1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

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

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

Use of Estimates

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

Liquidity

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

Net Loss Per Common Share

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

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

	At March 31,
	2018		2017
Options to purchase common stock		12,515		12,048
Unvested restricted common stock		157		163
		12,672		12,211

Equity

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

Fair Value Measurements

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

Investments in Marketable Securities and Cash Equivalents

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

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

Revenue Recognition

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

On January 1, 2018, we adopted the new revenue standard, discussed below under the heading “Recent Accounting Pronouncements,” which amended revenue recognition principles and provides a single, comprehensive set of criteria for revenue recognition within and across all industries. Our adoption of the new revenue standard had a material impact on our condensed consolidated financial statements, as discussed below under the heading “Recent Accounting Pronouncements.” This new revenue standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. The new revenue standard provides a five-step framework whereby revenue is recognized when control of promised goods or services is transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To determine revenue recognition for arrangements that we determine are within the scope of the new revenue standard, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. We only apply the five-step model to contracts when collectability of the consideration to which we are entitled in exchange for the goods or services we transfer to the customer is determined to be probable. At contract inception, once the contract is determined to be within the scope of the new revenue standard, we assess whether the goods or services promised within each contract are distinct and, therefore, represent a separate performance obligation. Goods and services that are determined not to be distinct are combined with other promised goods and services until a distinct bundle is identified. We then allocate the transaction price (the amount of consideration we expect to be entitled to from a customer in exchange for the promised goods or services) to each performance obligation and recognize the associated revenue when (or as) each performance obligation is satisfied. Our estimate of the transaction price for each contract includes all variable consideration to which we expect to be entitled.

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

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

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

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

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

For revenue generating arrangements where we, as a vendor, provide consideration to a licensor or collaborator, as a customer, we apply the accounting standard that governs such transactions. This standard addresses the accounting for revenue arrangements where both the vendor and the customer make cash payments to each other for services and/or products. A payment to a customer is presumed to be a reduction of the transaction price unless we receive an identifiable benefit for the payment and we can reasonably estimate the fair value of the benefit received. Payments to a customer that are deemed a reduction of the transaction price are recorded first as a reduction of revenue, to the extent of both cumulative revenue recorded to date and probable future revenues, which include any unamortized deferred revenue balances, under all arrangements with such customer, and then as an expense. Payments that are not deemed to be a reduction of the transaction price are recorded as an expense.

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

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

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

Recent Accounting Pronouncements

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

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

Condensed Consolidated Balance Sheet	Balance at December 31, 2017			Adjustments			Balance at January 1, 2018
Deferred revenue, current portion	$	41,705		$	(34,463	)	$	7,242
Deferred revenue, net of current portion	$	43,075		$	(33,747	)	$	9,328
Accumulated deficit	$	(2,147,685	)	$	68,210		$	(2,079,475	)

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

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

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

	At March 31, 2018
Condensed Consolidated Balance Sheet	As Reported			Balances Without Adoption of New Revenue Standard			Effect of Change Higher/(Lower)
Deferred revenue, current portion	$	35,855		$	52,860		$	(17,005	)
Deferred revenue, net of current portion	$	7,676		$	25,669		$	(17,993	)
Accumulated deficit	$	(2,220,689	)	$	(2,255,772	)	$	(35,083	)

	Three Months Ended March 31, 2018
Condensed Consolidated Statement of Comprehensive Loss	As Reported			Balances Without Adoption of New Revenue Standard			Effect of Change Higher/(Lower)
Net revenues from collaborators	$	21,899		$	55,026		$	(33,127	)
Net loss	$	(141,214	)	$	(108,087	)	$	33,127
Net loss per common share - basic and diluted	$	(1.41	)	$	(1.08	)	$	0.33

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

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

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

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

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

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

Subsequent Events

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