Alnylam Pharmaceuticals Q4 2007 Earnings Call Transcript

Alnylam Pharmaceuticals (NASDAQ:ALNY)

Q4 2007 Earnings Call

February 7, 2008 4:30 pm ET

Executives

Cynthia Clayton - Director of Investor Relations and Corporate Communications

John Maraganore, Ph.D. - Chief Executive Officer

Barry Greene - President and Chief Operating Officer

Akshay Vaishnaw, M.D., Ph.D. - Vice President, Clinical Research

Patricia Allen - Vice President of Finance

Stuart Pollard, Ph.D. - Vice President of Business and Scientific Strategy

Kleanthis G. Xanthopoulos, Ph.D. - President and Chief Executive Officer of Regulus

Analysts

Analyst for Sapna Srivastava - Morgan Stanley

William Sargen - Banc of America Securities

Michael King - Rodman & Renshaw Llc

Simos Simeonidis - Broadpoint Capital

Edward Tenthoff - Piper Jaffray

Alan Carr - Needham & Company

Douglas Chow - Caris & Company

Pamela Bassett of Cantor Fitzgerald

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Alnylam Pharmaceuticals Conference Call to discuss fourth quarter and year end 2007 financial results. There will be a question and answer session to follow. Please be advised this is being taped at the company’s request. I would now like to turn the call over to Alnylam.

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

Kleanthis G. Xanthopoulos, our Regulus President and Chief Executive Officer. During today’s call, John will open the call with an overview of 2007, Akshay will provide an R&D summary, Patty will review our financials and guidance, Barry will summarize our business highlights for the year, Kleanthis will summarize some recent highlights for Regulus, John will wrap up with an overview of our 2008 and RNAi 2010 goals and we will then open the call for your questions.

Before we begin, let me remind you that various statements we make concerning our future expectations, plans and prospects including, without limitation, the need for novel RNAi therapeutics, our views with respect to the potential for RNAi therapeutics, including

ALN - RSV01 and our expectations with respect to the timing and success of our clinical and preclinical trials, the timing of regulatory filings, our expectations regarding the development of efficient delivery of RNAi Therapeutics, the formation of new alliances and our cash position at the end of 2008, constitute forward - looking statements for the purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors including risks related to: our approach to discover and develop novel drugs, which is unproven and may never lead to marketable products; obtaining, maintaining and protecting intellectual property utilized by our products; our ability to enforce our patents against infringers and to defend our patent portfolio against challenges from third parties; our ability to obtain additional funding to support our business activities; our dependence on third parties for development, manufacture of marketing, sales and distribution of our products; the successful development of products, all of which are in early stages of development; obtaining regulatory approval for products; competition from others using technology similar to ours and others developing products for similar uses; our dependence on collaborators; and our short operating history; as well as those risks more fully discussed in the "Risk Factors" section of our most recent quarterly report on Form 10 - Q on file with the Securities and Exchange Commission. In addition, any forward - looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. We do not assume any obligation to update any forward - looking statements.

I will now turn the call over to John.

John Maraganore

Thanks, Cynthia. Welcome and good afternoon everyone. Let me begin by welcoming Stuart Pollard, Alnylam’s Vice President of Business and Scientific Strategy, and Kleanthis Xanthopoulos, our Regulus President and CEO to this afternoon’s call. Let me also begin by congratulating Barry Greene for his promotion to president and chief operating officer of Alnylam. We are truly fortunate to have these people as part of the Alnylam family.

We are off to a great start for 2008 and look forward to what we believe will be another spectacular year. I think it’s fair to say that 2007 was a game changing year for Alnylam. We are making in building the leading company in RNAi therapeutics and in our mission of building a leading biopharmaceutical company founded on RNAi. 2007 was a year in which we achieved major progress across all fronts, especially in advancing our science, our clinical pipeline and our business initiatives and that momentum has already continued into 2008. In a major step forward for both Alnylam and the entire field of RNAi, we recently reported that we achieved statistically significant antiviral activity for ALN - RSV01 in our Phase II experimental study. We are planning to advance this program into a Phase II natural infection study shortly, in the first half of this year.

On the business side, our alliance with Roche represents the largest drug discovery alliance in biotech history and the broadest collaboration on RNAi therapeutics to date. Further, we are delighted to have launched, together with Isis, our Regulus Therapeutics joint venture, focused on an entirely new frontier for pharmaceutical research, namely microRNA therapeutics and finally, our scientific and IP leadership of RNAi therapeutics continues to be unparalleled with multiple presentations at conferences, papers in the worlds leading scientific journals and many patent issuances and grants in major markets for our small interfering RNA and microRNA therapeutic programs. Based on these accomplishments we are more confident than ever regarding the broad potential of the RNAi opportunity and in our leadership and realizing the technology’s promise.

In addition to a robust set of goals for 2008, we have recently launched our RNAi 2010 plan as a new initiative focused on achieving important scientific, clinical and business milestones by the end of 2010, which I will review later in this call. Let me now turn the call over to Akshay Vaishnaw, to review our product pipeline and scientific leadership highlights.

Akshay Vaishnaw

Thanks, John. We view the clinical advancement of ALN - RSV01 as one of the key highlights in 2007. We drove development of ALN - RSV01 for the treatment of respiratory syncytial virus infection with Phase I inhalation data and completed enrollment of our experimentally infected GEMINI study in 2007 and we recently followed this by reporting top line Phase II results that we just reported a few weeks ago. Indeed these top - line data from the GEMINI trial showed statistically significant anti - viral activity for ALN - RSV01. The GEMINI study was a double blind placebo controlled randomized study of ALN - RSV01 or placebo in 88 adult subjects experimentally infected with a viral type clinical strain of RSV, with efficacy measures that included the incidence of viral infection and the effects of ALN - RSV01 on the degree of viral infection and resulting clinical symptoms. The study was performed using ALN - RSV01 or placebo administered intranasally for five consecutive days, two days prior and three days following viral inoculation. We look forward to presenting the detailed results of the GEMINI study at the International Symposium on Respiratory Viral Infections meeting that will take place on February 28 through March 2, 2008 in Singapore. The results were part of a robust clinical program for ALN - RSV01.

In addition to GEMINI we also completed a Phase I inhalation study in 2007, but all major objectives were met, including definition of a safe and well tolerated dose to carry forward for further development. Taken together these Phase I and II studies provide the basis for ALN - RSV01s advancement into a Phase II study in naturally infected adults populations, which we expect to initiate soon, in the first half of this year.

In 2007 we were also we were also quite pleased to advance our preclinical pipeline with the announcement of two new development programs from our discovery efforts, namely ALN - HTT and ALN - VSP. ALN - HTT and RNAi therapeutic targeting the huntingtin gene for the treatment of Huntington’s disease is being developed in partnership with Medtronic. Preclinical data presented last year showed that sRNA is targeting huntingtin, the gene responsible for Huntington’s disease in reduced expression of mutant huntingtin in the brain showed a reduction in neuronal pathology and an improvement in motor behavior, as well as a sustained benefit in motor behavior for at least one week. It was also well tolerated in the brain after direct CNS administration.

Our second new development program in 2007, ALN - VSP is a systemically delivered RNAi therapeutic for the treatment of liver cancer and potentially other solid tumors. This is an exciting program, as we are developing a drug that is extremely unique in cancer therapy. Indeed, ALN - VSP is designed to target VEGF and kinesin spindle protein or KSP, two well validated genes that are involved in distinct pathways of tumor pathology: cell proliferation and anti - genesis. Preclinical data showed the ability of RNAi therapeutics, designed as both VEGF and KSP expression in the liver and to stop cancer cell proliferation by targeting KSP. We’re very excited about moving this program forward, so look forward to sharing additional data on this program soon.

We also made continued progress in other key programs, notably in PCSK9, were we presented non - human primate data at the Drug Effecting Lipid Metabolism meeting in late 2007 and here we demonstrated efficient silencing of PCSK9 with rapid endurable reductions in LDL cholesterol levels by approximately 50%. We also made notable progress in our Parkinson’s disease program, for which we and our collaborators obtained a $3.8 million Leaps Award grant from the Michael J. Fox foundation. We also continued to advance our scientific leadership on RNAi therapeutics; both sRNAs and microRNAs through publications in the world’s top journals, including Nature, Nature Biotechnology, DNAs and Cell. And during the fourth quarter additional data in the company’s preclinical programs were published or presented in numerous scientific meetings, including ACR and the Society for Neuroscience.

Importantly in 2007 we also advanced our platform for systemic delivery of RNAi therapeutics with a world wide exclusive license to techmire lipisomal delivery formation technology. At an exclusive five year research agreement with the MIT Center for Cancer Research focused on the delivery of RNAi therapeutics.

And with that summary, I’ll turn over the call to Patty to review our financials.

Patricia Allen

Thanks, Akshay and good afternoon everyone. 2007 was also a strong year from a financial point of view. We ended 2007 with over $455 million in cash, more than double the balance we had at the end of 2006. Looking forward into 2008, our solid financial position affords us the opportunity to strengthen the investments we make, to grow our clinical and preclinical pipeline and technology. In the fourth quarter we reported ¼ of net income, rather than net loss, due to strong GAAP revenues, primarily from the Roche alliance and the associated increase in interest income during the quarter as a result of the net proceeds from the Roche alliance. While we are pleased to have achieved a profitable quarter, we expect to continue in the near term with significant investments in our technology and our pipeline as a development stage company. Indeed we do expect to be in an investment mode for the foreseeable future and would expect to see an increase in quarterly R&D expenses in 2008 from the amount reported in the fourth quarter. Thus, our Q4 net income result should not be viewed as a consistent trend.

Revenues of $18 million for the fourth quarter were strongly driven by the Roche alliance, which accounted for over 60% of total revenues. Expense reimbursement and amortization revenues from Novartis, the NIH, the DOD, Biogen Idec, InterfeRx(NYSE:TM), research reagent and services licenses and other sources accounting for the remaining revenues in the quarter. Revenues for the year were greater than $50 million and substantially increased from the prior year, due to our collaborations and government grand funding impacted, most importantly, by our new alliance with Roche. In 2008 and beyond we expect revenues from Roche to account for a significant portion of our total revenues over a five - year period and we expect to report approximately $14 million in GAAP revenues from our Roche alliance each quarter in 2008 and going forward.

R&D expenses for the fourth quarter and for the year ended 2007 increased substantially over the prior year periods as we conducted Phase I and Phase II trials for ALN - RSV01 and advanced the company’s preclinical programs for PCSK9, liver cancer and Huntington’s disease. Also contributing to the increases were expenses associated with the company’s collaborations related to its’ important delivery efforts. As a reminder, R&D expenses for the year also increased due to the $27.5 million of license fees payable to our licensors, primarily Isis, as a result of our alliance with Roche in July.

Higher professional fees and higher costs related to an increase in business development and intellectual property activities contributed to the increase in G&A expenses for the fourth quarter. The increase for the year, overall, was due primarily to business activities related to Roche and Regulus. We do not expect to see a significant increase in G&A expenses during 2008 over levels seen in 2007, although amounts may be lumpy from quarter to quarter, primarily due to the activities ongoing in business development.

On the non - cash side, the increase in non cash stock based compensation charges in 2007 was primarily related to charges incurred with the sale of the company’s German operations to Roche. As I mentioned last quarter, as a result of the sale of our German operations to Roche this past year, we recorded approximately $5 million of tax expense in our P&O in 2007 and we expect to pay about $3 million in cash to the German tax authorities in early 2008. We have a favorable tax strategy related to the proceeds from the Roche alliance and as expected, we did not incur any significant income tax expenses during the fourth quarter of 2007, as we are deferring a significant portion of the Roche revenues until 2008 for tax purposes; therefore, we do not expect to pay any significant federal income taxes until the first quarter of 2009. We will, however, make modest federal along with quarterly state cash tax payments in 2008, totaling approximately $4 million and we will record quarterly income tax provisions, in accordance with GAAP, totaling up to $8 million for 2008. In regards to our share account, at December 31, 2007, we had 40.8 million shares outstanding.

Looking forward into 2008, given our high level of planned R&D and delivery activities with liver cancer, PCFK9 and Huntingtin’s programs in development and ALN - RSV01 moving into Phase II trials in naturally infected patients, we are prepared to heavily invest in R&D in 2008. We expect to end the year with over $390 million in cash, resulting in a net cash burn of about $65 million this year.

I will now turn the call over to Barry, who will discuss our business highlights.

Barry Greene

Thanks, Patty. As John mentioned, one of the most important business highlights for the year, and in fact, the transformational event for the company, was our major alliance with Roche, valued at over $1 billion. We believe this represents the largest drug discovery alliance in biotech history, and certainly the broadest collaboration on RNAi therapeutics to date. This alliance included a non - exclusive license to existing fundamental, chemistry and delivery IP for RNAi therapeutics in four defined fields, as well as the acquisition of our German facilities by Roche. Importantly, this alliance does not limit us in any way from carrying forth our strategic objectives and it does not limit our freedom to develop any target in any therapeutic area. Importantly, Alnylam also retains the rights to do similar alliances in the future, and of course, we have full rights to expand our proprietary pipeline in scientific leadership and delivery in other areas for many years to come.

In 2007 we also launched Regulus Therapeutics, the joint venture with Isis focused on microRNA therapeutics and shortly Kleanthis will update you on this effort. As part of our initiative to create valuable partnerships that support our mission in building Alnylam into a leading biopharmaceutical company, we advanced and revised our 2005 collaboration with Medtronic into a 50 - 50 co - development and profit share relationship with the United States market.

As you know, we are developing a novel drug device combination for the treatment of Huntington’s disease consisting of an RNAi therapeutic targeting the Huntingtin gene, which will be delivered by Medtronic’s implantable infusion pump. This effort was named as a new development program with the lead compound ALN - HTT, which Akshay highlighted. This revised relationship creates greater value for Alnylam in allowing us to participate significantly in a down stream success by way of profit sharing.

As further evidence, of the considerable progress we’re making, and our ability to manage investments carefully, we were awarded a significant federal and grant funding during 2007, including a $38.6 million contract from the US Defense Threat Reduction Agency and as Akshay noted, a $3.8 million Leaps Grant from the Michael J. Fox Foundation. This kind of government and foundation support is an important part of our business model and certainly provides support for us to execute on our delivery, product development and research goals.

Finally, we continue to be the intellectual property enabler for RNAi by providing licenses to other companies. As part of our collaboration with Tekmira, for example, we granted three InterfeRx(TM) license options. We also granted research reagent licenses to Bio - Rad Hayashi - Kasei and Gene Design. We believe that over 75% of industrial sales of sRNAs for research purposes are now made under a license to Alnylam’s intellectual property. Dominating IP in the RNAi phase has been a strategy for Alnylam from the very beginning and in 2007 we certainly pursued this strategy vigorously and had continued success. The European office granted a Tuschl II patent in Europe, which broadly covers compositions, patents and uses of sRNAs. The German patent office granted two, Kreutzer - Limmer I patents, broadly covering RNAi therapeutics in Germany. The US patent office allowed claims for patents covering lipid based delivery of RNAi therapeutics derived from the Wheeler patent series and just last week, the UK patent office granted a patent for the Woppmann patent series, which cover siRNA molecules of any length that cover overhang and blunt end design features including siRNAs containing chemical novel motifs.

On the IP front, we will continue to aggressively prosecute and deliver on the leading and dominating intellectual property for RNAi. Importantly, we are confident that our IP will continue to strengthen substantially and we maintain our belief that all sRNA therapeutic efforts will require access to Alnylam intellectual property for product development and commercialization freedom to operate.

With that, let me now turn the call over to Kleanthis for an update on Regulus. Kleanthis?

Kleanthis Xanthopoulos

Thank you, Barry. As Barry just mentioned, Regulus is an exciting new joint venture from last year between Alnylam and Isis. The company is focused on the development and commercialization of microRNA therapeutics. This, in my opinion, is a very important new frontier for pharmaceutical research, but we aim to target microRNAs that are abnormally expressed in the course of all pathways of human diseases. Regulus formed by combining the strength and assets of Isis’ and Alnylam’s technologies, know how and intellectual property in the microRNA therapeutics field. Upon launch, Regulus was founded with a very strong scientific advisory board shared with Nobel laureate David Baltimore and including key pioneers in the microRNA field. I was very pleased to join shortly thereafter as the company’s President and Chief Executive Officer to help become the leading company in microRNA therapeutics. I view this as a very rare and exciting opportunity, where a new AO biologist converging with maturing olignuclear drug technologies.

One reason for my enthusiasm relates to the very unique IP position assembled at Regulus. Indeed, we started out with a commanding IP position in the microRNA space, including greater than 600 issued patents and greater than 300 patent applications, exclusively licensed, as I mentioned, to Regulus for using microRNA therapeutics. More recently, Alnylam and Isis announced that the US Patent and Trademark Office issued claims in the patent application that is derived from the Tuschl III patent series, which covers microRNA and therapeutic molecules that target these miRNAs. The US patent office also issued an allowance for the so - called “Sarnow" patent which covers the role of miRNA 122 as a post factor target for Hepatitis C.

Our efforts at Regulus are off to a great start. We are advancing our miR - 122 program as a potential development candidate. Furthermore, we are very pleased with the additional scientific progress we’ve made, including the recent publication in nature of the discovery of a virally encased miRNA that acts as an oncogene, representing the first example ever of [sadural] for miRNA and perhaps providing more fundamental insight into the link between viral infection and malignant cell transformation. You should expect a significant number of additional scientific updates on our Regulus efforts, since part of our strategy has been to closely work with the world’s best labs in understanding the biology and roles of miRNA as the disease targets.

Our launch of Regulus has also caught the significant attention of the broader pharmaceutical industry and we’re pleased, we’re both enthusiastic for the field and the nature of several ongoing discussions.

In short we believe the microRNA therapeutics will be an important part of the future story for RNAi therapeutics in general and you should expect our Regulus to lead these efforts, which we’ll greatly capitalize on this opportunity.

Now I would like to turn the call over to John, who will discuss the Alnylam goals. John.

John Maraganore

Thank you, Kleanthis. As you can tell, we are all very proud of our accomplishments in 2007 which, of course, derive from the strength and passion of our great team. In addition to the recent addition of Stuart Pollard at Alnylam and Kleanthis for Regulus, let me mention some additional key hires in 2007. We hired Eric Raichle, our Vice President for Human Resources, Jason Rhodes, our Vice President of Business Development, Philip Chase, our Vice President of Legal and Donna Ward, our Vice President of Intellectual Property. Our board of directors was also expanded in 2007 with the election of Dr. Victor Dzau from Duke.

Now let me wrap up by reviewing our near and mid - term goals. At the recent JP Morgan conference, we announced our RNAi 2010 initiative, a set of midterm goals based on our strong level of confidence in our technology and business. As part of RNAi 2010 we are going to take our scientific leadership and delivery to a whole new level by executing on our technology collaborations and forming a significant number of new collaborations.

In our clinical pipeline, we expect to have four or more clinical programs in clinical trials, including both siRNA and microRNA therapeutics.

On the business side we expect to form four or more new major partnerships, including broad platform alliances like our 2007 alliance with Roche and 50 - 50 alliances like our Medtronic relationship. These efforts will advance Alnylam’s efforts in bringing RNAi therapeutics to patients and building a top - tier biopharmaceutical company founded on RNAi.

In 2008 we are already well underway with our goals for the year, having reported positive top line Phase II data for an ALN - RSV01 in our RSV program. We believe that these data represent human proof of concept with an RNAi therapeutic, but will let the data speak for themselves, when we present it at a scientific conference later this month.

In addition, we will be advancing our clinical pipeline in scientific leadership with continued Phase II development of our RSV program and a new ID from our development program.

Further, we expect to publish over ten major scientific papers on our progress, including a paper that was just announced today.

Importantly, our success will continue on the IP front and this, combined with our scientific leadership, will enable creation of at least two new major alliances. Our on going discussions are excellent and we expect to update you on new business partnerships sooner versus later.

And finally, as Patty mentioned, we expect to end the year with over $390 million in cash which, to be clear, excludes the proceeds of major new alliances.

All in all, we had an extremely eventful year in 2007 and we expect another exciting year ahead in 2008. In fact we’re only motivated to create more success and we’d be disappointed if we delivered anything less.

Now with that, I’d be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) In the interest of time, please limit yourself to one question and one follow up. And your first question comes from the line of Sapna Srivastava of Morgan Stanley. Please proceed.

Analyst for Sapna Srivastava - Morgan Stanley

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

Barry Greene

Hi, Dave.

Analyst for Sapna Srivastava - Morgan Stanley

Hi, how are you doing?

Barry Greene

Good.

Analyst for Sapna Srivastava - Morgan Stanley

Just a quick question. You know, you guys have three preclinical programs, all of which have, you know, a good amount of work already done on them. How are you going about the decision of which one is going to be the next IND and what are the steps that you’re taking to evaluate these and when do you think you’re going to reach some type of conclusion?

John Maraganore

So Dave, there are in fact three programs that are formally development candidates in the company and these include or PCSK9 program for hypercholesterolemia, our VSP program for liver cancer and our HTT program for Huntington’s disease; of those three, the two most advanced are the PCSK9 program and the VSP program and those two in particular constitute the programs of which our goal externally is to have one IND in 2008. So, these are advancing through studies both GLP studies and also non - GLP - studies. They are advancing in scale up and manufacturing with our partners on the outside that are doing the GNP manufacturing and we’re pleased with the progress. The goal for the year is to have one of these enter the IND station in 2008. Akshay, do you want to comment any further on Dave’s question?

Akshay Vaishnaw

No, I mean I think I’d reiterate that we have done a lot of work. We’ve made tremendous progress in terms of delivery and biological insight both with VSP and PCS and as the work matures I think we look forward to an IND at the end of the year.

Analyst for Sapna Srivastava - Morgan Stanley

Just one quick follow up. How much of your decision is going to be based on sort of the effectiveness of the drug versus the crowdedness of the space that you’re trying to enter?

John Maraganore

Let me ask Barry to answer that.

Barry Greene

So Dave, we think that all of the opportunities that John mentioned, all of them offer significant product opportunities, so they’re all really good product opportunities. When we make decisions about moving programs forward, we’re making decisions based upon the data that emerged and we speed programs based upon data or repeat experiments based upon data. As both John and Akshay said, the reason we put the goal out there is that we believe, that out of the programs listed we’ll be able to and we’re focused on filing at least one IND.

John Maraganore

But I just, you know, one other point Dave, is obviously we look very carefully at the clinical on that need as well as the commercial opportunities for these programs and we’ve made decisions in the past to, our [Bedgep] program and AMD many years ago to stop that program based on the emergence of Lucentis data and the off label use of Avastin and that was a very smart decision.

Analyst for Sapna Srivastava - Morgan Stanley

Right. Okay, thank you.

Operator

Your next question comes from the line of William Sargen of Banc of America Securities. Please proceed.

John Maraganore

Hey Will.

William Sargen - Banc of America Securities

Hey, how’s it going everyone? Thanks for taking my question. Congratulations on a great 2007.

John Maraganore

Thank you.

William Sargen - Banc of America Securities

Just in looking forward to the goals for 2008, what are your thoughts on potentially partnering the RSV program and does that fit in your alliance guidance or is that more outside of that program?

John Maraganore

Well it, as you can imagine with the positive data that we reported, as well as an advance of those data, we have been having partnering discussions on RSV and the level and quality of those discussions has accelerated quite a bit with the advent of the data. We are, certainly for the longer term and we said this very clearly before, we will certainly work with a partner on the RSV program, because we think that the fullest potential of that program is going to be through a partnership. We think there are opportunities for geographic based partnerships for that program and then also even partnerships in the US market where Alnylam retains significant ownership and value commensurate with the value that we’ve created in that program. And I think, Will, as you’re aware, programs in clinical development with positive Phase II data are very highly valued assets in the marketplace and we obviously believe that there is a significant opportunity for partnerships with that program.

William Sargen - Banc of America Securities

And so would any potential partnership if, I’m assuming the terms were right, would that be included in your partnership alliance guidance or would that be external to that?

John Maraganore

It would be included therein and obviously when we talk about major alliances, as part of that guidance, we are talking about significant alliances that would be important and value created for everybody.

William Sargen - Banc of America Securities

Understood. Great, thanks for taking my question.

Barry Greene

Thanks Will.

Operator

Your next question comes from the line of Michael King of Rodman Renshaw. Please proceed.

Michael King - Rodman & Renshaw

Good afternoon guys, thanks for taking the question. I just wanted to ask, I think John, you answered one of the questions I was going to ask on an income statement basis, but the $390 million cash use excludes any revenue from major alliances, so, therefore, that’s why you’re not giving stride and ’08 R&D spend guidance is that a correct statement?

John Maraganore

Yes, Patty do you want to have a..?

Patricia Allen

That’s right, Mike. We have typically given cash guidance because we think that’s most appropriate. We try to help give people indications that, you know as we just did on the call, that R&D spend is expected to increase in 2008 and for G&A we expect it to not significantly increase from the levels we saw in 2007, but we’re not going to give a specific line item guidance. Because, as you can also see, our R&D expenses and our G&A expenses have been lumpy over the quarters based on given activities going on in the business.

Michael King - Rodman & Renshaw

Right and I did want to ask, you had a sequential decline in G&A. I assume that was legal, you had legal matters in the fourth quarter if I remember correctly, that’s why it was so inflated?

John Maraganore

Sure third quarter was a very big legal and business development quarter with both Roche as well as Regulus related activities and others.

Patricia Allen

That’s right.

Michael King - Rodman & Renshaw

Okay. Alright, let’s talk about fun stuff now. Can you discuss, I know you guys are aware I’m a big fan of the Regulus idea, but can you talk about the structure of the joint venture and how when Alnylam shareholders think about Regulus, can they benefit from Regulus as a joint venture or over the long term does something need to happen with regard to Regulus to really appreciate the full value from an Alnylam shareholder standpoint?

John Maraganore

That’s a great question Mike and let me answer part of it and then ask Kleanthis to chime in as well, because he’s got an important perspective here as well, since he’s building value for Regulus and for Alnylam and Isis shareholders as a result of it. Mike, Regulus is emboldened with a very important new therapeutic area around microRNA therapeutics, which we really think is a very important new frontier for pharmaceutical research and it is very clear that the only way to build maximal value out of that effort was to join our IP technologies and efforts together with Isis. So if this were an Alnylam alone effort, or for that matter an Isis alone effort, it would not build the type of value that we think it can build by being a joint effort. Regulus is going to, we believe, be very successful in advancing this new frontier and advancing a pipeline based on this technology and also advancing partnerships based on this technology and will ultimately, likely go down the path of being a public company and obviously Alnylam and Isis’ goals are to have a significant level of ownership in this company as it builds in value. So, there are many good examples in the industry of how those types of relationships can be very beneficial to parent company shareholders and we can spend quite a bit of time talking about each example. But at the end of the day, what’s important is that Regulus builds a great company, that it advances this whole space, that it does so uniquely by having the consolidation of our efforts together with those of Isis and that we will benefit, we Alnylam shareholders, if I can speak for us at this point only, will benefit greatly by the products that come out of that space and our ownership in that effort. Kleanthis, do you want to add anything?

Kleanthis Xanthopoulos

Certainly. Mike it’s a great question, so let me spend a little bit of time to give you a long - range view. Our goal is to build here and independent, a very vibrant company that is a well leading company in microRNA therapeutics. And the reason I’m personally extremely excited about this, it is, I think for the first time ever you see the completing UA biology with so many opportunities converging with technologies bought in the scientific and clinical levels that are maturing. We directly benefit from everything Alnylam has done, as well as what Isis has done on IP discovery, delivery, pharmacokinetics, pharmacodynamics and etcetera. With the goal being building a very high value company, the way, I believe, the shareholders of Alnylam can use this as a benefit back to the parent companies is two fold: one has to do with the science technology that we’re advancing, that inevitably is going to benefit all three companies involved; every advancement of Regulus is going to be adding a lot of scientific and clinical value to the pipeline of Alnylam and vice versa. In terms of financial rewards, I think given some very recent examples, which we see as thresholds, clearly our goal is to exceed those, you can immediately translate that to some tangible financial return. I’m referring to the relationship [medorix] had with genome and the relationship chemo genome science had with cogenesis, so you’re looking at how financially a parent company can benefit is just looking at the success of these two companies that essentially were spun out from parent companies and did very, very well. Our goal should be even better.

Michael King - Rodman & Renshaw

Okay, but I guess just to put a finer point on it, at some point the regular structure is going to have to change from a joint venture to something else wouldn’t it?

John Maraganore

Yes, so Mike, I mean we will transition at an appropriate stage the LLC corporate structure into a C corporate structure, which is a more traditional equity based structure. Right now it’s certainly immaterial, from an Alnylam prospective, which way it is, it just made more sense to do it this way, at least in the near term.

Michael King - Rodman & Renshaw

Right. And I wanted…I’m sorry, go ahead Kleanthis.

Barry Greene

It’s Barry. Just to close that finer point, our prospective on that and Kleanthis highlighted this, is for Regulus to build a significant product based company. And this is not a financial play; it’s a science and product put.

John Maraganore

And Mike, could we ask you to go back in queue, maybe there’s some other questions.

Michael King - Rodman & Renshaw

Yes, thank you.

Operator

Your next question comes from the line of Simos Simeonidis of Broadpoint Capital. Please proceed.

Simos Simeonidis - Broadpoint Capital

Hi, thanks for taking the question and congratulations on a superb year. I had a question on the Phase II trial in natural inspective that you’ve got it; you’re going to start in the first half of the year. I was wondering if you can provide any granularity on the composition of the patient population. You said adults, but also position on the design and the size of the trial.

John Maraganore

So Simos, let me turn that over to Akshay to address it to the extent that he can. But we have not yet disclosed exactly the patient population that we’ll be looking at. But, what Akshay can tell you are the range of different adult populations that one would logically look at as potential populations and then very shortly, albeit when we start that trial, we’ll be telling you exactly what the population and what the specifics are of design. So Akshay, you want to comment?

Akshay Vaishnaw

Yes, John. So Simos, you’re right. The adult population like pediatric patients is a high unmet need population, particularly when we look at important segments like immunocompromised patients and from there, there are transplant patients, lung transplant patients and other immunosuppressed populations and all of them, when they get RSV have very high morbidity and mortality and for example bone marrow transplant setting can be as high as 30 or 40%. Another important adult area that we have highlighted and that has emerged in the last five years or so is the clear recognition that elderly patients over 65 with preexisting COPD or heart failure are, unfortunately, at a high degree of risk of RSV and its complications and there are about 180,000 hospitalizations in the US annually from those folk and over 15,000 who unfortunately die. So clearly there are several high unmet need populations and as John said, in due course and quite soon, I suspect, we will be providing more guidance and to choice of population and the type of study we’re doing and the rationale underneath all of that.

John Maraganore

So Simos, I think the bottom line is just stay tuned and we’ll certainly get you that information shortly.

Simos Simeonidis - Broadpoint Capital

Okay great. Thank you.

Operator

Your next question comes from the line of Ted Tenthoff of Piper Jaffray. Please proceed.

Edward Tenthoff - Piper Jaffray

Great, thank you very much.

Barry Greene

Hey, Ted.

Edward Tenthoff - Piper Jaffray

How are you? Congratulations, you guys have really assembled quite a phenomenal gene there.

John Maraganore

Thank you. As you know Ted, at the end of the day that drives everything and we’re very lucky and fortunate and blessed to be in that position.

Edward Tenthoff - Piper Jaffray

I couldn’t agree more with you. Two questions if I may; firstly, Patty, I think you said that the tax rate in terms of what you’d be recognizing would be closer to $8 million this year. Can you just confirm that that’s what you said?

Patricia Allen

That’s what I said. So on a cash basis, Ted, what I said was we’ll make some modest, several and quarterly state cash payments that will total about 4 million, but on a GAAP basis we’ll incur several end state quarterly tax estimates, or charges if you will, totaling up to $8 million in 2008.

Edward Tenthoff - Piper Jaffray

Okay great and then I guess, you know, this one is kind of for the whole team, but for Kleanthis also. As you start to look at 2008 and I don’t want to pin you down to any budget or anything along those lines, but obviously you’re in the enviable position of having the talents of both of these two very well established and successful biotech companies. As you move forward, what are your, kind of, rate limiting steps and how much is it going to cost you to really kind of get out there and stay ahead in the field of microRNA?

John Maraganore

Well, you know, Kleanthis, you want to handle that? That seems like the perfect question for you.

Kleanthis Xanthopoulos

It’s a loaded question Ted, but I didn’t expect anything else. You know, if you think about it, five year long - term planning and you want to maintain the leaderships that were given to us by Berkley, given the intellectual property, the clinical know how, the financial support by the two parent companies and the fact that Regulus has access to more than 200 scientists on both sides of the equation, it is a relatively straight forward path. We are in the middle of modeling that, of what is it going to take, what is the company going to be looking like, what steps do we need to do to not only maintain, but enhance the dealership in microRNA and I can tell you that we’re very excited to build a very unique and very different kind of company that I want to see as a bell weather for the next wave of franchise names in biotech. What exactly is it going to take? If you allow me a couple of quarters, I can be very, very specific, but we’re using very cost efficient ways to advance our science for the moment. The rate limiting steps frankly are a biological unknown. We’re extremely successful with the talent that we can attract and hire given the response. We have an extremely solid financial position. Really the critical step is how is the biology of microRNAs going to play out and what kind of therapeutic opportunities we can exploit.

John Maraganore

I would just add to that, Ted and Kleanthis that one of the things that I think is really exciting about Regulus and there is no question that the biological understanding of the microRNAs is sort of, the rate limiting step here as this whole effort advances. But one of the things that Regulus has done through the initial efforts of both parents is having an extremely networked and externally oriented set of collaborations that literally cost nothing. I mean these are some of the world’s top laboratories coming to Regulus to work with Regulus, because Regulus has a tool that allows these laboratories to interrogate the role of Micronase in vivo and so we are unbelievably well positioned with some of the world’s best laboratories on that front. And so we are in a very strong position to be on the leading edge of where that whole biology goes in a way that will be very, very fruitful for Regulus in terms of defining new opportunities. And of course, Regulus’s efforts are to capitalize and translate those discoveries into development programs and clinical programs. So, you know, it’s a wonderful strategy that I think is going to work remarkably well here, as it has, of course, for Alnylam in the past and I think it’s going to be a strategy that’s going to be important for the future.

Edward Tenthoff - Piper Jaffray

Great. Well good luck with that and I’m really looking forward to the full Phase II RSV data.

John Maraganore

Absolutely. We’re looking forward to presenting it.

Operator

Your next question comes from the line of Alan Carr of Needham & Company. Please proceed.

Alan Carr - Needham & Company

Hi, good afternoon everyone.

Patricia Allen

Hi Allen.

Alan Carr - Needham & Company

I was wondering if you could elaborate a little bit about that clinical work that’s coming with the systemic programs, particularly with respect to delivery. I remember the last time we met you mentioned that you were being very careful that you had all your ducks in a row before you submitted an IND with the systemic program; I recall that that was related to delivery and so my question is, can you elaborate on where things stand with that, is that, you know, the rate limiting step and are you still on track for getting [indiscernible] into the clinic or submitting an IND by year end?

John Maraganore

Yes absolutely Alan. So these are the two programs in particular that are in our development pipeline right now, the systemic programs or the VSP program and the PCSKL9 program, both of which are using liposomal formulations to the liver, small interfering RNAi’s to the liver, in both cases and these are progressing actually quite well and we are expanding and have obviously, advanced the formulations for these systemic delivery programs. We have generated very strong preclinical data for the programs, we’ve been doing manufacturing and scale up of these programs and where we are right now is really completing GLP tops programs, for these efforts, in advance of filing INDs. So we’re optimistic and encouraged by what we’re seeing and we look forward to updating you in the months to come here, as those programs advance.

Alan Carr - Needham & Company

You’ve settled on formulations and all that sort of thing. Right now you’re just sorting out toxin and making a lot of it, is that a fair characterization?

John Maraganore

That’s a very fair characterization.

Alan Carr - Needham & Company

Okay and I was wondering if I could…. Alright, that’s it? Ok.

Barry Greene

Alan, sorry to interrupt. Yes, just we’re absolutely in execution mode on those programs.

Alan Carr - Needham & Company

Okay, sure thanks.

Operator

Your next question comes from the line of Douglas Chow of Caris & Company. Please proceed.

Douglas Chow - Caris & Company

Hi, thanks. Just a follow up on the discussion about Regulus. I was wondering if you could talk a little bit about the overall strategy for Regulus in ’08. And also, if you could describe how many people are working at Regulus now and how you think the stock levels might change in ’08?

John Maraganore

So Doug, let me just answer part of that question and then give the rest of it over to Kleanthis. The, in terms of the specific goals for Regulus this year, neither Alnylam nor Isis have specifically given goals for Regulus this year. Obviously it’s an effort that’s getting started with the new CEO and obviously he’ll be staffing up with other people. And we’ll certainly provide additional goals in the near term, but right now there is no additional granularity around specific objectives for Regulus, other than it’s a clear to build the leading company in microRNA therapeutics. So with that, let me turn it over to Kleanthis, who can discuss it with the people matters that you asked.

Kleanthis Xanthopoulos

So one way to view Regulus, is the company that is created and kids are benefiting from years of researching in RNAi therapeutics by both Isis and Alnylam and a way to characterize Regulus, that I like to use, is a super charged start - up company, given the fact that we have, as I said, access and a very close working relationship with 200 scientists in both companies. We have an infrastructure that is provided from either company so, cost efficiently moving forward are goals in a way that has never been done before. Let me give you some more specifics about strategy. We’re here to discover, develop and ultimately commercialize microRNA therapeutics. It’s an area of biology that is extremely exciting, but what makes it more exciting is that we actually have the tool books already established to be able to translate our biological knowledge into drugs of high value. We’re going that, we’re working very closely with both the parent companies, but building our own independent IND team, independent team and have our own goals. So today, we have about a dozen people completely dedicated to Regulus; you need to multiply that with the infrastructure and support, all of the support we’re getting from both Alnylam and Isis and a variety of activities that any company is involved in at this stage of development. We will almost double that by the end of the year, so we’ll be over 20 people specifically dedicated to Regulus. Our goal is to identify a handful of therapeutic areas which become our core focus and also expand that with collaboration with Big Pharma or biotech companies and we’ll be disclosing more and more information as we move forward, starting already next week when we’re presenting at the BIO CEO conference on Monday.

Douglas Chow - Caris & Company

Great, that’s helpful. And just one follow up question regarding the GEMINI study; in the results that were reported, the initial dose was given, I guess, two days before the inoculum was given to the patients. In the next trial would that be the case or will it likely be administered after the infection?

John Maraganore

Well the naturally infected study, Doug, is going to be a study in naturally infected people where the drug is going to be used as a treatment. So these are going to be individuals that have frank, natural, RSV infection.

Douglas Chow - Caris & Company

Okay. Okay, thank you very much.

Operator

(Operator Instructions)

John Maraganore

And we, this probably will be our last one.

Operator

Okay. And your next question comes from the line of Pamela Bassett of Cantor Fitzgerald. Please proceed.

Pamela Bassett - Cantor Fitzgerald

Actually, my questions have been answered, thanks very much.

John Maraganore

Oh, thanks Pamela.

Pamela Bassett - Cantor Fitzgerald

Thank you, congratulations.

John Maraganore

Okay, I think that’s it. Let me thank everybody for joining us today. We’re certainly excited about the progress that we’ve made to date and the milestones that we have to look forward to and we look forward to updating you in future calls and certainly look forward to seeing many of you at our RND day coming up and look forward to updating all of you on the GEMINI data when they’re presented at clinical meeting. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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