10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
_____________________

FORM 10-Q
_____________________

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

For the quarterly period ended March 31, 2005

OR

o 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 000-50743

ALNYLAM PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware	77-0602661
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
300 Third Street, Cambridge, MA	02142
(Address of principal executive	(Zip Code)
offices)

(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 þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     As of May 1, 2005, the registrant had 20,918,539 shares of Common Stock, $0.01 par value per share, outstanding.

INDEX

	PAGE
	NUMBER
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNAUDITED INTERIM CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2005 AND DECEMBER 31, 2004		1
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004		2
UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004		3
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS		4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		35
ITEM 4. CONTROLS AND PROCEDURES		36
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		37
ITEM 6. EXHIBITS		38
SIGNATURES		39
Ex-10.1 Collaboration Agreement effective as of February 8, 2005
Ex-31.1 Section 302 Certification of C.E.O.
Ex-31.2 Section 302 Certification of C.F.O.
Ex-32.1 Section 906 Certification of C.E.O.
Ex-32.2 Section 906 Certification of C.F.O.

ALNYLAM PHARMACEUTICALS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

(Unaudited)

	March 31,			December 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	12,215		$	20,272
Marketable securities		26,075			25,774
Collaboration receivable		1,867			859
Related party notes receivable		297			310
Prepaid expenses and other current assets		988			966
Total current assets		41,442			48,181
Property and equipment, net of accumulated depreciation of $3,063 and $2,463 at March 31, 2005 and December 31, 2004, respectively		11,540			11,694
Intangible assets, net of accumulated amortization of $788 and $670 at March 31, 2005 and December 31, 2004, respectively		3,287			3,405
Restricted cash		2,313			2,313
Other assets		485			514
Total assets	$	59,067		$	66,107
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,653		$	910
Accrued liabilities		1,678			3,875
Current portion of note payable		1,288			790
Deferred revenue		1,519			1,000
Total current liabilities		6,138			6,575
Deferred revenue		3,833			4,083
Deferred rent		2,789			2,896
Note payable, net of current portion		6,478			6,411
Total liabilities		19,238			19,965
Stockholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized and no shares issued and outstanding at March 31, 2005 and December 31, 2004		—			—
Common stock, $0.01 par value, 125,000,000 shares authorized; 20,991,302 shares issued and 20,908,408 shares outstanding as of March 31, 2005 and; 20,931,742 shares issued and 20,848,848 shares outstanding as of December 31, 2004		209			208
Additional paid-in capital		112,158			112,216
Deferred stock compensation		(3,125	)		(3,697	)
Accumulated other comprehensive income		191			420
Accumulated deficit		(69,604	)		(63,005	)
Total stockholders’ equity		39,829			46,142
Total liabilities and stockholders’ equity	$	59,067		$	66,107

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

1

ALNYLAM PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2005			2004
Net revenues	$	1,643		$	134
Cost and expenses:
Research and development(1)		5,372			10,435
General and administrative(1)		2,952			3,031
Total costs and expenses		8,324			13,466
Loss from operations		(6,681	)		(13,332	)
Other income (expense):
Interest income		264			37
Interest expense		(225	)		(208	)
Other income (expense), net		42			(79	)
Total other income (expense)		81			(250	)
Net loss		(6,600	)		(13,582	)
Accretion of redeemable convertible preferred stock		—			(1,962	)
Net loss attributable to common stockholders	$	(6,600	)	$	(15,544	)
Net loss per common share — basic and diluted	$	(0.32	)	$	(9.39	)
Weighted average common shares used to compute basic and diluted net loss per common share		20,434,896			1,655,168
Comprehensive loss:
Net loss	$	(6,600	)	$	(13,582	)
Foreign currency translation adjustments		(198	)		(7	)
Unrealized loss on marketable securities		(31	)		—
Comprehensive loss	$	(6,829	)	$	(13,589	)
(1) Non-cash stock-based compensation expense included in these amounts are as follows:
Research and development	$	173		$	1,724
General and administrative		307			507
Total non-cash stock-based compensation	$	480		$	2,231

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

2

ALNYLAM PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended
	March 31,
	2005			2004
Cash flows from operating activities:
Net loss	$	(6,600	)	$	(13,582	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		675			511
Gain on disposal of equipment		—			(19	)
Non-cash stock-based compensation		480			2,231
Changes in operating assets and liabilities, net of effects of acquisition:
Collaboration receivable		(1,008	)		—
Prepaid expenses and other current assets		(18	)		3
Accounts payable		752			2,126
Accrued expenses		(2,190	)		237
Deferred revenue		270			(1	)
Net cash used in operating activities		(7,639	)		(8,494	)
Cash flows from investing activities:
Purchases of property and equipment		(607	)		(2,139	)
Proceeds from sale of equipment		—			67
Purchases of marketable securities		(7,956	)		—
Sales of marketable securities		7,655			—
Net cash used in investing activities		(908	)		(2,072	)
Cash flows from financing activities:
Proceeds from issuance of common stock		37			114
Proceeds from issuance of Series D convertible preferred stock		—			10,000
Proceeds from bank debt		565			1,879
Repayments of bank debt		—			(1,859	)
Decrease in restricted cash		—			19
Deferred financing costs incurred in connection with initial public offering		—			(1,115	)
Deferred financing costs incurred in connection with the equipment line of credit		—			(46	)
Net cash provided by financing activities		602			8,992
Effect of exchange rate on cash		(112	)		(7	)
Net decrease in cash and cash equivalents		(8,057	)		(1,581	)
Cash and cash equivalents, beginning of period		20,272			23,193
Cash and cash equivalents, end of period	$	12,215		$	21,612
Supplementary information:
Cash paid for interest	$	135		$	140
Fair value of warrant issued in connection with equipment line of credit included as deferred financing costs		—			557
Accretion of redeemable convertible preferred stock		—			2,012
Beneficial conversion feature on issuance of Series D convertible preferred stock		—			833

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

3

ALNYLAM PHARMACEUTICALS, INC.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

          The accompanying condensed consolidated financial statements of Alnylam Pharmaceuticals, Inc. (the “Company” or “Alnylam”) are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim periods and, in the opinion of management, include all adjustments which are necessary to present fairly the results of operations for the reported periods. The Company’s condensed consolidated financial statements have also been prepared on a basis substantially consistent with, and should be read in conjunction with, the Company’s consolidated financial statements for the year ended December 31, 2004, which were filed in our Annual Report on Form 10-K with the Securities and Exchange Commission (the “SEC”) on March 30, 2005. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.

Principles of Consolidation

           The accompanying condensed consolidated financial statements reflect the operations of the Company and its wholly-owned subsidiaries Alnylam U.S., Inc. and Alnylam Europe AG. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

           The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounting for Stock-Based Compensation

          Employee stock awards granted under the Company’s compensation plans are accounted for in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. The Company has not adopted the fair value method of accounting for stock-based awards. All stock-based awards granted to non-employees are accounted for at their fair value in accordance with Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (“SFAS 123”), as amended, and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”) under which compensation expense is generally recognized over the vesting period of the award.

          Under the intrinsic value method, compensation associated with stock-based awards to employees is determined as the difference, if any, between the current fair value of the underlying common stock on the date compensation is measured and the price an employee must pay to exercise the award. The measurement date for employee awards is generally the grant date. Under the fair-value method, compensation associated with stock-based awards to non-employees is determined based on the estimated fair value of the award itself, measured using an established option pricing model. The measurement date for non-employee awards is generally the date performance of services is complete.

4

ALNYLAM PHARMACEUTICALS, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

          The Company provides the disclosure requirements of SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123” (“SFAS 148”). If compensation expense for the Company’s stock-based compensation plan had been determined based on the fair value at the grant dates as calculated in accordance with SFAS No. 123, the Company’s net loss attributable to common stockholders and net loss per common share would approximate the pro forma amounts below, in thousands, except per share amounts:

	Three Months Ended March 31,
	2005			2004
Net loss attributable to common stockholders
Net loss, as reported	$	(6,600	)	$	(15,544	)
Add employee stock-based compensation expense included in reported net loss		515			753
Deduct employee stock-based compensation expense determined under fair value method		(839	)		(838	)
Net loss — pro forma	$	(6,924	)	$	(15,629	)
Net loss per common share (basic and diluted)
As reported	$	(0.32	)	$	(9.39	)
Pro forma	$	(0.34	)	$	(9.44	)

     Since options vest over several years and additional option grants are expected to be made in future years, the pro forma effects of applying the fair value method may be material to reported net income or loss in future years.

Net Loss Per Common Share

          The Company accounts for and discloses net income (loss) per common share in accordance with SFAS 128. Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders 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 and warrants (using the treasury stock method), unvested restricted stock awards and the weighted average conversion of the preferred stock into shares of common stock (using the if-converted method) for periods prior to the Company’s initial public offering, which was completed in June 2004. Because the inclusion of potential common stock would be anti-dilutive for all periods presented, diluted net loss per share is the same as basic net loss per share.

          The following table sets forth the potential common stock excluded from the calculation of net loss per share because their inclusion would be anti-dilutive:

	Three Months Ended March 31,
	2005		2004
Options to purchase common stock		2,797,407		1,945,009
Warrants to purchase common stock		52,630		65,787
Convertible preferred stock		—		11,964,908
Unvested restricted common stock		276,976		578,773
Options that were exercised before vesting		123,855		126,578
		3,250,868		14,681,055

5

ALNYLAM PHARMACEUTICALS, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Segment Information

          Management uses consolidated financial information in determining how to allocate resources and assess financial performance. For this reason, the Company has determined that it is principally engaged in one industry segment.

The following table presents total long-lived tangible assets by geographic area as of March 31, 2005 and December 31, 2004, in thousands:

	March 31,		December 31,
	2005		2004
Long-lived tangible assets:
United States	$	8,899	$	8,919
Germany		2,641		2,775
Total long-lived tangible assets	$	11,540	$	11,694

Recent Accounting Pronouncements

          In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which revises SFAS No. 123, “Accounting for Stock-based Compensation” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. Under SFAS 123R, the most significant change in practice would be treating the fair value of stock based payment awards that are within its scope as compensation expense in the income statement beginning on the date that a company grants the awards to employees. In April 2005, the SEC delayed the effective date of SFAS 123R to financial statements issued for the first annual period beginning after June 15, 2005. As a result, the Company will adopt and comply with the requirements of SFAS 123R in the three months ending March 31, 2006. The Company is currently assessing the impact that the adoption of this standard will have on its financial position and results of operations and the method by which the Company will implement this standard, however, the Company expects stock compensation expense to increase as a result of the adoption of this standard.

2. NOTE PAYABLE

          In December 2002, the Company entered into an agreement with Silicon Valley Bank to establish an equipment line of credit for $2.5 million. The Company drew down a total of $2.1 million on this line of credit. Under the terms of the agreement with Silicon Valley Bank, borrowings bore interest at prime rate plus 0.25 percent as well as additional interest of 8.0 percent of the original principal payable upon the maturity of each equipment advance under this line of credit. In March 2004, the Company repaid all amounts outstanding under this line of credit, which represented an early repayment and resulted in interest penalties totaling $0.2 million that were included as interest expense in the three months ended March 31, 2004.

6

ALNYLAM PHARMACEUTICALS, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

          On March 26, 2004, the Company entered into an agreement with Lighthouse Capital Partners V, L.P. (“Lighthouse”) to establish an equipment line of credit for $10.0 million. The Company has the ability to draw down amounts under the line of credit through June 30, 2005 upon adherence to certain conditions. All borrowings under the line of credit are collateralized by the assets financed and the agreement contains certain provisions that restrict the Company’s ability to dispose of or transfer these assets. Borrowings bear interest at prime rate plus 3 percent (8.75% at March 31, 2005). The Company is required to make interest only payments on all draw-downs made during the period from March 26, 2004 through June 30, 2005 at which point all draw-downs under the line of credit will be repaid over 48 months. On the maturity of each equipment advance under the line of credit, the Company is required to pay, in addition to the paid principal and interest, an additional amount of 11.5 percent of the original principal. This amount is being accrued over the applicable borrowing period as additional interest expense. In connection with the agreement, the Company issued to Lighthouse and an affiliate of Lighthouse warrants to purchase redeemable convertible preferred stock, which were converted into warrants to purchase 52,630 shares of the Company’s common stock at an exercise price of $9.50 per share upon the closing of the Company’s initial public offering in June 2004. The Company recorded the fair value of these warrants of $0.6 million as a deferred financing cost which is being amortized to interest expense over the repayment term of the first advance of 63 months. The fair value of the warrants was calculated using the Black-Scholes option pricing model with the following assumptions: 100% volatility, risk-free interest rate of 3.49%, no dividend yield, and a seven-year term. In conjunction with entering into the agreement with Lighthouse in March 2004, Alnylam paid off the remaining balance of the loan with Silicon Valley Bank, of $1.9 million, via an initial draw in the amount of the payoff balance.

3. SIGNIFICANT AGREEMENTS

Isis Pharmaceuticals, Inc.

          In March 2004, the Company entered into a collaboration and license agreement with Isis Pharmaceuticals, Inc. (“Isis”). Under this agreement, Isis granted the Company licenses to current and future patents and patent applications relating to chemistry and to RNA-targeting mechanisms for the research, development and commercialization of double-stranded RNA products. The Company has the right to use Isis technologies in its development programs or in collaborations and Isis has agreed not to grant licenses under these patents to any other organization for the discovery, development and commercialization of double-stranded RNA products designed to work through an RNAi mechanism, except in the context of a collaboration in which Isis plays an active role. The Company granted Isis non-exclusive licenses to its current and future patents and patent applications relating to RNA-targeting mechanisms and to chemistry for research use. The Company also granted Isis the exclusive or co-exclusive right to develop and commercialize double-stranded RNA products developed using RNAi technology against a limited number of targets. In addition, the Company granted Isis non-exclusive rights to research, develop and commercialize single-stranded RNA products.

          Under the terms of the agreement, the Company agreed to pay Isis an upfront license fee of $5.0 million, $3.0 million of which was paid upon signing of the agreement and the remaining $2.0 million of which was paid in January 2005. The Company recorded the initial $5.0 million of consideration as license fee expense within research and development costs during the three months ended March 31, 2004 as the technology has not reached technological feasibility and does not have any alternative future use. The Company also agreed to make milestone payments (totaling $3.4 million payable upon the occurrence of specified development and regulatory events) and royalties to Isis for each product that the Company or a collaborator develops utilizing Isis intellectual property. In addition, the Company agreed to pay to Isis a percentage of certain fees earned from strategic collaborations it may enter into that include access to the Isis intellectual property. In connection with the Company’s ocular collaboration with Merck & Co., Inc. signed in June 2004, which is discussed below, the Company recorded $0.5 million in license fee expense related to payments due to Isis. In conjunction with the agreement, Isis purchased 1,666,667 shares of Series D preferred stock of the Company for $10.0 million, which were converted into 877,193 shares of common stock upon the closing of the Company’s initial public offering in June 2004. Isis also agreed to pay the Company a license fee, milestone payments (totaling $3.4 million payable upon the occurrence of specified development and regulatory events) and royalties for each product developed by Isis or a collaborator that utilizes the Company’s intellectual property. The agreement also gives the Company an option to use Isis manufacturing services for RNA-based therapeutics.

In addition, the agreement with Isis gives the Company the exclusive right to grant sub-licenses for Isis technology to third parties with whom the Company is not collaborating. The Company may include these sub-licenses in its InterfeRx licenses and research reagent and services licenses. If a license includes rights to Isis intellectual property, the Company will share revenues from that license equally with Isis.

7

ALNYLAM PHARMACEUTICALS, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Merck & Co.

     Technology Collaboration and License Agreement

          In September 2003, the Company entered into a five-year strategic alliance with Merck & Co. (“Merck”) to develop RNAi-based technology and therapeutics. For technology development, Merck and the Company each committed to devote resources, including full-time equivalents and expertise to the collaborative development of advanced RNAi technology. Merck will have rights to use this technology solely for the identification and validation of drug targets; the Company will have rights to use it for these purposes and also for therapeutic purposes. For therapeutics development, Merck agreed to provide the Company with twelve proprietary drug targets as potential targets for siRNA therapeutics. The Company has the right, but not the obligation, to develop siRNA drug candidates against each target provided by Merck. If the Company advances a candidate to a defined point in preclinical development, the Company and Merck will then decide whether the Company, Merck or the two companies together will proceed with the further development and commercialization of that candidate. For each drug candidate in whose development Merck decides to participate, it will make a cash payment to the Company at the time of its decision, and will also reimburse the Company for a portion of the costs the Company has so far incurred on that candidate.

          In connection with this alliance, Merck made an upfront cash payment of $2.0 million and a $5.0 million equity investment in the Company during 2003. In addition, in connection with this agreement the Company received $1.0 million in additional license fee payments from Merck in September 2004 and $7.0 million in December 2004 upon the attainment of a pre-specified technology milestone. Of the $7.0 million received in December 2004, $5.0 million was from the sale of 710,273 shares of the Company’s common stock and $2.0 million represented a cash milestone. A further cash payment is due from Merck in September 2005, based upon the continuation of the alliance. The Company is recognizing the revenue related to the upfront and license payments ratably over the estimated period of performance under the agreement, which the Company has determined to be six years. In the three months ended March 31, 2005, the Company recognized $0.1 million of revenue under this agreement and has deferred revenue on its balance sheet of $2.2 million related to this agreement at March 31, 2005.

     Ocular Collaboration Agreement

          In June 2004, the Company entered into a collaboration and license agreement with Merck. The agreement is a multi-year collaboration to develop and commercialize RNAi therapeutics for ocular diseases. This collaboration, the second strategic alliance between Merck and the Company, will focus on age-related macular degeneration (“AMD”) and other ocular diseases caused by abnormal growth or leakage of small blood vessels in the eye. The Company’s existing program to develop a Direct RNAi™ therapeutic for the treatment of AMD has been incorporated into this collaboration.

          Under the terms of the agreement, the Company received a $2.0 million license fee from Merck as well as $1.0 million representing reimbursement of prior research and development costs incurred by the Company. These up-front amounts have been deferred and will be recognized as revenue over the estimated period of performance under the collaboration agreement, which the Company has determined to be six years. In addition, the agreement provides for the Company to work on two additional mutually agreed ocular targets in addition to its vascular endothelial growth factor (“VEGF”) program with Merck. Merck and the Company will jointly fund the development of, and share the profits from, any RNAi therapeutics for the United States market that result from the collaboration. The Company will also have the option to co-promote these RNAi therapeutics in the United States. Marketing and sales outside of the United States will be conducted by Merck, with the Company receiving royalties. During the quarter ended March 31, 2005, the Company recorded net cost reimbursement revenues of $1.2 million, which represent $1.3 million of research and development costs to be reimbursed by Merck under the terms of the agreement less $0.1 million of research and development costs to be reimbursed by the Company to Merck. The Company also recorded revenues of $0.1 million in the three months ended March 31, 2005 from the amortization of the up-front payments received from Merck and has $2.6 million of deferred revenue on its balance sheet related to this agreement at March 31, 2005.

8

ALNYLAM PHARMACEUTICALS, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Medtronic, Inc.

          In February 2005, the Company entered into a strategic alliance with Medtronic, Inc. (“Medtronic”) to pursue the development of therapeutics for the treatment of neurodegenerative disorders such as Huntington’s, Alzheimer’s and Parkinson’s disease. The collaboration will focus on developing novel drug-device combinations incorporating RNAi therapeutics. Initially, the Company and Medtronic will engage in a joint technology development program for a period of two years, a period that can be extended by mutual agreement. This initial joint technology development program will focus on delivering candidate RNAi therapeutics to specific areas of the brain using an implantable infusion system.

          After successful completion of the initial joint technology development program and a joint decision to initiate product development, the Company would be responsible for the discovery and early development of candidate RNAi therapeutics, and Medtronic would be responsible for late-stage development and commercialization of any drug-device products that result. Medtronic also would adapt or develop medical devices to deliver the candidate RNAi therapeutics to targeted locations in the nervous system.

          After successful completion of the initial joint technology development program and a joint decision to initiate product development, Medtronic would make an initial equity investment in the Company and could make additional investments upon successful completion of specified milestones. The aggregate amount of the Company’s common stock that Medtronic would purchase if a joint decision were taken to initiate product development and the specified milestones were successfully completed would be $21.0 million. The amount of the investment to be made at the time of the joint decision to initiate product development would be between $1.0 million and $8.0 million, as determined by the Company, at the then-current market price. For the purpose of this investment, the then-current market price would be equal to the twenty-day trailing average of the closing price of the Company’s common stock on the Nasdaq National Market at the end of the trading day two trading days prior to the date of the decision to initiate product development. The remaining investments would be made upon the achievement of the specified milestones at a purchase price equal to 120% of the then-current market price, calculated as just described. If either Medtronic or the Company decides not to initiate product development under the collaboration agreement, Medtronic would not be required to make any equity investment in the Company.

          After successful completion of the initial joint technology development program and a joint decision to initiate product development, the Company would also be eligible to receive additional cash milestone payments for each product developed and royalties on sales of any RNAi therapeutic component of novel drug-device combinations that result from the collaboration.

GeneCare Research Institute Co., Ltd.

          In January 2005, the Company entered into a license agreement with GeneCare Research Institute Co., Ltd. (“GeneCare”) whereby the Company licensed to GeneCare an exclusive license through the Company’s InterfeRx™ licensing program to discover, develop, and commercialize RNAi therapeutics directed against two DNA helicase genes associated with cancer. Under the terms of this agreement, GeneCare agreed to make an initial payment of $0.2 million and annual license fee payments of $0.1 million during each year of the research term, which is initially three years and can be extended to up to five years. In addition, GeneCare agreed to provide the Company with a payment of $0.4 million for each potential product that GeneCare chooses to begin development efforts as well as milestone payments of up to $6.0 million per product, in the event that development scientific milestones are achieved by GeneCare. The Company recorded $0.2 million of revenues related to this agreement in the three months ended March 31, 2005.

9

ALNYLAM PHARMACEUTICALS, INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cystic Fibrosis Foundation Therapeutics, Inc.

          In March 2005, the Company entered into a collaboration with Cystic Fibrosis Foundation Therapeutics, Inc. (“CFFT”) to investigate the potential for RNAi therapeutics to treat cystic fibrosis (“CF”). Under this collaboration, CFFT will provide the Company with an initial payment of $0.5 million and make additional payments totaling an aggregate of $1.0 million in the event that certain scientific milestones are achieved. In addition to funding, CFFT will provide the Company with access to certain scientific resources to support the Company’s siRNA discovery and development efforts. If the discovery and development efforts under this collaboration result in the identification of siRNAs that are candidates for further development, the parties may negotiate a mutually agreeable support arrangement for further phases of development. In the event that the Company develops a marketable therapeutic for the treatment of CF, the Company will be required to pay CFFT certain pre-determined royalties. At March 31, 2005, the Company had recorded $0.5 million in receivables and deferred revenue associated with this agreement.

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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 and Section 21E of the Securities Exchange Act of 1934. Without limiting the foregoing, the words “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” “target” and similar expressions are intended to identify forward-looking statements. 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 assume no obligation to update any such forward-looking statements. 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 below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Certain Factors That May Affect Future Results” 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.

Overview

          We are a biopharmaceutical company seeking to develop and commercialize new drugs that work through a recently discovered mechanism in cells known as RNA interference, or RNAi. We believe that RNAi therapeutics have the potential to become a major class of drugs with applications in a wide range of therapeutic areas. We have initiated programs to develop RNAi therapeutics that will be administered directly to diseased parts of the body, which we call Direct RNAi™. We are also working to extend our capabilities by investing in RNAi therapeutics that will be administered systemically in order to treat a broad range of diseases, which we call Systemic RNAi™. To realize the potential of RNAi therapeutics, we are developing capabilities that we can apply to any specific short interfering RNA, or siRNA, in a systematic way to endow it with drug-like properties. We use the term “product engine” to describe these capabilities because we believe they will enable us to develop many products across a variety of therapeutic areas.

          We commenced operations in June 2002. Since our inception, we have generated significant losses. As of March 31, 2005, we had an accumulated deficit of $69.6 million. We have funded our operations primarily through the net proceeds of $89.9 million from the sale of equity securities, including $29.9 million in net proceeds from the sale of 5.75 million shares of our common stock from our initial public offering in June 2004. Through March 31, 2005, 91 percent of our total net revenues have been derived from our two strategic alliances with Merck and Co., Inc., or Merck. In September 2003, we began working with Merck under a collaboration agreement for the development of RNAi-based technology and therapeutics. In June 2004, we began working with Merck under a cost sharing collaboration agreement for the co-development of Direct RNAi therapeutics for the treatment of ocular diseases. We expect our revenues to continue to be derived primarily from strategic alliances and license fee revenues.

          We have yet to submit any drug applications to any regulatory authority. We have focused our efforts since inception primarily on business planning, research and development, acquiring intellectual property rights, recruiting management and technical staff, and raising capital. We currently have programs focused in a number of therapeutic areas, however; we are unable to predict when, if ever, we will be able to commence sales of any product. We have not achieved profitability on a quarterly or annual basis and we expect to incur significant additional losses over the next several years. We expect our net losses to increase primarily due to research and development activities relating to our collaborations, drug development programs and other general corporate activities. We anticipate that our operating results will fluctuate for the foreseeable future. Therefore, period-to-period comparisons should not be relied upon as predictive of the results in future periods. Our sources of potential funding for the next several years are expected to include proceeds from the sale of equity, license and other fees, funded research and development payments, proceeds from equipment lines of credit, and milestone payments under existing and future collaborative arrangements.

          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. We have initiated programs to identify specific RNAi therapeutics that will be administered directly to diseased parts of the body, which we refer to as Direct RNAi drug candidates and we expect to

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initiate additional programs as the capabilities of our product engine evolve. Included in our current programs are development programs, those which we have established targeted timing for human clinical trials, and preclinical programs, those which we have yet to establish targeted timing for human clinical trials. Our current development programs are focused on age-related macular degeneration, or AMD, and human respiratory syncytial virus, or RSV. Included as part of our preclinical programs are programs focused on Parkinson’s disease, or PD, spinal cord injury, or SCI, and cystic fibrosis, or CF.

          A significant component of our business strategy is to enter into strategic alliances and collaborations with pharmaceutical companies, academic institutions, research foundations and others, as appropriate, to gain access to funding, technical resources and intellectual property to further our development efforts and to generate revenues. We have entered into license agreements with Garching Innovation GmbH and Isis Pharmaceuticals, Inc., or Isis, to obtain rights to important intellectual property in the field of RNAi. We have entered into collaboration agreements with Merck for both the development of RNAi technology and therapeutics and the development of RNAi therapeutics for treatment of ocular diseases, both of which have provided us with significant funding and access to substantial technical resources, which has helped us further our development efforts in many areas. In particular, in conjunction with Merck we have begun evaluating RNAi therapeutics in animal models and expect to begin a clinical trial for an AMD product candidate in the second half of 2005. In addition, we have entered into an agreement with Cystic Fibrosis Foundation Therapeutics, Inc. to obtain funding and technical resources for our CF program. We also have collaborations with the Mayo Foundation for Medical Education and Research and the Mayo Clinic Jacksonville to explore the potential of an RNAi-based treatment for PD and other collaborations in connection with our RSV program. Under both our PD and RSV programs we have begun evaluating RNAi therapeutics in animal models and expect to begin a clinical trial for an RSV product candidate in the first half of 2006.

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

•   our ability to progress any product candidates into preclinical and clinical trials;

•   the scope, rate and progress of our preclinical trials and other research and development activities;

•   the scope, rate of progress and cost of any clinical trials we commence;

•   clinical trial results;

•   the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

•   the terms and timing of any collaborative, licensing and other arrangements that we may establish;

•   the cost and timing of regulatory approvals;

•   the cost and timing of establishing sales, marketing and distribution capabilities;

•   the cost of establishing clinical and commercial supplies of any products that we may develop; and

•   the effect of competing technological and market developments.

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

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          Critical Accounting Policies and Estimates

          There have been no changes to our critical accounting policies and estimates, as described in the “Management Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2004.

          Results of Operations

          The following data summarizes the results of our operations for the periods indicated, in thousands:

	Three Months Ended March 31,
	2005			2004
Net revenues	$	1,643		$	134
Operating expenses		8,324			13,466
Loss from operations		(6,681	)		(13,332	)
Net (loss)	$	(6,600	)	$	(13,582	)

          Discussion of Results of Operations for the Three Months Ended March 31, 2005 and 2004

          Revenues

          The following table summarizes our total consolidated revenues in the periods indicated, in thousands:

	Three Months Ended
	March 31,
	2005			2004
Revenues recorded from the amortization of up-front and license payments	$	492		$	134
Revenues recorded from cost reimbursements from Merck under collaboration agreement		1,251			—
Cost reimbursements to Merck under collaboration agreement		(100	)		—
Total revenues recorded	$	1,643		$	134

          We received a $2.0 million license fee from our first agreement with Merck in September 2003, which has been deferred and is being recognized as revenue over six years, the estimated period of performance under the collaboration agreement. In September 2004, we received an additional license fee of $1.0 million from Merck related to this agreement. We recognized revenues of $0.1 million from the amortization of these payments in each of the three months ended March 31, 2005 and 2004.

          In June 2004, we entered into an additional collaboration and license agreement with Merck for the co-development of RNAi therapeutics for the treatment of ocular diseases. Under the terms of the agreement, we received a $2.0 million license fee from Merck as well as $1.0 million representing reimbursement of prior research and development costs which we incurred on our AMD program targeting vascular endothelial growth factor, or VEGF. These amounts are being amortized into revenues over the estimated period of performance under the collaboration agreement of six years. As such, we recorded $0.1 million of revenues in the quarter ended March 31, 2005 from the amortization of these payments. In addition to up-front and milestone payments, our collaboration agreement with Merck related to RNAi therapeutics for ocular diseases provides for the sharing of costs incurred under this agreement. In the three months ended March 31, 2005, we recorded net revenues of $1.2 million from these cost-sharing activities related to the AMD program.

          For the foreseeable future, we expect our revenues to continue to be derived primarily from strategic alliances. In addition, we have established license programs for research reagents, services and licenses to narrowly defined therapeutic areas in which we are not currently engaged. We expect these programs to provide revenues from license fees and royalties on sales by the licensees,

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such as our January 2005 license agreement with GeneCare Research Institute Co., Ltd., or GeneCare, a Japanese biotechnology firm. In the three months ended March 31, 2005, we recorded revenues of $0.2 million from a license payment from GeneCare, made under an agreement through which GeneCare is researching RNAi-based therapeutics to treat certain cancers.

     Operating Expenses

          The following table summarizes our operating expenses for the periods indicated, in thousands and as a percentage of total expenses:

	Three Months					Three Months
	Ended		% of total			Ended		% of total
	March 31,		operating			March 31,		operating			Decrease
	2005		expenses			2004		expenses			$			%
Research and development	$	5,372		65	%	$	10,435		77	%	$	(5,063	)		-49	%
General and administrative		2,952		35	%		3,031		23	%	$	(79	)		-3	%
Total operating expenses	$	8,324		100	%	$	13,466		100	%	$	(5,142	)		-38	%

     Research and development

          The following table summarizes the most significant components of our research and development expenses for the periods indicated, in thousands and as a percentage of total research and development expenses and provides the changes in thousands and percentages:

	Three					Three
	Months					Months
	Ended		% of			Ended		% of
	March 31,		expense			March 31,		expense			Increase (Decrease)
	2005		category			2004		category			$			%
Research and development
Compensation-related	$	1,518		28	%	$	1,366		13	%	$	152			11	%
External services		1,026		19	%		740		7	%		286			39	%
License fees		54		1	%		5,000		48	%		(4,946	)		-99	%
Lab supplies and materials		1,168		22	%		816		8	%		352			43	%
Facilities-related		1,118		21	%		557		5	%		561			101	%
Stock-based compensation		173		3	%		1,724		17	%		(1,551	)		-90	%
Other		315		6	%		232		2	%		83			36	%
Total research and development	$	5,372		100	%	$	10,435		100	%	$	(5,063	)		-49	%

          As indicated by the table above, our research and development expenses decreased in the three months ended March 31, 2005 primarily due to lower technology license costs due to a $5.0 million charge in the three months ended March 31, 2004 related to our license agreement with Isis, for which there was no comparable charge in the three months ended March 31, 2005. In addition, research and development expenses decreased in the three months ended March 31, 2005 as a result of lower stock-based compensation, which is due to fluctuations in our stock price, the amount of options granted in the prior years at higher estimated fair values, and the accelerated method used to amortize the resulting deferred stock-based compensation which records a higher percentage of the associated expense in the earlier years of the awards. These decreases were offset in part by increased compensation and related costs as a result of the timing and size of the expansion of our research and development organization, which increased from 46 employees at March 31, 2004 to 53 at March 31, 2005. In addition to the increase in employees in our research organization, we improved our research infrastructure by moving into new corporate headquarters and research facilities in Cambridge, Massachusetts during 2004, which resulted in increased facilities-related costs. The expansion of our research organization was in support of both the growth of existing research programs such as AMD and PD as well the addition of new research programs initiated late in 2004 and early in 2005, including RSV, SCI and CF. This growth resulted in increased external

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service costs including consulting and contracted research with third parties as well as increased lab supplies and materials. We expect to continue to devote a substantial portion of our resources to research and development expenses.

          Prior to July 1, 2004, we did not track any of our research and development costs or our personnel and personnel-related costs on a project-by-project basis, because the majority of our efforts were focused on the development of capabilities associated with our product engine rather than on specific projects. In July 2004, we began work under our agreement with Merck for the co-development of RNAi ocular therapeutics. This agreement is a cost sharing arrangement whereby each party reimburses the other for 50% of the costs incurred under the project, as defined by the agreement. Costs reimbursed under the agreement include certain direct external costs and a negotiated full-time equivalent labor rate for the actual time worked on the project. As a result, we began tracking direct external costs attributable to this agreement and the actual time worked by our employees on this agreement in July 2004. However, a significant portion of our research and development expenses are not tracked on a project-by-project basis. Direct external costs incurred in the three months ended March 31, 2005 under our agreement with Merck for the co-development of RNAi ocular therapeutics were $0.2 million, including $0.1 billed to us by Merck and recorded as a reduction of revenue. In addition, all of our research programs are currently in the preclinical phase meaning that we are conducting formulation, efficacy, pharmacology and/or toxicology testing of compounds in animal models or biochemical assays.

          General and administrative

          The following table summarizes the most significant components of our general and administrative expenses for the periods indicated, in thousands and as a percentage of total general and administrative expenses and provides the changes in thousands and percentages:

	Three					Three
	Months					Months
	Ended		% of			Ended		% of
	March 31,		expense			March 31,		expense			Increase (Decrease)
	2005		category			2004		category			$			%
General and administrative
Compensation-related	$	758		26	%	$	1,140		38	%	$	(382	)		-34	%
Consulting and professional services		814		28	%		852		28	%		(38	)		-4	%
Facilities-related		508		17	%		271		9	%		237			87	%
Stock-based compensation		307		10	%		507		17	%		(200	)		-39	%
Insurance		159		5	%		31		1	%		128			413	%
Other		406		14	%		230		7	%		176			77	%
Total general and administrative	$	2,952		100	%	$	3,031		100	%	$	(79	)		-3	%

          As indicated in the table above, general and administrative expenses decreased in the three months ended March 31, 2005 versus the three months ended March 31, 2004. Decreases in compensation and related costs, as a result of costs associated with certain managerial changes incurred in the three months ended March 31, 2004 for which there were no comparable costs in the three months ended March 31, 2005, and stock-based compensation, which decreased as a result of the accelerated method used to amortize the associated deferred compensation, which records a higher percentage of the associated expense in the earlier years of the award, were the most significant factors in the decrease in general and administrative expenses. Partially offsetting these decreases were increased facilities related costs as a result of our relocation into our new corporate headquarters and research facilities in Cambridge, Massachusetts in 2004 and insurance costs associated with our operation as a publicly traded company.

          Interest income, interest expense and other

          Interest income increased to $0.3 million for the three months ended March 31, 2005 compared to less than $0.1 million for the three months ended March 31, 2004. This increase was due to our higher average cash, cash equivalent and marketable securities balances in the three months ended March 31, 2005, which was primarily a result of the net proceeds of $29.9 million from our initial public offering in June 2004, the issuance of $10.0 million of our Series D preferred stock in March 2004 and the issuance of $5.0 million of common stock to Merck in December 2004.

          Interest expense was $0.2 million for the three months ended March 31, 2005 compared to $0.2 million in the three months

15

ended March 31, 2004. Interest expense for the three months ended March 31, 2004 is related to our borrowings for equipment purchases under our previous Silicon Valley Bank line of credit and the premium paid to pay off this line of credit in March 2004. Interest expense for the three months ended March 31, 2005 is the result of borrowings under our line of credit with Lighthouse Capital Partners V, L.P., or Lighthouse, used to finance additional capital equipment purchases. We expect that our interest expense will increase as we continue to draw down our equipment loan with Lighthouse.

          Other income (expense) increased to $42,000 in the three months ended March 31, 2005 from ($79,000) in the three months ended March 31, 2004. This increase is due primarily to realized foreign currency gains on intercompany transactions as a result of the decrease in the conversion rate of the Euro versus the U.S. Dollar in the three months ended March 31, 2005.

Liquidity and Capital Resources

          The following table summarizes our cash flow activities for the periods indicated, in thousands:

	Three Months Ended
	March 31,
	2005			2004
Net loss	$	(6,600	)	$	(13,582	)
Adjustments to reconcile net loss to net cash used in operating activities		1,155			2,723
Changes in operating assets and liabilities		(2,194	)		2,365
Net cash used in operating activities		(7,639	)		(8,494	)
Net cash used in investing activities		(908	)		(2,072	)
Net cash provided by financing activities		602			8,992
Effect of exchange rate on cash		(112	)		(7	)
Net decrease in cash and cash equivalents		(8,057	)		(1,581	)
Cash and cash equivalents, beginning of period		20,272			23,193
Cash and cash equivalents, end of period	$	12,215		$	21,612

          We commenced operations in June 2002. Since our inception, we have generated significant losses. As of March 31, 2005, we had an accumulated deficit of $69.6 million. As of March 31, 2005, we had cash and cash equivalents and marketable securities of $38.3 million, compared to cash and cash equivalents of $46.0 million as of December 31, 2004. We invest in cash equivalents, U.S. government obligations, high-grade corporate notes and commercial paper. Our investment objectives are primarily, to assure liquidity and preservation of capital and, secondarily, to obtain investment income. All of our investments in debt securities are recorded at fair value and are available for sale. Fair value is determined based on quoted market prices.

          Operating activities

          We have required significant amounts of cash to fund our operating activities as a result of net losses since our inception. Although this trend has continued in the three months ended March 31, 2005, our use of cash in our operating activities declined as a result of a lower net loss due to our recognition of $5.0 million in license fees related to our March 2004 license agreement with Isis, for which there was no comparable charge in the three months ended March 31, 2005. Our net loss in the three months ended March 31, 2005 was also lower due to higher revenues as a result of our collaboration agreements with Merck and our January 2005 license agreement with GeneCare. Cash used in operating activities is adjusted for non-cash items to reconcile net loss to net cash used in operating activities. These non-cash adjustments primarily consist of stock-based compensation, depreciation and amortization. Non-cash stock-based compensation has decreased due to fluctuations in our stock price directly impacting our fair values of options granted to non-employees and the accelerated method used to amortize deferred compensation recorded in connection with our issuance of stock options to employees and non-employees. Depreciation expense has increased as a result of additional property and equipment we have acquired to expand our research capacity and support the growth of our infrastructure, mainly in our new corporate headquarters and research facilities in Cambridge, Massachusetts, which we moved into in April 2004. In connection with our acquisition of Ribopharma AG, now Alnylam Europe AG, we purchased intangible assets, which represent acquired technology and the workforce of Alnylam Europe AG, and in-process research and development, which represents the value of certain research projects in process at the time of the acquisition. We capitalized the intangible assets and are amortizing them over their useful lives and expensed the value of the in-process research and development, which was $4.6 million, at the time of the acquisition. In addition, changes in our operating assets and liabilities have affected our net cash used in operating activities since our inception. The increase in these changes is primarily due to higher accrued liabilities and the addition of deferred revenue in 2003 and 2004 as a result of license payments received

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under our collaboration agreements with Merck. We are amortizing this deferred revenue over the estimated period of performance under these agreements of six years.

          Investing activities

          Our primary investing activities since our inception have been purchases of property and equipment to expand our research capacity and support the growth of our organization. Our purchases of property and equipment increased significantly in 2004 due to the expansion of our operations into new corporate headquarters and research facilities in Cambridge, Massachusetts in April 2004. In connection with this expansion, we invested approximately $6.0 million in leasehold improvements. As our move into these facilities was completed in 2004, we have experienced a significant decline in purchases of property and equipment, which has resulted in a lower use of cash in our investing activities in the three months ended March 31, 2005. In 2004 we began investing the proceeds from our initial public offering and other equity financing proceeds in marketable securities, an activity which we have continued in 2005, which has contributed to our use of cash in investing activities.

          Financing activities

          Since our inception, we have funded our operations primarily through the sale of equity securities. Through March 31, 2005, we raised approximately $54.8 million in net proceeds from the sale of redeemable convertible preferred stock and approximately $35.3 million from the sale of common stock, including $29.9 million from the sale of 5.75 million shares of our common stock in our initial public offering, which was completed in June 2004.

          Certain of our sales of equity securities have been in connection with our strategic collaboration and licensing agreements. In connection with our March 2004 collaboration and license agreement with Isis, Isis purchased 1,666,667 shares of our Series D preferred stock for $10.0 million, in March 2004, which were converted into 877,193 shares of our common stock upon the closing of our initial public offering in June 2004. In September 2003, we entered into a collaboration and license agreement with Merck for the development of RNAi-based technology and therapeutics. In connection with this agreement, Merck purchased 1,000,000 shares of our Series C preferred stock for $5.0 million, in September 2003, which were converted into 526,315 shares of our common stock upon the closing of our initial public offering and 710,273 shares of our common stock for $5.0 million in December 2004.

          In addition to sales of equity securities, we have financed a portion of our property and equipment purchases through the establishment of equipment lines of credit. In December 2002, we established a $2.5 million equipment line of credit under which we drew down approximately $2.1 million in 2003, of which $1.8 million was repaid in March 2004. On March 26, 2004, we entered into an equipment line of credit with Lighthouse to finance leasehold improvements and equipment purchases of up to $10.0 million. The borrowings bear interest at 3% over the prime rate of interest (8.75% at March 31, 2005) plus an additional 11.5% due at the end of the term of each borrowing. We are required to make interest-only payments on all draw-downs through June 30, 2005, at which point all draw-downs under the line of credit will be repaid over 48 months. The borrowings are collateralized by the assets financed. At March 31, 2005, we had an outstanding balance of $7.8 million under this facility. The terms of the Lighthouse agreement include covenants which limit our ability to sell or transfer certain assets or businesses.

          Based on our current operating plan, we believe that our existing resources will be sufficient to fund our planned operations through at least the end of 2006, during which time we expect to extend the capabilities of our product engine, further the development of products for the treatment of AMD, RSV, PD, SCI and CF and continue to prosecute patent applications and otherwise build and maintain our patent portfolio. However, we may require significant additional funds earlier than we currently expect in order to develop and commence clinical trials for any product candidates we identify.

     We expect to seek additional funding through collaborative arrangements and public or private financings. Additional funding may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities, further dilution to our existing stockholders may result. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies or product candidates that we would otherwise pursue.

     Even if we are able to raise additional funds in a timely manner, our future capital requirements may vary from what we expect and will depend on many factors, including the following:

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•   our progress in demonstrating that siRNAs can be active as drugs;

•   our ability to develop relatively standard procedures for selecting and modifying siRNA drug candidates;

•   progress in our research and development programs, as well as the magnitude of these programs;

•   the timing, receipt, and amount of milestone and other payments, if any, from present and future collaborators, if any;

•   our ability to establish and maintain additional collaborative arrangements;

•   the resources, time and costs required to successfully initiate and complete our preclinical and clinical trials, obtain regulatory approvals, protect our intellectual property and obtain and maintain licenses to third-party intellectual property;

•   the cost of preparing, filing, prosecuting, maintaining, and enforcing patent claims; and

•   the timing, receipt and amount of sales and royalties, if any, from our potential products.

          Off-Balance Sheet Arrangements

     We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

          Contractual Obligations and Commitments

     The disclosure of our contractual obligations and commitments is set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” in our 2004 Annual Report on Form 10-K. There have been no material changes to our contractual obligations and commitments since December 31, 2004.

          Recently Issued Accounting Pronouncements

          In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123R, “Share-Based Payment” (“SFAS 123R”), which revises SFAS No. 123, “Accounting for Stock-based Compensation” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. Under SFAS 123R, the most significant change in practice would be treating the fair value of stock based payment awards that are within its scope as compensation expense in the income statement beginning on the date that a company grants the awards to employees. In April 2005, the SEC delayed the effective date of SFAS 123R to financial statements issued for the first annual period beginning after June 15, 2005. As a result, we will adopt and comply with the requirements of SFAS 123R in the three months ending March 31, 2006. We are currently assessing the impact that the adoption of this standard will have on our financial position and results of operations and the method by which we will implement this standard, however, we expect stock compensation expense to increase as a result of the adoption of this standard.

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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

     We caution you that the following important factors, among others, in the future could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.

Risks Related to Our Business

Risks Related to Being an Early Stage Company

Because we have a short operating history, there is a limited amount of information about us upon which you can evaluate our business and prospects.

     Our operations began in June 2002 and we have only a limited operating history upon which you can evaluate our business and prospects. In addition, as an early stage company, we have limited experience and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. For example, to execute our business plan, we will need to successfully:

•   execute product development activities using an unproven technology;

•   build and maintain a strong intellectual property portfolio;

•   gain acceptance for the development and commercialization of our products;

•   develop and maintain successful strategic relationships; and

•   manage our spending as costs and expenses increase due to clinical trials, regulatory approvals and commercialization.

          If we are unsuccessful in accomplishing these objectives, we may not be able to develop product candidates, raise capital, expand our business or continue our operations.

The approach we are taking to discover and develop novel drugs is unproven and may never lead to marketable products.

          We have concentrated our efforts and therapeutic product research on RNAi technology, and our future success depends on the successful development of this technology and products based on RNAi technology. Neither we nor any other company has received regulatory approval to market therapeutics utilizing siRNAs. The scientific discoveries that form the basis for our efforts to discover and develop new drugs are relatively new. The scientific evidence to support the feasibility of developing drugs based on these discoveries is both preliminary and limited. Skepticism as to the feasibility of developing RNAi therapeutics has been expressed in scientific literature. For example, there are potential challenges to achieving safe RNAi therapeutics based on the so-called off-target effects and activation of the interferon response. There are also potential challenges to achieving effective RNAi therapeutics based on the need to achieve efficient delivery into cells and tissues in a clinically relevant manner and at doses that are cost-effective.

          Very few drug candidates based on these discoveries have ever been tested in animals or humans. siRNAs, the class of molecule we are trying to develop into drugs, do not naturally possess the inherent properties typically required of drugs, such as the ability to be stable in the body long enough to reach the tissues in which their effects are required, nor the ability to enter cells within these tissues in order to exert their effects. We currently have only limited data, and no conclusive evidence, to suggest that we can introduce these drug-like properties into siRNAs. We may spend large amounts of money trying to introduce these properties, and may never succeed in doing so. In addition, these compounds may not demonstrate in patients the chemical and pharmacological properties ascribed to them in laboratory studies, and they may interact with human biological systems in unforeseen, ineffective or

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harmful ways. As a result, we may never succeed in developing a marketable product. If we do not successfully develop and commercialize drugs based upon our technological approach, we will not become profitable and the value of our common stock will decline.

          Further, our focus solely on RNAi technology for developing drugs as opposed to multiple, more proven technologies for drug development increases the risks associated with the ownership of our common stock. If we are not successful in developing a product candidate using RNAi technology, we may be required to change the scope and direction of our product development activities. In that case, we may not be able to identify and implement successfully an alternative product development strategy.

Risks Related to Our Financial Results and Need for Financing

We have a history of losses and may never be profitable.

          We have experienced significant operating losses since our inception. As of March 31, 2005, we had an accumulated deficit of $69.6 million. To date, we have not developed any products nor generated any revenues from the sale of products. Further, we do not expect to generate any such revenues in the foreseeable future. We expect to continue to incur annual net operating losses over the next several years as we expand our efforts to discover, develop and commercialize RNAi therapeutics. We anticipate that the majority of any revenue we generate over the next several years will be from collaborations with pharmaceutical companies, but cannot be certain that we will be able to secure these collaborations or to meet the obligations or achieve any milestones that we may be required to meet or achieve to receive payments. To date, our collaboration and license agreements have provided us with minimal revenue. If we are unable to secure revenue from collaborations, we may be unable to continue our efforts to discover, develop and commercialize RNAi therapeutics without raising financing from other sources.

          To become and remain profitable, we must succeed in developing and commercializing novel drugs with significant market potential. This will require us to be successful in a range of challenging activities that we have yet to perform, including preclinical testing and clinical trial stages of development, obtaining regulatory approval for these novel drugs, and manufacturing, marketing and selling them. We may never succeed in these activities, and may never generate revenues that are significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we cannot become and remain profitable, the market price of our common stock could decline. In addition, we may be unable to raise capital, expand our business, diversify our product offerings or continue our operations .

We will require substantial additional funds to complete our research and development activities and if additional funds are not available we may need to critically limit, significantly scale back or cease our operations.

          We have used substantial funds to develop our RNAi technologies and will require substantial funds to conduct further research and development, including preclinical testing and clinical trials of any product candidates, and to manufacture and market any products that are approved for commercial sale. Because the successful development of our products is uncertain, we are unable to estimate the actual funds we will require to develop and commercialize them.

          Our future capital requirements and the period for which we expect the net proceeds from our initial public offering and our existing resources to support our operations may vary from what we expect. We have based our expectations on a number of factors, many of which are difficult to predict or are outside of our control, including:

•   our progress in demonstrating that siRNAs can be active as drugs;

•   our ability to develop relatively standard procedures for selecting and modifying siRNA drug candidates;

•   progress in our research and development programs, as well as the magnitude of these programs;

•   the timing, receipt, and amount of milestone and other payments, if any, from present and future collaborators, if any;

•   our ability to establish and maintain additional collaborative arrangements;

•   the resources, time and costs required to initiate and complete our preclinical and clinical trials, obtain regulatory approvals, protect our intellectual property and obtain and maintain licenses to third-party intellectual property; and

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•   the timing, receipt and amount of sales and royalties, if any, from our potential products.

          If our estimates and predictions relating to these factors are incorrect, we may need to modify our operating plan.

          We will be required to seek additional funding in the future and intend to do so through collaborative arrangements and public or private equity offerings and debt financings. Additional funds may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities, further dilution to our stockholders will result. Debt financing, if available, may involve restrictive covenants that could limit our flexibility in conducting future business activities. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise pursue on our own.

Risks Related to Our Dependence on Third Parties

We may not be able to execute our business strategy if we are unable to enter into alliances with other companies that can provide capabilities and funds for the development and commercialization of our drug candidates. If we are unsuccessful in forming or maintaining these alliances on favorable terms, our business may not succeed.

          We do not have any capability for sales, marketing or distribution and have limited capabilities for drug development. Accordingly, we must enter into alliances with other companies that can provide such capabilities. For example, we may enter into alliances with major pharmaceutical companies to jointly develop specific drug candidates and to jointly commercialize them if they are approved. In such alliances, we would expect our pharmaceutical collaborators to provide substantial capabilities in clinical development, regulatory affairs, marketing and sales. We may not be successful in entering into any such alliances on favorable terms. Even if we do succeed in securing such alliances, we may not be able to maintain them if, for example, development or approval of a drug candidate is delayed or sales of an approved drug are disappointing. Furthermore, any delay in entering into collaboration agreements could delay the development and commercialization of our drug candidates and reduce their competitiveness even if they reach the market. Any such delay related to our collaborations could adversely affect our business.

          In addition, we expect that we will need to enter into alliances with other companies to provide substantial additional cash for development and potential commercialization of our drug candidates. We entered into a collaboration agreement with Merck in September 2003, under which Merck may elect to pay a portion of the costs to develop and market certain drug candidates that we may initially develop based on information and materials provided by Merck. Merck is under no obligation to pay any of the development and commercialization costs for any of these drug candidates, and they may elect not to do so. For drug candidates from our Merck collaboration that Merck does not elect to fund, and for drug candidates we may develop outside of this collaboration, we expect to seek additional collaborations with other pharmaceutical companies to fund all or part of the costs of drug development and commercialization, such as the second collaboration and license agreement we entered into with Merck for ocular disease, including our current VEGF program. We may not, however, be able to enter into additional collaborations, and the terms of any collaboration agreement we do secure may not be favorable to us. If we are not successful in our efforts to enter into future collaboration arrangements with respect to a particular drug candidate, we may not have sufficient funds to develop this or any other drug candidate internally, or to bring any drug candidates to market. If we do not have sufficient funds to develop and bring our drug candidates to market, we will not be able to generate sales revenues from these drug candidates, and this will substantially harm our business.

          Our collaboration with Medtronic was established to pursue development of drug-device combinations incorporating RNAi therapeutics. We will engage in a joint technology development program for two years. After completion of this initial two-year period, we and Medtronic must jointly determine whether to initiate product development. Neither party is obligated to do so. We may not be successful in the joint technology development program, in initiating any product development under our collaboration with Medtronic, or in completing any such product development.

          Our collaboration with CFFT was established to research the potential development of RNAi-based therapeutics for the treatment of CF. Under this collaboration, CFFT will provide us with funding and scientific guidance to assist in our efforts to develop siRNAs for evaluation as potential therapeutic treatments for CF. The funding by CFFT is comprised of an up-front payment and milestone payments upon our successful achievement of certain scientific milestones, as defined by the agreement. We may not be successful in meeting the defined milestones and receiving the associated milestone payments.

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If any collaborator terminates or fails to perform its obligations under agreements with us, the development and commercialization of our drug candidates could be delayed or terminated.

          Our expected dependence on collaborators for capabilities and funding means that our business would be adversely affected if any collaborator terminates its collaboration agreement with us or fails to perform its obligations under that agreement. Our current or future collaborations, if any, may not be scientifically or commercially successful. Disputes may arise in the future with respect to the ownership of rights to technology or products developed with collaborators, which could have an adverse effect on our ability to develop and commercialize any affected product candidate.

          Our current collaborations allow, and we expect that any future collaborations will allow, either party to terminate the collaboration for a material breach by the other party. If a collaborator terminates its collaboration with us, for breach or otherwise, it would be difficult for us to attract new collaborators and could adversely affect how we are perceived in the business and financial communities. In addition, a collaborator could determine that it is in its financial interest to:

•   pursue alternative technologies or develop alternative products, either on its own or jointly with others, that may be competitive with the products on which it is collaborating with us or which could affect its commitment to the collaboration with us;

•   pursue higher-priority programs or change the focus of its development programs, which could affect the collaborator’s commitment to us; or

•   if it has marketing rights, choose to devote fewer resources to the marketing of our product candidates, if any are approved for marketing, than it does for product candidates of its own development.

          If any of these occur, the development and commercialization of one or more drug candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.

          We have entered into a research collaboration agreement with the Mayo Foundation for Medical Education and Research and the Mayo Clinic Jacksonville, which we refer to collectively as the Mayo Clinic, in connection with our PD program and we may enter into similar agreements in the future. Either party may terminate this research collaboration agreement upon a breach by the other party. The agreement provides us with an option to acquire an exclusive license to any intellectual property or inventions developed in connection with the collaboration. However, in order to secure any such license, we and the Mayo Clinic must agree on terms within 90 days of the exercise of the option. We may not be able to enter into any such license on reasonable terms, if at all.

We have no manufacturing experience or resources and we must incur significant costs to develop this expertise or rely on third parties to manufacture our products.

          We have no manufacturing experience. In order to develop products, apply for regulatory approvals and commercialize our products, we will need to develop, contract for, or otherwise arrange for the necessary manufacturing capabilities. We may manufacture clinical trial materials ourselves or we may rely on others to manufacture the materials we will require for any clinical trials that we initiate. Only a limited number of manufacturers can supply synthetic RNAi. We have contracted with Dowpharma, a division of The Dow Chemical Company, for supply of certain amounts of material to meet our testing needs for future toxicology and clinical testing. There are risks inherent in pharmaceutical manufacturing that could affect Dowpharma’s ability to meet our delivery time requirements or provide adequate amounts of material to meet our needs. Included in these risks are synthesis failures and contamination during the manufacturing process, both of which could result in unusable product and cause delays in our development process. The manufacturing process for any products that we may develop is an element of the FDA approval process and we will need to contract with manufacturers who can meet the FDA requirements on an ongoing basis. In addition, if we receive the necessary regulatory approval for any product candidate, we also expect to rely on third parties, including our collaborators, to produce materials required for commercial production. We may experience difficulty in obtaining adequate manufacturing capacity for our needs. If we are unable to obtain or maintain contract manufacturing for these product candidates, or to do so on commercially reasonable terms, we may not be able to successfully develop and commercialize our products.

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          To the extent that we enter into manufacturing arrangements with third parties, we will depend on these third parties to perform their obligations in a timely manner and consistent with regulatory requirements. The failure of a third-party manufacturer to perform its obligations as expected could adversely affect our business in a number of ways, including:

•   we may not be able to initiate or continue clinical trials of products that are under development;

•   we may be delayed in submitting applications for regulatory approvals for our products;

•   we may lose the cooperation of our collaborators;

•   we may be required to cease distribution or recall some or all batches of our products; and

•   ultimately, we may not be able to meet commercial demands for our products.

          If a third-party manufacturer with whom we contract fails to perform its obligations, we may be forced to manufacture the materials ourselves, for which we may not have the capabilities or resources, or enter into an agreement with a different third-party manufacturer, which we may not be able to do on reasonable terms, if at all. In addition, if we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates in a timely manner or within budget. Furthermore, a manufacturer may possess technology related to the manufacture of our product candidate that such manufacturer owns independently. This would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our products.

We have no sales, marketing or distribution experience and expect to depend significantly on third parties who may not successfully commercialize our products.

          We have no sales, marketing or distribution experience. We expect to rely heavily on third parties to launch and market certain of our product candidates, if approved. We may have limited or no control over the sales, marketing and distribution activities of these third parties. Our future revenues may depend heavily on the success of the efforts of these third parties.

          To develop internal sales, distribution and marketing capabilities, we will have to invest significant amounts of financial and management resources. For products where we decide to perform sales, marketing and distribution functions ourselves, we could face a number of additional risks, including:

•   we may not be able to attract and build a significant marketing or sales force;

•   the cost of establishing a marketing or sales force may not be justifiable in light of the revenues generated by any particular product; and

•   our direct sales and marketing efforts may not be successful.

Risks Related to Managing Our Operations

If we are unable to attract and retain qualified key management and scientists, staff consultants and advisors, our ability to implement our business plan may be adversely affected.

          We are highly dependent upon our senior management and scientific staff. The loss of the service of any of the members of our senior management, including Dr. John Maraganore, our President and Chief Executive Officer, may significantly delay or prevent the achievement of product development and other business objectives. Our employment agreements with our key personnel are terminable without notice. We do not carry key man life insurance on any of our key employees.

          Although we have generally been successful in our recruiting efforts, we face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions. We may be unable to attract and retain suitably qualified individuals, and our failure to do so could have an adverse effect on our ability to implement our business plan.

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We may have difficulty managing our growth and expanding our operations successfully as we seek to evolve from a company primarily involved in discovery and preclinical testing into one that develops and commercializes drugs.

          Since we commenced operations in 2002, we have grown rapidly to over 70 full time employees, with offices and laboratory space in both Cambridge, Massachusetts and Kulmbach, Germany. This rapid and substantial growth, and the geographical separation of our sites, has placed a strain on our administrative and operational infrastructure, and we anticipate that our continued growth will have a similar impact. If drug candidates we develop enter and advance through clinical trials, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with other organizations to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various collaborators, suppliers and other organizations. Our ability to manage our operations and growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures in at least two different countries. We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.

If we are unable to manage the challenges associated with our international operations, the growth of our business could be limited.

          In addition to our operations in Cambridge, Massachusetts, we operate an office and laboratory in Kulmbach, Germany. We are subject to a number of risks and challenges that specifically relate to these international operations. Our international operations may not be successful if we are unable to meet and overcome these challenges, which could limit the growth of our business and may have an adverse effect on our business and operating results. These risks include:

•   fluctuations in foreign currency exchange rates that may increase the U.S. dollar cost of our international operations;

•   difficulty managing operations in multiple locations, which could adversely affect the progress of our product candidate development program and business prospects;

•   local regulations that may restrict or impair our ability to conduct biotechnology-based research and development;

•   foreign protectionist laws and business practices that favor local competition; and

•   failure of local laws to provide the same degree of protection against infringement of our intellectual property, which could adversely affect our ability to develop product candidates or reduce future product or royalty revenues, if any, from product candidates we may develop.

Risks Related to Our Industry

Risks Related to Development, Clinical Testing and Regulatory Approval of Our Drug Candidates

Any drug candidates we develop may fail in development or be delayed to a point where they do not become commercially viable.

          Preclinical testing and clinical trials of new drug candidates are lengthy and expensive and the historical failure rate for drug candidates is high. We may not be able to advance any product candidates into clinical trials. Even if we do successfully enter into clinical studies, the results from preclinical testing of a drug candidate may not predict the results that will be obtained in human clinical trials. We, the FDA or other applicable regulatory authorities may suspend clinical trials of a drug candidate at any time if we or they believe the subjects or patients participating in such trials are being exposed to unacceptable health risks, or for other reasons. Among other reasons, adverse side effects of a drug candidate on subjects or patients in a clinical trial could result in the FDA or foreign regulatory authorities suspending or terminating the trial and refusing to approve a particular drug candidate for any or all indications of use.

          Clinical trials of a new drug candidate require the enrollment of a sufficient number of patients, including patients who are suffering from the disease the drug candidate is intended to treat and who meet other eligibility criteria. Rates of patient enrollment are affected by many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease and the eligibility criteria for the clinical trial. Delays in patient enrollment can result in increased costs and longer development times.

          Clinical trials also require the review and oversight of institutional review boards, referred to as IRBs, which approve and

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continually review clinical investigations and protect the rights and welfare of human subjects. Inability to obtain or delay in obtaining IRB approval can prevent or delay the initiation and completion of clinical trials, and the FDA may decide not to consider any data or information derived from a clinical investigation not subject to initial and continuing IRB review and approval in support of a marketing application.

          Our drug candidates that we develop may encounter problems during clinical trials that will cause us or regulatory authorities to delay or suspend these trials, or that will delay the analysis of data from these trials. If we experience any such problems, we may not have the financial resources to continue development of the drug candidate that is affected, or development of any of our other drug candidates. We may also lose, or be unable to enter into, collaborative arrangements for the affected drug candidate and for other drug candidates we are developing.

          Delays in clinical trials could reduce the commercial viability of our drug candidates. Any of the following could delay our clinical trials:

•   discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;

•   problems in engaging IRBs to oversee trials or problems in obtaining IRB approval of studies;

•   delays in enrolling patients and volunteers into clinical trials;

•   high drop-out rates for patients and volunteers in clinical trials;

•   negative results of clinical trials;

•   inadequate supply or quality of drug candidate materials or other materials necessary for the conduct of our clinical trials;

•   serious and unexpected drug-related side effects experienced by participants in our clinical trials; or

•   unfavorable FDA inspection and review of a clinical trial site or records of any clinical or preclinical investigation.

The FDA approval process may be delayed for any drugs we develop that require the use of specialized drug delivery devices.

          Some drug candidates that we develop may need to be administered using specialized drug delivery devices. We believe that any product candidate we develop for PD, or other central nervous system diseases will need to be administered using such a device. For neurodegenerative diseases, we have entered into a collaboration agreement with Medtronic to pursue potential development of drug-device combinations incorporating RNAi therapeutics. We may not achieve successful development results under this collaboration and may need to seek other collaboration partners to develop alternative drug delivery systems, or utilize existing drug delivery systems, for the delivery of Direct RNAi therapeutics for these diseases. While we expect to rely on drug delivery systems that have been approved by the FDA or other regulatory agencies to deliver drugs like ours to similar physiological sites, we, or our collaborator, may need to modify the design or labeling of such delivery device for some products we may develop. In such an event, the FDA may regulate the product as a combination product or require additional approvals or clearances for the modified delivery device. Further, to the extent the specialized delivery device is owned by another company, we would need that company’s cooperation to implement the necessary changes to the device, or its labeling, and to obtain any additional approvals or clearances. In cases where we do not have an ongoing collaboration with the company that makes the device, obtaining such additional approvals or clearances and the cooperation of such other companycould significantly delay and increase the cost of obtaining marketing approval, which could reduce the commercial viability of our drug candidate. In summary, we may be unable to find, or experience delays in finding, suitable drug delivery systems to administer Direct RNAi therapeutics, which could negatively affect our ability to successfully commercialize certain Direct RNAi therapeutics.

We may be unable to obtain U.S. or foreign regulatory approval and, as a result, be unable to commercialize our drug candidates.

          Our drug candidates are subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization. Rigorous preclinical testing and clinical trials and an extensive regulatory approval process are required to be successfully completed in the United States and in many foreign jurisdictions before a new drug can be sold. Satisfaction of these and

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other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the drug candidates we may develop will obtain the appropriate regulatory approvals necessary for us or our collaborators to begin selling them.

          We have no experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA. The time required to obtain FDA and other approvals is unpredictable but typically exceeds five years following the commencement of clinical trials, depending upon the complexity of the drug candidate. Any analysis we perform of data from preclinical and clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unexpected delays or increased costs due to new government regulations, for example, from future legislation or administrative action, or from changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.

          Because the drugs we are intending to develop may represent a new class of drug, the FDA has not yet established any definitive policies, practices or guidelines in relation to these drugs. While we expect any AMD, RSV, PD or SCI product candidates we develop will be regulated as a new drug under the Federal Food, Drug, and Cosmetic Act, the FDA could decide to regulate them or other products we may develop as biologics under the Public Health Service Act. The lack of policies, practices or guidelines may hinder or slow review by the FDA of any regulatory filings that we may submit. Moreover, the FDA may respond to these submissions by defining requirements we may not have anticipated. Such responses could lead to significant delays in the clinical development of our product candidates. In addition, because there are approved treatments for AMD, RSV and PD, in order to receive regulatory approval, we will need to demonstrate through clinical trials that the product candidates we develop to treat these diseases, if any, are not only safe and effective, but safer or more effective than existing products.

          Any delay or failure in obtaining required approvals could have a material adverse effect on our ability to generate revenues from the particular drug candidate. Furthermore, any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may market the product. These limitations may limit the size of the market for the product.

          We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by the FDA does not assure approval by regulatory authorities outside the United States.

Even if we obtain regulatory approvals, our marketed drugs will be subject to ongoing regulatory review. If we fail to comply with continuing U.S. and foreign regulations, we could lose our approvals to market drugs and our business would be seriously harmed.

          Following any initial regulatory approval of any drugs we may develop, we will also be subject to continuing regulatory review, including the review of adverse drug experiences and clinical results that are reported after our drug products are made commercially available. This would include results from any post-marketing tests or vigilance required as a condition of approval. The manufacturer and manufacturing facilities we use to make any of our drug candidates will also be subject to periodic review and inspection by the FDA. The discovery of any previously unknown problems with the product, manufacturer or facility may result in restrictions on the drug or manufacturer or facility, including withdrawal of the drug from the market. We do not have, and currently do not intend to develop, the ability to manufacture material for our clinical trials or on a commercial scale. We may manufacture clinical trial materials or we may contract a third-party to manufacture these materials for us. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on the third-party manufacturer for regulatory compliance. Our product promotion and advertising is also subject to regulatory requirements and continuing FDA review.

          If we fail to comply with applicable continuing regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and criminal prosecutions.

Even if we receive regulatory approval to market our product candidates, the market may not be receptive to our product candidates upon their commercial introduction, which will prevent us from becoming profitable.

          The product candidates that we are developing are based upon new technologies or therapeutic approaches. Key participants in pharmaceutical marketplaces, such as physicians, third-party payors and consumers, may not accept a product intended to improve therapeutic results based on RNAi technology. As a result, it may be more difficult for us to convince the medical community and third-party payors to accept and use our products.

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                Other factors that we believe will materially affect market acceptance of our product candidates include:

•   the timing of our receipt of any marketing approvals, the terms of any approvals and the countries in which approvals are obtained;

•   the safety, efficacy and ease of administration;

•   the willingness of patients to accept relatively new routes of administration such as injection into the eye;

•   the success of our physician education programs;

•   the availability of government and third-party payor reimbursement;

•   the pricing of our products, particularly as compared to alternative treatments; and

•   the availability of alternative effective treatments for the diseases that product candidates we develop are intended to treat.

If we or our collaborators, manufacturers or service providers fail to comply with regulatory laws and regulations, we or they could be subject to enforcement actions, which could affect our ability to market and sell our products and may harm our reputation.

          If we or our collaborators, manufacturers or service providers fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions, which could affect our ability to develop, market and sell our products under development successfully and could harm our reputation and lead to reduced acceptance of our products by the market. These enforcement actions include:

•   warning letters;

•   recalls or public notification or medical product safety alerts;

•   restrictions on, or prohibitions against, marketing our products;

•   restrictions on importation of our products;

•   suspension of review or refusal to approve pending applications;

•   suspension or withdrawal of product approvals;

•   product seizures;

•   injunctions; and

•   civil and criminal penalties and fines.

Any drugs we develop may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, thereby harming our business.

          The regulations that govern marketing approvals, pricing and reimbursement for new drugs vary widely from country to country. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. Although we intend to monitor these regulations, our programs are currently in the early stages of development and we will not be able to assess the impact of price regulations for a number of years. As a result, we might obtain regulatory approval for a product in a particular country, but then be

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subject to price regulations that delay our commercial launch of the product and negatively impact the revenues we are able to generate from the sale of the product in that country.

          Our ability to commercialize any products successfully also will depend in part on the extent to which reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Even if we succeed in bringing one or more products to the market, these products may not be considered cost-effective, and the amount reimbursed for any products may be insufficient to allow us to sell our products on a competitive basis. Because our programs are in the early stages of development, we are unable at this time to determine their cost effectiveness and the level or method of reimbursement. Increasingly, the third-party payors who reimburse patients, such as government and private insurance plans, are requiring that drug companies provide them with predetermined discounts from list prices, and are challenging the prices charged for medical products. If the price we are able to charge for any products we develop is inadequate in light of our development and other costs, our profitability could be adversely affected.

          We currently expect that any drugs we develop may need to be administered under the supervision of a physician. Under currently applicable law, drugs that are not usually self-administered may be eligible for coverage by the Medicare program if:

•   they are incident to a physician’s services;

•   they are “reasonable and necessary” for the diagnosis or treatment of the illness or injury for which they are administered according to accepted standard of medical practice;

•   they are not excluded as immunizations; and · they have been approved by the FDA.

          There may be significant delays in obtaining coverage for newly-approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA. Moreover, eligibility for coverage does not imply that any drug will be reimbursed in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim payments for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement may be based on payments allowed for lower-cost drugs that are already reimbursed, may be incorporated into existing payments for other services and may reflect budgetary constraints or imperfections in Medicare data. Net prices for drugs may be reduced by mandatory discounts or rebates required by government health care programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. Third party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates. Our inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and private payors for new drugs that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products, and our overall financial condition.

          We believe that the efforts of governments and third-party payors to contain or reduce the cost of healthcare will continue to affect the business and financial condition of pharmaceutical and biopharmaceutical companies. A number of legislative and regulatory proposals to change the healthcare system in the United States and other major healthcare markets have been proposed in recent years. These proposals have included prescription drug benefit legislation recently enacted in the United States and healthcare reform legislation recently enacted by certain states. Further federal and state legislative and regulatory developments are possible and we expect ongoing initiatives in the United States to increase pressure on drug pricing. Such reforms could have an adverse effect on anticipated revenues from drug candidates that we may successfully develop.

          Another development that may affect the pricing of drugs is Congressional action regarding drug reimportation into the United States. The Medicare Prescription Drug Plan legislation, which became law in December 2003, requires the Secretary of Health and Human Services to promulgate regulations for drug reimportation from Canada into the United States under some circumstances, including when the drugs are sold at a lower price than in the United States. The Secretary retains the discretion not to implement a drug reimportation plan if he finds that the benefits do not outweigh the cost. Proponents of drug reimportation may attempt to pass legislation that would directly allow reimportation under certain circumstances. If legislation or regulations were passed allowing the reimportation of drugs, they could decrease the price we receive for any products that we may develop, negatively affecting our anticipated revenues and prospects for profitability.

          Some states and localities have established drug importation programs for their citizens. So far, these programs have not led

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to a large proportion of prescription orders to be placed for foreign purchase. The FDA has warned that importing drugs is illegal and in December 2004 began to take action to halt the use of these programs by filing a civil complaint against an importer of foreign prescription drugs. If such programs were to become more substantial and were not to be encumbered by the federal government, they could also decrease the price we receive for any products that we may develop, negatively affecting our anticipated revenues and prospects for profitability.

There is a substantial risk of product liability claims in our business. If we are unable to obtain sufficient insurance, a product liability claim against us could adversely affect our business.

          Our business exposes us to significant potential product liability risks that are inherent in the development, manufacturing and marketing of human therapeutic products. Product liability claims could delay or prevent completion of our clinical development programs. If we succeed in marketing products, such claims could result in an FDA investigation of the safety and effectiveness of our products, our manufacturing processes and facilities or our marketing programs, and potentially a recall of our products or more serious enforcement action, or limitations on the indications for which they may be used, or suspension or withdrawal of approval. We currently do not have any product liability insurance, but plan to obtain such insurance at appropriate levels prior to initiating clinical trials and at higher levels prior to marketing any of our drug candidates. Any insurance we obtain may not provide sufficient coverage against potential liabilities. Furthermore, clinical trial and product liability insurance is becoming increasingly expensive. As a result, we may be unable to obtain sufficient insurance at a reasonable cost to protect us against losses caused by product liability claims that could have a material adverse effect on our business.

If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.

          Our research and development involves the use of hazardous materials, chemicals and various radioactive compounds. We maintain quantities of various flammable and toxic chemicals in our facilities in Cambridge and Germany that are required for our research and development activities. We believe our procedures for storing, handling and disposing these materials in our Cambridge facility comply with the relevant guidelines of the City of Cambridge and the Commonwealth of Massachusetts and the procedures we employ in our German facility comply with the standards mandated by applicable German laws and guidelines. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards mandated by applicable regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials.

          Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological, hazardous or radioactive materials. Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate any of these laws or regulations.

Risks Related to Competition

The pharmaceutical market is intensely competitive. If we are unable to compete effectively with existing drugs, new treatment methods and new technologies, we may be unable to commercialize any drugs that we develop.

          The pharmaceutical market is intensely competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel drugs for the same diseases that we are targeting or expect to target. Many of our competitors have:

•   much greater financial, technical and human resources than we have at every stage of the discovery, development, manufacture and commercialization of products;

•   more extensive experience in preclinical testing, conducting clinical trials, obtaining regulatory approvals, and in manufacturing and marketing pharmaceutical products;

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•   product candidates that are based on previously tested or accepted technologies;

•   products that have been approved or are in late stages of development; and

•   collaborative arrangements in our target markets with leading companies and research institutions.

          We will face intense competition from drugs that have already been approved and accepted by the medical community for the treatment of the conditions for which we may develop drugs. We also expect to face competition from new drugs that enter the market. We believe a significant number of drugs are currently under development, and may become commercially available in the future, for the treatment of conditions for which we may try to develop drugs. For instance, we are currently evaluating RNAi therapeutics to suppress VEGF gene activity as a potential drug candidate for the treatment of wet AMD and we are currently evaluating the potential of RNAi therapeutics for the treatment of RSV, PD and CF. Two drugs, Visudyne and Macugen, are already marketed for the treatment of wet AMD, Virazole is currently marketed for the treatment of certain RSV patients, numerous drugs are currently marketed for the treatment of PD and two drugs, TOBI and Pulmozyme, are currently marketed for the treatment of CF. In addition, we are aware of a number of experimental drugs for the treatment of wet AMD that, unlike our product candidate, are in advanced stages of clinical development. These experimental drugs include Lucentis, which is being developed by Genentech, Inc. in collaboration with Novartis. These drug candidates may be approved for marketing before our product candidate receives approval. Furthermore, our competitors’ products may be more effective, or marketed and sold more effectively, than any products we develop.

          If we successfully develop drug candidates, and obtain approval for them, we will face competition based on many different factors, including:

•   the safety and effectiveness of our products;

•   the ease with which our products can be administered and the extent to which patients accept relatively new routes of administration such as injection into the eye;

•   the timing and scope of regulatory approvals for these products;

•   the availability and cost of manufacturing, marketing and sales capabilities;

•   price;

•   reimbursement coverage; and

•   patent position.

          Our competitors may develop or commercialize products with significant advantages over any products we develop based on any of the factors listed above or on other factors. Our competitors may therefore be more successful in commercializing their products than we are, which could adversely affect our competitive position and business. Competitive products may make any products we develop obsolete or noncompetitive before we can recover the expenses of developing and commercializing our drug candidates. Furthermore, we also face competition from existing and new treatment methods that reduce or eliminate the need for drugs, such as the use of advanced medical devices. The development of new medical devices or other treatment methods for the diseases we are targeting could make our drug candidates noncompetitive, obsolete or uneconomical.

We face competition from other companies that are working to develop novel drugs using technology similar to ours. If these companies develop drugs more rapidly than we do or their technologies are more effective, our ability to successfully commercialize drugs will be adversely affected.

          In addition to the competition we face from competing drugs in general, we also face competition from other companies working to develop novel drugs using technology that competes more directly with our own. We are aware of several other companies that are working in the field of RNAi, including Sirna Therapeutics, Inc., Acuity Pharmaceuticals, Inc., Nucleonics, Inc., Benitec Ltd. and CytRx Corporation. In addition, we granted a license to Isis under which it may develop RNAi therapeutics against a limited number of targets. Any of these companies may develop its RNAi technology more rapidly and more effectively than us.

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          We also compete with companies working to develop antisense-based drugs. Like RNAi product candidates, antisense drugs target mRNAs in order to suppress the activity of specific genes. Isis is currently marketing an antisense drug and has several antisense drug candidates in clinical trials, and another company, Genta Inc., has multiple antisense drug candidates in late-stage clinical trials. The development of antisense drugs is more advanced than that of RNAi therapeutics and may become the preferred technology for drugs that target mRNAs to silence specific genes.

Risks Related to Patents, Licenses and Trade Secrets

          If we are not able to obtain and enforce patent protection for our discoveries, our ability to develop and commercialize our product candidates will be harmed.

          Our success depends, in part, on our ability to protect proprietary methods and technologies that we develop under the patent and other intellectual property laws of the United States and other countries, so that we can prevent others from unlawfully using our inventions and proprietary information. However, we may not hold proprietary rights to some patents required for us to commercialize our proposed products. Because certain U.S. patent applications are confidential until patents issue, such as applications filed prior to November 29, 2000, or applications filed after such date which will not be filed in foreign countries, third parties may have filed patent applications for technology covered by our pending patent applications without our being aware of those applications, and our patent applications may not have priority over those applications. For this and other reasons, we may be unable to secure desired patent rights, thereby losing desired exclusivity. Further, we may be required to obtain licenses under third-party patents to market our proposed products or conduct our research and development or other activities. If licenses are not available to us on acceptable terms, we will not be able to market the affected products or conduct the desired activities.

          Our strategy depends on our ability to rapidly identify and seek patent protection for our discoveries. In addition, we will rely on third-party collaborators to file patent applications relating to proprietary technology that we develop jointly during certain collaborations. The process of obtaining patent protection is expensive and time-consuming. If our present or future collaborators fail to file and prosecute all necessary and desirable patent applications at a reasonable cost and in a timely manner, our business will be adversely affected. Despite our efforts and the efforts of our collaborators to protect our proprietary rights, unauthorized parties may be able to obtain and use information that we regard as proprietary. The mere issuance of a patent does not guarantee that it is valid or enforceable, so even if we obtain patents, they may not be valid or enforceable against third parties.

          Our pending patent applications may not result in issued patents. The patent position of pharmaceutical or biotechnology companies, including ours, is generally uncertain and involves complex legal and factual considerations. The standards that the United States Patent and Trademark Office and its foreign counterparts use to grant patents are not always applied predictably or uniformly and can change. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in pharmaceutical or biotechnology patents. Accordingly, we do not know the degree of future protection for our proprietary rights or the breadth of claims that will be allowed in any patents issued to us or to others.

          We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. If any trade secret, know-how or other technology not protected by a patent were to be disclosed to or independently developed by a competitor, our business and financial condition could be materially adversely affected.

We license patent rights from third party owners. If such owners do not properly maintain or enforce the patents underlying such licenses, our competitive position and business prospects will be harmed.

          We are a party to a number of licenses that give us rights to third party intellectual property that is necessary or useful for our business. In particular, we have obtained licenses from Isis, Hybridon, Carnegie Institution of Washington, Cancer Research Technology Limited, the Massachusetts Institute of Technology, the Whitehead Institute, Garching Innovation GmbH, representing the Max Planck Gesellschaft zur Förderung der Wissenschaften e.V., referred to as the Max Planck organization, Stanford University, Cold Spring Harbor Laboratory and the University of South Alabama. We also intend to enter into additional licenses to third party intellectual property in the future.

          Our success will depend in part on the ability of our licensors to obtain, maintain and enforce patent protection for our licensed intellectual property, in particular, those patents to which we have secured exclusive rights. Our licensors may not successfully prosecute the patent applications to which we are licensed. Even if patents issue in respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing

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these patents, or may pursue such litigation less aggressively than we would. Without protection for the intellectual property we license, other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

Two patents from one of our key patent families, the so-called Kreutzer-Limmer patent series of patents, are the subjects of opposition proceedings in the European Patent Office and the Australian Patent Office, which could result in the invalidation of these patents.

          A German Utility Model covering RNAi composition was registered in 2003, and a patent covering RNAi compositions and their use was granted by the European Patent Office, or EPO, in 2002, in South Africa in 2003 and accepted for grant in Australia in 2004. Related patent applications are pending in other countries, including the United States. A German Utility Model is a form of patent that is directed only to physical matter, such as medicines, and does not cover methods. The maximum period of protection afforded by the German Utility Model ends in 2010. After the grant by the EPO of the Kreutzer-Limmer patents published under publication number EP 1144623B9, several oppositions to the issuance of the European patent were filed with the EPO, a practice that is allowed under the European Patent Convention. Each of the oppositions raises a number of grounds for the invalidation of the patent, including the use of disclaimer practice. The EPO opposition division in charge of the opposition proceedings may agree with one or more of the grounds and could revoke the patent in whole or restrict the scope of the claims. It may be several years before the outcome of the opposition proceeding is decided by the EPO. In addition, in May 2005 the EPO granted the Company a new patent covering short interfering RNAs, or siRNAs, including therapeutic compositions, methods, and uses of siRNAs and derivatives with a length between 15 and 49 nucleotides. This patent is published under publication number EP 1214945 and we believe that it extends the claims of the original Kreutzer-Limmer patent significantly. However, this patent may also become the subject of opposition, which could result in its invalidation, the determination of which may take the EPO several years to decide upon.

          In addition, the Enlarged Board of Appeal at the EPO rendered a decision in an unrelated case covering what is known as “disclaimer practice”. With a disclaimer, a patent applicant gives up, or disclaims, part of the originally claimed invention in a patent application in order to overcome prior art and adds a limitation to the claims which may have no basis in the original disclosure. The Enlarged Board determined that disclaimer practice is allowed under the European Patent Convention under a defined set of circumstances. It now has to be determined as part of the opposition proceedings regarding the Kreutzer-Limmer patent whether the use of a disclaimer during the prosecution of this case falls within one of the allowable circumstances. Determination by the EPO opposition division that the use of the disclaimer in this case does not fall under one of the allowed circumstances could result in the invalidation of the Kreutzer-Limmer patent. Even if the EPO opposition division determines that the use of a disclaimer is permissible, the Kreutzer-Limmer patent would remain subject to the other issues raised in the opposition. If the Kreutzer-Limmer patent is invalidated or limited for any reason, other companies will be better able to develop products that compete with ours, which could adversely affect our competitive business position, business prospects and financial condition.

          Furthermore, one party has given notice to the Australian Patent Office, IP Australia, on March 9, 2005, that it opposes the grant of AU 778474. This Australian patent derives from the same parent international patent application that gave rise to EP 1144623B9, and is of similar, but not the same, scope. In particular, its claims do not rely upon a disclaimer. The opposing party has not furnished the grounds for its opposition, and has until June 9, 2005, to submit such grounds. Like the proceedings in the EPO, these proceedings may take several years before an outcome becomes final.

Other companies or organizations may assert patent rights that prevent us from developing and commercializing our products.

          RNA interference is a relatively new scientific field that has generated many different patent applications from organizations and individuals seeking to obtain important patents in the field. These applications claim many different methods, compositions and processes relating to the discovery, development and commercialization of RNAi therapeutics. Because the field is so new, very few of these patent applications have been fully processed by government patent offices around the world, and there is a great deal of uncertainty about which patents will issue, when, to whom, and with what claims. It is likely that there will be significant litigation and other proceedings, such as interference and opposition proceedings in various patent offices, relating to patent rights in the RNAi field. Others may attempt to invalidate our intellectual property rights. Even if our rights are not directly challenged, disputes among third parties could lead to the weakening or invalidation of our intellectual property rights.

          In addition, there are many issued and pending patents that claim aspects of oligonucleotide chemistry that we may need to apply to our siRNA drug candidates. There are also many issued patents that claim genes or portions of genes that may be relevant for siRNA drugs we wish to develop.

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          Thus, it is possible that one or more organizations will hold patent rights to which we will need a license. If those organizations refuse to grant us a license to such patent rights on reasonable terms, we will not be able to market products or perform research and development or other activities covered by these patents.

If we become involved in patent litigation or other proceedings related to a determination of rights, we could incur substantial costs and expenses, substantial liability for damages or be required to stop our product development and commercialization efforts.

          A third party may sue us for infringing its patent rights. Likewise, we may need to resort to litigation to enforce a patent issued or licensed to us or to determine the scope and validity of third-party proprietary rights. In addition, a third party may claim that we have improperly obtained or used its confidential or proprietary information. Furthermore, in connection with a license agreement, we have agreed to indemnify the licensor for costs incurred in connection with litigation relating to intellectual property rights. The cost to us of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial, and the litigation would divert our management’s efforts. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could limit our ability to continue our operations.

          If any parties successfully claim that our creation or use of proprietary technologies infringes upon their intellectual property rights, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties’ patent rights. In addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a license. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license and are unable to design around a patent, we may be unable to effectively market some of our technology and products, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. Moreover, we expect that a number of our collaborations will provide that royalties payable to us for licenses to our intellectual property may be offset by amounts paid by our collaborators to third parties who have competing or superior intellectual property positions in the relevant fields, which could result in significant reductions in our revenues from products developed through collaborations.

If we fail to comply with our obligations under any licenses or related agreements, we could lose license rights that are necessary for developing and protecting our RNAi technology and any related product candidates that we develop, or we could lose certain exclusive rights to grant sublicenses.

          Our current licenses impose, and any future licenses we enter into are likely to impose, various development, commercialization, funding, royalty, diligence, sublicensing, insurance and other obligations on us. If we breach any of these obligations, the licensor may have the right to terminate the license or render the license non-exclusive, which could result in us being unable to develop, manufacture and sell products that are covered by the licensed technology or enable a competitor to gain access to the licensed technology. In addition, while we cannot currently determine the amount of the royalty obligations we will be required to pay on sales of future products, if any, the amounts may be significant. The amount of our future royalty obligations will depend on the technology and intellectual property we use in products that we successfully develop and commercialize, if any. Therefore, even if we successfully develop and commercialize products, we may be unable to achieve or maintain profitability.

          For two important pending patent applications, owned in part or solely by the Max Planck organization of Germany, our licenses with Garching, a related entity to Max Planck, include a condition requiring us to operate a German company comparable to our United States operation until at least December 2007. If we fail to comply with this condition, the owners of the patent applications that are the subject of these licenses may have the right to grant a similar license to one other company. We are in continuing discussions with Garching about our obligations under these licenses in an effort to further define the comparability requirement described above. We regard these pending patent applications as significant because they relate to important aspects of the structure of siRNA molecules and their use as therapeutics.

          We have an agreement with Isis under which we were granted licenses to over 150 patents and patent applications that we believe will be useful to the development of RNAi therapeutics. If, by January 1, 2008, we or a collaborator have not completed the studies required for an investigational new drug application filing or similar foreign filing for at least one product candidate involving these patent rights, Isis would have the right to grant licenses to third parties for these patents and patent applications, thereby making our rights non-exclusive.

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Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

          In order to protect our proprietary technology and processes, we rely in part on confidentiality agreements with our collaborators, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such party. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Risks Related to Our Common Stock

If our stock price fluctuates, purchasers of our common stock could incur substantial losses.

          The market price of our common stock may fluctuate significantly in response to factors that are beyond our control. The stock market in general has recently experienced extreme price and volume fluctuations. The market prices of securities of pharmaceutical and biotechnology companies have been extremely volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause purchasers of our common stock to incur substantial losses.

We may incur significant costs from class action litigation due to our expected stock volatility.

          Our stock price may fluctuate for many reasons, including as a result of public announcements regarding the progress of our development efforts, the addition or departure of our key personnel, variations in our quarterly operating results and changes in market valuations of pharmaceutical and biotechnology companies. Recently, when the market price of a stock has been volatile as our stock price may be, holders of that stock have occasionally brought securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit of this type against us, even if the lawsuit is without merit, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.

If there are substantial sales of our common stock, the price of our common stock could decline.

          If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly.

          The holders of 11,523,884 shares of common stock have rights to require us to file registration statements under the Securities Act or to include their shares in registration statements that we may file in the future for ourselves or other stockholders. In addition, the holders of warrants to purchase 52,630 shares of our common stock will be entitled to include shares issued upon exercise of the warrants in registration statements that we may file in the future.

Insiders have substantial influence over Alnylam and could delay or prevent a change in corporate control.

          Our directors and executive officers, together with their affiliates, beneficially own, in the aggregate, approximately 22% of our outstanding common stock as of March 31, 2005. As a result, these stockholders, if acting together, may have the ability to significantly affect the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. Accordingly, this concentration of ownership may harm the market price of our common stock by:

•   delaying, deferring or preventing a change in control of our company;

•   impeding a merger, consolidation, takeover or other business combination involving our company; or

•   discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.

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Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

          Provisions in our certificate of incorporation and our bylaws may delay or prevent an acquisition of us or a change in our management. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:

•   a classified board of directors;

•   a prohibition on actions by our stockholders by written consent;

•   the ability of our board of directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors;

•   limitations on the removal of directors; and

•   advance notice requirements for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings.

          Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. These provisions would apply even if the proposed merger or acquisition could be considered beneficial by some stockholders.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          As part of our investment portfolio we own financial instruments that are sensitive to market risks. The investment portfolio is used to preserve our capital until it is required to fund operations, including our research and development activities. Our marketable securities consist of U.S. government obligations, corporate debt, and commercial paper. All of our investments in debt securities are classified as “available-for-sale” and are recorded at fair value. Our “available-for-sale” investments are sensitive to changes in interest rates. Interest rate changes would result in a change in the net fair value of these financial instruments due to the difference between the market interest rate and the market interest rate at the date of purchase of the financial instrument. A 10% decrease in market interest rates would impact the net fair value of such interest-sensitive financial instruments by less than $50,000.

          Our $10.0 million equipment line of credit with Lighthouse Capital Partners V, L.P. bears an interest rate of prime plus 3% (8.75% at March 31, 2005). The interest rate on each draw that we make under this line of credit is fixed at the time the draw is made. As a result, any changes in the prime rate will not affect our future payments for existing debt outstanding under this line of credit.

          Foreign Currency Exchange Rate Risk

     We are exposed to foreign currency exchange rate risk. Our European operations are based in Kulmbach, Germany and the functional currency of these operations is the Euro. We provide monthly funding to support these operations. The amount of this funding is based upon actual expenditures incurred by our European operations and is calculated in Euros. Because of the frequency with which these operations are funded, we record amounts payable to fund these operations as current liabilities, which eliminate upon consolidation. The effect that fluctuations in the exchange rate between the Euro and the United States Dollar have on the amounts payable to fund our European operations are recorded in our consolidated statements of operations as other income or expense. We do not enter into any foreign exchange hedge contracts.

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          Assuming the amount of expenditures by our European operations were consistent with 2004 and the timing of the funding of these operations were to remain consistent during the remainder of 2005, a constant increase or decrease in the exchange rate between the Euro and the United States Dollar during the remainder of 2005 of 10% would result in a foreign exchange gain or loss of between $50,000 and $100,000.

          The amount of our foreign currency exchange rate risk is based on many factors including the timing and size of fluctuations in the currency exchange rate between the Euro and the United States Dollar, the amount of actual expenditures incurred by our European operations and the timing and size of funding provided to our European operations from the United States.

ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our chief executive officer and chief operating officer and treasurer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2005. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2005, our chief executive officer and chief operating officer and treasurer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

     No change in our internal control over financial reporting occurred during the fiscal quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(b) Initial Public Offering and Use of Proceeds from Sales of Registered Securities

          We registered shares of our common stock in connection with our initial public offering under the Securities Act. Our Registration Statement on Form S-1 (Reg. No. 333-113162) in connection with our initial public offering was declared effective by the SEC on May 27, 2004. The offering commenced as of May 27, 2004. The offering did not terminate before any securities were sold. As of the date of the filing of this report, the offering has terminated and 5,000,000 shares of our common stock registered were sold in the initial public offering and an additional 750,000 shares of our common stock registered were sold in connection with the exercise of an over-allotment option by the underwriters. The underwriters of the offering were Banc of America Securities LLC, Citigroup Global Markets Inc., Piper Jaffray & Co. and ThinkEquity Partners LLC.

          All 5,750,000 shares of our common stock registered in the offering were sold at the initial public offering price per share of $6.00. The aggregate purchase price of the offering was $34,500,000. The net offering proceeds to us after deducting total expenses were $29,884,000. We incurred total expenses in connection with the offering of $4,616,000, which consisted of direct payments of:

(i)	$1,929,000 in legal, accounting and printing fees;
(ii)	$2,415,000 in underwriters discounts, fees and commissions; and
(iii)	$272,000 in miscellaneous expenses.

          No payments for such expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s) owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

          We completed our initial public offering on May 28, 2004. The net offering proceeds have been invested into short-term investment-grade securities and money market accounts.

          There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC pursuant to Rule 424(b).

          None of the net proceeds of our initial public offering have been utilized from the effective date of our Registration Statement on Form S-1, May 27, 2004, through March 31, 2005.

37

ITEM 6. EXHIBITS

10.1 †	Collaboration Agreement by and among Medtronic, Inc. and the Registrant effective as of February 8, 2005
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Principal Executive Officer.
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, Rule 13a-14(a)/15d-14(a), by Principal Financial Officer.
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Principal Executive Officer.
32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Principal Financial Officer.
†	Indicates confidential treatment requested as to certain portions, which portions were omitted and filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Request.

38

SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 16, 2005.

ALNYLAM PHARMACEUTICALS, INC.
By:	/s/ John M. Maraganore
	John M. Maraganore
	President and Chief Executive Officer

          Pursuant to the requirements of the Securities Exchange Act of 1934, the Report has been signed as of May 16, 2005 below by the following persons on behalf of the Registrant and in the capacities indicated.

Name	Title
/s/ John M. Maraganore John M. Maraganore	President and Chief Executive Officer (Principal Executive Officer)
/s/ Barry E. Greene Barry E. Greene	Chief Operating Officer and Treasurer (Principal Financial and Accounting Officer)

39

EX-10.1

                                                                  EXECUTION COPY

                                                                    Exhibit 10.1

                    Confidential Materials omitted and filed
                   separately with the Securities and exchange
                     Commission. Asterisks denote omissions.

                             COLLABORATION AGREEMENT

                                 BY AND BETWEEN

                          ALNYLAM PHARMACEUTICALS, INC.

                                       AND

                                 MEDTRONIC, INC.



                                Table of Contents



                                                                                             Page
                                                                                             ----
                                                                                          
ARTICLE 1  Definitions....................................................................     1
    Section 1.1      Affiliate............................................................     1
    Section 1.2      Alnylam FTE Cost.....................................................     1
    Section 1.3      Alnylam Intellectual Property........................................     2
    Section 1.4      Alnylam Know-How.....................................................     2
    Section 1.5      Alnylam Patent Rights................................................     2
    Section 1.6      Alnylam siRNA........................................................     2
    Section 1.7      Blocking Third Party Intellectual Property...........................     2
    Section 1.8      [**].................................................................     2
    Section 1.9      Collaboration Program................................................     2
    Section 1.10     Collaboration Term...................................................     2
    Section 1.11     Commercialization or Commercialize...................................     2
    Section 1.12     Commercially Reasonable Efforts......................................     3
    Section 1.13     Confidential Information.............................................     3
    Section 1.14     Control or Controlled................................................     3
    Section 1.15     Cover, Covering or Covered...........................................     4
    Section 1.16     CPI..................................................................     4
    Section 1.17     Develop or Development...............................................     4
    Section 1.18     Development Candidate................................................     4
    Section 1.19     Device...............................................................     4
    Section 1.20     Device-Related.......................................................     4
    Section 1.21     Discover or Discovery................................................     4
    Section 1.22     [**].................................................................     4
    Section 1.23     Exclusivity Field....................................................     4
    Section 1.24     Executive Officers...................................................     4
    Section 1.25     FDA..................................................................     5
    Section 1.26     Field................................................................     5
    Section 1.27     First Commercial Sale................................................     5
    Section 1.28     GAAP.................................................................     5
    Section 1.29     Gene Target..........................................................     5
    Section 1.30     Gross Margin.........................................................     5
    Section 1.31     IND..................................................................     5
    Section 1.32     Joint Intellectual Property..........................................     5
    Section 1.33     Joint Know-How.......................................................     5
    Section 1.34     Joint Patent Rights..................................................     5
    Section 1.35     JRDC Representative..................................................     5
    Section 1.36     Know-How.............................................................     5
    Section 1.37     Licensed Product.....................................................     6
    Section 1.38     Listed Alnylam Third Party Agreement.................................     6
    Section 1.39     Major Market.........................................................     6
    Section 1.40     Manufacturing Cost...................................................     6
    Section 1.41     Medtronic Device.....................................................     6
    Section 1.42     Medtronic Intellectual Property......................................     6


                                       i



                               Table of Contents
                                  (Continued)



                                                                                             Page
                                                                                             ----
                                                                                          
    Section 1.43     Medtronic Know-How...................................................     6
    Section 1.44     Medtronic Patent Rights..............................................     6
    Section 1.45     NDA..................................................................     6
    Section 1.46     Net Sales............................................................     7
    Section 1.47     Neurodegenerative Disease............................................     7
    Section 1.48     Party................................................................     7
    Section 1.49     Patent Rights........................................................     7
    Section 1.50     PDP Decision Milestone...............................................     8
    Section 1.51     Person...............................................................     8
    Section 1.52     Phase I Study........................................................     8
    Section 1.53     Phase II(a) Study....................................................     8
    Section 1.54     Phase II(b) Study....................................................     8
    Section 1.55     Phase III Study......................................................     8
    Section 1.56     Pivotal Study........................................................     8
    Section 1.57     Product..............................................................     8
    Section 1.58     Product..............................................................     8
    Section 1.59     Product Development Program..........................................     8
    Section 1.60     Product Development Term.............................................     8
    Section 1.61     Regulatory Approval..................................................     9
    Section 1.62     Regulatory Authority.................................................     9
    Section 1.63     Royalty Term.........................................................     9
    Section 1.64     siRNA................................................................     9
    Section 1.65     siRNA-Attributable Portion...........................................     9
    Section 1.66     siRNA Cost of Goods..................................................     9
    Section 1.67     Target Indication....................................................     9
    Section 1.68     Technology Development Term..........................................     9
    Section 1.69     Territory............................................................    10
    Section 1.70     Third Party..........................................................    10
    Section 1.71     Valid Claim..........................................................    10
    Section 1.72     Workplan.............................................................    10
    Section 1.73     Additional Definitions...............................................    10

ARTICLE 2  Collaboration Program..........................................................    11
    Section 2.1      General..............................................................    11
    Section 2.2      JRDC.................................................................    11
    Section 2.3      Management of Collaboration Program..................................    12
    Section 2.4      Decisionmaking.......................................................    16
    Section 2.5      Term of Collaboration Program........................................    17
    Section 2.6      Exclusivity and Diligence Obligations................................    17
    Section 2.7      [**] Alnylam siRNAs Used In Collaboration Program Activities
                     for Which Alnylam has Primary Responsibility.........................    19
    Section 2.8      Supply of Alnylam siRNAs to Medtronic................................    19


                                       ii



                               Table of Contents
                                  (Continued)



                                                                                             Page
                                                                                             ----
                                                                                          
ARTICLE 3  Grant of Rights................................................................    19
    Section 3.1      Alnylam Grants.......................................................    19
    Section 3.2      Medtronic Covenant Not to Sue........................................    22
    Section 3.3      Retained Rights......................................................    22

ARTICLE 4  Financial Provisions...........................................................    23
    Section 4.1      Equity Investments and Payments for Additional Product
                     Development Programs.................................................    23
    Section 4.2      Milestone Payments for Product Development Programs..................    24
    Section 4.3      Royalty Payments.....................................................    24
    Section 4.4      Duration of Royalty Payments.........................................    25
    Section 4.5      Royalties Payable Only Once..........................................    25
    Section 4.6      Reductions to Section 4.2 and Section 4.3 Payments After Product
                     Development Program Terminations.....................................    26
    Section 4.7      Credits Against Future Royalties.....................................    26
    Section 4.8      Royalty Reports and Accounting.......................................    26
    Section 4.9      Currency Exchange....................................................    27
    Section 4.10     Tax Withholding......................................................    27
    Section 4.11     Late Payments........................................................    27

ARTICLE 5  Intellectual Property Ownership, Protection and Related Matters................    28
    Section 5.1      Ownership of Inventions..............................................    28
    Section 5.2      Prosecution and Maintenance of Patent Rights.........................    29
    Section 5.3      Third Party Infringement.............................................    30
    Section 5.4      Claimed Infringement; Claimed Invalidity.............................    32
    Section 5.5      Patent Term Extensions...............................................    32
    Section 5.6      Patent Marking.......................................................    32
    Section 5.7      Maintain Licenses in Force...........................................    33

ARTICLE 6  Confidentiality................................................................    33
    Section 6.1      Confidential Information.............................................    33
    Section 6.2      Disclosures to Employees, Consultants and Advisors...................    34
    Section 6.3      Term ................................................................    34
    Section 6.4      Publicity............................................................    34
    Section 6.5      Publications.........................................................    34

ARTICLE 7  Representations and Warranties.................................................    35
    Section 7.1      Representations of Authority.........................................    35
    Section 7.2      Consents.............................................................    35
    Section 7.3      No Conflict..........................................................    35
    Section 7.4      Enforceability.......................................................    35
    Section 7.5      Employee Obligations.................................................    35
    Section 7.6      Intellectual Property................................................    36
    Section 7.7      No Warranties........................................................    36


                                      iii


                               Table of Contents
                                  (Continued)



                                                                                             Page
                                                                                             ----
                                                                                          
ARTICLE 8  Term and Termination...........................................................    36
    Section 8.1      Term.................................................................    36
    Section 8.2      Termination For Material Breach......................................    36
    Section 8.3      Termination Upon Termination of the Supply Agreement.................    37
    Section 8.4      Termination For Convenience..........................................    37
    Section 8.5      Effect of Termination................................................    38
    Section 8.6      Survival.............................................................    40

ARTICLE 9  Miscellaneous Provisions.......................................................    40
    Section 9.1      Indemnification......................................................    40
    Section 9.2      Governing Law and Waiver of Jury Trial...............................    42
    Section 9.3      Assignment...........................................................    42
    Section 9.4      Amendments...........................................................    42
    Section 9.5      Notices..............................................................    42
    Section 9.6      Force Majeure........................................................    43
    Section 9.7      Independent Contractors..............................................    43
    Section 9.8      No Strict Construction...............................................    44
    Section 9.9      Headings.............................................................    44
    Section 9.10     No Implied Waivers; Rights Cumulative................................    44
    Section 9.11     Severability.........................................................    44
    Section 9.12     Execution in Counterparts; Facsimile Signatures......................    44
    Section 9.13     No Consequential or Punitive Damages.................................    44
    Section 9.14     Interpretation.......................................................    44


Schedule 1.5         Alnylam Patent Rights
Schedule 1.38        Listed Alnylam Third Party Agreements
Schedule 3.1(e)      Burdens on Alnylam Intellectual Property Imposed by
                     Existing Alnylam Contractual Obligations
Schedule 4.3(b)      Medtronic Financial Obligations With Respect to Listed
                     Alnylam Third Party Agreements

Exhibit A      PDP Decision Milestone Criteria
Exhibit B      Form of Initial Technology Development Program Workplan
Exhibit C      Material Terms of Investment Agreement
Exhibit D      Initial Press Release
Exhibit E      Permitted Disclosures

                                       iv


                             COLLABORATION AGREEMENT

      This Collaboration Agreement (the "Agreement") is entered into as of the
8th day of February, 2005 (the "Effective Date") by and between Alnylam
Pharmaceuticals, Inc., a corporation organized and existing under the laws of
the State of Delaware and having its principal office at 300 Third Street,
Cambridge, Massachusetts 02142 ("Alnylam"), and Medtronic, Inc., a corporation
organized and existing under the laws of the State of Minnesota and having its
principal office at 710 Medtronic Parkway, Minneapolis, Minnesota 55432
("Medtronic").

                                  INTRODUCTION

      1. Alnylam is engaged in the business of discovering and developing
siRNA-based therapeutics.

      2. Medtronic is engaged in the business of developing and marketing
medical devices.

      3. Alnylam and Medtronic are interested in collaborating in the discovery,
development and commercialization of siRNA-based therapeutics for the treatment
of certain diseases using implanted infusion devices for the direct delivery of
siRNAs to the human nervous system.

      NOW, THEREFORE, in consideration of the respective representations,
warranties, covenants and agreements contained herein, and for other valuable
consideration, the receipt and adequacy of which are hereby acknowledged,
Alnylam and Medtronic agree as follows:

                                    Article I

                                   Definitions

When used in this Agreement, each of the following terms shall have the meanings
set forth in this Article I:

      Section 1.1 "Affiliate". Affiliate of a specified Person shall mean any
Person that controls, is controlled by, or is under common control with such
Person. For purposes of this Section 1.1, "control" shall mean (a) in the case
of corporate entities, direct or indirect ownership of at least fifty percent
(50%) of the stock or shares having the right to vote for the election of
directors, and (b) in the case of non-corporate entities, direct or indirect
ownership of at least fifty percent (50%) of the equity interest with the power
to direct the management and policies of such non-corporate entities.

      Section 1.2 "Alnylam FTE Cost". Alnylam FTE Cost shall mean the product
obtained by multiplying (a) the number of full-time-equivalent person-years
(each consisting of a total of [**]) of scientific, technical or managerial work
by Alnylam personnel on or directly related to the Product Development Program
by (b) an annual cost per full-time-equivalent person-year to be agreed by the
Parties in connection with the Proceed-to-PDP Determination, increased or
decreased annually by the percentage increase or decrease in the CPI as of
December 31 of the



then most recently ended calendar year over the level of the CPI on December 31
of the calendar year most recently ended prior to the Proceed-to-PDP
Determination (i.e., the first such increase or decrease would occur on January
1 of the calendar year following the calendar year in which the Proceed-to-PDP
Determination occurs).

      Section 1.3 "Alnylam Intellectual Property". Alnylam Intellectual
Property shall mean Alnylam Know-How and Alnylam Patent Rights, collectively.

      Section 1.4 "Alnylam Know-How". Alnylam Know-How shall mean any Know-How,
other than Joint Know-How, that (a) either (i) is in Alnylam's possession on the
Effective Date or (ii) Alnylam develops or acquires during the Collaboration
Term, (b) is useful to Discover, Develop and Commercialize Alnylam siRNAs and/or
Licensed Products, and (c) is Controlled by Alnylam or used by Alnylam in the
Collaboration Program.

      Section 1.5 "Alnylam Patent Rights". Alnylam Patent Rights shall mean
Patent Rights Controlled by Alnylam Covering Alnylam Know-How, including those
set forth on Schedule 1.5, but excluding Joint Patent Rights.

      Section 1.6 "Alnylam siRNA". Alnylam siRNA shall mean any siRNA (a) the
Discovery, Development, manufacture, Commercialization or other use of which
uses Alnylam Know-How or Joint Know-How or is Covered by Alnylam Patent Rights
or Joint Patent Rights and (b) made available or approved by Alnylam for
Development in the Collaboration Program.

      Section 1.7 "Blocking Third Party Intellectual Property". Blocking Third
Party Intellectual Property shall mean, on a Licensed Product-by-Licensed
Product and country-by-country basis, Valid Claims that (a) are not Controlled
by Alnylam and not Controlled as of the Effective Date by Medtronic and (b)
Cover an siRNA contained in or used in such Licensed Product in such country.
For the avoidance of doubt, Valid Claims Controlled by Alnylam under a [**]
shall not constitute Blocking Third Party Intellectual Property.

      Section 1.8 "[**] shall mean, with respect to an Alnylam siRNA included
in a Product Development Program, achievement of [**] agreed by the Parties
pursuant to Sections 2.3(c)(i), 2.3(c)(iii) and 2.3(c)(iv) as constituting
reasonable evidence of [**].

      Section 1.9 "Collaboration Program". Collaboration Program shall mean the
research and development program to be performed by the Parties pursuant to this
Agreement to develop Licensed Products, consisting of the Technology Development
Program and the Product Development Program(s).

      Section 1.10 "Collaboration Term". Collaboration Term shall mean the
period commencing on the Effective Date and ending on the earliest of (a) the
end of the Technology Development Term, [**] (b) the end of all Product
Development Terms, (c) the date (if any) on which the Collaboration Term is
terminated by mutual written agreement of the Parties, and (d) the date of
termination of this Agreement in accordance with the provisions hereof.

      Section 1.11 "Commercialization" or "Commercialize". Commercialization or
Commercialize shall mean any activities directed to marketing, promoting,
distributing,

                                        2


importing, offering to sell, and/or selling a product, whether before or after
Regulatory Approval for such product has been obtained.

      Section 1.12 "Commercially Reasonable Efforts". Commercially Reasonable
Efforts shall mean the efforts, expertise and resources normally used by a Party
to Discover, Develop and Commercialize a product or compound owned by it or to
which it has rights, which is of similar market potential at a similar stage in
its development or product life, taking into account issues of safety and
efficacy, product profile, difficulty in developing the product or compound,
competitiveness of the marketplace for the product, the proprietary position of
the compound or product, the regulatory structure involved, the availability and
level of reimbursement for such treatment by third party payors or health
insurance plans, the potential total profitability of the applicable product(s)
marketed or to be marketed and other relevant factors affecting the cost, risk
and timing of Development and the total potential reward to be obtained if a
product is Commercialized. The Parties agree that Commercially Reasonable
Efforts shall not require a Party to expend efforts, expertise and resources
that such Party would not normally expend to Discover, Develop and Commercialize
a product or compound owned by it or to which it has rights, taking into account
the foregoing factors.

      Section 1.13 "Confidential Information". Confidential Information shall
mean all Know-How or other information that is of a confidential and proprietary
nature to a Party. Confidential Information includes Know-How or other
information (whether or not patentable) regarding a Party's technology,
products, business information or objectives and reports and audits under
Section 4.8, and all biological materials of a Party. Notwithstanding the
foregoing, Confidential Information shall not include Know-How or other
information that:

            (a) was known or used by the receiving Party or its Affiliates prior
to its date of disclosure to the receiving Party as demonstrated by
contemporaneous written records; or

            (b) either before or after the date of the disclosure to the
receiving Party is lawfully disclosed to the receiving Party or its Affiliates
by sources other than the disclosing Party rightfully in possession of such
Know-How or other information and not bound by confidentiality obligations to
the disclosing Party; or

            (c) either before or after the date of the disclosure to the
receiving Party or its Affiliates is or becomes published or otherwise is or
becomes part of the public domain through no breach hereof on the part of the
receiving Party or its Affiliates; or

            (d) is independently developed by or for the receiving Party or its
Affiliates without reference to or reliance upon the Confidential Information of
the disclosing Party as demonstrated by contemporaneous written records.

      Section 1.14 "Control" or "Controlled". Control or Controlled, with
respect to any (a) Know-How or other information or materials or (b)
intellectual property right, shall mean the possession (whether by license or
ownership) by a Party of the ability to grant to the other Party access and/or a
license as provided herein without violating the terms of any agreement with any
Third Party existing as of the Effective Date or thereafter during the term of
this Agreement.

                                        3


      Section 1.15 "Cover", "Covering" or "Covered". Cover, Covering or
Covered, with respect to a product or technology, shall mean that, but for a
license granted to a Person under a Valid Claim included in the Patent Rights
under which such license is granted, the Discovery, Development, manufacture,
Commercialization and/or other use of such product or practice of such
technology by such Person would infringe such Valid Claim.

      Section 1.16 "CPI". CPI shall mean the Consumer Price Index - Urban Wage
Earners and Clerical Workers, U.S. City Average, All Items, 1982-84 = 100,
published by the United States Department of Labor, Bureau of Labor Statistics
(or its successor equivalent index) in the United States.

      Section 1.17 "Develop" or "Development". Develop or Development shall
mean preclinical and clinical siRNA and/or Device development activities,
including test method development and stability testing, Device design,
siRNA-Device compatibility testing, toxicology, animal efficacy studies,
formulation, quality assurance/quality control development, statistical
analysis, clinical studies, regulatory affairs, product approval and
registration.

      Section 1.18 "Development Candidate". Development Candidate shall mean an
Alnylam siRNA that is designated as a Development Candidate in connection with a
[**] or thereafter designated as a Development Candidate by mutual agreement of
the Parties.

      Section 1.19 "Device". Device shall mean any implanted infusion device
for delivery of therapeutics to the human nervous system.

      Section 1.20 "Device-Related". Device-Related, with respect to Know-How
or Patent Rights, shall mean relating specifically to the design or physical
features of a Device, any [**] a Device (excluding [**]), any hardware component
of a Device, any software that controls a Device and/or any associated medical
devices or accessories, such as [**], and any use or implantation of any of the
foregoing, but not relating specifically to an siRNA ([**]) to be delivered by
such Device.

      Section 1.21 "Discover" or "Discovery". Discover or Discovery shall mean
any activities conducted to discover and characterize siRNAs as potential
therapeutics in the Field and to support the designation of the same as
Development Candidates in connection with the Proceed-To-PDP Determination or
thereafter in connection with an Additional Product Development Program.

      Section 1.22 "[**]". [**]shall mean an [**] produced [**].

      Section 1.23 "Exclusivity Field". Exclusivity Field, with respect to a
[**], shall mean the treatment of Target Indications for which a Licensed
Product is to be Commercialized, using Devices for the direct delivery of siRNAs
to the human nervous system [**]. Notwithstanding the foregoing, (a) the
Exclusivity Field shall not include [**] and (b) the term `direct delivery to
the human nervous system' does not encompass [**].

      Section 1.24 "Executive Officers". Executive Officers shall mean
Medtronic's Senior Vice President of Medicine and Technology (or the officer or
employee of Medtronic then

                                        4


serving in a substantially equivalent capacity) and Alnylam's Chief Operating
Officer (or the officer or employee of Alnylam then serving in a substantially
equivalent capacity).

      Section 1.25 "FDA". FDA shall mean the United States Food and Drug
Administration.

      Section 1.26 "Field". Field shall mean the treatment of Neurodegenerative
Diseases using Devices for the direct delivery of siRNAs to the human nervous
system[**], it being understood that "direct delivery to the human nervous
system" does not encompass [**]. For the avoidance of doubt, the parties agree
that treatment of a Neurodegenerative Disease does not include [**].
Notwithstanding the foregoing, the Field shall not include [**].

      Section 1.27 "First Commercial Sale". First Commercial Sale, with respect
to a Licensed Product, shall mean the first commercial sale of such Licensed
Product by Medtronic, its Affiliates, distributors and/or agents. Sales for test
marketing or clinical trial purposes shall not constitute a First Commercial
Sale.

      Section 1.28 "GAAP". GAAP shall mean then current United States generally
accepted accounting principles, consistently applied.

      Section 1.29 "Gene Target". Gene Target shall mean [**].

      Section 1.30 "Gross Margin". Gross Margin, with respect to a Licensed
Product, shall mean: (a) (i) the Net Sales of such Licensed Product for the
applicable time period, times (ii) the [**] of such Licensed Product, less (b)
the [**] of such Licensed Product.

      Section 1.31 "IND". IND means an application submitted to a Regulatory
Authority to initiate human clinical trials, including (a) an Investigational
New Drug application or any successor application or procedure filed with the
FDA, (b) except where otherwise specifically provided in this Agreement, any
foreign equivalent of a U.S. Investigational New Drug application, and (c) all
supplements and amendments that may be filed with respect to the foregoing.

      Section 1.32 "Joint Intellectual Property". Joint Intellectual Property
shall mean Joint Know-How and Joint Patent Rights, collectively.

      Section 1.33 "Joint Know-How". Joint Know-How shall mean any Know-How
that is developed or acquired jointly by the Parties in the course of the
Collaboration Program, excluding [**].

      Section 1.34 "Joint Patent Rights". Joint Patent Rights shall mean Patent
Rights that Cover Joint Know-How.

      Section 1.35 "JRDC Representative". JRDC Representative shall mean a
Party's representative designated by such Party to serve on the JRDC pursuant to
Section 2.2.

      Section 1.36 "Know-How". Know-How shall mean any tangible or intangible
know-how, expertise, discoveries, inventions, information, data or materials,
including ideas, concepts,

                                       5


formulas, methods, procedures, designs, technologies, compositions, plans,
applications, technical data, samples, chemical compounds and biological
materials and all derivatives, modifications and improvements thereof.

      Section 1.37 "Licensed Product". Licensed Product shall mean a Product
within the Field that includes, as an active pharmaceutical ingredient, an
Alnylam siRNA for delivery via a Medtronic Device.

      Section 1.38 "Listed Alnylam Third Party Agreement". Listed Alnylam Third
Party Agreement shall mean any agreement listed on Schedule 1.38.

      Section 1.39 "Major Market". Major Market shall mean any of [**].

      Section 1.40 "Manufacturing Cost". Manufacturing Cost, with respect to the
manufacture and/or supply of Alnylam siRNAs for incorporation into Licensed
Products, shall mean (a) if either Party or an Affiliate of either Party
manufactures such Alnylam siRNAs, such Party's and/or its Affiliates' aggregate
manufacturing costs, which aggregate costs shall consist of (i) internal and
out-of-pocket costs of raw materials, labor and other variable costs directly
incurred in the manufacture of such Alnylam siRNAs and (ii) reasonable and
appropriate allocations (excluding [**]) pursuant to GAAP of Alnylam siRNA
manufacturing overhead costs, or (b) if [**] to a Third Party, such Party's
aggregate internal and out-of-pocket costs of procuring such [**] from the Third
Party, testing such [**] and putting such [**].

      Section 1.41 "Medtronic Device". Medtronic Device shall mean any Device
sold by Medtronic.

      Section 1.42 "Medtronic Intellectual Property". Medtronic Intellectual
Property shall mean Medtronic Know-How and Medtronic Patent Rights,
collectively.

      Section 1.43 "Medtronic Know-How". Medtronic Know-How shall mean any
Know-How, other than Joint Know-How and Know-How related to [**] siRNAs, that
(a) either (i) is in Medtronic's possession on the Effective Date or (ii)
Medtronic develops or acquires during the Collaboration Term, (b) is useful to
Discover, Develop and Commercialize Alnylam siRNAs and/or Licensed Products, and
(c) is Controlled by Medtronic or used by Medtronic in the Collaboration
Program.

      Section 1.44 "Medtronic Patent Rights". Medtronic Patent Rights shall mean
Patent Rights Controlled by Medtronic Covering Medtronic Know-How, but excluding
Joint Patent Rights.

      Section 1.45 "NDA". NDA shall mean an application submitted to a
Regulatory Authority for marketing approval of a product, including (a) a New
Drug Application, Product License Application or Biologics License Application
filed with FDA or any successor applications or procedures, (b) a foreign
equivalent of a U.S. New Drug Application, Product License Application or
Biologics License Application or any successor applications or procedures, and
(c) all supplements and amendments that may be filed with respect to the
foregoing.

                                       6


      Section 1.46 "Net Sales". Net Sales, with respect to a particular Licensed
Product in a particular period, shall mean the gross amount invoiced by
Medtronic, its Affiliates and/or its sublicensees on sales or other dispositions
(excluding sales or dispositions for use in clinical trials or other scientific
testing, in either case for which Medtronic receives no revenue) of the Licensed
Product to unrelated Third Parties during such period, less the following
deductions:

            (a) Trade, cash and quantity discounts actually allowed and taken
directly with respect to such sales or other dispositions;

            (b) Tariffs, duties, excises, sales taxes or other taxes imposed
upon and paid directly with respect to the delivery, sale or use of the Licensed
Product and included and separately stated in the applicable invoice (excluding
national, state or local taxes based on income);

            (c) Amounts repaid or credited by reason of rejections, defects,
recalls or returns or because of reasonable and customary chargebacks, refunds,
rebates or retroactive price reductions;

            (d) Amounts previously included in Net Sales of Licensed Products
that are written-off by Medtronic as uncollectible in accordance with
Medtronic's standard practices for writing off uncollectible amounts
consistently applied; provided that if any such written-off amounts are
subsequently collected, such collected amounts shall be included in Net Sales in
the period in which they are subsequently collected; and

            (e) Freight, insurance and other transportation charges incurred in
shipping a Licensed Product to Third Parties, included and separately stated in
the applicable invoice.

Such amounts shall, subject to the provisions of Sections 4.8 and 4.9, be
determined from the books and records of Medtronic, its Affiliates and/or its
sublicensees, maintained in accordance with GAAP, consistently applied.

      Section 1.47 "Neurodegenerative Disease". Neurodegenerative Disease shall
mean a disease of the brain and/or spinal cord in humans that is characterized
by the chronic and progressive death of neurons which leads to the loss of
normal neural function. Such diseases include, but are not limited to,
Parkinson's disease, Huntington's disease, Alzheimer's disease, and amyotrophic
lateral sclerosis. For the avoidance of doubt, Neurodegenerative Disease shall
not include [**].

      Section 1.48 "Party". Party shall mean Alnylam or Medtronic; "Parties"
shall mean Alnylam and Medtronic. As used in this Agreement, references to
"Third Parties" do not include a Party or its Affiliates.

      Section 1.49 "Patent Rights". Patent Rights shall mean United States and
foreign patents, patent applications and/or provisional patent applications,
utility models and utility model applications, design patents or registered
industrial designs and design applications or applications for registration of
industrial designs, and all substitutions, divisionals, continuations,
continuation-in-part applications, continued prosecution applications, reissues,
reexaminations and extensions thereof.

                                       7


      Section 1.50 "PDP Decision Milestone". PDP Decision Milestone shall mean
the satisfaction of the criteria set forth in Exhibit A with respect to [**]
Alnylam siRNA.

      Section 1.51 "Person". Person shall mean any corporation, limited or
general partnership, limited liability company, joint venture, trust,
unincorporated association, governmental body, authority, bureau or agency, any
other entity or body, or an individual.

      Section 1.52 "Phase I Study". Phase I Study shall mean a study of an siRNA
or Product in human volunteers or patients the purpose of which is preliminary
determination of safety and tolerability of a dosing regime and for which there
are no primary endpoints (as recognized by FDA or other Regulatory Authorities)
in the protocol relating to efficacy.

      Section 1.53 "Phase II(a) Study". Phase II(a) Study shall mean a
preliminary efficacy and safety study of an siRNA or Product in the target
patient population designed to demonstrate Clinical Proof of Concept.

      Section 1.54 "Phase II(b) Study". Phase II(b) Study shall mean a study of
an siRNA or Product to evaluate further any preliminary efficacy observed for,
and the safety of, the siRNA or Product in the target patient population and/or
to provide data that may be useful in the design of subsequent studies of the
siRNA or Product such as Phase III Studies or Pivotal Studies.

      Section 1.55 "Phase III Study". Phase III Study shall mean a controlled
study to confirm with statistical significance the efficacy and safety of an
siRNA or Product performed to obtain marketing and/or manufacturing approval for
the product in any country.

      Section 1.56 "Pivotal Study". Pivotal Study shall mean a human clinical
study, including any Phase III Study, the results of which, if the study
endpoints are met, would provide data necessary to support Regulatory Approval
for a Licensed Product in a Major Market. A Pivotal Study shall be deemed to
have commenced when the first patient has been dosed in such study or, in the
case of a study determined to meet the criteria of a Pivotal Study as set forth
above after the first patient has been dosed, when such study is determined to
meet such criteria.

      Section 1.57 "Primary Sequence or Chemical Modification Know-How". Primary
Sequence or Chemical Modifications Know-How shall mean information about the
primary sequence of any siRNA or chemical modifications incorporated into any
siRNA.

      Section 1.58 "Product". Product shall mean a human therapeutic product
that includes siRNA(s) as active pharmaceutical ingredient(s) delivered or
approved for delivery via a Device.

      Section 1.59 "Product Development Program". Product Development Program
shall mean the Initial Product Development Program and any Additional Product
Development Program(s).

      Section 1.60 "Product Development Term". Product Development Term, with
respect to a Product Development Program, shall mean the period commencing on
(a) with respect to the Initial Product Development Program, the date on which a
Proceed-to-PDP Determination is made, and (b) with respect to each Additional
Product Development Program, the date on which the Parties mutually agree to
commence such Product Development Program in accordance with

                                       8


Section 2.3(c)(iii), and, subject to [**], ending on the earliest date on which
at least one Licensed Product for the treatment of each Target Indication
designated for such Product Development Program has been commercially launched.

      Section 1.61 "Regulatory Approval". Regulatory Approval shall mean the
approval of the applicable Regulatory Authority necessary for the marketing and
sale of a Licensed Product for a particular indication in a country, excluding
separate pricing and/or reimbursement approvals that may be required.

      Section 1.62 "Regulatory Authority". Regulatory Authority shall mean a
federal, national, multinational, state, provincial or local regulatory agency,
department, bureau or other governmental entity with authority over the testing,
manufacture, use, storage, import, promotion, marketing or sale of a Product in
a country or territory.

      Section 1.63 "Royalty Term". Royalty Term, with respect to each Licensed
Product in each country of the Territory, shall mean the period of time ending
on the latest date on which the manufacture, use or sale of such Licensed
Product in such country is Covered by a Valid Claim of Alnylam Patent Rights.

      Section 1.64 "siRNA". siRNA means a composition designed to act primarily
through an RNAi mechanism which consists of either (a) two separate oligomers of
native or chemically modified RNA that are hybridized to one another along a
substantial portion of their lengths, or (b) a single oligomer of native or
chemically modified RNA that is hybridized to itself by self-complementary
base-pairing along a substantial portion of its length to form a hairpin.

      Section 1.65 "siRNA-Attributable Portion". siRNA-Attributable Portion,
with respect to any Licensed Product, shall mean the proportion of the end user
price of[**]such Licensed Product attributable, as determined jointly by both
Parties, to the Alnylam siRNA(s) incorporated in such Licensed Product (as
compared to the Medtronic Device incorporated in such Licensed Product), which
determination shall be made by the Parties prior to [**]. In making such
determination, the Parties shall consider [**], as well as any other factors
that the Parties may find relevant to such determination.

      Section 1.66 "siRNA Cost of Goods". siRNA Cost of Goods, with respect to a
Licensed Product, shall mean (a) either (i) Manufacturing Cost amounts [**], or
(ii) if Medtronic [**], Manufacturing Cost amounts incurred by [**] incorporated
into the Licensed Product, and (b) additional amounts attributable to the
Licensed Product reimbursable by [**]).

      Section 1.67 "Target Indication". Target Indication, with respect to an
Alnylam siRNA, shall mean each human disease or condition that is designated as
a Target Indication with respect to such Alnylam siRNA in accordance with
Section 2.3(c)(i) or 2.3(c)(iii).

      Section 1.68 "Technology Development Term". Technology Development Term
shall mean the period commencing on the Effective Date and, subject to early
termination pursuant to Section 2.3(e) or 2.3(f), ending on the earlier of (a)
the date on which either Party notifies the other Party that such Party [**] or
(b) the [**] anniversary of the Effective Date (or, if the Parties have, prior
to the date of such

                                       9

[**] anniversary, elected to extend the Technology Development Term, then the
date of expiration of such extension).

      Section 1.69 "Territory". Territory shall mean, subject to Section 8.2(b),
all countries of the world.

      Section 1.70 "Third Party". Third Party shall mean any Person other than
Alnylam or Medtronic and their respective Affiliates.

      Section 1.71 "Valid Claim". Valid Claim shall mean a claim (a) of any
issued, unexpired patent that has not been revoked or held unenforceable or
invalid by a decision of a court or governmental agency of competent
jurisdiction from which no appeal can be taken, or with respect to which an
appeal is not taken within the time allowed for appeal, and that has not been
disclaimed or admitted to be invalid or unenforceable through reissue,
disclaimer or otherwise, or (b) of any published patent application that has not
been cancelled, withdrawn or abandoned, nor been pending for more than seven (7)
years from the filing date of the earliest patent application from which such
patent application claims priority.

      Section 1.72 "Workplan". Workplan shall mean a work plan describing the
activities to be undertaken during each phase of the Collaboration Program, as
adopted, updated or amended pursuant to Section 2.3, including during the
Technology Development Program, the Initial Product Development Program
(consisting of the [**] Development Program[**] Development Program) and each
Additional Product Development Program.

      Section 1.73 Additional Definitions. Each of the following definitions is
set forth in the section of this Agreement indicated below:



             Definition                                        Section
- -----------------------------------------                  ----------------
                                                        
"Additional Product Development Program"                        2.3(c)(iii)
"Agreement"                                                        Preamble
"Alnylam"                                                          Preamble
"Alnylam Discontinuation Notice"                                     2.3(e)
"Alnylam Indemnified Parties"                                        9.1(a)
"Breaching Party"                                          8.2(a) or 8.2(c)
"[**] Development Program"                                        2.3(c)(i)
"[**] Development Program Workplan"                               2.3(c)(i)
"[**] Development Program"                                       2.3(c)(ii)
"[**] Development Program Workplan"                              2.3(c)(ii)
"Device Inventions"                                                  5.1(b)
"Effective Date"                                                   Preamble
"Electing Party"                                                     5.2(c)
"Exclusive Negotiation Period"                                   2.6(e)(ii)
"First Equity Investment"                                         Exhibit C
                                                                  ---------
"Indemnified Party"                                                  9.1(c)
"Indemnifying Party"                                                 9.1(c)
"Initial Product Development Program"                             2.3(c)(i)
"Invalidity Claim"                                                   5.4(c)


                                       10


                                                        
"Investment Agreement"                                               4.1(a)
"Jointly Developed Inventions"                                       5.1(c)
"JRDC"                                                                  2.2
"KOL Panel"                                                      2.3(c)(iv)
"Losses"                                                             9.1(a)
"Mayo"                                                               2.6(a)
"Medtronic"                                                        Preamble
"Medtronic Discontinuation Notice"                                   2.3(f)
"Medtronic Indemnified Parties"                                      9.1(b)
"Non-Breaching Party"                                      8.2(a) or 8.2(c)
"Non-Electing Party"                                                 5.2(c)
"Pre-IND PDP Termination"                                            2.3(e)
"Pre-Phase I PDP Termination"                                        2.3(e)
"Pre-PoC PDP Termination"                                            2.3(e)
"Pre-Tox PDP Termination"                                            2.3(e)
"Proceed-to-PDP Determination"                                    2.3(c)(i)
"Program Data"                                                       5.1(e)
"Right of Access"                                                    5.1(e)
"RoFN Notice"                                                     2.6(e)(i)
"RoFN Offer"                                                    2.6(e)(iii)
"RoFN Opportunity"                                                   2.6(e)
"RoFN Response Notice"                                            2.6(e)(i)
"RoFN Response Period"                                            2.6(e)(i)
"SEC"                                                                   6.1
"Second Equity Investment"                                        Exhibit C
                                                                  ---------
"Severed Clause"                                                       9.11
"Sole Inventions"                                                    5.1(c)
"Supply Agreement"                                                      2.8
"Technology Development Program"                                     2.3(b)
"Technology Development Program Workplan"                            2.3(b)
"Third Equity Investment"                                         Exhibit C
                                                                  ---------
"Third Party Infringement Claim"                                     5.4(a)



                                   Article II

                              Collaboration Program

      Section 2.1 General. Pursuant to the terms of this Agreement, the Parties
have agreed to collaborate on the Discovery, Development, manufacture and
Commercialization of Licensed Products. The objective of the Collaboration
Program is to Discover and Develop Licensed Products. Both Parties will be
engaged in the conduct of the Collaboration Program, and shall be responsible
for various Collaboration Program activities as set forth in this Agreement.

      Section 2.2 JRDC. The Parties shall establish a Joint Research and
Development Committee (the "JRDC"), comprised of three (3) JRDC Representatives
designated by Alnylam and three (3) JRDC Representatives designated by
Medtronic, each of which JRDC Representatives shall be of the seniority and
experience appropriate for service on the JRDC in

                                       11


light of the functions, responsibilities and authority of the JRDC. Each Party
shall make its designation of its JRDC Representatives not later than thirty
(30) days after the Effective Date. The JRDC shall meet within thirty (30) days
after the Effective Date and, thereafter, at least quarterly until the end of
the Collaboration Term, to (a) review the efforts of the Parties in the conduct
of the Collaboration Program, (b) review and, subject to Section 2.4, approve
proposed updates and amendments to the Workplan, (c) consider and determine
whether [**] and (d) otherwise oversee and direct the Collaboration Program
activities undertaken hereunder. For the avoidance of doubt, neither the JRDC
nor any of its members has the authority to make the [**] without written
authorization by each Party's Executive Officer. The location of such meetings
of the JRDC shall alternate between Minneapolis, MN and Cambridge, MA, unless
otherwise agreed by the JRDC. The JRDC may also meet by means of a telephone or
video conference call, and may take action by vote at a meeting or telephone or
video conference call, or pursuant to a written vote. Each Party may change any
one or more of its JRDC Representatives at any time upon written notice to the
other Party. Each Party shall use Commercially Reasonable Efforts to cause its
JRDC Representatives to attend the meetings of the JRDC. If a Party's JRDC
Representative is unable to attend a meeting, such Party may designate an
alternate to attend such meeting in place of the absent JRDC Representative. In
addition, each Party may, at its discretion, invite non-voting employees, and,
with the consent of the other Party, consultants or scientific advisors
(provided they are engaged as such under obligations of confidentiality) to
attend the meetings of the JRDC. The JRDC shall be dissolved and its activities
and authority terminated at the end of the Collaboration Term.

      Section 2.3 Management of Collaboration Program.

            (a) Workplan. The Parties shall undertake the specific Collaboration
Program activities in accordance with the relevant Workplan. Any JRDC
Representative may, at any time or from time to time, submit any proposed
additions, updates or amendments to the Workplan to the JRDC for its review. Any
such additions, updates or amendments shall not become effective until approved
in writing by the JRDC, and, in the case of the initial adoption of a new
Workplan or a material addition, update or amendment to an existing Workplan or
a significant change in the target date for completion of an activity in an
existing Workplan, approved in writing by each Party's Executive Officer. The
JRDC shall review and consider any such proposed Workplans, additions, updates
or amendments on an expeditious basis, and all such Workplans, additions,
updates and amendments approved as set forth above shall, subject to Section
2.4, constitute and be deemed part of this Agreement for all purposes and
incorporated herein.

            (b) Technology Development Program. During the Technology
Development Term, Alnylam will lead, and Medtronic will cooperate with Alnylam
with respect to, a program (the "Technology Development Program") whose goal is
to achieve the [**]; provided that Medtronic will lead, and Alnylam will
cooperate with Medtronic with respect to, all Technology Development Program
activities relating directly to the design, configuration, assembly, filling or
re-filling of Devices. Alnylam shall be responsible for [**] the Technology
Development Program for siRNA Discovery and Development and Medtronic shall be
responsible for [**] the Technology Development Program for Device Development;
provided that Medtronic shall be responsible for [**] the Technology Development
Program [**] performed during such studies, where such [**] to be agreed by the
Parties and specified in the applicable Workplan. The Technology Development
Program will be conducted in accordance with a Workplan to be

                                       12


mutually agreed to by the Parties within forty-five (45) days after the
Effective Date, in substantially the form attached as Exhibit B (the "Technology
Development Program Workplan"), which shall initially address, in reasonable
detail, the roles and responsibilities of each Party with respect to (i) the
design and identification of Alnylam siRNAs [**], (ii) the assessment of such
Alnylam siRNAs [**] as potential Development Candidates and (iii) the evaluation
of Devices, or prototypes thereof[**] to determine their compatibility with, and
suitability to deliver, Alnylam siRNAs. The JRDC shall monitor the progress of
the Technology Development Program on a regular basis, and shall be responsible
for determining if and when the [**] has been achieved with respect to [**]
Alnylam siRNA.

            (c) Product Development Program.

                  (i) First Development Candidate. Following a determination by
the JRDC that the [**] has been achieved, each Party shall determine whether it
desires to continue the Collaboration Program by initiating the Initial Product
Development Program (as defined below) with respect to a first Alnylam siRNA. If
both Parties desire to so continue, the Parties shall discuss which Alnylam
siRNA will initially be designated as the first Development Candidate for such
Initial Product Development Program, or what further work may be required before
designating an Alnylam siRNA as such Development Candidate, and what
indication(s) to designate as Target Indication(s) for such Development
Candidate, which Target Indication(s) shall be [**] corresponding to the Alnylam
siRNA(s) to be included in the Initial Product Development Program. If the
Parties reach a preliminary agreement upon such designations of a Development
Candidate (or work required prior to making such designation) and Target
Indication(s), the Parties shall negotiate a new Workplan (the [**]Development
Program Workplan" and the portion of the Initial Product Development Program
covered by such new Workplan the "[**] Development Program") in accordance with
Section 2.3(a), which shall (A) include plans and budgets for the designation,
if still pending, and Development of such Development Candidate for the
designated Target Indication(s), (B) specify the responsibilities of each Party
in performing clinical study activities, such as filing INDs with Regulatory
Authorities, the selection of centers, negotiation and execution of clinical
agreements, training, monitoring, data collection, notice of adverse events and
other regulatory requirements and (C) agree upon [**] for the Initial Product
Development Program, and to the extent reasonably feasible at the time such
Workplan is prepared, on [**]; provided that to the extent it is not reasonably
feasible at the time such Workplan is prepared to specify [**] for the Initial
Product Development Program, the [**] shall be subject to the approval of both
Parties, or by [**] in the absence of such joint approval, prior to [**], which
approval determinations shall be based solely on [**]t. The Parties acknowledge
that in the course of the Initial Product Development Program, the Parties (but
not the JRDC) may modify the [**] for the Initial Product Development Program,
and [**], by amending the relevant Workplan as set forth in Section 2.3(a) to
reflect such modification(s). The mutual agreement of the Parties to proceed
with implementation of such [**] Development Program Workplan and the Parties'
execution of the Investment Agreement shall constitute the Parties'
determination (the "Proceed-to-PDP Determination") to commence and carry out a
program (the "Initial Product Development Program") for the Development of such
Development Candidate as a Licensed Product for the treatment of the Target
Indication(s), a primary goal of which shall be to achieve Regulatory Approval
of such Licensed Product for the treatment of such Target Indication(s).

                                       13


                  (ii) Workplans. The [**] Development Program Workplan
negotiated by the Parties prior to the Proceed-to-PDP Determination shall
specify that [**]; provided that Medtronic will lead, and Alnylam will cooperate
with Medtronic with respect to all Product Development Program activities (i)
relating directly to the design, configuration, assembly, filling or re-filling
of Devices, [**] Product Development Program [**]y. Alnylam shall be responsible
for [**] to the designated Development Candidate in the course of the [**]
Development Program activities assigned to it pursuant to the [**] Development
Program Workplan (including the [**]; provided that, if a [**] is achieved is
designed with the intention that [**] may be determined based on an [**], then
Alnylam shall [**]and Medtronic shall be responsible for all subsequent costs of
such clinical study[**] and Medtronic shall [**] [**] Development Program [**].
Following the achievement of [**], the Parties shall, subject to any early
termination of the Initial Product Development Program, adopt additional
Workplan(s) to cover further Development of the designated Development Candidate
and of applicable Devices (each such additional Workplan, a "[**] Development
Program Workplan" and the portions of the Initial Product Development Program
covered by each such additional Workplan, collectively, the "[**] Development
Program"). Medtronic shall be responsible for [**]Development Program. Each [**]
Development Program Workplan shall specify as appropriate, in all requisite
detail, [**] in connection with any activities to be performed by Alnylam
pursuant to [**] Development Program Workplan. In connection with such
activities, Medtronic shall [**] through the Supply Agreement as described in
Section 2.8, (y) [**] in accordance with the [**] Development Program Workplan,
and (z) the [**] internal resources used by Alnylam in accordance with the [**]
Development Program Workplan. Notwithstanding the foregoing, Medtronic shall
[**] Alnylam's JRDC Representatives performing JRDC responsibilities or by
Alnylam employees or agents for activities not assigned to Alnylam in the [**]
Development Program Workplan [**] in accordance with Section 2.3(b)).

                  (iii) Additional Product Development Programs. At any time
during the Collaboration Term, the Parties may mutually agree (w) to initiate
additional program(s) (each, an "Additional Product Development Program") to
Discover and Develop additional Alnylam siRNA(s), Development Candidate(s) and
Licensed Product(s), (x) to adopt additional Workplan(s) for any such Additional
Product Development Program(s), including [**] in connection with any activities
performed by Alnylam with respect to such Additional Product Development
Program(s), (y) on the Target Indication(s) for Alnylam siRNA(s) within each
such Additional Product Development Program, [**] for each such Additional
Product Development Program, and to the extent reasonably feasible at the time
any such Workplan is prepared, on [**] (provided that to the extent it is not
reasonably feasible at the time such Workplan is prepared to specify [**] for
such Additional Product Development Program, the [**] shall be subject to the
approval of both Parties, or [**] in the absence of such joint approval, prior
to [**], which approval determinations shall be based solely on [**]), and (z)
pursuant to Section 4.1(b), on [**] prior to achievement of [**] in such
Additional Development Program(s) in [**] to such Additional Development
Program(s). Additional Development relating to [**] a Product Development
Program separate from an existing Product Development Program in which such
siRNA is Developed for [**]; provided that all such additional Development shall
be [**].

                  (iv) Determination of [**]. If the Parties are unable to agree
on (A) the [**] any Product Development Program, (B) [**] or (C) [**] in any
Product Development Program, then, in either case, the Parties shall submit such
dispute to [**]. One member of any

                                       14


[**] shall be nominated by Alnylam, one member shall be nominated by Medtronic
and the third shall be selected by the two members nominated by the Parties. If
the Parties pursue more than one Product Development Program, the Parties may
elect to [**] for different Product Development Programs in order to [**] of the
respective Product Development Programs. The determination of [**] as to such
dispute shall be binding on both Parties. Each Party shall be responsible for
[**] nominated by it and the Parties shall share equally in [**]l. The Parties
may also elect by mutual agreement to use [**] for guidance on other issues that
may arise in the course of the Collaboration Program.

            (d) Collaboration Program Responsibilities. Each Party agrees to use
its Commercially Reasonable Efforts in good faith to (i) undertake the
responsibilities assigned to such Party in the Workplan, (ii) perform its
obligations hereunder in a scientifically sound and workmanlike manner; (iii) as
appropriate, make available to the other Party those resources set forth in the
Workplan; and (iv) carry out all work done in the course of the Collaboration
Program in material compliance with all applicable federal, state or local laws,
regulations and guidelines governing the conduct of such work. Either Party may
perform its Collaboration Program responsibilities hereunder through its
Affiliates or through the use of Third Party contractors such as contract
research organizations, contract employees, consultants and the like who merely
conduct activities on behalf of such Party, are subject to such Party's
supervision and control and will not have any rights (other than non-exclusive
research rights) in any intellectual property created in connection such
activities; provided that such Party shall remain primarily liable for its
obligations under this Agreement.

            (e) Discontinuation of Certain Technology Development Program and
Product Development Program Activities by Alnylam. Notwithstanding anything to
the contrary in this Agreement, Alnylam may, in its sole discretion, by written
notice to Medtronic (an "Alnylam Discontinuation Notice"), discontinue (i) its
Technology Development Program activities with respect to any Alnylam siRNA or
indication or (ii) its Product Development Program activities, if in Alnylam's
business judgment the continuation of such activities is not reasonably likely
to result in the completion of Alnylam's Technology Development Program or
Product Development Program activities at an acceptable cost (in view of
Alnylam's expected return from any resulting Licensed Products), and no such
discontinuation shall constitute a breach of Alnylam's obligations hereunder.
Any such discontinuation shall constitute a termination of the Technology
Development Program or Product Development Program, as applicable; provided that
[**]. Such a termination of a Product Development Program by Alnylam shall
constitute (A) a [**] with respect to an Alnylam siRNA included in such Product
Development Program, (B) a [**] with respect to an Alnylam siRNA included in
such Product Development Program, (C) a [**] with respect to an Alnylam siRNA
included in such Product Development Program, or (D) a [**] with respect to an
Alnylam siRNA included in such Product Development Program. Subject to any other
provision of this Agreement under which [**], termination of a Product
Development Program pursuant to this Section 2.3(e) shall not result in [**]
with respect to any Alnylam siRNA(s) included in such Product Development
Program or in [**] provided that [**].

            (f) Discontinuation of Certain Technology Development Program and
Product Development Program Activities by Medtronic. Notwithstanding anything to
the contrary in this Agreement, Medtronic may, in its sole discretion, by
written notice to Alnylam at

                                       15


any time (a "Medtronic Discontinuation Notice"), discontinue (i) its Technology
Development Program activities with respect to any Alnylam siRNA or indication,
or (ii) its Product Development Program activities for an Alnylam siRNA included
in such Product Development Program, if in Medtronic's business judgment the
continuation of such activities is not reasonably likely to result in the
completion of the Technology Development Program or Product Development Program
activities at an acceptable cost (in view of Medtronic's expected return from
any resulting Licensed Products), and no such discontinuation shall constitute a
breach of Medtronic's obligations hereunder. Any such discontinuation shall
constitute a termination of the Technology Development Program or Product
Development Program and Medtronic's licenses hereunder with respect to all
Alnylam siRNAs included in such Technology Development Program or Product
Development Program, as applicable.

            (g) Failure to Advance Alnylam siRNAs After [**]. Notwithstanding
any other provision of this Agreement, if an Alnylam siRNA included in a Product
Development Program (i) has achieved [**]but[**]with respect to such Alnylam
siRNA or any other Alnylam siRNA included in the same Product Development
Program prior to [**] on which such Alnylam siRNA [**], or (ii) has achieved
[**] but [**] with respect to such Alnylam siRNA or any other Alnylam siRNA
included in the same Product Development Program prior to [**] on which such
Alnylam siRNA achieved [**] (provided however, that if prior to such [**]
anniversary [**] has been completed but Medtronic becomes aware or determines,
as a result of [**], that an [**], such [**] deadline shall automatically be
extended to the [**]), then, in either such event, Alnylam may, at its option,
notify Medtronic that it intends to terminate such Product Development Program
and Medtronic's licenses hereunder with respect to all Alnylam siRNAs included
in such Product Development Program, which termination (together with any
related consequences of such termination set forth in Article VIII) shall be
Alnylam's sole and exclusive remedy and Medtronic's sole and exclusive liability
for such failure to advance. Such terminations will take effect on [**] unless
(A) if the basis for such notice is [**] with respect to an Alnylam siRNA
included in such Product Development Program is commenced prior to the [**], (B)
if the basis for such notice is [**] with respect to an Alnylam siRNA included
in such Product Development Program has been [**] prior to the [**] or (C) if
the basis for such notice is [**], prior to the [**] Medtronic provides to
Alnylam a [**], as applicable, which [**] is reasonably acceptable to Alnylam,
and thereafter Medtronic [**] in accordance with such [**].

      Section 2.4 Decisionmaking. All decisions of the JRDC shall be made by
unanimous vote of the JRDC Representatives, with each Party's JRDC
Representatives collectively having one vote, and the goal of all decision
making shall be to achieve consensus. Upon fifteen (15) days prior written
notice, either Party may convene a special meeting of the JRDC for the purpose
of resolving any failure to reach agreement on a matter within the scope of the
authority and responsibility of the JRDC. If the JRDC is unable to reach
agreement on any matter so referred to it for resolution by one or more of the
Parties within thirty (30) days after the matter is so referred to it, such
matter shall be referred to the Executive Officers for resolution. If the matter
is not resolved by the Executive Officers within thirty (30) days after referral
to the Executive Officers, then:

            (a) if such matter relates primarily to Collaboration Program
activities with respect to any Alnylam siRNA or Development Candidate that has
not yet achieved [**], Alnylam shall have the right to decide the matter;

                                       16


            (b) if such matter relates primarily to Collaboration Program
activities with respect to any Alnylam siRNA or Development Candidate that has
achieved [**], Medtronic shall have the right to decide the matter;

            (c) notwithstanding Section 2.4(a) above, if such matter relates to
the Development of Devices for use in Licensed Products, Medtronic shall have
the right to decide the matter; and

            (d) otherwise such matter shall require the consent of both Parties
for resolution;

provided that nothing in this Section 2.4 shall give either Party a unilateral
right to resolve any dispute involving the breach or alleged breach of this
Agreement or to amend or modify this Agreement or any Workplan or the Parties'
respective rights and obligations hereunder or thereunder.

      Section 2.5 Term of Collaboration Program. The Collaboration Program shall
terminate at the end of the Collaboration Term.

      Section 2.6 Exclusivity and Diligence Obligations.

            (a) During the Technology Development Term, neither Party shall,
directly or indirectly, by itself or jointly with or through any of its
Affiliates or any Third Parties (but excluding minority investments in Third
Parties where such Party's engagement is limited to holding such minority
investments) engage in [**], other than pursuant to this Agreement.
Notwithstanding the foregoing, Alnylam shall [**].

            (b) During the Product Development Term for any Product Development
Program, neither Party shall, directly or indirectly, by itself or jointly with
or through any of its Affiliates or any Third Parties (but excluding minority
investments in Third Parties where such Party's engagement is limited to holding
such minority investments), engage in the [**] for such Product Development
Program, other than pursuant to this Agreement. In addition, commencing with
[**] and continuing for [**], neither Party shall, directly or indirectly, by
itself or jointly with or through any of its Affiliates or any Third Parties
(but excluding minority investments in Third Parties where such Party's
engagement is limited to holding such minority investments, engage in [**] in
such Licensed Product, other than pursuant to this Agreement.

            (c) With respect to each Product Development Program, Medtronic
shall use its Commercially Reasonable Efforts to obtain Regulatory Approvals for
and Commercialize at least one Licensed Product in each Major Market for each
Target Indication. Alnylam acknowledges that a failure by Medtronic to obtain a
Regulatory Approval for or to Commercialize a Licensed Product in a Major Market
for a Target Indication may be consistent with the exercise of Commercially
Reasonable Efforts under appropriate circumstances. Alnylam's sole and exclusive
remedy and Medtronic's sole and exclusive liability for any failure to use its
Commercially Reasonable Efforts to obtain Regulatory Approvals for and/or to
Commercialize at least one Licensed Product in one or more particular Major
Markets shall be the termination of Medtronic's license rights for such Major
Market pursuant to Section 8.2(b)

                                       17


or, if such failure relates to all Major Markets and to all Target Indications,
the termination of this Agreement pursuant to Section 8.2(c).

            (d) During the Technology Development Term, Alnylam shall use its
Commercially Reasonable Efforts to identify and make available siRNAs for
Development as specified in the Workplan.

            (e) During the period commencing on the Proceed-to-PDP Determination
and ending on the earlier of [**], in the event that (A) Alnylam desires to [**]
and (B) Alnylam desires to [**] (other than [**]) for (x) the collaborative
[**]of such Product and/or (y) a [**] of such Product (such [**], and such [**],
each, a "RoFN Opportunity"):

                  (i) Alnylam shall give to Medtronic notice of [**] to do so
(the "RoFN Notice") prior to [**]; provided, however, that this Section 2.6(e)
shall not prevent Alnylam from [**]. Not later than [**] days after the date of
the RoFN Notice (the "RoFN Response Period"), Medtronic shall, by written notice
to Alnylam (the "RoFN Response Notice"), advise Alnylam [**] with respect to
such RoFN Opportunity.

                  (ii) If either (A) Medtronic fails to timely give a RoFN
Response Notice with respect to a RoFN Notice, or (B) the RoFN Response Notice
does not state that Medtronic has a bona fide interest in discussing a
collaboration with or license from (as applicable) Alnylam with respect to the
RoFN Opportunity described in the RoFN Notice, then all of Medtronic's rights
under this Section 2.6(e) with respect to such RoFN Opportunity shall terminate
as of the date of the RoFN Response Notice or the expiration of the RoFN
Response Period (whichever is earlier), and Alnylam shall thereafter be free to
pursue such RoFN Opportunity with no participation by Medtronic for [**] after
which if Alnylam has not reached an agreement with respect to such RoFN
Opportunity [**]. If the RoFN Response Notice timely given by Medtronic to
Alnylam states that Medtronic has a bona fide interest in discussing a
collaboration with or license from (as applicable) Alnylam with respect to the
RoFN Opportunity described in the RoFN Notice, the Parties shall undertake, on
an exclusive basis and for [**] (unless a shorter period is mutually agreed by
the Parties) (the "Exclusive Negotiation Period"), good faith discussions and
negotiations of definitive agreements setting forth all applicable terms and
conditions of the collaboration or license between them with respect to the RoFN
Opportunity.

                  (iii) Prior to the end of the Exclusive Negotiation Period,
Medtronic shall furnish to Alnylam a written offer (the "RoFN Offer") which
shall (A) clearly specify that such written offer, and no other, constitutes the
RoFN Offer hereunder with respect to the relevant RoFN Opportunity, and (B) set
forth all material terms and conditions on which Medtronic is prepared to [**]
with respect to such RoFN Opportunity. If Medtronic fails to timely furnish to
Alnylam a RoFN Offer with respect to a RoFN Opportunity, Medtronic's rights and
Alnylam's obligations under this Section 2.6(e) shall terminate with respect to
such RoFN Opportunity for [**] after which if Alnylam has not reached an
agreement with respect to such RoFN Opportunity the provisions of this Section
2.6(e) shall once again apply to such RoFN Opportunity.

                                       18


                  (iv) If, as of the end of the Exclusive Negotiation Period,
the Parties have not entered into a legally binding definitive agreement with
respect to the RoFN Opportunity described in the RoFN Notice, Alnylam shall have
the right to undertake detailed discussions and negotiations with respect to
such RoFN Opportunity with one or more Third Parties and to enter into
definitive agreements for the same on terms more favorable to Alnylam, taken as
a whole, than the terms set forth in the RoFN Offer; provided, however, that if
no such definitive agreement is entered into prior to [**], then the provisions
of this Section 2.6(e) shall once again apply to such RoFN Opportunity. Alnylam
shall not be obligated to reveal to Medtronic the identity of any Third Party
involved in any such transaction.

      Section 2.7 [**] Alnylam siRNAs Used In Collaboration Program Activities
for Which Alnylam has Primary Responsibility. Alnylam shall be responsible for
[**] the Technology Development Program and the [**] Program and in the portions
of Additional Product Development Programs for which Alnylam is assigned primary
responsibility in an applicable Workplan for the purpose of establishing [**] in
such Additional Product Development Programs.

      Section 2.8 Supply of Alnylam siRNAs to Medtronic. Prior to the
commencement by Medtronic of [**] Development Program, the Parties shall enter
into a separate manufacturing and supply agreement (the "Supply Agreement")
containing customary terms and conditions under which Alnylam shall, prior to
and during the applicable Royalty Term(s), supply Alnylam siRNA(s) contained in
or used in the Licensed Product(s) to be [**] Development Program Workplan and
thereafter Commercialized pursuant to this Agreement, at Alnylam's Manufacturing
Cost (as reflected in a standard cost as described below), in stable bulk
material form and meeting mutually agreed manufacturing specifications to be set
forth in the Supply Agreement, to Medtronic or its designee. [**]. The Supply
Agreement shall contain customary provisions for periodically determining, and
adjusting the supply price thereunder to a standard cost approximating,
Alnylam's Manufacturing Cost.

      Section 2.9 SAB Observer Right. During the Collaboration Term, Alnylam
shall permit a Medtronic representative reasonably acceptable to Alnylam to
attend all meetings of Alnylam's Scientific Advisory Board as an observer.
Alnylam consents to [**] as Medtronic's initial representative for such purpose.

                                  Article III

                                 Grant of Rights

      Section 3.1 Alnylam Grants.

            (a) Technology Development Program License.

                  (i) Subject to the terms and conditions of this Agreement and
Alnylam's right to perform its obligations hereunder, Alnylam hereby grants to
Medtronic and its Affiliates an exclusive, non-royalty-bearing right and license
in the Territory during the Technology Development Term, without the right to
grant sublicenses (except in accordance with Section 3.1(d) to Third Party
contractors such as contract research organizations, contract

                                       19


employees, consultants and the like who merely conduct activities on behalf of
Medtronic, are subject to Medtronic's supervision and control and will not have
any rights (other than non-exclusive research rights) in any intellectual
property created in connection such activities), under Alnylam's rights in
Alnylam Intellectual Property, to perform Medtronic's obligations hereunder and
to use Alnylam siRNAs in the course of the Technology Development Program to
Discover and Develop Licensed Products in the Field.

                  (ii) Subject to the terms and conditions of this Agreement and
Alnylam's right to perform its obligations hereunder, Alnylam hereby grants to
Medtronic and its Affiliates an exclusive, non-royalty-bearing right and license
in the Territory during the Technology Development Term, with the right to grant
sublicenses, under Alnylam's rights in Joint Intellectual Property, to perform
Medtronic's obligations hereunder and to use Alnylam siRNAs in the course of the
Technology Development Program to Discover and Develop Licensed Products in the
Field.

                  (iii) For the avoidance of doubt, the foregoing licenses in
this Section 3.1(a) to Discover any Licensed Product are subject to Alnylam's
first having made available or approved the siRNA contained in such Licensed
Product.

            (b) Product Development Program License.

                  (i) Subject to the terms and conditions of this Agreement and
Alnylam's right to perform its obligations hereunder, Alnylam hereby grants to
Medtronic and its Affiliates an exclusive, non-royalty-bearing right and license
in the Territory during the Product Development Term, without the right to grant
sublicenses (except in accordance with Section 3.1(d) to (x) Third Party
contractors such as contract research organizations, contract employees,
consultants and the like who merely conduct activities on behalf of Medtronic,
are subject to Medtronic's supervision and control and will not have any rights
(other than non-exclusive research rights) in any intellectual property created
in connection such activities and (y) Third Party contract manufacturers
pursuant to the rights granted under clause (B) below), under Alnylam's rights
in Alnylam Intellectual Property, to perform Medtronic's obligations hereunder
and to use Alnylam siRNAs in the course of the Product Development Program(s) to
(A) Discover and Develop Licensed Products in the Field and (B) subject to
Section 3.1(g), to make or have made Licensed Products in the Field.

                  (ii) Subject to the terms and conditions of this Agreement and
Alnylam's right to perform its obligations hereunder, Alnylam hereby grants to
Medtronic and its Affiliates an exclusive, non-royalty-bearing right and license
in the Territory during the Product Development Term, with the right to grant
sublicenses, under Alnylam's rights in Joint Intellectual Property, to perform
Medtronic's obligations hereunder and to use Alnylam siRNAs in the course of the
Product Development Program(s) to (A) Discover and Develop Licensed Products in
the Field and (B) subject to Section 3.1(g), to make or have made Licensed
Products in the Field.

                  (iii) For the avoidance of doubt, the foregoing licenses in
this Section 3.1(b) to Discover any Licensed Product are subject to Alnylam's
first having made available or approved the siRNA contained in such Licensed
Product.

                                       20


            (c) Commercialization License.

                  (i) Subject to the terms and conditions of this Agreement and
Alnylam's right to perform its obligations hereunder, Alnylam hereby grants to
Medtronic and its Affiliates an exclusive (subject to Section 4.4),
royalty-bearing right and license in the Territory, with the right (subject to
Section 3.1(d)) to grant sublicenses, under Alnylam's rights in Alnylam
Intellectual Property, to (A) Commercialize Licensed Products Developed in the
course of a Product Development Program and (B) subject to Section 3.1(g), make
or have made Licensed Products Developed in the course of a Product Development
Program.

                  (ii) Subject to the terms and conditions of this Agreement and
Alnylam's right to perform its obligations hereunder, Alnylam hereby grants to
Medtronic and its Affiliates an exclusive (subject to Section 4.4),
non-royalty-bearing right and license in the Territory, with the right to grant
sublicenses, under Alnylam's rights in Joint Intellectual Property, to (A)
Commercialize Licensed Products Developed in the course of a Product Development
Program and (B) subject to Section 3.1(g), make or have made Licensed Products
Developed in the course of a Product Development Program.

            (d) Medtronic Sublicense Rights. Subject to Section 3.1(e), if
Medtronic determines in good faith that, solely for the purpose of facilitating
the Technology Development Program, a Product Development Program or the
Commercialization of a Licensed Product, it would be advantageous to grant to a
Third Party, for such purpose, a sublicense of the rights licensed to Medtronic
under Section 3.1(b)(i) or Section 3.1(c)(i), then Medtronic may grant such
sublicense; provided that:

                  (i) Medtronic's sublicensees shall have no right to grant
further sublicenses without Alnylam's written consent, which consent shall not
be unreasonably withheld;

                  (ii) Medtronic shall be primarily liable for any failure by
its sublicensees to comply with, and Medtronic guarantees to Alnylam the
compliance by each of its sublicensees with, all relevant restrictions,
limitations and obligations in this Agreement; and

                  (iii) such sublicense is granted pursuant to a written
sublicense agreement and Medtronic provides Alnylam with a copy of such
sublicense agreement within thirty (30) days after the execution of such
sublicense agreement.

            (e) Existing Third Party Contractual Obligations. With respect to
Alnylam Intellectual Property that is subject to contractual obligations between
Alnylam and Third Parties, Medtronic's rights and licenses under Section 3.1 of
this Agreement are subject to the restrictions and other terms described in
Schedule 3.1(e). During the Collaboration Program and the Royalty Term (and,
with respect to any continuing obligations under such Third Party contracts,
such as record-keeping and audit obligations, thereafter for so long as such
obligations continue), Medtronic hereby agrees to comply, and to cause its
Affiliates and sublicensees to comply, with such restrictions and other terms.

            (f) License Exclusions. Notwithstanding anything to the contrary
herein, the licenses to Alnylam Patent Rights hereunder initially shall not
include a license to [**] under any

                                       21


agreement between Alnylam and [**] in effect as of the Effective Date; provided
that if any such licensed Patent Rights [**], Medtronic shall [**] by notifying
Alnylam of such election (in which case [**]) and agreeing to [**] under such
sublicense during the Royalty Term attributable to such Licensed Product. Upon
[**] by Medtronic [**] by Alnylam, such [**] shall be included in [**] such
Licensed Product. In addition, if after the Effective Date Alnylam exercises any
option under its sponsored research agreement with [**] to obtain a license to
Patent Rights useful in the Field and controlled by [**], and such license
includes the right to grant a sublicense to Medtronic, then such Patent Rights
licensed from [**] shall constitute Alnylam Patent Rights hereunder from and
after the date Medtronic requests a sublicense thereto from Alnylam. Medtronic
shall [**] by Alnylam to [**] attributable to Medtronic's sublicense for so long
as such sublicense continues. Upon [**] by Medtronic [**] by Alnylam, such [**]
shall be included in [**] for a Licensed Product. If Medtronic exercises its
right under this Section 3.1(f) to obtain sublicense(s) under Patent Rights
licensed by Alnylam from [**], Schedule 3.1(e) shall thereupon be amended as
necessary to describe applicable restrictions and other terms imposed by such
contractual obligations for purposes of Section 3.1(e). Notwithstanding anything
to the contrary in this Agreement, the Patent Rights licensed by Alnylam from
[**] to which Medtronic has the right to obtain a sublicense from Alnylam as
described above in this Section 3.1(f) shall be deemed not to be [**].

            (g) Medtronic Covenant [**]. Medtronic covenants [**] unless (i)
Alnylam materially fails to[**] and fails to cure such failure within[**]; (ii)
Alnylam files for bankruptcy protection or has an involuntary bankruptcy action
filed against it, which involuntary bankruptcy action is not dismissed within
sixty (60) days after being filed, prior to [**]; (iii) Alnylam is unable to
[**] because Alnylam is not able to [**] reasonably required by Medtronic; (iv)
[**] or (v) Alnylam [**] for any reason other than [**] by Medtronic.

            (h) Medtronic Obligation with Respect to Affiliates. Medtronic shall
be primarily liable for any failure by its Affiliates to comply with, and
Medtronic guarantees to Alnylam the compliance by each of its Affiliates with,
all relevant restrictions, limitations and obligations in this Agreement.

      Section 3.2 Medtronic Covenant Not to Sue. Subject to the terms and
conditions of this Agreement, Medtronic covenants not to enforce against Alnylam
any rights under Medtronic Intellectual Property in connection with Alnylam's
Discovery and Development activities performed pursuant to the Collaboration
Program related to Products, provided that nothing contained in this Section 3.2
shall apply to any product sold by Alnylam to any Third Party (a) pursuant or
subject to the procedures described in Section 2.6(e) or (b) that otherwise
incorporates an siRNA developed pursuant to this Agreement.

      Section 3.3 Retained Rights. Subject to Sections 2.6, 3.1 and 4.4 of this
Agreement, each Party retains and shall have the right to practice and license
its rights in the Joint Intellectual Property without obtaining the other
Party's consent and without any duty to account to the other Party.

                                       22


                                   Article IV

                              Financial Provisions

      Section 4.1 Equity Investments and Payments for Additional Product
Development Programs.

            (a) Equity Investments. In connection with the Proceed-to-PDP
Determination, Alnylam and Medtronic shall enter into an Investment Agreement
that includes the material terms set forth on Exhibit C and other terms and
provisions reasonable and customary in such type of agreement (the "Investment
Agreement"), pursuant to which Medtronic shall make the following purchases of
Alnylam common stock from Alnylam upon the first occurrence of the following
milestones with respect to the Initial Product Development Program:



                                                  Equity Investment by Medtronic
                   Milestones                      Upon Occurrence of Milestone
- ----------------------------------------------    ------------------------------
                                               
The Proceed-to-PDP Determination:                 The First Equity Investment

Filing of the first IND with a Regulatory         The Second Equity Investment
Authority in a Major Market with respect
to a Licensed Product or, if no IND filing is
required in the Major Market in which the
first  clinical study is commenced, the first
dosing of a participant in a human clinical
study:

Completion of the first Phase I Study             The Third Equity Investment
prospectively identified by the JRDC as
sufficient to provide a basis for initiating a
Phase II(a) Study in a Major Market of a
Licensed Product directed to a Target
Indication:


If for any reason a milestone event corresponding to an equity investment under
this Section 4.1(a) does not occur prior to the occurrence of the next milestone
event listed in the table above in this Section 4.1(a), then such prior
non-occurring milestone event shall be deemed to occur concurrently with the
occurrence of the next milestone event. Each equity investment shall be made
within thirty (30) days after the achievement of the applicable milestone.

                                       23


            (b) Additional Product Development Programs. At such time as the
Parties agree, pursuant to Section 2.3(c)(iii), to initiate any Additional
Product Development Program(s), the Parties shall also agree on the timing,
nature and size of payments, in addition to those set forth in Sections 4.2 and
4.3, to be made by Medtronic to Alnylam in connection with the conduct of each
such Additional Product Development Program. For the avoidance of doubt, the
equity investments set forth in Section 4.1(a) shall only be made once
regardless of how many Product Development Programs the Parties agree to
initiate.

      Section 4.2 Milestone Payments for Product Development Programs. Subject
to Section 4.6, Medtronic shall make the following milestone payments to Alnylam
upon the first occurrence of the following milestones for the first Licensed
Product in each Product Development Program to reach such milestone:



                                                  Milestone Payment by Medtronic
                   Milestones                      Upon Occurrence of Milestone
- ----------------------------------------------    ------------------------------
                                               
Upon the commencement of a Pivotal                             $[**]
Study of a Licensed Product directed to a
Target Indication:

Upon filing of an NDA with a Regulatory                        $[**]
Authority in a Major Market with
respect to a Licensed Product directed to a
Target Indication:

Upon receipt of Regulatory Approval in a                       $[**]
Major Market with respect to a Licensed
Product directed to a Target Indication:


If for any reason a milestone event corresponding to a milestone payment under
this Section 4.2 does not occur prior to the occurrence of the next milestone
event listed in the table above in this Section 4.2 for such Product Development
Program, then such prior non-occurring milestone event shall be deemed to occur
concurrently with the occurrence of the next milestone event. Each milestone
payment shall be made within thirty (30) days after the achievement of the
applicable milestone.

      Section 4.3 Royalty Payments.

            (a) Subject to adjustment as set forth in Sections 4.3(c) and 4.6,
and subject to the royalty reductions specified in Sections 5.2(a) and 5.4(c),
on a Licensed Product-by-Licensed Product basis during the Royalty Term
applicable to each Licensed Product, Medtronic shall pay

                                       24


to Alnylam royalty in the amount of [**] percent ([**]%) [**] on Net Sales of
such Licensed Product. [**]In addition to any royalty set forth in Section
4.3(a) and any reimbursement set forth in Section 3.1(f), during the Royalty
Term, Medtronic shall reimburse Alnylam for the amounts payable to Third Parties
set forth in Schedule 4.3(b) pursuant to Listed Alnylam Third Party Agreements
in respect of the Discovery, Development, manufacture and/or Commercialization
of any Licensed Product and/or in respect of the licenses and sublicenses
granted by Alnylam to Medtronic in this Agreement with respect to such Licensed
Product. Upon reimbursement by Medtronic of such payments made by Alnylam, such
reimbursement amounts shall be included in [**] for such Licensed Product. The
Parties shall cooperate to coordinate such reimbursements by Medtronic in a
manner that ensures all amounts payable pursuant to Listed Alnylam Third Party
Agreements are paid in a timely manner and otherwise in compliance with such
Listed Alnylam Third Party Agreements (i.e., in a manner that does not require
Alnylam to pay such amounts to any Third Party prior to receiving such amounts
from Medtronic). [**]The royalty with respect to Gross Margin set forth in
Section 4.3(a) above shall, subject to Section 4.3(d), be reduced by an amount
equal to [**] percent ([**]%) of royalties paid by Medtronic to Third Parties in
respect of the Discovery, Development, manufacture or Commercialization of such
Licensed Product for licenses under Blocking Third Party Intellectual Property
(i) approved by both Parties and obtained by Medtronic; or (ii) entered into as
part of reasonable settlements approved by Medtronic of actions brought against
Medtronic by Third Parties alleging infringement of Blocking Third Party
Intellectual Property. For the avoidance of doubt, amounts paid by Medtronic
pursuant to Section 4.3(b) shall not be included in reduction amounts under this
Section 4.3(c).

            (b) The royalty reductions provided for in Section 4.3(c) shall not
reduce the royalty payable to Alnylam under Section 4.3(a) below [**] percent
([**]%) [**] on Net Sales of the relevant Licensed Product.

      Section 4.4 Duration of Royalty Payments. The royalties payable under
Section 4.3(a) shall be paid on a country-by-country basis on each Licensed
Product until the expiration of the Royalty Term. Upon the expiration of the
Royalty Term applicable to any Licensed Product, (a) Medtronic's licenses under
Section 3.1(c)(i) with respect to such Licensed Product shall convert to
non-exclusive, fully paid-up, non-royalty-bearing licenses and (b) Medtronic's
licenses under Section 3.1(c)(ii) with respect to such Licensed Product shall
convert to co-exclusive (with Alnylam), fully paid-up, non-royalty-bearing
licenses, with Alnylam retaining co-exclusive rights under its interest in Joint
Intellectual Property with the right to grant licenses to Third Parties;
provided that, for purposes of this clause (b), Alnylam shall not grant
Commercialization licenses to more than one Third Party in any given country
(i.e., Alnylam shall not grant multiple Commercialization licenses in a given
country under such Joint Intellectual Property with respect to such Licensed
Product but, for clarity, Medtronic acknowledges that Alnylam may grant such
licenses to more than one entity in any given country for the purpose of
enabling a unified Commercialization effort by a Third Party licensee, its
Affiliates and agents (including contract service providers engaged to
facilitate such unified Commercialization effort)).

      Section 4.5 Royalties Payable Only Once. Medtronic's obligation to pay
royalties under Section 4.3(a) is imposed only once with respect to the same
unit of Licensed Product, including by reason of such Licensed Product being
Covered by more than one Valid Claims of Alnylam Patent Rights.

                                       25


      Section 4.6 Reductions to Section 4.2 and Section 4.3 Payments After
Product Development Program Terminations. The payments otherwise payable by
Medtronic to Alnylam pursuant to Sections 4.2 and 4.3 accruing after a
termination by Alnylam pursuant to Section 2.3(e) of the Product Development
Program in which the applicable Licensed Product was Developed shall:

            (a) initially, be reduced to the following percentages of the
amounts otherwise payable pursuant to Sections 4.2 and 4.3, as appropriate:

                  [**]%;
                  [**]%;
                  [**]%;
                  [**]%; and

            (b) if [**] under Sections 4.2 and 4.3 with respect to the
applicable Licensed Product equal [**], such payments shall [**]).

      Section 4.7 Credits Against Future Royalties.

            (a) Upon the abandonment or withdrawal of a claim of a published
patent application of Alnylam Patent Rights that was the sole basis for the
payment of royalties by Medtronic pursuant to Section 4.3(a), Medtronic shall be
entitled to credit the amount of such royalties paid to Alnylam against any
future royalties or payments to be made to Alnylam with respect to the
Commercialization of such Licensed Product (excluding reimbursement amounts
pursuant to Sections 3.1(f) and 4.3(b)).

            (b) If the validity of a Valid Claim of an issued patent is the
subject of administrative or legal action and is later revoked or held
unenforceable or invalid by a decision of a court or governmental agency of
competent jurisdiction or is disclaimed or admitted to be invalid or
unenforceable through reissue, disclaimer or otherwise, and such claim was the
sole basis for the payment of royalties by Medtronic pursuant to Section 4.3(a),
Medtronic shall be entitled to credit the amount of such royalties paid to
Alnylam, from the date such claim became the subject of such action to the date
of the final unappealable decision, against any future royalties or payments to
be made to Alnylam with respect to the Commercialization of such Licensed
Product (excluding reimbursement amounts pursuant to Sections 3.1(f) and
4.3(b)). If such claim is the last claim of any Alnylam Patent Rights upon which
a royalty would be owed, Medtronic shall be entitled, from the date any action
challenging the validity or unenforceability of such claim until the final
decision, to escrow royalty payments due to Alnylam under Section 4.3(a) and if
such claim is declared invalid or unenforceable retain such royalty payments.

      Section 4.8 Royalty Reports and Accounting.

            (a) Royalty Reports; Royalty Payments. Medtronic shall deliver to
Alnylam, within forty-five (45) days after the end of each calendar quarter,
reasonably detailed written accountings of Net Sales of Licensed Products that
are subject to royalty payments due to Alnylam for such calendar quarter, and
[**]. Such accountings shall be Confidential Information of Medtronic unless
otherwise excluded by Section 1.13(a) through (d). Such quarterly reports

                                      26



shall indicate (i) gross sales and Net Sales on a country-by-country and
Licensed Product-by-Licensed Product basis, and (ii) the calculation of
royalties from such gross sales and Net Sales. When Medtronic delivers such
accounting to Alnylam, Medtronic shall also deliver all royalty payments due
under Section 4.3 to Alnylam for the calendar quarter.

            (b) Audits by Alnylam. Medtronic shall keep, and shall require its
Affiliates, and sublicensees to keep, complete and accurate records of the
latest three (3) years relating to gross sales, Net Sales and all information
relevant under Sections 4.3, 4.9, 4.10 and 4.11. For the sole purpose of
verifying amounts payable to Alnylam, Alnylam shall have the right annually, at
Alnylam's expense, to retain an independent certified public accountant selected
by Alnylam and reasonably acceptable to Medtronic, to review such records in the
location(s) where such records are maintained by Medtronic, its Affiliates and
sublicensees upon reasonable notice and during regular business hours. Such
representatives shall execute a suitable confidentiality agreement reasonably
acceptable to Medtronic prior to conducting such audit. Such representatives
shall disclose to each of Medtronic and Alnylam only their conclusions regarding
the accuracy of royalty payments and of records related thereto. The right to
audit any royalty report shall extend for three (3) years from the end of the
calendar year in which the royalty report was delivered. Each royalty report
shall be subject only to one such audit. Medtronic shall promptly pay Alnylam
the amount of any underpayment revealed by such audit together with interest
calculated in the manner provided in Section 4.11. If the underpayment is equal
to or greater than ten percent (10%) of the amount that was otherwise due,
Alnylam shall be entitled to have Medtronic reimburse Alnylam's reasonable
out-of-pocket costs of such review. Alnylam shall promptly return to Medtronic
any overpayment revealed by such audit.

      Section 4.9 Currency Exchange. With respect to sales of Licensed Products
invoiced in U.S. Dollars, the sales and royalties payable shall be expressed in
U.S. Dollars. With respect to sales of Licensed Products invoiced in a currency
other than U.S. Dollars, the sales and royalties payable shall be expressed in
their U.S. Dollar equivalent calculated using Medtronic's standard currency
translation methodology for the conversion of foreign sales currencies into U.S.
Dollars. All royalty payments shall be made in U.S. Dollars.

      Section 4.10 Tax Withholding. The Parties shall use all reasonable and
legal efforts to reduce tax withholding on payments made to Alnylam.
Notwithstanding such efforts, if Medtronic concludes that tax withholdings under
the laws of any country are required with respect to payments to Alnylam,
Medtronic shall withhold the required amount and pay it to the appropriate
governmental authority. In such case, Medtronic shall promptly provide Alnylam
with copies of receipts or other evidence reasonably required and sufficient to
allow Alnylam to document such tax withholdings adequately for purposes of
claiming foreign tax credits and similar benefits.

      Section 4.11 Late Payments. Medtronic shall pay interest to Alnylam on the
aggregate amount of any payments that are not paid on or before the date such
payments are due under this Agreement at a rate per annum equal to the lesser of
the then current "prime rate" in effect at Wells Fargo Bank, N.A. or the highest
rate permitted by applicable law, calculated on the number of days such payments
are paid after the date such payments are due.

                                      27



                                   Article V

         Intellectual Property Ownership, Protection and Related Matters

      Section 5.1 Ownership of Inventions.

            (a) Non-Program Know-How. Any Know-How developed by Medtronic or
Alnylam prior to or outside the Collaboration Program shall remain the sole
property of such Party.

            (b) Device Inventions. Medtronic shall exclusively own all
Device-Related Know-How made or created by either Party, their employees, agents
and consultants, or jointly by any of the foregoing, in the course of the
Collaboration Program ("Device Inventions").

            (c) Joint Inventions and Sole Inventions. All Know-How other than
Device Inventions made or created jointly by employees, agents and consultants
of Medtronic, on the one hand, and employees, agents and consultants of Alnylam,
on the other hand, in the course of the Collaboration Program ("Jointly
Developed Inventions") shall be owned jointly on the basis of each Party having
an undivided interest in the whole. All Know-How other than Device Inventions
made or created solely by employees, agents and consultants of a Party in the
course of the Collaboration Program ("Sole Inventions") shall be owned
exclusively by such Party.

            (d) Inventorship. The determination of inventorship shall be made in
accordance with United States patent laws. In the event of a dispute regarding
inventorship, if the Parties are unable to resolve the dispute, the Parties
shall jointly engage mutually acceptable independent patent counsel not
regularly employed by either Party to resolve such dispute. The decision of such
independent patent counsel shall be binding on the Parties with respect to the
issue of inventorship.

            (e) Data Ownership; Right of Reference and Other Use. All
preclinical and clinical data generated with respect to the Licensed Products in
the course of the Collaboration Program shall be owned by the Party generating
such data ("Program Data") and each Party shall have access to all Program Data
generated by the other Party in the course of the Collaboration Program. Each
Party shall have a right of reference with respect to, and the right to use, all
Program Data; provided that (i) Alnylam shall not attempt to use such Program
Data as the primary basis for obtaining a Regulatory Approval for a Product that
includes a Device substantially similar to any Medtronic Device used to generate
such Program Data and (ii) Medtronic shall not use such Program Data as the
primary basis for obtaining a Regulatory Approval for a Product, other than a
Licensed Product, containing an siRNA ([**]) substantially similar to any
Alnylam siRNA used to generate such data. Subject to the proviso in the
immediately preceding sentence, each Party shall be entitled to access,
reference, disclose to investors, lenders, acquirers, licensees, contractors and
prospective investors, lenders, acquirers, licensees and contractors, and
otherwise use all Program Data without the other Party's consent and without any
duty to account to the other Party for such access, reference, disclosure and
other use. During the Product Development Term for any Development Candidate or
as provided in Section 8.6, the Parties agree that upon the non-sponsoring
Party's written request, the Party that is sponsoring any IND, NDA or similar
application filed with any Regulatory

                                      28



Authority will provide copies to the other Party of all data and other materials
submitted with respect to such application and all correspondence from the
Regulatory Authority ("Right of Access").

            (f) Further Actions and Assignments. Each Party shall take all
further actions and execute all assignments requested by the other Party and
reasonably necessary or desirable to vest in the other Party the ownership
rights set forth in this Section 5.1.

      Section 5.2 Prosecution and Maintenance of Patent Rights.

            (a) Sole Inventions Owned by Alnylam. Alnylam shall have the
exclusive right and option to file and prosecute any patent applications and
maintain any patents covering Sole Inventions owned by Alnylam; provided that in
the event that Alnylam declines the option to file and prosecute any such patent
applications or maintain any such patents that pertain to Licensed Products, it
shall give Medtronic reasonable notice to this effect, sufficiently in advance
to permit Medtronic to undertake such filing, prosecution and maintenance
without a loss of rights, and thereafter Medtronic may, upon written notice to
Alnylam, file and prosecute such patent applications and maintain such patents
in Alnylam's name, all at Medtronic's expense (subject to the immediately
following sentence), and all such Sole Inventions shall remain owned exclusively
by Alnylam. If Medtronic incurs filing, prosecution and/or maintenance expenses
with respect to Sole Inventions owned by Alnylam and pertaining to a Licensed
Product in accordance with the immediately preceding sentence, Medtronic shall
be entitled to deduct the reasonable and documented amount of such expenses from
the royalties that Medtronic pays to Alnylam with respect to such Licensed
Product pursuant to Section 4.3(a).

            (b) Device Inventions and Sole Inventions Owned by Medtronic.
Medtronic shall have the exclusive right and option to file and prosecute any
patent applications and to maintain any patents covering Device Inventions and
Sole Inventions owned by Medtronic.

            (c) Jointly Developed Inventions. The JRDC shall determine which
Party shall have the right and option to file and prosecute any patent
applications and to maintain any patents covering Jointly Developed Inventions
at the shared expense of both parties; provided that in the event that either
Party declines an option to file and prosecute any such patent applications or
maintain any such patents that pertain solely to Licensed Products or declines
to share in such filing, prosecution and maintenance expenses ("Non-Electing
Party"), it shall give the other Party ("Electing Party") reasonable notice to
this effect, sufficiently in advance to permit the Electing Party to undertake
such filing, prosecution and maintenance without a loss of rights, and
thereafter the Electing Party may, upon written notice to the Non-Electing
Party, file and prosecute such patent applications and maintain such patents in
its own name and at its sole expense, and the Non-Electing Party shall assign
all of its rights therein to the Electing Party for no additional consideration.

            (d) Alnylam Intellectual Property. Alnylam shall use reasonable
efforts to protect the Alnylam Intellectual Property by obtaining and
maintaining appropriate patent rights, including pursuing appropriate patent
rights in an interference or opposition action, as determined by Alnylam in the
exercise of its reasonable business judgment.

                                      29



            (e) Costs and Expenses. Except as otherwise provided in Section
5.2(c), each Party shall bear its own costs and expenses in filing, prosecuting
and maintaining Patent Rights covering Device Inventions, Sole Inventions and
Jointly Developed Inventions. Furthermore, Alnylam shall bear its own costs and
expenses in filing, prosecuting and maintaining other Patent Rights within
Alnylam Patent Rights and Medtronic shall bear its own costs and expenses in
filing, prosecuting and maintaining other Patent Rights within Medtronic Patent
Rights.

            (f) Cooperation. Each Party agrees to cooperate with the other with
respect to the filing, prosecution and maintenance of Patent Rights pursuant to
this Section 5.2, including the execution of all such documents and instruments
and the performance of such acts as may be reasonably necessary in order to
permit the other Party to undertake any filing, prosecution or maintenance of
Patent Rights that such Party has elected not to pursue, as provided for in
Sections 5.2(a), (b) and (c).

      Section 5.3 Third Party Infringement.

            (a) Notice. Each Party shall promptly report in writing to the other
Party during the term of this Agreement any (i) known or suspected infringement
of Medtronic Patent Rights, Alnylam Patent Rights or Joint Patent Rights or (ii)
known or suspected unauthorized use or misappropriation of Medtronic Know-How,
Alnylam Know-How or Joint Know-How, related to the unauthorized manufacture,
use, offer for sale, sale or importation of a Product in the Field, of which
such Party becomes aware, and shall provide the other Party with all available
evidence supporting such infringement, suspected infringement, unauthorized use
or misappropriation or suspected unauthorized use or misappropriation.

            (b) Infringement Action.

                  (i) Alnylam shall have the initial right to initiate a suit or
take other appropriate action that it believes is reasonably required to protect
the Alnylam Intellectual Property. To the extent that any such suit or actions
pertains to Licensed Products, Alnylam shall give Medtronic advance notice of
its intent to file any such suit or take any such action and the reasons
therefor, and shall provide Medtronic with an opportunity to make suggestions
and comments regarding such suit or action. Thereafter, Alnylam shall keep
Medtronic promptly informed, and shall from time to time consult with Medtronic
regarding the status of any such suit or action and shall provide Medtronic with
copies of all material documents (e.g., complaints, answers, counterclaims,
material motions, orders of the court, memoranda of law and legal briefs,
interrogatory responses, depositions, material pre-trial filings, expert
reports, affidavits filed in court, transcripts of hearings and trial testimony,
trial exhibits and notices of appeal) filed in, or otherwise relating to, such
suit or action.

                  (ii) Medtronic shall have the sole and exclusive right to
initiate a suit or take other appropriate action that it believes is reasonably
required to protect Medtronic Intellectual Property. To the extent that any such
suit or actions pertains to Licensed Products, Medtronic shall give Alnylam
advance notice of its intent to file any such suit or take any such action and
the reasons therefor, and shall provide Alnylam with an opportunity to make
suggestions and comments regarding such suit or action. Thereafter, Medtronic
shall keep Alnylam promptly informed, and shall from time to time consult with
Alnylam regarding the

                                      30



status of any such suit or action and shall provide Alnylam with copies of all
material documents (e.g., complaints, answers, counterclaims, material motions,
orders of the court, memoranda of law and legal briefs, interrogatory responses,
depositions, material pre-trial filings, expert reports, affidavits filed in
court, transcripts of hearings and trial testimony, trial exhibits and notices
of appeal) filed in, or otherwise relating to, such suit or action. For the
avoidance of doubt, Alnylam shall have no right to enforce any solely owned
intellectual property rights of Medtronic.

            (c) Step-in Right. If Alnylam fails to initiate a suit or take such
other appropriate action within [**] days after becoming aware of alleged
infringement, unauthorized use or misappropriation, then, to the extent that
such alleged infringement, unauthorized use or misappropriation pertains to
Licensed Products, Medtronic may, in its discretion, provide Alnylam with
written notice of its intent to initiate a suit or take other appropriate
action. If Medtronic provides such notice and Alnylam fails to initiate a suit
or take such other appropriate action within [**] days after receipt of such
notice from Medtronic, then Medtronic shall have the right to initiate a suit or
take other appropriate action that it believes is reasonably required to protect
the Alnylam Intellectual Property or the Joint Intellectual Property, as
applicable. Medtronic shall give Alnylam advance notice of its intent to file
any such suit or take any such action and the reasons therefor, and shall
provide Alnylam with an opportunity to make suggestions and comments regarding
such suit or action. Thereafter, Medtronic shall keep Alnylam promptly informed,
and shall from time to time consult with Alnylam regarding the status of any
such suit or action and shall provide Alnylam with copies of all material
documents (e.g., complaints, answers, counterclaims, material motions, orders of
the court, memoranda of law and legal briefs, interrogatory responses,
depositions, material pre-trial filings, expert reports, affidavits filed in
court, transcripts of hearings and trial testimony, trial exhibits and notices
of appeal) filed in, or otherwise relating to, such suit or action.
Notwithstanding the foregoing provisions of this Section 5.3(c), the rights of
Medtronic to initiate suit or take other action pursuant to this Section 5.3(c)
shall be subject to all limitations and restrictions on such rights imposed by
agreements between Alnylam and Third Parties.

            (d) Conduct of Action; Costs. The Party initiating suit shall have
the sole and exclusive right to select counsel for any suit initiated by it
under this Section 5.3. If required under applicable law in order for such Party
to initiate and/or maintain such suit, the other Party shall join as a party to
the suit. If requested by the Party initiating suit, the other Party shall
provide reasonable assistance to the Party initiating suit in connection
therewith at no charge to such Party except for reimbursement of reasonable
out-of-pocket expenses incurred in rendering such assistance. The Party
initiating suit shall assume and pay all of its own out-of-pocket costs incurred
in connection with any litigation or proceedings described in this Section 5.3,
including the fees and expenses of the counsel selected by it. The other Party
shall have the right to participate and be represented in any such suit by its
own counsel at its own expense.

            (e) Recoveries. To the extent that any such suit or action pertains
to Licensed Products, any recovery obtained as a result of any proceeding
described in this Section 5.3 or from any counterclaim or similar claim asserted
in a proceeding described in Section 5.4, by settlement or otherwise, shall be
applied in the following order of priority:

                                      31



                  (i) first, the Party initiating the suit or action shall be
reimbursed for all costs in connection with such proceeding paid by such Party;

                  (ii) second, the other Party shall be reimbursed for all costs
in connection with such proceeding paid by the other Party; and

                  (iii) third, any remainder shall be paid seventy-five percent
(75%) to the Party initiating the suit or action, and the balance to the other
Party.

      Section 5.4 Claimed Infringement; Claimed Invalidity.

            (a) Notice. In the event that a Third Party at any time provides
written notice of a claim to, or brings an action, suit or proceeding against a
Party, or any of its Affiliates or sublicensees, claiming infringement of such
Third Party's Patent Rights or unauthorized use or misappropriation of such
Third Party's Know-How, based upon an assertion or claim arising out of the
research, development, manufacture, use or sale of Licensed Products by such
Party (a "Third Party Infringement Claim"), such Party shall promptly notify the
other Party of the claim or the commencement of such action, suit or proceeding,
enclosing a copy of the claim and/or all papers served.

            (b) Defense of Third Party Infringement Claims. The Parties'
respective obligations with respect to Third Party Infringement Claims are set
forth in Section 10.1.

            (c) Patent Invalidity Claim. If a Third Party at any time asserts a
claim that any Alnylam Patent Right or Joint Patent Right Covering a Licensed
Product is invalid or otherwise unenforceable (an "Invalidity Claim"), whether
as a defense in an infringement action brought by Alnylam or Medtronic pursuant
to Section 5.3, in a declaratory judgment action or in a Third Party
Infringement Claim brought against Alnylam or Medtronic, the Parties shall
cooperate with each other in preparing and formulating a response to such
Invalidity Claim. Neither Party shall settle or compromise any Invalidity Claim
involving Patent Rights Controlled by the other Party without the consent of the
other Party. If Medtronic incurs expenses to respond to Invalidity Claims
involving Alnylam Patent Rights and pertaining to a Licensed Product, Medtronic
shall be entitled to deduct the reasonable and documented amount of such
expenses from the royalties that Medtronic pays to Alnylam with respect to such
Licensed Product pursuant to Section 4.3(a).

      Section 5.5 Patent Term Extensions. The Parties shall, as necessary and
appropriate, use reasonable efforts to agree upon a joint strategy for
obtaining, and cooperate with each other in obtaining, patent term extensions
for Medtronic Patent Rights, Alnylam Patent Rights or Joint Patent Rights
Covering Licensed Products.

      Section 5.6 Patent Marking. Medtronic agrees to comply with all applicable
statutes that require patent marking in any country in which Licensed Products
are sold by Medtronic, its Affiliates and/or sublicensees with respect to
Alnylam Patent Rights and with respect to which Alnylam has provided Medtronic
the appropriate language to be used sufficiently in advance of the sale of the
Licensed Product to allow Medtronic to mark such Licensed Product.

                                      32



      Section 5.7 Maintain Licenses in Force. Alnylam shall promptly notify
Medtronic if any Third Party with which Alnylam has entered into a license
agreement material to any Development Candidate or Licensed Product alleges any
breach, default, or event that with the passage of time or giving of notice
could become a default, by Alnylam of any such license agreement. Medtronic
shall be entitled, but not obligated, to cure any alleged breach or default by
Alnylam of a payment obligation or other obligation, if possible, under any such
license agreement and set-off the cost of such cure against amounts otherwise
owed to Alnylam hereunder. Alnylam agrees that, prior to modifying, waiving,
amending or letting lapse any provision of any such license agreement in a
manner material to any Development Candidate or Licensed Product, Alnylam shall
notify Medtronic of such prospective modification, waiver, amendment or lapse
and provide Medtronic with a reasonable opportunity to provide Alnylam with
input regarding such prospective modification, waiver, amendment or lapse.
Alnylam shall use reasonable efforts, consistent with the exercise of reasonable
business judgment, not to modify, waive, amend or let lapse any such license
agreement, and not to take any action or omit to take any action with respect to
any such license agreement, an effect of which would be to adversely affect
Medtronic's rights or obligations hereunder in any material respect.

                                   Article VI

                                 Confidentiality

      Section 6.1 Confidential Information. With respect to any Confidential
Information of a Party disclosed by it or its Affiliates to the other Party,
such receiving Party agrees: (a) not to use any Confidential Information
consisting of Device-Related Know-How or Primary Sequence or Chemical
Modification Know-How in connection with activities other than those
contemplated by this Agreement, (b) that any Confidential Information consisting
of Device-Related Know-How or Primary Sequence or Chemical Modification Know-How
shall not be used in conjunction with any Third Party who is not a consultant
of, or an advisor to, the receiving Party or its Affiliates without the prior
written consent of the disclosing Party, (c) that such Confidential Information
shall be maintained in confidence by the receiving Party and its Affiliates, and
(d) that such Confidential Information shall not be disclosed by the receiving
Party or its Affiliates to any Third Party who is not a consultant of, or an
advisor to, the receiving Party or its Affiliates without the prior written
consent of the disclosing Party. Notwithstanding the foregoing provisions of
this Section 6.1, either Party may disclose Confidential Information of the
other Party or the terms of this Agreement if such Party reasonably determines,
based on advice from its counsel, that it is required to make such disclosure by
applicable law, regulation or legal process, including by the rules or
regulations of the United States Securities and Exchange Commission (the "SEC")
or similar regulatory agency in a country other than the United States or of any
stock exchange or NASDAQ, in which event such Party shall provide prior notice
of such intended disclosure to such other Party sufficiently in advance to
enable the other Party to seek confidential treatment or other protection for
the Confidential Information subject to such requirement unless the disclosing
Party is prevented by law or regulation from providing such advance notice,
shall disclose only such Confidential Information of such other Party as such
disclosing Party reasonably determines is required to be disclosed, and shall
seek confidential treatment of any terms of this Agreement that such other Party
considers particularly sensitive, including the royalty rate terms of this
Agreement, from the SEC, similar regulatory agencies in countries other than the
United States, any stock exchange or NASDAQ.

                                      33



      Section 6.2 Disclosures to Employees, Consultants and Advisors. Each Party
agrees that it and its Affiliates shall provide Confidential Information
received from the other Party only to the receiving Party's respective
employees, consultants and advisors, and to the employees, consultants and
advisors of the receiving Party's Affiliates, who have a need to know such
Confidential Information to assist the receiving Party in fulfilling its
obligations under this Agreement, provided that each Party shall remain
responsible for any failure by its and its Affiliates' respective employees,
consultants and advisors to treat such information and materials as required
under Section 6.1.

      Section 6.3 Term. All obligations imposed under this Article VI shall
expire upon the later of (a) expiration of the Royalty Term or (b) [**] years
after the expiration or termination of this Agreement.

      Section 6.4 Publicity. Upon execution of this Agreement, the Parties shall
jointly issue a press release announcing the execution of this Agreement in form
and substance substantially as attached hereto as Exhibit D. Thereafter, during
the term of this Agreement, the content of any press release or public
announcement relating to this Agreement and/or Licensed Products shall be
mutually agreed by the Parties, which agreement shall not be unreasonably
withheld, delayed or conditioned, except that a Party may, without the other
Party's consent, (a) issue such press release or public announcement if the
contents of such press release or public announcement have previously been made
public other than through a breach of this Agreement by the issuing Party or its
Affiliates, (b) issue such press release or public announcement if the contents
of such press release or public announcement are limited substantially to any of
the matters set forth on Exhibit E, or (c) issue such a press release or public
announcement if such Party reasonably determines, based on advice from its
counsel, that it is required to issue such a press release or public
announcement by applicable law, regulation or legal process, including by the
rules or regulations of the SEC or similar regulatory agency in a country other
than the United States or of any stock exchange or NASDAQ, in which event such
Party shall provide at least two (2) business days' prior notice of such
intended press release or public announcement to the other Party unless the
disclosing Party is prevented by law, regulation or legal process for providing
such advance notice and shall include in such press release or public
announcement only such information relating to this Agreement and/or the
Licensed Product as it reasonably determines is required by such applicable law,
regulation or legal process. The Party subject to the requirement to issue such
press release or public announcement shall, if reasonably practicable under the
circumstances, consider in good faith all comments provided by the other Party
prior to such press release or public announcement.

      Section 6.5 Publications. The Parties acknowledge that scientific lead
time is a key element of the value of the Collaboration Program and further
agree to use Commercially Reasonable Efforts to control public scientific
disclosures of the results of the Collaboration Program to prevent any potential
adverse effect of any premature public disclosure of such results. The Parties
shall establish a procedure for publication review and each Party shall first
submit to the other Party an early draft of all such publications, whether they
are to be presented orally or in written form, at least thirty (30) days prior
to submission for publication. Each Party shall review such proposed publication
in order to avoid the unauthorized disclosure of a Party's Confidential
Information and to preserve the patentability of inventions arising from the
Collaboration Program. If, as soon as reasonably possible, but no longer than
[**] following

                                      34



receipt of an advance copy of a Party's proposed publication, the other Party
informs such Party that its proposed publication contains Confidential
Information of the other Party, then such Party shall delete such Confidential
Information from its proposed publication. In addition, if at any time during
such [**], the other Party informs such Party that its proposed publication
discloses inventions made by either Party in the course of the Collaboration
Program that have not yet been protected through the filing of a patent
application, or the public disclosure of such proposed publication could be
expected to have a material adverse effect on any Patent Rights or Know-How of
such other Party, then such Party shall either delay such proposed publication,
for up to [**] from the date the other Party informed such Party of its
objection to the proposed publication, to permit the timely preparation and
first filing of patent application(s) on the information involved or remove the
identified disclosures prior to publication. The Parties agree that all
publications of results of the Collaboration Program by Alnylam or Medtronic
shall acknowledge the contribution of the other Party and Third Party
collaborators, as applicable, to such results.

                                  Article VII

                         Representations and Warranties

      Section 7.1 Representations of Authority. Alnylam and Medtronic each
represents and warrants to the other Party that it has full corporate right,
power and authority to enter into this Agreement and to perform its respective
obligations under this Agreement.

      Section 7.2 Consents. Alnylam and Medtronic each represents and warrants
to the other Party that all necessary consents, approvals and authorizations of
all government authorities and other Persons required to be obtained by it as of
the Effective Date in connection with the execution, delivery and performance of
this Agreement have been or shall be obtained by the Effective Date.

      Section 7.3 No Conflict. Alnylam and Medtronic each represents and
warrants to the other Party that, notwithstanding anything to the contrary in
this Agreement, the execution and delivery of this Agreement, the performance of
such Party's obligations in the conduct of the Collaboration Program and the
licenses and sublicenses to be granted pursuant to this Agreement (a) do not and
will not conflict with or violate any requirement of applicable laws or
regulations existing as of the Effective Date and (b) do not and will not
conflict with, violate, breach or constitute a default under any contractual
obligations of such Party or any of its Affiliates existing as of the Effective
Date.

      Section 7.4 Enforceability. Alnylam and Medtronic each represents and
warrants to the other Party that this Agreement is a legal and valid obligation
binding upon it and is enforceable in accordance with its terms.

      Section 7.5 Employee Obligations. Alnylam and Medtronic each represents
and warrants that all of its employees, officers, consultants and advisors who
are or will be involved in the Collaboration Program have executed or will have
executed agreements or have existing obligations under law requiring assignment
to such Party of all intellectual property made during the course of and as the
result of their association with such Party, and obligating the individual

                                      35



to maintain as confidential such Party's Confidential Information, to the extent
required to support such Party's obligations under this Agreement. Alnylam and
Medtronic each represents and warrants that, to its knowledge, none of its
employees who are or will be involved in the Collaboration Program are, as a
result of the nature of such Collaboration Program to be conducted by the
Parties, in violation of any covenant in any contract with a Third Party
relating to non-disclosure of proprietary information, non-competition or
non-solicitation.

      Section 7.6 Intellectual Property. Each Party represents and warrants to
the other Party as follows:

            (a) To such Party's knowledge, the performance by either Party of
its obligations under a Workplan will not result in the infringement of any
intellectual property rights or the use of misappropriated trade secrets of any
Third Party.

            (b) Such Party has the right to grant the rights and licenses
granted to the other Party by such Party under this Agreement.

            (c) To such Party's knowledge, no Third Party with which such Party
has entered into any license agreement under which Patent Rights or Know-How
material to this Agreement are licensed from such Third Party intends to cancel
or terminate such license agreement and no Third Party has the right to cancel
or terminate such license agreement.

      Section 7.7 No Warranties. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH HEREIN
OR IN THE SUPPLY AGREEMENT, THE PARTIES MAKE NO REPRESENTATIONS AND EXTEND NO
WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING ANY REPRESENTATIONS
OR WARRANTIES AS TO MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
NONINFRINGEMENT.

                                  Article VIII

                              Term and Termination

      Section 8.1 Term. This Agreement shall become effective as of the
Effective Date and may be terminated only as set forth in this Article VIII.

      Section 8.2 Termination For Material Breach.

            (a) Upon any material breach of obligations under a Workplan by a
Party (the "Breaching Party") related solely to such Workplan, the other Party
(the "Non-Breaching Party") may terminate the Technology Development Program or
the Product Development Program for which the Workplan was prepared, by
providing [**] days' written notice to the Breaching Party specifying the
material breach. In the case of payment defaults, the Breaching Party may cure
by paying all non-contested amounts during the notice period and submitting
issues regarding the remaining disputed amounts to dispute resolution without
termination of the Agreement. The termination shall become effective at the end
of the notice period unless the Breaching Party cures such breach during such
notice period. Notwithstanding the foregoing, if such material breach, by its
nature, is not curable, the Non-Breaching Party may terminate immediately. If

                                      36



upon the termination of the Technology Development Program or a Product
Development Program, no Product Development Program remains in progress and no
Licensed Product is then being Commercialized under this Agreement, this
Agreement shall terminate when the Technology Development Program or such
Product Development Program terminates.

            (b) Upon any material breach of Section 2.6(c) of this Agreement by
Medtronic with respect to one or more, but less than all, Major Markets for a
given Target Indication, Alnylam may terminate Medtronic's license rights to
Alnylam Patents under Sections 3.1(b) and 3.1(c) with respect to such Major
Markets for such Target Indication by providing [**] days' written notice to
Medtronic, specifying the material breach. The termination shall become
effective at the end of the notice period unless Medtronic cures such breach
during such notice period. Notwithstanding the foregoing, if such material
breach, by its nature, is not curable, Alnylam may terminate immediately. Upon
termination of Medtronic's license rights to Alnylam Patents under Sections
3.1(b) and 3.1(c) with respect to such Major Markets for such Target Indication,
Medtronic shall have no further obligations under Section 2.6(c) with respect to
such Major Markets for such Target Indication.

            (c) Upon any material breach of this Agreement by a Party (the
"Breaching Party") other than a material breach described in Section 8.2(a) or
8.2(b), the other Party (the "Non-Breaching Party") may terminate this Agreement
by providing [**] days' written notice to the Breaching Party, specifying the
material breach. In the case of payment defaults, the Breaching Party may cure
by paying all non-contested amounts during the notice period and submitting
issues regarding the remaining disputed amounts to dispute resolution without
termination of the Agreement. The termination shall become effective at the end
of the notice period unless the Breaching Party cures such breach during such
notice period. Notwithstanding the foregoing, if such material breach, by its
nature, is not curable, the Non-Breaching Party may terminate immediately.

      Section 8.3 Termination Upon Termination of the Supply Agreement. Either
Party shall have the right to terminate this Agreement at any time after the
[**] anniversary of the commercial launch of the first Licensed Product in the
event that at any such time the Supply Agreement has been terminated (other than
such a termination resulting from one or more of the events or circumstances
described in Section 3.1(g)) by providing the other Party with [**] days'
written notice of termination.

      Section 8.4 Termination For Convenience. Medtronic shall have the right to
terminate this Agreement at any time upon [**] prior written notice of such
termination to Alnylam. During the [**] notice period prior to termination, this
Agreement shall remain in full force and effect and Medtronic shall remain
responsible for its obligations hereunder.

      Section 8.5 Termination for Other Reasons.

            (a) [**] prior to the expiration or early termination of the
Technology Development Term, this Agreement shall terminate as of the date of
such expiration or termination.

                                      37



            (b) If either Party decides to discontinue the Technology
Development Program pursuant to Section 2.3(e) or Section 2.3(f), this Agreement
shall terminate [**]days following receipt by the other of the Alnylam
Discontinuation Notice or Medtronic Discontinuation Notice, whichever is
applicable.

            (c) If either Party decides to discontinue all Product Development
Programs pursuant to Section 2.3(e) or Section 2.3(f), this Agreement shall
terminate [**] days following receipt by the other of the Alnylam
Discontinuation Notice or Medtronic Discontinuation Notice, whichever is
applicable; provided that, in the case of a decision by Alnylam to [**], if
Medtronic [**], this Agreement shall [**].

            (d) If Alnylam decides to terminate a Product Development Program
pursuant to Section 2.3(g), this Agreement shall terminate upon the effective
date of such termination, if as of that date, no other Product Development
Program remains in progress.

      Section 8.6 Effect of Termination.

            (a) In the event of termination of this Agreement by Alnylam
pursuant to Section 8.2(a) or 8.2(c), Medtronic shall be entitled to complete
all work-in-process and sell its remaining inventory of Licensed Products,
subject to the payment of royalties in accordance with Section 4.3(a), for a
period of up to [**] following termination.

            (b) In the event of termination of Medtronic's license rights with
respect to a Target Indication in one or more (but less than all) Major
Market(s) by Alnylam pursuant to Section 8.2(b), then:

                  (i) Medtronic shall be entitled to complete all
work-in-process and sell its remaining inventory of Licensed Products for such
Target Indication located or labeled for sale in such Major Market(s), subject
to the payment of royalties in accordance with Section 4.3(a), for a period of
up to [**] [**] following termination.

                  (ii) with respect to all Alnylam siRNAs that have achieved
[**] as of the effective date of such termination, Medtronic shall promptly
transfer to Alnylam all INDs, NDAs and similar applications filed with
Regulatory Authorities for such Target Indication in such Major Market(s) for
which Medtronic is then the sponsor in relation to Licensed Products containing
or using such Alnylam siRNAs;

                  (iii) with respect to all Alnylam siRNAs that have not yet
achieved [**], Medtronic shall grant Alnylam a Right of Access and a right of
reference for any purpose to all INDs and other filings with Regulatory
Authorities for such Target Indication in such Major Market(s) for which
Medtronic is then the sponsor in relation to Products containing or using such
Alnylam siRNAs; and

                  (iv) promptly provide to Alnylam copies of all scientific and
regulatory data in Medtronic's possession (excluding data already in Alnylam's
possession) with respect to such Alnylam siRNAs and to Licensed Products
containing or using such Alnylam siRNAs.

                                      38



            (c) In the event of termination of this Agreement by Alnylam
pursuant to Section 8.2(a) or 8.2(c), by Alnylam pursuant to Section 8.5(d), by
Medtronic pursuant to Section 8.3 (other than such a termination resulting from
one or more of the events or circumstances described in Section 3.1(g)), by
Medtronic pursuant to Section 8.4, or by Medtronic pursuant to Section 8.5(c)
due to Medtronic's decision to discontinue all Product Development Programs
pursuant to Section 2.3(f), then:

                  (i) with respect to all Alnylam siRNAs that have achieved [**]
in the Collaboration Program as of the effective date of such termination,
Medtronic shall promptly transfer to Alnylam all INDs, NDAs and similar
applications filed with Regulatory Authorities for which Medtronic is then the
sponsor in relation to Licensed Products containing or using such Alnylam
siRNAs; provided that, solely in the case of such a termination by Medtronic
pursuant to Section 8.4 after the commercial launch of any such Licensed
Product, Medtronic shall only transfer such INDs, NDAs and similar applications
to Alnylam upon Alnylam's request and, in the case of such a requested transfer,
Alnylam shall pay to Medtronic a [**] percent ([**]%) royalty (calculated on the
same basis that royalties payable by Medtronic are calculated under Section
4.3(a)) [**] such Licensed Product until [**];

                  (ii) with respect to all Alnylam siRNAs that have not yet
achieved [**], Medtronic shall grant Alnylam a Right of Access and a right of
reference for any purpose to all INDs and other filings with Regulatory
Authorities for which Medtronic is then the sponsor in relation to Products
containing or using such Alnylam siRNAs; and

                  (iii) promptly provide to Alnylam copies of all scientific and
regulatory data in Medtronic's possession (excluding data already in Alnylam's
possession) with respect to such Alnylam siRNAs and to Licensed Products
containing or using such Alnylam siRNAs.

            (d) Nothing in this Agreement shall be deemed to grant Alnylam any
right or license to any Patent Rights of Medtronic or any of its Affiliates.

            (e) In the event of termination of this Agreement by Medtronic
pursuant to Section 8.2 or termination by Alnylam pursuant to Section 8.3 (other
than such a termination resulting from material breaches by Medtronic of its
obligations under the Supply Agreement), then:

                  (i) with respect to all Alnylam siRNAs that have achieved [**]
in the Collaboration Program as of the effective date of such termination,
Alnylam shall promptly transfer to Medtronic all INDs, NDAs and similar
applications filed with Regulatory Authorities for which Alnylam is then the
sponsor in relation to Licensed Products containing or using such Alnylam
siRNAs;

                  (ii) with respect to all Alnylam siRNAs that have not yet
achieved [**], Alnylam shall grant Medtronic a Right of Access and a right of
reference for any purpose to all INDs and other filings with Regulatory
Authorities for which Alnylam is then the sponsor in relation to Products
containing or using such Alnylam siRNAs;

                  (iii) all licenses granted to Medtronic under this Agreement
shall survive termination, subject to (A) the payment of royalties, milestones
and other amounts in

                                      39



accordance with Sections 4.2 and 4.3(a), (B) the payment of all reimbursement
amounts pursuant to Section 3.1(f) and 4.3(b), (C) Section 2.3(g), and (D)
Medtronic's continued satisfaction of its obligations under Section 2.6(c); and

                  (iv) promptly provide to Medtronic copies of all scientific
and regulatory data in Alnylam's possession (excluding data already in
Medtronic's possession) with respect to such Alnylam siRNAs and to Licensed
Products containing or using such Alnylam siRNAs.

            (f) In the event of termination of this Agreement pursuant to
Section 8.5(a) or Section 8.5(b), or termination pursuant to Section 8.5(c) in
the event that, pursuant to Section 2.3(e), Alnylam decides to discontinue all
Product Development Programs and Medtronic does not exercise its right under
Section 2.3(e) to continue any such Product Development Program, then each
Party's rights, obligations and licenses under this Agreement shall terminate.

            (g) Upon termination of this Agreement for any reason, each Party
will within [**] [**] return to the other all tangible Confidential Information
of the other Party (except one copy which may be retained by legal counsel
solely for evidentiary purposes in the event of a dispute), and each Party will
deliver to the other Party a copy of any documentation in its possession or
control specifically relating to the Joint Intellectual Property.

            (h) Notwithstanding any other provision of this Agreement, upon
termination of any of the licenses granted to Medtronic hereunder for any reason
(including termination of this Agreement), each Party hereby grants the other
Party a perpetual, irrevocable, royalty-free, non-exclusive license to its
Know-How related to Products, excluding any Patent Rights, any Device-Related
Know-How and any Primary Sequence or Chemical Modification Know-How, with the
right to grant sublicenses, in such country or countries where such licenses
terminated. Nothing in this section shall be interpreted to require either Party
to deliver or to provide its Know-How to the other Party.

      Section 8.7 Survival. In the event of any expiration or termination of
this Agreement, (a) all financial obligations under Article II, IV or V accrued
as of the effective date of such expiration or termination shall survive, and
(b) the obligations set forth in Article VI and in Section 9.1, and all other
terms, provisions, representations, rights and obligations contained in this
Agreement that by their terms survive expiration or termination of this
Agreement, shall survive.

                                   Article IX

                            Miscellaneous Provisions

      Section 9.1 Indemnification.

            (a) Medtronic. Medtronic shall indemnify and hold harmless Alnylam
and its Affiliates and their respective directors, officers, employees and
agents (the "Alnylam Indemnified Parties") from and against any losses, costs,
damages, fees or expenses ("Losses") arising out of (i) any breach by Medtronic
of any of its representations, warranties or obligations pursuant to this
Agreement, (ii) any Third Party claim of personal injury or other product
liability

                                      40


resulting from Licensed Products Commercialized by Medtronic or its Affiliates
or Third Party sublicensees; provided that Medtronic shall have no obligation to
indemnify or hold harmless Alnylam from personal injury or other product
liability resulting from manufacturing defects (i.e., failures to manufacture in
accordance with cGMP or agreed manufacturing specifications [**]) in Alnylam
siRNAs supplied by Alnylam pursuant to the Supply Agreement, or (iii) any Third
Party Infringement Claim based on the manufacture, use, offer for sale, sale or
importation of any Device component of Licensed Products by Medtronic or its
Affiliates or Third Party sublicensees. Notwithstanding the foregoing, Medtronic
shall not be responsible for the indemnification of any Alnylam Indemnified
Party to the extent arising from any grossly negligent or willfully wrongful
acts by such Alnylam Indemnified Party.

            (b) Alnylam. Alnylam shall indemnify and hold harmless Medtronic and
its Affiliates and their respective directors, officers, employees and agents
(the "Medtronic Indemnified Parties") harmless from and against any Losses
arising out of (i) any breach by Alnylam of any of its representations,
warranties or obligations pursuant to this Agreement, (ii) any Third Party claim
of personal injury or other product liability resulting from manufacturing
defects (i.e., failures to manufacture in accordance with cGMP or agreed
manufacturing specifications [**]) in Alnylam siRNAs supplied by Alnylam
pursuant to the Supply Agreement, or (iii) any Third Party Infringement Claim
based on the manufacture, use, offer for sale, sale or importation of any
Alnylam siRNA component of Licensed Products by either Party in accordance with
this Agreement. Notwithstanding the foregoing, Alnylam shall not be responsible
for the indemnification of any Medtronic Indemnified Party to the extent arising
from any grossly negligent or willfully wrongful acts by any Medtronic
Indemnified Party.

            (c) Third Party Claims. A person entitled to indemnification under
this Section 9.1 (an "Indemnified Party") shall give prompt written notification
to the person from whom indemnification is sought (the "Indemnifying Party") of
the commencement of any action, suit or proceeding relating to a Third Party
claim for which indemnification may be sought or, if earlier, upon the assertion
of any such claim by a Third Party (it being understood and agreed, however,
that the failure by an Indemnified Party to give notice of a Third Party claim
as provided in this subsection shall not relieve the Indemnifying Party of its
indemnification obligation under this Agreement except and only to the extent
that such Indemnifying Party is actually prejudiced as a result of such failure
to give notice). Within [**] days after delivery of such notification, the
Indemnifying Party may, upon written notice thereof to the Indemnified Party,
assume control of the defense of such action, suit, proceeding or claim with
counsel reasonably satisfactory to the Indemnified Party. If the Indemnifying
Party does not assume control of such defense, the Indemnified Party shall
control such defense. The Party not controlling such defense may participate
therein at its own expense; provided that if the Indemnifying Party assumes
control of such defense and the Indemnified Party reasonably concludes, based on
advice from counsel, that the Indemnifying Party and the Indemnified Party have
conflicting interests with respect to such action, suit, proceeding or claim,
the Indemnifying Party shall be responsible for the reasonable fees and expenses
of counsel to the Indemnified Party solely in connection therewith; provided
further, however, that in no event shall the Indemnifying Party be responsible
for the fees and expenses of more than one counsel in any one jurisdiction for
all Indemnified Parties. The Party controlling such defense shall keep the other
Party advised of the status of such action, suit, proceeding or claim and the
defense thereof and

                                       41


shall consider recommendations made by the other Party with respect thereto. The
Indemnified Party shall not agree to any settlement of such action, suit,
proceeding or claim without the prior written consent of the Indemnifying Party,
which shall not be unreasonably withheld. The Indemnifying Party shall not agree
to any settlement of such action, suit, proceeding or claim or consent to any
judgment in respect thereof that does not include a complete and unconditional
release of the Indemnified Party from all liability with respect thereto or that
imposes any liability or obligation on the Indemnified Party without the prior
written consent of the Indemnified Party.

      Section 9.2 Governing Law and Waiver of Jury Trial. This Agreement shall
be construed and the respective rights of the Parties determined according to
the substantive laws of the State of Delaware notwithstanding the provisions
governing conflict of laws under such Delaware law to the contrary. The Parties
hereby (a) consent to service of process by mailing or delivering such service
to the party at its respective notice address set forth in Section 9.5; and (b)
waive any right to a trial by jury in any action or proceeding to enforce or
defend any rights under this Agreement or under any amendment, instrument,
document or agreement delivered in connection herewith or hereafter and agree
that any such action or proceeding shall be tried before a court and not before
a jury.

      Section 9.3 Assignment. Neither Alnylam nor Medtronic may assign this
Agreement in whole or in part without the consent of the other Party, except if
such assignment is to an Affiliate of the assigning Party or occurs in
connection with the sale or transfer of all or substantially all of the business
or assets of the assigning Party to which the subject matter of this Agreement
pertains. In the event that, in connection with the sale or transfer of all or
substantially all of Alnylam's business or assets to which the subject matter of
this Agreement pertains, Alnylam assigns this Agreement to a [**] without
Medtronic's consent as permitted by the immediately preceding sentence,
Medtronic shall have the right to [**]; provided that Medtronic shall not have
the right to [**]. If Medtronic [**] in accordance with the immediately
preceding sentence, Medtronic shall be entitled to [**]; provided that in no
event shall [**]; provided further that if as a result of the restriction in the
preceding proviso Medtronic is not [**], Medtronic may [**].

      Section 9.4 Amendments. This Agreement constitutes the entire agreement
between the Parties with respect to the subject matter hereof, and supersedes
all previous arrangements with respect to the subject matter hereof, whether
written or oral. Any amendment or modification to this Agreement shall be made
in writing signed by both Parties.

      Section 9.5 Notices.

      Notices to Alnylam shall be addressed to:

            Alnylam Pharmaceuticals, Inc.
            300 Third Street
            Cambridge, MA 02142
            Telefacsimile:  (617) 551-8101
            Attention:  President

                                       42


      with a copy to:

            Wilmer Cutler Pickering Hale and Dorr LLP
            60 State Street
            Boston, MA 02109
            Telefacsimile:  (617) 526-5000
            Attention:  Steven D. Singer, Esq.

      Notices to Medtronic shall be addressed to:

            Medtronic, Inc.
            710 Medtronic Parkway
            Minneapolis, MN 55432-5604

      with separate copies thereof addressed to

            Attention: General Counsel
                       Mail Stop LC400
                       Telefacsimile: (763) 572-5459

            and

            Attention: Vice President and Chief Development Officer
                       Mail Stop LC390
                       Telefacsimile: (763) 505-2542

Either Party may change its address by giving notice to the other Party in the
manner herein provided. Any notice required or provided for by the terms of this
Agreement shall be in writing and shall be (a) sent by registered or certified
mail, return receipt requested, postage prepaid, (b) sent via a reputable
overnight courier service, or (c) sent by facsimile transmission with an
original to be followed the same day via a reputable overnight courier service,
in each case properly addressed in accordance with the paragraph above. The
effective date of notice shall be the actual date of receipt by the Party
receiving the same.

      Section 9.6 Force Majeure. No failure or omission by the Parties in the
performance of any obligation of this Agreement shall be deemed a breach of this
Agreement or create any liability if the same shall arise from any cause or
causes beyond the control of the Parties, including, but not limited to, the
following: acts of God; acts or omissions of any government; any rules,
regulations or orders issued by any governmental authority or by any officer,
department, agency or instrumentality thereof; fire; storm; flood; earthquake;
accident; war; rebellion; insurrection; riot; and invasion and provided that
such failure or omission resulting from one of the above causes is cured as soon
as is practicable after the occurrence of one or more of the above-mentioned
causes.

      Section 9.7 Independent Contractors. It is understood and agreed that the
relationship between the Parties hereunder is that of independent contractors
and that nothing in this

                                       43


Agreement shall be construed as authorization for either Alnylam or Medtronic to
act as agent for the other.

      Section 9.8 No Strict Construction. This Agreement has been prepared
jointly and shall not be strictly construed against any Party.

      Section 9.9 Headings. The captions or headings of the sections or other
subdivisions hereof are inserted only as a matter of convenience or for
reference and shall have no effect on the meaning of the provisions hereof.

      Section 9.10 No Implied Waivers; Rights Cumulative. No failure on the part
of Alnylam or Medtronic to exercise, and no delay in exercising, any right,
power, remedy or privilege under this Agreement, or provided by statute or at
law or in equity or otherwise, shall impair, prejudice or constitute a waiver of
any such right, power, remedy or privilege or be construed as a waiver of any
breach of this Agreement or as an acquiescence therein, nor shall any single or
partial exercise of any such right, power, remedy or privilege preclude any
other or further exercise thereof or the exercise of any other right, power,
remedy or privilege.

      Section 9.11 Severability. If, under applicable law or regulation, any
provision of this Agreement is invalid or unenforceable, or otherwise directly
or indirectly affects the validity of any other material provision(s) of this
Agreement (such invalid or unenforceable provision, a "Severed Clause"), the
Parties shall consult one another and use reasonable efforts to agree upon a
valid and enforceable provision that is a reasonable substitute for the Severed
Clause in view of the intent of this Agreement. In the event such a valid and
enforceable provision cannot be agreed upon, the invalidity of one or more
Severed Clauses shall not affect the validity of this Agreement as a whole,
unless the Severed Clauses are of such essential importance to this Agreement
that it is to be reasonably assumed that the Parties would not have entered into
this Agreement without the Severed Clauses.

      Section 9.12 Execution in Counterparts; Facsimile Signatures. This
Agreement may be executed in counterparts, each of which counterparts, when so
executed and delivered, shall be deemed to be an original, and all of which
counterparts, taken together, shall constitute one and the same instrument even
if both Parties have not executed the same counterpart. Signatures provided by
facsimile transmission shall be deemed to be original signatures.

      Section 9.13 No Consequential or Punitive Damages. NEITHER PARTY HERETO
WILL BE LIABLE FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, EXEMPLARY,
MULTIPLE OR PUNITIVE DAMAGES, OR FOR LOST PROFITS, ARISING OUT OF THIS AGREEMENT
OR RELATING TO ANY BREACH OF THIS AGREEMENT, REGARDLESS OF ANY NOTICE OF SUCH
DAMAGES. NOTHING IN THIS SECTION 9.13 IS INTENDED TO LIMIT OR RESTRICT THE
INDEMNIFICATION RIGHTS OR OBLIGATIONS OF EITHER PARTY WITH RESPECT TO THIRD
PARTY CLAIMS.

      Section 9.14 Interpretation. Whenever the context may require, any pronoun
shall include the corresponding masculine, feminine and neuter forms. The words
"include", "includes" and "including" shall be deemed to be followed by the
phrase "without limitation." The word "will" shall be construed to have the same
meaning and effect as the word "shall."

                                       44


Unless the context requires otherwise, (A) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein or therein), (B) any
reference to any laws herein shall be construed as referring to such laws as
from time to time enacted, repealed or amended, (C) any reference herein to any
Person shall be construed to include the Person's successors and assigns, (D)
the words "herein", "hereof' and "hereunder", and words of similar import, shall
be construed to refer to this Agreement in its entirety and not to any
particular provision hereof, (E) any reference herein to the words "mutually
agree" or "mutual written agreement" shall not impose any obligation on either
Party to agree to any terms relating thereto or to engage in discussions
relating to such terms except as such Party may determine in such Party's sole
discretion; (F) all references herein to Articles, Sections, Exhibits or
Schedules shall be construed to refer to Articles, Sections, Exhibits and
Schedules of this Agreement; and (g) all references to the "knowledge" of a
Party shall refer to the actual knowledge of any of such Party's officer or
director level employees or members of its Board of Directors, or the knowledge
which any such person would reasonably be expected to have assuming reasonable
inquiry in light of such person's position with such Party.

                  [Remainder of page intentionally left blank]

                                       45


      IN WITNESS WHEREOF, the Parties have executed this Collaboration Agreement
as of the Effective Date.

                                 ALNYLAM PHARMACEUTICALS, INC.

                                 By:   /s/ John M. Maraganore
                                       ----------------------------------------
                                 Name: John M. Maraganore
                                       ----------------------------------------
                                 Title: President and CEO
                                       ----------------------------------------

                                 MEDTRONIC, INC.

                                 By:   /s/ Stephen N. Oesterle
                                       ---------------------------------------
                                 Name: Stephen N. Oesterle
                                       ---------------------------------------
                                 Title: SVP, Medicine and Technology
                                       ---------------------------------------


                                       46


                                  SCHEDULE 1.5

                              ALNYLAM PATENT RIGHTS

A)    Owned by Alnylam

      [To be provided.]

B)    Licensed to Alnylam

      [To be provided.]



                                  SCHEDULE 1.38

                      LISTED ALNYLAM THIRD PARTY AGREEMENTS

                                [To be provided.]



                                 SCHEDULE 3.1(e)

          BURDENS ON ALNYLAM INTELLECTUAL PROPERTY IMPOSED BY EXISTING
                         ALNYLAM CONTRACTUAL OBLIGATIONS

                                [To be provided.]



                                 SCHEDULE 4.3(b)

             MEDTRONIC FINANCIAL OBLIGATIONS WITH RESPECT TO LISTED
                         ALNYLAM THIRD PARTY AGREEMENTS

                                [To be provided.]



                                    EXHIBIT A

                         PDP DECISION MILESTONE CRITERIA

The PDP Decision Milestone shall be reached upon completion of all of the
following, or such amended list of activities and outcomes as the Parties may
mutually agree:

            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]
            [**]

Understanding that the [**] of the PDP Milestone cannot be determined as of the
Effective Date of this Agreement, the parties will set these criteria in
mutually agreed detail[**].

                                      B-1


                                    EXHIBIT B

             FORM OF INITIAL TECHNOLOGY DEVELOPMENT PROGRAM WORKPLAN

This Workplan describes the initial 12 months of the Technology Development Term
and sets forth activities intended to meet the PDP Milestone as described in
Exhibit A. It is understood that a detailed Workplan will be approved on an
annual basis by the Joint Research and Development Committee ("JRDC") and, to
the extent required by Sections 2.3(a) or 2.4 of the Agreement, by the Parties.
The Workplan will be reviewed by the JRDC on a quarterly basis and the actual
activities adjusted in response to the progress made and the data collected.
Each party shall commit the resources necessary to complete the Workplan
activities, and as deemed appropriate by the JRDC, each party shall assist the
other through provision of the relevant know-how, reagents, instruments, etc.

OVERALL GOALS

The goal of the collaboration is [**].

SPECIFIC GOALS AND TIMING FOR THE FIRST 12 MONTHS

Overall goal:

Demonstrate [**].

Sub-goals:

1.    [**].

      a. [**].
      b. [**].
      c. [**].

2.    [**].

3.    [**].

4.    [**].

5.    If goals 1 through 4 have been met, Alnylam and Medtronic will [**].

      [**].

6.    Alnylam and Medtronic will [**].

7.    [**].

                                      B-2


TEAM MEMBERS:

      [**]
      [**]
      [**]
      [**]
      [**]
      [**]
      [**]
      [**]

EXCHANGE OF KNOW-HOW, SAMPLES, AND REAGENTS:

At various times [**], there will be an exchange of knowledge and samples
between the parties as needed to successfully execute the Workplan. Such
possible exchanges may include:

      [**]
      [**]
      [**]
      [**]
      [**]
      [**]
      [**]
      [**]

Such exchanges will be made as soon as is practicable by mutual agreement. The
following table summarizes the obligations of each Party under this Workplan:



ACTIVITY   ALNYLAM  MEDTRONIC
- ---------  -------  ---------
              
  [**]      [**]      [**]
  [**]      [**]      [**]
  [**]      [**]
  [**]                [**]
  [**]      [**]      [**]
  [**]      [**]      [**]
  [**]      [**]      [**]
  [**]      [**]      [**]
  [**]                [**]


*Testing may be done through qualified CROs and/or academic labs.

                                      B-3



                                   EXHIBIT C

                     MATERIAL TERMS OF INVESTMENT AGREEMENT

      Securities:           Common Stock

      Amount of Investment: Up to $21.0 million in cash.

                            Alnylam, in its sole discretion, shall determine the
                            aggregate purchase price for the shares that shall
                            constitute the "First Equity Investment", which
                            shall be between $1.0 million and $8.0 million.

                            The amount of each of the "Second Equity Investment"
                            and "Third Equity Investment" shall be one-half of
                            the amount by which $21.0 million exceeds the amount
                            of the First Equity Investment.

                            Notwithstanding the foregoing, in no event shall the
                            number of shares to be issued exceed the number of
                            shares that (i) may be issued by Alnylam without
                            stockholder approval under applicable Nasdaq rules,
                            or (ii) would cause Medtronic to own shares having
                            more than 19.9% of the voting power of all issued
                            and outstanding shares of Alnylam.

      Purchase Price:       The purchase price per share for the First Equity
                            Investment shall equal the average of the last
                            reported sale prices per share of the Common Stock
                            on the Nasdaq National Market over the twenty
                            consecutive trading days ending on the trading day
                            that is two trading days prior to the date of
                            achieving the PDP Decision Milestone.

                            The purchase price per share for each of the Second
                            Equity Investment and the Third Equity Investment
                            shall equal the product of (i) 1.2 and (ii) the
                            average of the last reported sale prices per share
                            of the Common Stock on the Nasdaq National Market
                            over the twenty consecutive trading days ending on
                            the trading day that is two trading days prior to
                            the occurrence of the applicable milestone specified
                            in Section 4.2 triggering such investment.

      Registration Rights:  Medtronic shall have customary "demand" registration
                            rights with respect to Medtronic's resale of Alnylam
                            shares issued to Medtronic pursuant to the
                            Investment Agreement; provided that Medtronic shall
                            not have the right to demand more than three
                            registrations.

                                      C-1


                                    EXHIBIT D

                              INITIAL PRESS RELEASE

                                       D-1


                                [To be provided.]


                                    EXHIBIT E

                              PERMITTED DISCLOSURES

                                       E-1


                                [To be provided.]

EX-31.1

                                                                    EXHIBIT 31.1

                                  CERTIFICATION

I, John M. Maraganore, Ph.D., certify that:

      1)    I have reviewed this Quarterly Report on Form 10-Q of Alnylam
            Pharmaceuticals, Inc.;

      2)    Based on my knowledge, this report does not contain any untrue
            statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this report;

      3)    Based on my knowledge, the financial statements, and other financial
            information included in this report, fairly present in all material
            respects the financial condition, results of operations and cash
            flows of the registrant as of, and for, the periods presented in
            this report;

      4)    The registrant's other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
            registrant and have:

            a)    Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, to ensure that material information relating
                  to the registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during the period in which this report is being prepared;

            b)    [Paragraph omitted in accordance with SEC transition
                  instructions contained in SEC Release 34-47986]

            c)    Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

            d)    Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter (the registrant's
                  fourth fiscal quarter in the case of an annual report) that
                  has materially affected, or is reasonably likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

      5)    The registrant's other certifying officer and I have disclosed,
            based on our most recent evaluation of internal control over
            financial reporting, to the registrant's auditors and the audit
            committee of the registrant's board of directors (or persons
            performing the equivalent functions):

            a)    All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

            b)    Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.

Date: May 16, 2005                        /s/ John M. Maraganore, Ph.D.
                                          --------------------------------------
                                          John M. Maraganore, Ph.D.
                                          President and Chief Executive Officer

EX-31.2

                                                                    EXHIBIT 31.2

                                  CERTIFICATION

I, Barry E. Greene, certify that:

      1)    I have reviewed this Quarterly Report on Form 10-Q of Alnylam
            Pharmaceuticals, Inc.;

      2)    Based on my knowledge, this report does not contain any untrue
            statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this report;

      3)    Based on my knowledge, the financial statements, and other financial
            information included in this report, fairly present in all material
            respects the financial condition, results of operations and cash
            flows of the registrant as of, and for, the periods presented in
            this report;

      4)    The registrant's other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
            registrant and have:

            a)    Designed such disclosure controls and procedures, or caused
                  such disclosure controls and procedures to be designed under
                  our supervision, to ensure that material information relating
                  to the registrant, including its consolidated subsidiaries, is
                  made known to us by others within those entities, particularly
                  during the period in which this report is being prepared;

            b)    [Paragraph omitted in accordance with SEC transition
                  instructions contained in SEC Release 34-47986]

            c)    Evaluated the effectiveness of the registrant's disclosure
                  controls and procedures and presented in this report our
                  conclusions about the effectiveness of the disclosure controls
                  and procedures, as of the end of the period covered by this
                  report based on such evaluation; and

            d)    Disclosed in this report any change in the registrant's
                  internal control over financial reporting that occurred during
                  the registrant's most recent fiscal quarter (the registrant's
                  fourth fiscal quarter in the case of an annual report) that
                  has materially affected, or is reasonably likely to materially
                  affect, the registrant's internal control over financial
                  reporting; and

      5)    The registrant's other certifying officer and I have disclosed,
            based on our most recent evaluation of internal control over
            financial reporting, to the registrant's auditors and the audit
            committee of the registrant's board of directors (or persons
            performing the equivalent functions):

            a)    All significant deficiencies and material weaknesses in the
                  design or operation of internal control over financial
                  reporting which are reasonably likely to adversely affect the
                  registrant's ability to record, process, summarize and report
                  financial information; and

            b)    Any fraud, whether or not material, that involves management
                  or other employees who have a significant role in the
                  registrant's internal control over financial reporting.

Date: May 16, 2005                        /s/ Barry E. Greene
                                          --------------------------------------
                                          Barry E. Greene
                                          Chief Operating Officer and Treasurer

EX-32.1

                                                                    EXHIBIT 32.1

      CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
                TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the Quarterly Report on Form 10-Q of Alnylam
Pharmaceuticals, Inc. (the "Company") for the fiscal quarter ended March 31,
2005 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), the undersigned, John M. Maraganore, Ph.D., President and Chief
Executive Officer of the Company, hereby certifies, pursuant to Section 1350 of
Chapter 63 of Title 18, United States Code, that:

            (1)   the Report fully complies with the requirements of Section
                  13(a) or 15(d) of the Securities Exchange Act of 1934; and

            (2)   the information contained in the Report fairly presents, in
                  all material respects, the financial condition and results of
                  operations of the Company.

Dated: May 16, 2005           /s/ John M. Maraganore, Ph.D.
                              ------------------------------------------
                              John M. Maraganore, Ph.D.
                              President and Chief Executive Officer

EX-32.2

                                                                    EXHIBIT 32.2

      CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
                TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

      In connection with the Quarterly Report on Form 10-Q of Alnylam
Pharmaceuticals, Inc. (the "Company") for the fiscal quarter ended March 31,
2005 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), the undersigned, Barry E. Greene, Chief Operating Officer and
Treasurer of the Company, hereby certifies, pursuant to Section 1350 of Chapter
63 of Titleed States Code, that:

            (1)   the Report fully complies with the requirements of Section
                  13(a) or 15(d) of the Securities Exchange Act of 1934; and

            (2)   the information contained in the Report fairly presents, in
                  all material respects, the financial condition and results of
                  operations of the Company.

Dated: May 16, 2005           /s/  Barry E. Greene
                              -------------------------------------------
                              Barry E. Greene
                              Chief Operating Officer and Treasurer