BUSINESS

Overview

      We are a biopharmaceutical company seeking to develop and commercialize novel therapeutics based on a recently discovered biological pathway known as RNA interference, or RNAi. We believe that RNAi therapeutics have the potential to become a major class of drugs, like small molecules and therapeutic proteins, including monoclonal antibodies. Using our intellectual property and substantial expertise, we are developing a set of standardized capabilities that we expect will enable us to pursue many different opportunities for RNAi therapeutics. We refer to these standardized capabilities as our product engine. Using our current capabilities, we have initiated programs to develop RNAi therapeutics that will be administered directly to sites of disease, which we refer to as Direct RNAi therapeutics. We believe there are multiple opportunities for Direct RNAi therapeutics. Our current Direct RNAi programs are focused on age-related macular degeneration, or AMD, and Parkinson’s disease. We expect to initiate a clinical trial for our lead AMD product candidate in 2005. We are also working to extend our capabilities to enable the development of RNAi therapeutics that travel through the blood stream to reach sites of disease, which we refer to as Systemic RNAi therapeutics. We believe Systemic RNAi could be used to treat a broad range of diseases.

      RNAi is a recently discovered natural mechanism for selectively silencing genes. Genes provide cells with instructions for making proteins, and silencing a gene refers to stopping or reducing production of the protein specified by that gene. Our goal is to develop novel therapeutics that use the RNAi mechanism to selectively silence genes whose protein products play harmful roles in disease. We intend to develop drugs based on a type of molecule known as small interfering RNA, or siRNA. siRNAs are the molecules within cells that directly trigger RNAi. Given the recent availability of the base sequence of the entire human genome, siRNA drugs can be designed, in theory, to suppress the production of any human protein involved in disease, including proteins that are currently intractable to conventional drugs.

      We believe we have a strong intellectual property position relating to the development and commercialization of siRNAs as therapeutics. This position results from our concentration of intellectual property rights claiming key features of siRNAs and their use as therapeutics, which includes our ownership of one granted patent and exclusive rights to several pending patent applications. We are also focusing on intellectual property relating to chemical modifications to siRNAs and on siRNAs directed to specific targets as treatments for particular diseases. We have filed or licensed over 50 U.S. patent applications and corresponding foreign patent applications in the RNAi field.

      Our goal is to develop and commercialize RNAi therapeutics. In the near term, we intend to capitalize on our expertise in RNAi and our intellectual property position to form strategic alliances that provide us with access to the resources necessary to develop and commercialize RNAi therapeutics. Our first such alliance is with Merck. In the longer term, we expect to expand our capabilities and resources to enable us to develop and commercialize RNAi therapeutics independently.

      Our scientific founders are among the recognized pioneers in the field of RNAi. In addition, we have assembled an experienced management team to implement our business plan. Members of our management team have played key leadership roles in the discovery, development and commercialization of a number of marketed drugs, including Aranesp, Neulasta, Angiomax and Velcade.

RNA Interference

      RNAi is a recently discovered mechanism that occurs naturally within cells and selectively silences the activity of specific genes. Genes provide cells with instructions for producing proteins. Proteins perform many of the vital functions of the cell and of the human body. Although the roles they play are generally beneficial, in certain circumstances, proteins can be harmful. Many human diseases are caused by the inappropriate behavior of proteins. A particular protein may, for example, be present in too great a quantity, be too active or appear in the wrong place or at the wrong time. In these circumstances, the ability to stop or reduce production of the protein by selectively silencing the gene that directs its synthesis could be very beneficial towards the treatment of the disease.

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      Beginning in 1999, our scientific founders were the first to describe and provide evidence that the RNAi mechanism occurs in mammalian cells and that its immediate trigger is a type of molecule known as small interfering RNA, or siRNA. They showed that laboratory-synthesized siRNAs could be introduced into the cell and suppress production of specific target proteins. Because it is possible, in theory, to design and synthesize siRNAs specific for any gene of interest, we believe that RNAi therapeutics have the potential to become a broad new class of drugs.

How RNA interference Works

      RNA is a crucial intermediate in the process by which the cell uses inherited genetic information. This information is passed from one generation to the next in the form of genes, which are made of a substance known as deoxyribonucleic acid, or DNA. Generally, each gene contains the instructions that tell the cell how to make one specific protein. These instructions are in a coded form. The code is based on the four different chemical building blocks from which DNA is made, usually designated by the first letters of their chemical names, A, C, G and T. It is the sequence in which these building blocks, or bases, occur in a gene that tells the cell what protein to make. Most gene sequences are thousands of bases long, and the variety possible in such long sequences allows the cell to produce a large number of different proteins.

      One very important property of DNA is that it is double-stranded, consisting of two separate strands intertwined around each other in a double helix. The two strands are held together by base pairs that form between bases on the opposite strands. Strict rules govern the formation of these base pairs: an A on one strand can pair with a T on the other, and a G can pair with a C, but no other pairings are allowed. The double-stranded nature of DNA and the strict rules governing base-pairing are fundamental to ensuring that genetic information is copied accurately when it is handed down from one generation to the next.

      Base-pairing rules are also fundamental to the process by which the cell uses, or expresses, genetic information to make a protein. To initiate this process, the cell makes a working copy of the gene that encodes the protein. This working copy is made not of DNA but of a closely related substance called ribonucleic acid, or RNA. The working copy is known as messenger RNA, or mRNA. Unlike DNA, mRNA has only one strand. However, the application of base-pairing rules during synthesis of this strand ensures that the sequence of bases in mRNA accurately reflects the base sequence, and thus the genetic information, in the gene being copied. This mRNA then associates with the cell’s protein synthesis machinery, where it directs synthesis of a protein in such a way that the structure of the protein is directly determined by the sequence of bases in the mRNA, and thus in the gene. The protein specified by a particular gene or mRNA is said to be encoded by that gene or mRNA. When this protein is made, the gene is said to be active or expressed.

      Although many RNA molecules, like mRNA, are single-stranded, RNA is capable of forming double-stranded molecules analogous to those formed by DNA. When it does so, base-pairing rules apply. As a result, only RNA molecules with complementary sequences can form double-stranded structures. Every base on one strand has to line up with its permitted base-pair partner on the other strand, otherwise the double-stranded structure will be unstable.

      Double-stranded RNA, or dsRNA, is crucial to the phenomenon of RNAi. A particular type of dsRNA interferes with the activity of specific genes by triggering the breakdown of mRNAs copied from these genes, preventing production of the proteins they encode. Selection of mRNAs for breakdown is driven by base-pairing between the target mRNAs and the separated strands of the dsRNA. Thus, the mRNAs selected for breakdown are those which contain base sequences identical to base sequences in one strand of the dsRNA. As a result, RNAi leads to selective silencing of specific genes with little impact on other genes whose mRNAs do not share base sequences with the dsRNA.

      In nature, the cell initiates RNAi by cutting longer dsRNAs into smaller dsRNA pieces that have 25 or fewer base pairs. These shorter dsRNAs are known as small interfering RNAs, or siRNAs. siRNAs are double-stranded along most of their length but have unpaired bases, or overhangs, at each end, which are

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	Step 1.	siRNAs associate with several proteins to form an assembly known as the RNA-induced silencing complex, or RISC. The two strands of the siRNA become separated as the RISC is formed, so that RISC contains an unpaired single-stranded RNA.
	Step 2.	The RISC then looks for mRNA molecules that contain base sequences complementary to the single-stranded RNA it contains — that is, sequences within the mRNA whose bases can pair up exactly, using base-pairing rules, with the bases in the single-stranded RNA.
	Step 3.	Once this pairing occurs, the RISC complex cuts the mRNA into two separate pieces at the base-paired region, destroying its ability to direct protein synthesis. The RISC complex is then available to cut additional mRNA molecules that contain the appropriate base sequence.

      Repetitive cycles through steps two and three lead to catalytic degradation of mRNAs that contain a sequence complementary to the siRNA strand in the RISC. The ability of each RISC complex to cut multiple mRNA molecules consecutively in a catalytic manner is one of the reasons why we believe RNAi will be effective at silencing gene activity.

Opportunity for Therapeutics Based on RNAi

      In May 2001, one of our scientific founders published the first scientific paper demonstrating that the siRNAs required to trigger RNA interference need not be generated inside the cell. Instead, siRNAs can be synthesized in the laboratory using chemical or biochemical methods and introduced into cells to silence the activity of a specific gene. As a result of the human genome project, complete base sequences are available for most human genes. With the sophisticated bioinformatics tools that were developed in conjunction with the genome project, it is possible to scan through the gene that encodes a particular protein and select base sequences that are of the appropriate length for siRNAs and unique to that gene. Several siRNAs targeted to the gene of interest can then be synthesized. Each synthesized siRNA will contain a sequence capable of base-pairing exactly with a short stretch of the sequence of the mRNA copied from the target gene. The synthetic siRNAs can then be tested to determine whether they silence the activity of this gene and suppress the synthesis of the protein it encodes.

      The use of siRNAs has been broadly adopted by academic and industrial researchers for the fundamental study of the function of genes. Important information about the function of a gene can often be deduced by

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      One important application of such knock-down studies is to confirm the role of a particular gene or protein in a disease, a process often referred to as target identification or target validation. If silencing a gene with an siRNA leads to improvements in disease symptoms in an experimental disease model, this implies that the target gene or protein plays an important role in the disease. It also implies that the siRNA that suppresses the gene in the model system may be a useful starting point for the development of a drug. We believe that it will be possible to develop these siRNAs into potent and specific drugs.

Broad Potential of siRNAs as Therapeutics

      The success of siRNAs in silencing gene activity in experimental systems suggests that siRNAs could potentially be developed into a broad class of human therapeutics. We believe this new class of drugs has the potential to become a major class of drugs because RNAi therapeutics could offer the following benefits:

	•	Ability to treat a broad range of diseases. Given the availability of the base sequence of the entire human genome, in theory, it could be possible to design siRNAs to suppress the production of virtually any human protein whose presence or activity causes disease. This suggests that RNAi therapeutics could potentially be used to treat a broad range of diseases.
	•	Ability to target proteins that cannot be targeted effectively by existing drug classes. Many proteins that play important roles in disease cannot be targeted effectively with small molecules and therapeutic proteins, including monoclonal antibodies. These proteins are commonly referred to as non-druggable targets. In the case of small molecule drugs, many proteins are non-druggable because it has proved difficult to synthesize drug candidates with appropriate specificity, potency and safety. In the case of protein drugs, the range of available targets is limited to targets outside the cell. These limitations on small molecule and protein drugs should not apply to siRNAs, which, in theory, can be synthesized to target any gene in the genome. Therefore, we believe RNAi therapeutics will be able to target proteins that small molecule and protein drugs cannot currently target.
	•	Inherently potent mechanism of action. One molecule of siRNA could potentially do the work of thousands of molecules of conventional drugs. With conventional drugs, one drug molecule is typically required for every protein molecule whose activity needs to be blocked. Accordingly, to block several thousand protein molecules, several thousand drug molecules are required. In contrast, a single siRNA molecule can potentially block the synthesis of many protein molecules. This is because each siRNA within a RISC complex can trigger destruction of multiple mRNA molecules, each of which could otherwise direct the synthesis of many protein molecules. This inherent potency of the RNAi mechanism suggests a potentially high degree of potency for RNAi therapeutics.
	•	Simplified discovery of drug candidates. Identification of small molecule and protein drug candidates typically requires screening of a large number of potential candidates to find prospective leads. These leads must then undergo significant optimization in order to become drug candidates. Particularly in the case of small molecule drug candidates, the optimization procedure can be very challenging, and has to be almost entirely repeated for each candidate. Identification of siRNA drug candidates has the potential to be much simpler and take considerably less time because, in theory, it will involve relatively standard processes that can be applied in a similar fashion to many successive product candidates.

      For these potential benefits of siRNA drugs to be realized, it will be necessary to create chemically-synthesized siRNAs that are potent, specific, stable and safe and also capable of reaching the appropriate tissues and cells. The incorporation of such properties into siRNAs is the focus of our product engine.

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Our Business Strategy

      Our strategy is to use our intellectual property and substantial expertise in RNAi to develop and commercialize RNAi therapeutics. The key elements of our business strategy are as follows:

	•	Pursue product opportunities in a phased approach based on the capabilities of our product engine. With the goal of accelerating the development of RNAi therapeutics, we are implementing a phased approach to product development. Using the current capabilities of our product engine, we will focus initially on the development of Direct RNAi therapeutics. We believe there are multiple opportunities for Direct RNAi therapeutics. As we extend the capabilities of our product engine, we will initiate development of Systemic RNAi products. We believe this approach will allow us to initiate product development activities in three main phases.

	—	Direct RNAi therapeutics. We intend to utilize the current capabilities of our product engine by focusing our efforts on developing RNAi therapeutics that can be administered directly at sites of disease, such as the eye or the brain. As part of this phase, we have initiated Direct RNAi programs focused on age-related macular degeneration and Parkinson’s disease.
	—	Systemic RNAi therapeutics for liver-based diseases. As we extend the capabilities of our product engine, we intend to develop RNAi therapeutics for liver-based diseases. We intend to focus on the liver because it is central to several important diseases and also appears, on the basis of early evidence, to take up siRNAs more readily than other tissues.
	—	Systemic RNAi therapeutics for other diseases. As a third phase of our product development strategy, we will seek to develop RNAi therapeutics that exert their effects in tissues other than the liver. We believe achievement of this objective could permit us to develop Systemic RNAi drugs for a broad range of diseases, such as cancer and autoimmune diseases.

	•	Maintain a strong intellectual property position in the RNAi field. We believe we have a strong intellectual property position relating to the development and commercialization of siRNAs as therapeutics. To build upon our existing intellectual property position, we are focusing on patent and patent applications covering:

	—	fundamental aspects of the structure and uses of siRNAs, including their use as therapeutics;
	—	chemical modifications to siRNAs that improve their suitability for therapeutic uses; and
	—	siRNAs directed to specific targets as treatments for particular diseases.

	•	Capitalize on our expertise in RNAi and our intellectual property position to gain access to additional resources to develop and commercialize RNAi therapeutics. We believe that we can use our expertise and the strength of our intellectual property to drive the formation of strategic alliances that will provide us with access to important additional resources. We expect these resources to include significant additional capital as well as expertise in the development, manufacturing and commercialization of novel therapeutics. We intend to take an active role in these alliances, including maintaining certain commercialization and development rights. We also intend to use our early alliances to expand our own capabilities so that in the future we will be able to develop and commercialize our therapeutic products independently. To date, we have entered into one such alliance with Merck, the goal of which is to jointly develop advanced RNAi technology and therapeutics.
	•	Leverage our intellectual property position by licensing our technology to generate revenues. We intend to license our intellectual property to third parties for the development and commercialization of RNAi therapeutics outside our areas of strategic focus through our Interfe Rx Program. We expect to receive license fees, annual maintenance fees, milestone payments and royalties on sales of any resulting RNAi therapeutics. We also intend to grant further licenses to our intellectual property for the development and commercialization of research reagents and services. To date, we have granted research reagents licenses to Invitrogen Corporation and Cell Signaling Technology, Inc. and have granted research service licenses to Invitrogen, Cenix Bioscience AG and RNAx GmbH. We

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		grant these licenses in return for an initial license fee, annual renewal fees and royalties on sales of siRNA research reagents and services.

Alnylam Product Engine

      To realize the potential of RNAi therapeutics as a broad new class of drugs, we are developing capabilities that we can apply to any specific siRNA in a relatively standard fashion to endow it with drug-like properties. We use the term product engine to describe these capabilities because we believe they will enable us to develop many products across a variety of therapeutic areas. The concept for our product engine is that it will provide a systematic approach to identifying RNAi drug candidates with the following steps:

	•	Sequence selection. Using sophisticated bioinformatics tools we scan through the entire sequence of a target mRNA to identify sequences that are unique to that mRNA and have few closely similar sequences in other mRNAs. From these unique sequences we derive a list of potential siRNAs that would match up exactly with the target mRNA and not with any other mRNAs. We narrow this list down further by applying filters for other important properties, such as the presence of stabilizing sequence motifs that we have identified. This provides us with a shorter list of siRNAs, each of which we then synthesize for experimental evaluation.
	•	Potency selection. The siRNAs synthesized in the sequence selection step are tested in cell culture systems to compare their potencies in suppressing production of the target protein.
	•	Stabilization by chemical modification. Each of the most potent siRNAs is tested to identify the sites within its structure where it is most vulnerable to attack by enzymes known as ribonucleases that could degrade the siRNA. A minimal set of chemical modifications is then introduced into the siRNA to protect these vulnerable sites, and the modified siRNA is tested to confirm its stability and that it has retained activity against the target mRNA.
	•	Improvement of biodistribution by conjugation of additional chemical groups. The stabilized siRNA is further modified by the addition, or conjugation, of one or more chemical groups designed to improve uptake of the siRNA into cells and, if desired, to prolong the time it circulates in the blood.

      We expect the output of this process to be RNAi drug candidates that are potent against and specific for a particular target, are appropriately stable and are able to penetrate cells of target tissues. Moreover, we expect this process for finding suitable drug candidates will be simpler, faster and more productive than the corresponding process for small molecule and protein drug candidates. Therefore, we believe that any significant success in the development of our product engine will place us in a position to pursue multiple therapeutic opportunities.

Progress in the Development of Product Engine

      We have made considerable progress in establishing capabilities suitable for Direct RNAi drugs, and believe on the basis of early results that we will be able to develop capabilities suitable for Systemic RNAi drugs. In judging our progress, we focus on five key attributes that are important for any drug molecule: potency, specificity, stability, safety and biodistribution.

Potency

      The more potent a drug is, the lower the dose required for a therapeutic effect, and the lower the risk of side effects. Because siRNAs harness the catalytic activity of a natural mechanism to block the synthesis of undesirable proteins, we expect siRNA drugs to be potent at this task. Current data that we and others have generated support this expectation. We have designed and synthesized siRNAs that are highly effective at low concentrations in suppressing target protein production in cultured cells. A frequently used measure of the potency of potential drug candidates is the parameter known as IC ₅₀ , which is the concentration of the drug candidate required to reduce the activity of the target protein by 50% of its normal level. The lower the IC ₅₀ value, the more potent the drug candidate. We have made siRNAs that suppress target protein production in

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Specificity

      To maximize beneficial effects and minimize harmful ones, a drug should be highly selective for its intended target and have minimal activity against unintended targets. For siRNAs, careful selection of an appropriate base sequence can provide a high degree of specificity for the target mRNA. Some evidence has been reported of off-target effects with certain siRNAs, meaning that these siRNAs affected mRNAs other than their intended targets. However, we believe that such effects can be minimized by the use of sophisticated bioinformatics tools to improve selection of siRNA sequences and by judicious incorporation of chemical modifications at appropriate positions within the siRNA molecule. Therefore, we believe we will be able to identify siRNA molecules that are sufficiently specific to the target mRNAs.

Stability

      To be effective, drugs must be stable in the body long enough to reach the tissues in which their effects are required and then to exert those effects. To endow siRNA molecules with appropriate stability, we are introducing a series of chemical modifications into siRNAs to protect them against enzymes called ribonucleases that would otherwise degrade them. We have also identified certain sequence motifs that help to stabilize the siRNAs that contain them, and which we can incorporate by design into the siRNAs we make. We use various experimental systems to assess the impact of sequence selection or chemical modifications on the stability of siRNAs. These systems include incubation of modified siRNAs at body temperature in samples of animal or human serum or in extracts made from animal tissues, such as the liver or the eye. We also assess the stability of siRNAs by injecting them into animals and analyzing samples of serum or tissues for the presence of intact siRNA. These analyses are performed using radioactive labels to trace the fate of the siRNAs or using a biochemical test known as a ribonuclease protection assay to detect the presence of the siRNAs. Using these analytical procedures, we have systematically evaluated the impact of various chemical modifications within siRNA molecules. As a result, we have developed a series of rules enabling us to synthesize siRNAs that are more resistant to breakdown in our experimental systems than unmodified siRNAs but which also retain sufficient potency in cell culture experiments. We have shown that a modified siRNA can maintain stability for 24 hours, whereas many unmodified siRNAs are largely degraded within minutes.

Safety

      All drugs carry the risk of side effects. These effects may have a variety of causes, including incomplete specificity of the drug for its intended target or an adverse interaction between the drug and the body’s systems for monitoring and disposing of foreign materials. In the case of RNAi drugs, our ability to choose siRNAs that are potent and selective for their targets should help to minimize side effects caused by lack of specificity. Moreover, we are deliberately minimizing the number of chemical modifications we are introducing into siRNAs to enhance stability and other properties and believe that this will help minimize potential adverse effects on the body’s disposal systems.

      Because siRNAs are dsRNAs, one further potential side effect is activation of the so-called interferon response, which can be provoked by dsRNAs and causes influenza-like symptoms. There is published evidence, however, that dsRNAs must be at least 30 base pairs long to trigger the interferon response. We expect that siRNAs we develop as drugs will typically have 25 or fewer base pairs.

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Biodistribution

      Biodistribution refers to the ability of drugs to reach different tissues within the body and to enter cells within these tissues. Because RNA molecules are typically unable to enter cells without the use of special delivery agents, biodistribution is considered to be one of the key issues to be addressed before siRNAs can be developed into drugs. We believe we have made considerable progress addressing biodistribution for siRNAs. For example, we have recently demonstrated that:

	•	The attachment of a chemical structure to one end of an siRNA molecule enables that molecule to enter cells without any other delivery agent. To demonstrate entry of the modified siRNA into cells, we incubated cultured cells with various concentrations of the modified siRNA or of an siRNA having the same base sequence but lacking the crucial modification. Activity of the target protein was reduced to about 20% of its normal level in the cells incubated with the modified siRNA, but was essentially unaffected in the cells incubated with the siRNA lacking the crucial modification. We refer to this modification as the permeation group, and use the term permeating siRNAs to describe siRNAs to which we have attached the permeation group.
	•	A permeating siRNA can make its way to the liver after injection into the tail vein of a mouse. We made extracts from the livers of mice that had been injected with various siRNAs and used the ribonuclease protection assay to analyze these extracts for the presence of siRNA. siRNAs were only observed in liver extracts if the injected siRNAs had been modified by attachment of the permeation group. No siRNAs were observed in liver extracts from mice that had not been injected or had been injected with siRNAs lacking the permeation group.
	•	A permeating siRNA remains in the circulation of a mouse and a rat for longer than a similar siRNA that has not been modified with the permeation group. In a test to measure the lifetime of injected siRNA, we demonstrated that a permeating siRNA was detectable in the circulation of a mouse and a rat 12 hours after injection, whereas an unmodified siRNA was barely detectable after one hour.

      These experiments lead us to believe that we will be able to identify siRNAs that have appropriate biodistribution for use as drugs.

Our Development Programs

      Given our progress in developing our product engine we have begun work on Direct RNAi drug candidates and believe that we will also be able to move forward with Systemic RNAi drug candidates in the future. Using the current capabilities of the product engine, we have initiated two programs to identify specific siRNAs for potential further development as Direct RNAi drug candidates. Our two current programs are focused on age-related macular degeneration and Parkinson’s disease.

Age-Related Macular Degeneration

Market Opportunity

      Age-related macular degeneration, or AMD, can cause severe deterioration of vision and may ultimately cause blindness. The siRNAs we are exploring would treat wet AMD, a subtype of AMD often associated with severe vision loss. It is estimated that over 1.6 million adults in the United States suffer from wet AMD, and approximately 200,000 new cases are diagnosed in the United States each year.

      The macula is the central area of the retina, and is the area most responsible for visual acuity, or sharpness of vision. Macular degeneration is a complex process involving the formation of new blood vessels immediately behind the retina. These newly formed vessels tend to be relatively fragile, and to leak blood and fluid into the surrounding tissue. The presence of leaked fluids and new blood vessels behind the retina physically disrupts the integrity of the macula, resulting in blurring of central vision, and ultimately blindness.

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Current Treatments

      Current treatments for AMD are limited in their effectiveness and there is only one drug approved for treatment of wet AMD, Visudyne. Visudyne is used in a two-step process known as photodynamic therapy whose goal is to seal newly formed blood vessels behind the retina so that they neither grow nor leak. However, Visudyne is only approved for the treatment of certain subtypes of wet AMD, and its beneficial effects are frequently modest and of limited duration. The only current alternative to photodynamic therapy is treatment with a laser to burn out newly formed blood vessels. Unfortunately, this treatment can also cause irreversible damage to the retina, resulting in significant blind spots, and its beneficial effects appear to be of limited duration.

      Several companies are currently pursuing a new approach to treat wet AMD by blocking the activity of a protein known as vascular endothelial growth factor, or VEGF. There is evidence that VEGF promotes both the growth and the leakage of new blood vessels behind the retina in AMD. Eyetech Pharmaceuticals, Inc. and Genentech, Inc. each have investigational drugs, Macugen and Lucentis, respectively, directed against VEGF in advanced stages of clinical testing for the treatment of wet AMD. These drugs are intended to block the activity of VEGF by binding to it. Two other companies are in the early stages of developing siRNA products to block VEGF activity. One of these products is intended to limit production of VEGF by suppressing the activity of the VEGF gene. The other is intended to limit production of a protein known as VEGF-receptor, which is the protein on cell surfaces that VEGF must bind to in order to exert its effects.

Alnylam Program

      We are developing a RNAi therapeutic, which we refer to as VEGF Production Inhibitor, for the treatment of wet AMD. We believe that a RNAi therapeutic that suppresses VEGF gene activity, thereby cutting off VEGF production, could have significant advantages over drugs that bind to VEGF once it has been produced or that limit production of the VEGF-receptor. We have identified siRNAs that suppress the activity of the VEGF gene potently and specifically in cultured cells. We believe that the siRNAs we have identified are significantly more potent and effective than VEGF-directed siRNAs reported by others, and that we can apply the current capabilities of our product engine to develop them into competitive drug candidates. We are currently evaluating these siRNAs in animal models relevant to wet AMD and expect to begin a clinical trial for a wet AMD product candidate in 2005. Any siRNA we develop for wet AMD will be a Direct RNAi drug administered by direct injection into the eye, the method of administration for Macugen and Lucentis in their clinical trials. We have filed patent applications relating to the use of siRNAs to suppress VEGF production for therapeutic purposes.

Parkinson’s Disease

Market Opportunity

      Parkinson’s disease, or PD, is a disorder of the nervous system that afflicts between one million and 1.5 million people in the United States, and approximately four million people worldwide. In its early stages, PD is characterized by uncontrollable tremors that gradually increase in severity. As the disease progresses it can lead to severe loss of mobility and dementia. Worldwide sales of drugs for treating PD were estimated to be $2 billion in 2002.

      The symptoms of PD are caused by a shortage of a substance called dopamine in a key region of the brain. Dopamine plays an important role in transmitting signals between nerve cells and in regulating movement. The shortage of dopamine in PD is caused by the death of dopamine-producing cells in a region of the brain known as the substantia nigra.

Current Treatments

      Currently approved treatments address the symptoms of PD rather than its cause and largely rely on drugs that replace the function of the missing dopamine. These drugs act in a variety of ways, including mimicking dopamine, boosting the amount of dopamine in the brain, enhancing the activity of dopamine

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Alnylam Program

      The goal of our program is to develop a RNAi therapeutic that will slow or halt the progress of PD. Instead of replacing the function of missing dopamine in persons with PD, the siRNAs we have begun to explore as potential treatments of PD would attempt to prevent the shortage of dopamine by preventing the death of dopamine-producing cells that causes this shortage. Based on recent scientific findings, we believe that it may be possible to prevent the death of those cells by using an siRNA to suppress production of a protein known as alpha-synuclein. Recent evidence suggests that the presence of excessive amounts of alpha-synuclein in dopamine-producing cells contributes to their death. We have identified siRNAs that suppress the activity of the alpha-synuclein gene in cultured cells. We recently entered into a collaboration with the Mayo Foundation for Medical Education and Research and the Mayo Clinic Jacksonville, which we refer to collectively as the Mayo Clinic, to explore this possibility in animal models of PD.

      The collaboration is established with an initial one-year period to explore whether an siRNA could be effective in treating PD and allows for an extension of the collaboration if the results are positive. We expect that any resulting RNAi therapeutic would be a Direct RNAi drug administered using a specialized medical device to infuse the drug into the appropriate region of the brain. Accordingly, we would anticipate collaborating with a manufacturer of such devices to develop appropriate procedures for delivery. We have secured an option for an exclusive license to a patent application filed by the Mayo Clinic relating to the use of siRNAs to suppress production of alpha-synuclein for therapeutic purposes.

Strategic Alliances and Licenses

Strategic Alliances

      We intend to form strategic alliances to gain access to the financial, technical, clinical and commercial resources necessary to develop and market RNAi therapeutics. We expect these alliances to provide us with financial support in the form of equity investments, research and development funding, license fees, milestone payments and royalties or profit sharing based on sales of RNAi therapeutics. Our first strategic alliance is with Merck for the development of advanced RNAi technology and therapeutics.

Merck

      In September 2003, Alnylam entered into a five-year strategic alliance with Merck to develop advanced RNAi technology and RNAi therapeutics. For technology development, both parties committed to devote significant human resources and expertise to the collaborative development of advanced RNAi technology. Merck will have exclusive rights to use Alnylam’s RNAi technology and the RNAi technology developed jointly under the collaboration solely for the identification and validation of drug targets. Alnylam will have rights to use this technology for all internal research purposes and in collaborations in which the primary purpose is the development of therapeutic products using RNAi. For therapeutics development, Merck agreed to provide Alnylam with twelve proprietary drug targets over the course of the collaboration that have well-validated roles in disease and that appear attractive as potential targets for RNAi therapeutics. Alnylam has the right, but not the obligation, to develop siRNA drug candidates against each target provided by Merck. If Alnylam advances a candidate to a defined point in preclinical development, Alnylam and Merck will then decide whether Alnylam, Merck or the two companies together will proceed with the further development and commercialization of that candidate. For each drug candidate that Merck decides to develop, whether by itself or jointly with Alnylam, Merck will pay Alnylam a fee at the time of its decision, and will also reimburse Alnylam for one-half of the costs we incurred previously on that candidate. If the parties agree to develop a drug candidate together, we will share development expenses and co-promote the products upon terms to be determined by mutual agreement. If it is determined that Merck will develop the drug candidate without Alnylam’s further involvement, Merck will bear all development expenses and will pay Alnylam a royalty on

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      In connection with this alliance, Merck made a $2 million cash payment and $5 million equity investment in Alnylam during 2003. Further cash payments are due from Merck in each of 2004 and 2005. In addition, if a pre-specified technology milestone is achieved in the RNAi technology development program, Merck will make an additional cash payment and equity investment.

Licenses

      We believe that our intellectual property rights provide us with the opportunity to generate revenues from licenses we will grant to others for the use of our intellectual property to develop and commercialize siRNA products. We are pursuing this opportunity through our Interfe Rx program and our research reagents and services licensing program.

InterfeRx Program

      Our Interfe Rx program consists of the licensing of our intellectual property to others for the development and commercialization of RNAi therapeutics relating to specific protein targets outside our areas of strategic focus. We expect to receive license fees, annual maintenance fees, milestone payments and royalties on sales of any resulting RNAi therapeutics. Generally, we do not expect to collaborate with our Interfe Rx licensees in the development of RNAi therapeutics, but may do so in appropriate circumstances. To date, we have not entered into any Interfe Rx licenses.

Research Reagents and Services

      We have granted licenses to our intellectual property for the development and commercialization of research reagents and services, and intend to enter into additional licenses on an ongoing basis. Our target licensees are vendors that provide siRNAs and related products and services for use in biological research. To date, we have entered into research reagent licenses with Invitrogen Corporation and Cell Signaling Technology, Inc. and research service licenses with Invitrogen Corporation, Cenix Bioscience AG and RNAx GmbH. We grant these licenses in return for an initial license fee, annual renewal fees and royalties from sales of siRNA research reagents and services.

Research Collaborations

      We may also enter into collaborations with leading research and medical institutions in connection with our development of RNAi therapeutics for specific indications. Our arrangement with the Mayo Clinic related to Parkinson’s disease is an example of this type of collaboration.

Mayo Clinic

      In October 2003, we entered into a one-year research collaboration with the Mayo Clinic to develop an siRNA that suppresses the expression of alpha-synuclein, which is over-expressed in patients with Parkinson’s disease. Under the collaboration, we agreed to identify, synthesize and provide siRNA drug candidates to the Mayo Clinic, which will test these candidates for their efficacy in a series of in vitro and in vivo studies. We provide research funding to the Mayo Clinic, and have the option to acquire exclusive licenses to background intellectual property held by the Mayo Clinic and inventions arising out of the collaboration.

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Patents and Proprietary Rights

      We have devoted considerable effort and resources to establish what we believe to be a strong position in intellectual property relevant to RNAi therapeutics. In this regard, we have focused on patents or patent applications and other intellectual property covering:

	•	fundamental aspects of the structure and uses of siRNAs, including their use as therapeutics;
	•	chemical modifications to siRNAs that improve their suitability for therapeutic uses; and
	•	siRNAs directed to specific targets as treatments for particular diseases.

Intellectual Property Related to the Fundamental Aspects and Uses of siRNA

      In this category, we include patents and patent applications that claim double-stranded RNAs of particular lengths, particular structural features of these dsRNAs such as overhanging ends, and uses of these dsRNAs. Our strategy has been to secure rights to the potentially key patents and patent applications covering the fundamental aspects of siRNAs on an exclusive basis where possible or appropriate. The following table lists patents or patent applications to which we have secured rights that we regard as being potentially fundamental for the use of siRNAs as therapeutics.

*	Alnylam holds exclusive rights to the interest owned by three of four co-owners. The fourth co-owner, the University of Massachusetts, has licensed its interest separately to third parties.

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      We believe that no other company owns a portfolio of such broad and exclusive rights to fundamental siRNA patents and patent applications. In securing these rights, we have focused on obtaining the strongest rights for those intellectual property assets we believe will be most important in providing competitive advantage with respect to RNAi therapeutics. We note in particular the second and fifth patents and patent applications listed in the table above, those covering inventions by Dr. Kreutzer and Dr. Limmer and by Dr. Tuschl and his colleagues. We believe the so-called Kreutzer-Limmer European patent is the only patent so far granted that specifically covers the use of short dsRNAs as therapeutics. Through our acquisition of Ribopharma AG in 2003, we own this patent outright, as well as corresponding patent applications in other countries, including the United States. The pending patent application filed by the Max Planck organization on the invention by Dr. Tuschl and his colleagues, or the Tuschl II patent application, covers a key structural feature of siRNAs, namely the presence of overhangs at the 3’-end of each of the two strands. We have obtained an exclusive license to claims in the Tuschl II patent application covering the use of RNAi for therapeutic purposes. The application contains claims relating to therapeutic uses of siRNAs with or without concomitant gene therapy. Our exclusive rights are to the claims that do not require concomitant gene therapy.

      As can be seen from the table, one other RNAi patent has already been issued that pre-dates the Kreutzer-Limmer patent. This is the Fire and Mello patent owned by the Carnegie Institution, which covers the use of dsRNAs to induce RNAi. The Carnegie Institution has made this patent broadly available for licensing, and we, like many companies, have taken a non-exclusive license to the patent for therapeutic purposes. We believe, however, that the Fire and Mello patent does not claim specific structural features of dsRNAs that are important for the biological activity of siRNAs in mammalian cells. These specific features are the subjects of the Kreutzer-Limmer patent and the Tuschl II patent application for which we have secured exclusive rights.

      The Kreutzer-Limmer patent was granted in Europe in 2002 and in South Africa in 2003 and is pending in other countries, including the United States. In addition, a German Utility Model covering RNAi composition was branched off the European patent application, and was granted by the German Patent and Trademark Office in 2003. A German Utility Model is a form of patent that is directed only to physical matter, such as medicines, and does not cover methods. The German Utility Model is valid for ten years from the time of the first filing and is thus in effect until 2009. The issuance of the European patent is currently being opposed by several other companies under a provision of European patent law that allows such opposition. It may be several years before the outcome of this opposition is decided by the EPO.

      In addition, the EPO is also reviewing what is known as disclaimer practice, a process in which a patent applicant disclaims part of the claimed invention in a patent application in order to overcome prior art. In the Kreutzer-Limmer patent prosecution, the inventors disclaimed coverage of RNAi agents which were between 49 and 25 nucleotides in length. The EPO may determine that disclaimer practice is not allowed under European patent rules. Such a determination could result in the invalidation of the currently allowed claims of the Kreutzer-Limmer patent. In the event that the current granted patent is invalidated, there are pending claims of the patent that do not rely on disclaimer practice. Even if the EPO determines that disclaimer practice is permissible under European patent rules, the Kreutzer-Limmer patent would remain subject to the opposition described in the preceding paragraph.

      The other pending patent applications listed in the table either provide further coverage for structural features of siRNAs or relate to the use of siRNAs in mammalian cells. For some of these we have exclusive rights, for others non-exclusive. While we believe these pending patent applications are important, we also believe that access to the Kreutzer-Limmer patent and the Tuschl II patent application will be of particular importance for development and commercialization of RNAi therapeutics, which is why we have secured exclusive positions with respect to these assets. However, because RNAi is a relatively new field, few patents have been issued, and many potentially key patent applications are still pending.

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Intellectual Property Related to Chemical Modifications

      Over the last fifteen years a large amount of effort has been devoted by academics and other biotechnology companies to two other technologies with the potential to selectively turn off gene activity. These technologies are known as antisense oligonucleotides and ribozymes. Both involve using short DNA or RNA molecules to intercept specific mRNAs so as to reduce production of proteins encoded by these mRNAs. Scientists and companies working on antisense oligonucleotides and ribozymes have developed a variety of chemical modifications that can be applied to short DNA and RNA molecules to endow them with drug-like properties. A number of patents have been issued to these scientists and companies claiming the chemical modifications they have developed.

      We believe we will be successful in identifying new proprietary modifications that we can apply to siRNAs to endow them with drug-like properties. We further believe that, if necessary, we would be able to develop RNAi therapeutics that fall outside of patent claims on chemical modifications issued to other organizations. In parallel, however, we may also seek licenses to patents held by other organizations that relate to chemical modifications we may wish to include in siRNAs we develop as RNAi therapeutics.

      We have filed a number of patent applications relating to novel chemical modifications that we may apply to siRNAs. Because we filed these applications relatively recently, and are still evaluating which chemical modifications we may incorporate into siRNA drugs, we may not know for a number of years whether the modifications we use will be patentable and free of patents held by others.

Intellectual Property Related to siRNAs Directed to Specific Targets

      We have also filed a number of patent applications claiming specific siRNAs directed to a large number of targets as treatments for specific diseases. We recognize, however, that there may be a significant number of competing applications filed by other organizations on similar siRNAs. Because our subsidiaries, Ribopharma AG and Alnylam U.S., Inc., were among the first companies to focus on RNAi therapeutics, we believe that a number of our patent applications may predate competing applications that others may have filed. With respect to specific siRNAs, we believe that the most important patent coverage will ultimately result from demonstrating that particular compositions exert suitable biological and therapeutic effects. Accordingly, we are focused on achieving such demonstrations for siRNAs in key therapeutic areas.

      Because the work we and others are performing to develop siRNAs as drugs is at a relatively early stage, and because many patent applications on specific siRNAs are pending but none, to our knowledge, have been issued, we may not know for a number of years whether any siRNA drugs we develop will be patentable and free of patents held by others.

Competition

      The pharmaceutical marketplace is extremely competitive, with hundreds of companies competing to discover, develop and market new drugs. We face a broad spectrum of current and potential competitors, ranging from very large, global pharmaceutical companies with significant resources to other biotechnology companies with resources and expertise comparable to our own. We believe that for most or all of our drug development programs, there will be one or more competing programs in other companies. In many cases the companies with competing programs will have access to greater resources and expertise than we do and may be more advanced.

      The competition we face can be grouped into three broad categories:

	•	Other companies working to develop RNAi therapeutics;
	•	Companies developing technology known as antisense, which, like RNAi, attempts to silence the activity of specific genes by targeting the mRNAs copied from them; and
	•	Marketed products and development programs that compete with the drugs we may try to develop.

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Other Companies Working to Develop RNAi Therapeutics

      We are aware of several other companies that are working to develop RNAi therapeutics. Some of these companies are seeking, as we are, to develop chemically synthesized siRNAs as drugs. Others are following a gene therapy approach, with the goal of treating patients not with synthetic siRNAs but with genes designed to produce siRNA-like molecules within cells.

      Companies working on chemically synthesized siRNAs include Sirna Therapeutics, Inc., Genta, Inc., and Acuity Pharmaceuticals, Inc. Sirna Therapeutics has approximately ten years’ prior experience working to develop RNA molecules as drugs. This experience was largely gained with a different class of RNA molecules known as ribozymes, but could potentially be relevant for siRNAs. Companies working on gene therapy approaches to RNAi therapeutics include Nucleonics, Inc. and Benitec Ltd. In addition, CytRx Corporation may be developing RNAi therapeutics.

Other Companies Working to Develop Antisense Technology

      Antisense technology uses short, single-stranded, DNA-like molecules known as oligonucleotides to block mRNAs encoding specific proteins. An antisense oligonucleotide, or ASO, contains a sequence of bases complementary to a sequence within its target mRNA, enabling it to attach to the mRNA by base-pairing. The attachment of the ASO may lead to breakdown of the mRNA, or may physically block the mRNA from associating with the protein synthesis machinery of the cell. In either case, production of the protein encoded by the mRNA may be reduced. Typically, the backbone of an ASO, the linkages that hold its constituent bases together, will carry a number of chemical modifications that do not exist in naturally occurring DNA. These modifications are intended to improve the stability and pharmaceutical properties of the ASO.

      While we believe that RNAi drugs may potentially have significant advantages over ASOs, including greater potency and specificity, others are developing ASO drugs that are currently at a more advanced stage of development than RNAi drugs. For example, ISIS Pharmaceuticals, Inc. has developed an ASO drug, Vitravene, which is currently on the market, and has several ASO drug candidates in clinical trials. In addition, a number of other companies have product candidates in various stages of preclinical and clinical development, including Genta Inc., which has a drug candidate known as Genasense under review by the FDA as a potential treatment for various forms of cancer. ASOs, rather than siRNAs, may become the preferred technology for drugs that target mRNAs in order to turn off the activity of specific genes.

Competing Drugs for Age-Related Macular Degeneration

      We are currently evaluating siRNAs that suppress VEGF gene activity as potential drug candidates for the treatment of wet AMD. The only currently marketed drug for wet AMD is Visudyne. However, we are also aware of a number of experimental drugs in advanced stages of clinical development for the treatment of wet AMD, including Macugen, which is being developed by Eyetech Pharmaceuticals, Inc. in collaboration with Pfizer, Inc., and Lucentis, which is being developed by Genentech, Inc. in collaboration with Novartis.

      While none of these experimental drugs is an siRNA, we are aware of two less advanced programs to develop siRNAs for the treatment of wet AMD. Both are currently at the preclinical stage of development. Acuity Pharmaceuticals, Inc. has an unmodified siRNA drug candidate that targets VEGF gene activity, the same target as our wet AMD drug candidate. Sirna Therapeutics, Inc. has an siRNA drug candidate that targets not VEGF but VEGF-receptor, the protein on cell surfaces to which VEGF binds. In addition, there are a number of other companies that are currently developing potential new treatments for wet AMD, including Alcon, Inc. and Mirivant Medical Technologies.

Competing Drugs for Parkinson’s Disease

      In collaboration with the Mayo Clinic, we are currently evaluating the potential of siRNAs directed against alpha-synuclein gene activity for the treatment of PD. The goal of our own program is to find a RNAi therapeutic that will slow or halt the progress of the disease. Should we decide to pursue development of an alpha-synuclein siRNA for this disease, we would face competition from a number of marketed and investigational drugs. There are numerous drugs that are currently marketed for the treatment of PD, including levodopa, Eldopryl, Carbex and Congentine.

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      None of the drugs currently on the market is believed to alter the underlying progress of PD, but two of those in clinical development, CEP-1347 and GDNF, are intended to do so. In addition, like GDNF, any siRNA drug candidate we develop is likely to require administration using a specialized medical device to deliver it to the appropriate region of the brain, which could make any drug we develop less competitive.

Regulatory Matters

      The research, testing, manufacture and marketing of drug products and their delivery systems are extensively regulated in the United States and the rest of the world. In the United States, drugs are subject to rigorous regulation by the FDA. The Federal Food, Drug, and Cosmetic Act and other federal and state statutes and regulations govern, among other things, the research, development, testing, manufacture, storage, record keeping, packaging, labeling, promotion and advertising, marketing and distribution of pharmaceutical products. The failure to comply with the applicable regulatory requirements may subject a company to a variety of administrative or judicially-imposed sanctions and the inability to obtain or maintain required approvals or to market approved drug products.

      The steps ordinarily required before a new pharmaceutical product may be marketed in the United States include preclinical laboratory tests, animal tests and formulation studies, the submission to the FDA of an investigational new drug application, which must become effective prior to commencement of clinical testing, and adequate and well-controlled clinical trials to establish that the drug product is safe and effective for the indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically take several years and the actual time taken may vary substantially depending upon the complexity of the product or the disease. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures on a company’s activities. Success in early stage clinical trials does not necessarily assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be subject to alternative interpretations that could delay, limit or even prevent regulatory approval. Even if a product receives regulatory approval, later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market.

      Preclinical tests include laboratory evaluation of product chemistry and formulation, as well as animal trials to assess the potential safety and efficacy of the product. The conduct of the preclinical tests and formulation of compounds for testing must comply with federal regulations and requirements. The results of preclinical testing are submitted to the FDA as part of an investigational new drug application.

      A 30-day waiting period after the filing of an investigational new drug application is required prior to such application becoming effective and the commencement of clinical testing in humans. If the FDA has not commented on, or questioned, the application during this 30-day waiting period, clinical trials may begin. If the FDA has comments or questions these must be resolved to the satisfaction of the FDA prior to commencement of clinical trials. The investigational new drug application process can result in substantial delay and expense. The FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization and then only under terms authorized by the FDA.

      Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted in compliance with federal regulations and requirements, under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the safety and effectiveness criteria to be evaluated. Each protocol involving testing on subjects in the United States must be submitted to the FDA as part of the investigational new drug application. The study protocol and informed consent information for patients in clinical trials must be submitted to institutional review boards for approval.

      Clinical trials to support new drug applications for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated with increasing doses. Phase II usually involves trials in a

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      If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population, typically at geographically dispersed clinical trial sites. Phase I, Phase II or Phase III testing of any product candidates may not be completed successfully within any specified time period, if at all. After successful completion of the required clinical testing, generally a new drug application is prepared and submitted to the FDA.

      We believe that any Direct RNAi product candidate we develop for AMD or Parkinson’s disease will be regulated as a new drug by the FDA. FDA approval of the new drug application is required before marketing of the product may begin in the United States. The new drug application must include the results of extensive clinical and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture and controls. The cost of preparing and submitting a new drug application is substantial. Under Federal law, the submission of new drug applications are additionally subject to substantial application user fees, currently exceeding $500,000, and sponsor under an approved new drug application are also subject to annual product and establishment user fees, currently exceeding $30,000 per product and $200,000 per establishment. These fees are typically increased annually.

      The FDA has 60 days from its receipt of a new drug application to determine whether the application will be accepted for filing based on the agency’s threshold determination that the new drug application is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review of the new drug application. The review process is often significantly extended by FDA requests for additional information or clarification regarding information already provided in the submission. The FDA may also refer applications for novel drug products or drug products which present difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee. The FDA normally also will conduct a preapproval inspection to ensure the manufacturing facility, methods and controls are adequate to preserve the drug’s identity, strength, quality, purity and stability, and are in compliance with regulations governing current good manufacturing practices.

      If FDA evaluations of the new drug application and the manufacturing facilities are favorable, the FDA may issue an approval letter or an approvable letter followed by an approval letter. An approvable letter generally contains a statement of specific conditions that must be met in order to secure final approval of the new drug application. If and when those conditions have been met to the FDA’s satisfaction, the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of new drug application approval, the FDA may require post approval testing and surveillance to monitor the drug’s safety or efficacy and may impose other conditions, including labeling restrictions which can materially impact the potential market and profitability of the drug. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

      While we believe that any RNAi therapeutic we develop will be regulated as a new drug under the Federal Food, Drug, and Cosmetics Act, the FDA could decide to regulate RNAi therapeutics as biologics under the Public Health Service Act. Biologics must have a biologics license application, or BLA, approved prior to commercialization. Like new drug applications, BLAs are subject to user fees. To obtain BLA approval, an applicant must provide preclinical and clinical evidence and other information to demonstrate that the biologic product is safe, pure and potent, and that the facilities in which it is manufactured, processed, packed or held meet standards, including drug good manufacturing practices and any additional standards in the license designed to ensure its continued safety, purity and potency. Biologics establishments are subject to preapproval inspections. The review process for BLAs is time consuming and uncertain, and BLA approval may be conditioned on post approval testing and surveillance. Once granted, BLA approvals

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      Once a new drug application or biologics license application is approved, a product will be subject to certain post-approval requirements, including requirements for adverse event reporting and submission of periodic reports. Additionally, the FDA also strictly regulates the promotional claims that may be made about prescription drug products and biologics. In particular, the FDA requires substantiation of any claims of superiority of one product over another, including that such claims be proven by adequate and well controlled head-to-head clinical trials. To the extent that market acceptance of our products may depend on their superiority over existing therapies, any restriction on our ability to advertise or otherwise promote claims of superiority, or requirements to conduct additional expensive clinical trials to provide proof of such claims, could negatively affect the sales of our products or our costs. We must also notify the FDA of any change in an approved product beyond variations already allowed in the approval. Certain changes to the product, its labeling or its manufacturing require prior FDA approval and may require conduct of further clinical investigations to support the change. Such approvals may be expensive and time-consuming and, if not approved, the product will not be allowed to be marketed as modified.

      If the FDA’s evaluation of the new drug application submission or manufacturing facilities is not favorable, the FDA may refuse to approve the new drug application or issue a not approvable letter. The not approvable letter outlines the deficiencies in the submission and often requires additional testing or information in order for the FDA to reconsider the application. Even after submitting this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. With limited exceptions, the FDA may withhold approval of a new drug application regardless of prior advice it may have provided or commitments it may have made to the sponsor.

      Some of our drug candidates may need to be administered using specialized drug delivery systems. While we expect to rely on drug delivery systems that are already approved to deliver drugs like ours to similar physiological sites, in some instances, we may need to modify the design or labeling of the legally available device for delivery of our product candidate. In such an event, the FDA may regulate the product as a combination product or require additional approvals or clearances for the modified device. Further, to the extent the delivery device is owned by another company, we would need that company’s cooperation to implement the necessary changes to the device and to obtain any additional approvals or clearances. Obtaining such a additional approvals or clearances, and cooperation of other companies, when necessary, could significantly delay, and increase the cost of obtaining, marketing approval, which could reduce the commercial viability of a drug candidate.

      Once a new drug application is approved, the product covered thereby becomes a listed drug that can, in turn, be cited by potential competitors in support of approval of an abbreviated new drug application. An abbreviated new drug application provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing to be therapeutically equivalent to the listed drug. There is no requirement, other than the requirement for bioequivalence testing, for an abbreviated new drug application applicant to conduct or submit results of preclinical or clinical tests to prove the safety or effectiveness of its drug product. Drugs approved in this way are commonly referred to as generic equivalents to the listed drug, are listed as such by the FDA, and can often be substituted by pharmacists under prescriptions written for the original listed drug. Federal law provides for a period of three years of exclusivity following approval of a listed drug that contains previously approved active ingredients but is approved in a new dosage, dosage form, route of administration or combination, or for a new use, the approval of which was required to be supported by new clinical trials conducted by or for the sponsor. During such three-year exclusivity period the FDA cannot grant approval of an abbreviated new drug application to commercially distribute a generic version of the drug based on that listed drug. However, the FDA can approve generic equivalents of that listed drug based on other listed drugs, such as a generic that is the same in every way but its indication for use, and thus the value of such exclusivity may be undermined. Federal law also provides a period of five years following approval of a drug containing no previously approved active ingredients, during which abbreviated new drug applications for generic versions of those drugs cannot be submitted unless the submission accompanies a

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      From time to time legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of such changes, if any, may be.

Foreign Regulation of New Drug Compounds

      Approval of a product by comparable regulatory authorities may be necessary in foreign countries prior to the commencement of marketing of the product in those countries, whether or not FDA approval has been obtained. The approval procedure varies among countries and can involve requirements for additional testing. The time required may differ from that required for FDA approval. Although there are some procedures for unified filings for some European countries with the sponsorship of the country which first granted marketing approval, in general, each country has its own procedures and requirements, many of which are time consuming and expensive. Thus, there can be substantial delays in obtaining required approvals from foreign regulatory authorities after the relevant applications are filed.

      In Europe, marketing authorizations may be submitted at a centralized, a decentralized or a national level. The centralized procedure is mandatory for the approval of biotechnology products and provides for the grant of a single marketing authorization that is valid in all European Union member states. As of January 1995, a mutual recognition procedure is available at the request of the applicant for all medicinal products that are not subject to the centralized procedure. We will choose the appropriate route of European regulatory filing to accomplish the most rapid regulatory approvals. However, our chosen regulatory strategy may not secure regulatory approvals on a timely basis or at all.

Hazardous Materials

      Our research and development processes involve the controlled use of hazardous materials, chemicals and radioactive materials and produce waste products. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. We do not expect the cost of complying with these laws and regulations to be material.

Manufacturing

      We have no commercial manufacturing capabilities. We plan to rely on third parties to manufacture bulk compounds and finished investigational medicines for clinical trials. Commercial quantities of any drugs that we may seek to develop will have to be manufactured in facilities and by processes that comply with FDA and other regulations. We plan to rely on third parties to manufacture commercial quantities of any products that we successfully develop.

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Scientific Advisors

      We seek advice from our scientific advisory board, which consists of a number of leading scientists and physicians, on scientific and medical matters. Our scientific advisory board meets regularly to assess:

	•	our research and development programs;
	•	the design and implementation of our clinical programs;
	•	our patent and publication strategies;
	•	new technologies relevant to our research and development programs; and
	•	specific scientific and technical issues relevant to our business.