Alnylam Pharmaceuticals Inc (ALNY) 2006 Q2 法說會逐字稿

Welcome to the Alnylam Pharmaceuticals conference call to discuss the second quarter 2006 financial results. There will be a question and answer session to follow.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Alnylam. Please proceed.

Thank you. Good morning, this is Cynthia Clayton, Director of Investor Relations and Corporate Communications for Alnylam Pharmaceuticals. With my today from Alnylam are John Maraganore, President and Chief Executive Officer; Barry Greene, Chief Operating Officer; Vin Miles, Senior Vice President of Business Development and Patty Allen, Vice President of Finance.

During today's call, John will review the events of the quarter along with an update on our R&D efforts and business highlights. Patty will review our financials, Barry will close with a review of upcoming milestones and we will then open the call for your questions.

Various statements we make concerning our future expectations, plans and prospects including, without limitation, statements related to our clinical development plans, product goals and business goals for 2006 and projections for the amount and sufficiency of cash, cash equivalents and marketable securities constitute forward-looking statements for the purpose of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including risks related to our approach to discover and develop novel drugs, which is unproven and may never lead to marketable products, obtaining, maintaining and protecting intellectual property utilized by our products, our ability to enforce our patents against infringers and to defend our patent portfolio against challenges from third parties, our ability to obtain additional funding to support our business activities, our dependence from third parties for development, manufacture, marketing, sales and distribution of products, the successful development of our product candidates, all of which are in early stages of development, obtaining regulatory approval for products, competition from others using technology similar to ours and others developing products for similar uses, our dependence on collaborators and our short operating history, as well as those risks more fully discussed in the risk factor section of our most recent report on form 10-Q on file with the Securities and exchange commission.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. We do not assume any obligation to update any forward looking statement. I will now turn the call over to John.

Thanks Cynthia, welcome everyone to Alnylam's second quarter 2006 earnings call. We had an extremely productive quarter here at Alnylam with our pipeline, intellectual property, business execution and organizational development, as we built on the successes of the first quarter and paved the way for continued progress in the achievement of additional important milestones in the second half of the year.

Importantly, we've made this progress while maintaining our solid financial profile. As we committed to, we have established pharmaceutical alliances which provide steady, sustainable and recurring revenues and allow us to build what we believe is the broadest and most significant RNAi therapeutic pipeline in the industry.

Our product, IP and business collaboration accomplishments in the second quarter are important steps in our efforts to build a leading biopharmaceutical company focused on leveraging the promise of the RNAi product platform to address human disease in a fundamentally new way.

Let me now update you on some of our recent accomplishments, beginning with the progress we're making with our pipeline of RNAi therapeutics and our leadership in RNAi delivery. One of the key highlights of the quarter was the completion of our two Phase I trials for our lead RNAi therapeutic, ALN-RSV01, our program for the treatment of RSV infection.

We were very pleased to present this data at the 2006 Pediatric Academic Society's annual meeting in San Francisco at the end of April. These two Phase I trials were designed to assess the safety, probability and pharmacology of ALN-RSV01 in healthy volunteers.

Both trials were conducted in a double blind, randomized and placebo controlled manner. In total, 101 subjects were enrolled in these protocols, 65 of whom were treated with ALN-RSV01. The subjects received single or multiple daily doses of the drug or saline placebo in a nasal spray.

Importantly, ALN-RSV01, was found to be safe and well tolerated when administered intranasally with a profile comparable to the placebo control. There were no serious adverse events and as expected, no detectable systemic exposure with intranasal dosing. All told, these results represent a very important step in our effort to develop RNAi therapeutics for respiratory disease indications.

Based on these encouraging results, we are planning additional Phase I studies, one with an inhaled formulation of ALN-RSV01 and in parallel, an experimental infection study in adult volunteers later in the year, both of which should prepare us to enter Phase II studies in naturally infected patients in the first half of next year.

We remain very excited about the prospects for ALN-RSV01 for the treatment of RSV infection. This is an unpartnered Alnylam program where we have retained all the value, that addresses a significant medical issue for which no effective products have been approved to date.

Certainly, prevention of RSV has already proven to be $1 billion market. We will continue to move this program through a comprehensive clinical development program and we will continue to maintain overall leadership in the development of RNAi therapeutics for both viral disease and respiratory indications.

Turning to our flu program, our collaboration with Novartis is advancing, and we are very pleased to have them as a partner given their very strong commitment to RNAi therapeutics and to Alnylam. We reported on recent progress with our flu program at the American Thoraxic Society International Congress in San Diego where we presented pre-clinical data on the identification of siRNAs that demonstrate potent antiviral activity across multiple strands of flu, in particular, toward a human clinical isolate of the H5N1 virus obtained from a patient in Southeastern Asia.

Based on these and other results to date, we have selected our flu drug candidate, ALN-FLU01, which is comprised of two siRNAs targeting two different genes within the influenza viral genome. When combined, these siRNAs are designed to achieve the broadest spectrum of antiviral activity while diminishing the likelihood of viral resistance. With our partner Novartis, we look forward to continued progress with this program as our goal is to advance this effort toward an IND as early as the end of this year.

As part of our efforts to secure government funding for our program, we recently responded to a request for proposal, or RFP, from the Department of Health and Human Services with a request for funding related to the development of our RNAi therapeutic for pandemic flu. We submitted this RFP last week. While we have significant funding today for this program from our Novartis partnership, potential funding from DHHS will strengthen the private sector/public sector partnership we assembled last year, particularly for the pandemic flu applications. Based on Secretary Levitt's comments, we understand that notifications to companies receiving award grants will occur as early as the fall of this year.

At the beginning of the second quarter, we also announced the signing of a CRADA with the United States Army Medical Research Institute of Infectious Disease, also known as USAMRIID under which we will collaborate with USAMRIID to discover RNAi therapeutics targeting viral organisms including hemorrhagic fever viruses, like Ebola, which could pose a serious biological threat to the military and public health of the United States.

This is an encouraging effort as there is significant interest by Federal authorities in the application of RNAi as a rapid response platform for biodefense needs, in addition to the strong federal interest in RNA interference for pandemic flu.

Of course, in addition to our efforts on flu as well as RSV, we also made significant progress in our other respiratory and CNS direct RNAi efforts and presented new data at a number of peer review meetings in the second quarter. Now, complementing our progress on direct RNAi opportunities, we have also made tremendous and rapid progress in our efforts to enable the systemic delivery of RNAi therapeutics building on our landmark data published in Nature earlier this year.

As you may recall, we formed a collaboration with Inex in March 2006 to explore the use of Inex's liposomal formulations for the systemic delivery of Alnylam's RNAi therapeutic products. Recently, as a result of rapid progress to date, Alnylam and Inex decided to accelerate these efforts into an expanded Phase of the collaboration which includes looking at a broader range of disease targets.

Our Inex collaboration, together with our collaboration at MIT with Bob Langer, and recent end licensing of technology from Judy Lieberman's lab at the CBR Institute, comprised what we are convinced is the leading industry effort for systemic delivery of RNAi therapeutics.

Building on our success with systemic delivery of RNAi therapeutics, we recently entered into a collaboration with the University of Texas Southwestern Medical Center at Dallas to evaluate new approaches for reducing LDL cholesterol levels using RNAi therapeutics directed to a disease target called PCSK9.

PCSK9 is an important gene involved in the metabolism of LDL cholesterol or so called bad cholesterol and we believe it is truly a remarkable disease target for potential breakthrough treatments of hypercholesterolemia and [ischemia] complications of acute coronary syndromes.

We are very excited about this target. As you know, Alnylam has already seen very compelling results in vivo in primates evaluating the systemic delivery of small interfering RNAs targeting apolipoprotein B or Apo B, another protein involved in cholesterol metabolism.

And this collaboration on PCSK9 with UT Southwestern will utilize systemic RNAi technologies developed by Alnylam such as those used in primates as described in our recent Nature paper. PCSK9 is truly an excellent target for the development of RNAi therapeutics since it is highly clinically relevant, extremely well validated and to date, undruggable.

Finally, in addition to our efforts on proprietary Alnylam or partnered co-development programs that I just described, we alsohave made substantial progress on our partnered programs, notably those with our most significant alliance partner Novartis.

While the specific disease targets for this partnership are yet to be disclosed, we are extremely pleased with the progress in this alliance and look forward to updating our investors with specific details in the future.

Turning to the execution of our business strategy, we were pleased to announce recently that we have amended our two existing RNAi collaboration agreements with Merck and consolidated the efforts into a single ongoing collaboration. The amended agreements represents a new and stronger Phase of our relationship and significantly increases the ability of both companies to realize maximal value from our collaboration.

As a result of this new agreement, Alnylam will have the opportunity to receive R&D funding at a much earlier stage. In addition, we have the potential for greater than $120 million in milestones in addition to royalty payments or profit sharing on any commercialized products resulting from the collaboration. Merck has been a truly and enthusiastic and supportive partner in our efforts to advance the field of RNAi and we look forward to this new phase of our collaborative efforts to bring forward novel, RNAi therapeutics.

In addition to Merck, our existing major alliances with Medtronic and Novartis, as well as alliances that we will form in the future remain the most important feature of our business execution strategy. I think it's gratifying to see the remarkably increased interest from pharma and top tier biotech companies based on two important recent events. First, the progress on delivery of RNAi therapeutics that Alnylam scientists have summarily led in the field. And second, our continued leadership on intellectual property as I'll expand on in just a minute.

The key point here is that Alnylam has many future opportunities on partnerships and I think this will be an important part of our continued story in the near future. Now, as it relates to our IP on RNAi therapeutics, let's start by taking a step back and talk for a minute about how and why this IP is an important part of Alnylam's business and value creation strategy. I'll then walk through our recent progress on IP that has served to markedly solidify our leading IP position in the field of RNAi.

So first and foremost, this is all about products. And the value of any and all biotech patents depends on the emergence of successful products. Indeed, we believe that the mid to long term value of Alnylam's intellectual property is fully dependent on the successful development and commercialization of RNAi therapeutic products and the demonstration that RNAi is a bona fide platform that leads to a whole new class of drugs for the treatment of human disease in a fundamentally new way.

In this mid to long term context, Alnylam's leading IP estate would uniquely serve to protect our products and our partner's products as innovative medicines. It will also allow us to uniquely generate significant economic value based on progress from product development by Alnylam's licensees or as needed, through licensing of our IP on significantly higher terms with third parties who are choosing to advance RNAi therapeutics today without obtaining a license to Alnylam IP.

While the value of IP is linked to specific products in the long term, our IP is actually extremely valuable today in the context of partnerships, access to capabilities and access to alliance based funding that allow us to uniquely build the leading RNAi therapeutics company.

In this regard, our IP was a critical component of decisions by Merck, Medtronic and Novartis to form major RNAi partnerships with Alnylam. On financial metrics alone, this IP estate has enabled us to earn over $100 million to date in alliance based funding in addition to a committed and sustainable source of R&D funding and the potential for significant future alliance based milestone payments.

Including our three existing major alliance partners, the value of our IP estate has also been validated with 20 licensing relationships to date. Further, in the near term, our progress on RNAi therapeutics and the continued strengthening of our IP estate has significantly enhanced the quality and quantity of discussions with future partners.

Let me now turn to a summary of our specific accomplishments on the IP front where we reported what we believe is phenomenal progress in just the past few weeks. I invite all of you who are interested to visit our updated website where we are now posting the issued claims of these patents.

First, the USPTO issued two patents in the Tuschl II patent series which broadly cover methods of making small interfering RNAs for any target in mammalian cells with or without chemical modifications required to introduce drug-like properties into RNAi therapeutics.

Patents 704 and 196 from the Tuschl II patent series are licensed exclusively to Alnylam for RNAi therapeutics and cover the preparation of double-stranded RNAs having key structural elements that are widely recognized as critical for the therapeutic activity of siRNAs.

These patents are exclusively licensed on a worldwide basis, to Alnylam for RNAi therapeutics by the Max Planck institute. These issued patents are legally distinct and separate in both inventorship and ownership from the so called Tuschl I patent application where Alnylam has a non exclusive license and has yet to issue in either the U.S. or Europe.

The next major accomplishment in our IP estate relates Kreutzer-Limmer I patent that we own by virtue of our July 2003 acquisition of Ribopharma AG now Alnylam Europe AG. Last month, we reported that following opposition proceedings, the EPO upheld key features of Alnylam's Kreutzer-Limmer I patent, known as the 623 patent with claims covering methods, medicaments and uses of small interfering RNAs.

The amended claims granted through the oral opposition proceedings cover features of SRNAs that are also critical for the development of RNAi therapeutics products. It should be clear that the outcome of the opposition was a major success for Alnylam. Importantly, this now upheld patent when combined with our Tuschl II patent in the U.S. extends Alnylam's IP leadership to the world's two largest pharmaceutical markets, the United States and Europe.

We believe that our IP position will only continue to strengthen as further patents are issued or granted in the U.S. and Europe based on the Tuschl II patent application including four additional divisional cases in the U.S. and as Kreutzer-Limmer and other Alnylam IP assets are being prosecuted in the U.S. and other major territories.

Just as we secured what we believe is a dominant IP estate for siRNAs, we are also extending this leadership to other forms of RNAi therapeutics directed towards the emerging opportunities on microRNAs. As a reminder, Alnylam and collaborators published a landmark paper this past fall on approaches to silence microRNA genes in vivo.

As it relates to our IP and microRNAs, we announced today that we announced a license for the Tuschl IV patent application from the Rockefeller University covering RNAi therapeutics to silence disease associated microRNAs. This licensing agreement extends our consolidation of intellectual property on microRNAs that includes the Tuschl III patent application from the Max Planck institute, the [Sarno] patent application from Stanford, the Antagomir patent application from the Rockefeller University, for which our scientists are co-inventors and also certain intellectual property which is also very important as part of our March 2004 agreement with Isis Pharmaceuticals.

Now, before turning over the call to Patty, I would like to briefly address our organization highlights from the quarter. During the quarter, we appointed Dr. Sara Nochur as VP of Regulatory Affairs. Sara has extensive industry experience in the areas of regulatory affairs and overall drug development. And at Alnylam, she will be responsible for leading the global regulatory strategy for the company's development stage programs and overseeing regulatory operations. We are pleased to welcome her to the management team as we advance our proprietary programs.

Also, we were very pleased to add Dr. Judy Lieberman to our scientific advisory board. As many of you probably know, Judy is widely recognized in both industry and academic arenas as a translational researcher with significant experience in the area of applying RNAi to clinical applications. Now with that, I will turn the call over to Patty for a review of our financials for the second quarter. Patty?

Thanks John, and good morning everyone. We had a strong second quarter with our financial performance reflecting a very active and productive period at Alnylam. As we advanced clinical activities for our lead RNAi therapeutic candidate ALN-RSV01. And as John mentioned, we continue to realize that from our partnerships through a steady increase in partnership based revenue which totaled $11.7 million for the first half of 2006.

We ended the quarter in a solid financial position with $123.3 million in cash, cash equivalents and marketable securities. GAAP net loss for the quarter was $9.9 million or $0.31 per share which included $1.6 million or $0.05 per share of non-cash stock based compensation expense. This was compared to $11.1 million or $0.54 per share, which included $900,000 or $0.04 of non-cash stock based compensation expense in the second quarter of 2005.

Revenues were $6 million in Q2 compared to $1.1 million during the second quarter of 2005. This significant increase is mainly due to our two collaborations with Novartis which did not exist one year ago. Specifically, we recorded $4.4 million of cost reimbursement and amortization revenues related to our main collaboration with Novartis, $1.2 million of cost reimbursement revenues related to our Novartis flu collaboration and $400,000 from a combination of Merck revenues, government funding from DARPA and reagent license revenues.

Going forward, we continue to expect that we will see an increase in revenue over our 2005 levels due to steady and recurring revenues from [milestones]. This also includes revenues as part of pre-clinical milestone payments from our existing partnerships that we expect to receive in the second half of the year.

In addition, we anticipate that we will begin to recognize the economic benefits of our new amended collaboration with Merck in the second half of the year and early parts of next year, which will provide us with R&D funding on an accelerated basis as compared to our original alliance with Merck.

On the expense side, our GAAP R&D expenses were $12.7 million in the quarter including $900,000 of non-cash stock based compensation as compared to $9.2 million in the second quarter of 2005 which included $600,000 of non-cash stock based compensation.

The increase in R&D was primarily due to clinical trial and manufacturing related expenses in support of our clinical program for RSV which began in December 2005. This was a very active quarter for the RSV program as we completed the Phase I trial, made preparations in advance for the additional trials set to begin later this year and supported GLP and CMC activities for this program.

Also contributing to the increase, were higher costs related to an increase in R&D headcount over the past year to support our expanding pipeline [inaudible]. And finally, with the adoption of FAS 123R on January 1, 2006, we had a higher non-cash stock based compensation charges during the quarter as compared to the prior year.

GAAP G&A expenses were $4.4 million in the quarter including $700,000 of non-cash stock based compensation as compared with $3.1 million in the second quarter of 2005, which included $400,000 of non-cash stock based compensation. The increase in G&A expenses was due partially to higher legal and professional service fees due to increased business activities. In addition, with the adoption of FAS 123R, we had higher non-cash stock based compensation charges during the quarter as compared to the prior year.

To support our growth, we recently expanded our facilities here in Cambridge. As part of that expansion, we drew down $2.3 million during Q2 from our available line of credit with Oxford Finance. We believe this is an attractive credit vehicle and a market attractive cost of capital to fund our modest appointment additions and facility expansions. The total amount due under our lines of credit at quarter end totaled $9.1 million.

In the anticipation of further revenues from our alliances, we expect that we will exceed our goal of at $15 million in alliance based funding in 2006. In addition, we continue to expect increased revenues over the second half of the year, although revenues can be lumpy from quarter to quarter. These projected revenues, including pre-clinical milestone payments from alliances balanced with our planned investments in advancing our programs, put us on track to achieve our guidance of year end cash of more than $115 million. I'll now turn the call over to Barry to review our upcoming milestones.

Thanks Patty. As John and Patty have highlighted, we have reported a number of important achievements in the first half of the year and we are looking forward to continued success in the second half of the year, which promises to be as equally exciting and milestone driven at first.

On the clinical side, we continue to make great progress with ALN-RSV01, our lead program being developed for the treatment of RSV infection. We are taking the steps necessary to initiate clinical trials in naturally infected patients in the first half of 2007. The robust clinical data and encouraging pre-clinical results we've reported gives us great confidence to advance this program into additional clinical trials. In the second half of 2006, we expect to initiate a Phase I inhalation trial as well as advance our efforts for an experimental infection clinical study.

The significant private sector, public sector effort that we are leading for our pandemic flu program is also making progress. As John highlighted, we submitted a high quality response to the Department of Health and Human Services Request for Proposal utilizing RNAi towards a potential flu pandemic. As we've stated in the past, we've a goal to file an IND for this program as early as the end of the year.

We're also making solid progress on the number of pre-clinical programs and remain on track to announce our next development program in the second half of the year. Importantly, our goal for this program is to be an Alnylam wholly owned program.

On the business side, our collaborations continued to progress forward. We expect to continue to receive significant and repeatable R&D funding as well as pre-clinical milestone funding in the second half of the year. The IP estate we have built will continue to strengthen over the year with further patent issuances and grants in major markets.

We will also continue to see further monetization of our leading intellectual property position with additional reagent licenses and target specific InterfeRex licenses. Importantly, we are very encouraged by the prospects for further significant collaborations based on the strength of our intellectual property portfolio and the progress we are making on RNAi therapeutics.

We of course will update you on this progress at the appropriate time in the future. And finally, we plan to maintain a strong balance sheet and in 2006 with more than $115 million cash. So with that, I'd like to turn the call over to your questions and over to the Operator. Cheryl, would you take questions please?

[OPERATOR INSTRUCTIONS]

Our first question will come from the line of Mark Monane, please proceed sir.

Good morning and thanks for taking my question, congratulations on all that you did in quarter two.

Thanks Mark.

I'm here with Mona and she has a question as well. I agree with your pithy statement that it is all about products, so let me start with a question on the RSV program. I noticed in the flu program that you've decided to use two different siRNAs targeting two different genes. Did you consider doing this for the RSV program and can you talk about what you're doing to prevent resistance as is often seen with antivirals?

That's a great question, Mark. We, RSV and flu are different, they are both negative stranded RNA viruses but they have one very, very important difference. The flu genome is discontinuous, whereas the RSV genome is continuous. And as a result of the discontinuous nature of the flu genome, it is in fact much more variant from flu season to flu season and flu strain to flu strain.

So effectively, an emerging flu virus might adopt specific flu genetic elements from one flu genome that's quite diverse from another for example whereas with RSV with as a continuous viral genome it is much more conserved. So what we have done with our RSV program is in fact identify and obtain clinical isolates across the world, a large number of them and sequence the specific RSV genomic sequences relative to our RSV01 drug and has found that it is absolutely conserved and have been obviously reassured by that type of observation.

In the case of the flu genome, if you look across well over 500 genomes that are in the public databases right now, there are -- one can identify roughly 220, 250 19 more sequences that are in fact more broadly conserved. However, to obtain 100% conservation, it is best to use two different sequences. So by virtue of the genomic structure of these two different viruses, we have different strategies with RSV and flu that really make sense for those two different viruses.

That makes a lot of sense, Mona has a question.

Hi John, just a quick question actually on the systemic delivery program. I wondered if you could really expand on what progress you saw on the collaboration with Inex that allowed you to take that option and what do you hope to see before you exercise that option?

Well, thanks Mona, that's a great question. We started our collaboration with Inex in March of 2004, obviously had been talking to them, well, I'm sorry, 2006, and obviously have been talking to them well before that time before getting started.

And we were very gratified to be able to rapidly identify liposomal formulations that were able to achieve in vivo results in rodent models across a broad range of disease targets. Now as you know, we typically report our results in peer reviewed forms and we'll do that in the future with these specific data.

And that's typically the form that we talk about specific data. But what we saw there was so encouraging that it made sense to accelerate their relationship and expand it and also to secure the period of exclusivity in our relationship with Inex as well.

Great, so just a follow up, have you revealed when the option expires?

I believe we did, it was in March of 2007.

Okay, great, thanks.

On the systemic delivery program that Mona is asking, I noticed that you finished the intranasal trial and the intranasal area is very interesting because it can be used locally, for giving, for example, steroids for allergic rhinitis but it's also a vehicle for systemic delivery. Can you talk about what you learned in intranasal program and if there is anything that can be moved over to the systemic program as well, generalized to systemic program?

Well, Mark, it's a good question. Our interest in intranasal delivery in the first study was to support the experimental infection study which will be done with intranasal formulation. Obviously, the clinical and commercial formulation for RSV 01 will be supported with the inhalation and nebulized formulation of the drug which provides a broader distribution into the lower respiratory tract.

The ability of getting a topical, upper respiratory tract exposure with ALN-RSV 01, again, in the context of an experimental viral challenge study was the objective of that study, in addition to obtaining initial safety data which is, obviously, critically important for this agent.

We look at it mostly for topical direct delivery of RNAi therapeutics, not for systemic exposure and in fact, when we look for systemic exposure, at the doses that we tested, as expected, based on pre-clinical studies, the levels were very low. And in fact, that was the desired outcome based on what we were doing there.

Good, that was very helpful clarifying that last point. I appreciate it. And then the last question is, while we do believe it's all about the products, we do note that the Tuschl II patent was issued and maybe you can talk about what that brings to leverage the products going forward as well?

Right, so thanks Mark for the question. I think the key thing I think about the patents that were issued, the 704 patent and the 196 patent is that they have claims now issued in the U.S. that describe key structural features, including a double-stranded region formed from two RNA strands of a length of 19 to 25 nucleotides and one or more three prime overhangs at the ends of the double-stranded molecule.

This is in fact the sweet spot of RNAi therapeutics. The claims from the 704 patent also cover such siRNAs for, and I pulled from the claims, mediating the cleavage of a target messenger RNA in a mammalian cell, unquote. And therefore, cover sRNAs that are directed toward any and all target genes expressed in mammalian cells.

So we therefore believe that the 704 patent is a big circle patent that covers more narrow target patents or patent applications.

When we go to the 196 patent, this covers siRNAs with or without chemical modifications that are used to introduce drug like properties into siRNAs like stability and delivery. And these chemical modifications that are in the claims and they are now available on the website include those that are used to stabilize siRNA such as phosphorothioate and those that are used to prepare so called no ribose or siNA agents like 2'-methyl and 2'fluoro modifications and it should be absolutely clear that the issue claims do not have any limitation on the extent or number of such chemical modifications.

So we view the 196 patent as a big circle patent that covers all later file patent applications on chemical modifications. So the Tuschl II patent is truly becoming a critical element of the IP landscape and Alnylam is the exclusive licensee of that patent from the Max Planck.

I appreciate you going over all that with us, congratulations again on your progress.

Thanks Mark, thanks Mona.

Our next question is from the line of Sapna Srivastava of Morgan Stanley, please proceed.

Hi, thanks congratulations to all your progress this quarter, pretty impressive.

Thanks Sapna.

Just a quick question on basically, if you've been able to define the therapeutic area where you think you can proceed with systemic delivery over the next 12 to 18 months. Should we see the University of Texas Southwestern collaboration as you being able to target that area or is that just exploratory?

No, I think that's one area of great interest to us, Sapna. I'm mean clearly, with systemic delivery and in particular with our current technology for the silencing of genes expressed in hepatocytes. Hypercholesterolemia is an area of interest to us but there are also other areas of interest to us as well where we have other, smaller collaborations and internal efforts.

And they range from obviously thinking about systemic viral infections to thinking about opportunities and other opportunities in cardiovascular disease or metabolic disease or diabetes and obesity. So it's a pretty broad range set of efforts. The exciting aspect of PCSK9 is that it really is almost an ideal target for RNAi therapeutics given the fact that it is so well validated in human genetics and also in murine genetics and it has really been undruggable with today's approaches.

So we're very excited about that approach. And I think just in general on that Sapna, stayed tuned because as we go into the later part of the year and update people and certainly we're planning an R&D day, we'll be able to provide a lot more color about the strategies and the approaches and the targets that we're focusing on.

Thank you.

Great.

Our next question is from the line of David Witzke of Banc of America Securities. Please proceed, sir.

Hi good morning.

Hey Dave.

Hey, a couple questions, first, can you review the committed revenue stream from Merck, Medtronic, Novartis as well as kind of the run rate on royalties from the tool companies?

Sure Dave, so for the quarter, what we recorded was $4.4 million from our main alliance from Novartis, $1.2 from flu and then $400,000 from a combination from Merck, government funding and DARPA revenues. So what we've committed to for the year is greater than $15 million in alliance based funding from those alliances. And what I said earlier on the call is that we expect to exceed that number. Although we're not ready to define it as we still expect revenues to be for the rest of the year.

Okay, and then how many for royalties from some of the tool companies?

So those are low single digit revenue royalty streams that we earn from those fabulation shops. And we expect that to significant increase over time but be a small part of our overall revenue stream. And we do believe that we have over 50% of the reagent market lined up under and signed under IP.

Great and then regarding Tuschl II, I guess of the six provisional patents, two have issued, four remain. What's expected timing on the four and how important do you think they are relative, for example, as the 196 patent?

Thanks Dave. The four remaining ones are in prosecution and they are in various stages of prosecution. We're optimistic about the nature and flavor of that process with the USPTO but it is always hard to predict, unfortunately the patent process is really not predicted in terms of timing. And it does require oftentimes a back and forth with the patent office in terms of prosecution in discussion about claims.

So it's really hard for us to predict exactly when that would result in allowance and then when that would result in specific issuances of those claims. Tuschl II is also in our active prosecution in Europe and is also in active prosecution in Japan. And the additional divisionals obviously further expand what we've already obtained which is already quite broad out of the Tuschl II 704 196 patents.

So I think in general it's only going to get better from here, it's certainly not going to get any less limited based on what's been issued to date.

Okay, thank you.

Our next question is from the line of Ted Tenthoff of Piper Jaffray, please proceed, sir.

Great, good morning everyone and my congratulations too on a lot of progress this year.

Thanks Ted.

Real quick question, a lot of them have been addressed, but from our side, it's kind of tough to see other than the RSV program what remains to be partnered. So maybe John you can kind of give us your view of what we should expect or what we should look for going forward in terms of partnerships?

That's a great question, Ted. We obviously, one of the things we commented on in the prepared comments is the fact that by virtue of the progress we made in systemic delivery, the Nature paper we published in March in non human primates, that is truly, when we talk to people about this work, they are truly blown away by the data set.

And I think many people, obviously the Nature reviewers felt the same way. And then combine that with the remarkably strong quarter we had on the strengthening of our IP, with Kreutzer-Limmer being upheld and now the two Tuschl II, first two Tuschl II patents being issued in the U.S.

You can only imagine, which is absolutely the case, that our business development team has been very, very busy across multiple different dimensions of both discussing opportunities on our InterfeRex target by target license program as well as our, obviously reagent market, reagent market discussions.

But perhaps more importantly, the opportunity which is very much part of our strategy for future partnerships that are going to be significant with major pharmaceutical companies and [inaudible] companies.

And so those discussions have been going along very nicely. The interest has been extremely strong because of the IP and because of the nature of our progress on delivery. And frankly, because of the fact that the pharma industry today is more starved today for innovative new medicines. And they look at RNA inteference as a major opportunity for developing drugs.

We obviously have a number of unpartnered assets in our pipeline that includes RSV 01, it includes our neuropathic pain program, it also includes our cystic fibrosis program amongst others. There are opportunities for partnership that are global around those programs subject to our third party obligations.

There are also opportunities for this program that are geographic for those programs. And we had very active discussions historically in Japan and the rest of the world. So we think that, it's always hard to say which, where it's going at one point of another because these are obviously active discussions. But we're extremely encouraged by the progress and we are very much looking forward to updating you when appropriate.

Great, and maybe just as a quick follow-up to that, just broadly speaking and again, it kind of depends on a program by program basis but where do you see at this point as the value add for partnering? In other words, where do you think it's logical to take, for example, the RSV program with the plans to go into Phase II next year before potentially looking at partnering? And maybe even apply that to kind of more broadly where you see taking these programs, how far with Alnylam before potentially seeking partners at this point?

Yeah, so I think one of the beauties of the broad relationship that we did with Novartis in September of '05, is particular but also our other relationships as well, is that the source of sustainable and committed funding we have from those relationships allows us to take our own proprietary pipeline to later stages of clinical development if not all the way to the market over time.

And what that creates for us is greater degrees of optionality for how we create value in our programs to either, again, take them all the way forward ourselves over time or to find at a later stage of value in the programs, a significant alliance. With a program like RSV, we're committed to advancing that to clinical proof of concept.

We think it's a program that we're very, very excited about, very committed to. We think obtaining clinical proof of concept, it can be done in a very definable and significant manner. We might think in a program like that about geographic partnerships. And clearly the opportunity for a partnership in Asia, for example. It might be something that we'd think about in a program like that today versus later.

But for the most part, as we think of that type of program, it is a program that we would hold onto until at least we achieve clinical proof of concept and that would apply for other emerging programs in our pipeline that are unpartnered programs including things like neuropathic pain and cystic fibrosis and so forth.

Okay, that's very helpful, thank you.

Good.

Our next question is from the line of Andrew McDonald of Think Equity, please proceed sir.

Thank you for taking my questions and congratulations on the quarter.

Thanks Andrew.

My question really has to do with sort of your cash situation and burn. It looks like at the end of the first quarter you had $132 million and now you're down to $123 and yet you're guiding that you'll end the year with $115 million. So it looks like you're burning about $9, $10 million a quarter, at least you have over the last two. So I'm wondering how you get to guidance of $115 at year end.

Patty, do you want to take that question?

Sure, hi Andrew.

Hi.

So what we've said is we expect to see increased revenues in the second half of the year from our alliances as well as achieving pre-clinical milestones. And we guided that revenue, we expect them to be lumpy over the remaining half of the year but we think balanced with our planned investment and programs we're going to be able to that guidance.

Okay, great and then finally with the experimental infection model for RSV that you've got planned, what sort of obstacles do you need to overcome to get that proof of concept study underway?

Yes, that's a good question Andrew. As I think we've said to you and others, the key thing that we had to do with viral challenge study was to grow up a GMP supply of RSV virus that we would use to safely infect adult volunteers. And the GMP production is literally underway and we are still expecting to start that study by year's end.

And we've been a little bit cautious about some of the timing there because obviously there is some critical step there that needs to get done. And we're in the midst of doing that step. We're encouraged by where we are right now but we certainly have sights that are ready to go as it relates to doing the viral infection model itself. And so we're just in the production stage with that recombinant, not the recombinant virus, a GMP virus, pharma clinical isolate.

Okay and what do you need to do in preparation of the naturally infected study? Do you have plans for the first half of '07?

That's really linked to the completion of our Phase I inhalational study because that will use an inhalational formulation in that first half. And that's a study that we're expecting to start in the second half of the year, the Phase I study and that will put us on track next year for the first half of Phase II.

Gotcha, thanks for taking my questions.

Sure. Good, thanks Andrew.

[OPERATOR INSTRUCTIONS] Our next question is from the line of [Douglas Chao] of Harris and Company, please proceed, sir.

Hi, thanks for taking my question. Just regarding the small uptake in G&A we saw this quarter, was that more of a one time or do you think we're going to continue at that level for the rest of the year? And then just regarding R&D, when you start your inhalation trial in H1 07, do you expect R&D to go up a little bit next year? And how many patients is that probably going to be?

Sure, so on the G&A I would say we had a pretty busy quarter this past quarter and we have a lot of business activities ongoing which caused our G&A number to be higher than we've seen. And then, I'm sorry, on R&D --

On the R&D side Doug, let me handle that, [inaudible] timing as well. The start of the Phase I inhalational study is one that is going to be in the size and the scale of what we've already done with intranasal delivery. But a lot of the R&D expenses in the second quarter linked to the RSV program was the leading edge of the CMC and the manufacturing costs related to that.

So we have in our sights, in terms of the R&D expenses, again, a balance with the revenues coming in that gets us to that year end cash guidance that we're committing to. So I don't necessarily think you can sort of straight line those type of expenses going forward.

Oh, okay. And then regarding the G&A, we just saw a small increase this quarter. Is that basically going to stay the same going forward or are we coming back down a bit?

Right, so although we really don't give specific guidance on our G&A and R&D lines, Doug, as I said, I think this was a very busy quarter this past quarter so I'm not sure that I would expect to see that level going forward in G&A.

Oh, I see, okay, great, thanks a lot.

Okay, you're welcome.

Our next question is from the line Ding Ding of Maxim Group, please proceed.

Thank you for taking my call.

Hi Ding Ding.

Good morning and thanks for the updates for the quarter.

Good morning.

Most of my questions have been asked, I just have two remaining questions. On the patent front, under the microRNA patents you elaborate on the number of patents that you have and would you please just share with us what are the ones you own exclusively and what are the ones you co-license with other parties?

Sure, Ding Ding, much of our IP strategy on microRNAs has been part of our March 2004 collaboration with Isis. So in many ways we've been co with Isis on these patents. So we're co-exclusive with Isis on Tuschl III, we have obviously in our relationship with Isis access to intellectual property both ways as it related to microRNAs.

And as it relates to the Sarno patent from Stanford, we also have a co-exclusive with Stanford with Isis on that patent, specifically patent application. So in many ways, much of our strategy on this field has been developed together with Isis. And that's been a very prudent strategy because the approaches and intellectual property from Isis is extremely relevant as it relates to approaches for targeting microRNAs. And we're very, very pleased to be working with them on that dimension.

Great, that's helpful and secondly, on the partnership front, for the remainder of the year other than continuous partners with Asian company. Is any other partnership we should expect for the remainder of the year?

So, we, our goal is that we will have over five new licensees this year in our InterfeRex program and our reagent program and we have three so far and we're very much on track for achieving that goal. And in terms of other partnerships, we don't have a specific goal for the year.

But what we commented on is obviously the context of the strengthening of our IP and also the continued and expanded interest from the industry around this technology. We're extremely gratified with the quality and quantity of discussions that we have right now and we'll certainly update you at the appropriate time when such and event occurs.

Great, thank you very much.

Great, thanks Ding Ding.

There are no further questions in queue.

Great.

I'll return the call back to management for closing remarks.

Thanks Cheryl, well thanks everyone for participating in our Q2 call this morning. We appreciate you taking the time and we hope that we've been able to convey to you the significance of the progress we had made this quarter as well as the future growth and value drivers to come throughout the year. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.