ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Without limiting the foregoing, the words “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “target,” “goal” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us up to, and including, the date of this document, and we expressly disclaim any obligation to update any such forward-looking statements to reflect events or circumstances that arise after the date hereof. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth in this Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as under Part II, Item 1A — “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the Securities and Exchange Commission, or SEC.

Overview

We are a biopharmaceutical company developing novel therapeutics based on RNA interference, or RNAi. RNAi is a naturally occurring biological pathway within cells for selectively silencing and regulating the expression of specific genes. Since many diseases are caused by the inappropriate activity of specific genes, the ability to silence genes selectively through RNAi could provide a new way to treat a wide range of human diseases. We believe that drugs that work through RNAi have the potential to become a broad new class of drugs, like small molecule, protein and antibody drugs. Using our intellectual property and the expertise we have built in RNAi, we are developing a set of biological and chemical methods and know-how that we apply in a systematic way to develop RNAi therapeutics for a variety of diseases.

Our core product strategy, which we refer to as “Alnylam 5x15,” was launched in January 2011 and is focused on the development and commercialization of novel RNAi therapeutics as genetic medicines. Our genetic medicine programs are RNAi therapeutics directed towards genetically defined targets for the treatment of diseases with high unmet medical need. Under our core product strategy, we expect to have six to seven genetic medicine product candidates in clinical development, including at least two programs in Phase 3 and five to six programs with human proof of concept, by the end of 2015. We are currently advancing the following programs in clinical or pre-clinical development: patisiran (ALN-TTR02), an intravenously delivered RNAi therapeutic targeting transthyretin, or TTR, in development for the treatment of TTR-mediated amyloidosis, or ATTR, in patients with familial amyloidotic polyneuropathy, or FAP; ALN-TTRsc, a subcutaneously delivered RNAi therapeutic targeting TTR in development for the treatment of ATTR in patients with TTR cardiac amyloidosis, including familial amyloidotic cardiomyopathy, or FAC, and senile systemic amyloidosis, or SSA; ALN-AT3, an RNAi therapeutic targeting antithrombin, or AT, in development for the treatment of hemophilia and rare bleeding disorders, or RBD; ALN-CC5, an RNAi therapeutic targeting complement component C5 in development for the treatment of complement-mediated diseases; ALN-AS1, an RNAi therapeutic targeting aminolevulinate synthase-1, or ALAS-1, in development for the treatment of hepatic porphyrias, including acute intermittent porphyria, or AIP; ALN-PCSsc, an RNAi therapeutic targeting proprotein convertase subtilisin/kexin type 9, or PCSK9, in development for the treatment of hypercholesterolemia; ALN-AAT, an RNAi therapeutic targeting alpha-1-antitrypsin, or AAT, in development for the treatment of AAT deficiency liver disease; ALN-TMP, an RNAi therapeutic targeting transmembrane protease, serine 6, or TMPRSS6, in development for the treatment of beta-thalassemia and iron-overload disorders; ALN-ANG, an RNAi therapeutic targeting angioprotein-like 3, or ANGPTL3, in development for the treatment of genetic forms of mixed hyperlipidemia and severe hypertriglyceridemia; ALN-AC3, an RNAi therapeutic targeting apolipoprotein C-III, or apoCIII, for the treatment of hypertriglyceridemia; and other yet to be disclosed programs. We are also developing ALN-HBV, an RNAi therapeutic targeting the hepatitis B virus, or HBV, genome, for the treatment of HBV infection. Our strategy is to retain development and commercial rights for our current and future genetic medicine pipeline in North America and Western Europe, while forming alliances with leading, innovative companies for the development and commercialization of these products in the rest of the world. In early 2014, we formed an alliance with Genzyme Corporation, a Sanofi company, or Genzyme, to develop and commercialize our current “Alnylam 5x15” and future genetic medicine pipeline principally in territories outside of North America and Western Europe, subject to certain broader rights. The 2014 Genzyme collaboration is described in more detail below under the heading “Strategic Alliances.”

We believe that the strength of our intellectual property portfolio relating to the development and commercialization of small interfering RNAs, or siRNAs, as therapeutics provides us a leading position with respect to this therapeutic modality. Our intellectual

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property portfolio includes ownership of, or exclusive rights to, issued patents and pending patent applications claiming fundamental features of siRNAs and RNAi therapeutics as well as those claiming crucial chemical modifications and promising delivery technologies. We believe that no other company possesses a portfolio of such broad and exclusive rights to the patents and patent applications required for the commercialization of RNAi therapeutics. Given the importance of our intellectual property portfolio to our business operations, we intend to vigorously enforce our rights and defend against challenges that have arisen or may arise in this area.

In addition, our expertise in RNAi therapeutics and broad intellectual property estate have allowed us to form alliances with leading pharmaceutical and life sciences companies, including Isis Pharmaceuticals, Inc., or Isis, Medtronic, Inc., or Medtronic, Novartis Pharma AG, or Novartis, Biogen Idec Inc., or Biogen Idec, F. Hoffmann-La Roche Ltd, or Roche (which assigned its rights and obligations to Arrowhead Research Corporation, or Arrowhead, during 2011), Takeda Pharmaceutical Company Limited, or Takeda, Kyowa Hakko Kirin Co., Ltd., or Kyowa Hakko Kirin, Cubist Pharmaceuticals, Inc., or Cubist, Ascletis BioScience Co., Ltd., or Ascletis, Monsanto Company, or Monsanto, Genzyme and The Medicines Company, or MDCO. We also have established collaborations with and, in some instances, received funding from major medical and disease associations. Finally, to further enable the field and monetize our intellectual property rights, we also grant licenses to biotechnology companies for the development and commercialization of RNAi therapeutics for specified targets in which we have no direct strategic interest under our InterfeRx™ program, and to research companies that commercialize RNAi reagents or services under our research product licenses.

We also seek to form or advance new ventures and opportunities in areas outside our primary focus on RNAi therapeutics. In 2007, we and Isis established Regulus Therapeutics Inc., or Regulus, a company focused on the discovery, development and commercialization of microRNA therapeutics. In October 2012, Regulus completed its initial public offering and currently, we own approximately 14% of Regulus’ outstanding common stock.

In January 2014, we entered into a stock purchase agreement with Sirna Therapeutics, Inc., or Sirna, Merck Sharp & Dohme Corp., or Merck, and, for limited purposes, Merck & Co., Inc., pursuant to which we purchased from Merck all of Merck’s right, title and interest in and to all of the outstanding shares of common stock of Sirna. The Merck transaction closed in March 2014. Sirna possesses intellectual property and RNAi assets including pre-clinical therapeutic candidates, chemistry, and siRNA-conjugate and other delivery technologies that we intend to integrate into our platform for delivery of RNAi therapeutics. We did not acquire any employees, manufacturing or other facilities, developed processes or clinical-stage assets as part of the acquisition of Sirna. In consideration for the Sirna common stock, we (i) paid Merck $25.0 million in cash and (ii) agreed to issue to Merck 2,520,044 shares of our common stock, having a value of $150.0 million as calculated under the terms of the stock purchase agreement on the date of execution. At the closing in March 2014, we issued to Merck 2,142,037 shares of our common stock. We issued the remaining 378,007 shares to Merck in May 2014, upon the completion of certain technology transfer activities during the second quarter of 2014. Merck beneficially owns approximately 3% of our outstanding common stock.

In addition, Merck is eligible to receive the following consideration from us: (i) up to an aggregate of $10.0 million upon the achievement by us or our related parties of specified regulatory milestones for RNAi products covered by Sirna intellectual property, and (ii) up to an aggregate of $105.0 million upon the achievement by us or our related parties of specified development and regulatory ($40.0 million) and commercial ($65.0 million) milestones associated with the clinical development progress of certain pre-clinical candidates discovered by Sirna, together with low single-digit royalties for our products and single-digit royalties for Sirna products, in each case based on annual worldwide net sales, if any, by us and our related parties of any such products.

We have incurred significant losses since we commenced operations in 2002 and expect such losses to continue for the foreseeable future. At June 30, 2014, we had an accumulated deficit of $891.3 million. Historically, we have generated losses principally from costs associated with research and development activities, acquiring, filing and expanding intellectual property rights and general administrative costs. As a result of planned expenditures for research and development activities relating to our drug development programs, including the development and optimization of drug delivery technologies and clinical trial costs, extension of the capabilities of our technology platform, including through business initiatives, continued management and growth of our patent portfolio, collaborations and general corporate activities, we expect to incur additional operating losses for the foreseeable future. We anticipate that our operating results will fluctuate for the foreseeable future. Therefore, period-to-period comparisons should not be relied upon as predictive of the results in future periods.

Although we currently have programs focused on a number of therapeutic areas, we are unable to predict when, if ever, we will successfully develop or be able to commence sales of any product. To date, a substantial portion of our total net revenues has been derived from collaboration revenues from strategic alliances with Roche/Arrowhead, Takeda, Cubist and Novartis, and from the United States government in connection with our development of treatments for hemorrhagic fever viruses, including Ebola. We

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expect our sources of potential funding for the next several years to be derived primarily from new and existing strategic alliances, which may include license and other fees, funded research and development and milestone payments, and proceeds from the sale of equity or debt.

In January 2013, we sold an aggregate of 9,200,000 shares of our common stock through an underwritten public offering at a price to the public of $20.13 per share. As a result of the offering, we received aggregate net proceeds of $173.6 million, after deducting underwriting discounts and commissions and other offering expenses of $11.6 million.

Research and Development

Since our inception, we have focused on drug discovery and development programs. Research and development expenses represent a substantial percentage of our total operating expenses. Under our core product strategy, we expect to have six to seven genetic medicine product candidates in clinical development, including at least two programs in Phase 3 and five to six programs with human proof of concept, by the end of 2015. While focusing our efforts on our core product strategy, we also intend to continue to advance additional partner-based development programs through existing or future alliances. In addition, we continue to work internally and with third-party collaborators to develop and optimize new technologies to deliver our RNAi therapeutics both directly to specific sites of disease, and systemically by intravenous or subcutaneous administration.

Our most advanced core product development program, ALN-TTR, targets the TTR gene for the treatment of ATTR. ATTR is an inherited, progressively debilitating and fatal disease caused by a mutation in the TTR gene. We are advancing patisiran as our lead product candidate in our ALN-TTR program. In November 2013, we announced the initiation of our APOLLO Phase 3 clinical trial of patisiran. The APOLLO Phase 3 clinical trial is a randomized, double-blind, placebo-controlled, global study designed to evaluate the efficacy and safety of patisiran in ATTR patients with FAP. We are also conducting an open-label extension, or OLE, study of patisiran for patients treated in our Phase 2 clinical trial. The Phase 2 OLE study is designed to evaluate the long-term safety and tolerability of patisiran administration. The OLE study is measuring a number of clinical endpoints every six months, including the modified composite Neuropathy Impairment Score, termed “mNIS+7.” This score is also the primary endpoint of the Phase 3 APOLLO trial of patisiran. Of the 29 patients in the Phase 2 clinical trial, 27 have been enrolled in the Phase 2 OLE study. After up to nine months of therapy, there have been no study drug discontinuations. In April 2014, we reported preliminary results from 23 patients that were evaluable for analysis based on a data cut-off as of April 3, 2014. These results showed that the TTR knockdown observed following the first dose in the OLE study closely matched TTR knockdown shown in the Phase 2 study, with essentially superimposable pharmacodynamic effects. Moreover, repeat dosing of patisiran led to a sustained TTR knockdown of approximately 80% through up to day 168, equivalent to up to eight doses of drug, as measured in pre-dose blood samples. Repeat dosing of patisiran was found to be well tolerated, with minimal adverse events. Importantly, the incidence of infusion-related reactions was found to be significantly reduced to 2% in patients from the Phase 2 and Phase 2 OLE studies receiving study drug with a proprietary micro-dosing regimen, as compared with an incidence of 15% in patients receiving a standard infusion (p=0.03). All other reported adverse events were mild to moderate, and there were no changes in liver function tests, renal function or hematological parameters.

In addition to ALN-TTR02, we are advancing ALN-TTRsc, a subcutaneously delivered RNAi therapeutic targeting TTR for the treatment of ATTR in patients with TTR cardiac amyloidosis. ALN-TTRsc is in a Phase 2 clinical trial aimed at evaluating the tolerability and preliminary clinical activity of ALN-TTRsc in patients with FAC and SSA. Based on encouraging enrollment to date, the protocol for this study was amended to enroll up to 25 patients; the previous enrollment target had been 15. Patients completing the Phase 2 trial will be eligible to participate in an OLE study for further assessment of general tolerability and clinical activity with long-term dosing. The ALN-TTRsc Phase 2 OLE study is on track to be initiated in mid-2014. We are also evaluating additional cohorts in an ongoing Phase 1 study of ALN-TTRsc to confirm a fixed-dose regimen for further development. We plan to initiate a Phase 3 trial for ALN-TTRsc in patients with TTR cardiac amyloidosis by the end of 2014.

Under the 2014 Genzyme collaboration, we will lead development and commercialization of patisiran in North America and Western Europe, referred to as the Alnylam Territory, while Genzyme will develop and commercialize the product in the rest of the world, referred to as the Genzyme Territory. In addition, under this new collaboration, we and Genzyme have agreed to co-develop and co-commercialize ALN-TTRsc in the Alnylam Territory, with Genzyme developing and commercializing the product in the Genzyme Territory. This broadened relationship on ALN-TTRsc is aimed at expanding and accelerating the product’s potential global value.

We are also developing ALN-AT3, an RNAi therapeutic targeting AT, a genetically defined target, for the treatment of hemophilia and RBD. ALN-AT3 is a novel therapeutic approach aimed at re-balancing the coagulation cascade and normalizing hemostasis in severe hemophilia A and B patients, including patients with inhibitors against their replacement factor. ALN-AT3 also

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has potential as a treatment for RBD patients and patients with other bleeding disorders. In January 2014, we initiated a Phase 1 clinical trial with ALN-AT3. The Phase 1 clinical trial is being conducted in the U.K. as a single- and multi-dose, dose-escalation study consisting of two parts. In May 2014, we reported positive top-line results from Part A of the ongoing Phase 1 clinical trial at the World Federation of Hemophilia 2014 World Congress. Part A, which has now been completed, was a randomized, single-blind, placebo-controlled, single-dose, dose-escalation study, intended to enroll up to 24 healthy volunteer subjects. The primary objective of this part of the clinical trial was to evaluate the safety and tolerability of a single dose of ALN-AT3, with the potential secondarily to show changes in AT plasma levels at sub-pharmacologic doses. In Part A of the Phase 1 study, human volunteer subjects received a single subcutaneous dose of ALN-AT3 and, per protocol, the maximum allowable level of AT knockdown was set at 40%. Initial results from the sole dose cohort (n=four, three:one, drug:placebo) enrolled showed that a single, low subcutaneous ALN-AT3 dose at 0.03 mg/kg resulted in an up to 28-32% knockdown of AT at nadir that was statistically significant relative to placebo (p < 0.01 by ANOVA). This resulted in a statistically significant (p < 0.01) increase in peak thrombin generation, that was temporally associated and consistent with the degree of AT knockdown. ALN-AT3 was found to be well tolerated with no significant adverse events reported. We have now transitioned to the multiple ascending dose Part B of the study, which is designed as an open-label, multi-dose, dose-escalation study enrolling up to 18 people with moderate-to-severe hemophilia A or B. The primary objective of this part of the study is to evaluate the safety and tolerability of multiple doses, specifically three doses, of subcutaneously administered ALN-AT3 in hemophilia subjects. Secondary objectives include assessment of clinical activity as determined by knockdown of circulating AT levels and increase in thrombin generation at pharmacologic doses of ALN-AT3.

The ALN-AT3 Phase 1 human study results are the first to be reported for our Enhanced Stabilization Chemistry, or ESC-GalNAc conjugate technology, which enables subcutaneous dosing with increased potency, durability and a wide therapeutic index. Further, these initial clinical results demonstrate a greater than 50-fold potency improvement with ESC-GalNAc conjugates relative to standard template chemistry conjugates.

In August 2014, we announced that the Committee for Orphan Medicinal Products of the European Medicines Agency, or EMA, has designated ALN-AT3 as an orphan medicinal product for the treatment of hemophilia A and B. Orphan Drug Designation, or ODD, by the European Commission provides regulatory and financial incentives for companies developing orphan drugs to develop and market therapies that treat a life-threatening or chronically debilitating condition affecting no more than five in 10,000 persons in the European Union, or EU. In addition to a ten-year period of marketing exclusivity in the EU after product approval, ODD provides companies with protocol assistance from the EMA during the product development phase, direct access to centralized marketing authorization and reduced regulatory fees.

Under the 2014 Genzyme collaboration, Genzyme will have the right to opt-in to the ALN-AT3 program after completion of human proof-of-principal study completion, or Human POP, to either co-develop and co-promote ALN-AT3 with us in the Alnylam Territory, with Genzyme developing and commercializing in the Genzyme Territory (subject to its development decision regarding ALN-AS1), or to develop and commercialize the product in the Genzyme Territory. In both circumstances, we will lead and control development and commercialization in the Alnylam Territory.

We are also advancing several additional programs through pre-clinical development and expect to file two investigational new drug, or IND, applications, or IND equivalents, with respect to these programs in late 2014 and one IND or IND equivalent in early 2015. These programs include:

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In addition to the programs described above, we are also advancing other early-stage genetic medicine programs. These programs include: ALN-AAT, an RNAi therapeutic targeting AAT in development for the treatment of AAT deficiency liver disease; ALN-TMP, an RNAi therapeutic targeting TMPRSS6 in development for the treatment of beta-thalassemia and iron-overload disorders; ALN-ANG, an RNAi therapeutic targeting ANGPTL3 in development for the treatment of genetic forms of mixed hyperlipidemia and severe hypertriglyceridemia; ALN-AC3, an RNAi therapeutic targeting apoCIII for the treatment of hypertriglyceridemia; and other yet to be disclosed programs. In the case of ALN-AAT, we have recently selected our development candidate and expect to file an IND or IND equivalent for this program in mid-2015. Finally, in May 2014, we announced that we are also developing ALN-HBV, an RNAi therapeutic targeting the HBV genome, for the treatment of HBV infection.

There is a risk that any drug discovery or development program may not produce revenue for a variety of reasons, including the possibility that we will not be able to adequately demonstrate the safety and efficacy of the product candidate. Moreover, there are uncertainties specific to any new field of drug discovery, including RNAi. The successful development of any product candidate we develop is highly uncertain. Due to the numerous risks associated with developing drugs, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts necessary to complete the development of, or the period, if any, in which material net cash inflows will commence from, any potential product candidate. These risks include the uncertainty of:

Any failure to complete any stage of the development of any potential products in a timely manner could have a material adverse effect on our operations, financial position and liquidity. A discussion of some of the risks and uncertainties associated with completing our development projects on schedule, or at all, and the potential consequences of failing to do so, are set forth in Part II, Item 1A below under the heading “Risk Factors.”

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Strategic Alliances

A significant component of our business plan is to enter into strategic alliances and collaborations with leading pharmaceutical and life sciences companies, academic institutions, research foundations and others, as appropriate, to gain access to funding, capabilities, technical resources and intellectual property to further our development efforts and to generate revenues. We also seek to form or advance new ventures and opportunities in areas outside our primary focus on RNAi therapeutics.

Since delivery of RNAi therapeutics remains an important objective of our research activities, we also look to form collaboration and licensing arrangements with other companies and academic institutions to gain access to delivery technologies. For example, we have entered into agreements with Arrowhead, Tekmira Pharmaceuticals Corporation, or TPC, Protiva Biotherapeutics, Inc., or Protiva, a wholly-owned subsidiary of TPC, and together with TPC, referred to as Tekmira, the Massachusetts Institute of Technology, or MIT, The University of British Columbia, or UBC, and Acuitas Therapeutics Inc. (formerly AlCana Technologies, Inc.), or Acuitas, among others, to focus on various delivery strategies. We have also entered into license agreements with Isis, Max Planck Innovation GmbH (formerly known as Garching Innovation GmbH), or Max Planck Innovation, Tekmira, MIT, Cancer Research Technology Limited, or CRT, and Whitehead Institute for Biomedical Research, or Whitehead, as well as a number of other entities, to obtain rights to intellectual property in the field of RNAi.

To generate revenues from our intellectual property rights, we grant licenses to biotechnology companies under our InterfeRx program for the development and commercialization of RNAi therapeutics for specified targets in which we have no direct strategic interest. We also license key aspects of our intellectual property to companies active in the research products and services market, which includes the manufacture and sale of reagents. We expect our InterfeRx and research product licenses to generate modest near-term revenues that we can re-invest in the development of our proprietary RNAi therapeutics pipeline. At June 30, 2014, we had granted such licenses, on both an exclusive and non-exclusive basis, to approximately 20 companies.

The 2014 Genzyme Collaboration. In January 2014, we entered into a global, strategic collaboration with Genzyme to discover, develop and commercialize RNAi therapeutics as genetic medicines to treat orphan diseases. The 2014 Genzyme collaboration is governed by a master collaboration agreement, including the license terms appended thereto, which became effective upon closing of the equity transaction, described below. As of the closing of the equity transaction in February 2014, the master agreement superseded and replaced the 2012 Genzyme agreement, which original Genzyme agreement is described under the heading “Strategic Alliances” in our annual report on Form 10-K for the year ended December 31, 2012.

The 2014 Genzyme collaboration is structured as an exclusive relationship for the worldwide development and commercialization of RNAi therapeutics in the field of genetic medicines, which includes our current and future genetic medicine programs that reach Human POP by the end of 2019, subject to extension to the end of 2021 in various circumstances. We will retain product rights in the Alnylam Territory, while Genzyme will obtain exclusive rights to develop and commercialize collaboration products in the Genzyme Territory, together with certain broader co-development/co-promote or worldwide rights for certain products. Genzyme’s regional, co-development/co-promote and worldwide rights are structured as an opt-in that is triggered upon achievement of Human POP. We will maintain development control for all programs prior to Genzyme’s opt-in and maintain development and commercialization control after Genzyme’s opt-in for all programs in our territory.

Upon the effective date of the 2014 Genzyme collaboration, Genzyme expanded the scope of its regional license and collaboration for patisiran for the Genzyme Territory. We retain full product rights in the Alnylam Territory. We and Genzyme have also expanded our current collaboration on ALN-TTRsc, so that we and Genzyme will co-develop and co-promote ALN-TTRsc in the Alnylam Territory. We will maintain development and commercialization control with ALN-TTRsc in the Alnylam Territory. Genzyme will develop and commercialize the product in the Genzyme Territory.

In addition to its regional rights for our current and future genetic medicine programs in the Genzyme Territory, Genzyme will have the right to either (i) co-develop and co-promote ALN-AT3 for the treatment of hemophilia and other RBDs in our territory, with us maintaining development and commercialization control, or (ii) obtain a global license to ALN-AS1 for the treatment of hepatic porphyrias. Genzyme will exercise this selection right upon completion of Human POP for both the ALN-AT3 and ALN-AS1 programs. Finally, Genzyme will have the right for a global license to a single, future genetic medicine program that is not one of our currently defined genetic medicine programs. We will retain global rights to any RNAi therapeutic genetic medicine program that does not reach Human POP by the end of 2019, subject to certain limited exceptions. Under the terms of the master agreement, we will retain full rights to all current and future RNAi therapeutic programs outside of the field of genetic medicines, including the right to form new collaborations.

In consideration for the rights granted to Genzyme under the master agreement and pursuant to the terms of a stock purchase agreement, we sold to Genzyme 8,766,338 shares of our common stock and Genzyme paid us $700.0 million in aggregate cash consideration. At the closing, we also entered into an investor agreement with Genzyme. Our investor agreement with Genzyme

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provides Genzyme with the right, subject to certain exceptions, generally to maintain its ownership position in us until Genzyme owns less than 7.5% of our outstanding common stock, subject to certain additional limited rights of Genzyme to maintain its ownership percentage. In accordance with the investor rights agreement, as a result of our issuance of shares in connection with our acquisition of Sirna in March 2014, on March 25, 2014, Genzyme exercised its right to purchase an additional 344,448 shares of our common stock, at a purchase price of $66.88, the price of our common stock that day, and paid us $23.0 million. This purchase allowed Genzyme to maintain its ownership level of our outstanding common stock of approximately 12%.

A more detailed description of our 2014 Genzyme collaboration and the related stock purchase agreement is set forth in Note 2 to our condensed consolidated financial statements included in Part I, Item 1, “Financial Statements,” of this quarterly report on Form 10-Q.

microRNA Therapeutics

Regulus.  In September 2007, we and Isis established Regulus, a company focused on the discovery, development and commercialization of microRNA therapeutics. Regulus leverages our and Isis’ technologies, know-how and intellectual property relating to microRNA therapeutics.

Regulus, which initially was established as a limited liability company, converted to a C corporation as of January 2, 2009 and changed its name to Regulus Therapeutics Inc. In consideration for our and Isis’ initial interests in Regulus, we and Isis each granted Regulus exclusive licenses to our intellectual property for certain microRNA therapeutics as well as certain patents in the microRNA field. Regulus operates as an independent company with a separate board of directors, scientific advisory board and management team, some of whom have options to purchase common stock of Regulus. Members of the board of directors of Regulus who are our employees or Isis’ employees have not been eligible to receive options to purchase Regulus common stock. In October 2012, Regulus completed an underwritten initial public offering, raising $45.0 million in net proceeds, including proceeds from the exercise by the underwriters of the over-allotment option. In July 2013, Regulus completed an additional underwritten public offering, raising an additional $45.8 million in net proceeds, including proceeds from the exercise of the over-allotment option. Currently, we own approximately 14% of Regulus’ outstanding common stock.

Regulus is exploring therapeutic opportunities that arise from microRNA dysregulation. Since microRNAs are believed to regulate broad networks of genes and biological pathways, microRNA therapeutics define a new and potentially high-impact strategy to target multiple nodes on disease pathways. microRNAs are small non-coding RNAs that regulate the expression of other genes. More than 500 microRNAs have been identified to date in humans, each of which is believed to interact with a specific set of genes that control key aspects of cell biology. Since microRNAs may act as master regulators of the genome and are often found to be dysregulated in disease, microRNAs potentially represent an exciting new platform for drug discovery and development. Regulus is advancing microRNA therapeutics in several areas including oncology, fibrosis, hepatitis C virus and metabolic diseases.

Regulus has entered into a number of strategic alliances with leading pharmaceutical companies, including GSK, Sanofi, Biogen Idec and AstraZeneca PLC. Each of Alnylam and Isis is entitled to receive specified sublicense income in connection with certain collaborative agreements entered into by Regulus, as well as royalties on net sales, if any, of certain products developed by Regulus or its collaborators, in each case subject to the terms and conditions of the license and collaboration agreement among Regulus, Isis and Alnylam.

Intellectual Property

The strength of our intellectual property portfolio relating to the development and commercialization of siRNAs as therapeutics is essential to our business strategy. We own or license issued patents and pending patent applications in the United States and in key markets around the world claiming fundamental features of siRNAs and RNAi therapeutics as well as those claiming crucial chemical modifications and promising delivery technologies. Specifically, we have a portfolio of patents, patent applications and other intellectual property covering: fundamental aspects of the structure and uses of siRNAs, including their use as therapeutics, and RNAi-related mechanisms; chemical modifications to siRNAs that improve their suitability for therapeutic uses; siRNAs directed to specific targets as treatments for particular diseases; delivery technologies, such as in the field of cationic liposomes and conjugates; and all aspects of our specific development candidates.

We believe that no other company possesses a portfolio of such broad and exclusive rights to the patents and patent applications required for the commercialization of RNAi therapeutics. Our intellectual property portfolio for RNAi therapeutics

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includes over 1,000 active cases and over 900 granted or issued patents, of which over 400 are issued or granted in the United States, the EU and Japan. We continue to seek to grow our portfolio through the creation of new technology in this field. In addition, we are very active in our evaluation of third-party technologies. To that end, we recently acquired Sirna’s RNAi assets, including an extensive patent estate. The granted patents, applications and know-how obtained through this acquisition further strengthens the breadth and depth of our intellectual property portfolio.

Our expertise in RNAi therapeutics and broad intellectual property portfolio have allowed us to form alliances with leading companies, including Isis, Medtronic, Novartis, Biogen Idec, Roche/Arrowhead, Takeda, Kyowa Hakko Kirin, Cubist, Ascletis, Monsanto, Genzyme and MDCO, as well as enter into license agreements with other biotechnology companies interested in developing RNAi therapeutic products and research companies that commercialize RNAi reagents or services.

Given the importance of our intellectual property portfolio to our business operations, we intend to vigorously enforce our rights and defend against challenges that have arisen or may arise in this area.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies since the beginning of this fiscal year. Our critical accounting policies are described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2013, which we filed with the SEC on February 20, 2014.

The increase in operating expenses for the six months ended June 30, 2014 resulted from a $220.8 million charge to in-process research and development expense in connection with the purchase of the Sirna RNAi assets from Merck, which is described below under the heading “In-process research and development.”

Net revenues from collaborators

We generate revenues through research and development collaborations. The following table summarizes our total consolidated net revenues from collaborators, for the periods indicated, in thousands:

Net revenues from collaborators during the three months ended June 30, 2014 were relatively consistent with net revenues from collaborators during the three months ended June 30, 2013. Net revenues from collaborators decreased during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 due primarily to the recognition of the remaining deferred revenue under the Cubist agreement of $9.7 million, due to the termination of the Cubist agreement in February 2013 and the end of our performance obligations thereunder.

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We also had $59.6 million of deferred revenue at June 30, 2014, which primarily consists of payments we have received from collaborators, but have not yet recognized pursuant to our revenue recognition policies.

For the foreseeable future, we expect our revenues to continue to be derived primarily from our alliances with Takeda, Monsanto, MDCO and Genzyme, and other strategic alliances, as well as any new collaborations and licensing activities.

Operating expenses

The following tables summarize our operating expenses for the periods indicated, in thousands and as a percentage of total operating expenses, together with the changes, in thousands and percentages:

Research and development. The following tables summarize the components of our research and development expenses for the periods indicated, in thousands and as a percentage of total research and development expenses, together with the changes, in thousands and percentages:

Research and development expenses increased due to additional expenses for clinical trial and manufacturing and external services during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 due primarily to the significant advancement of certain of our clinical and pre-clinical programs. In addition, compensation and related expense increased during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 due primarily to a significant increase in headcount during the period.

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Research and development expenses increased due to additional expenses for clinical trial and manufacturing and external services during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 due primarily to the significant advancement of certain of our clinical and pre-clinical programs. License fees increased during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 due to payments to certain entities, primarily fees paid to Isis as a result of the 2014 Genzyme collaboration. In addition, compensation and related expense increased during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 due primarily to a significant increase in headcount during the period.

We expect to continue to devote a substantial portion of our resources to research and development expenses as we continue development of our and our collaborators’ product candidates and focus on continuing to develop drug delivery-related technologies. Excluding a one-time license fee payment to Isis in the first half of 2014 as a result of the 2014 Genzyme collaboration, we expect that research and development expenses will increase slightly for the second half of 2014 as compared to the first half of 2014 as certain of our programs move into late-stage clinical development.

A significant portion of our research and development expenses are not tracked by project as they benefit multiple projects or our technology platform. Our collaboration agreements may contain cost-sharing arrangements pursuant to which certain costs incurred under the project are reimbursed by the counterparty to such agreement. Costs reimbursed under these agreements could include certain direct external costs and a negotiated full-time equivalent labor rate for the actual time worked on the project. However, while we may track direct external costs attributable to, and the actual time our employees worked on certain of our collaborations agreements, we do not track or manage total research and development expenses by product area or development phase.

In-process research and development . For the three and six months ended June 30, 2014, we recorded a credit of $3.9 million and an expense of $220.8 million, respectively, to in-process research and development in connection with the purchase of the Sirna RNAi assets from Merck. Specifically, at the closing of the transaction, we paid Merck $25.0 million in cash and issued 2,142,037 shares of our common stock, resulting in a charge to in-process research and development expense of $199.3 million. We issued an additional 378,007 shares of common stock to Merck in May 2014 upon the completion of certain technology transfer activities during the second quarter of 2014. In the first quarter of 2014, we recorded a liability of $25.4 million associated with the then future obligation to issue these shares, which was also charged to in-process research and development expense. Upon completion of these technology transfer activities in the second quarter of 2014, we re-measured the expense recorded in connection with these shares using the then current price of our common stock, resulting in a credit of $3.9 million. In future periods, there will be no additional charges recorded to in-process research and development related to the purchase of the Sirna RNAi assets from Merck.

General and administrative. The following tables summarize the components of our general and administrative expenses for the periods indicated, in thousands and as a percentage of total general and administrative expenses, together with the changes, in thousands and percentages:

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General and administrative expenses increased during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 due primarily to an increase in non-cash stock-based compensation expenses. This increase was due primarily to a one-time charge recorded for certain stock options that were modified during the three months ended June 30, 2014. In addition, consulting and professional services increased during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 related to business development activities.

General and administrative expenses increased during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 due primarily to an increase in non-cash stock-based compensation expenses. This increase was due primarily to a one-time charge recorded for certain stock options that were modified during the six months ended June 30, 2014. In addition, consulting and professional services increased during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 related to business development activities. Excluding the one-time charge recorded for a modification of certain stock options, we expect that general and administrative expenses will remain consistent for the second half of 2014 as compared to the first half of 2014.

Benefit from income taxes

Our benefit from income taxes was $0.3 million and $18.2 million for the three and six months ended June 30, 2014, respectively, as compared to $2.9 million and $3.4 million for the three and six months ended June 30, 2013, respectively. The increase during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 was due to the corresponding income tax benefit associated with the sale of common stock to Genzyme under the 2014 Genzyme collaboration being recorded net of tax to additional paid-in capital. In addition, we also recorded an income tax benefit for the increase in the value of our investment in Regulus that we carried at fair market value during in each period.