Alnylam Pharmaceuticals Inc (ALNY) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Alnylam Pharmaceuticals Conference Call to discuss the second quarter 2007 financial results. There will be a question-and-answer to follow. Please be advised that this call is being taped at Alnylam's request. I would now like to turn the call over to Alnylam.

Good afternoon. I'm Cynthia Clayton, Director of Investor Relations and Corporate Communications. With me today from Alnylam are John Maraganore, our President and Chief Executive Officer, Barry Greene, our Chief Operating Officer, Akshay Vaishnaw, our Vice President Clinical Research, Patty Allen, our Vice President Finance and Treasurer and Jason Rhodes, our Vice President Business Development.

During today's call, John will provide a brief overview of the second quarter, Akshay will provide an R&D update, Patty will review our financials and guidance, Barry will review our business operations and 2007 goals and we will then open the call for your questions.

Before we begin, let me remind you that various statements in this call concerning our future expectations, plans and prospects including, without limitation, statements related to clinical development plans for our pipeline programs and our other product candidates, the filing of INDs for product candidates and projections for the amount and sufficiency of cash, cash equivalents and marketable securities constitute forward-looking statements for the purposes of the Safe Harbor provisions 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, our ability to fund and the results of further pre-clinical and clinical trials, 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 activities.

Our dependence on 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, a dependence on collaborators in our short operating history, as well as those risks more fully discussed in the Risk Factors 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 statements.

I will now turn the call over to John.

Thanks, Cynthia, and good afternoon everyone. Thank you for joining us on our second quarter 2007 earnings call. The first half of the year has been absolutely game changing for Alnylam, having demonstrated our scientific leadership and RNAi at the Keystone Symposium in January, started Alnylam's first Phase II study for an RNAi therapeutic in June and formed the largest drug discovery alliance in biotech history in July.

Overall, we made a tremendously forward in our efforts to build a leading biopharmaceutical company built on the breakthrough discovery of RNAi interference. And it is really rare in any biopharmaceuticals company's development to have such important events converge over a relatively short period of time to so fundamentally change and strengthen the business. At the same time, this is just the beginning of building what we believe will be a very successful company and there remains much to be accomplished in our overall mission.

On the business front, the key highlights so far in 2007 was our transformative alliance with Roche, which we're pleased to announce closed today. This is a superb opportunity for Roche to become a major pharmaceutical player in RNAi therapeutics, as it provides them the required enablement with our intellectual property and access to our current world-class know how and technology. The benefits for Alnylam are also very, very clear.

Valued at over $1 billion, the transaction represents the largest drug discovery lines in biotech and the largest partnership, by far, in RNA interference to date. The transaction thus provides us with significant non-dilutive capital to advance our efforts to build a leading, fully integrated biopharmaceutical company, based on our proprietary programs. Importantly, by virtue of its nonexclusive structure, this alliance ensures complete flexibility in pursuing our own targets and pipeline as well as forming additional alliances, which we expect to do.

Our execution on the business front was complimented and in fact made possible by our scientists and their execution in our R&D efforts. We have continued with a rapid pace as we work toward translating the science of RNAi into a whole new class of therapeutics. We made significant progress with our RSP program, as Akshay will detail for you in a moment. Importantly, we initiated the company's first Phase II study, a step that advances our efforts toward human proof-of-concept for RNAi therapeutics.

Further, we extended our scientific leadership through an exciting and exclusive relationship with the Langer and Anderson labs at MIT, focused on delivery, the key technical hurdle for RNAi therapeutics. And of course, we also continue to lead on the IP front, where we believe our patent estate is dominant and blocking for the development and commercialization of RNAi therapeutics.

Importantly, we have also been focused on building the Alnylam team. After the close of the first quarter, we elected Dr. Victor Dzau to our Board of Directors. We also announced the expansion of our management team with key hires in Legal, Human Resources and Business Development. Advancement of our business as a leading biopharmaceutical enterprise continues to depend on our people, their passion and our culture. And these additions are very important events in our efforts to fulfill our company's mission.

To sum up my introductory comments, the first half of 2007 has been without a doubt the most productive and transformative time for Alnylam as we have advanced our pipeline into Phase II development, further expanded our network of partners to advance the field of RNAi as a whole and secured additional resources, namely people, cash and IP, to build, develop and ultimately commercialize our own portfolio of RNAi therapeutics as innovative medicines. To be clear, Alnylam has never been stronger and has never been as fundamentally enabled to build a great company.

Going forward, we are focused on continuing our scientific leadership with major breakthroughs in delivery, advancing our proprietary pipeline of RNAi therapeutics and forming additional and significant alliances to support our business goals. In short, in the first half of 2007, we set brand new standards that were only motivated to exceed.

Let me now turn the call over to Akshay Vaishnaw to summarize our R&D progress. Akshay?

Thanks, John. As already mentioned, we've made significant progress with our scientific leadership efforts and in our pre-clinical and clinical development pipeline year-to-date. Most importantly, we achieved several key milestones with our clinical development program, ALN-RSV01. As presented in May at the PAS meeting, we successfully completed Part 1 of our Experimental Infection Model study, which showed that the establishment of the safe and reliable RSV infection in the upper respiratory tract of adult volunteers was possible. This model was designed to evaluate viral infectivity of RSV administered intranasally in healthy adults.

With that under our belt, we initiated our Phase II study of ALN-RSV01 in experimentally infective adults in June. This is a randomized double-blind placebo controlled study designed to evaluate the safety and antiviral activity of intranasal ALN-RSV01, administered to approximately 90 healthy adult volunteers experimentally inoculated with RSV. The trial provides a real opportunity for proof-of-concept via demonstration of ALN-RSV01's antiviral activity. And we believe it's an important milestone towards demonstrating a novel RNAi therapeutic towards the treatment of a viral disease. Results from this trial are expected in the second half of the year. In addition, we're still enrolling in our Phase I inhalational study and also expect data from this trial in the second half of the year.

Elsewhere, we've expanded our development pipeline with ALN-VSP01 for the treatment of liver cancer and potentially other solid tumors. ALN-VSP01 is comprised of two siRNAs, each targeting a distinct and well validated gene in the growth and proliferation of tumors, namely VEGF and KSP. Data presented at the ASCR meeting showed the ability of RNAi therapeutics to silence both VEGF and KSP expression in the liver and to stop cancer cell proliferation by targeting KSP. This is our first RNAi therapeutic program in cancer, the first of what we believe will be a broader pipeline of cancer therapeutics in the future.

Looking at our other proprietary and co-development pre-clinical programs, we made continued progress in our PCSK9 development program for hypercholesterolemia and several other proprietary and co-development discovery programs, including those in Huntington's disease, Parkinson's disease and in our Ebola bio-defense efforts. In addition to these efforts, we're very pleased with the scientific progress in our partnered pipeline activities. Certainly the broadest of these relationships is with Novartis where we continue to have a very close and active relationship.

Turning now to our research progress, we continue to expand our efforts in delivery technologies for advancement of RNAi therapeutics exemplified, as John mentioned, by the establishment of the new research program in collaboration with the Langer and Anderson labs at MIT. This new agreement reinforces our continued commitment to delivery technologies for RNAi therapeutics in collaboration with the world's leading lab in this area. We thus continue our strong commitment to delivery with both internal and external efforts. Without question, our delivery toolkit is the broadest and most significant in the industry with a platform that includes Liposomal, conjugation, antibody and peptide-based technologies.

And finally, scientific publications and presentations by Alnylam scientists and collaborators continue to highlight the potential of RNAi as a whole new class of human therapeutics. And accordingly, our scientists have continued to publish a number of leading publications this quarter. Our scientific efforts also include an exciting line of research focused on antagonists of endogenous microRNAs, our Antagomir platform for antagonizing microRNAs promises to be an important area for the future.

I'll turn the call now over to Patty Allen to review our finances and guidance. Patty?

Thanks, Akshay, and good afternoon everyone. We ended the quarter in a remarkably strong financial position with the resources and funding to advance our partnered and proprietary pipeline for many years to come. I will refer you to the press release we issued this afternoon for a detailed review of our second quarter 2007 financial results, but will also take just a few minutes now to provide you with our high level perspective on these results and an overview of the financial implications of our Roche alliance, which will be reported in our Q3 financials.

We continue to receive recurring and sustainable revenues from our collaboration partners and from government agencies. Revenues in the second quarter of 2007 were $9.1 million, representing our largest quarter to date. Looking ahead on revenues, particularly as they relate to the amortization of the up-front payments from the license with Roche, we expect to see a very significant increase in GAAP revenues for the remainder of the year.

R&D expenses were $18.8 million in the second quarter of 2007, including $900,000 of non-cash stock-based compensation. This was lower than the R&D expense of $26.7 million in the first quarter of 2007, primarily due to the fact that Q1 included non-cash and cash fees paid to Tekmira as part of our collaboration with them. Excluding those charges, our R&D expenses remained fairly consistent quarter over quarter. That being said, we do expect R&D expenses to increase over the remainder of the year as our proprietary programs advance and as we add certain capacities in Cambridge as a result of our sale of Alnylam Europe to Roche.

G&A expenses were $5.3 million in the second quarter of 2007, including $900,000 of non-cash stock-based compensation. This represents a slight increase in G&A expenses as compared with prior quarters, due primarily to higher professional service fees from increased business activities, including the company's recent alliance with Roche. GAAP net loss in the quarter was $12.7 million or $0.34 per share. As a reminder of our share count, at the end of the second quarter, we had 37.6 million shares outstanding and today we issued 1.975 million shares to Roche in connection with the close of our transaction, bringing our total shares outstanding to approximately 39.6 million shares as of today.

Let me turn now to a discussion of our cash position. As of June 30, we had cash, cash equivalents and marketable securities of $194.8 million compared to $204.5 million on March 31, 2007 and $217.3 million at December 31, 2006. This reflects a quarterly net cash burn of under $10 million in the second quarter.

I will wrap up today with our high level views on the financial implications of the Roche deal. We are very pleased to have closed the transaction earlier today and we will be recording this transaction in our Q3 financials where we will be able to provide the detailed entries for this broad transaction that included a license and collaboration agreement, the sale of our Alnylam Europe facility in Kulmbach, Germany and an equity sale of just under 5% of our outstanding common stock. The licensing and collaboration agreement contains a nonexclusive license granted to Roche for an up-front payment of $273.5 million. On a GAAP basis, we expect this $273.5 million up-front fee to amortized quarterly over a five-year period, beginning mid Q3, and recorded as collaboration revenue.

The accounting treatment will be adding the $273.5 million in cash to our books and recording the up-front fee as deferred revenue on our balance sheet. Additionally, this deal included the sale of our Kulmbach facility for a purchase price of $15 million. We will provide additional detail on the entry for the disposition of Alnylam Europe on our Q3 call. The final part of this transaction was an equity purchase by Roche of 1.975 million shares of our common stock, which was sold today for total proceeds of $42.5 million. In Q3, we will add this cash to our books and record the issuance of the equity.

Now turning the potential tax implications of the transaction, we will likely have a GAAP tax entry recorded in Q3 as we address our tax valuation allowance. But we actually expect nominal, if any, tax payments on a cash basis in calendar year 2007. Again, we will be able to provide more details on our Q3 call but do not expect to make any significant tax payments until calendar year 2008. We expect that, as compared with our previous plan, our expenses will increase in the second half of the year due to certain costs required to add additional capacity in Cambridge related to the sale of Alnylam Europe to Roche.

However, as a result of the proceeds from the Roche deal, we are significantly raising our cash guidance for the year and we now expect to end the year with greater than $435 million in cash, a position that will allow us significant resources to execute on our scientific, clinical and business objectives for many years to come.

And now, Barry Greene will review our business highlights and progress against our 2007 goals. Barry?

Thanks, Patty. Turning to our business activities, we continue to leverage our scientific leadership position in RNAi and our intellectual property estate to form partnerships and alliances that help us build our business. Without a doubt, the major business highlight of the quarter, in fact the year, was the alliance we announced with Roche on July 9. As John mentioned earlier, this is truly a transformative alliance for Alnylam. The deal, which again closed today, is valued at over $1 billion and includes $331 million in up-front cash, including an equity investment in Alnylam of 1.97 million shares at a price of $21.50 per share, representing an approximate 5% position in Alnylam.

We have significant milestones per successful product and royalties, additional payments including potential field expansion payments and a license and a collaboration agreement containing a broad, nonexclusive license granted to Roche to Alnylam's current intellectual property, technology and know how in four therapeutic areas, oncology, respiratory, metabolic and certain liver diseases. Also in association with this deal, Roche acquired our site in Kulmbach, Germany. Importantly, because of the structure and the nonexclusive nature of this partnership, we are not excluded from working on any target in any therapeutic area and we retain the right to do similar alliances like this one in the future.

The license grant is based on current Alnylam IP technology know how such that almost certain breakthrough discoveries of our scientists in the future are not under valued. We would expect to do additional such broad nonexclusive platform deals in the future and we are having ongoing discussions that we find very encouraging. As our technologic success continues, our IP strengthens and, in light of our alliance with Roche, the opportunities in flavor of future Alnylam business development activities will change substantially.

First, we will be proactively looking at all our existing alliances to ensure that they deliver a maximum level to Alnylam's efforts to build a major biopharmaceutical company. Our announcement last week that we've restructured our alliance with Medtronic is an example of improving the value equation for Alnylam. Second, we will be fundamentally focusing our business development efforts towards partnerships that bring considerable value to our efforts in advancing our pipeline.

This may occur through additional nonexclusive platform license deals that fund our business very significantly, without dilution of equity or resources. This may also occur through geographic partnerships for our pipeline assets where Alnylam retains ownership of the U.S. product rights. And it certainly also can occur through additional 50/50 relationships like our Medtronic alliance, where our partner brings significant value add to our efforts.

Finally, on the buy side, we expect to form more partnerships that significantly enhance our delivery leadership efforts, such as our relationships with MIT and our relationship with Tekmira. As I mentioned, the advancement of our Medtronic collaboration in Huntington's disease is characteristic of this new strategy. To reflect the type of value that we now require to build our business, we have revised the terms of the alliance, including a 50/50 co-development in the U.S. with Alnylam receiving royalties that are designed to capture an approximate 50% of profit share of product sales.

The strength of our existing alliance with Novartis is clear in the scientific progress we are making, but also is evidenced by our revenue stream from Novartis. They play a pioneering role in recognizing the potential of RNAi to form the basis of a new class of innovative medicines and we remain very committed to the Novartis alliance and this partnership.

We are very pleased to announce this morning continued progress in funding our Alnylam bio-defense efforts with a new 33-month, $38.6 million grant from the Department of Defense to develop RNAi treatments for the treatment of hemorrhagic viral infections, such as Ebola and Marburg. This funding will continue to contribute to the building and expansion of our RNAi technology platform. We also continue to believe that there are additional important value drivers here, based on more accelerated time lines for product approval and sale of product to federal authorities as part of a strategic stock piling.

Now turning to our IP estate, we continued to expand and strengthen our leading IP position in the first half of the year. Indeed today there are nine issued, granted or allowed patents in the major markets, the U.S. and Europe, that cover siRNAs. We have all nine of these patents and eight of these are exclusively held by Alnylam. Our fundamental IP estate covers architectural and function features of sRNAs including length, three-prime overhangs, [enblon ends], chemical modifications with no limitations, including so-called siRNAs, activity in mammalian cells and activity towards any and all disease targets.

Most recently, our exclusively licensed Tuschl II patent was allowed in Europe. This 044 patent broadly covers compositions, methods and uses of siRNAs. In addition, we announced today that our exclusively owned Kreutzer-Limmer patent has issued in Canada and the Tuschl I patent has been allowed in Australia. All told, we have the clearest and strongest intellectual property position on RNAi therapeutics bar none.

Let me now conclude by providing you with a review of our goals for the year and our progress to date. For our product goals, we are very focused on our goal of demonstrating human proof-of-concept for an RNAi therapeutic. Clearly, this is an important goal as we focus on building an entirely new class of human therapeutics. Our focus is on advancing our pipeline of innovative medicines in a data driven and high quality manner, and therefore, we will continue to maintain a very dynamic decision making approach for our pipeline portfolio and specific program time lines. Our primary focus is on ALN-RSV01 where we have made significant progress. As Akshay mentioned, our Phase I inhalation trial is enrolling and we expect to have data from this trial in the second half of the year.

We have also initiated a Phase II study in experimentally infected adults to demonstrate human antiviral activity. We want to use the results of the current Phase II study that is actively enrolling to guide the design of the next Phase II study in naturally infected patients, and therefore we feel that it's wise to move the start of that study to the first half of 2008. We are still excited by and committed to our pandemic flu program but do not expect this effort to yield an IND in 2007, due to changes in the level of focus from the federal government towards novel treatments for pandemic flu, but also because of the need for optimized formulations to achieve the necessary level of in vivo efficacy.

In fact, data in the published literature and data we're aware from other efforts appear to reflect certain nonspecific affects and we only have an interest in advancing a program based on solid scientific foundation. Thus, we now expect to file one IND this year for either ALN-PCS01 or ALN-VSP01. That said, these are our first systemic delivery programs and the timing of the IND will depend on the result of many current ongoing development efforts. Finally this year, we expect to add one additional development program in addition to ALN-VSP01 to continue to expand our pipeline. Of course, we will maintain our leadership position with systemic delivery and microRNAs with many publications and presentations likely to occur in the second half.

Moving on to the business goals, clearly we fulfilled our goal of forming one major alliance with a leading company through our collaboration with Roche. However, as I commented earlier, we remain committed to exploring and pursuing additional partnerships that either support our efforts to build a leading biotech company or advance our own pipeline. Our discussions remain very active and are occurring at the very senior levels of major pharmaceutical and biotech companies. The interest in RNAi therapeutics and in Alnylam continues to be driven by the hunger for innovation across the entire biomedical industry. This has clearly provided and will continue to fuel an extremely positive environment for unique and creative partnership structures.

We will continue to further strengthen our fundamental IP position by obtaining multiple patent issuances grants in the U.S. and Europe over the course of the year. And we will realize additional near-term value from our IP estate by granting additional, new [interferex] or reagent product licenses. As we previously stated, we expect to receive more than 25 million in alliance-based funding in 2007, including expected R&D funding, an achievement of additional objectives under existing alliances with our collaborators.

Of course, by adding the payments from our recent Roche transaction, our alliance-based cash funding will actually exceed $300 million this year. Finally, as always, we plan to maintain our solid financial position while executing on our product and business goals, ending the year with greater than $435 million in cash.

And now I'd like to wrap up, as we open the call for questions and turn the call over to our Operator. Paul?

(OPERATOR INSTRUCTIONS)

Your first question is from the line of Ted Tenthoff with Piper Jaffray. Please proceed.

Hey, Ted.

Hey guys, how are you? Congratulations --.

Good. I can't hear you very well, can you speak up a little bit?

Yes, sorry about that, my phone is a little bit off but I'll try to talk a little bit louder. Congratulations on just a great first half of the year, very exciting stuff. I guess my one first question would have to do with - Patty had mentioned that there could be some potential tax payments in '08. Can you just give us a little bit better understanding what that might look like? And also, Barry, did you mention that one of the trials may now start in the first half of '08, was that the Phase II study?

Yes, let me address the last one first, just to take it for Barry and then hand it over to Patty. So the Phase II naturally infective study with RSV we believe is best to start in the first half of '08, Ted, because we'll have the data from our current Phase II trial completed at that point in time. And so we think it's prudent to start that second study in the first half of next year as opposed to doing it this year, so that's really the driver there. Let me then turn it over to Patty to address the specific question on tax.

Right. So Ted, we don't have a firm estimate in 2008 for a cash tax payment. We don't expect it to be significant, we think we have a very good tax strategy for this overall Roche alliance in hand. We currently are undergoing some tax studies right now to finalize our NOLs, both here and in Germany. And as the studies are finalized, we'll have a better idea likely in Q3 as to what those tax payments might look like for 2008. But again, we don't expect them to be significant.

Great, thanks very much. Keep it up.

Thanks, Ted.

Thanks, Ted.

Your next question is from the line of Sapna Srivastava with Morgan Stanley. Please proceed.

Hi, it's actually Dave calling in for Sapna.

Hi, Dave.

How are you doing?

Good.

Congratulations on the good quarter.

Thank you.

Just a question, it was our previous assumption that the PCSK9 was going to be the first IND and I was just wondering if you could talk a little bit about why -- I mean that had been the program that seemed to be sort of the most advanced, why the sort of indecision now about which one would come first. And what criteria are you going to use to make those decisions?

So Dave, that's a great question. So, both the PCSK9 program and the VSP program, which is our liver cancer program, are in active stages of development right now and are advancing as [thin] candidates. And it's too soon to tell which will come out first. Event though we announced the liver cancer program after the PCS program, we obviously have been doing quite a bit of work in that area in advance.

A lot of it just depends on where we get to vis--vis the completion of the GLP studies that support the right dosing regimen in initial clinical studies. And so that's really what's guiding where the timing will go on those types of programs right now. And obviously, as Barry commented, we're literally doing our GLP studies right now, so the results of those studies will drive exactly which one happens first and what the timing is around that.

Okay. And just one other thing is are you planning on using the same type of systemic delivery for both programs? Or are you considering developing two systems in parallel?

Well, in the current efforts on these programs they're using the same systemic delivery platform, but we certainly continue to invest and develop additional delivery platforms for both programs, in fact, and will continue to do that for all of our systemic programs. So, there are clearly program activities that have been "locked down" using the same platform for both, but there are also additional activities that are going on in more development stages or pre-formal development stages related to additional approaches for systemic delivery.

Okay, great. Thank you.

Thanks, Dave.

Your next question is from the line of Mike King with Rodman & Renshaw. Please proceed.

Thanks and good afternoon, guys.

Hey, Mike.

How are you doing, John? I just wanted to see if you guys could perhaps give us a little bit of a sense of what a PCSK9 clinical development program might look like?

Absolutely. You know Akshay is on the phone, I think he's probably - he's not here in the room, but I think he's probably the right person to answer that. Akshay, do you want to give some highlights on our thinking?

Yes, sure. I mean I think the main thing to emphasize about the clinical development program there is that we think in Phase I, it provides a wonderful kind of early opportunity to demonstrate both safety and efficacy in terms of demonstrating systemic RNAi and knock down of serum LDL levels. That being said, it could be done in a variety of populations, we haven't finalized which population we would go for, but there are several to think about. There are folks with very high LDL cholesterol levels due to one or more genetic factors, we know that that's a relatively small population but an important and highly underserved population.

The other populations to think about could be people who are already on multiple medical therapies who have persistently elevated their LDL cholesterol levels, and they could also be a segment that we could show proof-of-concept in Phase I. And then depending on which of those populations we show those Phase I data in, I think we could go rapidly to a Phase II study to finalize the dose that would be safe and efficacious in a dose ranging approach and then lead to Phase III studies accordingly.

So, that's how we see it at the moment, but our most important focus is on that first Phase I study where we want to establish, obviously, safety and tolerability of the systemic approach but at the same time clearly demonstrate knock down of serum LDL cholesterol levels.

Right. Okay great. And then I got distracted when Barry was talking about the flu program. If I heard you correctly, Barry, did you say that you're pushing the program out because the lead compound had non-specific effects?

No Mike, this is John, we've been working on this, as you know, as part of our relationship with Novartis and we've just not been satisfied with the level of in vivo efficacy we're seeing related to specific RNAi effects. And unfortunately, a lot of the data in the literature that has been reported historically, as well as other efforts that we know going on in the industry, are all looking at non-specific effects. And so, we're not going to go ahead until we have a satisfactory data set around this program, and so we're pushing out the timing of that IND to some later point and not even giving specific guidance on it. We're still really committed to it and we have a lot of work that's going on with it, but you know it's got to be ready to our satisfaction of scientific quality before we go ahead.

Okay, but what is non-specific about it? Is it generating an immune response? Or is it just not binding correctly to the targeted RNA?

Well, it's probably the former, Mike. You know we don't truly know based on some of the work that's been published. And it's just not an RNAi immediate effect that, to our satisfaction, is a foundation for moving ahead.

Okay. So, just to push that a little further then, have you tracked it down to a particular sequence in that particular [all-a-go]? Or are you concerned that it might be a more general problem?

No, I think it's actually much more related to just the broad aspects of the flu model and what we're seeing with sRNAs, it's not sequence specific. So again we just want to make sure, like with the RSV program, that we have a very solid foundation of pre-clinical data to support going forward and we just don't have that yet with flu, Mike.

Okay, thanks.

Yes.

Your next question is from the line of Mark Monane with Needham & Company. Please proceed.

Hi, good afternoon, it's actually both Alan Carr and Mark here.

Oh great.

Congratulations on another good quarter and also on the Roche deal.

Thank you.

I also wanted to congratulate you on this morning's deal, I was wondering if you could talk a little bit more about not only the program that was announced this morning, the funding, but also an update on the rest of the bio-defense program as well.

Yes, thank you. Well let me actually have Barry address that specifically, since he's been leading up those efforts.

Yes, so as you guys know, we have had a very active program with Alnylam bio-defense, believing that RNAi offers a tremendous product platform opportunities for the government in their mission to protect U.S. citizens both here and abroad. And that has really paid off. You know the program that we initiated previous to this was a specific program to target the Ebola virus, working with the government in USAMRIID. And based upon successes thus far with that program, we initiated another program to go after kind of a broad spectrum approach targeting host genes to have a more broad spectrum antiviral affect for Ebola, Marburg and other kinds of viruses. And you know we continue to keep an outstanding relationship.

Strategically, this is important to us really for two reasons. One, the funding we get from the government in developing these specific programs are also helpful to solve delivery and apply those to other platform programs of our own and our partners. And then secondly and importantly, as these programs reach degrees of success, they offer early commercial opportunities through government strategic stock piling.

What sort of scale opportunities do you see in this area?

In what domain?

Bio-defense.

Well, you know we've generated slightly over $63 million of funding to date through federal grants. And in general, if that's what you're referring to, the level of funding has actually been very substantial. And again, with a technology like Alnylam's, it has the beautiful benefits of obviously being applied to advance these specific programs to the benefit of biosecurity needs, but it does allow us to fundamentally build our platform in a way that can be amortized, if you will, across different more traditional commercial opportunities.

In terms of stock piling needs, I mean it's too soon to say what those look like but I think there are some good examples in the industry. The one that we've used both from the standpoint of how these things get priced but also on the standpoint of how these things get valued is what [HTS] was able to do with their Anthrax program through the federal government and the purchasing of supplies for that program. So there is a precedent out there.

We've also had extensive discussions with key people in the Pentagon that have helped us understand how stock piling proceeds with companies. And we do think that there is not only this broader platform funding element of this type of resources coming to the company, but also obviously there's a potential for more accelerated timelines through FDA consideration, and also an interesting commercial model that relates to stock piling.

Yes, and keep in mind, and just to be really clear, we think the stock piling opportunity is significant and can be very profitable for us. Unlike other approaches that have been used in the past where someone builds a product in the hope of interest, the government's funding these efforts because they are interested. And we feel that if we're successful in building these products, the government interest will be there and the stock pile will come.

Okay, thanks. And I think Mark has a question as well.

Yes, thank you, I have a couple questions, good afternoon, everybody.

Good afternoon.

RSV program, could you please outline for us what you hope to learn from the experimental model that you can translate into the natural infected model? Do you have a priority hit list of learning items?

Absolutely. And I think I'll defer to our kind gentlemen, Dr. Vaishnaw.

I think, Mark, the most important thing first and foremost is that it would be the first time that in man, we would have used RNAi as a modality to establish antiviral activity. And just to do that with ANL-RSV01 I think is a huge de-risking step because then we have done that in the upper respiratory tract. And I think that along with the mouse data that we already have really puts us in a good position to look forwards to completing proof-of-concept in a naturally infected population with infection involving both upper and lower respiratory tract. So, I think that's the first and most important thing we want to learn.

Secondly, you know we continue obviously to establish safety and will be doing that for the first time in the context of an infected respiratory tract, and that's the important principal. And thirdly, we'll be learning about the dose levels that are efficacious and the caveat there is that, of course, that's the upper respiratory tract, but I still think that's an important nugget of information that will be helpful to us moving forwards. So, those are the three areas I can think of, with the most important being establishing antiviral proof-of-concept in man and de-risking the program technically in that sense.

That's very helpful. I want to move on to a question for Patty. With $435 million in the bank at the end of the year, I think you're going to be able to afford to buy a vowel for Alnylam so it'll be easier to spell. In addition, how many people are now at the Alnylam? And given the fact that you're going into challenging areas like liver cancer and then another program going into cholesterol, a number of different disease areas, what do you believe is the right number of people going forward?

Well, let me answer that, Mark, if you don't mind. Clearly right now, with now the close of our Roche deal, our Alnylam Europe employees have become employees of a Roche center of excellence for RNAi therapeutics called Roche Kulmbach, more appropriate vowels perhaps in those names. So that leaves approximately 110 employees in Cambridge and we are going to be rebuilding certain capabilities in Cambridge to deal with capacity related matters related to the sale of Alnylam Europe to Roche, and probably will end the year in the range of 140 employees plus or minus. So that's the scale.

Now, we are adding employees consistent with building our business, consistent with the needs in the different areas related to either development activities or the research activities, and it's a very balanced approach. But fundamentally, Mark, you know we believe in an efficient growth of our business, the continued use of external CROs for doing GLP tox studies, the use of CROs for doing certain aspects of our clinical development activities, the use of CMOs for doing manufacturing, because we just feel that that's the most prudent way to build the business in a more variabalized manner. And time has proven that to be the right way to build companies in our industry.

So, we're being very cautious and careful and studious about how we build this company and doing it the right way. And we really feel adequately seasoned with the people that we've been bringing in, people like Akshay on the development side, to be able to bring the world's best clinical experts together on any given therapeutic area and have the best dialog and the best design outcome from the standpoint of clinical studies. So I think as it relates to any aspect of the diversity of what we're doing as a business, we feel that we are very well positioned to be able to do that effectively.

That's very helpful. And then the last question, you spent a lot of time talking about the Roche collaboration, the bio-defense contract, the Medtronic, but what about Novartis that started it all? Can you spend a few moments then giving us the state of the union with the Novartis relationship? Where are you? Are in a young adulthood there in terms of that relationship? Is it adulthood? Is there a chance to have further offspring here? What's the life of that contract and the lifecycle of the relationship going forward in your opinion?

You know it's going great. First of all, Novartis was brilliant in their pioneering move in RNAi therapeutics and they came in in a significant way before anybody else did. And to their credit, they deserve a lot of kudos for that and certainly they recognize the value and they valued what we brought to the table. But they probably came in at an earlier time and got perhaps broader things for less, so I mean I think that's clear to everybody including our friends at Roche and certainly our friends at Merck.

So the bottom line is that Novartis came in early, they had the benefit of working with Alnylam, we have a very significant collaboration with them. We meet almost daily, we have scientists meeting with their scientists. We have the benefit in our relationship with Novartis of being just down the street from the NIBR Institute that Mark Fishman leads up. And most of the programs are being driven between Alnylam Cambridge and the NIBR group, although there are some activities that go on in other geographic sites of Novartis.

And I would characterize it as being I think the young adulthood stage. I mean we're almost two years into the relationship, it'll go for a committed level of three years. Novartis has the right to add additional annual years up to five years, they also have the right to purchase an adoption license, so-called platform license, in association with significant payments to Alnylam, both up-front and downstream payments, that we're very excited about. And they haven't made that commitment nor do they need to make that commitment today and we'll see when they make that commitment, but I'd be surprised if they don't.

Congratulations on all your progress.

Thanks, Mark.

Your next question is from the line of Ding Ding with Maxim Group. Please proceed.

Good afternoon, everyone.

Hi, Ding Ding.

Hi, Ding Ding.

Great. Again, my congratulations to a fantastic first half of the year. Maybe I'll just follow up on the discussion on the Roche deal. What are the key factors in, when we reflect on this transaction, what are the key factors you think contributed to the very rich economics of this Roche deal? And how important is the personnel on the German side in terms of determining the economics of the deal.

Sure. Ding Ding, those are excellent questions as always. First, I think the number one and the number two and the number three drivers of what drove Roche's interest in working with Alnylam is our scientific leaders, our scientific leadership and then our scientific leadership. And I think that drove, by far, their recognition of what we've been able to build in truly engineering drug-like properties at small interfering RNAs. But clearly all of that, in a binary way, would have not occurred had it not been for their absolute conviction in the strength, the power and dominance of our intellectual property. So almost in a binary fashion the value of our intellectual property was a [scenic qua non] of the transaction to begin with.

So it was IP but ultimately scientific leadership that made it happen, and our vision at the top. A vision at the top of the organization of Roche who clearly recognized that RNAi can be transformative, it can drive fundamental discoveries of new innovative medicines to address diseases that cannot be addressed by small molecules or antibodies. And it's a company that has a serious and longstanding commitment to innovation in everything they do. And clearly that is what they did with Genentech and we think that is what they're doing Alnylam, and even Roche executives have made analogies between the two companies, which I think are notable.

So, that's really the bottom line of why Roche and Alnylam came together. And the exciting this is we can do this again and we will do this again, because there's significant interest across the whole pharma industry in innovation, and there's a significant recognition of the value of the Alnylam intellectual property, our scientific leadership and what is needed to be a major player in this space. And nobody wants to miss out on what was clearly the major advances of monoclonal antibodies that many pharma companies did miss out on, and they don't want that to happen again with RNAi. And that puts us in a very significant and strong position to do new transactions that absolutely add value to our partner, that has to be there, but at the same time is consistent with how we think about building our business.

Great, that's very helpful. In thinking about the future deals that you may consummate down the road, and if we wanted to think about variables besides the excess nonexclusively to your IP and scientific leadership, besides the number of therapeutic areas and number of targets, do you think it's important to have some personnel who have hands-on experience in terms of working with siRNA to be transferred to your partner to facilitate that learning process for your partner? Or do you think the excess to IP nonexclusively by itself is sufficient for --?

Yes, that's a great question, Ding Ding, and I failed to answer that in my comments back. Actually our proposal to Roche and our discussions with other companies has been predominately focused on providing them a nonexclusive license and actually transferring technology to our partner and not, obviously, what ultimately happened with Roche, which is a purchase of Kulmbach site. And Roche was interested in the Kulmbach site because of the fact that their model of their business has very much been to have external sites, like they had with Genentech, that they allow as innovation centers. And that's the model that they've enjoyed.

In other discussions we've had, the pharma partners are actually quite interested in having a technology transfer component of a transaction where we would effectively transfer technology, nonexclusively of course, to these pharma partners. And that's the way, in the future, that this would proceed.

When you were referring to the technology transfer, what do you mean by that exactly? I just wanted to get a little color on that.

Well, I mean there are lots of interesting examples in the software industry to this effect, but I think the best analogy in our industry would be the type of transaction that Millennium did with Monsanto where Millennium actually built a genomics group, these were all Monsanto employees, but they ultimately worked for Monsanto and became [Serion]. And what they received in return was sort of the SOPs for doing what needs to get done, obviously always cautious of what can be provided to them and what can't be provided to them. And obviously the enablement from an IP standpoint.

Okay, great. The next question on the RSV program, do we still expect to receive the proof-of-concept from Part 2 of the experiment and section study before year end?

That's the goal, absolutely. And that study is currently enrolling and we are feeling good about those data being available by year's end.

And the initiation of Phase II in natural infection study in the first half, so between the end of proof-of-concept and moving into natural infection study in Phase II, are there any steps you need to go through? Do you need to discuss with the FDA? What are the other steps --?

Well yes absolutely, Ding Ding, there is completion of our inhalational study, there's discussions with the agency, there is discussions with clinical sites and opinion leaders that will be the principal investigators of the studies and there's a lot of parallel tracking that goes on in preparation for a study like that.

Okay, great. And lastly for the PCSK9 program and the liver cancer program, what's the targeted formulation and dosing regimens that you plan to start Phase I with? And how different the target formulation and dosing you think would be, or envision to be for commercialization?

Well Ding Ding, it's premature on both of those. Obviously the initial studies in both cases will be single ascending doses looking obviously at tolerability. And then in a cancer setting there might be a more frequent dose regimen because there we'll be treating patients that have otherwise failed other types of therapies. But I think it would be premature to get too specific on any of those discussions.

And the formulation wise? Is it --?

It'll be the MIT technology that we've been working on, as you know.

Okay, great. Thank you very much.

Great.

And we only have time for one more question and it will come from the line of William Sargent with Banc of America Securities. Please proceed.

Hi, Will.

How's it going?

Good, how are you?

I'm doing pretty great, congratulations on the quarter.

Thanks, Will.

I just had a quick question, for the Phase I inhalation study, I know this is still enrolling, but I was wondering did that have any contribution to moving the start of the naturally occurring back into 2008? And exactly would we be just getting some safety data on that in the second half of the year? Or would there be some other dynamic data that we'd be getting with that study?

Yes, I mean I can make some comments and then, Akshay, you can chime in. The inhalational study and the timing of that has been part of the factors, but the real driver is the experimental infection Phase II data and the outcomes there. And no for the most part the inhalational study would will just be giving us tolerability with an inhaled formulation and doing that in both single-ascending doses as well as multi doses. Akshay, anything to add there?

No. I mean I think you got it exactly right and the two pieces come together and I think we'll be in a good spot for decision making in the second half.

Yes, exactly.

And then just to follow up on that, are you still getting some active inquiries around the RSV program? And would you consider the completion of this proof-of-concept study a point to look at partnerships? Or are you, now that you're in a very secure financial position, potentially looking at going beyond the experimental or even further before looking at partnership opportunities?

Well, at least for the U.S. market we're holding on to that for some time. But we do have some discussions ongoing for ex-U.S. type of partnerships. And to Barry's comments earlier, a lot of the flavor or types of deal that you'll see from Alnylam, beyond platform license deals, are ones where increasingly we keep U.S. rights on programs because we now have, obviously, the financial means to advance these things on our own accord, and be seeking rest of world partnerships on these programs in Japan and Europe primarily, either with single partners in those geographies or distinct partners in those geographies.

And Will, we've been very consistent, as you know, talking about RSV saying this is definitely something eventually we'll partner because of the seasonality and the complexities of Phase III studies. And we've also been consistent that that likely would not happen until after human proof-of-concept. So we've got reasonable timing now, and some good sets of discussions going on.

Sure. I just didn't know if that had been pushed out further, but it sounds like it's still an option.

Yes.

Okay, excellent. Thank you.

Good. Great, guys. I think that's it for our call. So listen, I want to thank everybody for joining us today. As I said earlier, the first half of the year has been really game changing for the company. But this is only the beginning. And I think what's very, very clear to all of sitting here in Cambridge rooting for the Red Sarbanes-Oxley Act is that we've never been stronger as a business and we look forward to updating you certainly in the months to come. Thank you.

Thank you for attending today's conference, everyone, this concludes the presentation. Have a great evening.