UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

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ALNYLAM PHARMACEUTICALS, INC.

(Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

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ALNYLAM PHARMACEUTICALS, INC.
300 THIRD STREET
CAMBRIDGE, MASSACHUSETTS 02142

 

 

NOTICE OF 2007 ANNUAL MEETING OF STOCKHOLDERS

To Be Held On June 1, 2007

 

 

To our Stockholders:

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Alnylam Pharmaceuticals, Inc. will be held on Friday, June 1, 2007 at 9:00 a.m., local time, at the offices of Alnylam Pharmaceuticals, Inc., 300 Third Street, Cambridge, Massachusetts 02142. At the meeting, stockholders will consider and vote on the following matters:

 

 

The stockholders will also act on any other business that may properly come before the annual meeting or any adjournment thereof.

 

Stockholders of record at the close of business on April 13, 2007 are entitled to notice of, and to vote at, the annual meeting or any adjournment thereof. Your vote is important regardless of the number of shares you own.

 

We hope that all stockholders will be able to attend the annual meeting in person.

 

Whether or not you plan to attend the annual meeting in person, we hope you will take the time to vote your shares. If you are a stockholder of record, you may vote on the Internet, by telephone or by completing and mailing the enclosed proxy card in the envelope provided. If your shares are held in “street name,” that is, held for your account by a broker or other nominee, you will receive instructions from the holder of record that you must follow for your shares to be voted. If you attend the annual meeting, your proxy will, upon your written request, be returned to you and you may vote your shares in person.

 

By Order of the Board of Directors

 

John M. Maraganore, Ph.D.
President and Chief Executive Officer

 

Cambridge, Massachusetts

April 30, 2007

 

TABLE OF CONTENTS

 

ALNYLAM PHARMACEUTICALS, INC.
300 THIRD STREET
CAMBRIDGE, MASSACHUSETTS 02142

 

 

PROXY STATEMENT

 

 

for the 2007 Annual Meeting of Stockholders

to be held on June 1, 2007

 

This proxy statement and the enclosed proxy card are being furnished in connection with the solicitation of proxies by the board of directors of Alnylam Pharmaceuticals, Inc. for use at the Annual Meeting of Stockholders to be held on Friday, June 1, 2007 at 9:00 a.m., local time, at the offices of Alnylam Pharmaceuticals, Inc., 300 Third Street, Cambridge, Massachusetts 02142, and at any adjournment thereof.

 

All proxies will be voted in accordance with the instructions contained in those proxies. If no choice is specified, the proxies will be voted in favor of the matters set forth in the accompanying Notice of Meeting.

 

Our Annual Report to Stockholders and our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 are being mailed to stockholders with the mailing of these proxy materials on or about May 1, 2007.

 

A copy of our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as filed with the Securities and Exchange Commission, or SEC, will be furnished without charge to any stockholder upon written request to Alnylam Pharmaceuticals, Inc., 300 Third Street, Cambridge, Massachusetts 02142, Attention: Cynthia Clayton, Director, Investor Relations and Corporate Communications. This proxy statement and our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 are also available on the SEC’s website at www.sec.gov.

 

 

Householding of Annual Meeting Materials

 

Some banks, brokers and other nominee record holders may be participating in the practice of “householding” proxy statements and annual reports. This means that only one copy of our proxy statement and annual report to stockholders may have been sent to multiple stockholders in your household. We will promptly deliver a separate copy of either document to you upon written or oral request to Alnylam Pharmaceuticals, Inc., 300 Third Street, Cambridge, Massachusetts 02142, Attention: Cynthia Clayton, Director, Investor Relations and Corporate Communications, telephone: (617) 551-8200. If you want to receive separate copies of the proxy statement or annual report to stockholders in the future, or if you are receiving multiple copies and would like to receive only one copy per household, you should contact your bank, broker or other nominee record holder, or you may contact us at the above address and phone number.

 

The following table sets forth information regarding beneficial ownership of our common stock as of January 31, 2007 by:

 

 

The number of shares of common stock beneficially owned by each person or entity is determined in accordance with the applicable rules of the SEC and includes voting or investment power with respect to shares of our common stock. The information is not necessarily indicative of beneficial ownership for any other purpose. Unless otherwise indicated, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under community property laws. The inclusion of any shares deemed beneficially owned in this table does not constitute an admission of beneficial ownership of those shares.

 

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and the holders of more than 10% of our common stock to file with the Securities and Exchange Commission initial reports of ownership of our common stock and other equity securities on a Form 3 and reports of changes in such ownership on a Form 4 or Form 5. Officers, directors and 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of our records and written representations by the persons required to file these reports, we believe that all filing requirements of Section 16(a) were satisfied with respect to our most recent fiscal year.

 

 

We have three classes of directors, currently consisting of three Class I directors, three Class II directors and three Class III directors. At each annual meeting, directors are elected for a full term of three years to succeed those whose terms are expiring. The terms of the three classes are staggered in a manner so that only one class is elected by stockholders annually. Peter Barrett, Ph.D., Victor J. Dzau, M.D. and Kevin P. Starr are currently serving as Class III directors. Dr. Barrett and Mr. Starr have served as directors since 2002 and 2003, respectively. Dr. Dzau was nominated for election to the board of directors by the nominating and corporate governance committee pursuant to the process described below in the “Director Nomination Process” on page 13 and was elected director by our board of directors in April 2007. Following the 2007 annual meeting, we will have a vacancy on our board of directors as a result of Dr. Barrett’s decision to retire from the board and not stand for reelection as a Class III director. We intend to fill this vacancy by a vote of a majority of our remaining directors, which is expected to occur after the 2007 annual meeting, pursuant to our Amended and Restated By-Laws. The Class III directors elected this year will serve as members of our board of directors until the 2010 annual meeting of stockholders, or until their respective successors are elected and qualified.

 

The persons named in the enclosed proxy will vote to elect Dr. Dzau and Mr. Starr as Class III directors unless the proxy is marked otherwise. Dr. Dzau and Mr. Starr have indicated their willingness to serve on our board of directors, if elected; however, if any nominee should be unable to serve, the person acting under the proxy may vote the proxy for a substitute nominee designated by our board of directors. Our board of directors has no reason to believe that Dr. Dzau or Mr. Starr would be unable to serve if elected.

Board Recommendation

 

The board of directors recommends a vote “FOR” the election of each of the Class III director nominees.

 

Set forth below for each director, including the Class III director nominees, Dr. Dzau and Mr. Starr, is information as of January 31, 2007 with respect to his or her (a) name and age, (b) positions and offices at Alnylam, (c) principal occupation and business experience during at least the past five years, (d) directorships, if any, of other publicly held companies and (e) the year such person became a member of our board of directors. The duration of an individual’s service on our board of directors or as an officer described below includes service on the board of directors or as an officer of our predecessor company, which was also known as Alnylam Pharmaceuticals, Inc.

 

 

 

 

For information relating to shares of our common stock owned by each of our directors, see the disclosure set forth under the heading “Ownership of Our Common Stock.”

 

 

General

 

We believe that good corporate governance is important to ensure that Alnylam is managed for the long-term benefit of our stockholders. This section describes key corporate governance practices that we have adopted.

 

We have adopted a Code of Business Conduct and Ethics which applies to all of our officers, directors and employees, as well as charters for our audit committee, our compensation committee and our nominating and corporate governance committee. We have posted copies of the Code of Business Conduct and Ethics and each committee’s charter on the Corporate Governance section of our website, www.alnylam.com. We intend to disclose any amendments to, or waivers from, our Code of Business Conduct and Ethics on our website.

 

Corporate Governance Guidelines

 

Our board of directors has adopted corporate governance guidelines to assist in the exercise of its duties and responsibilities and to serve the best interests of Alnylam and our stockholders. These guidelines, which provide a framework for the conduct of the board of directors’ business, provide that:

 

 

 

Board Determination of Independence

 

Under the Nasdaq Stock Market Marketplace Rules, a director will only qualify as an “independent director” if, in the opinion of our board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Our board of directors has determined that none of Drs. Barrett, Dzau, Sato and Schimmel and Messrs. Clarke, Starr and Vincent has a relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is an “independent director” as defined under Nasdaq Rule 4200(a)(15).

 

Board of Directors Meetings and Attendance

 

The board of directors has responsibility for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The primary responsibility of our board of directors is to oversee the management of our company and, in doing so, serve the best interests of the company and our stockholders. The board of directors selects, evaluates and provides for the succession of executive officers and, subject to stockholder election, directors. It reviews and approves corporate objectives and strategies, and evaluates significant policies and proposed major commitments of corporate resources. Our board of directors also participates in decisions that have a potential major economic impact on our company. Management keeps the directors informed of company activity through regular communication, including written reports and presentations at board of directors and committee meetings.

 

Our board of directors met seven times during the fiscal year ended December 31, 2006, either in person or by teleconference. During 2006, each of our directors attended at least 75% of the aggregate number of board meetings and meetings held by all committees on which he or she then served.

 

Directors are expected to attend the annual meeting of stockholders. All members of our board of directors attended the 2006 annual meeting of stockholders.

 

Board Committees

 

The board of directors has established three standing committees — audit, compensation and nominating and corporate governance — each of which operates under a written charter that has been approved by the board. We have posted copies of each committee’s charter on the Corporate Governance section of our website, www.alnylam.com. The members of each committee are appointed by our board of directors, upon recommendation of the nominating and corporate governance committee.

 

The board of directors has determined that all of the members of each of the board’s three standing committees are independent as defined under the Nasdaq Stock Market Marketplace Rules, including, in the case of all members of the audit committee, the additional independence requirements of Rule 10A-3 under the Securities Exchange Act of 1934.

 

Audit Committee

 

The audit committee is responsible for:

 

 

 

In addition, the audit committee must approve or ratify any related party transaction entered into by us. Our policies and procedures for the review, approval and ratification of related person transactions are summarized on page 16 of this proxy statement.

 

The members of the audit committee are Messrs. Starr (Chair) and Clarke and Dr. Schimmel. We believe that each member of the audit committee satisfies the requirements for membership, including independence, established by the Nasdaq Stock Market and the SEC.

 

The board of directors has determined that Mr. Starr is an “audit committee financial expert” as defined in Item 401(h) of Regulation S-K.

 

No member of the audit committee is the beneficial owner of more than 10% of our common stock.

 

The audit committee met seven times during 2006.

 

Compensation Committee

 

The compensation committee is responsible for:

 

 

The processes and procedures followed by our compensation committee in considering and determining executive and director compensation are described below under the heading “Compensation Discussion and Analysis.”

 

The members of our compensation committee are Dr. Sato (Chair) and Messrs. Starr and Vincent. Dr. Barrett was the Chair of this committee until April 25, 2007. At that time, in connection with his decision not to stand for re-election at the annual meeting, Dr. Barrett resigned from his position on the compensation committee and, upon the recommendation of the nominating and corporate governance committee, our board

of directors appointed Dr. Sato to the committee. We believe that each member of the compensation committee satisfies the requirements for membership, including independence, established by the Nasdaq Stock Market.

 

The compensation committee met five times during 2006.

 

Nominating and Corporate Governance Committee

 

The nominating and corporate governance committee is responsible for:

 

 

The processes and procedures followed by the nominating and corporate governance committee in identifying and evaluating director candidates are described below under the heading “Director Nomination Process.”

 

The members of our nominating and corporate governance committee are Mr. Clarke (Chair) and Dr. Sato. Dr. Barrett was a member of this committee until April 25, 2007. At that time, in connection with his decision not to stand for re-election at the annual meeting, Dr. Barrett resigned from his position on the committee. We believe that each member of the nominating and corporate governance committee satisfies the requirements for membership, including independence, as established by the Nasdaq Stock Market.

 

The nominating and corporate governance committee met three times during 2006.

 

Director Nomination Process

 

The nominating and corporate governance committee is responsible for identifying individuals qualified to become board members, consistent with criteria approved by the board, and recommending the persons to be nominated for election as directors, except where we are legally required by contract, law or otherwise to provide third parties with the right to nominate.

 

The process followed by our nominating and corporate governance committee to identify and evaluate director candidates includes requests to board members and others for recommendations, meetings from time to time to evaluate biographical information and background material relating to potential candidates and interviews of selected candidates by members of the committee and the board.

 

In considering whether to recommend any particular candidate for inclusion in the board’s slate of recommended director nominees, our nominating and corporate governance committee will apply certain criteria, including the candidate’s integrity, business acumen, knowledge of our business and industry, experience, diligence, conflicts of interest and the ability to act in the interests of all stockholders. The committee does not assign specific weights to particular criteria and no particular criterion is a prerequisite for each prospective nominee. We believe that the backgrounds and qualifications of our directors, considered as a group, should provide a composite mix of experience, knowledge and abilities that will allow the board to fulfill its responsibilities.

 

Stockholders may recommend individuals to the nominating and corporate governance committee for consideration as potential director candidates by submitting their names, together with appropriate biographical information and background materials and a statement as to whether the stockholder or group of stockholders making the recommendation has beneficially owned more than 5% of our common stock for at least a year as of the date such recommendation is made, to the nominating and corporate governance committee, c/o Corporate Secretary, Alnylam Pharmaceuticals, Inc., 300 Third Street, Cambridge, Massachusetts 02142. Assuming

that appropriate biographical and background material has been provided on a timely basis, the committee will evaluate stockholder-recommended candidates by following substantially the same process, and applying substantially the same criteria, as it follows for candidates submitted by others. Stockholders also have the right under our bylaws to nominate director candidates directly, without any action or recommendation on the part of the committee or the board, by following the procedures set forth below under the heading “Stockholder Proposals.”

 

At the annual meeting, stockholders will be asked to consider the election of Dr. Dzau and Mr. Starr, both of whom currently serve on our board of directors. Dr. Dzau and Mr. Starr were proposed to the board of directors by the nominating and corporate governance committee and the board of directors determined to include them as its nominees.

 

Communicating with the Independent Directors

 

The board of directors will give appropriate attention to written communications that are submitted by stockholders, and will respond if and as appropriate. The chair of the board of directors (if an independent director), or the lead director (if one is appointed), or otherwise the chair of the nominating and corporate governance committee, is primarily responsible for monitoring communications from stockholders and for providing copies or summaries to the other directors as he or she considers appropriate.

 

Communications are forwarded to all directors if they relate to important substantive matters and include suggestions or comments that the chair of the board of directors (if an independent director), or the lead director (if one is appointed), or otherwise the chair of the nominating and corporate governance committee, considers to be important for the directors to know. In general, communications relating to corporate governance and long-term corporate strategy are more likely to be forwarded than communications relating to ordinary business affairs, personal grievances and matters as to which we tend to receive repetitive or duplicative communications.

 

Stockholders who wish to send communications on any topic to the board of directors should address such communications to the Board of Directors, c/o Corporate Secretary, Alnylam Pharmaceuticals, Inc., 300 Third Street, Cambridge, Massachusetts 02142.

 

Report of the Audit Committee

 

The audit committee reports to and acts on behalf of the board of directors by providing oversight of our financial management, related person transaction policies and procedures, audits of our financial statements and financial reporting controls and accounting policies and procedures. Our management is responsible for the preparation, presentation and integrity of our financial statements and the independent registered public accounting firm is responsible for conducting an independent audit of our annual financial statements. The audit committee is responsible for independently overseeing the conduct of these activities by our management and the independent registered public accounting firm.

 

The audit committee operates under a written charter adopted by the board of directors that reflects standards contained in the Nasdaq Stock Market Marketplace Rules. The audit committee reviews this charter annually. A complete copy of the current charter is posted on the Corporate Governance section of our website, www.alnylam.com.

 

The board of directors has determined that Mr. Starr, the audit committee chair, qualifies as an “audit committee financial expert” as defined in Item 401(h) of Regulation S-K and that each member of our audit committee is independent as defined under Rule 10A-3 of the Securities Exchange Act of 1934 and the Nasdaq Stock Market Marketplace Rules.

 

The audit committee has reviewed our audited financial statements for the fiscal year ended December 31, 2006, and has discussed them with our management and our independent registered public accounting firm, PricewaterhouseCoopers LLP. The audit committee has also discussed with PricewaterhouseCoopers LLP the matters required to be discussed by the Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T,

which requires the independent registered public accounting firm to provide the audit committee with additional information regarding the scope and results of the audit, including the independent registered public accounting firm’s responsibilities under generally accepted auditing standards, significant issues or disagreements concerning our accounting practices or financial statements, significant accounting policies, significant accounting adjustments, alternative accounting treatments, accounting for significant unusual transactions, and estimates, judgments and uncertainties.

 

In addition, PricewaterhouseCoopers LLP also provided the audit committee with the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the audit committee and PricewaterhouseCoopers LLP have discussed their independence from the company and its management, including the matters in those written disclosures.

 

In this context, the audit committee members meet regularly with PricewaterhouseCoopers LLP and management (including private sessions with PricewaterhouseCoopers LLP and members of management) to discuss any matters that the audit committee or these individuals believe should be discussed. The audit committee conducts a meeting each quarter to review the financial statements prior to the public release of earnings.

 

Based on its discussions with management and PricewaterhouseCoopers LLP, and its review of the representations and information provided by management and PricewaterhouseCoopers LLP, the audit committee recommended to the board of directors that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2006. The audit committee also recommended to the board of directors, and the board of directors has approved, subject to stockholder ratification, the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2007.

 

By the audit committee of the board of directors of Alnylam

 

Kevin P. Starr, Chair

John K. Clarke

Paul R. Schimmel, Ph.D.

 

Principal Accountant Fees and Services

 

The following table summarizes the fees of our independent auditors, PricewaterhouseCoopers LLP, an independent registered public accounting firm, billed to us for each of the last two fiscal years for audit and other services:

 

 

 

 

Pre-Approval Policies and Procedures

 

The audit committee is required to preapprove all audit services to be provided to us, whether provided by our principal independent auditors or other firms, and all other services to be provided to us by our independent auditors, except that de minimis non-audit services may be approved in accordance with applicable SEC rules.

 

Policies and Procedures For Related Person Transactions

 

Our board of directors has adopted written policies and procedures for the review of any transaction, arrangement or relationship in which Alnylam is a participant, the amount involved exceeds $120,000, and one of our executive officers, directors, director nominees or 5% stockholders (or their immediate family members), each of whom we refer to as a “related person,” has a direct or indirect material interest.

 

If a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related person transaction,” the related person must report the proposed related person transaction to our chief operating officer. The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by the board’s audit committee. Whenever practicable, the reporting, review and approval will occur prior to entry into the transaction. If advance review and approval is not practicable, the audit committee will review, and, in its discretion, may ratify the related person transaction. The policy also permits the chair of the audit committee to review and, if deemed appropriate, approve proposed related person transactions that arise between committee meetings, subject to ratification by the audit committee at its next meeting. Any related person transactions that are ongoing in nature will be reviewed annually.

 

A related person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the audit committee after full disclosure of the related person’s interest in the transaction. As appropriate for the circumstances, the audit committee will review and consider:

 

 

The audit committee may approve or ratify the transaction only if the committee determines that, under all of the circumstances, the transaction is not inconsistent with the best interests of Alnylam. The audit committee may impose any conditions on the related person transaction that it deems appropriate.

 

In addition to the transactions that are excluded by the instructions to the SEC’s related person transaction disclosure rule, the board of directors has determined that the following transactions do not create a material direct or indirect interest on behalf of related persons and, therefore, are not related person transactions for purposes of this policy:

 

 

 

The policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the compensation committee in the manner specified in its charter.

 

Agreements with Novartis

 

Beginning in September 2005, we entered into the first of two strategic alliances with Novartis Pharma AG and its affiliate, Novartis Institutes for Biomedical Research, Inc., whom we refer to collectively as Novartis. At that time, we and Novartis executed a stock purchase agreement and an investor rights agreement. When the transactions contemplated by the stock purchase agreement closed in October 2005, the investor rights agreement became effective, and we and Novartis executed a research collaboration and license agreement. Under the terms of the stock purchase agreement, on October 12, 2005, Novartis purchased approximately 5.3 million shares of our common stock at a purchase price of $11.11 per share for an aggregate purchase price of approximately $58.5 million, which, immediately after such issuance, represented 19.9% of our then outstanding common stock. Novartis owned approximately 14% of our common stock as of March 31, 2007 and has the right to purchase up to an additional 1,104,036 shares of our common stock pursuant to the terms of the investor rights agreement described below.

 

Under the terms of the investor rights agreement, we granted Novartis demand and piggyback registration rights under the Securities Act of 1933, as amended, for the shares of our common stock held by Novartis. We also granted to Novartis rights to acquire additional equity securities of Alnylam in the event that we propose to sell or issue any equity securities, subject to specified exceptions, as described in the investor rights agreement, such that Novartis would be able to maintain its ownership percentage in Alnylam. Novartis agreed, until the later of (1) three years from the date of the investor rights agreement and (2) the date of termination or expiration of the Selection Term, as defined in the collaboration and license agreement, not to acquire any of our securities, other than an acquisition resulting in Novartis and its affiliates beneficially owning less than 20% of the total outstanding voting securities of Alnylam, participate in any tender or exchange offer, merger or other business combination involving us or seek to control or influence our management, board of directors or policies, subject to specified exceptions described in the investor rights agreement.

 

Under the terms of the collaboration and license agreement, we agreed with Novartis to work on certain targets selected by Novartis, as defined in the collaboration and license agreement, to discover and develop therapeutics based on RNA interference, or RNAi. In consideration for rights granted to Novartis under the collaboration and license agreement, Novartis made an up-front payment totaling $10.0 million to Alnylam in October 2005, partly to reimburse prior costs incurred by us to develop in vivo RNAi technology. In addition, the collaboration and license agreement includes terms under which Novartis will provide us with research funding and milestone payments as well as royalties on annual net sales of products resulting from the collaboration and license agreement.

 

In February 2006, we entered into the Novartis flu alliance. The agreement governing the flu alliance is structured as an addendum to the collaboration and license agreement for the broad Novartis alliance. This addendum supplements and, to the extent described therein, supersedes in relevant part the collaboration and license agreement for the broad Novartis alliance. Under the terms of the addendum, we and Novartis have joint responsibility for the development of RNAi therapeutics for pandemic flu. Novartis will have primary responsibility for commercialization of any such RNAi therapeutics worldwide, but we will be actively involved, and may in certain circumstances take the lead, in commercialization in the United States. We are eligible to receive significant funding from Novartis for our efforts on RNAi therapeutics for pandemic flu, and to receive a significant share of any profits.

 

Compensation Discussion and Analysis

 

Our compensation committee is responsible for overseeing the compensation of all of our executive officers. In this capacity, the compensation committee designs, implements, reviews and approves all compensation for our chief executive officer and other named executive officers. The goal of the compensation committee is to ensure that our compensation programs are aligned with our business goals and objectives and that the total compensation paid to each of our named executive officers is fair, reasonable and competitive.

 

Compensation Objectives and Philosophy

 

Our compensation programs are designed to attract and retain qualified and talented executives, motivating them to achieve our business goals and rewarding them for superior short and long-term performance. In particular, our compensation programs are intended to reward the achievement of specified predetermined quantitative and qualitative goals and to align our executives’ interests with those of our stockholders in order to attain the ultimate objective of increasing stockholder value.

 

Elements of Total Compensation and Relationship to Performance

 

Key elements of these programs include:

 

 

Determining and Setting Executive Compensation

 

Our management develops our compensation plans by utilizing publicly available compensation data and subscription survey data for a peer group of national and regional companies in the biopharmaceutical and biotechnology industries, which we believe are generally comparable to Alnylam in terms of organization structure, size and stage of development, and against which we believe we compete for executive talent. This peer group of companies is reviewed with and approved by the compensation committee annually. We believe that the compensation practices of this peer group provide us with appropriate compensation benchmarks. Notwithstanding the similarities of the peer group companies to Alnylam, due to the nature of our business, we compete for executive talent with many companies that are larger and better established than we are or that possess greater resources than we do, as well as with highly prestigious academic and non-profit institutions. Accordingly, the compensation committee generally targets compensation for our executives between the 50th and 60th percentile of compensation paid to similarly situated executives of the companies in our peer group. Other considerations, including market factors and the experience level of an executive, may dictate variations to this general target.

 

As the biopharmaceutical industry is characterized by a very long product development cycle, including a lengthy research and product-testing period and a rigorous approval phase involving human testing and governmental regulatory approval, many of the traditional benchmarking metrics, such as product sales, revenues and profits are inappropriate for an early-stage biopharmaceutical company such as Alnylam. Instead, the specific factors the compensation committee considers when determining our named executives’ compensation include:

 

 

 

The compensation committee determines executive compensation after carefully reviewing corporate performance and performing a detailed evaluation of a named executive’s annual performance against established goals. The compensation committee has implemented an annual performance review program for our executives under which annual corporate and individual performance goals are determined and set forth in writing at the beginning of each fiscal year. Annual corporate goals are proposed by our senior management and approved by our board of directors. Individual goals focus on contributions that facilitate the achievement of the corporate goals and are proposed by each executive and approved by the chief executive officer. The compensation committee approves the chief executive officer’s goals. Annual salary increases and annual stock option awards granted to our executives are tied to the achievement of these corporate and individual performance goals.

 

During the last quarter of each fiscal year, our senior management evaluates our corporate performance and each executive’s individual performance, as compared to the goals for that year. Based on this evaluation, the chief executive officer recommends to the compensation committee any annual executive salary increases or annual stock option awards. The chief executive officer’s individual performance evaluation is conducted by the compensation committee, which also determines his compensation changes and stock option awards. Annual stock option awards are granted at the last board of directors meeting of the year. Any annual base salary increases granted to our executives are implemented at the beginning of the following year.

 

Executive Compensation Components, Role of our Executives, the Compensation Committee and
Consultants in Determining Our Compensation Programs and Setting Compensation Levels

 

The principal components of our executive compensation program are:

 

 

Defining and Comparing Compensation to Market Benchmarks

 

The compensation committee’s goal is to determine an appropriate mix between cash payments and equity incentive awards to meet short and long-term goals and objectives. We do not have any pre-established target for allocations or apportionment by type of compensation. The mix of compensation components is designed to reward recent results and drive long-term company performance.

 

During 2006, we engaged W.T. Haigh & Company, Inc. to work with the compensation committee and our executive officers to conduct a review of our total executive compensation, comparing our executive compensation programs and levels to those of our industry peers, and to interpret the results, make specific and overall recommendations and assist us in implementing any changes or additions to our compensation mix.

 

We compare our executives’ total compensation to others in our industry. For 2006, our peer group consisted of biotechnology and biopharmaceutical companies with 50 to 149 employees that are identified in the 2006 Radford Benchmark Survey. This peer group of companies is reviewed with and approved by the compensation committee annually.

 

Base Salary

 

Base salaries are provided to named executive officers to compensate them with a fair and competitive base level of compensation for services rendered during the year. The compensation committee typically determines base salary for each executive based on the executive’s responsibilities, education, experience and, if applicable, the base salary level of the executive at his or her prior employment. In addition, the compensation committee reviews and considers the level of base salary paid by companies in our peer group for similar positions. Generally, we believe that executive base salaries should be targeted between the 50th and 60th percentile of the range of salaries in our peer group.

 

Merit based increases for all of our executives, other than our president and chief executive officer, are based upon a written summary of the management team members’ performance and recommendations submitted by the president and chief executive officer. A merit based increase for the president and chief executive officer is based upon a written assessment of his performance by the chair of our board of directors, discussion by our board of directors about his performance and a review of the base level salaries of chief executive officers in our peer group. In 2006, the compensation committee discussed with our board of directors its recommendation for a 4% merit increase in the annual base salary of our president and chief executive officer. The board adopted this recommendation. Based on our review of available compensation data, we believe the base salaries we paid our executives in 2006 were in approximately the 50th to 60th percentile of our peer group.

 

Equity Awards

 

Our equity awards program is designed to:

 

 

The market for qualified and talented executives in the biopharmaceutical industry is highly competitive, and we compete for these personnel with many companies that have greater resources than we do. Accordingly, equity compensation is a crucial component of any competitive executive compensation package we may offer.

 

Our equity awards have taken the form of stock options. We typically grant stock options to each of our executive officers upon commencement of employment and annually in conjunction with our review of individual performance. All stock option grants to our executive officers are approved by the compensation committee and, other than new hire grants, are typically granted at the compensation committee’s regularly scheduled meeting at the end of the fiscal year. All stock options granted to our executives have exercise prices equal to the fair market value of our common stock on the date of grant, so that the recipient will earn no compensation from his or her options unless the share price increases beyond the exercise price. In addition, the stock options granted typically vest over four years, which we believe provides an incentive to our executives to add value to the company over the long term and to remain with Alnylam.

 

Stock option grant levels vary among executive officers based on their positions and annual performance assessment, and are determined partly based on peer group market data. In addition, the compensation committee reviews all components of the executive’s compensation to ensure that an executive’s total compensation conforms to our overall philosophy and objectives.

 

Typically, the stock options we grant to our executives have a ten-year term and vest as to 25% of the shares on the first anniversary of the grant date and as to an additional 6.25% of the shares at the end of each successive three-month period following the first anniversary of the grant date until the fourth anniversary of the grant date. Vesting ceases upon termination of employment and exercise rights cease three months

following termination of employment, except in the case of death or disability. Prior to the exercise of an option, the holder has no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents.

 

The number of stock options granted to our named executive officers, and the value of those grants determined in accordance with SFAS 123R, are shown below in the 2006 Grants of Plan-Based Awards Table on page 25.

 

We do not have any equity ownership guidelines for our executives.

 

Bonuses

 

In 2004, we offered to each of our vice presidents and executive officers two options relating to future bonuses. The vice president or executive officer could either (1) elect to continue to receive a cash bonus or (2) “opt-out” of the cash bonus program and elect to receive an increased number of stock options as part of his or her annual stock option grant. Dr. Miles elected to continue to receive an annual cash bonus and the other executive officers elected to receive additional shares as part of their annual stock option grant. Effective in 2007, our U.S. vice presidents and executive officers only receive additional stock options and no longer have the option to receive a cash bonus.

 

In March 2007, the compensation committee authorized the implementation of an Executive Stock Option Bonus Plan for 2007, pursuant to which each of our U.S. vice presidents and executive officers is eligible to receive an annual bonus in the form of common stock options based upon the achievement of individual and corporate objectives for 2007 that have been approved by the compensation committee. In addition, under this plan, each participant is eligible to receive an additional award of stock options for individual performance that exceeds his or her annual individual performance objectives. Stock options awarded under this plan are expected to be granted at the regularly scheduled December 2007 board of directors meeting and will have an exercise price equal to the fair market value of our common stock on the date of grant. In addition, any such stock options will vest as to 25% of the shares on the first anniversary of the date of grant and as to an additional 6.25% of the shares at the end of each successive three-month period following the first anniversary of the date of grant until the fourth anniversary.

 

Benefits and Other Compensation

 

Other compensation to named executive officers primarily relates to the broad-based benefits we provide to all employees, including health and dental insurance, life and disability insurance and a 401(k) plan. Executives are eligible to participate in all of our employee benefit plans, in each case on the same basis as other employees. Our 401(k) plan is a tax-qualified retirement savings plan pursuant to which all U.S. based employees, including the named executive officers, are able to contribute the lesser of up to 60% of their annual salary or the limit prescribed by the Internal Revenue Service on a before tax basis. We match, in our common stock, 50% of the first 6% of a plan participant’s pay that is contributed to the plan. Our contribution is made at the end of each quarter up to an annual maximum of $5,250 for each participant. All employee contributions to the plan are fully vested and our contribution is fully vested after the employee has been employed by us for two years.

 

Compensation for the Named Executive Officers in 2006

 

In determining the 2006 compensation for our President and Chief Executive Officer, John M. Maraganore, Ph.D., the compensation committee reviewed his performance as compared to his corporate, financial, strategic and operational goals for the year. In particular, in making its determination, the compensation committee considered Dr. Maraganore’s leadership of and contributions to the achievement of our long-term business strategy and corporate objectives in the areas of clinical milestones, scientific success, establishment of business alliances and financial results. The overall review of Dr. Maraganore’s performance against his objectives resulted in a 4% annual salary rate increase from $415,000 in 2006 to $431,600 in 2007.

 

Similar to our chief executive officer, the compensation for our Chief Operating Officer, Barry E. Greene, and our Vice President of Finance and Treasurer, Patricia L. Allen, was established by comparing their annual achievement against the performance objectives established for them at the beginning of the year. These objectives were in the areas of business development, external alliance management and funding, pipeline development, financial and operating performance and strategic planning.

 

Severance and Change of Control Benefits

 

In 2002 and 2003, respectively, prior to our initial public offering, we entered into agreements with Dr. Maraganore and Mr. Greene regarding their employment with us. These agreements provide that if Dr. Maraganore or Mr. Greene is employed upon a change in control of Alnylam, options to purchase up to an aggregate of 417,367 shares of common stock held by Dr. Maraganore and options to purchase up to an aggregate of 131,578 shares of common stock held by Mr. Greene will vest and become immediately exercisable to the extent that such options have not already vested. As of March 31, 2007, 3,010 of Dr. Maraganore’s options had not yet vested and 16,448 of Mr. Greene’s options had not yet vested.

 

In September 2006, we announced that Dr. Miles was planning to leave Alnylam to pursue other interests. We have entered into a letter agreement with Dr. Miles relating to his employment. Under the terms of the agreement, Dr. Miles will continue as a part-time employee from January 1, 2007 until August 1, 2007. In the event Dr. Miles terminates his employment with us or we terminate his employment for cause (as defined in the agreement) prior to August 1, 2007, Dr. Miles shall be entitled to receive 20% of his then current base salary thereafter until August 1, 2007. In addition, in the event we terminate Dr. Miles’ employment without cause prior to August 1, 2007, he shall be entitled to continue to receive his applicable salary until August 1, 2007. During his part-time employment, Dr. Miles shall not be entitled to medical and dental insurance coverage under our group plans, however, if Dr. Miles elects to continue receiving such insurance coverage pursuant to the federal “COBRA” law, we will reimburse him for any difference between the premiums he is required to pay for such coverage and the premiums he would have paid if he were still an eligible employee covered by our group plan. Unless Dr. Miles terminates his employment with us or we terminate his employment for cause, we will pay him a lump-sum cash payment in an amount equal to (1) $1,122.91 multiplied by (2) the number of full weeks that he remains continuously employed by us as a 50% part-time employee during the period beginning on January 1, 2007 and ending on August 1, 2007, provided that, in the event we terminate Dr. Miles without cause prior to August 1, 2007, he will be entitled to receive the amount he would have been due if he had been continuously employed by us as a 20% part-time employee between January 1, 2007 and August 1, 2007. In consideration for these payments and benefits, Dr. Miles has agreed to execute a document releasing Alnylam and related parties from any and all claims.

 

Compliance with IRS Code Section 162(m)

 

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction to public companies for compensation in excess of $1.0 million paid to a company’s chief executive officer and its four other most highly paid executive officers. Qualified performance-based compensation is not subject to the deduction limitation if specified requirements are met. We periodically review the potential effects of Section 162(m) and we generally intend to structure the performance-based portion of our executive compensation, where feasible, to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, the compensation committee may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent and are in the best interest of Alnylam and our stockholders.

 

Stock Option Granting Practices

 

Delegation to Our Chief Executive Officer

 

Currently, all of our employees, including our named executive officers, are eligible to participate in our 2004 Stock Incentive Plan. All new U.S. employees are granted stock options when they start employment and all continuing employees on a worldwide basis are eligible for stock option grants on an annual basis based on

performance and upon promotions to positions of greater responsibility. The compensation committee has delegated to Dr. Maraganore, our President and Chief Executive Officer, the authority to make stock option grants under our 2004 Stock Incentive Plan to new hires, other than vice presidents and executive officers. The number of stock options he may grant to any one individual must be within the range specifically set by the board of directors for these grants. The exercise price of such stock options must be equal to the closing price of our common stock on the Nasdaq Global Market on the date of grant. Dr. Maraganore is required to maintain a list of options granted pursuant to such delegated authority and report to the compensation committee regarding such grants.

 

With respect to stock option grants to new hires other than vice presidents, Dr. Maraganore typically approves the grant prior to the employee’s first date of employment with such approval providing that the award is to be granted to the new hire on his or her first date of employment, with a price equal to the closing price of the common stock as reported on the Nasdaq Global Market on the first date of employment.

 

Report of the Compensation Committee on Executive Compensation

 

The compensation committee has reviewed and discussed the “Compensation Discussion and Analysis” required by Item 402(b) of Regulation S-K with management. Based upon such review and discussions, the compensation committee recommended to the board of directors that such section be included in this proxy statement and incorporated by reference in Alnylam’s Annual Report on Form 10-K for the year ended December 31, 2006, which was filed with the SEC on March 12, 2007.

 

By the compensation committee of the board of directors

 

Peter Barrett, Ph.D., Chair

Kevin P. Starr

James L. Vincent

Executive Compensation

 

The following table sets forth the total compensation paid or accrued for the year ended December 31, 2006 to named executive officers.

 

2006 Summary Compensation Table

 

 

 

 

 

 

 

 

The following table sets forth information concerning each grant of an award made to a named executive officer during the fiscal year ended December 31, 2006 under any plan, contract, authorization or arrangement pursuant to which cash, securities, similar instruments or other property may be received:

 

2006 Grants of Plan-Based Awards

 

 

 

 

We caution that the amounts reported in the 2006 Summary Compensation Table for these option awards reflect our accounting expense and may not represent the amounts the named executive officers will actually realize from the awards. Whether, and to what extent, a named executive officer realizes value will depend on our stock price fluctuations and the named executive officer’s continued employment.

 

Information Relating to Equity Awards and Holdings

 

The following table sets forth information concerning stock options that have not been exercised for each of the named executive officers outstanding at December 31, 2006.

 

Outstanding Equity Awards at Fiscal Year-End for 2006

 

 

 

 

 

The following table sets forth information concerning the exercise of stock options during 2006 for each of the named executive officers.

 

2006 Option Exercises and Stock Vested

 

 

 

 

Employment Arrangements

 

In 2002 and 2003, respectively, prior to our initial public offering, we entered into agreements with Dr. Maraganore and Mr. Greene regarding their employment with us. Dr. Maraganore’s agreement provides that if he is employed upon a change in control of Alnylam, options to purchase up to an aggregate of 417,367 shares of our common stock held by Dr. Maraganore will vest and become immediately exercisable to the extent such options have not already vested. Mr. Greene’s agreement provides that if he is employed upon a change in control of Alnylam, an option to purchase 131,578 shares of our common stock held by Mr. Greene will vest and become immediately exercisable to the extent such option has not already vested.

 

Each executive officer has signed a nondisclosure, invention and non-competition agreement providing for the protection of our confidential information and ownership of intellectual property developed by such executive officer and a covenant not to compete with us for a period of one year after termination of employment.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table provides information as of December 31, 2006 about the securities authorized for issuance under our equity compensation plans, consisting of our 2002 Employee, Director and Consultant Stock Option Plan, our 2003 Employee, Director and Consultant Stock Option Plan, our 2004 Stock Incentive Plan and our 2004 Employee Stock Purchase Plan. All of our equity compensation plans were adopted with the approval of our stockholders.

 

Equity Compensation Plan Information

 

 

 

 

Compensation of Directors

 

We compensate our non-employee directors for their service as directors. We do not pay directors who are also Alnylam employees any additional compensation for their service as a director. Accordingly, Dr. Maraganore does not receive any additional compensation for his service as a director.

 

The compensation committee periodically reviews the compensation we pay our non-employee directors. The compensation committee compares our board compensation to compensation paid to non-employee directors of similarly size public companies at a similar stage of development in the biotechnology industry.

The compensation committee also considers the responsibilities we ask of our board members along with the amount of time required to perform those responsibilities.

 

Each non-employee director is eligible to receive $20,000 per year and the chairs of our board of directors, the compensation committee and the nominating and corporate governance committee are entitled to receive an additional $5,000 per year. The chair of our audit committee is entitled to receive an additional $15,000 per year. Each non-employee director is also entitled to receive upon his or her initial election to the board a stock option grant for 25,000 shares of common stock, vesting annually over three years, and an additional stock option grant to purchase 10,000 shares of common stock at each year’s annual meeting at which he or she serves as a director. Commencing in September 2006, the initial election stock option grant was increased to 30,000 shares of common stock, vesting annually over three years, and the annual stock option grant to each non-employee director granted on the date of our annual meeting was increased to 15,000 shares of common stock, vesting in full on the first anniversary of the date of grant. In addition, the chair of the audit committee is entitled to an additional stock option grant to purchase 10,000 shares of common stock per year. The exercise price of these stock options is the fair market value of our common stock on the date of grant.

 

The following table sets forth information concerning the compensation of our non-employee directors in 2006.

 

Director Compensation

 

 

 

 

 

 

 

 

 

 

 

 

Compensation Committee Interlocks and Insider Participation

 

None of our executive officers served as a member of the board of directors or compensation committee (or other committee serving an equivalent function) of any other entity while an executive officer of that other entity served as a member of our board of directors or compensation committee. None of the current members of our compensation committee has ever been an employee of Alnylam.

 

Board Recommendation

 

The board of directors recommends a vote “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as our independent auditors for the fiscal year ending December 31, 2007.

 

Our board of directors has appointed the firm of PricewaterhouseCoopers LLP, an independent registered public accounting firm, as independent auditors for the fiscal year ending December 31, 2007. Although stockholder approval of the board of directors’ appointment of PricewaterhouseCoopers LLP is not required by law, our board of directors believes that it is advisable to give stockholders an opportunity to ratify this appointment. If this proposal is not approved at the annual meeting, our board of directors will reconsider its appointment of PricewaterhouseCoopers LLP. Representatives of PricewaterhouseCoopers LLP are expected to be present at the annual meeting and will have the opportunity to make a statement, if they desire to do so, and will be available to respond to appropriate questions from our stockholders.

 

Our board of directors does not know of any other matters which may come before the meeting. However, if any other matters are properly presented to the meeting, it is the intention of the persons named in the accompanying proxy card to vote, or otherwise act, in accordance with their judgment on those matters.

 

In order to be included in proxy material for the 2008 annual meeting of stockholders, stockholders’ proposals must be received by us at our principal executive offices, 300 Third Street, Cambridge, Massachusetts 02142 no later than December 29, 2007. We suggest that proponents submit their proposals by certified mail, return receipt requested, addressed to our Corporate Secretary.

 

In addition, our by-laws require that we be given advance notice of stockholder nominations for election to the board of directors and of other matters which stockholders wish to present for action at an annual meeting of stockholders, other than matters included in our proxy statement. The required notice must be in writing and received by our corporate secretary at our principal offices not later than March 3, 2008 (90 days prior to the first anniversary of our 2007 Annual Meeting of Stockholders) and not before February 1, 2008 (120 days prior to the first anniversary of our 2007 Annual Meeting of Stockholders). However, if the 2008 Annual Meeting of Stockholders is advanced by more than 20 days, or delayed by more than 60 days, from the first anniversary of the 2007 Annual Meeting of Stockholders, notice must be received not earlier than the 120th day prior to such Annual Meeting and not later than the close of business on the later of (1) the 90th day prior to such Annual Meeting and (2) the 10th day following the date on which notice of the date of such Annual Meeting was mailed or public disclosure of the date of such Annual Meeting was made, whichever occurs first. Our by-laws also specify requirements relating to the content of the notice which stockholders must provide, including a stockholder nomination for election to the board of directors, to be properly presented at the 2008 annual meeting of stockholders.

 

By Order of the Board of Directors,

 

JOHN M. MARAGANORE, Ph.D.

President and Chief Executive Officer

 

Cambridge, Massachusetts

April 30, 2007

OUR BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE ANNUAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON, YOU ARE URGED TO VOTE BY PROXY OVER THE INTERNET, BY TELEPHONE OR BY MAIL AS DESCRIBED IN THE ENCLOSED PROXY CARD. A PROMPT RESPONSE WILL GREATLY FACILITATE ARRANGEMENTS FOR THE ANNUAL MEETING AND YOUR COOPERATION WILL BE APPRECIATED. STOCKHOLDERS WHO ATTEND THE ANNUAL MEETING MAY VOTE THEIR STOCK PERSONALLY EVEN THOUGH THEY HAVE SUBMITTED A PROXY PREVIOUSLY.

002CS-11247

Appendix A