a manufacturer may possess
technology related to the manufacture of our product candidate
that such manufacturer owns independently. This would increase
our reliance on such manufacturer or require us to obtain a
license from such manufacturer in order to have another third
party manufacture our products.
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We have no sales, marketing or distribution experience and
expect to depend significantly on third parties who may not
successfully commercialize our products. |
We have no sales, marketing or distribution experience. We
expect to rely heavily on third parties to launch and market
certain of our product candidates, if approved. We may have
limited or no control over the sales, marketing and distribution
activities of these third parties. Our future revenues may
depend heavily on the success of the efforts of these third
parties.
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To develop internal sales, distribution and marketing
capabilities, we will have to invest significant amounts of
financial and management resources. For products where we decide
to perform sales, marketing and distribution functions
ourselves, we could face a number of additional risks, including:
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we may not be able to attract and build a significant marketing
or sales force; |
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the cost of establishing a marketing or sales force may not be
justifiable in light of the revenues generated by any particular
product; and |
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our direct sales and marketing efforts may not be successful. |
Risks Related to Managing Our Operations
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If we are unable to attract and retain qualified key
management and scientists, staff consultants and advisors, our
ability to implement our business plan may be adversely
affected. |
We are highly dependent upon our senior management and
scientific staff. The loss of the service of any of the members
of our senior management, including Dr. John Maraganore,
our President and Chief Executive Officer, may significantly
delay or prevent the achievement of product development and
other business objectives. Our employment agreements with our
key personnel are terminable without notice. We do not carry key
man life insurance on any of our key employees.
Although we have generally been successful in our recruiting
efforts, we face intense competition for qualified individuals
from numerous pharmaceutical and biotechnology companies,
universities, governmental entities and other research
institutions. We may be unable to attract and retain suitably
qualified individuals, and our failure to do so could have an
adverse effect on our ability to implement our business plan.
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We may have difficulty managing our growth and expanding
our operations successfully as we seek to evolve from a company
primarily involved in discovery and preclinical testing into one
that develops and commercializes drugs. |
Since we commenced operations in 2002, we have grown rapidly to
over 70 full time employees, with offices and laboratory space
in both Cambridge, Massachusetts and Kulmbach, Germany. This
rapid and substantial growth, and the geographical separation of
our sites, has placed a strain on our administrative and
operational infrastructure, and we anticipate that our continued
growth will have a similar impact. If drug candidates we develop
enter and advance through clinical trials, we will need to
expand our development, regulatory, manufacturing, marketing and
sales capabilities or contract with other organizations to
provide these capabilities for us. As our operations expand, we
expect that we will need to manage additional relationships with
various collaborators, suppliers and other organizations. Our
ability to manage our operations and growth will require us to
continue to improve our operational, financial and management
controls, reporting systems and procedures in at least two
different countries. We may not be able to implement
improvements to our management information and control systems
in an efficient or timely manner and may discover deficiencies
in existing systems and controls.
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If we are unable to manage the challenges associated with
our international operations, the growth of our business could
be limited. |
In addition to our operations in Cambridge, Massachusetts, we
operate an office and laboratory in Kulmbach, Germany. We are
subject to a number of risks and challenges that specifically
relate to these international operations. Our international
operations may not be successful if we are unable to meet and
overcome these challenges, which could limit the growth of our
business and may have an adverse effect on our business and
operating results. These risks include:
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fluctuations in foreign currency exchange rates that may
increase the U.S. dollar cost of our international
operations; |
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difficulty managing operations in multiple locations, which
could adversely affect the progress of our product candidate
development program and business prospects; |
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local regulations that may restrict or impair our ability to
conduct biotechnology-based research and development; |
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foreign protectionist laws and business practices that favor
local competition; and |
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failure of local laws to provide the same degree of protection
against infringement of our intellectual property, which could
adversely affect our ability to develop product candidates or
reduce future product or royalty revenues, if any, from product
candidates we may develop. |
Risks Related to Our Industry
Risks Related to Development, Clinical Testing and Regulatory
Approval of Our Drug Candidates
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Any drug candidates we develop may fail in development or
be delayed so much that they do not become commercially
viable. |
Preclinical testing and clinical trials of new drug candidates
are lengthy and expensive and the historical failure rate for
drug candidates is high. We may not be able to advance any
product candidates into clinical trials. Even if we do
successfully enter into clinical studies, the results from
preclinical testing of a drug candidate may not predict the
results that will be obtained in human clinical trials. We, the
FDA or other applicable regulatory authorities may suspend
clinical trials of a drug candidate at any time if we or they
believe the subjects or patients participating in such trials
are being exposed to unacceptable health risks, or for other
reasons. Among other reasons, adverse side effects of a drug
candidate on subjects or patients in a clinical trial could
result in the FDA or foreign regulatory authorities suspending
or terminating the trial and refusing to approve a particular
drug candidate for any or all indications of use.
Clinical trials of a new drug candidate require the enrollment
of a sufficient number of patients, including patients who are
suffering from the disease the drug candidate is intended to
treat and who meet other eligibility criteria. Rates of patient
enrollment are affected by many factors, including the size of
the patient population, the nature of the protocol, the
proximity of patients to clinical sites, the availability of
effective treatments for the relevant disease and the
eligibility criteria for the clinical trial. Delays in patient
enrollment can result in increased costs and longer development
times.
Clinical trials also require the review and oversight of
institutional review boards, referred to as IRBs, which approve
and continually review clinical investigations and protect the
rights and welfare of human subjects. Inability to obtain or
delay in obtaining IRB approval can prevent or delay the
initiation and completion of clinical trials, and the FDA may
decide not to consider any data or information derived from a
clinical investigation not subject to initial and continuing IRB
review and approval in support of a marketing application.
Our drug candidates that we develop may encounter problems
during clinical trials that will cause us or regulatory
authorities to delay or suspend these trials, or that will delay
the analysis of data from these trials. If we experience any
such problems, we may not have the financial resources to
continue development of the drug candidate that is affected, or
development of any of our other drug candidates. We may also
lose, or be unable to enter into, collaborative arrangements for
the affected drug candidate and for other drug candidates we are
developing.
Delays in clinical trials could reduce the commercial viability
of our drug candidates. Any of the following could delay our
clinical trials:
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discussions with the FDA or comparable foreign authorities
regarding the scope or design of our clinical trials; |
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problems in engaging IRBs to oversee trials or problems in
obtaining IRB approval of studies; |
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delays in enrolling patients and volunteers into clinical trials; |
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high drop-out rates for patients and volunteers in clinical
trials; |
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negative results of clinical trials; |
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inadequate supply or quality of drug candidate materials or
other materials necessary for the conduct of our clinical trials; |
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serious and unexpected drug-related side effects experienced by
participants in our clinical trials; or |
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unfavorable FDA inspection and review of a clinical trial site
or records of any clinical or preclinical investigation. |
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The FDA approval process may be delayed for any drugs we
develop that require the use of specialized drug delivery
devices. |
Some drug candidates that we develop may need to be administered
using specialized drug delivery devices. We believe that any
product candidate we develop for PD, or other central nervous
system diseases will need to be administered using such a
device. For neurodegenerative diseases, we have entered into a
collaboration agreement with Medtronic to pursue potential
development of drug-device combinations incorporating RNAi
therapeutics. We may not achieve successful development results
under this collaboration and may need to seek other
collaboration partners to develop alternative drug delivery
systems, or utilize existing drug delivery systems, for the
delivery of Direct RNAi therapeutics for these diseases. While
we expect to rely on drug delivery systems that have been
approved by the FDA or other regulatory agencies to deliver
drugs like ours to similar physiological sites, we, or our
collaborator, may need to modify the design or labeling of such
delivery device for some products we may develop. In such an
event, the FDA may regulate the product as a combination product
or require additional approvals or clearances for the modified
delivery device. Further, to the extent the specialized delivery
device is owned by another company, we would need that
company’s cooperation to implement the necessary changes to
the device, or its labeling, and to obtain any additional
approvals or clearances. In cases where we do not have an
ongoing collaboration with the company that makes the device,
obtaining such additional approvals or clearances and the
cooperation of such other company could significantly delay and
increase the cost of obtaining marketing approval, which could
reduce the commercial viability of our drug candidate. In
summary, we may be unable to find, or experience delays in
finding, suitable drug delivery systems to administer Direct
RNAi therapeutics, which could negatively affect our ability to
successfully commercialize certain Direct RNAi therapeutics.
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We may be unable to obtain U.S. or foreign regulatory
approval and, as a result, be unable to commercialize our drug
candidates. |
Our drug candidates are subject to extensive governmental
regulations relating to development, clinical trials,
manufacturing and commercialization. Rigorous preclinical
testing and clinical trials and an extensive regulatory approval
process are required to be successfully completed in the United
States and in many foreign jurisdictions before a new drug can
be sold. Satisfaction of these and other regulatory requirements
is costly, time consuming, uncertain and subject to
unanticipated delays. It is possible that none of the drug
candidates we may develop will obtain the appropriate regulatory
approvals necessary for us or our collaborators to begin selling
them.
We have no experience in conducting and managing the clinical
trials necessary to obtain regulatory approvals, including
approval by the FDA. The time required to obtain FDA and other
approvals is unpredictable but typically exceeds five years
following the commencement of clinical trials, depending upon
the complexity of the drug candidate. Any analysis we perform of
data from preclinical and clinical activities is subject to
confirmation and interpretation by regulatory authorities, which
could delay, limit or prevent regulatory approval. We may also
encounter unexpected delays or increased costs due to new
government regulations, for example, from future legislation or
administrative action, or from changes in FDA policy during the
period of product development, clinical trials and FDA
regulatory review.
Because the drugs we are intending to develop may represent a
new class of drug, the FDA has not yet established any
definitive policies, practices or guidelines in relation to
these drugs. While we expect any AMD, RSV, PD or SCI product
candidates we develop will be regulated as a new drug under the
Federal
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Food, Drug, and Cosmetic Act, the FDA could decide to regulate
them or other products we may develop as biologics under the
Public Health Service Act. The lack of definitive policies,
practices or guidelines may hinder or slow review by the FDA of
any regulatory filings that we may submit. Moreover, the FDA may
respond to these submissions by defining requirements we may not
have anticipated. Such responses could lead to significant
delays in the clinical development of our product candidates. In
addition, because there are approved treatments for AMD, RSV and
PD, in order to receive regulatory approval, we will need to
demonstrate through clinical trials that the product candidates
we develop to treat these diseases, if any, are not only safe
and effective, but safer or more effective than existing
products.
Any delay or failure in obtaining required approvals could have
a material adverse effect on our ability to generate revenues
from the particular drug candidate. Furthermore, any regulatory
approval to market a product may be subject to limitations on
the indicated uses for which we may market the product. These
limitations may limit the size of the market for the product.
We are also subject to numerous foreign regulatory requirements
governing the conduct of clinical trials, manufacturing and
marketing authorization, pricing and third-party reimbursement.
The foreign regulatory approval process includes all of the
risks associated with FDA approval described above as well as
risks attributable to the satisfaction of local regulations in
foreign jurisdictions. Approval by the FDA does not assure
approval by regulatory authorities outside the United States.
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Even if we obtain regulatory approvals, our marketed drugs
will be subject to ongoing regulatory review. If we fail to
comply with continuing U.S. and foreign regulations, we could
lose our approvals to market drugs and our business would be
seriously harmed. |
Following any initial regulatory approval of any drugs we may
develop, we will also be subject to continuing regulatory
review, including the review of adverse drug experiences and
clinical results that are reported after our drug products are
made commercially available. This would include results from any
post-marketing tests or vigilance required as a condition of
approval. The manufacturer and manufacturing facilities we use
to make any of our drug candidates will also be subject to
periodic review and inspection by the FDA. The discovery of any
previously unknown problems with the product, manufacturer or
facility may result in restrictions on the drug or manufacturer
or facility, including withdrawal of the drug from the market.
We do not have, and may not develop, the ability to manufacture
material on a commercial scale. We may manufacture clinical
trial materials or we may contract a third-party to manufacture
these materials for us. Reliance on third-party manufacturers
entails risks to which we would not be subject if we
manufactured products ourselves, including reliance on the
third-party manufacturer for regulatory compliance. Our product
promotion and advertising is also subject to regulatory
requirements and continuing FDA review.
If we fail to comply with applicable continuing regulatory
requirements, we may be subject to fines, suspension or
withdrawal of regulatory approval, product recalls and seizures,
operating restrictions and criminal prosecutions.
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Even if we receive regulatory approval to market our
product candidates, the market may not be receptive to our
product candidates upon their commercial introduction, which
will prevent us from becoming profitable. |
The product candidates that we are developing are based upon new
technologies or therapeutic approaches. Key participants in
pharmaceutical marketplaces, such as physicians, third-party
payors and consumers, may not accept a product intended to
improve therapeutic results based on RNAi technology. As a
result, it may be more difficult for us to convince the medical
community and third-party payors to accept and use our products.
Other factors that we believe will materially affect market
acceptance of our product candidates include:
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the timing of our receipt of any marketing approvals, the terms
of any approvals and the countries in which approvals are
obtained; |
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the safety, efficacy and ease of administration; |
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the willingness of patients to accept relatively new routes of
administration such as injection into the eye; |
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the success of our physician education programs; |
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the availability of government and third-party payor
reimbursement; |
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the pricing of our products, particularly as compared to
alternative treatments; and |
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the availability of alternative effective treatments for the
diseases that product candidates we develop are intended to
treat. |
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If we or our collaborators, manufacturers or service
providers fail to comply with regulatory laws and regulations,
we or they could be subject to enforcement actions, which could
affect our ability to market and sell our products and may harm
our reputation. |
If we or our collaborators, manufacturers or service providers
fail to comply with applicable federal, state or foreign laws or
regulations, we could be subject to enforcement actions, which
could affect our ability to develop, market and sell our
products under development successfully and could harm our
reputation and lead to reduced acceptance of our products by the
market. These enforcement actions could include:
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warning letters; |
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recalls or public notification or medical product safety alerts; |
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restrictions on, or prohibitions against, marketing our products; |
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restrictions on importation of our products; |
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suspension of review or refusal to approve pending applications; |
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suspension or withdrawal of product approvals; |
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product seizures; |
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injunctions; and |
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civil and criminal penalties and fines. |
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Any drugs we develop may become subject to unfavorable
pricing regulations, third-party reimbursement practices or
healthcare reform initiatives, thereby harming our
business. |
The regulations that govern marketing approvals, pricing and
reimbursement for new drugs vary widely from country to country.
Some countries require approval of the sale price of a drug
before it can be marketed. In many countries, the pricing review
period begins after marketing or product licensing approval is
granted. In some foreign markets, prescription pharmaceutical
pricing remains subject to continuing governmental control even
after initial approval is granted. Although we intend to monitor
these regulations, our programs are currently in the early
stages of development and we will not be able to assess the
impact of price regulations for a number of years. As a result,
we might obtain regulatory approval for a product in a
particular country, but then be subject to price regulations
that delay our commercial launch of the product and negatively
impact the revenues we are able to generate from the sale of the
product in that country.
Our ability to commercialize any products successfully also will
depend in part on the extent to which reimbursement for these
products and related treatments will be available from
government health administration authorities, private health
insurers and other organizations. Even if we succeed in bringing
one or more products to the market, these products may not be
considered cost-effective, and the amount reimbursed for any
products may be insufficient to allow us to sell our products on
a competitive basis. Because our programs are in the early
stages of development, we are unable at this time to determine
their cost effectiveness and the level or method of
reimbursement. Increasingly, the third-party payors who
reimburse patients, such as government and private insurance
plans, are requiring that drug companies provide them with
predetermined discounts from list prices, and are challenging
the prices charged for medical products. If the price we are able
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to charge for any products we develop is inadequate in light of
our development and other costs, our profitability could be
adversely affected.
We currently expect that any drugs we develop may need to be
administered under the supervision of a physician. Under
currently applicable law, drugs that are not usually
self-administered may be eligible for coverage by the Medicare
program if:
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they are incident to a physician’s services; |
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they are “reasonable and necessary” for the diagnosis
or treatment of the illness or injury for which they are
administered according to accepted standard of medical practice; |
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they are not excluded as immunizations; and |
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they have been approved by the FDA. |
There may be significant delays in obtaining coverage for
newly-approved drugs, and coverage may be more limited than the
purposes for which the drug is approved by the FDA. Moreover,
eligibility for coverage does not imply that any drug will be
reimbursed in all cases or at a rate that covers our costs,
including research, development, manufacture, sale and
distribution. Interim payments for new drugs, if applicable, may
also not be sufficient to cover our costs and may not be made
permanent. Reimbursement may be based on payments allowed for
lower-cost drugs that are already reimbursed, may be
incorporated into existing payments for other services and may
reflect budgetary constraints or imperfections in Medicare data.
Net prices for drugs may be reduced by mandatory discounts or
rebates required by government health care programs or private
payors and by any future relaxation of laws that presently
restrict imports of drugs from countries where they may be sold
at lower prices than in the United States. Third party payors
often rely upon Medicare coverage policy and payment limitations
in setting their own reimbursement rates. Our inability to
promptly obtain coverage and profitable reimbursement rates from
both government-funded and private payors for new drugs that we
develop could have a material adverse effect on our operating
results, our ability to raise capital needed to commercialize
products, and our overall financial condition.
We believe that the efforts of governments and third-party
payors to contain or reduce the cost of healthcare will continue
to affect the business and financial condition of pharmaceutical
and biopharmaceutical companies. A number of legislative and
regulatory proposals to change the healthcare system in the
United States and other major healthcare markets have been
proposed in recent years. These proposals have included
prescription drug benefit legislation recently enacted in the
United States and healthcare reform legislation recently enacted
by certain states. Further federal and state legislative and
regulatory developments are possible and we expect ongoing
initiatives in the United States to increase pressure on drug
pricing. Such reforms could have an adverse effect on
anticipated revenues from drug candidates that we may
successfully develop.
Another development that may affect the pricing of drugs is
Congressional action regarding drug reimportation into the
United States. The Medicare Prescription Drug Plan legislation,
which became law in December 2003, requires the Secretary of
Health and Human Services to promulgate regulations for drug
reimportation from Canada into the United States under some
circumstances, including when the drugs are sold at a lower
price than in the United States. The Secretary retains the
discretion not to implement a drug reimportation plan if he
finds that the benefits do not outweigh the cost. Proponents of
drug reimportation may attempt to pass legislation that would
directly allow reimportation under certain circumstances. If
legislation or regulations were passed allowing the
reimportation of drugs, they could decrease the price we receive
for any products that we may develop, negatively affecting our
anticipated revenues and prospects for profitability.
Some states and localities have established drug importation
programs for their citizens. So far, these programs have not led
to a large proportion of prescription orders to be placed for
foreign purchase. The FDA has warned that importing drugs is
illegal and in December 2004 began to take action to halt the
use of these programs by filing a civil complaint against an
importer of foreign prescription drugs. If such programs were to
become more substantial and were not to be encumbered by the
federal government, they could also decrease
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the price we receive for any products that we may develop,
negatively affecting our anticipated revenues and prospects for
profitability.
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There is a substantial risk of product liability claims in
our business. If we are unable to obtain sufficient insurance, a
product liability claim against us could adversely affect our
business. |
Our business exposes us to significant potential product
liability risks that are inherent in the development,
manufacturing and marketing of human therapeutic products.
Product liability claims could delay or prevent completion of
our clinical development programs. If we succeed in marketing
products, such claims could result in an FDA investigation of
the safety and effectiveness of our products, our manufacturing
processes and facilities or our marketing programs, and
potentially a recall of our products or more serious enforcement
action, or limitations on the indications for which they may be
used, or suspension or withdrawal of approval. We currently do
not have any product liability insurance, but plan to obtain
such insurance at appropriate levels prior to initiating
clinical trials and at higher levels prior to marketing any of
our drug candidates. Any insurance we obtain may not provide
sufficient coverage against potential liabilities. Furthermore,
clinical trial and product liability insurance is becoming
increasingly expensive. As a result, we may be unable to obtain
sufficient insurance at a reasonable cost to protect us against
losses caused by product liability claims that could have a
material adverse effect on our business.
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If we do not comply with laws regulating the protection of
the environment and health and human safety, our business could
be adversely affected. |
Our research and development involves the use of hazardous
materials, chemicals and various radioactive compounds. We
maintain quantities of various flammable and toxic chemicals in
our facilities in Cambridge and Germany that are required for
our research and development activities. We believe our
procedures for storing, handling and disposing these materials
in our Cambridge facility comply with the relevant guidelines of
the City of Cambridge and the Commonwealth of Massachusetts and
the procedures we employ in our German facility comply with the
standards mandated by applicable German laws and guidelines.
Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards mandated
by applicable regulations, the risk of accidental contamination
or injury from these materials cannot be eliminated. If an
accident occurs, we could be held liable for resulting damages,
which could be substantial. We are also subject to numerous
environmental, health and workplace safety laws and regulations,
including those governing laboratory procedures, exposure to
blood-borne pathogens and the handling of biohazardous materials.
Although we maintain workers’ compensation insurance to
cover us for costs and expenses we may incur due to injuries to
our employees resulting from the use of these materials, this
insurance may not provide adequate coverage against potential
liabilities. We do not maintain insurance for environmental
liability or toxic tort claims that may be asserted against us
in connection with our storage or disposal of biological,
hazardous or radioactive materials. Additional federal, state
and local laws and regulations affecting our operations may be
adopted in the future. We may incur substantial costs to comply
with, and substantial fines or penalties if we violate, any of
these laws or regulations.
Risks Related to Competition
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The pharmaceutical market is intensely competitive. If we
are unable to compete effectively with existing drugs, new
treatment methods and new technologies, we may be unable to
commercialize any drugs that we develop. |
The pharmaceutical market is intensely competitive and rapidly
changing. Many large pharmaceutical and biotechnology companies,
academic institutions, governmental agencies and other public
and private research organizations are pursuing the development
of novel drugs for the same diseases that we are targeting or
expect to target. Many of our competitors have:
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much greater financial, technical and human resources than we
have at every stage of the discovery, development, manufacture
and commercialization of products; |
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more extensive experience in preclinical testing, conducting
clinical trials, obtaining regulatory approvals, and in
manufacturing and marketing pharmaceutical products; |
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product candidates that are based on previously tested or
accepted technologies; |
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products that have been approved or are in late stages of
development; and |
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collaborative arrangements in our target markets with leading
companies and research institutions. |
We will face intense competition from drugs that have already
been approved and accepted by the medical community for the
treatment of the conditions for which we may develop drugs. We
also expect to face competition from new drugs that enter the
market. We believe a significant number of drugs are currently
under development, and may become commercially available in the
future, for the treatment of conditions for which we may try to
develop drugs. For instance, we are currently evaluating RNAi
therapeutics to suppress VEGF gene activity as a potential drug
candidate for the treatment of wet AMD and we are currently
evaluating the potential of RNAi therapeutics for the treatment
of RSV, PD and CF. Two drugs, Visudyne and Macugen, are already
marketed for the treatment of wet AMD, Virazole is currently
marketed for the treatment of certain RSV patients, numerous
drugs are currently marketed for the treatment of PD and two
drugs, TOBI and Pulmozyme, are currently marketed for the
treatment of CF. In addition, we are aware of a number of
experimental drugs for the treatment of wet AMD that, unlike our
product candidate, are in advanced stages of clinical
development. These experimental drugs include Lucentis, which is
being developed by Genentech, Inc. in collaboration with
Novartis. These drug candidates may be approved for marketing
before our product candidate receives approval. Furthermore, our
competitors’ products may be more effective, or marketed
and sold more effectively, than any products we develop.
If we successfully develop drug candidates, and obtain approval
for them, we will face competition based on many different
factors, including:
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the safety and effectiveness of our products; |
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the ease with which our products can be administered and the
extent to which patients accept relatively new routes of
administration, such as injection into the eye; |
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the timing and scope of regulatory approvals for these products; |
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the availability and cost of manufacturing, marketing and sales
capabilities; |
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price; |
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reimbursement coverage; and |
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patent position. |
Our competitors may develop or commercialize products with
significant advantages over any products we develop based on any
of the factors listed above or on other factors. Our competitors
may therefore be more successful in commercializing their
products than we are, which could adversely affect our
competitive position and business. Competitive products may make
any products we develop obsolete or noncompetitive before we can
recover the expenses of developing and commercializing our drug
candidates. Furthermore, we also face competition from existing
and new treatment methods that reduce or eliminate the need for
drugs, such as the use of advanced medical devices. The
development of new medical devices or other treatment methods
for the diseases we are targeting could make our drug candidates
noncompetitive, obsolete or uneconomical.
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We face competition from other companies that are working
to develop novel drugs using technology similar to ours. If
these companies develop drugs more rapidly than we do or their
technologies are more effective, our ability to successfully
commercialize drugs will be adversely affected. |
In addition to the competition we face from competing drugs in
general, we also face competition from other companies working
to develop novel drugs using technology that competes more
directly with our own. We are aware of several other companies
that are working in the field of RNAi, including Sirna
Therapeutics,
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Inc., Acuity Pharmaceuticals, Inc., Nucleonics, Inc., Benitec
Ltd. and CytRx Corporation. In addition, we granted a license to
Isis under which it may develop RNAi therapeutics against a
limited number of targets. Any of these companies may develop
its RNAi technology more rapidly and more effectively than us.
We also compete with companies working to develop
antisense-based drugs. Like RNAi product candidates, antisense
drugs target mRNAs in order to suppress the activity of specific
genes. Isis is currently marketing an antisense drug and has
several antisense drug candidates in clinical trials, and
another company, Genta Inc., has multiple antisense drug
candidates in late-stage clinical trials. The development of
antisense drugs is more advanced than that of RNAi therapeutics
and may become the preferred technology for drugs that target
mRNAs to silence specific genes.
Risks Related to Patents, Licenses and Trade Secrets
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If we are not able to obtain and enforce patent protection
for our discoveries, our ability to develop and commercialize
our product candidates will be harmed. |
Our success depends, in part, on our ability to protect
proprietary methods and technologies that we develop under the
patent and other intellectual property laws of the United States
and other countries, so that we can prevent others from
unlawfully using our inventions and proprietary information.
However, we may not hold proprietary rights to some patents
required for us to commercialize our proposed products. Because
certain U.S. patent applications are confidential until
patents issue, such as applications filed prior to
November 29, 2000, or applications filed after such date
which will not be filed in foreign countries, third parties may
have filed patent applications for technology covered by our
pending patent applications without our being aware of those
applications, and our patent applications may not have priority
over those applications. For this and other reasons, we may be
unable to secure desired patent rights, thereby losing desired
exclusivity. Further, we may be required to obtain licenses
under third-party patents to market our proposed products or
conduct our research and development or other activities. If
licenses are not available to us on acceptable terms, we will
not be able to market the affected products or conduct the
desired activities.
Our strategy depends on our ability to rapidly identify and seek
patent protection for our discoveries. In addition, we will rely
on third-party collaborators to file patent applications
relating to proprietary technology that we develop jointly
during certain collaborations. The process of obtaining patent
protection is expensive and time-consuming. If our present or
future collaborators fail to file and prosecute all necessary
and desirable patent applications at a reasonable cost and in a
timely manner, our business will be adversely affected. Despite
our efforts and the efforts of our collaborators to protect our
proprietary rights, unauthorized parties may be able to obtain
and use information that we regard as proprietary. The mere
issuance of a patent does not guarantee that it is valid or
enforceable, so even if we obtain patents, they may not be valid
or enforceable against third parties.
Our pending patent applications may not result in issued
patents. The patent position of pharmaceutical or biotechnology
companies, including ours, is generally uncertain and involves
complex legal and factual considerations. The standards that the
United States Patent and Trademark Office and its foreign
counterparts use to grant patents are not always applied
predictably or uniformly and can change. There is also no
uniform, worldwide policy regarding the subject matter and scope
of claims granted or allowable in pharmaceutical or
biotechnology patents. Accordingly, we do not know the degree of
future protection for our proprietary rights or the breadth of
claims that will be allowed in any patents issued to us or to
others.
We also rely on trade secrets, know-how and technology, which
are not protected by patents, to maintain our competitive
position. If any trade secret, know-how or other technology not
protected by a patent were to be disclosed to or independently
developed by a competitor, our business and financial condition
could be materially adversely affected.
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We license patent rights from third party owners. If such
owners do not properly maintain or enforce the patents
underlying such licenses, our competitive position and business
prospects will be harmed. |
We are a party to a number of licenses that give us rights to
third party intellectual property that is necessary or useful
for our business. In particular, we have obtained licenses from
Isis, Hybridon, Inc., Carnegie Institution of Washington, Cancer
Research Technology Limited, the Massachusetts Institute of
Technology, the Whitehead Institute, Garching Innovation GmbH,
representing the Max Planck Gesellschaft zur Förderung der
Wissenschaften e.V., referred to as the Max Planck organization,
Stanford University and Cold Spring Harbor Laboratory. We also
intend to enter into additional licenses to third party
intellectual property in the future.
Our success will depend in part on the ability of our licensors
to obtain, maintain and enforce patent protection for our
licensed intellectual property, in particular, those patents to
which we have secured exclusive rights. Our licensors may not
successfully prosecute the patent applications to which we are
licensed. Even if patents issue in respect of these patent
applications, our licensors may fail to maintain these patents,
may determine not to pursue litigation against other companies
that are infringing these patents, or may pursue such litigation
less aggressively than we would. Without protection for the
intellectual property we license, other companies might be able
to offer substantially identical products for sale, which could
adversely affect our competitive business position and harm our
business prospects.
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Two patents from one of our key patent families, the
so-called Kreutzer-Limmer patent series of patents, are the
subjects of opposition proceedings in the European Patent Office
and the Australian Patent Office, which could result in the
invalidation of these patents. |
A German Utility Model covering RNAi composition was registered
in 2003, and a patent covering RNAi compositions and their use
was granted by the European Patent Office, or EPO, in 2002, in
South Africa in 2003 and accepted for grant in Australia in
2004. Related patent applications are pending in other
countries, including the United States. A German Utility Model
is a form of patent that is directed only to physical matter,
such as medicines, and does not cover methods. The maximum
period of protection afforded by the German Utility Model ends
in 2010. After the grant by the EPO of the Kreutzer-Limmer
patents published under publication number EP 1144623B9,
several oppositions to the issuance of the European patent were
filed with the EPO, a practice that is allowed under the
European Patent Convention. Each of the oppositions raises a
number of grounds for the invalidation of the patent, including
the use of disclaimer practice. The EPO opposition division in
charge of the opposition proceedings may agree with one or more
of the grounds and could revoke the patent in whole or restrict
the scope of the claims. It may be several years before the
outcome of the opposition proceeding is decided by the EPO.
In addition, the Enlarged Board of Appeal at the EPO recently
rendered a decision in an unrelated case covering what is known
as “disclaimer practice”. With a disclaimer, a patent
applicant gives up, or disclaims, part of the originally claimed
invention in a patent application in order to overcome prior art
and adds a limitation to the claims which may have no basis in
the original disclosure. The Enlarged Board determined that
disclaimer practice is allowed under the European Patent
Convention under a defined set of circumstances. It now has to
be determined as part of the opposition proceedings regarding
the Kreutzer-Limmer patent whether the use of a disclaimer
during the prosecution of this case falls within one of the
allowable circumstances. Determination by the EPO opposition
division that the use of the disclaimer in this case does not
fall under one of the allowed circumstances could result in the
invalidation of the Kreutzer-Limmer patent. Even if the EPO
opposition division determines that the use of a disclaimer is
permissible, the Kreutzer-Limmer patent would remain subject to
the other issues raised in the opposition. If the
Kreutzer-Limmer patent is invalidated or limited for any reason,
other companies will be better able to develop products that
compete with ours, which could adversely affect our competitive
business position, business prospects and financial condition.
Furthermore, one party has given notice to the Australian Patent
Office, IP Australia, on March 9, 2005, that it opposes the
grant of AU 778474. This Australian patent derives from the
same parent international patent application that gave rise to
EP 1144623B9, and is of similar, but not the same, scope.
In particular, its
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claims do not rely upon a disclaimer. The opposing party has not
furnished the grounds for its opposition, and has until
June 9, 2005, to submit such grounds. Like the proceedings
in the EPO, these proceedings may take several years before an
outcome becomes final.
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Other companies or organizations may assert patent rights
that prevent us from developing and commercializing our
products. |
RNA interference is a relatively new scientific field that has
generated many different patent applications from organizations
and individuals seeking to obtain important patents in the
field. These applications claim many different methods,
compositions and processes relating to the discovery,
development and commercialization of RNAi therapeutics. Because
the field is so new, very few of these patent applications have
been fully processed by government patent offices around the
world, and there is a great deal of uncertainty about which
patents will issue, when, to whom, and with what claims. It is
likely that there will be significant litigation and other
proceedings, such as interference and opposition proceedings in
various patent offices, relating to patent rights in the RNAi
field. Others may attempt to invalidate our intellectual
property rights. Even if our rights are not directly challenged,
disputes among third parties could lead to the weakening or
invalidation of our intellectual property rights.
In addition, there are many issued and pending patents that
claim aspects of oligonucleotide chemistry that we may need to
apply to our siRNA drug candidates. There are also many issued
patents that claim genes or portions of genes that may be
relevant for siRNA drugs we wish to develop.
Thus, it is possible that one or more organizations will hold
patent rights to which we will need a license. If those
organizations refuse to grant us a license to such patent rights
on reasonable terms, we will not be able to market products or
perform research and development or other activities covered by
these patents.
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If we become involved in patent litigation or other
proceedings related to a determination of rights, we could incur
substantial costs and expenses, substantial liability for
damages or be required to stop our product development and
commercialization efforts. |
A third party may sue us for infringing its patent rights.
Likewise, we may need to resort to litigation to enforce a
patent issued or licensed to us or to determine the scope and
validity of third-party proprietary rights. In addition, a third
party may claim that we have improperly obtained or used its
confidential or proprietary information. Furthermore, in
connection with a license agreement, we have agreed to indemnify
the licensor for costs incurred in connection with litigation
relating to intellectual property rights. The cost to us of any
litigation or other proceeding relating to intellectual property
rights, even if resolved in our favor, could be substantial, and
the litigation would divert our management’s efforts. Some
of our competitors may be able to sustain the costs of complex
patent litigation more effectively than we can because they have
substantially greater resources. Uncertainties resulting from
the initiation and continuation of any litigation could limit
our ability to continue our operations.
If any parties successfully claim that our creation or use of
proprietary technologies infringes upon their intellectual
property rights, we might be forced to pay damages, potentially
including treble damages, if we are found to have willfully
infringed on such parties’ patent rights. In addition to
any damages we might have to pay, a court could require us to
stop the infringing activity or obtain a license. Any license
required under any patent may not be made available on
commercially acceptable terms, if at all. In addition, such
licenses are likely to be non-exclusive and, therefore, our
competitors may have access to the same technology licensed to
us. If we fail to obtain a required license and are unable to
design around a patent, we may be unable to effectively market
some of our technology and products, which could limit our
ability to generate revenues or achieve profitability and
possibly prevent us from generating revenue sufficient to
sustain our operations. Moreover, we expect that a number of our
collaborations will provide that royalties payable to us for
licenses to our intellectual property may be offset by amounts
paid by our collaborators to third parties who have competing or
superior intellectual property positions in the relevant fields,
which could result in significant reductions in our revenues
from products developed through collaborations.
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If we fail to comply with our obligations under any
licenses or related agreements, we could lose license rights
that are necessary for developing and protecting our RNAi
technology and any related product candidates that we develop,
or we could lose certain exclusive rights to grant
sublicenses. |
Our current licenses impose, and any future licenses we enter
into are likely to impose, various development,
commercialization, funding, royalty, diligence, sublicensing,
insurance and other obligations on us. If we breach any of these
obligations, the licensor may have the right to terminate the
license or render the license non-exclusive, which could result
in us being unable to develop, manufacture and sell products
that are covered by the licensed technology or enable a
competitor to gain access to the licensed technology. In
addition, while we cannot currently determine the amount of the
royalty obligations we will be required to pay on sales of
future products, if any, the amounts may be significant. The
amount of our future royalty obligations will depend on the
technology and intellectual property we use in products that we
successfully develop and commercialize, if any. Therefore, even
if we successfully develop and commercialize products, we may be
unable to achieve or maintain profitability.
For two important pending patent applications, owned in part or
solely by the Max Planck organization of Germany, our licenses
with Garching, a related entity to Max Planck, include a
condition requiring us to operate a German company comparable to
our United States operation until at least December 2007. If we
fail to comply with this condition, the owners of the patent
applications that are the subject of these licenses may have the
right to grant a similar license to one other company. We are in
continuing discussions with Garching about our obligations under
these licenses in an effort to further define the comparability
requirement described above. We regard these pending patent
applications as significant because they relate to important
aspects of the structure of siRNA molecules and their use as
therapeutics.
We have an agreement with Isis under which we were granted
licenses to over 150 patents and patent applications that we
believe will be useful to the development of RNAi therapeutics.
If, by January 1, 2008, we or a collaborator have not
completed the studies required for an investigational new drug
application filing or similar foreign filing for at least one
product candidate involving these patent rights, Isis would have
the right to grant licenses to third parties for these patents
and patent applications, thereby making our rights non-exclusive.
|
|
|
Confidentiality agreements with employees and others may
not adequately prevent disclosure of trade secrets and other
proprietary information. |
In order to protect our proprietary technology and processes, we
rely in part on confidentiality agreements with our
collaborators, employees, consultants, outside scientific
collaborators and sponsored researchers and other advisors.
These agreements may not effectively prevent disclosure of
confidential information and may not provide an adequate remedy
in the event of unauthorized disclosure of confidential
information. In addition, others may independently discover
trade secrets and proprietary information, and in such cases we
could not assert any trade secret rights against such party.
Costly and time-consuming litigation could be necessary to
enforce and determine the scope of our proprietary rights, and
failure to obtain or maintain trade secret protection could
adversely affect our competitive business position.
Risks Related to Our Common Stock
|
|
|
If our stock price fluctuates, purchasers of our common
stock could incur substantial losses. |
The market price of our common stock may fluctuate significantly
in response to factors that are beyond our control. The stock
market in general has recently experienced extreme price and
volume fluctuations. The market prices of securities of
pharmaceutical and biotechnology companies have been extremely
volatile, and have experienced fluctuations that often have been
unrelated or disproportionate to the operating performance of
these companies. These broad market fluctuations could result in
extreme fluctuations in the price of our common stock, which
could cause purchasers of our common stock to incur substantial
losses.
67
|
|
|
We may incur significant costs from class action
litigation due to our expected stock volatility. |
Our stock price may fluctuate for many reasons, including as a
result of public announcements regarding the progress of our
development efforts, the addition or departure of our key
personnel, variations in our quarterly operating results and
changes in market valuations of pharmaceutical and biotechnology
companies. Recently, when the market price of a stock has been
volatile as our stock price may be, holders of that stock have
occasionally brought securities class action litigation against
the company that issued the stock. If any of our stockholders
were to bring a lawsuit of this type against us, even if the
lawsuit is without merit, we could incur substantial costs
defending the lawsuit. The lawsuit could also divert the time
and attention of our management.
|
|
|
If there are substantial sales of our common stock, the
price of our common stock could decline. |
If our existing stockholders sell a large number of shares of
our common stock or the public market perceives that existing
stockholders might sell shares of common stock, the market price
of our common stock could decline significantly.
The holders of 11,523,884 shares of common stock have
rights to require us to file registration statements under the
Securities Act or to include their shares in registration
statements that we may file in the future for ourselves or other
stockholders. In addition, the holders of warrants to
purchase 52,630 shares of our common stock will be
entitled to include shares issued upon exercise of the warrants
in registration statements that we may file in the future.
|
|
|
Insiders have substantial influence over Alnylam and could
delay or prevent a change in corporate control. |
Our directors and executive officers, together with their
affiliates, beneficially own, in the aggregate, approximately
22% of our outstanding common stock as of December 31,
2004. As a result, these stockholders, if acting together, may
have the ability to significantly affect the outcome of matters
submitted to our stockholders for approval, including the
election of directors and any merger, consolidation or sale of
all or substantially all of our assets. Accordingly, this
concentration of ownership may harm the market price of our
common stock by:
|
|
|
| |
• |
delaying, deferring or preventing a change in control of our
company; |
| |
| |
• |
impeding a merger, consolidation, takeover or other business
combination involving our company; or |
| |
| |
• |
discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our company. |
|
|
|
Anti-takeover provisions in our charter documents and
under Delaware law could make an acquisition of us, which may be
beneficial to our stockholders, more difficult and may prevent
attempts by our stockholders to replace or remove our current
management. |
Provisions in our certificate of incorporation and our bylaws
may delay or prevent an acquisition of us or a change in our
management. In addition, these provisions may frustrate or
prevent any attempts by our stockholders to replace or remove
our current management by making it more difficult for
stockholders to replace members of our board of directors.
Because our board of directors is responsible for appointing the
members of our management team, these provisions could in turn
affect any attempt by our stockholders to replace current
members of our management team. These provisions include:
|
|
|
| |
• |
a classified board of directors; |
| |
| |
• |
a prohibition on actions by our stockholders by written consent; |
| |
| |
• |
the ability of our board of directors to issue preferred stock
without stockholder approval, which could be used to institute a
“poison pill” that would work to dilute the stock
ownership of a potential hostile acquirer, effectively
preventing acquisitions that have not been approved by our board
of directors; |
| |
| |
• |
limitations on the removal of directors; and |
68
|
|
|
| |
• |
advance notice requirements for election to our board of
directors and for proposing matters that can be acted upon at
stockholder meetings. |
Moreover, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law, which prohibits a person who owns in
excess of 15% of our outstanding voting stock from merging or
combining with us for a period of three years after the date of
the transaction in which the person acquired in excess of 15% of
our outstanding voting stock, unless the merger or combination
is approved in a prescribed manner. These provisions would apply
even if the proposed merger or acquisition could be considered
beneficial by some stockholders.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of our investment portfolio we own financial instruments
that are sensitive to market risks. The investment portfolio is
used to preserve our capital until it is required to fund
operations, including our research and development activities.
Our marketable securities consist of U.S. government
obligations, corporate debt, and commercial paper. All of our
investments in debt securities are classified as
“available-for-sale” and are recorded at fair value.
Our “available-for-sale” investments are sensitive to
changes in interest rates. Interest rate changes would result in
a change in the net fair value of these financial instruments
due to the difference between the market interest rate and the
market interest rate at the date of purchase of the financial
instrument. A 10% decrease in market interest rates would impact
the net fair value of such interest-sensitive financial
instruments by less than $50,000.
Our $10.0 million equipment line of credit with Lighthouse
Capital Partners bears an interest rate of prime plus 3% (8.25%
at December 31, 2004). The interest rate on each draw that
we make under this line of credit is fixed at the time the draw
is made. As a result, any changes in the prime rate will not
affect our future payments for existing debt outstanding under
this line of credit.
|
|
|
Foreign Currency Exchange Rate Risk |
We are exposed to foreign currency exchange rate risk. Our
European operations are based in Kulmbach, Germany and the
functional currency of these operations is the Euro. We provide
quarterly funding to support these operations. The amount of
this funding is based upon actual expenditures incurred by our
European operations and is calculated in Euros. Because of the
frequency with which these operations are funded, we record
amounts payable to fund these operations as current liabilities,
which eliminate upon consolidation. The effect that fluctuations
in the exchange rate between the Euro and the United States
Dollar have on the amounts payable to fund our European
operations are recorded in our consolidated statements of
operations as other income or expense. We do not enter into any
foreign exchange hedge contracts.
Assuming the amount of expenditures by our European operations
were consistent with 2004 and the timing of the funding of these
operations were consistent with 2004, a constant increase or
decrease in the exchange rate between the Euro and the United
States Dollar during 2005 of 10% would result in a foreign
exchange gain or loss of between $50,000 and $100,000.
The amount of our foreign currency exchange rate risk is based
on many factors including the timing and size of fluctuations in
the currency exchange rate between the Euro and the United
States Dollar, the amount of actual expenditures incurred by our
European operations and the timing and size of funding provided
to our European operations from the United States.
69
ITEM 8. FINANCIAL STATEMENT
AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| |
|
|
|
|
| |
|
Page | |
| |
|
| |
|
Report of Independent Registered Public Accounting Firm
|
|
|
71 |
|
|
Consolidated Balance Sheets as of December 31, 2004 and 2003
|
|
|
72 |
|
|
Consolidated Statements of Operations and Comprehensive Loss for
the Years Ended December 31, 2004 and 2003 and for the
Period From Inception (June 14, 2002) through
December 31, 2002
|
|
|
73 |
|
|
Consolidated Statements of Changes in Redeemable Convertible
Preferred Stock and Stockholders’ Equity (Deficit) for the
Period From Inception (June 14, 2002) through
December 31, 2002 and for the Years Ended December 31,
2003 and 2004
|
|
|
74 |
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004 and 2003 and for the Period From
Inception (June 14, 2002) through December 31, 2002
|
|
|
76 |
|
|
Notes to Consolidated Financial Statements
|
|
|
78 |
|
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Alnylam Pharmaceuticals, Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations and
comprehensive loss, of changes in redeemable convertible
preferred stock and stockholders’ equity (deficit) and of
cash flows present fairly, in all material respects, the
financial position of Alnylam Pharmaceuticals, Inc. and its
subsidiaries at December 31, 2004 and 2003, and the results
of their operations and their cash flows for the years ended
December 31, 2004 and 2003 and for the period from
inception (June 14, 2002) through December 31, 2002 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
|
|
| |
/s/ PricewaterhouseCoopers LLP |
Boston, Massachusetts
March 15, 2005
71
ALNYLAM PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
20,272 |
|
|
$ |
23,193 |
|
| |
Marketable securities
|
|
|
25,774 |
|
|
|
— |
|
| |
Restricted cash
|
|
|
— |
|
|
|
373 |
|
| |
Collaboration receivable
|
|
|
859 |
|
|
|
— |
|
| |
Related party notes receivable
|
|
|
310 |
|
|
|
— |
|
| |
Prepaid expenses and other current assets
|
|
|
966 |
|
|
|
623 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
48,181 |
|
|
|
24,189 |
|
|
Property and equipment, net
|
|
|
11,694 |
|
|
|
4,756 |
|
|
Intangible assets, net
|
|
|
3,405 |
|
|
|
3,878 |
|
|
Restricted cash
|
|
|
2,313 |
|
|
|
2,313 |
|
|
Other assets
|
|
|
514 |
|
|
|
47 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
66,107 |
|
|
$ |
35,183 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS’ EQUITY (DEFICIT) |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
910 |
|
|
$ |
1,510 |
|
| |
Accrued liabilities
|
|
|
3,875 |
|
|
|
1,443 |
|
| |
Current portion of note payable
|
|
|
790 |
|
|
|
558 |
|
| |
Deferred revenue
|
|
|
1,000 |
|
|
|
333 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
6,575 |
|
|
|
3,844 |
|
|
Deferred revenue
|
|
|
4,083 |
|
|
|
1,556 |
|
|
Deferred rent
|
|
|
2,896 |
|
|
|
— |
|
|
Note payable, net of current portion
|
|
|
6,411 |
|
|
|
1,301 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
19,965 |
|
|
|
6,701 |
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock
|
|
|
— |
|
|
|
55,189 |
|
|
Stockholders’ equity (deficit):
|
|
|
|
|
|
|
|
|
| |
Preferred stock, $0.01 par value, 5,000,000 shares
authorized and no shares issued and outstanding at
December 31, 2004 and no shares authorized, issued or
outstanding at December 31, 2003
|
|
|
— |
|
|
|
— |
|
| |
Common stock, $0.01 par value, 125,000,000 shares
authorized; 20,931,742 shares issued and
20,848,848 shares outstanding as of December 31, 2004
and $0.0001 par value, 32,000,000 shares authorized;
2,251,482 shares issued and outstanding as of
December 31, 2003
|
|
|
208 |
|
|
|
— |
|
| |
Additional paid-in capital
|
|
|
112,216 |
|
|
|
7,416 |
|
| |
Deferred stock compensation
|
|
|
(3,697 |
) |
|
|
(4,681 |
) |
| |
Accumulated other comprehensive income
|
|
|
420 |
|
|
|
76 |
|
| |
Accumulated deficit
|
|
|
(63,005 |
) |
|
|
(29,518 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ equity (deficit)
|
|
|
46,142 |
|
|
|
(26,707 |
) |
| |
|
|
|
|
|
|
| |
|
|
Total liabilities, redeemable convertible preferred stock and
stockholders’ equity (deficit)
|
|
$ |
66,107 |
|
|
$ |
35,183 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
72
ALNYLAM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(In thousands, except share and per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Period from | |
| |
|
|
|
Inception | |
| |
|
Year Ended December 31, | |
|
(June 14, 2002) | |
| |
|
| |
|
through | |
| |
|
2004 | |
|
2003 | |
|
December 31, 2002 | |
| |
|
| |
|
| |
|
| |
|
Net revenues from research collaborators
|
|
$ |
4,278 |
|
|
$ |
176 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Research and development(1)
|
|
|
24,603 |
|
|
|
13,097 |
|
|
|
3,342 |
|
| |
General and administrative(1)
|
|
|
11,939 |
|
|
|
7,527 |
|
|
|
880 |
|
| |
Purchased in-process research and development
|
|
|
— |
|
|
|
4,609 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total costs and expenses
|
|
|
36,542 |
|
|
|
25,233 |
|
|
|
4,222 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Loss from operations
|
|
|
(32,264 |
) |
|
|
(25,057 |
) |
|
|
(4,222 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest income
|
|
|
504 |
|
|
|
179 |
|
|
|
86 |
|
| |
Interest expense
|
|
|
(661 |
) |
|
|
(127 |
) |
|
|
— |
|
| |
Other expense
|
|
|
(233 |
) |
|
|
(28 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total other income (expense)
|
|
|
(390 |
) |
|
|
24 |
|
|
|
86 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(32,654 |
) |
|
|
(25,033 |
) |
|
|
(4,136 |
) |
|
Accretion of redeemable convertible preferred stock
|
|
|
(2,713 |
) |
|
|
(2,906 |
) |
|
|
(748 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$ |
(35,367 |
) |
|
$ |
(27,939 |
) |
|
$ |
(4,884 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(32,654 |
) |
|
$ |
(25,033 |
) |
|
$ |
(4,136 |
) |
|
Foreign currency translation adjustments
|
|
|
400 |
|
|
|
76 |
|
|
|
— |
|
|
Unrealized loss on marketable securities
|
|
|
(56 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$ |
(32,310 |
) |
|
$ |
(24,957 |
) |
|
$ |
(4,136 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net loss per common share — basic and diluted
|
|
$ |
(2.98 |
) |
|
$ |
(29.64 |
) |
|
$ |
(14.74 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to compute basic and diluted
net loss per common share
|
|
|
11,886,126 |
|
|
|
942,665 |
|
|
|
331,341 |
|
|
(1) Non-cash stock-based compensation expense included in these
amounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Research and development
|
|
$ |
2,087 |
|
|
$ |
2,832 |
|
|
$ |
172 |
|
| |
|
General and administrative
|
|
|
2,019 |
|
|
|
623 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total non-cash stock-based compensation
|
|
$ |
4,106 |
|
|
$ |
3,455 |
|
|
$ |
172 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
73
ALNYLAM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands, except share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Redeemable Convertible | |
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
Total | |
| |
|
Preferred Stock | |
|
|
Common Stock |
|
Additional | |
|
Deferred | |
|
Other | |
|
|
|
Stockholders’ | |
| |
|
| |
|
|
|
|
Paid-in | |
|
Stock | |
|
Comprehensive | |
|
Accumulated | |
|
Equity | |
| |
|
Shares | |
|
Amount | |
|
|
Shares | |
|
Amount |
|
Capital | |
|
Compensation | |
|
Income | |
|
Deficit | |
|
(Deficit) | |
| |
|
| |
|
| |
|
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance at inception (June 14, 2002)
|
|
|
— |
|
|
$ |
— |
|
|
|
|
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Issuance of common stock to founders
|
|
|
— |
|
|
|
— |
|
|
|
|
1,294,716 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance of common stock to non-employee
|
|
|
— |
|
|
|
— |
|
|
|
|
47,368 |
|
|
|
— |
|
|
|
9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
Issuance of Series A redeemable convertible preferred
stock, net of issuance costs of $21
|
|
|
2,000,010 |
|
|
|
1,979 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance of Series B redeemable convertible preferred
stock, net of issuance costs of $43
|
|
|
6,160,000 |
|
|
|
15,357 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance of warrant to purchase Series B preferred stock in
connection with equipment line of credit
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
57 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
57 |
|
|
Deferred compensation related to restricted common stock issued
to non- employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
333 |
|
|
|
(333 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of deferred compensation expense related to
restricted stock issued to non-employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
172 |
|
|
|
— |
|
|
|
— |
|
|
|
172 |
|
|
Accretion of Series A and Series B preferred stock to
redemption
|
|
|
— |
|
|
|
748 |
|
|
|
|
— |
|
|
|
— |
|
|
|
(399 |
) |
|
|
— |
|
|
|
— |
|
|
|
(349 |
) |
|
|
(748 |
) |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,136 |
) |
|
|
(4,136 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
8,160,010 |
|
|
|
18,084 |
|
|
|
|
1,342,084 |
|
|
|
— |
|
|
|
— |
|
|
|
(161 |
) |
|
|
— |
|
|
|
(4,485 |
) |
|
|
(4,646 |
) |
|
Exercise of common stock options
|
|
|
— |
|
|
|
— |
|
|
|
|
44,526 |
|
|
|
— |
|
|
|
21 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
21 |
|
|
Issuance of common stock in connection with acquisition of
Ribopharma
|
|
|
— |
|
|
|
— |
|
|
|
|
815,376 |
|
|
|
— |
|
|
|
1,947 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,947 |
|
|
Settlement of Ribopharma AG accrued interest for common stock
|
|
|
— |
|
|
|
— |
|
|
|
|
49,496 |
|
|
|
— |
|
|
|
119 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
119 |
|
|
Issuance of Series A redeemable convertible preferred stock
|
|
|
1,000,000 |
|
|
|
1,000 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Beneficial conversion feature from the issuance of Series A
preferred stock
|
|
|
— |
|
|
|
(260 |
) |
|
|
|
— |
|
|
|
— |
|
|
|
260 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
260 |
|
|
Accretion of beneficial conversion feature on Series A
preferred stock
|
|
|
— |
|
|
|
27 |
|
|
|
|
— |
|
|
|
— |
|
|
|
(27 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(27 |
) |
|
Issuance of Series B redeemable convertible preferred stock
|
|
|
10,401,845 |
|
|
|
26,005 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance of Series C convertible preferred stock, net of
issuance costs of $70
|
|
|
1,504,825 |
|
|
|
7,454 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Accretion of Series A and Series B preferred stock to
redemption
|
|
|
— |
|
|
|
2,879 |
|
|
|
|
— |
|
|
|
— |
|
|
|
(2,879 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,879 |
) |
|
Deferred compensation related to issuance of options granted to
employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
3,339 |
|
|
|
(3,339 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of deferred compensation expense related to options
issued to employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
667 |
|
|
|
— |
|
|
|
— |
|
|
|
667 |
|
|
Deferred compensation related to restricted stock issued to non-
employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
3,458 |
|
|
|
(3,458 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of deferred compensation expense related to
restricted stock issued to non-employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,241 |
|
|
|
— |
|
|
|
— |
|
|
|
2,241 |
|
|
Deferred compensation related to stock options issued to
non-employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
1,178 |
|
|
|
(1,178 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of deferred compensation expense related to stock
options issued to non-employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
547 |
|
|
|
— |
|
|
|
— |
|
|
|
547 |
|
|
Foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
|
|
— |
|
|
|
76 |
|
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(25,033 |
) |
|
|
(25,033 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
21,066,680 |
|
|
|
55,189 |
|
|
|
|
2,251,482 |
|
|
|
— |
|
|
|
7,416 |
|
|
|
(4,681 |
) |
|
|
76 |
|
|
|
(29,518 |
) |
|
|
(26,707 |
) |
The accompanying notes are an integral part of these
consolidated financial statements.
74
ALNYLAM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS’
EQUITY (DEFICIT) — (Continued)
(In thousands, except share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Redeemable Convertible | |
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
Total | |
| |
|
Preferred Stock | |
|
|
Common Stock | |
|
Additional | |
|
Deferred | |
|
Other | |
|
|
|
Stockholders’ | |
| |
|
| |
|
|
| |
|
Paid-in | |
|
Stock | |
|
Comprehensive | |
|
Accumulated | |
|
Equity | |
| |
|
Shares | |
|
Amount | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Compensation | |
|
Income | |
|
Deficit | |
|
(Deficit) | |
| |
|
| |
|
| |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Adjustment to reflect change in par value of common stock
(Note 9)
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
22 |
|
|
|
(22 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Exercise of common stock options and warrants
|
|
|
— |
|
|
|
— |
|
|
|
|
255,075 |
|
|
|
3 |
|
|
|
165 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
168 |
|
|
Accretion of beneficial conversion feature on Series A
preferred stock
|
|
|
— |
|
|
|
27 |
|
|
|
|
— |
|
|
|
— |
|
|
|
(27 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(27 |
) |
|
Repurchase of restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
|
(82,890 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Issuance of Series D convertible preferred stock
|
|
|
1,666,667 |
|
|
|
10,000 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Beneficial conversion feature recorded upon issuance of
Series D convertible preferred stock
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
833 |
|
|
|
— |
|
|
|
— |
|
|
|
(833 |
) |
|
|
— |
|
|
Accretion of Series A and Series B preferred stock to
redemption
|
|
|
— |
|
|
|
1,853 |
|
|
|
|
— |
|
|
|
— |
|
|
|
(1,853 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,853 |
) |
|
Issuance of Series C convertible preferred stock warrants
|
|
|
— |
|
|
|
557 |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Deferred compensation related to issuance of options granted to
employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
3,739 |
|
|
|
(3,739 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of deferred compensation expense related to options
issued to employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,137 |
|
|
|
— |
|
|
|
— |
|
|
|
3,137 |
|
|
Deferred compensation related to cancellation of stock options
for terminated employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
(339 |
) |
|
|
339 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Stock compensation related to common stock option modification
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
65 |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
65 |
|
|
Deferred compensation related to restricted stock issued to non-
employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
(739 |
) |
|
|
739 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of deferred compensation expense related to
restricted stock issued to non-employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
244 |
|
|
|
— |
|
|
|
— |
|
|
|
244 |
|
|
Deferred compensation related to stock options issued to
non-employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
395 |
|
|
|
(395 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of deferred compensation expense related to stock
options issued to non-employees
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
659 |
|
|
|
— |
|
|
|
— |
|
|
|
659 |
|
|
Conversion of redeemable convertible preferred stock into common
stock upon initial public offering
|
|
|
(22,733,347 |
) |
|
|
(67,626 |
) |
|
|
|
11,964,908 |
|
|
|
120 |
|
|
|
67,506 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
67,626 |
|
|
Issuance of common stock upon initial public offering, net of
offering costs of $4,616
|
|
|
— |
|
|
|
— |
|
|
|
|
5,750,000 |
|
|
|
57 |
|
|
|
29,827 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
29,884 |
|
|
Issuance of common stock pursuant to collaboration agreement
|
|
|
— |
|
|
|
— |
|
|
|
|
710,273 |
|
|
|
7 |
|
|
|
5,249 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,256 |
|
|
Foreign currency translation
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
399 |
|
|
|
— |
|
|
|
399 |
|
|
Unrealized loss on marketable securities
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(55 |
) |
|
|
— |
|
|
|
(55 |
) |
|
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(32,654 |
) |
|
|
(32,654 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
— |
|
|
$ |
— |
|
|
|
|
20,848,848 |
|
|
$ |
208 |
|
|
$ |
112,216 |
|
|
$ |
(3,697 |
) |
|
$ |
420 |
|
|
$ |
(63,005 |
) |
|
$ |
46,142 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
75
ALNYLAM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Period from | |
| |
|
|
|
|
|
Inception | |
| |
|
|
|
|
|
(June 14, | |
| |
|
|
|
2002) | |
| |
|
Year Ended December 31, | |
|
through | |
| |
|
| |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
$ |
(32,654 |
) |
|
$ |
(25,033 |
) |
|
$ |
(4,136 |
) |
| |
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
2,444 |
|
|
|
838 |
|
|
|
36 |
|
| |
|
Loss on disposal of equipment
|
|
|
49 |
|
|
|
— |
|
|
|
— |
|
| |
|
Non-cash stock-based compensation
|
|
|
4,106 |
|
|
|
3,455 |
|
|
|
172 |
|
| |
|
Series B preferred stock issued for Garching license
|
|
|
— |
|
|
|
397 |
|
|
|
— |
|
| |
|
Charge for purchased in-process research and development
|
|
|
— |
|
|
|
4,609 |
|
|
|
— |
|
| |
|
|
Proceeds from landlord for tenant improvements
|
|
|
3,003 |
|
|
|
— |
|
|
|
— |
|
|
Changes in operating assets and liabilities, net of effects of
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Collaboration receivable
|
|
|
(859 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Related party notes receivable
|
|
|
(310 |
) |
|
|
— |
|
|
|
— |
|
| |
|
Prepaid expenses and other current assets
|
|
|
(327 |
) |
|
|
(558 |
) |
|
|
(23 |
) |
| |
|
Accounts payable
|
|
|
(615 |
) |
|
|
794 |
|
|
|
674 |
|
| |
|
Accrued expenses
|
|
|
2,399 |
|
|
|
781 |
|
|
|
1,999 |
|
| |
|
Deferred revenue
|
|
|
3,194 |
|
|
|
1,889 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in operating activities
|
|
|
(19,570 |
) |
|
|
(12,828 |
) |
|
|
(1,278 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Purchases of property and equipment
|
|
|
(9,006 |
) |
|
|
(3,119 |
) |
|
|
(562 |
) |
| |
Proceeds from sale of equipment
|
|
|
185 |
|
|
|
— |
|
|
|
— |
|
| |
Purchases of marketable securities
|
|
|
(33,499 |
) |
|
|
— |
|
|
|
— |
|
| |
Sales of marketable securities
|
|
|
7,725 |
|
|
|
— |
|
|
|
— |
|
| |
Acquisition of Ribopharma AG, net of cash acquired
|
|
|
— |
|
|
|
(121 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(34,595 |
) |
|
|
(3,240 |
) |
|
|
(562 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds from issuance of common stock, net of issuance costs
|
|
|
35,308 |
|
|
|
21 |
|
|
|
9 |
|
| |
Proceeds from issuance of Series A redeemable convertible
preferred stock, net of issuance costs
|
|
|
— |
|
|
|
1,000 |
|
|
|
1,979 |
|
| |
Proceeds from issuance of Series B redeemable convertible
preferred stock, net of issuance costs
|
|
|
— |
|
|
|
19,005 |
|
|
|
15,357 |
|
| |
Proceeds from issuance of Series C redeemable convertible
preferred stock, net of issuance costs
|
|
|
— |
|
|
|
7,454 |
|
|
|
— |
|
| |
Proceeds from issuance of Series D convertible preferred
stock
|
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
| |
Proceeds from bank debt
|
|
|
7,201 |
|
|
|
2,098 |
|
|
|
— |
|
| |
Repayments of bank debt
|
|
|
(1,859 |
) |
|
|
(239 |
) |
|
|
— |
|
| |
Repayment of debt assumed in acquisition
|
|
|
— |
|
|
|
(2,964 |
) |
|
|
— |
|
| |
Decrease (increase) in restricted cash
|
|
|
373 |
|
|
|
(2,667 |
) |
|
|
(19 |
) |
| |
Deferred financing costs incurred in connection with the
equipment line of credit
|
|
|
(46 |
) |
|
|
— |
|
|
|
(9 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by financing activities
|
|
|
50,977 |
|
|
|
23,708 |
|
|
|
17,317 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Effect of exchange rate changes on cash
|
|
|
267 |
|
|
|
76 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(2,921 |
) |
|
|
7,716 |
|
|
|
15,477 |
|
| |
|
|
Cash and cash equivalents, beginning of period
|
|
|
23,193 |
|
|
|
15,477 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Cash and cash equivalents, end of period
|
|
$ |
20,272 |
|
|
$ |
23,193 |
|
|
$ |
15,477 |
|
| |
|
|
|
|
|
|
|
|
|
76
ALNYLAM PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS — (Continued)
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Period from | |
| |
|
|
|
|
|
Inception | |
| |
|
|
|
|
|
(June 14, | |
| |
|
|
|
2002) | |
| |
|
Year Ended December 31, | |
|
through | |
| |
|
| |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Supplemental disclosure of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash paid for interest
|
|
$ |
487 |
|
|
$ |
503 |
|
|
$ |
— |
|
|
Supplemental disclosure of non-cash financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of warrant issued in connection with equipment line
of credit included as deferred financing costs
|
|
$ |
557 |
|
|
$ |
— |
|
|
$ |
57 |
|
| |
Conversion of redeemable convertible preferred stock into common
stock
|
|
$ |
67,626 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Accretion of redeemable convertible preferred stock
|
|
|
2,713 |
|
|
|
2,906 |
|
|
|
748 |
|
| |
Series B preferred stock issued to Garching in 2003 for a
license in 2002 included in accrued expenses
|
|
|
— |
|
|
|
2,205 |
|
|
|
— |
|
| |
Conversion of note payable and accrued interest into
Series B preferred stock
|
|
|
— |
|
|
|
4,795 |
|
|
|
— |
|
| |
Beneficial conversion feature on issuance of Series A
preferred stock
|
|
|
— |
|
|
|
260 |
|
|
|
— |
|
| |
Acquisition of Ribopharma AG
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair value of assets acquired
|
|
$ |
— |
|
|
$ |
12,256 |
|
|
$ |
— |
|
| |
|
Assumed liabilities
|
|
|
— |
|
|
|
(8,390 |
) |
|
|
— |
|
| |
|
Cash paid
|
|
|
— |
|
|
|
(1,500 |
) |
|
|
— |
|
| |
|
Acquisition costs incurred
|
|
|
— |
|
|
|
(419 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Fair value of common stock issued
|
|
$ |
— |
|
|
$ |
1,947 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
77
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alnylam Pharmaceuticals, Inc. (the “Company” or
“Alnylam”) commenced operations on June 14, 2002
as a biopharmaceutical company seeking to develop and
commercialize new drugs that work through a recently discovered
system in cells known as RNA interference, or RNAi. Alnylam is
focused on discovering, developing and commercializing RNAi
therapeutics by establishing strategic alliances with leading
pharmaceutical companies, establishing and maintaining a strong
intellectual property position in the RNAi field and generating
revenues through licensing agreements. The Company has devoted
substantially all of its efforts to business planning, research
and development, acquiring intellectual property rights,
recruiting management and technical staff, and raising capital.
|
|
| 2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The Company comprises three entities, Alnylam Pharmaceuticals,
Inc. (the parent company) and two subsidiaries (Alnylam U.S.,
Inc. and Alnylam Europe AG). Alnylam Pharmaceuticals, Inc is a
Delaware corporation that was formed on May 8, 2003 and was
formerly called Alnylam Holding Co. Alnylam U.S. is also a
Delaware corporation that was formed on June 14, 2002 and
was previously called Alnylam Pharmaceuticals, Inc. On
July 31, 2003, Alnylam Pharmaceuticals, Inc. (the parent
company) and Alnylam U.S., Inc. were reorganized and Alnylam
U.S., Inc. became a wholly owned subsidiary of Alnylam
Pharmaceuticals, Inc. (the parent company). Since Alnylam U.S.,
Inc. and Alnylam Pharmaceuticals, Inc. were under common control
and Alnylam Pharmaceuticals, Inc. (the parent company) did not
have independent operations prior to the reorganization, the
combination of the two entities did not result in a new basis of
accounting.
|
|
|
Principles of Consolidation |
The accompanying consolidated financial statements reflect the
operations of the Company and its wholly-owned subsidiaries
Alnylam U.S., Inc. and Alnylam Europe AG. All significant
intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
|
|
|
Concentrations of Credit Risk |
The Company’s cash, cash equivalent and marketable
securities are primarily maintained with two major financial
institutions in the United States. Deposits with banks may
exceed the amount of insurance provided on such deposits.
Generally, these deposits may be redeemed upon demand and,
therefore, bear minimal risk. Financial instruments which
potentially expose the Company to concentrations of credit risk
consist primarily of cash equivalents and marketable securities.
Cash equivalents and marketable securities consist of commercial
paper, corporate notes and U.S. government agency securities,
which are invested in accordance with the Company’s
investment policy, as approved by the Board of Directors.
78
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Fair Value of Financial Instruments |
The carrying amounts of the Company’s financial
instruments, which include cash equivalents, collaboration
receivable, accounts payable, accrued expenses and notes
payable, approximate their fair values at December 31, 2004
and 2003. During 2004, the Company began investing a portion of
its available cash and cash equivalents in marketable
securities. Certain of these marketable security investments
have maturities of greater than one year. The Company classifies
its investments as available for sale and all of the
Company’s unrestricted investments are available for use,
if needed, to fund the Company’s current operations. As a
result, the Company classifies all of its investments with
maturities of greater than one year as short-term on its balance
sheet. At December 31, 2004, the Company had approximately
$4.9 million of investments with maturities of greater than
one year classified as short-term in its balance sheet.
Unrealized gains or losses are included as a component of
accumulated other comprehensive income, included in
stockholders’ equity (deficit) in the consolidated
balance sheets. The following table summarizes the
Company’s marketable securities at December 31, 2004,
in thousands:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
|
| |
|
Cost | |
|
Losses | |
|
Fair Value | |
| |
|
| |
|
| |
|
| |
|
Commercial paper
|
|
$ |
2,838 |
|
|
$ |
(1 |
) |
|
$ |
2,837 |
|
|
Corporate notes due within one year
|
|
|
14,658 |
|
|
|
(33 |
) |
|
|
14,625 |
|
|
Corporate notes due in one to two years
|
|
|
4,942 |
|
|
|
(15 |
) |
|
|
4,927 |
|
|
Government securities
|
|
|
3,391 |
|
|
|
(6 |
) |
|
|
3,385 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
25,829 |
|
|
$ |
(55 |
) |
|
$ |
25,774 |
|
| |
|
|
|
|
|
|
|
|
|
The Company recognizes revenue in accordance with the Securities
and Exchange Commission’s Staff Accounting
Bulletin No. 104, “Revenue Recognition in
Financial Statements.” The Company has entered
into collaboration agreements with Merck & Co.
(“Merck”). Revenues from these collaboration
agreements may include nonrefundable license fees, milestones,
research and development funding, cost reimbursements and
royalties. When evaluating multiple element arrangements, the
Company considers whether the components of the arrangement
represents separate units of accounting as defined in Emerging
Issues Task Force (“EITF”) Issue No. 00-21,
“Revenue Arrangements with Multiple
Deliverables” (“EITF 00-21”).
Application of these standards requires subjective
determinations and requires management to make judgments about
the value of the individual elements and whether it is separable
from the other aspects of the contractual relationship.
Nonrefundable license fees are recognized as revenue as the
Company performs under the collaboration agreements. Where the
Company’s level of effort is relatively constant over the
performance period, the Company recognizes total fixed or
determined contract revenues on a straight-line basis over the
estimated period of performance under the contract.
The Company recognizes milestone payments as revenue upon
achievement of the milestone only if (1) the milestone
payments are nonrefundable; (2) substantive effort is
involved in achieving the milestone; and (3) the amount of
the milestone is reasonable in relation to the effort expended
or the risk associated with achievement of the milestone. If any
of these conditions are not met, the Company defers the
milestone payments and recognizes them as revenue over the
estimated period of performance under the contract as the
Company completes its performance obligations. In December 2004,
the Company recognized revenue related to the receipt of a
$2.0 million technology milestone payment from Merck under
the Company’s September 2003 collaboration agreement for
the development of RNAi-based technology and therapeutics (the
“Technology Milestone”).
79
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company recognizes revenues from reimbursable research and
development activities at the time these activities are
performed under the terms of the related agreement, when the
collaborator is obligated to pay and when no future performance
obligations exist. In revenue arrangements where both parties
reimburse each other for research costs, such as the
Company’s June 2004 collaboration agreement with Merck for
the co-development of RNAi therapeutics for the treatment of
ocular diseases, in which both parties reimburse each other for
50% of the costs incurred, as defined by the agreement, the
Company follows EITF Issue No. 01-9, “Accounting
for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor’s Products)”
(“EITF 01-9”) in determining the proper
accounting for these costs. In accordance with EITF 01-9,
revenue recognized by the Company for costs reimbursed by the
Company’s customer are reduced by amounts reimbursable to
the other party during the same accounting period unless the
Company receives a separable and identifiable benefit in
exchange for the payments made to the other party under the
arrangement and the Company can reasonably estimate the fair
value of the benefit received. In 2004, the Company recognized
approximately $1.5 million in cost reimbursement revenues
from its June 2004 collaboration agreement with Merck, net of
$0.3 million of payments due to Merck for Merck’s work
under this agreement that could not be separated from the
underlying arrangement.
The Company uses the liability method of accounting for income
taxes. Under the liability method, deferred tax assets and
liabilities reflect the impact of temporary differences between
amounts of assets and liabilities for financial reporting
purposes and such amounts as measured under enacted tax laws. A
valuation allowance is required to offset any net deferred tax
assets if, based upon the available evidence, it is more likely
than not that some or all of the deferred tax asset will not be
realized.
|
|
|
Research and Development Costs |
Research and development costs are expensed as incurred.
Included in research and development costs are wages, benefits
and other operating costs such as legal expenses to secure and
defend patents (which are expensed as incurred), facilities,
supplies and overhead directly related to the Company’s
research and development department as well as costs to acquire
technology licenses.
During the years ended December 31, 2004 and 2003 and the
period from inception (June 14, 2002) through
December 31, 2002 the Company included approximately
$1.3 million, $1.4 million and $0.5 million,
respectively, of legal patent costs in research and development
costs and expenses.
The Company has entered into several license agreements for
rights to utilize certain technologies. The terms of the
licenses may provide for up-front payments, annual maintenance
payments, milestone payments based upon certain specified events
being achieved and royalties on product sales. Costs to acquire
and maintain licensed technology that has not reached
technological feasibility and does not have alternative future
use are charged to research and development expense as incurred.
During the years ended December 31, 2004 and 2003 and the
period from inception (June 14, 2002) through
December 31, 2002, the Company charged to research and
development expense $5.8 million, $1.7 million and
$1.9 million, respectively, of costs associated with
license fees (Note 13).
|
|
|
Accounting for Stock-Based Compensation |
Employee stock awards granted under the Company’s
compensation plans are accounted for in accordance with
Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”), and related
interpretations. The Company has not adopted the fair value
method of accounting for stock-based awards. All stock-based
awards granted to non-employees are accounted for at their fair
value in accordance with Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards (“SFAS”) No. 123
(“SFAS 123”), as amended, and EITF Issue
No. 96-18,
80
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
“Accounting for Equity Instruments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services,”
(“EITF 96-18”) under which compensation expense
is generally recognized over the vesting period of the award.
Under the intrinsic value method, compensation associated with
stock-based awards to employees is determined as the difference,
if any, between the current fair value of the underlying common
stock on the date compensation is measured and the price an
employee must pay to exercise the award. The measurement date
for employee awards is generally the grant date. Under the
fair-value method, compensation associated with stock-based
awards to non-employees is determined based on the estimated
fair value of the award itself, measured using an established
option pricing model. The measurement date for non-employee
awards is generally the date performance of certain services is
complete.
The Company provides the disclosure requirements of
SFAS No. 148, “Accounting for Stock Based
Compensation — Transition and Disclosure, an amendment
of FASB Statement No. 123”
(“SFAS 148”). If compensation expense for the
Company’s stock-based compensation plan had been determined
based on the fair value at the grant dates as calculated in
accordance with SFAS No. 123, the Company’s net
loss attributable to common stockholders and net loss per common
share would approximate the pro forma amounts below, in
thousands:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Period from | |
| |
|
|
|
|
|
Inception | |
| |
|
|
|
|
|
(June 14, | |
| |
|
|
|
|
|
2002) | |
| |
|
|
|
|
|
through | |
| |
|
|
|
|
|
December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net loss attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss, as reported
|
|
$ |
(35,367 |
) |
|
$ |
(27,939 |
) |
|
$ |
(4,884 |
) |
| |
Add employee stock-based compensation expense included in
reported net loss
|
|
|
3,137 |
|
|
|
667 |
|
|
|
— |
|
| |
Deduct employee stock-based compensation expense determined
under fair value method
|
|
|
(3,448 |
) |
|
|
(697 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss — pro forma
|
|
$ |
(35,678 |
) |
|
$ |
(27,969 |
) |
|
$ |
(4,884 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net loss per common share (basic and diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(2.98 |
) |
|
$ |
(29.64 |
) |
|
$ |
(14.74 |
) |
|
Pro forma
|
|
$ |
(3.00 |
) |
|
$ |
(29.67 |
) |
|
$ |
(14.74 |
) |
81
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
For the period from inception (June 14, 2002) through
December 31, 2002 and the year ended December 31,
2003, the Company estimated the fair value of its stock option
grants by applying a present value approach which does not
consider expected volatility of the underlying stock
(“minimum value method”) since the Company’s
common stock was not publicly traded. For 2004 the Company
estimated the fair value of its stock option grants using the
Black-Scholes option pricing model. Assumptions used in these
fair values are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Period from | |
| |
|
|
|
|
|
Inception | |
| |
|
|
|
|
|
(June 14, | |
| |
|
|
|
|
|
2002) | |
| |
|
|
|
|
|
through | |
| |
|
|
|
|
|
December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Risk-free interest rate
|
|
|
3.60 |
% |
|
|
3.19 |
% |
|
|
3.02 |
% |
|
Expected dividend yield
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Expected option term
|
|
|
5 years |
|
|
|
5 years |
|
|
|
5 years |
|
|
Volatility
|
|
|
88 |
% |
|
|
— |
|
|
|
— |
|
|
|
|
Redeemable Convertible Preferred Stock |
Redeemable convertible preferred stock was treated as if it was
mandatorily redeemable (classified in the mezzanine section of
the balance sheet) if it may have been redeemed by the holder
based on facts and circumstances not in the Company’s
control. If there was a specified redemption date, the carrying
value was accreted to its redemption value over the term. These
adjustments were affected through charges first against retained
earnings, then against additional paid-in capital until it was
reduced to zero and then to accumulated deficit.
The Company’s foreign subsidiary, Alnylam Europe AG (a
German based company), has designated its local currency, the
Euro, as its functional currency. Financial statements of this
foreign subsidiary are translated to United States dollars for
consolidation purposes using current rates of exchange for
assets and liabilities; equity is translated using historical
exchange rates; and revenue and expense amounts are translated
using the average exchange rate for the period. Net unrealized
gains and losses resulting from foreign currency translation are
included in other comprehensive loss which is a separate
component of stockholders’ equity (deficit). The Company
also records a charge or a credit to stockholders’ equity
(deficit) for exchange gains or losses on intercompany balances
that are of a long-term nature. Net realized gains and losses
from foreign currency transactions are included in the
consolidated statement of operations. The Company recognized a
loss of $231,000 during 2004, a gain of $51,000 during 2003, and
had no gain or loss during the period from inception
(June 14, 2002) through December 31, 2002,
respectively, from foreign currency transactions.
Comprehensive income (loss) is comprised of net income (loss)
and certain changes in stockholders’ equity that are
excluded from net income (loss). The Company includes foreign
currency translation adjustments in other comprehensive income
(loss) for Alnylam Europe AG as the functional currency is not
the United States dollar.
|
|
|
Net Income (Loss) Per Common Share |
The Company accounts for and discloses net income (loss) per
common share in accordance with SFAS 128. Basic net income
(loss) per common share is computed by dividing net income
(loss) attributable
82
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
to common stockholders by the weighted average number of common
shares outstanding. Diluted net income (loss) per common share
is computed by dividing net income (loss) attributable to common
stockholders by the weighted average number of common shares and
dilutive potential common share equivalents then outstanding.
Potential common shares consist of shares issuable upon the
exercise of stock options and warrants (using the treasury stock
method), unvested restricted stock awards and the weighted
average conversion of the preferred stock into shares of common
stock (using the if-converted method) for periods prior to the
Company’s initial public offering, which was completed in
June 2004. Because the inclusion of potential common stock would
be anti-dilutive for all periods presented, diluted net loss per
share is the same as basic net loss per share.
The following table sets forth the potential common stock
excluded from the calculation of net loss per share because
their inclusion would be anti-dilutive:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Period from | |
| |
|
|
|
|
|
Inception | |
| |
|
|
|
|
|
(June 14, | |
| |
|
|
|
2002) | |
| |
|
December 31, | |
|
through | |
| |
|
| |
|
December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Options to purchase common stock
|
|
|
2,851,967 |
|
|
|
1,693,530 |
|
|
|
81,892 |
|
|
Warrants to purchase common stock
|
|
|
52,630 |
|
|
|
13,157 |
|
|
|
13,157 |
|
|
Convertible preferred stock
|
|
|
— |
|
|
|
11,087,696 |
|
|
|
4,294,736 |
|
|
Unvested restricted common stock
|
|
|
331,567 |
|
|
|
645,385 |
|
|
|
914,803 |
|
|
Options exercised prior to vesting
|
|
|
118,563 |
|
|
|
15,789 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
3,354,727 |
|
|
|
13,455,557 |
|
|
|
5,304,588 |
|
| |
|
|
|
|
|
|
|
|
|
Management uses consolidated financial information in
determining how to allocate resources and assess financial
performance. For this reason, the Company has determined that
they are principally engaged in one industry segment.
The following table presents total long-lived tangible assets by
geographic area as of December 31, 2004 and 2003, in
thousands:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Long-lived tangible assets:
|
|
|
|
|
|
|
|
|
| |
United States
|
|
$ |
8,919 |
|
|
$ |
2,342 |
|
| |
Germany
|
|
|
2,775 |
|
|
|
2,414 |
|
| |
|
|
|
|
|
|
|
Total long-lived tangible assets
|
|
$ |
11,694 |
|
|
$ |
4,756 |
|
| |
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements |
In December 2004, the FASB issued SFAS No. 123R,
“Share-Based Payment”,
(“SFAS 123R”) which revises SFAS 123 and
requires companies to expense the fair value of employee stock
options and other forms of stock-based compensation. Under
SFAS 123R, the most significant change in practice would be
treating the fair value of stock based payment awards that are
within its scope as compensation expense in the income statement
beginning on the date that a company grants the awards to
employees. This pronouncement is
83
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
effective for the first fiscal period beginning after
June 15, 2005. The Company is currently assessing the
impact that the adoption of this standard will have on its
financial position and results of operations.
In April 2004, the EITF issued Statement No. 03-06,
“Participating Securities and the Two-Class Method
Under Financial Accounting Standards Board (“FASB”)
Statement No. 128, Earnings Per Share”
(“EITF 03-06”). EITF 03-06 addresses a
number of questions regarding the computation of earnings per
share by a company that has issued securities other than common
stock that contractually entitle the holder to the right to
participate in dividends when, and if, declared. The issue also
provides further guidance in applying the two-class method of
calculating earnings per share, clarifying the definition of a
participating security and how to apply the two-class method.
EITF 03-06 was effective for fiscal periods beginning after
March 31, 2004, which was the Company’s second
quarter, and was required to be retroactively applied. There was
no impact from the adoption of EITF 03-06 on the
Company’s earnings per share as the Company has incurred
net operating losses during each period presented in the
consolidated financial statements and the effect would be
anti-dilutive.
|
|
| 3. |
ACQUISITION OF RIBOPHARMA AG |
On July 31, 2003, Alnylam acquired all the outstanding
voting shares of Ribopharma AG, a German-based company now
called Alnylam Europe AG. The results of operations of
Ribopharma AG are included in the operating results of the
Company from the date of acquisition (July 31, 2003). At
the date of acquisition, Ribopharma was a development stage
enterprise performing research and development associated with a
new pharmaceutical active agent category siRNA, which it
continues to do as a wholly-owned subsidiary. Alnylam purchased
Ribopharma for access to its in-process research and development
programs and its core technology. In addition, the acquisition
of Ribopharma enabled Alnylam to satisfy the conditions in the
technology license agreement with Garching Innovation GmbH
(“Garching”) (Note 13) to establish a German
based company with comparable operational force and resources.
Satisfaction of this condition enabled Alnylam to convert its
co-exclusive rights under the Garching license to exclusive
rights.
The consideration consisted of $1.5 million in cash and
815,376 shares of common stock. Based on a valuation
performed of Ribopharma AG and the intangible assets acquired,
the purchase price was estimated at $3.9 million and
comprised of the following, in thousands:
| |
|
|
|
|
|
Cash paid
|
|
$ |
1,500 |
|
|
Fair value of common stock issued
|
|
|
1,947 |
|
|
Acquisition costs
|
|
|
419 |
|
| |
|
|
|
| |
|
$ |
3,866 |
|
| |
|
|
|
The fair value of the tangible and intangible assets acquired
and liabilities assumed were recorded as follows, in thousands:
| |
|
|
|
|
|
Cash
|
|
$ |
1,798 |
|
|
Other current assets
|
|
|
41 |
|
|
Fixed assets
|
|
|
1,733 |
|
|
Intangible assets
|
|
|
8,684 |
|
|
Accounts payable and accrued expenses assumed
|
|
|
(1,300 |
) |
|
Notes payable assumed
|
|
|
(7,090 |
) |
| |
|
|
|
| |
|
$ |
3,866 |
|
| |
|
|
|
The appraised value of intangible assets acquired was below the
total fair value of intangible assets acquired and would
generally result in the recognition of goodwill. However, since
Ribopharma AG was a
84
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
development stage company and not considered a
“business” as defined by the applicable accounting
rules at the date of acquisition, this residual value was
allocated proportionately to the long-lived assets acquired as
follows, in thousands:
| |
|
|
|
|
| |
|
Fair Value | |
| |
|
| |
|
Purchased in-process research and development
|
|
$ |
4,609 |
|
|
Core technology
|
|
|
3,638 |
|
|
Workforce
|
|
|
437 |
|
|
Fixed assets
|
|
|
1,733 |
|
| |
|
|
|
| |
|
$ |
10,417 |
|
| |
|
|
|
The fair market value of the intangible assets acquired was
based on a valuation and determined using an income approach.
The core technology was valued using a relief from royalty
methodology, the purchased in-process research and development
was valued based on a discounted cash flow analysis and the
workforce was valued using the avoided cost method.
Purchased in-process technology was written off immediately upon
the consummation of the acquisition and is included as a
separate line in the Company’s statement of operations.
Core technology and workforce are being amortized over their
estimated useful lives of ten years and four years,
respectively. The step up in the fixed assets is being amortized
over four years, the remaining estimated useful life of these
assets.
Intangible assets at December 31, 2004 and 2003 are as
follows, in thousands:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Core Technology
|
|
$ |
3,638 |
|
|
$ |
3,638 |
|
|
Workforce
|
|
|
437 |
|
|
|
437 |
|
| |
|
|
|
|
|
|
| |
|
|
4,075 |
|
|
|
4,075 |
|
|
Less — accumulated amortization:
|
|
|
|
|
|
|
|
|
| |
Core Technology
|
|
|
(515 |
) |
|
|
(152 |
) |
| |
Workforce
|
|
|
(155 |
) |
|
|
(45 |
) |
| |
|
|
|
|
|
|
| |
|
Total accumulated amortization
|
|
|
(670 |
) |
|
|
(197 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
3,405 |
|
|
$ |
3,878 |
|
| |
|
|
|
|
|
|
During the years ended December 31, 2004 and 2003, the
Company recorded $473,000 and $197,000, respectively, of
amortization expense related to the core technology and
workforce intangibles of which the entire amount is included in
research and development. During the years ended
December 31, 2004 and 2003, the Company recorded $295,000
and $123,000, respectively, of additional depreciation related
to the increase in the recorded fair value of the fixed assets
of which $265,000 and $111,000 is included in research and
development expenses in 2004 and 2003, respectively, and $30,000
and $12,000 is included in general and administrative expense in
2004 and 2003, respectively. The Company expects annual
amortization expense related to the core technology intangible
asset to be $364,000 through 2012 and $211,000 in 2013. The
Company also expects annual amortization expense related to the
workforce intangible asset to be $109,000 through 2006 and
$64,000 in 2007.
|
|
|
Purchased In-Process Research and Development |
In connection with the Company’s acquisition of Ribopharma
AG, the Company acquired two Systemic
RNAitm
programs related to the development of drugs targeting cancers
such as malignant melanoma and
85
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
pancreatic carcinoma. The Company expensed $4.6 million of
purchased in-process research and development associated with
these programs. Management’s plans contemplate that the
Company will conduct the first phase of clinical trials and then
out-license the programs to a partner. Upon out-licensing, the
partner is expected to bear all development costs and control
clinical development. The Company expects to earn payments upon
the attainment of clinical milestones by our partner and
royalties on product sales. Since our partner will control the
clinical development, we will be unable to influence the timing
of the achievement of the milestones, if at all, or the
estimated year of the product launch, if at all. The
Company’s valuation assumed a development period of
approximately 10 years, with milestones being earned during
that period, which management believes is a typical horizon to
bring a therapeutic drug to market. Actual results will differ
from these estimates due to the uncertainties surrounding drug
development.
Management assumes responsibility for determining the in-process
research and development valuation. The fair value assigned to
purchase in-process research and development was estimated by
discounting, to present value, the probability-adjusted net cash
flows expected to result once the technology has reached
technological feasibility. A discount rate of 32 percent
was applied to estimate the present value of the cash flows and
is consistent with the overall risks of developing these
projects. As of December 31, 2004, the technological
feasibility of the projects had not been reached and management
believes the assumptions included in the valuation analysis
continue to be valid. In the allocation of the purchase price,
the concept of alternative future use was considered. The
projects under development have no current alternative future
uses for the underlying technology in the event the projects are
unsuccessful.
|
|
| 4. |
PROPERTY AND EQUIPMENT |
Property and equipment consist of the following at
December 31, 2004 and 2003, in thousands:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, | |
| |
|
|
|
| |
| |
|
Useful Life | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Laboratory equipment and software
|
|
|
5 years |
|
|
$ |
6,881 |
|
|
$ |
4,300 |
|
|
Computer equipment
|
|
|
3 years |
|
|
|
579 |
|
|
|
270 |
|
|
Furniture and fixtures
|
|
|
5 years |
|
|
|
795 |
|
|
|
431 |
|
|
Leasehold improvements
|
|
|
* |
|
|
|
5,902 |
|
|
|
50 |
|
|
Construction in progress
|
|
|
— |
|
|
|
— |
|
|
|
363 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
14,157 |
|
|
|
5,414 |
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
(2,463 |
) |
|
|
(658 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
11,694 |
|
|
$ |
4,756 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| * |
shorter of asset life or lease term |
Depreciation expense was $2.0 million, $0.6 million,
and $36,000 for the years ended December 31, 2004 and 2003
and the period from June 14, 2002 (date of inception) to
December 31, 2002, respectively.
86
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accrued expenses consist of the following at December 31,
2004 and 2003, in thousands:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
License fee payable to Isis
|
|
$ |
2,000 |
|
|
$ |
— |
|
|
Payroll and benefits
|
|
|
685 |
|
|
|
823 |
|
|
Professional fees
|
|
|
561 |
|
|
|
344 |
|
|
Interest
|
|
|
91 |
|
|
|
21 |
|
|
Payable to research collaboration partner
|
|
|
259 |
|
|
|
— |
|
|
Other
|
|
|
279 |
|
|
|
255 |
|
| |
|
|
|
|
|
|
| |
|
$ |
3,875 |
|
|
$ |
1,443 |
|
| |
|
|
|
|
|
|
In December 2002, the Company entered into an agreement with
Silicon Valley Bank to establish an equipment line of credit for
$2.5 million. The Company drew down a total of
$2.1 million on this line of credit during 2003, of which
$239,000 was paid in 2003 and the remainder was repaid in March
2004 in connection with the Company’s establishment of a
new line of credit. Under the terms of the agreement with
Silicon Valley Bank, borrowings bore interest at prime rate plus
0.25 percent as well as additional interest of
8.0 percent of the original principal payable upon the
maturity of each equipment advance under this line of credit. In
2004 and 2003, the Company recorded interest expense of $202,000
and $83,000, respectively, related to borrowings under this line
of credit. Interest expense recorded in 2004 included $168,000
of interest penalties paid upon the early repayment of this line
of credit.
On March 26, 2004, the Company entered into an agreement
with Lighthouse Capital Partners V, L.P.
(“Lighthouse”) to establish an equipment line of
credit for $10.0 million. The Company has the ability to
draw down amounts under the line of credit through June 30,
2005 upon adherence to certain conditions. All borrowings under
the line of credit are collateralized by the assets financed and
the agreement contains certain provisions that restrict the
Company’s ability to dispose of or transfer these assets.
Borrowings bear interest at prime rate plus 3 percent
(8.25% at December 31, 2004). The Company is required to
make interest only payments on all draw-downs made during the
period from March 26, 2004 through June 30, 2005 at
which point all draw-downs under the line of credit will be
repaid over 48 months. On the maturity of each equipment
advance under the line of credit, the Company is required to
pay, in addition to the paid principal and interest, an
additional amount of 11.5 percent of the original
principal. This amount is being accrued over the applicable
borrowing period as additional interest expense. In connection
with the agreement, Alnylam issued to an affiliate of Lighthouse
warrants to purchase 100,000 shares of Series C
redeemable convertible preferred stock at an exercise price of
$5.00 per share and a term of seven years, which were
converted into warrants to purchase 52,630 shares of
our common stock at an exercise price of $9.50 per share
upon the closing of our initial public offering. Alnylam
recorded the fair value of these warrants of $557,000 as a
deferred financing cost which is being amortized to interest
expense over the repayment term of the first advance of
63 months. The fair value of the warrants was calculated
using the Black-Scholes option pricing model with the following
assumptions: 100% volatility, risk-free interest rate of 3.49%,
no dividend yield, and a seven-year term. In conjunction with
entering into the agreement with Lighthouse in March 2004,
Alnylam
87
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
paid off the remaining balance of the loan with Silicon Valley
Bank, of $1.9 million, via an initial draw in the amount of
the payoff balance.
As of December 31, 2004, future cash payments under the
note payable to Lighthouse, including interest, are as follows,
in thousands:
| |
|
|
|
|
| Year Ending December 31, |
|
|
| |
|
|
|
2005
|
|
$ |
1,301 |
|
|
2006
|
|
|
2,080 |
|
|
2007
|
|
|
2,080 |
|
|
2008
|
|
|
2,080 |
|
|
2009
|
|
|
1,868 |
|
| |
|
|
|
| |
|
|
9,409 |
|
|
Less: portion representing interest
|
|
|
2,208 |
|
| |
|
|
|
| |
|
|
7,201 |
|
|
Less: current portion
|
|
|
790 |
|
| |
|
|
|
|
Long-term equipment loan
|
|
$ |
6,411 |
|
| |
|
|
|
|
|
|
Note Payable to Ribopharma AG Shareholder |
Upon the acquisition of Ribopharma AG, Alnylam Pharmaceuticals,
Inc. assumed a note payable and accrued interest of
$4.8 million to a Ribopharma shareholder and an obligation
to provide common shares based on prior terms of the note valued
at $119,000, both of which were included in assumed liabilities
upon the acquisition date. The note payable of $4.5 million
and accrued interest of $0.3 million were exchanged for
1,917,857 shares of Series B preferred stock.
Additionally, 49,496 shares of Alnylam Pharmaceuticals,
Inc.’s common stock were issued to satisfy the obligation
to provide shares. There were no amounts outstanding under this
note payable as of December 31, 2004 or 2003.
Upon the acquisition of Ribopharma AG, Alnylam Pharmaceuticals,
Inc. assumed notes payable amounting to $2.6 million. The
Company repaid $3.0 million in August 2003, which included
accrued interest of $0.4 million. There were no amounts
outstanding under these notes as of December 31, 2004 or
2003.
|
|
| 7. |
COMMITMENTS AND CONTINGENCIES |
Licensor indemnification — In connection with a
certain license agreement, the Company is required to indemnify
the licensor for certain damages arising in connection with the
intellectual property rights licensed under the agreement. The
Company believes that the probability of receiving a claim is
remote and, as such, no amounts have been accrued related to
this indemnification as of December 31, 2004 and 2003.
The Company is also a party to a number of agreements entered
into in the ordinary course of business, which contain typical
provisions, which obligate the Company to indemnify the other
parties to such agreements upon the occurrence of certain
events. Such indemnification obligations are usually in effect
from the date of execution of the applicable agreement for a
period equal to the applicable statute of limitations. The
aggregate maximum potential future liability of the Company
under such indemnification provisions is uncertain. Since its
inception, the Company has not incurred any expenses as a result
of such indemnification provisions. Accordingly, the Company has
determined that the estimated aggregate fair value of its
potential
88
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
liabilities under such indemnification provisions is minimal and
has not recorded any liability related to such indemnification
provisions as of December 31, 2004 and 2003.
|
|
|
Technology License Commitments |
The Company has licensed the rights to use certain technologies
in its research process as well as in any products the Company
may develop including these licensed technologies. In accordance
with the related license agreements, the Company is required to
make certain fixed annual payments to the licensor or a designee
of the licensor over various agreement terms. Many of these
agreement terms are consistent with the remaining lives of the
underlying intellectual property that the Company has licensed.
At December 31, 2004, the Company was committed to make the
following fixed license payments under existing license
agreements, in thousands:
| |
|
|
|
|
| Year Ending December 31, |
|
|
| |
|
|
|
2005
|
|
$ |
2,155 |
|
|
2006
|
|
|
155 |
|
|
2007
|
|
|
155 |
|
|
2008
|
|
|
155 |
|
|
2009
|
|
|
155 |
|
|
Thereafter
|
|
|
1,650 |
|
| |
|
|
|
|
Total
|
|
$ |
4,425 |
|
| |
|
|
|
The Company leases office and laboratory space in Cambridge,
Massachusetts and Kulmbach, Germany (beginning on July 31,
2003 the date of acquisition of Ribopharma AG), under
non-cancelable operating lease agreements. Total rent expense
under these operating leases was $2.2 million,
$1.0 million, and $0.1 million for the years ended
December 31, 2004 and 2003 and for the period from
June 14, 2002 (date of inception) through December 31,
2002, respectively.
In September 2003, the Company entered into an operating lease
to rent 33,453 square feet of laboratory and office space
in Cambridge, Massachusetts through September 2011. Rental
payments began in April 2004. Under the original terms of the
lease agreement, the Company will begin paying rent on an
additional 10,605 square feet in this same facility in
September 2005. The Company has the option to extend the lease
for two successive five-year extensions.
Pursuant to the terms of the lease agreement, the Company
secured a $2.3 million letter of credit as security for its
leased facility. The underlying cash securing this letter of
credit has been classified as long-term restricted cash in the
accompanying consolidated balance sheets.
The Company also leases 13,585 square feet of laboratory
and office space in Kulmbach, Germany through June 2008 under a
non-cancelable operating lease. The Company will begin paying
rent on an additional 1,439 square feet in the same
facility in March 2005. The Company has the option to extend its
lease of this facility for two successive three-year extensions.
89
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Future minimum lease payments under these non-cancelable leases
are approximately as follows:
| |
|
|
|
|
| Year Ending December 31, |
|
|
| |
|
|
|
2005
|
|
$ |
2,522 |
|
|
2006
|
|
|
2,544 |
|
|
2007
|
|
|
2,598 |
|
|
2008
|
|
|
2,505 |
|
|
2009
|
|
|
2,280 |
|
|
Thereafter
|
|
|
4,058 |
|
| |
|
|
|
|
Total
|
|
$ |
16,507 |
|
| |
|
|
|
|
|
|
Related Party Notes Receivable |
In connection with the acquisition of Ribopharma AG, the Company
agreed to provide two shareholders of Ribopharma AG who received
cash and common stock in the acquisition with non-recourse loans
to cover any tax contingencies the shareholders may incur as a
result of the acquisition. These loans bear interest at four
percent per annum and are payable upon certain liquidity events.
In addition to the loan commitment, the Company entered into an
indemnity agreement whereby the Company has indemnified these
shareholders for any taxes payable as a result of making the
loan to the Ribopharma shareholders up to a maximum of
approximately $179,000 for each shareholder. With respect to the
indemnity, the Company issued a letter of credit in 2003 to the
two shareholders amounting to $354,000 related to the potential
indemnity that the Company has with the two shareholders. The
required amount of the letter of credit is collateralized by
restricted funds maintained by the Company at the bank issuing
the letter of credit. As a result, the Company classified this
amount as restricted cash in its consolidated balance sheet as
of December 31, 2003. In June 2004, loans totaling
approximately $304,000 were provided to these shareholders and
each shareholder subsequently released the Company from its
indemnity obligation. As a result, the Company cancelled its
letter of credit and removed this restriction of its cash. At
December 31, 2004, these loans totaled $310,000, including
accrued interest.
In connection with the employment agreements of the same two
Ribopharma AG employees, the Company has committed to paying a
one-time payment to each employee of $250,000 upon the issuance
of a specific patent in the United States of America. This
contingent payment will be paid and expensed upon the issuance
of the patent.
The Company may periodically become subject to legal proceedings
and claims arising in connection with on-going business
activities, including being subject to claims or disputes around
patents that have been issued or are pending in the field of
research the Company is focused on. The Company does not believe
that there were any material claims against the Company as of
December 31, 2004.
Prior to the Company’s initial public offering in June
2004, the Company’s primary source of funding was from
sales of preferred stock, both convertible and redeemable
convertible. During 2004, 2003 and 2002, the Company sold
1,666,667, 12,906,670 and 8,160,010 shares of preferred
stock, respectively, which resulted in net proceeds of
$10.0 million, $34.5 million and $17.3 million,
respectively. During the years ended December 31, 2004 and
2003 and the period from inception (June 14, 2002) through
December 31, 2002, the Company recorded accretion of
preferred stock of $2.7 million, $2.9 million and
$0.7 million, respectively. In connection with the
Company’s initial public offering in June 2004, and in
accordance with the preferred stock
90
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
agreements, all outstanding shares of preferred stock converted
into 11,964,908 of the Company’s common stock. At
December 31, 2004 and 2003 there were no shares and
21,066,680 shares of preferred stock outstanding,
respectively.
The Company has authorized up to 5,000,000 shares of
preferred stock, $0.01 par value per share for issuance.
The preferred stock will have such rights, preferences,
privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the board of directors
upon its issuance.
In June 2002, the Company sold 1,294,716 shares of common
stock to the Company’s founders, including certain
non-employees, in exchange for $0.0001 per share, which
represented the fair market value of the common stock on the
date of sale, as determined by management and approved by the
board of directors. The founders’ common stock is subject
to restricted stock agreements, which include various
restrictions, including the right of the Company to repurchase
declining percentages of the shares at the original issuance
price during the four-year period following issuance if the
employee or non-employee ceases to provide services to the
Company for any reason. In July 2002, the Company sold
47,368 shares of common stock to a consultant for
$0.19 per share, which represented the fair market value of
the common stock on the date of sale, as determined by
management. This common stock is subject to a restricted stock
agreement, which includes various restrictions, including the
right of the Company to repurchase declining percentages of the
shares at the original issuance price during the four-year
period following issuance if the consultant ceases to perform
services.
In connection with the restricted stock awards issued to
non-employees, the Company has recorded cumulative deferred
compensation of $3.1 million, which represents the
cumulative fair value of the restricted stock awards measured in
accordance with SFAS No. 123 and EITF 96-18. Shares
remaining unvested or subject to forfeiture for non-employees
still providing services are subject to a mark-to-market
adjustment during each reporting period prior to vesting in
full. The deferred compensation will be recorded as an expense
over the vesting period of the underlying restricted stock using
the method prescribed by FIN No. 28, “Accounting
for Stock Appreciation Rights and Other Variable Stock Options
or Award Plans,” (“FIN 28”). The Company
recorded $0.2 million, $2.2 million and
$0.2 million of compensation expense during the years ended
December 31, 2004 and 2003 and the period from inception
(June 14, 2002) through December 31, 2002,
respectively, related to the amortization of the deferred
compensation. The deferred compensation balance at
December 31, 2004 and 2003, and the period from inception
(June 14, 2002) through December 31, 2002,
respectively, related to these awards was $0.4 million and
$1.2 million and $0.2 million. Since the fair market
value of the common stock issued to non-employees is subject to
change in the future, the compensation expense recognized during
the year ended December 31, 2004, and prior years may not
be indicative of future compensation charges.
On May 7, 2004, the Company effected a reverse 1-for-1.9
split of all outstanding shares of common stock. All common
share and per share data have been retroactively restated to
reflect this event.
In June 2004, the Company completed the initial public offering
of its common stock. The initial public offering consisted of
the sale of 5,000,000 shares of common stock at a price of
$6.00 per share. As part of the offering, the Company
granted to the underwriters an option to purchase an additional
750,000 shares within
91
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
30 days of the initial public offering to cover
over-allotments. This option was exercised in full in June 2004.
Net proceeds from the initial public offering after deducting
underwriters’ discounts and expenses was
$29.9 million. Upon the closing of the initial public
offering, the authorized number of shares of the Company’s
common stock increased to 125,000,000. In addition, upon the
closing of the Company’s initial public offering, the
Company adopted certain stock incentive plans (Note 10).
|
|
| 10. |
STOCK INCENTIVE PLANS |
Prior to the Company’s initial public offering in June
2004, the Company had adopted stock incentive plans in 2002 and
2003. In June 2002, the Company adopted the 2002 Stock Incentive
Plan (the “2002 Stock Plan”), which was terminated in
November 2002, and was replaced with the Alnylam U.S., Inc. 2002
Employee, Director and Consultant Stock Plan (the “2002
Plan”). All options previously granted under the 2002 Stock
Plan were canceled and new options for the same number of
shares, vesting provisions and exercise price were granted under
the 2002 Plan. In September 2003, the Company adopted the
Alnylam Pharmaceuticals, Inc. 2003 Employee, Director and
Consultant Stock Plan (the “2003 Plan”). Subsequent to
the closing of the Company’s initial public offering, no
further stock options or other equity awards have been granted,
or may be granted in the future, under the 2002 Plan or the 2003
Plan.
Upon the effective date of the Company’s initial public
offering, the Company adopted the 2004 Stock Incentive Plan (the
“2004 Plan”) with a total of 4,030,260 shares
authorized for future issuance. The 2004 Plan provides for an
annual increase in the number of shares available for issuance
under the plan equal to the lesser of 2,631,578 shares of
common stock, 5% of the Company’s outstanding shares or an
amount determined by the board of directors. In addition, the
2004 Plan includes a non-employee director stock option program
under which each eligible non-employee director will be entitled
to receive an annual grant of options to
purchase 7,105 shares of common stock upon his or her
initial appointment to the board of directors and a subsequent
annual grant of an option to purchase 5,263 shares of
common stock based on continued service.
As of December 31, 2004, an aggregate of
3,736,012 shares of common stock were reserved for issuance
under the 2004 Plan, including outstanding options to
purchase 2,851,967 shares of common stock and
884,045 shares were available for future grant.
The plans provide for the granting of incentive stock options
(“ISOs”) and nonqualified stock options. Stock options
may be granted to the Company’s employees, officers,
directors, consultants and advisors, as defined. ISOs may be
granted at no less than fair market value on the date of grant,
as determined by the Company’s Board of Directors (no less
than 110 percent of fair market value on the date of grant
for 10 percent or greater stockholders), subject to
limitations, as defined. Each option shall be exercisable at
such times and subject to such terms as determined by the Board
of Directors and expires within ten years of issuance.
Options granted generally vest at a rate of 25 percent on
the first anniversary of the grant date and 6.25 percent of
the shares each successive three-month period until fully
vested. In January 2004, the Company granted an option to the
chief executive officer to purchase 105,263 shares of
common stock at an exercise price of $0.95 per share that
vested as to 100 percent of the shares upon the
Company’s initial public offering in June 2004. In December
2004, the Company granted an option to the chief executive
officer to purchase up to 250,000 shares of common stock at
an exercise price of $7.47 per share that vests only upon
the Company’s attainment of a corporate goal as determined
by the Company’s compensation committee.
92
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the activity of the
Company’s stock option plans:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of | |
|
|
|
Weighted | |
| |
|
Options | |
|
|
|
Average | |
| |
|
Available for | |
|
Number of | |
|
Exercise | |
| |
|
Future Grant | |
|
Options | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
Outstanding, June 14, 2002
|
|
|
|
|
|
|
— |
|
|
$ |
— |
|
| |
Granted
|
|
|
|
|
|
|
163,788 |
|
|
|
0.48 |
|
| |
Exercised
|
|
|
|
|
|
|
— |
|
|
|
— |
|
| |
Cancelled
|
|
|
|
|
|
|
(81,894 |
) |
|
|
0.48 |
|
| |
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2002
|
|
|
681,263 |
|
|
|
81,894 |
|
|
|
0.48 |
|
| |
Granted
|
|
|
|
|
|
|
1,656,187 |
|
|
|
0.53 |
|
| |
Exercised
|
|
|
|
|
|
|
(44,526 |
) |
|
|
0.48 |
|
| |
Cancelled
|
|
|
|
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2003
|
|
|
498,761 |
|
|
|
1,693,555 |
|
|
|
0.53 |
|
| |
Granted
|
|
|
|
|
|
|
1,590,474 |
|
|
|
5.39 |
|
| |
Exercised
|
|
|
|
|
|
|
(249,724 |
) |
|
|
0.74 |
|
| |
Cancelled
|
|
|
|
|
|
|
(182,338 |
) |
|
|
0.56 |
|
| |
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
884,045 |
|
|
|
2,851,967 |
|
|
$ |
2.91 |
|
| |
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2002
|
|
|
|
|
|
|
842 |
|
|
$ |
0.19 |
|
|
Exercisable at December 31, 2003
|
|
|
|
|
|
|
192,711 |
|
|
$ |
0.48 |
|
|
Exercisable at December 31, 2004
|
|
|
|
|
|
|
724,097 |
|
|
$ |
0.57 |
|
All options granted during the period from inception
(June 14, 2002) through December 31, 2002, had an
exercise price that was equal to the fair market value of common
stock on the date of grant. The weighted average fair value of
these options granted at fair market value during the period
from inception (June 14, 2002) through December 31,
2002 was $0.06. All options granted during the year ended
December 31, 2003, had an exercise price that was less than
the fair value of common stock on the date of grant. The
weighted average fair value of these options was $2.38. During
2004, the Company granted options to
purchase 544,989 shares of common stock, with exercise
prices that were less than the fair value of the Company’s
common stock on the date of grant. The weighted average fair
value of these options was $4.89. In addition, during 2004 the
Company granted options to purchase 1,045,485 shares
of common stock with exercise prices that were equal to the
market price of the Company’s common stock on the date of
grant. The weighted average fair value of these options was
$5.17.
93
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
|
| |
|
| |
|
Options Exercisable | |
| |
|
|
|
Weighted | |
|
| |
| |
|
|
|
Weighted | |
|
Average | |
|
|
|
Weighted | |
| |
|
|
|
Average | |
|
Remaining | |
|
|
|
Average | |
| |
|
Number of | |
|
Exercise | |
|
Contractual | |
|
Number of | |
|
Exercise | |
| Exercise Price Range |
|
Options | |
|
Price | |
|
Life (in Years) | |
|
Options | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$0.48
|
|
|
1,165,637 |
|
|
$ |
0.48 |
|
|
|
8.38 |
|
|
|
573,950 |
|
|
$ |
0.48 |
|
|
$0.95
|
|
|
640,845 |
|
|
$ |
0.95 |
|
|
|
9.04 |
|
|
|
150,147 |
|
|
$ |
0.95 |
|
|
$5.23 - $5.85
|
|
|
127,408 |
|
|
$ |
5.69 |
|
|
|
9.70 |
|
|
|
— |
|
|
|
— |
|
|
$6.78
|
|
|
649,827 |
|
|
$ |
6.78 |
|
|
|
9.93 |
|
|
|
— |
|
|
|
— |
|
|
$6.86 - $7.47
|
|
|
268,250 |
|
|
$ |
7.43 |
|
|
|
9.97 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
2,851,967 |
|
|
|
|
|
|
|
|
|
|
|
724,097 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2004 and 2003 and the
period from inception (June 14, 2002) through
December 31, 2002, in connection with the grant of common
stock options to employees, the Company recorded deferred stock
compensation of approximately $3.8 million,
$3.3 million and zero, respectively, representing the
difference between the exercise price and the fair market value
of the Company’s common stock on the date the stock options
were granted. During the years ended December 31, 2004 and
2003 and the period from inception (June 14, 2002) through
December 31, 2002, the Company recorded amortization of
deferred stock compensation of $3.1 million,
$0.7 million and zero, respectively, and $2.9 million
remains unamortized at December 31, 2004. The Company will
be recognizing the fixed deferred stock compensation over the
remaining vesting period of the options, subject to forfeitures
should the employees terminate, in accordance with the method
prescribed by FIN 28. The anticipated future amortization
of deferred stock compensation related to employee option grants
as of December 31, 2004 is as follows, in thousands:
| |
|
|
|
|
| Year Ending December 31, |
|
|
|
2005
|
|
$ |
1,691 |
|
|
2006
|
|
|
891 |
|
|
2007
|
|
|
355 |
|
|
2008
|
|
|
18 |
|
| |
|
|
|
| |
|
$ |
2,955 |
|
| |
|
|
|
In connection with stock options granted to non-employees for
services during the years ended December 31, 2004 and
2003,the Company has recorded aggregate deferred compensation of
$1.6 million, which represents the fair value of
non-employee grants. The deferred compensation will be recorded
as an expense over the vesting period of the underlying stock
options using the method prescribed by FIN 28. At the end
of each financial reporting period prior to vesting, the value
of these options (as calculated using the Black-Scholes option
pricing model) will be re-measured using the then current fair
value of the Company’s common stock. At that point,
deferred compensation and the non-cash compensation recognized
during that period will be adjusted accordingly. Since the fair
market value of the common stock options granted to
non-employees is subject to change in the future, the amount of
future compensation expense recognized will be adjusted until
the stock options, are fully vested. Stock-based compensation
expense related to these non-employee options for the years
ended December 31, 2004 and 2003 and the period from
inception (June 14, 2002) through December 31, 2002
was $0.7 million, $0.5 million and $0, respectively.
94
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Employee Stock Purchase Plan |
In 2004, the Company adopted the 2004 Employee Stock Purchase
Plan (the “2004 Purchase Plan”) with
315,789 shares authorized for issuance. Under the 2004
Purchase Plan, the Company makes one offering each year, at the
end of which employees may purchase shares of common stock
through payroll deductions made over the term of the offering.
The per-share purchase price at the end of the offering is equal
to the lesser of 85% of the closing price of the common stock at
the beginning or end of the offering period. The annual offering
period begins on the 1st day of November each year and ends
on the 31st day of October each year. No shares had been
issued under the 2004 Purchase Plan through December 31,
2004.
Deferred income taxes reflect the tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes. A
valuation allowance is established when uncertainty exists as to
whether all or a portion of the net deferred tax assets will be
realized. Components of the net deferred tax asset as of
December 31, 2004 and 2003, are approximately as follows,
in thousands:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
| |
Net operating loss carryforwards
|
|
$ |
5,863 |
|
|
$ |
2,628 |
|
| |
Research and development credits
|
|
|
1,000 |
|
|
|
238 |
|
| |
Capitalized research and development and start-up costs
|
|
|
12,962 |
|
|
|
6,239 |
|
| |
Deferred revenue
|
|
|
2,047 |
|
|
|
761 |
|
| |
Other
|
|
|
634 |
|
|
|
839 |
|
| |
|
|
|
|
|
|
| |
Total deferred tax assets
|
|
|
22,506 |
|
|
|
10,705 |
|
|
Deferred Tax Liabilities:
|
|
|
|
|
|
|
|
|
| |
Intangible assets
|
|
|
(1,371 |
) |
|
|
(1,788 |
) |
|
Deferred tax asset valuation allowance
|
|
|
(21,135 |
) |
|
|
(8,917 |
) |
| |
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
The Company’s effective income tax rate differs from the
statutory federal income tax rate as follows for the years ended
December 31, 2004 and 2003 and for the period from
inception (June 14, 2002) through December 31, 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Period from | |
| |
|
|
|
|
|
Inception | |
| |
|
|
|
|
|
(June 14, 2002) | |
| |
|
|
|
|
|
through | |
| |
|
2004 | |
|
2003 | |
|
December 31, 2002 | |
| |
|
| |
|
| |
|
| |
|
At U.S. federal statutory rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
State taxes, net of federal effect
|
|
|
5.4 |
|
|
|
5.0 |
|
|
|
6.2 |
|
|
Permanent items
|
|
|
(3.8 |
) |
|
|
(2.2 |
) |
|
|
0.8 |
|
|
Purchased in-process research and development
|
|
|
— |
|
|
|
(6.0 |
) |
|
|
— |
|
|
Research credits
|
|
|
1.9 |
|
|
|
0.6 |
|
|
|
0.9 |
|
|
German tax rate differential
|
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
|
Valuation allowance
|
|
|
(37.4 |
) |
|
|
(31.4 |
) |
|
|
(41.9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
| |
|
|
|
|
|
|
|
|
|
95
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As required by SFAS No. 109, management of the Company
has evaluated the positive and negative evidence bearing upon
the realizability of its deferred tax assets. Management has
concluded, in accordance with the applicable accounting
standards, that it is more likely than not that the Company may
not realize the benefit of its deferred tax assets. Accordingly,
the deferred tax assets have been fully reserved. Management
reevaluates the positive and negative evidence on an annual
basis.
At December 31, 2004, the Company had federal and state net
operating loss carryforwards of approximately $9.7 million
and $9.2 million available, respectively, to reduce future
taxable income in the United States, which will expire at
various dates beginning in 2007 through 2024. At
December 31, 2004, the Company had federal and trade
operating loss carryforwards of approximately $6.0 million
and $3.9 million, respectively, to reduce future taxable
income in Germany, which do not expire. At December 31,
2004, federal and state research and development credit
carryforwards were approximately $0.7 million and
$0.5 million, respectively, available to reduce future tax
liabilities in the United States, and, which expire at various
dates beginning in 2017 through 2024. Ownership changes, as
defined in the Internal Revenue Code, including those resulting
from the issuance of common stock in connection with the
Company’s planned initial public offering, may limit the
amount of net operating loss and tax credit carryforwards that
can be utilized to offset future taxable income or tax
liability. The amount of the limitation is determined in
accordance with Section 382 of the Internal Revenue Code.
On October 22, 2004, President Bush signed the American
Jobs Creation Act of 2004 (the “Act” ) into law. The
Company is reviewing the Act to determine what impact, if any,
it will have on its financial statements.
The Company sponsors a savings plan for its employees, who meet
certain eligibility requirements, which is designed to be a
qualified plan under section 401(k) of the Internal Revenue
Code (the “401(k) Plan”). The 401(k) Plan allows
participants to defer up to 15 percent of their annual
compensation and with proper notice up to 100 percent of
their compensation in the final month of the plan year on a
pretax basis and subject to Internal Revenue Code limits. The
plan covers substantially all of the employees who meet minimum
age and service requirements. The Company may make matching
contributions to the 401(k) Plan in amounts determined by the
Company’s Board of Directors. The Company did not
contribute to the 401(k) plan during the years ended
December 31, 2004, December 31, 2003 or the period
from inception (June 14, 2002) through December 31,
2002.
|
|
| 13. |
SIGNIFICANT AGREEMENTS |
|
|
|
Garching Innovation GmbH License Agreement |
In December 2002, the Company entered into a co-exclusive
license with Garching for the worldwide rights to use and
sublicense certain technology on which patents are pending to
develop and commercialize therapeutic products and related
applications. The Company also obtained the rights to use
without the right to sublicense, the technology for all
diagnostic uses other than for the purposes of therapeutic
monitoring. In consideration for the rights to license this
technology, the Company agreed to issue to Garching 723,240
shares of Series B redeemable convertible preferred stock.
As of December 31, 2002, the Company valued this
consideration at the Series B redeemable convertible
preferred stock issuance price of $2.50 per share for total
consideration of $1.8 million. The Company recorded the
consideration as license fee expense during the period from
inception (June 14, 2002) through December 31, 2002 as
the technology had not reached technological feasibility and
does not have any alternative future use. In July 2003, the
Company issued the shares of Series B redeemable preferred
stock to Garching. The Company will also be required to pay
future royalties on net sales of all therapeutic and
prophylactic products developed with the technology.
96
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company was also given the ability to acquire the remaining
50 percent exclusive rights to the technology that had not
been previously granted to the Company by Garching upon the
establishment of a German-based company with comparable
operational work force and resources. The Company successfully
obtained the remaining 50 percent exclusive rights upon the
acquisition of Ribopharma AG in July 2003 (Note 3) and in
consideration for the remaining rights to this technology,
issued 158,605 shares of Series B redeemable
convertible preferred stock, which were converted into
83,476 shares of common stock upon the closing of the
Company’s initial public offering in June 2004. These
shares were determined to have a fair value of $0.4 million
and the value was recorded as license fee expense in 2003. The
Company is also reserving an additional 8,594 shares of its
common stock which is contingently issuable if a specified claim
is obtained related to one of its licensed patents.
|
|
|
Isis Pharmaceuticals, Inc. Collaboration and License
Agreement |
In March 2004, Alnylam entered into a collaboration and license
agreement with Isis Pharmaceuticals, Inc. (“Isis”).
Isis granted Alnylam 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 products. Alnylam 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 and commercialization of double-stranded RNA
products designed to work through an RNAi mechanism, except in
the context of a collaboration in which Isis plays an active
role. Alnylam 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.
Alnylam also granted Isis the exclusive or co-exclusive right to
develop and commercialize double-stranded RNA products developed
using RNAi technology against a limited number of targets. In
addition, Alnylam granted Isis non-exclusive rights to research,
develop and commercialize single-stranded RNA products.
Under the terms of the agreement, Alnylam agreed to pay Isis an
upfront license fee of $5.0 million, $3.0 million of
which was paid upon signing of the agreement and the remaining
$2.0 million of which was paid in January 2005. Alnylam has
recorded the initial $5.0 million of consideration as
license fee expense within research and development costs during
the year ended December 31, 2004 as the technology has not
reached technological feasibility and does not have any
alternative future use. Alnylam also agreed to make milestone
payments (totaling $3.4 million payable upon the occurrence
of specified development and regulatory events) and royalties to
Isis for each product that Alnylam or a collaborator develops
utilizing Isis intellectual property. In addition, Alnylam
agreed to pay to Isis a percentage of certain fees earned from
strategic collaborations it may enter into that include access
to the Isis intellectual property. In connection with the Merck
ocular collaboration signed in June 2004, which is discussed
below, the Company recorded $0.5 million in license fee
expense related to payments due to Isis. In conjunction with the
agreement, Isis purchased 1,666,667 shares of Series D
preferred stock of Alnylam for $10.0 million, which were
converted into 877,193 shares of common stock upon the
closing of the Company’s initial public offering in June
2004. Isis also agreed to pay Alnylam a license fee, milestone
payments (totaling $3.4 million payable upon the occurrence
of specified development and regulatory events) and royalties
for each product developed by Isis or a collaborator that
utilizes Alnylam’s intellectual property. The agreement
also gives Alnylam an option to use Isis manufacturing services
for RNA-based therapeutics.
In addition, the agreement with Isis gives Alnylam the exclusive
right to grant sub-licenses for Isis technology to third parties
with whom Alnylam is not collaborating. Alnylam may include
these sub-licenses in its InterfeRx licenses and research
reagent and services licenses. If such a license includes rights
to Isis intellectual property, Alnylam will share revenues from
that license equally with Isis.
97
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
Collaboration Agreement with Merck & Co. |
In September 2003, the Company entered into a five-year
strategic alliance with Merck to develop RNAi-based technology
and therapeutics. For technology development, Merck and Alnylam
each committed to devote resources, including full-time
equivalents and expertise, to the collaborative development of
advanced RNAi technology. Merck will have rights to use this
technology solely for the identification and validation of drug
targets; Alnylam will have rights to use it for these purposes
and also for therapeutic purposes. For therapeutics development,
Merck agreed to provide Alnylam with twelve proprietary drug
targets as potential targets for siRNA therapeutics. Alnylam has
the right, but not the obligation, to develop siRNA drug
candidates against each target provided by Merck. If Alnylam
advances a candidate to a defined point in preclinical
development, Alnylam and Merck will then decide whether Alnylam,
Merck or the two companies together will proceed with the
further development and commercialization of that candidate. For
each drug candidate in whose development Merck decides to
participate, it will make a cash payment to Alnylam at the time
of its decision, and will also reimburse Alnylam for a portion
of the costs Alnylam has so far incurred on that candidate.
In connection with this alliance, Merck made an upfront cash
payment of $2.0 million and a $5.0 million equity
investment in Alnylam during 2003. In addition, in connection
with this agreement the Company received $1.0 million in
additional license fee payments from Merck in September 2004 and
$7.0 million in December 2004 upon the attainment of a
pre-specified technology milestone. Of the $7.0 million
received in December 2004, $5.0 million was from the sale
of 710,273 shares of the Company’s common stock and
$2.0 million represented a cash milestone. A further cash
payment is due from Merck in 2005, based upon the continuation
of the alliance. The Company is recognizing the revenue related
to the upfront and license payments ratably over the period of
continuing performance obligations, which is estimated as six
years. The amortization of these payments resulted in revenues
of $0.6 million and $0.1 million in 2004 and 2003,
respectively. Of the $7.0 million payment received in
December 2004, the Company recorded $5.3 million in
stockholders’ equity for the sale of common stock, which
represents the fair value of the stock on the date of issuance,
and recognized the residual of $1.7 million as revenue in
connection with the cash milestone payment. As of
December 31, 2004, the Company has recognized approximately
$2.4 million as revenue under this agreement and has
deferred revenue on its balance sheet of $2.3 million.
|
|
|
Merck Ocular Collaboration |
In June 2004, Alnylam entered into a second collaboration and
license agreement with Merck. The agreement is a multi-year
collaboration to develop and commercialize RNAi therapeutics for
ocular diseases. This second collaboration is focused on
age-related macular degeneration (“AMD”) and other
ocular diseases caused by abnormal growth or leakage of small
blood vessels in the eye. Alnylam’s existing program to
develop a Direct
RNAitm
therapeutic for the treatment of AMD was incorporated into the
new collaboration.
Under the terms of the agreement, Alnylam received a
$2.0 million license fee from Merck as well as
$1.0 million representing reimbursement of prior research
and development costs incurred by the Company. These up-front
amounts have been deferred and will be recognized as revenue
over the estimated period of performance under the collaboration
agreement, which the Company has determined to be six years. In
addition, the agreement provides for Alnylam to work on two
additional mutually agreed ocular targets in addition to its
vascular endothelial growth factor (“VEGF”) program
with Merck. Merck and Alnylam will jointly fund the development
of, and share the profits from, any RNAi therapeutics for the
United States market that result from the collaboration. Alnylam
will also have the option to co-promote these RNAi therapeutics
in the United States. Marketing and sales outside of the United
States will be conducted by Merck, with Alnylam receiving
royalties. During 2004, Alnylam recorded net cost reimbursement
revenues of $1.5 million, which represent $1.8 million
of research and development costs to be reimbursed by Merck
under the terms of the agreement less $0.3 million of
research and development costs to be reimbursed by Alnylam
98
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
to Merck. The Company also recorded revenues of
$0.3 million during 2004 from the amortization of the
up-front payments received from Merck.
On February 8, 2005, Alnylam entered into a strategic
alliance with Medtronic to pursue the development of
therapeutics for the treatment of neurodegenerative disorders
such as Huntington’s, Alzheimer’s and Parkinson’s
disease. The collaboration will focus on developing novel
drug-device combinations incorporating RNAi therapeutics.
Initially, Alnylam and Medtronic will engage in a joint
technology development program for a period of two years, a
period that can be extended by mutual agreement. This initial
joint technology development program will focus on delivering
candidate RNAi therapeutics to specific areas of the brain using
an implantable infusion system.
After successful completion of the initial joint technology
development program and a joint decision to initiate product
development, Alnylam would be responsible for the discovery and
early development of candidate RNAi therapeutics, and Medtronic
would be responsible for late-stage development and
commercialization of any drug-device products that result.
Medtronic also would adapt or develop medical devices to deliver
the candidate RNAi therapeutics to targeted locations in the
nervous system.
After successful completion of the initial joint technology
development program and a joint decision to initiate product
development, Medtronic would make an initial equity investment
in Alnylam and could make additional investments upon successful
completion of specified milestones. The aggregate amount of
Alnylam common stock that Medtronic would purchase if a joint
decision were taken to initiate product development and the
specified milestones were successfully completed would be
$21.0 million. The amount of the investment to be made at
the time of the joint decision to initiate product development
would be between $1.0 million and $8.0 million, as
determined by Alnylam, at the then-current market price. For the
purpose of this investment, the then-current market price would
be equal to the twenty-day trailing average of the closing price
of Alnylam common stock on the Nasdaq National Market at the end
of the trading day two trading days prior to the date of the
decision to initiate product development. The remaining
investments would be made upon the achievement of the specified
milestones at a purchase price equal to 120% of the then-current
market price, calculated as just described. If either Medtronic
or Alnylam decides not to initiate product development under the
collaboration agreement, Medtronic would not be required to make
any equity investment in Alnylam.
After successful completion of the initial joint technology
development program and a joint decision to initiate product
development, Alnylam would also be eligible to receive
additional cash milestone payments for each product developed
and royalties on sales of any RNAi therapeutic component of
novel drug-device combinations that result from the
collaboration.
|
|
|
Cystic Fibrosis Foundation Therapeutics, Inc. |
On March 15, 2005, the Company entered into a collaboration
with Cystic Fibrosis Foundation Therapeutics, Inc.
(“CFFT”) to investigate the potential for RNAi
therapeutics to treat cystic fibrosis (“CF”). Under
this collaboration, CFFT will provide the Company with an
initial payment of $0.5 million and make additional
payments totaling an aggregate of $1.0 million in the event
that certain scientific milestones are achieved. In addition to
funding, CFFT will provide the Company with access to certain
scientific resources to support the Company’s siRNA
discovery and development efforts. If the discovery and
development efforts under this collaboration result in the
identification of siRNAs that are candidates for further
development, the parties may negotiate a mutually agreeable
support arrangement for further phases of development. In the
event that the Company develops a marketable therapeutic for the
treatment of CF, the Company will be required to pay CFFT
certain pre-determined royalties.
99
ALNYLAM PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
14. QUARTERLY FINANCIAL DATA
(UNAUDITED)
The following information has been derived from unaudited
consolidated financial statements that, in the opinion of
management, include all recurring adjustments necessary for a
fair presentation of such information.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except share and per share data) | |
|
Revenues
|
|
$ |
134 |
|
|
$ |
131 |
|
|
$ |
1,367 |
|
|
$ |
2,646 |
|
|
Operating expenses
|
|
|
13,466 |
|
|
|
7,106 |
|
|
|
7,793 |
|
|
|
8,177 |
|
|
Net loss
|
|
|
(13,582 |
) |
|
|
(6,956 |
) |
|
|
(6,416 |
) |
|
|
(5,700 |
) |
|
Net loss attributable to common stockholders
|
|
|
(15,544 |
) |
|
|
(7,707 |
) |
|
|
(6,416 |
) |
|
|
(5,700 |
) |
|
Net loss per common share — basic and diluted
|
|
$ |
(9.39 |
) |
|
$ |
(1.10 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.29 |
) |
|
Weighted average shares — basic and diluted
|
|
|
1,655,168 |
|
|
|
6,997,479 |
|
|
|
19,507,468 |
|
|
|
19,613,950 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
| |
|
| |
| |
|
March 31, | |
|
June 30, | |
|
September 30, | |
|
December 31, | |
| |
|
2003 | |
|
2003 | |
|
2003 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except share and per share data) | |
|
Revenues
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
74 |
|
|
$ |
102 |
|
|
Operating expenses
|
|
|
2,174 |
|
|
|
3,264 |
|
|
|
11,167 |
|
|
|
8,628 |
|
|
Net loss
|
|
|
(2,151 |
) |
|
|
(3,244 |
) |
|
|
(11,104 |
) |
|
|
(8,534 |
) |
|
Net loss attributable to common stockholders
|
|
|
(2,586 |
) |
|
|
(3,679 |
) |
|
|
(12,000 |
) |
|
|
(9,674 |
) |
|
Net loss per common share — basic and diluted
|
|
$ |
(5.56 |
) |
|
$ |
(6.83 |
) |
|
$ |
(9.79 |
) |
|
$ |
(6.18 |
) |
|
Weighted average shares — basic and diluted
|
|
|
465,349 |
|
|
|
538,706 |
|
|
|
1,225,150 |
|
|
|
1,565,622 |
|
100
|
|
| ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
None
|
|
| ITEM 9A. |
CONTROLS AND PROCEDURES |
Our management, with the participation of our chief executive
officer and chief operating officer and treasurer, evaluated the
effectiveness of our disclosure controls and procedures as of
December 31, 2004. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that
information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to
be disclosed by a company in the reports that it files or
submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal
executive and principal financial officers, as appropriate to
allow timely decisions regarding required disclosure. Management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of December 31, 2004,
our chief executive officer and chief operating officer and
treasurer concluded that, as of such date, our disclosure
controls and procedures were effective at the reasonable
assurance level.
No change in our internal control over financial reporting
occurred during the fiscal quarter ended December 31, 2004
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
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| ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
We will file with the Securities and Exchange Commission a
definitive Proxy Statement (the Proxy Statement) not later than
120 days after the close of the fiscal year ended
December 31, 2004. The information required by this item is
incorporated herein by reference to the information contained
under the sections captioned “Proposal One —
Election of Class I Directors,”
“Section 16(a) Beneficial Ownership Reporting
Compliance” and “Corporate Governance” of the
Proxy Statement. The information required by this item relating
to executive officers is included in Part I of this Annual
Report on Form 10-K under the section captioned
“Executive Officers of the Registrant.”
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| ITEM 11. |
EXECUTIVE COMPENSATION |
The information required by this item is incorporated herein by
reference to the information contained under the sections
captioned “Executive Compensation,” “Compensation
of Directors,” “Proposal Two — Board
Compensation,” “Compensation Committee Interlocks and
Insider Participation” and “Employment
Arrangements” of the Proxy Statement.
101
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| ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND |
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by
reference to the information contained under the sections
captioned “Security Ownership of Certain Beneficial Owners
and Management” and “Equity Compensation Plan
Information” of the Proxy Statement.
|
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| ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The information required by this item is incorporated herein by
reference to the information contained, under the sections
captioned “Employment Arrangements” and “Certain
Relationships and Related Transactions” of the Proxy
Statement.
|
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| ITEM 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this item is incorporated herein by
reference to the information contained under the sections
captioned “Principal Accountant Fees and Services” and
“Pre-Approval Policies and Procedures” of the Proxy
Statement.
PART IV
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| ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements
The following consolidated financial statements are filed as
part of this report under “Item 8 —
Financial Statements and Supplementary Data”:
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Page | |
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Report of Independent Registered Public Accounting Firm
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71 |
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Consolidated Balance Sheets as of December 31, 2004 and 2003
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72 |
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Consolidated Statements of Operations and Comprehensive Loss for
the Years Ended December 31, 2004 and 2003 and for the
Period From Inception (June 14, 2002) through
December 31, 2002
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73 |
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Consolidated Statements of Changes in Redeemable Convertible
Preferred Stock and Stockholders’ Equity (Deficit) for the
Period From Inception (June 14, 2002) through
December 31, 2002 and for the Years Ended December 31,
2003 and 2004
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74 |
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Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004 and 2003 and for the Period From
Inception (June 14, 2002) through December 31, 2002
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76 |
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Notes to Consolidated Financial Statements
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78 |
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(a)(2) List of Schedules
Schedule II — Valuation and Qualifying Accounts
for the year ended December 31, 2004, the year ended
December 31, 2003 and for the period from inception
(June 14, 2002) through December 31, 2002.
All other schedules to the consolidated financial statements are
omitted as the required information is either inapplicable or
presented in the consolidated financial statements.
(a)(3) List of Exhibits
The exhibits which are filed with this report or which are
incorporated herein by reference are set forth in the
Exhibit Index hereto.
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 30, 2005.
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ALNYLAM
PHARMACEUTICALS, INC. |
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By: |
/s/ John M. Maraganore, Ph.D. |
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John M. Maraganore, Ph.D. |
| |
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, the Report has been signed as of March 30, 2005 below
by the following persons on behalf of the Registrant and in the
capacities indicated.
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|
| Name |
|
Title |
| |
|
|
| |
/s/ John M. Maraganore, Ph.D.
John
M. Maraganore, Ph.D. |
|
Director and President and Chief Executive Officer
(Principal Executive Officer) |
| |
/s/ Barry E. Greene
Barry
E. Greene |
|
Chief Operating Officer and Treasurer
(Principal Financial and Accounting Officer) |
| |
/s/ Peter Barrett, Ph.D.
Peter
Barrett, Ph.D. |
|
Director |
| |
/s/ John E. Berriman
John
E. Berriman |
|
Director |
| |
/s/ John K. Clarke
John
K. Clarke |
|
Director |
| |
/s/ Paul R. Schimmel, Ph.D.
Paul
R. Schimmel, Ph.D. |
|
Director |
| |
/s/ Phillip A. Sharp, Ph.D.
Phillip
A. Sharp, Ph.D. |
|
Director |
| |
/s/ Kevin P. Starr
Kevin
P. Starr |
|
Director |
103
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Alnylam Pharmaceuticals, Inc.:
Our audits of the consolidated financial statements referred to
in our report dated March 15, 2005, appearing in this
Form 10-K of Alnylam Pharmaceuticals, Inc., also included
an audit of the financial statement schedule listed in
Item 15(a)(2) of this Form 10-K. In our opinion, the
financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
|
|
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/s/ PricewaterhouseCoopers LLP |
Boston, Massachusetts
March 15, 2005
104
SCHEDULE II
ALNYLAM PHARMACEUTICALS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
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Balance at | |
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|
Balance | |
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Beginning | |
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at End | |
| Year | |
|
Description |
|
of Period | |
|
Additions | |
|
Deductions |
|
of Period | |
| | |
|
|
|
| |
|
| |
|
|
|
| |
| |
2004: |
|
|
DEFERRED TAX ASSET VALUATION ALLOWANCE |
|
$ |
8,917 |
|
|
$ |
12,218 |
|
|
$ |
— |
|
|
$ |
21,135 |
|
| |
2003: |
|
|
DEFERRED TAX ASSET VALUATION ALLOWANCE |
|
$ |
862 |
|
|
$ |
8,055 |
|
|
$ |
— |
|
|
$ |
8,917 |
|
| |
2002:* |
|
|
DEFERRED TAX ASSET VALUATION ALLOWANCE |
|
$ |
— |
|
|
$ |
862 |
|
|
$ |
— |
|
|
$ |
862 |
|
|
|
| * |
For the Period from Inception (June 14, 2002) through
December 31, 2002 |
105
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit No. |
|
Exhibit |
| |
|
|
| |
3 |
.1 |
|
Restated Certificate of Incorporation of the Registrant (filed
as Exhibit 3.1 to the Registrant’s Quarterly Report on
Form 10-Q (File No. 000-5074) for the quarterly period ended
June 30, 2004 and incorporated herein by reference) |
| |
3 |
.2 |
|
Amended and Restated Bylaws of the Registrant (filed as
Exhibit 3.4 to the Registrant’s Registration Statement
on Form S-1 (File No. 333-113162) and incorporated
herein by reference) |
| |
4 |
.1 |
|
Specimen certificate evidencing shares of common stock (filed as
Exhibit 4.1 to the Registrant’s Registration Statement
on Form S-1 (File No. 333-113162) and incorporated
herein by reference) |
| |
10 |
.1* |
|
2002 Employee, Director and Consultant Stock Plan, as amended,
together with forms of Incentive Stock Option Agreement,
Non-qualified Stock Option Agreement and Restricted Stock
Agreement (filed as Exhibit 10.1 to the Registrant’s
Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.2* |
|
2003 Employee, Director and Consultant Stock Plan, as amended,
together with forms of Incentive Stock Option Agreement,
Non-qualified Stock Option Agreement and Restricted Stock
Agreement (filed as Exhibit 10.2 to the Registrant’s
Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.3* |
|
2004 Stock Incentive Plan, together with forms of Incentive
Stock Option Agreement and Nonstatutory Stock Option Agreement
(filed as Exhibit 10.3 to the Registrant’s
Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.4* |
|
Form of Nonstatutory Stock Option Agreement under 2004 Stock
Incentive Plan Granted to John M. Maraganore, Ph.D., on
December 21, 2004 (filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (File No.
000-50743) and incorporated herein by reference) |
| |
10 |
.5* |
|
2004 Employee Stock Purchase Plan (filed as Exhibit 10.4 to
the Registrant’s Registration Statement on Form S-1
(File No. 333-113162) and incorporated herein by reference) |
| |
10 |
.6*# |
|
Summary of Cash Compensation Paid to Directors |
| |
10 |
.7 |
|
Registration Rights Agreement dated as of July 31, 2003 and
amended as of October 9, 2003 and February 26, 2004 by
and among the Registrant and the parties listed on Schedule A
thereto (filed as Exhibit 10.5 to the Registrant’s
Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.8 |
|
Investor Rights Agreement dated as of September 8, 2003 and
amended on February 26, 2004 by and between the Registrant
and Merck & Co., Inc. (filed as Exhibit 10.6 to
the Registrant’s Registration Statement on Form S-1
(File No. 333-113162) and incorporated herein by reference) |
| |
10 |
.9 |
|
Investor Rights Agreement entered into as of March 11, 2004
by and between the Registrant and Isis Pharmaceuticals, Inc.
(filed as Exhibit 10.25 to the Registrant’s
Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.10* |
|
Letter Agreement between the Registrant and John M.
Maraganore, Ph.D. dated October 30, 2002 (filed as
Exhibit 10.7 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-113162) and
incorporated herein by reference) |
| |
10 |
.11* |
|
Letter Agreement between the Registrant and Vincent J.
Miles, Ph.D. dated June 16, 2003 (filed as
Exhibit 10.8 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-113162) and
incorporated herein by reference) |
| |
10 |
.12* |
|
Letter Agreement between the Registrant and Thomas R.
Ulich, M.D. dated June 15, 2003 (filed as
Exhibit 10.9 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-113162) and
incorporated herein by reference) |
| |
10 |
.13* |
|
Letter Agreement between the Registrant and Barry E. Greene
dated September 29, 2003 (filed as Exhibit 10.10 to
the Registrant’s Registration Statement on Form S-1
(File No. 333-113162) and incorporated herein by reference) |
106
| |
|
|
|
|
| Exhibit No. | |
|
Exhibit |
| | |
|
|
| |
10 |
.14 |
|
Loan and Security Agreement by and between Lighthouse Capital
Partners V, L.P. and the Registrant dated as of
March 26, 2004, together with the Negative Pledge Agreement
by and between Lighthouse Capital Partners V, L.P. and the
Registrant dated as of March 26, 2004 (filed as
Exhibit 10.11 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-113162) and
incorporated herein by reference) |
| |
10 |
.15 |
|
Warrants to Purchase Preferred Stock effective as of
March 30, 2004 issued to Lighthouse Capital
Partners V, L.P. and Lighthouse Capital Partners IV, L.P.
(filed as Exhibit 10.12 to the Registrant’s
Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.16 |
|
Lease, dated as of September 26, 2003 by and between the
Registrant and Three Hundred Third Street LLC (filed as
Exhibit 10.15 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-113162) and
incorporated herein by reference) |
| |
10 |
.17† |
|
License Agreement between Cancer Research Technology Limited and
Alnylam U.S., Inc. dated July 18, 2003 (filed as
Exhibit 10.16 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-113162) and
incorporated herein by reference) |
| |
10 |
.18† |
|
License Agreement between the Carnegie Institution of Washington
and Alnylam Europe AG, effective March 1, 2002, as amended
by letter agreements dated September 2, 2002 and
October 28, 2003 (filed as Exhibit 10.17 to the
Registrant’s Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.19† |
|
License Agreement by and between the Cold Spring Harbor
Laboratory and Alnylam U.S., Inc. dated December 30, 2003
(filed as Exhibit 10.18 to the Registrant’s
Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.20† |
|
Co-exclusive License Agreement between Garching Innovation GmbH
and Alnylam U.S., Inc. dated December 20, 2002, as amended
by Amendment dated July 8, 2003 together with
Indemnification Agreement by and between Garching Innovation
GmbH and Alnylam Pharmaceuticals, Inc. effective April 1,
2004 (filed as Exhibit 10.19 to the Registrant’s
Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.21† |
|
Co-exclusive License Agreement between Garching Innovation GmbH
and Alnylam Europe AG dated July 30, 2003 (filed as
Exhibit 10.20 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-113162) and
incorporated herein by reference) |
| |
10 |
.22† |
|
Agreement between The Board of Trustees of the Leland Stanford
Junior University and Alnylam U.S., Inc. effective as of
September 17, 2003 (filed as Exhibit 10.21 to the
Registrant’s Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.23† |
|
Research Collaboration and License Agreement by and among
Merck & Co., Inc., Alnylam U.S., Inc. and Registrant
dated September 8, 2003 (filed as Exhibit 10.22 to the
Registrant’s Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.24† |
|
Sponsored Research Agreement among Mayo Foundation for Medical
Education and Research, Mayo Clinic Jacksonville and Alnylam
Pharmaceuticals, Inc. effective as of October 1, 2003
(filed as Exhibit 10.23 to the Registrant’s
Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.25† |
|
Strategic Collaboration and License Agreement effective as of
March 11, 2004 between Isis Pharmaceuticals, Inc. and the
Registrant (filed as Exhibit 10.24 to the Registrant’s
Registration Statement on Form S-1 (File
No. 333-113162) and incorporated herein by reference) |
| |
10 |
.26 |
|
Agreement between the Registrant and Perini Building Company,
Inc. effective as of March 26, 2004 (filed as
Exhibit 10.26 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-113162) and
incorporated herein by reference) |
| |
10 |
.27† |
|
Collaboration and License Agreement by and among Merck and Co.,
Inc. and the Registrant effective as of June 29, 2004
(filed as Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q (File No. 000-50743) for the quarterly
period ended June 30, 2004 and incorporated herein by
reference) |
107
| |
|
|
|
|
| Exhibit No. | |
|
Exhibit |
| | |
|
|
| |
21 |
.1# |
|
Subsidiaries of the Registrant |
| |
23 |
.1# |
|
Consent of PricewaterhouseCoopers LLP, Independent Registered
Public Accounting Firm |
| |
31 |
.1# |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, Rule 13(a)-14(a)/ 15d-14(a), by Chief
Executive Officer. |
| |
31 |
.2# |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, Rule 13(a)-14(a)/ 15d-14(a), by Chief
Operating Officer and Treasurer. |
| |
32 |
.1# |
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Chief Executive Officer. |
| |
32 |
.2# |
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Chief Operating Officer and Treasurer. |
|
|
| * |
Management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto pursuant to
Item 15(a) of Form 10-K. |
|
|
| † |
Indicates confidential treatment requested as to certain
portions, which portions were omitted and filed separately with
the Securities and Exchange Commission pursuant to a
Confidential Treatment Request. |
| |
| # |
Filed herewith |
108
