ALNYLAM PHARMACEUTICALS, INC. quarterly report, Q2 FY2011

Business context and reporting period

Alnylam Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company developing RNA interference (RNAi) therapeutics. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Revenue was generated from collaborations and licenses, not product sales.

Financial results and liquidity

Amounts below are in millions of U.S. dollars except per-share data. The filing reports no clear standalone gross-margin measure.

For H1 2011, operating cash use was $32.9 million, versus $39.9 million in H1 2010. Investing activities provided $24.9 million, principally from net sales and maturities of marketable securities; financing activities provided $0.5 million. Cash and cash equivalents were $67.1 million at June 30, down from $74.6 million at year-end 2010. Cash, cash equivalents and marketable securities totaled $316.0 million, compared with $349.9 million at year-end. Current assets were $224.3 million and current liabilities $100.5 million, or working capital of approximately $123.8 million.

Total assets were $340.8 million and stockholders’ equity $136.6 million at June 30. The balance sheet reports no company borrowings. Alnylam’s disclosed exposure to Regulus Therapeutics, including the portion of Regulus debt guaranteed by Alnylam, was $5.4 million. Deferred revenue was $180.8 million. Accumulated deficit was $373.5 million.

Material changes versus the prior comparable period

• Q2 revenue fell 23% year over year and H1 revenue fell 19%. Roche revenue was unchanged at $14.0 million per quarter; lower Novartis and government-contract revenue drove much of the decline, following completion of the Novartis research program in October 2010 and the NIAID contract in December 2010.
• Operating expenses decreased 12% in Q2 and 5% in H1. Lower external services and administrative/professional costs were partly offset by higher clinical-trial and manufacturing expenses. The company attributed some expense reductions to its September 2010 workforce restructuring.
• Despite lower expenses and a smaller equity-method loss from Regulus, operating loss widened in both reported periods as collaboration revenue declined. Net loss improved in Q2 but worsened for H1.
• Operating cash use improved year over year, but cash and marketable securities declined from year-end. The $10.7 million income-tax refund received in Q1 supported operating cash flow; deferred revenue declined by $30.3 million during H1.

Outlook, management commentary, risks and unusual items

• Management said existing cash, cash equivalents, fixed-income securities and expected receipts under current alliances should fund planned operations for at least the next several years. It also cautioned that additional funds could be needed earlier than expected; financing may be unavailable or dilutive, and programs could be delayed or curtailed if funding is insufficient.
• The company expected R&D and G&A expenses to remain consistent in the second half of 2011. Its “Alnylam 5x15” goal was to advance five RNAi programs into advanced clinical development by the end of 2015, and it expected to designate two additional preclinical candidates by the end of 2011.
• Pipeline updates included a July 2011 clinical-trial application for ALN-PCS and an August 2011 announcement that the ALN-VSP Phase I trial was complete. The ALN-VSP trial included a patient death following hepatic failure, deemed possibly related to study drug; the filing also reports biological-activity evidence. The company planned to partner ALN-VSP before Phase II.
• Roche had discontinued RNAi research efforts in 2010, although its agreement remained in effect; Roche could assign its rights in connection with a transfer of its RNAi business. Development and revenue remain dependent on collaborators, milestone timing and clinical progress.
• Alnylam disclosed Tekmira/Protiva litigation alleging trade-secret, contract and related claims; Alnylam denied the claims and filed counterclaims. The University of Utah also brought an inventorship dispute concerning Tuschl patents. No liability was recorded for these cases because likelihood and amount of any loss were uncertain. A separate Tuschl dispute was settled in March 2011, with no further significant expense expected.
• Alnylam filed a shelf registration statement in July 2011 permitting future issuance of up to $150 million of securities. Market-risk disclosure estimated a $1.1 million fair-value decline if interest rates rose immediately and uniformly by 50 basis points. No impairment charge was recorded on fixed-income securities.
• Management cited substantial continuing losses, early-stage and unproven RNAi technology, clinical and regulatory uncertainty, delivery and manufacturing constraints, reliance on collaborators, intellectual-property disputes, and potential financing and dilution risks.

Important facts for investors to verify

• Progress, safety findings and enrollment in ALN-TTR, ALN-PCS, ALN-RSV01 and other pipeline programs, including the ALN-VSP hepatic-failure event and planned partnering.
• Cash runway assumptions, alliance receipts and whether the $150 million shelf is used; review potential dilution and Novartis’s ownership-maintenance rights.
• Continuation and terms of key collaborations, especially Roche’s RNAi business and assignment options, and the timing of deferred-revenue recognition and future milestones.
• Developments and potential financial or operational effects of the Tekmira/Protiva and University of Utah litigation, along with the disclosed Regulus guarantee exposure.