1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements of Alnylam Pharmaceuticals, Inc. are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, applicable to interim periods and, in the opinion of management, include all normal and recurring adjustments that are necessary to state fairly the results of operations for the reported periods. Our condensed consolidated financial statements have also been prepared on a basis substantially consistent with, and should be read in conjunction with, our audited consolidated financial statements for the year ended December 31, 2013, which were included in our Annual Report on Form 10-K that was filed with the Securities and Exchange Commission, or SEC, on February 20, 2014. The year-end condensed consolidated balance sheet data was derived from our audited financial statements, but does not include all disclosures required by GAAP. The results of our operations for any interim period are not necessarily indicative of the results of our operations for any other interim period or for a full fiscal year.

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

Use of Estimates

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

Net Loss Per Common Share

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

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


	At March 31,
	2014		2013
Options to purchase common stock		8,185		8,568
Unvested restricted common stock		10		604
Other		378		—

		8,573		9,172

Public Offering

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

Fair Value Measurements

The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following tables present information about our assets that are measured at fair value on a recurring basis at March 31, 2014 and December 31, 2013, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices (adjusted), interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The fair value hierarchy level is determined by the lowest level of significant input. Financial assets measured at fair value on a recurring basis are summarized as follows, in thousands:


Description	At March 31, 2014		Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents	$	344,211	$	342,208	$	2,003	$	—
Marketable securities (fixed income):
Corporate notes		512,081		—		512,081		—
U.S. Government obligations		65,930		—		65,930		—
Commercial paper		71,915		—		71,915		—
Marketable securities (Regulus equity holdings)		55,478		55,478		—		—

Total	$	1,049,615	$	397,686	$	651,929	$	—


Description	At December 31, 2013		Quoted Prices in Active Markets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash equivalents	$	32,571	$	32,571	$	—	$	—
Marketable securities (fixed income):
Corporate notes		228,462		—		228,462		—
U.S. Government obligations		56,863		—		56,863		—
Commercial paper		11,978		—		11,978		—
Marketable securities (Regulus equity holdings)		45,452		45,452		—		—

Total	$	375,326	$	78,023	$	297,303	$	—

During the three months ended March 31, 2014, there were no transfers between Level 1 and Level 2 financial assets. The carrying amounts reflected in our condensed consolidated balance sheets for cash, billed and unbilled collaboration receivables, other current assets, accounts payable, liability for stock issuance and accrued expenses approximate fair value due to their short-term maturities.

Investments in Marketable Securities

We invest our excess cash balances in short-term and long-term marketable debt and equity securities. We classify our investments in marketable debt securities as either held-to-maturity or available-for-sale based on facts and circumstances present at the time we purchased the securities. At each balance sheet date presented, we classified all of our investments in debt and equity securities as available-for-sale. We report available-for-sale investments at fair value at each balance sheet date and include any unrealized holding gains and losses (the adjustment to fair value) in accumulated other comprehensive income (loss), a component of stockholders’ equity. Realized gains and losses are determined using the specific identification method and are included in other income. We did not recognize any realized gains or losses from sales of our available-for-sale securities during the three months ended March 31, 2014, and as a result, did not reclassify any amount out of accumulated other comprehensive income for the same period. If any adjustment to fair value reflects a decline in the value of the investment, we consider all available evidence to evaluate the extent to which the decline is “other than temporary” and, if so, mark the investment to market through a charge to our condensed consolidated statements of comprehensive income (loss). We did not record any impairment charges related to our fixed income marketable securities during the current period. Our marketable securities are classified as cash equivalents if the original maturity, from the date of purchase, is 90 days or less, and as marketable securities if the original maturity, from the date of purchase, is in excess of 90 days. Our cash equivalents are composed of money market funds and corporate notes.

In the fourth quarter of 2012, we began accounting for our investment in Regulus Therapeutics Inc., or Regulus, as an available-for-sale marketable security. Intraperiod tax allocation rules require us to allocate our provision for income taxes between continuing operations and other categories of earnings, such as other comprehensive income. In periods in which we have a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as other comprehensive income, we must allocate the tax provision to the other categories of earnings. We then record a related tax benefit in continuing operations. The following table summarizes the fair value, accumulated other comprehensive income and intraperiod tax allocation regarding our investment in Regulus available-for-sale marketable securities at March 31, 2014 and 2013 and the activity for the three months ended March 31, 2014 and 2013, in thousands:


Description	At December 31, 2013			Three Months Ended March 31, 2014			Balance at March 31, 2014
Carrying value	$	12,449		$	—		$	12,449
Accumulated other comprehensive income, before tax		33,003			10,026			43,029

Investment in equity securities of Regulus, as reported	$	45,452		$	10,026		$	55,478

Accumulated other comprehensive income, before tax	$	33,003		$	10,026		$	43,029
Intraperiod tax allocation recorded as a benefit from income taxes		(13,267	)		(2,699	)		(15,966	)
Intraperiod tax allocation recorded as an accrued liability		—			(1,380	)		(1,380	)

Accumulated other comprehensive income, net of tax	$	19,736		$	5,947		$	25,683


Description	At December 31, 2012			Three Months Ended March 31, 2013			Balance at March 31, 2013
Carrying value	$	12,449		$	—		$	12,449
Accumulated other comprehensive income, before tax		26,299			8,918			35,217

Investment in equity securities of Regulus, as reported	$	38,748		$	8,918		$	47,666

Accumulated other comprehensive income, before tax	$	26,299		$	8,918		$	35,217
Intraperiod tax allocation recorded as a benefit from income taxes		(10,572	)		(562	)		(11,134	)
Intraperiod tax allocation recorded as an accrued liability		—			(3,023	)		(3,023	)

Accumulated other comprehensive income, net of tax	$	15,727		$	5,333		$	21,060

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

The following tables summarize our marketable securities, other than our holdings in Regulus noted above, at March 31, 2014 and December 31, 2013, in thousands:


	At March 31, 2014
Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper (Due within 1 year)	$	71,940	$	—	$	(25	)	$	71,915
Corporate notes (Due within 1 year)		223,039		49		(137	)		222,951
Corporate notes (Due after 1 year through 2 years)		289,659		32		(561	)		289,130
U.S. Government obligations (Due within 1 year)		20,024		11		—			20,035
U.S. Government obligations (Due after 1 year through 2 years)		45,916		7		(28	)		45,895

Total	$	650,578	$	99	$	(751	)	$	649,926


	At December 31, 2013
Description	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Commercial paper (Due within 1 year)	$	11,983	$	—	$	(5	)	$	11,978
Corporate notes (Due within 1 year)		154,175		33		(46	)		154,162
Corporate notes (Due after 1 year through 2 years)		74,312		23		(35	)		74,300
U.S. Government obligations (Due within 1 year)		26,553		8		—			26,561
U.S. Government obligations (Due after 1 year through 2 years)		30,300		2		—			30,302

Total	$	297,323	$	66	$	(86	)	$	297,303