alny-10q_20180331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number 001-36407

 

ALNYLAM PHARMACEUTICALS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

77-0602661

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

300 Third Street,

Cambridge, MA

 

02142

(Address of Principal Executive Offices)

 

(Zip Code)

(617) 551-8200

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes     No  

At April 30, 2018, the registrant had 100,522,411 shares of Common Stock, $0.01 par value per share, outstanding.

 

 

 

 


INDEX

 

 

 

PAGE

NUMBER

 

 

 

PART I.  FINANCIAL INFORMATION

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

 

 

 

 

 

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2018 AND DECEMBER 31, 2017

 

2

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

3

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5

 

 

 

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

 

22

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

32

 

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

32

 

 

 

PART II.  OTHER INFORMATION

 

 

 

 

 

ITEM 1.  LEGAL PROCEEDINGS

 

33

 

 

 

ITEM 1A.  RISK FACTORS

 

33

 

 

 

ITEM 6. EXHIBITS

 

59

 

 

 

SIGNATURES

 

60

 

1


ALNYLAM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

March 31, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

396,149

 

 

$

645,361

 

Marketable securities

 

 

1,171,715

 

 

 

1,045,257

 

Billed and unbilled collaboration receivables

 

 

50,768

 

 

 

34,002

 

Prepaid expenses and other current assets

 

 

66,665

 

 

 

40,120

 

Total current assets

 

 

1,685,297

 

 

 

1,764,740

 

Marketable securities

 

 

648

 

 

 

13,919

 

Property, plant and equipment, net

 

 

201,979

 

 

 

181,900

 

Restricted investments

 

 

30,000

 

 

 

30,000

 

Other assets

 

 

5,215

 

 

 

4,171

 

Total assets

 

$

1,923,139

 

 

$

1,994,730

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,206

 

 

$

28,355

 

Accrued expenses

 

 

63,824

 

 

 

72,203

 

Deferred rent

 

 

2,498

 

 

 

1,988

 

Deferred revenue

 

 

35,855

 

 

 

41,705

 

Total current liabilities

 

 

115,383

 

 

 

144,251

 

Deferred rent, net of current portion

 

 

10,817

 

 

 

6,626

 

Deferred revenue, net of current portion

 

 

7,676

 

 

 

43,075

 

Long-term debt

 

 

30,000

 

 

 

30,000

 

Other liabilities

 

 

4,458

 

 

 

4,347

 

Total liabilities

 

 

168,334

 

 

 

228,299

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value per share, 5,000,000 shares authorized and no shares

   issued and outstanding at March 31, 2018 and December 31, 2017

 

 

 

 

 

Common stock, $0.01 par value per share, 125,000,000 shares authorized;

   100,468,061 shares issued and outstanding at March 31, 2018; 99,666,549

   shares issued and outstanding at December 31, 2017

 

 

1,005

 

 

 

997

 

Additional paid-in capital

 

 

4,009,342

 

 

 

3,947,552

 

Accumulated other comprehensive loss

 

 

(34,853

)

 

 

(34,433

)

Accumulated deficit

 

 

(2,220,689

)

 

 

(2,147,685

)

Total stockholders’ equity

 

 

1,754,805

 

 

 

1,766,431

 

Total liabilities and stockholders’ equity

 

$

1,923,139

 

 

$

1,994,730

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


ALNYLAM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Net revenues from collaborators

 

$

21,899

 

 

$

18,960

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development (1)

 

 

96,857

 

 

 

86,984

 

General and administrative (1)

 

 

72,447

 

 

 

38,487

 

Total operating expenses

 

 

169,304

 

 

 

125,471

 

Loss from operations

 

 

(147,405

)

 

 

(106,511

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

5,794

 

 

 

2,128

 

Other income (expense)

 

 

335

 

 

 

(2,907

)

      Total other income (expense)

 

 

6,129

 

 

 

(779

)

Loss before income taxes

 

 

(141,276

)

 

 

(107,290

)

Benefit from income taxes

 

 

62

 

 

 

 

Net loss

 

$

(141,214

)

 

$

(107,290

)

Net loss per common share - basic and diluted

 

$

(1.41

)

 

$

(1.25

)

Weighted-average common shares used to compute basic and diluted net loss per

   common share

 

 

99,979

 

 

 

86,027

 

Comprehensive loss:

 

 

 

 

 

 

 

 

Net loss

 

$

(141,214

)

 

$

(107,290

)

Unrealized loss on marketable securities, net of tax

 

 

(420

)

 

 

(1,936

)

Reclassification adjustment for realized loss on marketable securities included in

   net loss

 

 

 

 

 

1,549

 

Comprehensive loss

 

$

(141,634

)

 

$

(107,677

)

 

(1)

Stock-based compensation expenses included in operating expenses are as follows:

 

Research and development

 

$

10,137

 

 

$

8,691

 

General and administrative

 

 

9,447

 

 

 

7,026

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


ALNYLAM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(141,214

)

 

$

(107,290

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,178

 

 

 

3,000

 

Stock-based compensation

 

 

19,584

 

 

 

15,717

 

Charge for 401(k) company stock match

 

 

942

 

 

 

551

 

Realized loss on sale of marketable equity securities

 

 

 

 

 

1,549

 

Other

 

 

 

 

 

608

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Billed and unbilled collaboration receivables

 

 

(16,766

)

 

 

3,877

 

Prepaid expenses and other assets

 

 

(27,540

)

 

 

3,708

 

Accounts payable

 

 

(9,042

)

 

 

(11,067

)

Accrued expenses and other

 

 

(11,767

)

 

 

(10,855

)

Deferred revenue

 

 

26,961

 

 

 

(128

)

Net cash used in operating activities

 

 

(155,664

)

 

 

(100,330

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(21,257

)

 

 

(36,152

)

Purchases of marketable securities

 

 

(358,433

)

 

 

(86,803

)

Sales and maturities of marketable securities

 

 

244,876

 

 

 

198,031

 

Net cash (used in) provided by investing activities

 

 

(134,814

)

 

 

75,076

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from exercise of stock options and other types of equity

 

 

42,094

 

 

 

2,769

 

Payments for repurchase of common stock for employee tax withholding

 

 

(572

)

 

 

(53

)

Net cash provided by financing activities

 

 

41,522

 

 

 

2,716

 

Net decrease in cash, cash equivalents and restricted cash

 

 

(248,956

)

 

 

(22,538

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

646,832

 

 

 

195,088

 

Cash, cash equivalents and restricted cash, end of period

 

$

397,876

 

 

$

172,550

 

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within our condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:

 

 

 

At Ended March 31,

 

 

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

396,149

 

 

$

171,079

 

Restricted cash included in long-term other assets

 

 

1,727

 

 

 

1,471

 

Total cash, cash equivalents, and restricted cash shown in the

   condensed consolidated statements of cash flows

 

$

397,876

 

 

$

172,550

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


ALNYLAM PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements of Alnylam Pharmaceuticals, Inc. are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, applicable to interim periods and, in the opinion of management, include all normal and recurring adjustments that are necessary to state fairly the results of operations for the reported periods. Our condensed consolidated financial statements have also been prepared on a basis substantially consistent with, and should be read in conjunction with, our audited consolidated financial statements for the year ended December 31, 2017, which were included in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission, or SEC, on February 15, 2018. The year-end condensed consolidated balance sheet data was derived from our audited financial statements, but does not include all disclosures required by GAAP.  The results of our operations for any interim period are not necessarily indicative of the results of our operations for any other interim period or for a full fiscal year.

The accompanying condensed consolidated financial statements reflect the operations of Alnylam and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Liquidity

Based on our current operating plan, we believe that our cash, cash equivalents and fixed income marketable securities at March 31, 2018, together with the cash we expect to generate under our current alliances, will be sufficient to enable us to advance our Alnylam 2020 strategy for at least the next 12 months from the filing of this Quarterly Report on Form 10-Q.

Net Loss Per Common Share

We compute basic net loss per common share by dividing net loss by the weighted-average number of common shares outstanding. We compute diluted net loss per common share by dividing net loss by the weighted-average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options (the proceeds of which are then assumed to have been used to repurchase outstanding shares using the treasury stock method). Because the inclusion of potential common shares would be anti-dilutive for all periods presented, diluted net loss per common share is the same as basic net loss per common share.

The following table sets forth for the periods presented the potential common shares (prior to consideration of the treasury stock method) excluded from the calculation of net loss per common share because their inclusion would be anti-dilutive, in thousands:

 

 

 

At March 31,

 

 

 

2018

 

 

2017

 

Options to purchase common stock

 

 

12,515

 

 

 

12,048

 

Unvested restricted common stock

 

 

157

 

 

 

163

 

 

 

 

12,672

 

 

 

12,211

 

 

Equity

Total stockholders’ equity at March 31, 2018 decreased by $11.6 million compared to December 31, 2017. This decrease was related primarily to our net loss, partially offset during the three months ended March 31, 2018 by an adjustment to the opening balance of our accumulated deficit related to the adoption of the new revenue standard on January 1, 2018, described below under the heading “Recent Accounting Pronouncements,” as well as increases to additional paid-in capital due to proceeds from the exercise of stock options and stock-based compensation.

5


Fair Value Measurements

The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices (adjusted), interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.  The fair value hierarchy level is determined by the lowest level of significant input.

Investments in Marketable Securities and Cash Equivalents

We invest our excess cash balances in short-term and long-term marketable debt and equity securities. We classify our investments in marketable debt securities as either held-to-maturity or available-for-sale based on facts and circumstances present at the time we purchased the securities. At each balance sheet date presented, we classified all of our investments in debt securities as available-for-sale. We report available-for-sale debt securities at fair value at each balance sheet date and include any unrealized holding gains and losses (the adjustment to fair value) in accumulated other comprehensive income (loss), a component of stockholders’ equity. At March 31, 2018, the balance in our accumulated other comprehensive loss was composed solely of activity related to our fixed income marketable securities and our investment in equity securities of Regulus Therapeutics Inc., or Regulus. Realized gains and losses are determined using the specific identification method and are included in other income (expense). We recognized $1.5 million of realized losses from sales of our Regulus available-for-sale securities as other expense in our condensed consolidated statement of comprehensive loss during the three months ended March 31, 2017. If any adjustment to fair value reflects a decline in the value of the fixed income marketable securities, we consider all available evidence to evaluate the extent to which the decline is “other than temporary,” including our intention to sell and, if so, mark the investment to market through a charge to our condensed consolidated statements of comprehensive loss. We did not record any impairment charges related to our fixed income marketable securities during the three months ended March 31, 2018 or 2017. Our marketable securities are classified as cash equivalents if the original maturity, from the date of purchase, is 90 days or less, and as marketable securities if the original maturity, from the date of purchase, is in excess of 90 days. Our cash equivalents are composed of commercial paper, corporate notes, U.S. government-sponsored enterprise securities, U.S. treasury securities and money market funds.

During the second quarter of 2017, we sold all our remaining holdings in Regulus. We accounted for our investment in Regulus as an available-for-sale marketable security. Intraperiod tax allocation rules require us to allocate our provision for income taxes between continuing operations and other categories of earnings, such as other comprehensive income. In periods in which we have a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as other comprehensive income, we must allocate the tax provision to the other categories of earnings. We then record a related tax benefit in continuing operations. Upon sales of our available-for-sale marketable securities, we apply the aggregate portfolio approach to recognize the related tax provision or benefit into income (loss) from continuing operations. As a result, the disproportionate tax effect remains in accumulated other comprehensive income (loss) as long as we maintain an investment portfolio. At March 31, 2018 and December 31, 2017, there was $32.8 million of accumulated other comprehensive loss, net of tax, recorded on our condensed consolidated balance sheets related to our investment in Regulus.

 

Revenue Recognition

We have entered into collaboration agreements with leading pharmaceutical and life sciences companies, including Sanofi Genzyme, the specialty care global business unit of Sanofi, and The Medicines Company, or MDCO. The terms of our collaboration agreements may include consideration such as non-refundable license fees, funding of research and development services, payments due upon the achievement of clinical and pre-clinical performance-based development milestones, regulatory milestones, manufacturing services, sales-based milestones and royalties on product sales.

On January 1, 2018, we adopted the new revenue standard, discussed below under the heading “Recent Accounting Pronouncements,” which amended revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries. Our adoption of the new revenue standard had a material impact on our condensed consolidated financial statements, as discussed below under the heading “Recent Accounting Pronouncements.” This new revenue standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. The new revenue standard provides a five-step framework whereby revenue is recognized when control of promised goods or services is transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of the new revenue standard, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation.  We only apply the five-step model to contracts when collectability of the consideration to which we are entitled in

6


exchange for the goods or services we transfer to the customer is determined to be probable.  At contract inception, once the contract is determined to be within the scope of the new revenue standard, we assess whether the goods or services promised within each contract are distinct and, therefore, represent a separate performance obligation.  Goods and services that are determined not to be distinct are combined with other promised goods and services until a distinct bundle is identified. We then allocate the transaction price (the amount of consideration we expect to be entitled to from a customer in exchange for the promised goods or services) to each performance obligation and recognize the associated revenue when (or as) each performance obligation is satisfied. Our estimate of the transaction price for each contract includes all variable consideration to which we expect to be entitled.

We recognize the transaction price allocated to upfront license payments as revenue upon delivery of the license to the customer and resulting ability of the customer to use and benefit from the license, if the license is determined to be distinct from the other performance obligations identified in the contract.  If the license is considered to not be distinct from other performance obligations, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied (i) at a point in time, but only for licenses determined to be distinct from other performance obligations in the contract, or (ii) over time; and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from license payments.  We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.

Many of our collaboration agreements entitle us to additional payments upon the achievement of performance-based milestones. These milestones are generally categorized into three types: development milestones, generally based on the advancement of our pipeline and initiation of clinical trials; regulatory milestones, generally based on the submission, filing or approval of regulatory applications such as a New Drug Application, or NDA, in the United States; and sales-based milestones, generally based on meeting specific thresholds of sales in certain geographic areas. For each collaboration that includes development milestone payments, we evaluate whether it is probable that the consideration associated with each milestone will not be subject to a significant reversal in the cumulative amount of revenue recognized. Amounts that meet this threshold are included in the transaction price using the most likely amount method, whereas amounts that do not meet this threshold are considered constrained and excluded from the transaction price until they meet this threshold. Milestones tied to regulatory approval, and therefore not within our control, are considered constrained until such approval is received. Upfront and ongoing development milestones per our collaboration agreements are not subject to refund if the development activities are not successful. At the end of each subsequent reporting period, we re-evaluate the probability of a significant reversal of the cumulative revenue recognized for our milestones, and, if necessary, adjust our estimate of the overall transaction price.  Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues from collaborators and loss in the period of adjustment. We exclude sales-based royalties and milestone payments from the transaction price until the sale occurs (or, if later, the underlying performance obligation to which some or all of the royalty has been allocated has been satisfied, or partially satisfied), because the license to our intellectual property is deemed to be the predominant item to which the royalties relate as it is the primary driver of value. Currently, we have not recognized any royalty revenue resulting from any of our agreements.

The new revenue standard requires us to allocate the arrangement consideration on a relative standalone selling price basis for each performance obligation after determining the transaction price of the contract and identifying the performance obligations to which that amount should be allocated. The relative standalone selling price is defined in the new revenue standard as the price at which an entity would sell a promised good or service separately to a customer. If other observable transactions in which we have sold the same performance obligation separately are not available, we are required to estimate the standalone selling price of each performance obligation. Key assumptions to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Whenever we determine that a contract should be accounted for as a combined performance obligation over time, we determine the period over which the performance obligations will be performed and revenue will be recognized. Revenue is recognized using the proportional performance method. Direct labor hours or full-time equivalents are typically used as the measure of performance. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which we are expected to complete our performance obligations under an arrangement.

We evaluate our collaborative agreements for proper classification in our consolidated statements of comprehensive loss based on the nature of the underlying activity. Transactions between collaborators recorded in our consolidated statements of comprehensive loss are recorded on either a gross or net basis, depending on the characteristics of the collaborative relationship. We generally reflect amounts due under our collaborative agreements related to cost-sharing of development activities as revenue if we have a vendor-customer relationship with our collaborator. Costs incurred or shared with our collaboration partners that are deemed to be joint-risk sharing activities are recorded as an adjustment to the related operating expense captions.

For revenue generating arrangements where we, as a vendor, provide consideration to a licensor or collaborator, as a customer, we apply the accounting standard that governs such transactions. This standard addresses the accounting for revenue arrangements where both the vendor and the customer make cash payments to each other for services and/or products. A payment to a customer is presumed to be a reduction of the transaction price unless we receive an identifiable benefit for the payment and we can reasonably

7


estimate the fair value of the benefit received. Payments to a customer that are deemed a reduction of the transaction price are recorded first as a reduction of revenue, to the extent of both cumulative revenue recorded to date and probable future revenues, which include any unamortized deferred revenue balances, under all arrangements with such customer, and then as an expense. Payments that are not deemed to be a reduction of the transaction price are recorded as an expense.

Consideration that does not meet the requirements to satisfy the above revenue recognition criteria is recorded as deferred revenue in the accompanying condensed consolidated balance sheets. Although we follow detailed guidelines in measuring revenue, certain judgments affect the application of our revenue policy. For example, in connection with our existing collaboration agreements, we have recorded on our condensed consolidated balance sheets short-term and long-term deferred revenue based on our best estimate of when such revenue will be recognized. Short-term deferred revenue consists of amounts that are expected to be recognized as revenue in the next 12 months. Amounts that we expect will not be recognized within the next 12 months are classified as long-term deferred revenue. However, this estimate is based on our current operating plan and, if our operating plan should change in the future, we may recognize a different amount of deferred revenue over the next 12-month period.

The estimate of deferred revenue also reflects management’s estimate of the periods of our involvement in certain of our collaborations. Our performance obligations under these collaborations consist of participation on steering committees and the performance of other research and development services. In certain instances, the timing of satisfying these obligations can be difficult to estimate. Accordingly, our estimates may change in the future. Such changes to estimates would result in a change in revenue recognition amounts. If these estimates and judgments change over the course of these agreements, it may affect the timing and amount of revenue that we recognize and record in future periods. At March 31, 2018, we had short-term and long-term deferred revenue of $35.9 million and $7.7 million, respectively, related to our collaborations.

Amounts are recorded as accounts receivable when our right to consideration is unconditional. We do not assess whether a contract has a significant financing component if the expectation at contract inception is that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial. At March 31, 2018, we have not capitalized any costs to obtain any of our contracts.

 

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued a new revenue recognition standard, which we refer to as the new revenue standard, which amends revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries. The new revenue standard provides a five-step framework whereby revenue is recognized when control of promised goods or services are transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new revenue standard also requires enhanced disclosures pertaining to revenue recognition in both interim and annual periods. In August 2015, the FASB deferred the effective date of the new revenue standard from January 1, 2017 to January 1, 2018. In March 2016, the FASB issued amendments to clarify the implementation standard on principal versus agent considerations. In April 2016, the FASB issued amendments to clarify the standard on accounting for licenses of intellectual property and identifying performance obligations. In May 2016, the FASB issued amendments related to collectibility, non-cash consideration, the presentation of sales and other similar taxes collected from customers and transition. The new revenue standard allows for adoption using a full retrospective method or a modified retrospective method. On January 1, 2018, we adopted the new revenue standard by applying the modified retrospective method to all contracts that were not completed as of January 1, 2018. As a result, while reporting periods beginning on our adoption of the new revenue standard are presented under the new revenue standard, prior period amounts have not been adjusted and continue to be presented under the revenue standard in effect prior to January 1, 2018. For contracts that were modified prior to our adoption of the new revenue standard, we reflected the aggregate effect of all modifications that occurred before the beginning of the earliest period presented when identifying performance obligations and allocating the transaction price in accordance with an available practical expedient. Our implementation approach included performing a detailed review of our collaboration agreements not completed as of the transition date. In addition, we designed internal controls to enable the preparation of financial information and have reached conclusions on key accounting assessments related to the new revenue standard, including our assessment that the impact of accounting for costs incurred to obtain a contract is immaterial. There was no impact to cash from or used in operating, financing or investing activities on our condensed consolidated statement of cash flows as a result of the adoption of the new revenue standard.

8


The following table summarizes the cumulative effect to our condensed consolidated balance sheet upon the adoption of the new revenue standard on January 1, 2018, in thousands:

 

Condensed Consolidated Balance Sheet

 

Balance at December 31, 2017

 

 

Adjustments

 

 

Balance at January 1, 2018

 

Deferred revenue, current portion

 

$

41,705

 

 

$

(34,463

)

 

$

7,242

 

Deferred revenue, net of current portion

 

$

43,075

 

 

$

(33,747

)

 

$

9,328

 

Accumulated deficit

 

$

(2,147,685

)

 

$

68,210

 

 

$

(2,079,475

)

 

The adoption of the new revenue standard resulted in a cumulative reduction of $68.2 million of deferred revenue with a corresponding adjustment to the opening balance of accumulated deficit recorded in the first quarter of 2018. This adjustment is due primarily to the application of the new revenue standard to our collaboration agreements with Sanofi Genzyme, MDCO and Kyowa Hakko Kirin Co., Ltd., or Kyowa Hakko Kirin. In addition, as a result of the cumulative reduction in deferred revenue, our corresponding deferred tax asset was reduced by $13.6 million, which was offset by a corresponding decrease to our valuation allowance. These offsetting adjustments were recorded to our accumulated deficit in the first quarter of 2018.  

 

A substantial portion of the incremental $68.2 million adjustment is the result of the application of the new revenue standard regarding how entities should measure progress in satisfying performance obligations and the contract’s transaction price. In particular, for Sanofi Genzyme and MDCO, the adoption of the new revenue standard resulted in the recognition of previously deferred revenue of $45.7 million and $4.5 million, respectively, due to the change in the way we measure our performance under each agreement, from a straight-line method to a proportional performance model. As a result, at January 1, 2018, the balance of remaining deferred revenues was $3.5 million and $1.2 million, respectively, related to Sanofi Genzyme and MDCO. In addition, the adoption of the new revenue standard resulted in the recognition of $15.5 million of previously deferred revenue related to our Kyowa Hakko Kirin agreement. Under the revenue standard in effect at the time this agreement was executed, we had been unable to reasonably estimate our period of performance under the Kyowa Hakko Kirin agreement as we were unable to estimate the timeline of our deliverables related to the fixed-price option granted to Kyowa Hakko Kirin for any additional compounds, an obligation that was bundled with all other deliverables into a single unit of accounting. Under the new revenue standard, two distinct performance obligations were identified. The first distinct performance obligation included a license to our program targeting respiratory syncytial virus, or RSV, infection, related know-how and updates, manufacturing supply services and joint steering committee services. The second distinct performance obligation included the fixed-price option to a future follow-on compound. We allocated all consideration to the first performance obligation because the second performance obligation was deemed to have a de minimis relative selling price due to its low likelihood of occurring, in part due to our discontinuation of our RSV program. Given this fact pattern, because we do not expect to incur any future costs related to our RSV program, we concluded our performance obligations were complete in the period prior to our adoption of the new revenue standard and therefore, there would not be a future significant reversal of revenue. As a result, we recorded the $15.5 million of deferred revenue as of December 31, 2017 as an adjustment to the opening balance of our accumulated deficit on January 1, 2018.

 

In accordance with the new revenue standard requirements, the following tables summarize the impact of adoption on our condensed consolidated balance sheet and condensed consolidated statement of comprehensive loss, in thousands:

 

 

 

At March 31, 2018

 

Condensed Consolidated Balance Sheet

 

As Reported

 

 

Balances Without Adoption of New Revenue Standard

 

 

Effect of Change Higher/(Lower)

 

Deferred revenue, current portion

 

$

35,855

 

 

$

52,860

 

 

$

(17,005

)

Deferred revenue, net of current portion

 

$

7,676

 

 

$

25,669

 

 

$

(17,993

)

Accumulated deficit

 

$

(2,220,689

)

 

$

(2,255,772

)

 

$

(35,083

)

 

 

 

Three Months Ended March 31, 2018

 

Condensed Consolidated Statement of Comprehensive Loss

 

As Reported

 

 

Balances Without Adoption of New Revenue Standard

 

 

Effect of Change Higher/(Lower)

 

Net revenues from collaborators

 

$

21,899

 

 

$

55,026

 

 

$

(33,127

)

Net loss

 

$

(141,214

)

 

$

(108,087

)

 

$

33,127

 

Net loss per common share - basic and diluted

 

$

(1.41

)

 

$

(1.08

)

 

$

0.33

 

 

9


In addition to the reduction to deferred revenues recorded and corresponding offset to the accumulated deficit described above, on January 6, 2018, we and Sanofi Genzyme entered into an amendment to our 2014 Sanofi Genzyme collaboration. In connection and simultaneously with entering into the amendment to the 2014 Sanofi Genzyme collaboration, we and Sanofi Genzyme also entered into an Exclusive License Agreement with respect to all TTR products, including patisiran, ALN-TTRsc02 and any back-up products, referred to as the Exclusive TTR License, and the ALN-AT3 Global License Terms with respect to fitusiran and any back-up products, referred to as the AT3 License Terms. Please read Note 2 for a discussion of our accounting related to the 2014 Sanofi Genzyme collaboration, as amended in January 2018, together with the Exclusive TTR License and the AT3 License Terms.

 

In January 2016, the FASB issued a new standard on recognition and measurement of financial assets and financial liabilities. The new standard impacts the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. All equity investments in unconsolidated entities (other than those accounted for under the equity method of accounting) will generally be measured at fair value with changes in fair value recognized through earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other comprehensive income (loss)) for equity securities with readily determinable fair values. In addition, the FASB clarified the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale debt securities. In general, the new standard will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings. This standard became effective for us on January 1, 2018. This standard did not have a significant impact on our condensed consolidated financial statements and related disclosures for the three months ended March 31, 2018. However, we expect this standard to have an impact on our condensed consolidated financial statements and related disclosures beginning in the second quarter of 2018 as a result of the 983,208 shares of Dicerna Pharmaceuticals, Inc., or Dicerna, common stock that we received under a settlement agreement entered into in April 2018, described more fully below at Note 5.

In February 2016, the FASB issued a new leasing standard that requires that all lessees recognize the assets and liabilities that arise from leases on the condensed consolidated balance sheet and disclose qualitative and quantitative information about its leasing arrangements. The new standard will be effective for us on January 1, 2019. Early adoption is permitted. We are currently evaluating the timing of our adoption and the expected impact that this standard could have on our condensed consolidated financial statements and related disclosures.

In November 2016, the FASB issued a new standard that requires restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the condensed consolidated statements of cash flows. The new standard became effective for us on January 1, 2018 using a retrospective transition method for each period presented. For the years ended December 31, 2017 and 2016, our restricted cash and restricted cash equivalents were not significant. This standard did not have a significant impact on our condensed consolidated financial statements and related disclosures.

In March 2017, the FASB issued a new standard that amends the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period for the premium to the earliest call date.  The new standard will be effective for us on January 1, 2019. Early adoption is permitted. We are currently evaluating the timing of our adoption and the expected impact that this standard could have on our condensed consolidated financial statements and related disclosures.

In March 2018, the FASB issued a new standard to incorporate SEC Staff Accounting Bulletin No. 118, or SAB 118, which addresses the accounting implications of the Tax Cuts and Jobs Act, or TCJA, enacted on December 22, 2017. SAB 118 allows a company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date and was effective upon issuance. We continue to assess the TCJA, and in certain areas, have made reasonable estimates of the effects on our condensed consolidated financial statements and tax disclosures, described more fully below at Note 6.

Subsequent Events

We did not have any material recognized subsequent events. However, we did have a nonrecognized subsequent event with respect to a Settlement Agreement and General Release, or the Settlement Agreement, entered into by us and Dicerna, resolving all ongoing litigation between the parties, which is more fully described below at Note 5.

 

2. COLLABORATION AGREEMENTS

The following table summarizes our total consolidated net revenues from collaborators, for the periods indicated, in thousands:

 

 

 

Three Months Ended March 31,

 

Description

 

2018

 

 

2017

 

Sanofi Genzyme

 

$

18,853

 

 

$

12,277

 

MDCO

 

 

1,295

 

 

 

6,364

 

Other

 

 

1,751

 

 

 

319

 

Total net revenues from collaborators

 

$

21,899

 

 

$

18,960

 

10


 

The following table summarizes our total consolidated net revenues from collaborators, using the prior revenue standard, for the periods indicated, in thousands:

 

 

 

Three Months Ended March 31,

 

Description

 

2018

 

 

2017

 

Sanofi Genzyme

 

$

50,430

 

 

$

12,277

 

MDCO

 

 

2,845

 

 

 

6,364

 

Other

 

 

1,751

 

 

 

319

 

Total net revenues from collaborators

 

$

55,026

 

 

$

18,960

 

 

The following table presents the balance of our contract liabilities at January 1, 2018 and March 31, 2018, in thousands, which at March 31, 2018 includes the achievement of the $50.0 million milestone under our collaboration with Sanofi Genzyme as discussed below:

 

 

 

At January 1, 2018

 

 

At March 31, 2018

 

Contract liabilities:

 

 

 

 

 

 

 

 

Deferred revenues

 

$

16,570

 

 

$

43,531

 

 

During the three months ended March 31, 2018, we recognized the following revenues as a result of the change in the contract liability balances, in thousands:

 

Revenue recognized in the period from:

 

Three Months Ended March 31, 2018

 

 

Amounts included in contract liability at the beginning of the period

 

$

5,883

 

 

 

In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that balance. If additional consideration is received on those contracts in subsequent periods, we assume all revenue recognized in the reporting period first applies to the beginning contract liability as opposed to a portion applying to the new consideration for the period.

 

The following table provides the research and development expenses incurred by type that are directly attributable to each significant agreement for the periods indicated, in thousands:

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

 

 

Sanofi Genzyme

 

 

MDCO

 

 

Sanofi Genzyme

 

 

MDCO

 

Research and development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical trial and manufacturing

 

$

10,523

 

 

$

641

 

 

$

40,575

 

 

$

5,095

 

External services

 

 

2,673

 

 

 

 

 

 

567

 

 

 

 

Other

 

 

509

 

 

 

 

 

 

1,436

 

 

 

24

 

Total research and

   development expenses

 

$

13,705

 

 

$

641

 

 

$

42,578

 

 

$

5,119

 

 

The research and development expenses incurred for each significant agreement consist of costs incurred for external development and manufacturing services for which we are reimbursed, licensing payments made to the counterparty to such agreement and costs directly attributable to Sanofi Genzyme transition services. In addition, these expenses include a reasonable estimate of compensation and related costs as billed to our counterparties. As part of our revenue recognition policy, the costs in the above table are considered as an input in our determination of transaction price when they relate to consideration received for the delivery of goods or services. For the three months ended March 31, 2018 and 2017, we did not incur material general and administrative expenses related to our significant agreements.

11


Product Alliances

Sanofi Genzyme Collaboration

In January 2014, we entered into a global, strategic collaboration with Sanofi Genzyme to discover, develop and commercialize RNAi therapeutics as Genetic Medicines to treat orphan diseases, referred to as the 2014 Sanofi Genzyme collaboration. The 2014 Sanofi Genzyme collaboration superseded and replaced the previous collaboration between us and Sanofi Genzyme entered into in October 2012 to develop and commercialize RNAi therapeutics targeting transthyretin, or TTR, for the treatment of hereditary ATTR amyloidosis, including patisiran and revusiran, in Japan and the Asia-Pacific region.

On January 6, 2018, we and Sanofi Genzyme entered into an amendment to our 2014 Sanofi Genzyme collaboration. In connection and simultaneously with entering into the amendment to the 2014 Sanofi Genzyme collaboration, we and Sanofi Genzyme also entered into the Exclusive TTR License and the AT3 License Terms. As a result, we have the exclusive right to pursue the further global development and commercialization of all TTR products, including patisiran, ALN-TTRsc02 and any back-up products, and Sanofi Genzyme has the exclusive right to pursue the further global development and commercialization of fitusiran and any back-up products. The January 2018 transaction was subject to customary closing conditions and clearances, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act, and closed during the first quarter of 2018.

2012 Sanofi Genzyme Agreement

Under the 2012 Sanofi Genzyme agreement, Sanofi Genzyme paid us an upfront cash payment of $22.5 million. We were also entitled to receive certain milestone payments under the 2012 Sanofi Genzyme agreement. In the fourth quarter of 2013, we earned $11.0 million in patisiran development milestones under the 2012 Sanofi Genzyme agreement.

We determined that the deliverables under the 2012 Sanofi Genzyme agreement included the license, a joint steering committee and any additional TTR-specific RNAi therapeutic compounds that comprised the ALN-TTR program. We also determined that, pursuant to the accounting guidance governing revenue recognition on multiple element arrangements, the license and undelivered joint steering committee and any additional TTR-specific RNAi therapeutic compounds did not have standalone value due to the specialized nature of the services to be provided by us. In addition, while Sanofi Genzyme had the ability to grant sublicenses, it could not sublicense all or substantially all of its rights under the 2012 Sanofi Genzyme agreement. The uniqueness of our services and the limited sublicense right were indicators that standalone value was not present in the arrangement. Therefore the deliverables were not separable and, accordingly, the license and undelivered services were treated as a single unit of accounting. We were unable to reasonably estimate the period of performance under the 2012 Sanofi Genzyme agreement, as we were unable to estimate the timeline of our deliverables related to the deliverable for any additional TTR-specific RNAi therapeutic compounds.

Through December 31, 2013, under the prior revenue standard, we had deferred all revenue, or $33.5 million, under the 2012 Sanofi Genzyme agreement.

2014 Sanofi Genzyme Collaboration, as amended in January 2018

In January 2014, we entered into the 2014 Sanofi Genzyme collaboration. As noted above, the 2014 Sanofi Genzyme collaboration superseded and replaced the 2012 Sanofi Genzyme agreement and was amended in January 2018, at which time we also entered into the Exclusive TTR License and the AT3 License Terms.

The 2014 Sanofi 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 Proof-of-Principle Study Completion (as defined in the Sanofi Genzyme master agreement), or 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 United States, Canada and Western Europe, referred to as the Alnylam Territory, while Sanofi Genzyme will obtain exclusive rights to develop and commercialize collaboration products in the rest of the world, referred to as the Sanofi Genzyme Territory, together with worldwide rights for one product. Sanofi Genzyme’s rights under the 2014 Sanofi Genzyme collaboration, described in detail below, are structured as an opt-in that is triggered upon achievement of Human POP. We maintain development control for all programs prior to Sanofi Genzyme’s opt-in and maintain development and commercialization control after Sanofi Genzyme’s opt-in for all programs in the Alnylam Territory. 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. We 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.

12


Under the 2014 Sanofi Genzyme collaboration, Sanofi Genzyme’s specific license rights and the programs which Sanofi Genzyme opted into prior to the 2018 amendment include the following:

 

Regional license terms and programs — Upon opt-in, we will retain product rights in the Alnylam Territory, while Sanofi Genzyme will obtain exclusive rights to develop and commercialize the product in the Sanofi Genzyme Territory. Sanofi Genzyme can elect this license for any of our current and future Genetic Medicine programs that complete Human POP by the end of 2019, subject to limited extension. Development costs for products once Sanofi Genzyme exercises an option will be shared between Sanofi Genzyme and us, with Sanofi Genzyme responsible for twenty percent of the global development costs. Sanofi Genzyme will be required to make payments totaling up to $75.0 million per regional product, consisting of up to $55.0 million in development milestones and $20.0 million in commercial milestones. Sanofi Genzyme will also be required to pay tiered double-digit royalties up to twenty percent for each regional product based on annual net sales, if any, of such regional product by Sanofi Genzyme, its affiliates and sublicensees. Upon the effective date of the 2014 Sanofi Genzyme collaboration, Sanofi Genzyme expanded the scope of its regional license and collaboration for patisiran, which was originally established under the 2012 Sanofi Genzyme agreement. In September 2015, Sanofi Genzyme elected to opt into our fitusiran clinical development program for the treatment of hemophilia and other rare bleeding disorders under the regional license terms. Cost-sharing for the fitusiran program began in January 2016 under the regional license terms. Sanofi Genzyme also had the right to elect to co-develop and co-commercialize fitusiran in the Alnylam Territory pursuant to the co-development/co-commercialize license terms described below. In November 2016, Sanofi Genzyme exercised this right and elected to co-develop and co-commercialize fitusiran in the Alnylam Territory. In addition, during 2016, Sanofi Genzyme elected not to opt into the development and commercialization of givosiran or cemdisiran in the Sanofi Genzyme Territory.

 

Sanofi Genzyme’s rights with respect to patisiran and fitusiran were modified in connection with the 2018 amendment, the Exclusive TTR License and the AT3 License Terms, as described below. Sanofi Genzyme continues to have the right to opt into our future rare genetic disease programs for development and commercialization in the Sanofi Genzyme Territory under the regional license terms.

 

Co-development/co-commercialize license terms and programs — Upon opt-in, we retained product rights in the Alnylam Territory, while Sanofi Genzyme obtained exclusive rights to develop and commercialize the product in the Sanofi Genzyme Territory, and to co-commercialize the product in the Alnylam Territory. Upon the effective date of the 2014 Sanofi Genzyme collaboration, Sanofi Genzyme expanded its regional rights for revusiran, which were originally granted under the 2012 Sanofi Genzyme agreement, to include a co-development/co-commercialize license and collaboration. In October 2016, we decided to discontinue development of revusiran. In our TTR program, we are also developing ALN-TTRsc02.  Sanofi Genzyme had a right to elect a co-development/co-commercialize license for ALN-TTRsc02. As noted above, in November 2016, Sanofi Genzyme exercised its right to elect a co-development/co-commercialize license for fitusiran. Development costs for co-development/co-commercialize products, once Sanofi Genzyme exercised an option, were shared between Sanofi Genzyme and us, with Sanofi Genzyme responsible for fifty percent of the global development costs. In connection with the exercise of its co-development/co-commercialize rights for fitusiran, Sanofi Genzyme paid us approximately $6.0 million in January 2017 for its incremental share of co-development costs incurred from January 2016 through September 2016. Sanofi Genzyme was required to make certain milestone payments for fitusiran, and, prior to the discontinuation of the revusiran program, was required to make certain milestone payments for revusiran. In December 2014, we earned a development milestone payment of  $25.0 million based upon the initiation of the first global Phase 3 clinical trial for revusiran.  Sanofi Genzyme was also obligated to pay us a milestone of $25.0 million upon the dosing of the first patient in our ATLAS Phase 3 program for fitusiran. In addition, Sanofi Genzyme was required to pay tiered double-digit royalties up to twenty percent for each co-development/co-commercialize product based on annual net sales, if any, in the Sanofi Genzyme Territory for such co-development/co-commercialize product by Sanofi Genzyme, its affiliates and sublicensees. The parties were to share profits equally and we expected to book product sales in the Alnylam Territory.

In connection with the 2018 amendment, the Exclusive TTR License and the AT3 License Terms, as described below, we and Sanofi Genzyme agreed to terminate the co-development and co-commercialization rights related to revusiran, ALN-TTRsc02 and fitusiran under the 2014 Sanofi Genzyme collaboration. No future rights will be granted to Sanofi Genzyme for co-development and co-commercialization under the 2014 Sanofi Genzyme collaboration, as amended by the 2018 amendment.

13


 

Global license terms and programs — Sanofi Genzyme continues to have one right to a global license through 2019, subject to limited extension, for a future Genetic Medicine program that was not one of our defined Genetic Medicine programs as of the effective date of the 2014 Sanofi Genzyme collaboration. Upon opt-in, Sanofi Genzyme will obtain a worldwide license to develop and commercialize the product. Sanofi Genzyme shall be responsible for one hundred percent of global development costs for a global license product. Sanofi Genzyme will be required to make payments totaling up to $200.0 million for such global product, including up to $100.0 million in development milestones and $100.0 million in commercial milestones. Sanofi Genzyme will also be required to pay tiered double-digit royalties up to twenty percent for such global product based on annual net sales, if any, of each global product by Sanofi Genzyme, its affiliates and sublicensees.  During the first quarter of 2018, Sanofi Genzyme elected not to exercise its global option for our lumasiran program.

Exclusive TTR License and AT3 License Terms

As noted above, the 2018 amendment, together with the Exclusive TTR License and the AT3 License Terms, revise the terms and conditions of the 2014 Sanofi Genzyme collaboration to (i) provide us the exclusive right to pursue the further global development and commercialization of all TTR products, including patisiran, ALN-TTRsc02 and any back-up products, (ii) provide Sanofi Genzyme the exclusive right to pursue the further global development and commercialization of fitusiran and any back-up products and (iii) terminate the previous co-development and co-commercialization rights related to revusiran, ALN-TTRsc02 and fitusiran under the 2014 Sanofi Genzyme collaboration. Going forward, we are funding all development and commercialization costs for patisiran and ALN-TTRsc02.  We are also funding development and commercialization costs for fitusiran through the transition period, up to a cap of $50.0 million, after which Sanofi Genzyme will fund all development and commercialization costs for fitusiran. We expect to substantially complete the transition of the fitusiran program to Sanofi Genzyme by mid-2018. Each party is responsible for its costs associated with the transfer of the respective program to the other party.

Under the 2018 amendment and the Exclusive TTR License, Sanofi Genzyme will be eligible to receive (i) royalties up to twenty-five percent, increasing over time, based on annual net sales of patisiran in territories excluding the United States, Canada and Western Europe, provided royalties on annual net sales of patisiran in Japan will be twenty-five percent beginning as of the effective date of the Exclusive TTR License, (ii) tiered royalties of fifteen to thirty percent based on global annual net sales of ALN-TTRsc02 (consistent with the royalties due to us from Sanofi Genzyme on fitusiran), and (iii) tiered royalties of up to fifteen percent based on global annual net sales of any back-up products, in each case by us, our affiliates and our sublicensees.  Except as described below, there will be no additional milestones due to either party with respect to patisiran, ALN-TTRsc02 or fitusiran.

In consideration for the rights granted to Sanofi Genzyme under the 2018 amendment and the AT3 License Terms, Sanofi Genzyme is required to make one milestone payment of $50.0 million following the dosing of the first patient in the ATLAS Phase 3 program for fitusiran. This milestone was achieved in the first quarter of 2018. In addition, we will be eligible to receive tiered royalties of fifteen to thirty percent based on global annual net sales of fitusiran and up to fifteen percent based on global annual net sales of any back-up products, in each case by Sanofi Genzyme, its affiliates and its sublicensees. We and Sanofi Genzyme intend to enter into a supply agreement to provide for the supply of fitusiran to Sanofi Genzyme for ongoing clinical studies, and, at Sanofi Genzyme’s request, commercial sales. Sanofi Genzyme also has the right to manufacture fitusiran.

Due to the uncertainty of pharmaceutical development and the high historical failure rates generally associated with drug development, we may not receive any additional milestone payments or any royalty payments from Sanofi Genzyme under the 2014 Sanofi Genzyme collaboration, as amended, or the AT3 License Terms.

The 2014 Sanofi Genzyme collaboration, as amended, will continue to be governed by an alliance joint steering committee that is comprised of an equal number of representatives from each party. Additional committees manage various aspects of each regional and global program and oversee certain matters, including transition planning, that may arise under the Exclusive TTR License and the AT3 License Terms.

 

As noted above, the Sanofi Genzyme collaboration originally entered into in 2012 was materially modified during its term when the agreement was amended in 2014, prior to our adoption of the new revenue standard on January 1, 2018. In accordance with the new revenue standard, we evaluated the Sanofi Genzyme collaboration with the aggregate effect of all modifications when identifying performance obligations, determining the transaction price and allocating the transaction price. We determined that certain promises included in these agreements are within the scope of the new revenue standard since Sanofi Genzyme is a customer with respect to the license of the rights to its territories. We also determined, however, that certain aspects of these agreements are within the scope of the collaboration accounting guidance with respect to co-commercialization activities as these activities are joint risk-sharing and are not reflective of a vendor-customer relationship. We apply the new revenue standard to all promises associated with the transfer of goods and services to a customer.

 

14


We concluded that Sanofi Genzyme meets the definition of a customer as we are delivering intellectual property and know-how rights as well as research and development activities for the TTR programs and fitusiran programs in support of territories in which we are not jointly sharing the risks and rewards. We concluded that the accounting for the original 2014 Sanofi Genzyme collaboration, and the collaboration, as amended, should be assessed as separate contracts for (i) the patisiran and revusiran (TTR) programs, upon the initiation of the 2014 Sanofi Genzyme collaboration, and (ii) the subsequent opt-in by Sanofi Genzyme for the fitusiran program. In addition, we determined that the Sanofi Genzyme collaboration met the requirements to be accounted for as a contract, including that it is probable that we will collect the consideration to which we are entitled in exchange for the goods or services that will be delivered to Sanofi Genzyme. We identified contract promises or deliverables for licenses to our intellectual property and know-how rights, associated development activities, joint steering committee participation and information exchange. We determined that, pursuant to the new revenue standard (and consistent with our accounting prior to the adoption of the new revenue standard), the performance obligations were not separately identifiable and were not distinct (and did not have standalone value) due to the specialized nature of the services to be provided by us and the dependent relationship between the performance obligations. Given this fact pattern, we have concluded each of the TTR and fitusiran contracts have a single identified or combined performance obligation.

When applying the previous revenue standard, we determined that the co-commercialization activities prior to the 2018 amendment were within the scope of the collaboration accounting standard since both parties would actively participate in the co-commercialization and be subject to significant risks and rewards. As a result of this determination, we recorded any payments or cash receipts for these joint risk-sharing activities as an adjustment to the related operations expense captions. The amounts recorded as a reduction of our selling, general and administrative activities were not material.

The transaction price as of January 1, 2018 of $127.6 million for the 2014 Sanofi Genzyme collaboration related to the license to the TTR programs included the $22.5 million upfront payment and $11.0 million of development milestone payments earned under the now superseded 2012 Sanofi Genzyme agreement, a $25.0 million development milestone payment for revusiran achieved in 2014, the estimated patisiran and revusiran cost-share reimbursements of $63.6 million and $57.0 million, net of payments to Sanofi Genzyme, respectively, and the $51.5 million equity discount related to the stock purchase agreement, described below. Since the fair value of the stock at the time of closing was more than the consideration received by the Company by $51.5 million, we reduced the transaction price of the license and collaboration contract, treating the equity discount in a manner consistent with a payment to the customer. The transaction price related to our license to the fitusiran program as of January 1, 2018, accounted for as a separate agreement, included estimated fitusiran development cost-share reimbursements of $147.3 million, net of payments to Sanofi Genzyme. There are no refund provisions in the agreement and, therefore, none of the consideration received to date has been excluded from the transaction price calculation. None of the unearned milestones as of January 1, 2018 were included in the transaction price, as all unearned milestone amounts were determined to be fully constrained. We considered several factors, including that achievement of the milestones is outside our control and contingent upon success in clinical trials and regulatory decisions and the licensee’s efforts. Any consideration related to sales-based royalties (including milestones) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to Sanofi Genzyme and as a result have also been excluded from the transaction price.  We will re-evaluate the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

We allocated the transaction price to the combined performance obligation. We have determined that this combined performance obligation is satisfied over time based on our performance that is creating or enhancing an asset that Sanofi Genzyme controls. In this instance, Sanofi Genzyme received control over the asset, or the licensed intellectual property, and know-how, at the time the contract was executed since the licensed intellectual property and know-how meet the definition of functional intellectual property per the new revenue standard, which defines functional intellectual property as intellectual property that derives a substantial portion of its utility from its standalone functionality rather than the entity’s ongoing activities (thus, once the asset is fully developed, our ongoing involvement is not required for the licensee to derive value). The other promises included in the performance obligation, however, are enhancing the controlled asset, and thus the combined performance obligation is being satisfied over time.

The new revenue standard requires a single method of measuring performance for each performance obligation satisfied over time. Since we do not have a reliable method of estimating progress based upon its outputs, it was determined that the most reliable method of estimating progress would be using a cost-to-cost input method. We have determined that our completion of certain clinical and regulatory development tasks is relevant and directly related to our progress in completing the combined performance obligation. As such, we measured our progress upon adoption and will continue to measure our progress during each reporting period based upon the amount of development costs incurred divided by the total amount of development costs expected to be incurred over the course of the agreement. We exclude costs that are not related to our completion of this performance obligation, such as the completion of tasks (and incurring of costs) associated with the marketing and commercialization of the drug. We estimated our internal costs during the last three years, excluding non-reimbursable costs that were not deemed to directly relate to the delivery of the development services to Sanofi Genzyme. Historically, we have been unable to reliably measure our performance based upon our lack of historical experience in completing the development of a drug candidate and have, as a result, defaulted to straight-line attribution for many of our licensing agreements. At the time of adoption of the new revenue standard, however, we have completed a substantial portion of our development obligations and determined we have sufficient information to estimate the remaining development costs for the fitusiran program and sufficient experience to reasonably estimate our development costs.

15


We determined that the 2018 amendment, together with the Exclusive TTR License and the AT3 License Terms, referred to as the 2018 restructured agreement, are included in the scope of the modification provisions of the new revenue standard. We had identified that the agreement for the TTR programs under the 2014 Sanofi Genzyme collaboration should be accounted for separately from any subsequent option exercises, including with respect to fitusiran. Therefore, we concluded it is appropriate to account for the 2018 restructured agreement as two separate modifications to the 2014 Sanofi Genzyme collaboration: one related to the TTR programs and one related to the fitusiran program. Our conclusions related to scoping under the prior revenue standard are consistent with the new revenue standard.

As noted above, the 2018 amendment, together with the Exclusive TTR License, provide us with the exclusive right to pursue the further global development and commercialization of all TTR products, including patisiran. We are responsible for all development and commercialization costs for patisiran and ALN-TTRsc02. As of the 2018 restructured agreement, we are no longer required to complete the delivery of any of the performance obligations under the agreement related to the TTR programs. As a result, the transaction price prior to the 2018 amendment has been reduced as we are no longer entitled to cost-share reimbursements or any of the previously constrained consideration, such as milestones and royalties. Since the 2018 amendment affected the transaction price but did not add any incremental and distinct performance obligations, we concluded this amendment should be accounted for as a change to the existing agreement and recorded the revenue on a cumulative catch-up basis. At the time of the 2018 amendment, we had $2.9 million in revenue deferred as a contract liability on our condensed consolidated balance sheet related to this contract for TTR programs, all of which we recognized in the first quarter of 2018 under the proportional performance model as we no longer expected to incur costs associated with the delivery of goods or services. If we had not adopted the new revenue standard, at the time of the 2018 restructured agreement, we would have $25.8 million of deferred revenues on our condensed consolidated balance sheet that would have been recognized in full upon the date of the 2018 restructured agreement as we would have similarly concluded there were no ongoing deliverables under the 2018 restructured agreement related to the TTR programs. We expect to record future royalties payable to Sanofi Genzyme with respect to any sales of patisiran within cost of goods sold as Sanofi Genzyme is no longer considered our customer after the 2018 restructured agreement for sales of all TTR products, including patisiran, and as such, these royalty payments are outside of the scope of the new revenue standard, including with respect to principal versus agent guidance.

The 2018 amendment, together with the AT3 License Terms, as noted above, provide Sanofi Genzyme the exclusive right to pursue the further global development and commercialization of fitusiran and any back-up products and terminates the previous co-development and co-commercialization rights related to fitusiran under the 2014 Sanofi Genzyme collaboration. The 2018 restructured agreement provides a broader license that permits global development, manufacturing and commercialization, and we are required to facilitate the transfer of all ongoing activities, contracts, intellectual property, know-how and other materials and information related to fitusiran to Sanofi Genzyme.  

In connection with the 2018 restructured agreement for fitusiran, we will fund development and commercialization costs for fitusiran through the transition period, which is expected to end in mid-2018, up to a limit of $50.0 million. The only milestone under the 2018 restructured agreement, which was achieved in the first quarter of 2018 following the dosing of the first patient in the ATLAS Phase 3 program for fitusiran, is considered variable consideration for the license and transition services related to the fitusiran program. We have agreed to reimburse Sanofi Genzyme for certain transition activities that are reflected as a reduction in the transaction price. As a result, the transaction price has been reduced as we are no longer entitled to cost-share reimbursements or any of the previously constrained consideration, such as milestones and royalties.

We concluded that the modification that resulted from the 2018 restructured agreement related to fitusiran would be treated as a termination and replacement of the 2014 Sanofi Genzyme collaboration and accounted for prospectively as the remaining license and transition services are considered distinct from that under the agreement prior to this modification. However, the incremental consideration under the 2018 restructured agreement does not directly reflect the standalone selling price of the incremental performance obligation. Therefore, we concluded the 2018 restructured agreement for fitusiran should be accounted for on a prospective basis. At the time of the 2018 amendment, we had $0.6 million in revenue deferred as a contract liability on our condensed consolidated balance sheet related to the 2014 Sanofi Genzyme collaboration for the fitusiran program. As of March 31, 2018, the transaction price of the 2018 restructured agreement for fitusiran is $45.0 million, primarily related to the $50.0 million milestone that was achieved in the first quarter of 2018. Consistent with our accounting prior to this 2018 modification, we are applying the sales-based royalty under the new revenue standard to exclude from the transaction price the royalties earned on Sanofi Genzyme’s sales of fitusiran as we have determined in the context of all the performance obligations, including those delivered prior to the 2018 modification, that the value of the broader license will continue to represent a substantial portion of the value provided to Sanofi Genzyme; and therefore the license to the intellectual property is the predominant item to which the royalty relates.

We have determined that Sanofi Genzyme’s right to purchase additional clinical and commercial material from us reflects optional purchases that are distinct from other performance obligations. Revenues associated with these purchases will be recognized as Sanofi Genzyme obtains control of any purchased material.

16


We are recognizing the transaction price of the 2018 restructured agreement related to fitusiran under a separate proportional performance model as we perform transition services over the transition period, expected to end in mid-2018. We are measuring our performance based on a percentage of our costs expected to be incurred, currently estimated to be $43.6 million. In the first quarter of 2018, under the proportional performance model, we recognized $16.0 million related to the 2018 restructured agreement for fitusiran. If we had not adopted the new revenue standard, at the time of the 2018 restructured agreement, we would have $23.4 million of deferred revenues on our condensed consolidated balance, that would have represented an incremental $22.8 million to the transaction price. Similar to under the new revenue standard, we consider the 2018 restructured agreement related to fitusiran to include a combined performance obligation. Under the prior revenue standard and our historical practice to account for contract modifications, we would apply a separate model to the consideration. Historically, we have measured our performance under our models based on the passage of time due to our inability to estimate performance under another method. However, as a result of the 2018 restructured agreement related to fitusiran, we have the ability to measure our performance under the prior revenue standard based on costs expected to be incurred, and therefore measure performance under the prior standard consistent with that of the new revenue standard. Under the prior revenue standard, we would have recorded $24.6 million in the first quarter of 2018.    

 We determined that the opt-in rights that Sanofi Genzyme continues to have for future Genetic Medicine programs represent separate and additional optional purchases that Sanofi Genzyme may receive from us in future periods.

 

Accounting for Equity Purchases In Connection with our 2014 Sanofi Genzyme Collaboration

Upon the closing of the equity transaction in February 2014, we sold to Sanofi Genzyme 8,766,338 shares of our common stock and Sanofi Genzyme paid $700.0 million in aggregate cash consideration to us. As a condition to the closing of the equity transaction, Sanofi Genzyme entered into an investor agreement with us containing provisions regarding Sanofi Genzyme’s holding and “standstill” obligations, additional purchase, voting and registration rights, as well as certain other rights and obligations of the parties.

We recorded the issuance of 8,766,338 shares of our common stock under the stock purchase agreement using the price of our common stock on the date the shares were issued to Sanofi Genzyme. Based on the common stock price of $85.72, the fair value of the shares issued was $751.5 million, which was $51.5 million in excess of the proceeds received from Sanofi Genzyme for the issuance of our common stock. This $51.5 million has been reflected as a reduction of the transaction price for the ALN-TTR programs. In addition, due to intraperiod tax allocation rules, upon closing of the equity transaction we recorded a benefit from income taxes of $15.2 million due to the Sanofi Genzyme equity purchase being recorded in additional paid-in capital, net of tax.

In accordance with the investor agreement, as a result of our issuance of shares in connection with our acquisition of Sirna Therapeutics, Inc., or Sirna, in March 2014, Sanofi Genzyme exercised its right to purchase an additional 344,448 shares of our common stock for $23.0 million. In addition, in connection with our public offerings, Sanofi Genzyme exercised its right to purchase directly from us, in concurrent private placements, 744,566 shares of common stock in January 2015 at the public offering price resulting in $70.7 million in proceeds to us and 297,501 shares of common stock in May 2017 at the public offering price resulting in $21.4 million in proceeds to us. The sales of common stock to Sanofi Genzyme were not registered as part of these public offerings, though they were consummated simultaneously with the public offering.

Sanofi Genzyme also has the right at the beginning of each year to purchase a number of shares of our common stock based on the number of shares we issued during the previous year for compensation-related purposes. Sanofi Genzyme exercised this right to purchase directly from us 196,251 shares of our common stock in January 2015 for $18.3 million and 205,030 shares of our common stock in February 2016 for $14.3 million. The sales of these shares to Sanofi Genzyme were consummated as private placements.

 

Sanofi Genzyme currently holds approximately 11 percent of our outstanding common stock.

 

We applied the guidance in the equity accounting standard for the stock purchase arrangement since the sale of our equity is not part of our ordinary activities and, therefore, does not qualify as a contract with a customer that is within the scope of the new revenue standard.

 

 

17


3. FAIR VALUE MEASUREMENTS

The following tables present information about our assets that are measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value, in thousands:

 

Description

 

At March 31, 2018

 

 

Quoted

Prices in

Active

Markets

(Level 1)

 

 

Significant

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

19,981

 

 

$

 

 

$

19,981

 

 

$

 

Corporate notes

 

 

5,168

 

 

 

 

 

 

5,168

 

 

 

 

U.S. treasury securities

 

 

5,491

 

 

 

 

 

 

5,491

 

 

 

 

Money market funds

 

 

231,854

 

 

 

231,854

 

 

 

 

 

 

 

Marketable securities (fixed income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

33,541

 

 

 

 

 

 

33,541

 

 

 

 

Commercial paper

 

 

96,539

 

 

 

 

 

 

96,539

 

 

 

 

Corporate notes

 

 

401,035

 

 

 

 

 

 

401,035

 

 

 

 

U.S. government-sponsored enterprise securities

 

 

378,861

 

 

 

 

 

 

378,861

 

 

 

 

U.S. treasury securities

 

 

262,387

 

 

 

 

 

 

262,387

 

 

 

 

Restricted cash (money market funds)

 

 

1,474

 

 

 

1,474

 

 

 

 

 

 

 

Total

 

$

1,436,331

 

 

$

233,328

 

 

$

1,203,003

 

 

$

 

 

Description

 

At December 31, 2017

 

 

Quoted

Prices in

Active

Markets

(Level 1)

 

 

Significant

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial paper

 

$

82,262

 

 

$

 

 

$

82,262

 

 

$

 

Corporate notes

 

 

18,116

 

 

 

 

 

 

18,116

 

 

 

 

U.S. government-sponsored enterprise securities

 

 

231,122

 

 

 

 

 

 

231,122

 

 

 

 

U.S. treasury securities

 

 

62,855

 

 

 

 

 

 

62,855

 

 

 

 

Money market funds

 

 

122,986

 

 

 

122,986

 

 

 

 

 

 

 

Marketable securities (fixed income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

 

30,200

 

 

 

 

 

 

30,200

 

 

 

 

Commercial paper

 

 

56,951

 

 

 

 

 

 

56,951

 

 

 

 

Corporate notes

 

 

373,252

 

 

 

 

 

 

373,252

 

 

 

 

U.S. government-sponsored enterprise securities

 

 

398,298

 

 

 

 

 

 

398,298

 

 

 

 

U.S. treasury securities

 

 

200,475

 

 

 

 

 

 

200,475

 

 

 

 

Restricted cash (money market funds)

 

 

1,471

 

 

 

1,471

 

 

 

 

 

 

 

Total

 

$

1,577,988

 

 

$

124,457

 

 

$

1,453,531

 

 

$

 

 

During the three months ended March 31, 2018 and 2017, there were no transfers between Level 1 and Level 2 financial assets. The carrying amounts reflected in our condensed consolidated balance sheets for cash, billed and unbilled collaboration receivables, other current assets, accounts payable and accrued expenses approximate fair value due to their short-term maturities. The fair value of our long-term debt at March 31, 2018, computed pursuant to a discounted cash flow technique using a market interest rate, was $30.1 million and is considered a Level 3 fair value measurement. The effective interest rate reflects the current market rate.

4. MARKETABLE SECURITIES

 

We obtain fair value measurement data for our marketable securities from independent pricing services. We perform validation procedures to ensure the reasonableness of this data. This includes meeting with the independent pricing services to understand the methods and data sources used. Additionally, we perform our own review of prices received from the independent pricing services by comparing these prices to other sources and confirming those securities are trading in active markets.

18


The following tables summarize our marketable securities at March 31, 2018 and December 31, 2017, in thousands:

 

 

 

At March 31, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Certificates of deposit

 

$

33,541

 

 

$

 

 

$

 

 

$

33,541

 

Commercial paper

 

 

96,539

 

 

 

 

 

 

 

 

 

96,539

 

Corporate notes

 

 

401,930

 

 

 

5

 

 

 

(900

)

 

 

401,035

 

U.S. government-sponsored enterprise securities

 

 

379,692

 

 

 

 

 

 

(831

)

 

 

378,861

 

U.S. treasury securities

 

 

262,722

 

 

 

 

 

 

(335

)

 

 

262,387

 

Total

 

$

1,174,424

 

 

$

5

 

 

$

(2,066

)

 

$

1,172,363

 

 

 

 

At December 31, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

Certificates of deposit

 

$

30,200

 

 

$

 

 

$

 

 

$

30,200

 

Commercial paper

 

 

56,951

 

 

 

 

 

 

 

 

 

56,951

 

Corporate notes

 

 

373,736

 

 

 

11

 

 

 

(495

)

 

 

373,252

 

U.S. government-sponsored enterprise securities

 

 

399,281

 

 

 

 

 

 

(983

)

 

 

398,298

 

U.S. treasury securities

 

 

200,649

 

 

 

1

 

 

 

(175

)

 

 

200,475

 

Total

 

$

1,060,817

 

 

$

12

 

 

$

(1,653

)

 

$

1,059,176

 

 

We classify our debt security investments based on their contractual maturity dates. The following table summarizes our available-for-sale debt securities by contractual maturity, at March 31, 2018, in thousands:

 

 

 

At March 31, 2018

 

 

 

Amortized Cost

 

 

Fair Value

 

Less than one year

 

$

1,173,776

 

 

$

1,171,715

 

Greater than one year but less than two years

 

 

648

 

 

 

648

 

Total

 

$

1,174,424

 

 

$

1,172,363

 

 

5. COMMITMENTS AND CONTINGENCIES

Manufacturing Facility

In April 2016, we purchased 12 acres of undeveloped land in Norton, Massachusetts. We are constructing a manufacturing facility at this site for drug substance, including small interfering RNAs, or siRNAs, and siRNA conjugates, for clinical and commercial use. At March 31, 2018 and December 31, 2017, property, plant and equipment, net, on our condensed consolidated balance sheets reflects $158.2 million and $140.5 million, respectively, of land and associated costs related to the construction of our drug substance manufacturing facility.

Credit Agreements

On April 29, 2016, we entered into (i) a Credit Agreement, or the BOA Credit Agreement, with Alnylam U.S., Inc., our wholly-owned subsidiary, as the borrower, us, as a guarantor, and Bank of America N.A., or BOA, as the lender and (ii) a Credit Agreement, or the Wells Credit Agreement, together with the BOA Credit Agreement, the Credit Agreements, by and among Alnylam U.S., Inc., as the borrower, us, as a guarantor, and Wells Fargo Bank, National Association, or Wells, as the lender. The Credit Agreements were entered into in connection with the planned build out of our new drug substance manufacturing facility.

The BOA Credit Agreement provided for a $120.0 million term loan facility and was scheduled to mature on April 29, 2021. In December 2017, we repaid in full the $120.0 million outstanding principal amount under the BOA Credit Agreement and the BOA Credit Agreement terminated in accordance with its terms upon repayment of the outstanding indebtedness. The Wells Credit Agreement provides for a $30.0 million term loan facility and matures on April 29, 2021. The proceeds of the borrowing under the BOA Credit Agreement were, and under the Wells Credit Agreement are, to be used for working capital and general corporate purposes. Interest on borrowings under the BOA Credit Agreement was, and under the Wells Credit Agreement is calculated based on LIBOR plus 0.45 percent, except in the event of default. The borrower may prepay loans under the Wells Credit Agreement at any time, without premium or penalty, subject to certain notice requirements and LIBOR breakage costs.

19


The obligations of the borrower and us under the BOA Credit Agreement were, and under the Wells Credit Agreement are secured by cash collateral in an amount equal to, at any given time, at least 100 percent of the principal amount of all term loans outstanding under such Credit Agreement at such time. At each of March 31, 2018 and December 31, 2017, we have recorded $30.0 million of cash collateral in connection with the Wells Credit Agreement as restricted investments on our condensed consolidated balance sheets. The Wells Credit Agreement contains limited representations and warranties and limited affirmative and negative covenants, including quarterly reporting obligations, as well as certain customary events of default.

  

Litigation

From time to time, we are a party to legal proceedings in the course of our business, including the matters described below. The claims and legal proceedings in which we could be involved include challenges to the scope, validity or enforceability of patents relating to our product candidates, and challenges by us to the scope, validity or enforceability of the patents held by others. These include claims by third parties that we infringe their patents. The outcome of any such legal proceedings, regardless of the merits, is inherently uncertain. In addition, litigation and related matters are costly and may divert the attention of our management and other resources that would otherwise be engaged in other activities.  If we were unable to prevail in any such legal proceedings, our business, results of operations, liquidity and financial condition could be adversely affected. Our accounting policy for accrual of legal costs is to recognize such expenses as incurred.

Silence Litigation

 

On October 17, 2017, Silence Therapeutics plc, or Silence, served its previously announced claim in the High Court of England and Wales, or the High Court, issued in the name of Silence Therapeutics GmbH against Alnylam UK Ltd., Alnylam Pharmaceuticals, Inc., and The Medicines Company UK Ltd, referred to collectively as the Defendants. The claim seeks a declaration that patisiran, fitusiran, givosiran and inclisiran, together, the Products, are protected by Silence’s European Patent No. 2 258 847, referred to as the ‘847 patent, within the meaning of the Supplementary Protection Certificate, or SPC, Regulation of the European Union. The claim alleges that any marketing authorization for any of these Products granted to any of the Defendants is a valid authorization within the meaning of the SPC Regulation, to support an application for an SPC by Silence for each of the Products, allegedly allowing Silence to extend the expiration date of its ‘847 patent on a Product-by-Product basis, based on the amount of time in regulatory review for each of the Products, again on a Product-by-Product basis, up to a statutory maximum.  In addition, Silence is seeking costs, interest and other unspecified relief.

 

On October 31, 2017, the Defendants acknowledged service of the claim served by Silence contesting jurisdiction of the High Court.  On November 30, 2017, the Defendants submitted substantive defenses to the claim.  

 

On October 27, 2017, we, through our affiliate Alnylam UK Ltd., and The Medicines Company UK Ltd filed and served a claim against Silence Therapeutics GmbH and Silence in the High Court seeking revocation of the ‘847 patent, as well as a declaration of non-infringement by each of the Products of the ‘847 patent, and costs and interest among other potential remedies. The High Court has set a trial date of December 3, 2018 for all claims between Silence and the Defendants.

 

On December 13, 2017, we filed an opposition with the European Patent Office seeking revocation of the ‘847 patent in its entirety. Although we believe the ‘847 patent is invalid and not infringed by our Products and that, therefore, Silence would not be entitled to obtain an SPC based on any of our Products, litigation and opposition proceedings are subject to inherent uncertainty, as noted above, and a court or patent office could ultimately rule against us or find that Silence’s patents are valid.

 

On March 29, 2018 we filed, and on April 6, 2018 served, an action against Silence in the United States District Court for the District of Massachusetts seeking a declaratory judgement of non-infringement by patisiran of Silence U.S. Patent Nos: 7,893,245; 8,324,370; 8,933,215; 9,222,092; and 9,695,423.

 

On April 2, 2018, we filed a petition for Post Grant Review of Silence U.S. Patent No. 9,695,423 with the U.S. Patent and Trademark Office seeking a cancellation of all claims as being unpatentable under 35 U.S.C. §§ 112 and 102.  

 

On April 3, 2018, Silence amended its claim in the High Court of England and Wales further alleging that patisiran and fitusiran infringe its recently granted patent EP 1 857 547, referred to as the ‘547 patent, and seeking an injunction as well as monetary damages based on such alleged infringement. On April 23, 2018, Silence served patent infringement proceedings against us in Portugal alleging that patisiran infringes the ‘547 patent.  Silence is seeking a permanent injunction against the commercialization of patisiran in Portugal. We believe the ‘547 patent is invalid and not infringed by any of our products and intend to vigorously defend against these claims in both the United Kingdom and Portugal and also intend to file an opposition with the European Patent Office seeking to revoke the ‘547 patent in its entirety.

20


Dicerna Litigation

 

On June 10, 2015, we filed a trade secret misappropriation lawsuit against Dicerna in the Superior Court of Middlesex County, Massachusetts seeking to stop misappropriation by Dicerna of our confidential, proprietary and trade secret information related to the RNAi assets we purchased from Merck, including certain N-acetylgalactosamine, or GalNAc, conjugate technology. In addition to permanent injunctive relief, we were also seeking monetary damages from Dicerna. In August 2017, Dicerna successfully added counterclaims against us in the trade secret lawsuit alleging that our lawsuit represented abuse of process and claiming tortious interference with its business. In September 2017, we filed a motion to dismiss Dicerna’s counterclaims, which motion was denied. In addition, in August 2017, Dicerna filed a lawsuit against us in the United States District Court of Massachusetts alleging attempted monopolization by us under the Sherman Antitrust Act.  In October 2017, we filed a motion to dismiss the antitrust lawsuit.  

 

On April 18, 2018, we and Dicerna entered into a Settlement Agreement resolving all ongoing litigation between the companies. The terms of the Settlement Agreement include mutual releases and dismissal with prejudice of all claims and counterclaims in the following litigation between the parties: (i) Alnylam Pharmaceuticals, Inc. v. Dicerna Pharmaceuticals, Inc., No. 15-4126, pending in the Massachusetts Superior Court for Middlesex County; and (ii) Dicerna Pharmaceuticals, Inc. v. Alnylam Pharmaceuticals, Inc., No. 1:17-cv-11466, pending in the United States District Court for the District of Massachusetts.

Under the terms of the Settlement Agreement, Dicerna will pay us an aggregate of $25.0 million, including an upfront cash payment of $2.0 million and 983,208 shares of Dicerna common stock, valued at $10.0 million, and an additional $13.0 million over the next four years, the timing of which will be dependent upon revenue Dicerna receives pursuant to future partnerships and collaborations related to Ga1NAc-conjugated RNAi research and development, provided that such additional amount must be paid by no later than April 18, 2022. In addition, Dicerna will be restricted in its development and other activities relating to oligonucleotide-based therapeutics directed toward a defined set of targets, for periods ranging from 18 months up to four years. The Settlement Agreement does not include any license to our GalNAc conjugate intellectual property or any licenses to any other intellectual property from either party. Nor does the Settlement Agreement include any admission of liability or wrongdoing by either company.

 

6. INCOME TAXES

For the three months ended March 31, 2018, we recorded a benefit from income taxes of $62,000 with respect to a $0.8 million benefit for refundable credits related to the TCJA offset by foreign income taxes.

Our preliminary estimate of the TCJA and the remeasurement of our deferred tax assets and liabilities is subject to the finalization of management’s analysis related to certain matters, such as developing interpretations of the provisions of the TCJA, changes to certain estimates and the filing of our tax returns. U.S. Treasury regulations, administrative interpretations or court decisions interpreting the TCJA may require further adjustments and changes in our estimates. The final determination of the TCJA and the remeasurement of our deferred assets and liabilities will be completed as additional information becomes available, but no later than one year from the enactment of the TCJA. For the three months ended March 31, 2018, there were no changes to management’s analysis originally performed as of December 31, 2017.

 

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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 global biopharmaceutical company developing novel therapeutics based on RNA interference, or RNAi. RNAi is a naturally occurring biological pathway within cells for sequence-specific silencing and regulation of gene expression. We are harnessing the RNAi pathway to develop a potential new class of innovative medicines, known as RNAi therapeutics. RNAi therapeutics are comprised of small interfering RNA, or siRNA, and function upstream of today’s medicines by potently silencing messenger RNA, or mRNA, that encode for disease-causing proteins, thus preventing them from being made. This is a revolutionary approach with the potential to transform the care of patients with genetic and other diseases.

Our research and development strategy is to target genetically validated liver-expressed genes that have been implicated in the cause or pathway of human disease. We utilize a lipid nanoparticle, or LNP, or N-acetylgalactosamine, or GalNAc, conjugate approach to enable hepatic delivery of siRNAs. Our focus is on clinical indications where there is a high unmet need, early biomarkers for the assessment of clinical activity in Phase 1 clinical studies, and a definable path for drug development, regulatory approval, patient access and commercialization.

Specifically, our broad pipeline of investigational RNAi therapeutics is focused in three Strategic Therapeutic Areas, or “STArs:” Genetic Medicines; Cardio-Metabolic Diseases; and Hepatic Infectious Diseases. We are committed to the advancement of our Alnylam 2020 strategy, which is to achieve a company profile with three marketed products and ten RNAi therapeutic clinical programs, including four in late stages of development, across our three STArs by the end of 2020. In December 2017, we filed our first new drug application, or NDA, and marketing authorisation application, or MAA, for patisiran. In January 2018, we announced that the European Medicines Agency, or EMA, has accepted the MAA and initiated its review. Patisiran was previously granted an accelerated assessment by the EMA.  In February 2018, we announced that the United States Food and Drug Administration, or FDA, has accepted our NDA and granted our request for priority review, with an action date of August 11, 2018. If approved, we expect to launch patisiran and may begin generating product revenues in 2018.

Based on our expertise in RNAi therapeutics and broad intellectual property estate, we have formed alliances with leading pharmaceutical and life sciences companies to support our development and commercialization efforts, including Sanofi Genzyme, the specialty care global business unit of Sanofi, The Medicines Company, or MDCO, and Vir Biotechnology, Inc.  In addition, in late 2017, we joined a research consortium with the UK Biobank, Regeneron Pharmaceuticals, Inc., or Regeneron, and four major pharmaceutical companies aimed at generating 500,000 human exome sequences linked to medical records by the end of 2019. We and each of the other collaborators agreed to commit $10.0 million to enable an acceleration of sequencing timelines. We believe that the broad and ongoing access to detailed health and full exome sequencing data for the 500,000 UK Biobank participants will greatly enhance our target identification and validation efforts, contributing to the sustainability of our RNAi therapeutics product engine.  

In March 2018, we entered into a discovery collaboration with Regeneron to identify RNAi therapeutics for the chronic liver disease nonalcoholic steatohepatitis, or NASH, and potentially other related diseases, and we and Regeneron plan to enter into a separate, fifty-fifty collaboration to further research, co-develop and commercialize any therapeutic product candidates that emerge from these discovery efforts.

In March 2018, we also entered into a manufacturing services agreement with Agilent Technologies, Inc. providing for the commercial supply of patisiran drug substance by Agilent for an initial five-year term.

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In April 2018, we and Dicerna Therapeutics, Inc., or Dicerna, entered into a settlement agreement resolving all ongoing litigation between the companies. For a discussion of the terms of the Dicerna settlement, please read Note 5, Commitments and Contingencies – Litigation, to our condensed consolidated financial statements included in Part I, Item 1, “Financial Statements (Unaudited),” of this quarterly report on Form 10-Q.

We have incurred significant losses since we commenced operations in 2002 and expect such losses to continue for the foreseeable future. At March 31, 2018, we had an accumulated deficit of $2.22 billion. 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 research platform, our drug development programs, including clinical trial and manufacturing costs, the establishment of late stage clinical and commercial capabilities, including global operations, 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 also 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.

We currently have programs focused on a number of therapeutic areas and, as noted above, in December 2017, submitted our first NDA and MAA for marketing approval for patisiran.  However, our development efforts may not be successful and we may not be able to commence sales of patisiran or any other product. If we gain approval for and successfully launch patisiran in 2018, we may begin to generate net revenues from product sales. A substantial portion of our total revenues in recent years has been derived from collaboration revenues from strategic alliances with Sanofi Genzyme and MDCO. In addition to potential revenues from the commercial sale of patisiran and future product candidates, we expect our sources of potential funding for the next several years to continue to be derived primarily from existing and new strategic alliances, which may include license and other fees, funded research and development, milestone payments and royalties on product sales by our licensors, and proceeds from the sale of equity or debt.

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, as reflected by our broad pipeline of clinical development programs, which includes several programs in late-stage development and one product in registration in the United States and the EU.

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The following is a summary of our product development programs as of April 30, 2018. It identifies those programs in which we have achieved human proof-of-concept, or POC, by demonstrating target gene knockdown and/or additional evidence of activity in clinical studies, those programs for which we have received Breakthrough Therapy Designation from the FDA, the development stage of our programs, and our commercial rights to such programs:

 

 

During the first quarter of 2018 and recent period, we reported the following updates from our late-stage clinical programs:

 

We continued to advance patisiran, an investigational RNAi therapeutic for the treatment of patients with hereditary ATTR amyloidosis, or hATTR, presenting new data from our APOLLO Phase 3 study, including results on the effects of patisiran on cardiomyopathy manifestations and a post-hoc analysis on the effects of patisiran on the composite rate of all-cause hospitalization and mortality.  We received acceptance from the FDA and the EMA of patisiran’s NDA and MAA, respectively.

 

We continued to advance ALN-TTRsc02, a subcutaneously administered investigational RNAi therapeutic in development for the treatment of ATTR amyloidosis, presenting updated Phase 1 data in March 2018 and announcing receipt of a positive opinion from the EMA Committee for Orphan Medicinal Products for Orphan Drug Designation in the European Union, or EU, for ALN-TTRsc02 for the treatment of ATTR amyloidosis.

 

We continued to advance givosiran, an investigational RNAi therapeutic in development for the treatment of acute hepatic porphyrias, or AHPs, presenting new Phase 1 and Phase 1/2 open-label extension, or OLE, study results in April 2018. In addition, we completed enrollment of the first 30 patients in our ENVISION Phase 3 study, which comprise the interim analysis cohort for a potential accelerated approval by the FDA.

 

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We expect to report interim analysis results in the September timeframe and, pending FDA review of the program at the time of interim analysis and assuming positive results, we expect to submit an NDA at or around year-end 2018.

 

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Notwithstanding productive discussions with the EMA on a potential accelerated approval pathway for givosiran, we plan to file an MAA on the full dataset from ENVISION, expected in 2019, to optimize market access in Europe.

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We continued to advance lumasiran, an investigational RNAi therapeutic in development for the treatment of primary hyperoxaluria type 1, or PH1, announcing in May 2018 that we have reached alignment with the FDA on a pivotal study design for lumasiran in approximately 25 patients with PH1, using the reduction at six months of urinary oxalate the primary endpoint.

 

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We expect to initiate the lumasiran Phase 3 study in mid-2018, report results in 2019, and, if positive, file an NDA in early 2020.