UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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ALNYLAM PHARMACEUTICALS, INC.

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

 

 

NOTICE OF 2010 ANNUAL MEETING OF STOCKHOLDERS
To Be Held On June 2, 2010

 

 

To our Stockholders:

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Alnylam Pharmaceuticals, Inc. will be held on Wednesday, June 2, 2010 at 9:00 a.m., Eastern Time, at the offices of Alnylam Pharmaceuticals, Inc., 300 Third Street, Cambridge, Massachusetts. 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 15, 2010, the record date for the annual meeting, 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. If you are a stockholder of record, please vote in one of these three ways:

 

 

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.

 

We encourage all stockholders to attend the annual meeting in person. You may obtain directions to the location of the annual meeting on our website at www.alnylam.com. Whether or not you plan to attend the annual meeting in person, we hope you will take the time to vote your shares.

 

By Order of the Board of Directors

 

John M. Maraganore, Ph.D.

Chief Executive Officer

 

Cambridge, Massachusetts

April 20, 2010

 

TABLE OF CONTENTS

 

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

 

 

PROXY STATEMENT

 

 

for the 2010 Annual Meeting of Stockholders

to be held on June 2, 2010

 

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 Wednesday, June 2, 2010 at 9:00 a.m., Eastern Time, at the offices of Alnylam Pharmaceuticals, Inc., 300 Third Street, Cambridge, Massachusetts, 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, 2009 are being mailed to stockholders with these proxy materials on or about April 22, 2010.

 

Important Notice Regarding the Availability of Proxy Materials for
the Annual Meeting of Stockholders to be Held on June 2, 2010:

 

This proxy statement and our 2009 Annual Report to Stockholders are available for viewing,
printing and downloading at www.alnylam.com/AnnualMeeting.

 

A copy of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, 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: Investor Relations and Corporate Communications. This proxy statement and our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 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: 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 February 28, 2010 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 herein of any shares as beneficially owned does not constitute an admission of beneficial ownership.

 

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires our directors, executive officers and the holders of more than 10% of our common stock to file with the SEC 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 2009.

 

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 term of three years to succeed those whose terms are expiring. The terms of the three classes are staggered so that only one class is elected by stockholders annually. Victor J. Dzau, M.D., Edward M. Scolnick, M.D. and Kevin P. Starr are currently serving as Class III directors. Mr. Starr has served as a director since 2003, Dr. Dzau has served as a director since 2007 and Dr. Scolnick has served as a director since 2008. Following the 2010 annual meeting, we will have a vacancy on our board of directors as a result of Dr. Scolnick’s decision to retire from the board at the 2010 annual meeting and not stand for reelection as a Class III director. We intend to fill this vacancy by a vote of the majority of our remaining directors, which is expected to occur after the 2010 annual meeting, pursuant to our amended and restated bylaws. The Class III directors elected this year will serve as members of our board until the 2013 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, 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. Our board 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 February 28, 2010 with respect to his or her (a) name and age, (b) positions and offices at Alnylam, if any, (c) principal occupation and business experience during at least the past five years, (d) directorships, if any, of other publicly-held companies, held currently or during the past five years, and (e) the year such person became a member of our board of directors. The duration of an individual’s service on our board 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.

 

We have also included information below regarding each director’s specific experience, qualifications, attributes and skills that led our board of directors to the conclusion that he or she should serve as a director in light of our business and structure. There are no family relationships among any of our directors or executive officers.

 

 

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, and corporate governance guidelines. We have posted copies of these documents on the Corporate Governance page of the Investors section of our website, www.alnylam.com. We intend to disclose on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics required to be disclosed by law or NASDAQ Global Market listing standards.

 

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 our board of directors’ business, provide that:

 

 

 

We have posted a copy of our corporate governance guidelines on the Corporate Governance page of the Investors section of our website, www.alnylam.com.

 

Board Determination of Independence

 

Under The NASDAQ Stock Market, or NASDAQ, Marketplace Rules, a director only will qualify as an “independent director” if, in the opinion of our board, 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 has determined that none of Drs. Dzau, Sato, Schimmel and Scolnick and Messrs. Clarke, Starr and Vincent have 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 5605(a)(2). In making such determination, our board considered relationships, if any, that each non-employee director has with Alnylam, their beneficial ownership of our outstanding common stock and all other facts and circumstances our board deemed relevant in determining their independence.

 

Role of the Board

 

Our board of directors is responsible for establishing broad corporate policies and reviewing our overall performance rather than day-to-day operations. The primary responsibility of our board is to oversee the management of our company and, in doing so, serve the best interests of the company and our stockholders. Our board 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 also participates in decisions that have a potential major economic impact on our company. Management keeps our directors informed of company activity through regular communication, including written reports and presentations at board of directors and committee meetings.

 

Board Leadership Structure

 

Our board has determined that the roles of chief executive officer and chairman of the board should be separated at the current time. John K. Clarke, an independent director, has served as our chairman since the founding of Alnylam in 2002, and John M. Maraganore, Ph.D. has served as our chief executive officer and a director since 2002. Separating these positions allows our chief executive officer to focus on our day-to-day business, while allowing the chairman to lead the board in its fundamental role of providing advice to and independent oversight of management. The board recognizes the time, effort, and energy that the chief executive officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our chairman, particularly as the board’s oversight responsibilities continue to grow. While our bylaws and corporate governance guidelines do not require that our chairman and chief executive officer positions be separate, our board believes that our current leadership structure is appropriate because it provides an effective balance between strategy development and independent leadership and management oversight.

 

The Board’s Role in Risk Oversight

 

We face a number of risks in our business, including risks related to: pre-clinical and clinical research and development; regulatory reviews, approvals and oversight; intellectual property filings, prosecution, maintenance and challenges; the establishment and maintenance of strategic alliances; competition; and the ability to access additional funding for our business; as well as other risks. Our management is responsible for

the day-to-day management of the risks that we face, while our board of directors, as a whole and through its committees, has responsibility for the oversight of risk management.

 

Our board administers its risk oversight function directly and through its three committees. Our chairman meets regularly with our chief executive officer and other executive officers to discuss strategy and risks facing the company. Members of senior management attend the quarterly board meetings and are available to address any questions or concerns raised by the board on risk management-related and any other matters. Each quarter, the board of directors receives presentations from members of senior management on strategic matters involving our business. In addition, as part of its charter, the audit committee regularly discusses with management our risk exposures in the areas of financial reporting, internal controls and compliance with legal and financial regulatory requirements, their potential impact on our company and the steps we take to manage them. The compensation committee assists the board in fulfilling its oversight responsibilities with respect to the management of risks arising from our compensation policies and programs. The nominating and governance committee assists the board in fulfilling its oversight responsibilities with respect to the management of risks associated with board organization, membership and structure, succession planning for our directors and executive officers, and corporate governance.

 

Board of Directors Meetings and Attendance

 

Our board met seven times during 2009, either in person or by teleconference, and acted by written consent once. During 2009, each of our directors attended at least 75% of the aggregate number of board meetings and meetings of the committees on which he or she then served, except Dr. Scolnick, who attended a majority of the meetings of the board and did not serve on any board committees.

 

Our directors are expected to attend the annual meeting of stockholders. All of our directors attended the 2009 annual meeting of stockholders. We expect substantially all of our directors to attend the 2010 annual meeting.

 

Board Committees

 

Our 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 our board. We have posted copies of each committee’s charter on the Corporate Governance page of the Investors section of our website, www.alnylam.com. The members of each committee are appointed by our board, upon recommendation of our nominating and corporate governance committee.

 

Our board has determined that all of the members of each of its three standing committees are independent as defined under the NASDAQ Marketplace rules, and, in the case of all members of our audit committee, the independence requirements of Rule 10A-3 under the Exchange Act.

 

Audit Committee

 

Our audit committee is responsible for:

 

 

 

In addition, our audit committee must approve or ratify any related party transaction entered into by us. Our policies and procedures for the review and approval of related person transactions are summarized under the heading “Policies and Procedures for Related Person Transactions,” which appears below.

 

The members of our audit committee are Messrs. Starr (Chair) and Clarke and Dr. Schimmel. We believe that each member of our audit committee satisfies the requirements for membership, including independence, established by NASDAQ and the SEC. Our board has determined that Mr. Starr is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K. No member of our audit committee is the beneficial owner of more than 10% of our common stock.

 

Our audit committee met four times during 2009.

 

Compensation Committee

 

Our compensation committee is responsible for:

 

 

Our compensation committee has retained Towers Watson (previously known as Towers, Perrin, Forster & Crosby, Inc.), an independent, nationally recognized compensation consultant, to provide assistance from time to time in reviewing the compensation paid to our senior management team, which is comprised of our named executive officers and all of our vice presidents, and our non-employee directors, and to review our compensation programs and practices generally. In 2009, our compensation committee engaged Towers Watson to assist it in: assessing competitive compensation levels (cash and equity) for non-employee directors relative to our peer group, which peer group is described below under the heading “Compensation Discussion and Analysis;” evaluating the market practice and trends for merit increases, adjustments and promotions based upon market survey and peer group data and trend analysis; reviewing 2010 incentive compensation program structure; reviewing equity utilization and annual stock option awards as compared to our peer group; and assessing competitive compensation levels and pay mix (base salary, target annual incentive award and long-term incentive compensation) for our named executive officers based upon comparison with our peer group and market survey data. In connection with its work for the compensation committee during 2009, Towers Watson prepared reports for the compensation committee, met with the Chair of the committee as necessary and attended certain committee meetings to present its findings and recommendations.

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

 

The members of our compensation committee are Dr. Sato (Chair) and Messrs. Starr and Vincent. We believe that each member of our compensation committee satisfies the requirements for membership, including independence, as established by NASDAQ.

 

Our compensation committee met eight times during 2009.

 

Nominating and Corporate Governance Committee

 

Our nominating and corporate governance committee is responsible for:

 

 

The processes and procedures followed by our 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. Dzau. We believe that each member of our nominating and corporate governance committee satisfies the requirements for membership, including independence, as established by NASDAQ.

 

Our nominating and corporate governance committee met four times during 2009.

 

Director Nomination Process

 

Our nominating and corporate governance committee is responsible for identifying individuals qualified to become directors, consistent with criteria approved by our 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 our board.

 

Criteria and Diversity

 

Our corporate governance guidelines specify that diversity on the board should be considered by the nominating and corporate governance committee in the director identification and nomination process. In considering whether to recommend any particular candidate for inclusion in our 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 ability to act in the interests of all stockholders. Our nominating and corporate governance committee also considers issues of diversity, such as diversity of gender, race and national origin, education, professional experience and differences in viewpoints and skills. While our nominating and corporate governance committee does not have a formal policy with respect to diversity, our board and nominating and corporate governance committee believe that it is essential that the board members represent diverse viewpoints. 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 our board to promote our strategic objectives and fulfill its responsibilities to our stockholders.

 

The director biographies appearing above under “Proposal 1 — Election of Class III Directors” indicate each nominee’s experience, qualifications, attributes and skills that led our board to conclude that he should continue to serve as a member of our board. Our board believes that each of the nominees has had substantial achievement in his professional and personal pursuits, and possesses the background, talents and experience that our board desires and that will contribute to the best interests of our company and to long-term stockholder value.

 

Stockholder Nominations

 

Stockholders may recommend individuals to our nominating and corporate governance committee for consideration as potential director candidates by submitting their names, together with appropriate biographical information and background materials and, if the stockholder is not a stockholder of record, 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, each of whom currently serves on our board of directors. Dr. Dzau and Mr. Starr were proposed to our board by our nominating and corporate governance committee and our board determined to include them as its nominees.

 

Communicating with the Independent Directors

 

Our 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 our board (if an independent director), the lead director (if one is appointed), or otherwise the chair of our 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 our board (if an independent director), or the lead director (if one is appointed), or otherwise the chair of our 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 communications.

 

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

 

Risk Considerations in Executive Compensation

 

Our compensation committee has discussed the concept of risk as it relates to our executive compensation program and our compensation committee does not believe our executive compensation program encourages excessive or inappropriate risk taking. As described more fully below in “Compensation Discussion and Analysis,” we structure our pay to consist of both fixed and variable compensation to motivate our executives to produce superior short- and long-term results that are in the best interests of our company and stockholders

in order to attain our ultimate objective of increasing stockholder value. We believe that any risks that may arise from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on our company.

 

Report of the Audit Committee

 

Our audit committee reports to and acts on behalf of our board 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, the appropriateness of our accounting principles and reporting policies, and for establishing and maintaining adequate internal control over financial reporting. The independent registered public accounting firm is responsible for conducting an independent audit of our annual financial statements and our internal control over financial reporting. Our audit committee is responsible for independently overseeing the conduct of these activities by our management and our independent registered public accounting firm.

 

Our audit committee operates under a written charter adopted by our board that reflects standards contained in the NASDAQ Marketplace Rules. Our audit committee reviews its charter annually and, in February 2009, approved an amendment thereto. A complete copy of the current audit committee charter, as amended, is posted on the Corporate Governance page of the Investors section of our website, www.alnylam.com.

 

Our audit committee has reviewed our audited financial statements for the fiscal year ended December 31, 2009, and has discussed them with our management and our independent registered public accounting firm, PricewaterhouseCoopers LLP. Our audit committee has also received from, and discussed with, PricewaterhouseCoopers LLP various communications that PricewaterhouseCoopers LLP is required to provide to our audit committee, including the matters required to be discussed by the Public Company Accounting Oversight Board (“PCAOB”), AU Section 380, Communication with Audit Committees, as amended, 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 PCAOB 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 provided our audit committee with the written disclosures and the letter required by PCAOB Rule 3526, Communications with Audit Committees Concerning Independence, as amended, and our audit committee and PricewaterhouseCoopers LLP have discussed its independence from us and our management, including the matters in those written disclosures.

 

In this context, our audit committee meets regularly with PricewaterhouseCoopers LLP and our management (including private sessions with each of PricewaterhouseCoopers LLP and members of management) to discuss any matters that our audit committee or these individuals believe should be discussed. Our 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, our audit committee recommended to our board that the audited financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2009. Our audit committee also recommended to our board, and our board has approved, subject to stockholder ratification, the appointment of PricewaterhouseCoopers LLP as our independent auditors for the fiscal year ending December 31, 2010.

 

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 that 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:

 

 

 

 

All such accountant services and fees were pre-approved by our audit committee in accordance with the “Pre-Approval Policies and Procedures” described below.

 

Pre-Approval Policies and Procedures

 

Our audit committee is required to pre-approve all audit services to be provided to us by our principal independent auditors, as well as all other services to be provided to us by such 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 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 president and chief operating officer. The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by our 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, our audit committee will review, and, in its discretion, may ratify the related person transaction. The policy also permits the chair of our audit committee to review and, if deemed appropriate, approve proposed related person transactions that arise between committee meetings, subject to ratification by our 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 our audit committee after full disclosure of the related person’s interest in the transaction. As appropriate for the circumstances, our audit committee will review and consider:

 

 

Our 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 our best interests. Our 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, our board 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 our compensation committee in the manner specified in its charter.

 

Related Person Transactions

 

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, and ultimately executed a research collaboration and license agreement. As of March 31, 2010, Novartis owned approximately 13.3% of our common stock and pursuant to the terms of the investor rights agreement, Novartis has the right until April 30, 2010 to purchase up to an additional 55,223 shares of our common stock at a purchase price of $17.99 per share, which, if purchased, would result in Novartis owning approximately 13.4% of our outstanding common stock.

 

Severance Agreement

 

On August 21, 2009, Dr. Schmidt confirmed his resignation as our senior vice president and chief scientific officer, effective as of September 30, 2009. In connection with Dr. Schmidt’s resignation, in

consideration for his continued service through September 30, 2009 and his agreement to a general release and certain other standard terms and conditions, we agreed to provide Dr. Schmidt with the following severance pay and benefits: (i) severance in the gross amount of $212,500 (an amount equal to six months of Dr. Schmidt’s gross base salary); (ii) the full cost of any COBRA premiums until the earlier of March 31, 2010 and the date Dr. Schmidt becomes eligible for coverage under the group health plan of another employer; and (iii) reimbursement of outplacement services up to a maximum amount of $10,000. In addition, we waived our right to repayment by Dr. Schmidt of a sign-on bonus and certain relocation and related expenses provided pursuant to the terms of Dr. Schmidt’s offer of employment.

 

Other than these transactions, we have not been a participant in any transaction, nor is there any currently proposed transaction, that is reportable under Item 404(a) of Regulation S-K.

 

Compensation Discussion and Analysis

 

Our compensation committee is responsible for overseeing the compensation of our senior management team, which is comprised of our named executive officers and all of our vice presidents. In this capacity, our compensation committee designs, implements, reviews and approves all compensation for our chief executive officer and our other named executive officers. The goal of our compensation committee is to ensure that our compensation programs are aligned with our business goals 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 pre-determined quantitative and qualitative individual and corporate performance goals and objectives and to align the interests of our senior management team with those of our stockholders in order to attain our ultimate objective of increasing stockholder value.

 

Elements of Total Compensation and Relationship to Performance

 

Key elements of our compensation programs include:

 

 

We award annual merit-based increases in base salary based upon an assessment of each executive’s performance and the scope of his or her responsibilities. Consistent with our compensation philosophy, we target salaries between the 50^th and 60^th percentile of the range of salaries in our peer group. Our annual incentive program is designed to reward annual achievements as measured against pre-determined quantitative and qualitative individual and corporate performance goals and objectives, with consideration given to the officer’s scope of responsibility, leadership abilities and effectiveness. We awarded cash incentive payments to our named executive officers and the other members of our senior management team under our 2009 annual incentive program, which is described in more detail below. In 2010, our named executive officers and the other members of our senior management team will be eligible to receive cash awards under our 2010 annual incentive program. Prior to 2009, awards under our annual incentive program were made in the form of stock options only. We typically grant stock options to our executive officers upon commencement of their

employment and annually in conjunction with a review of individual performance. With the exception of our annual incentive program, we do not have any pre-established targets for allocations or apportionment by type of compensation. The mix of compensation components is designed to reward annual results as well as drive long-term company performance and create stockholder value.

 

Determining and Setting Executive Compensation

 

We develop our compensation programs after reviewing publicly available compensation data and subscription survey data for a peer group of national and regional companies in the biopharmaceutical and biotechnology industries, as described below.

 

Defining and Comparing Compensation to Market Benchmarks

 

During 2009, our compensation committee engaged Towers Watson for assistance with its review of the compensation of our senior management team. In evaluating the total compensation of our named executive officers, our compensation committee, with the assistance of Towers Watson, established a peer group of 20 publicly traded, national and regional companies in the biopharmaceutical and biotechnology industries that was selected based on a balance of the following criteria:

 

 

Based on these criteria, our peer group for 2009, referred to as our 2009 peer group, was comprised of the following:

 

 

Our compensation committee also compared the total compensation of our senior management team to a broader biotechnology industry group, which, for 2009, consisted of 50 biotechnology and biopharmaceutical companies listed in the 2009 Radford Global Life Sciences Survey, with a focus on companies with 150 to 499 employees. This larger survey group included 18 of the companies in our 2009 peer group, among other companies. When conducting its review of our executive compensation programs, our compensation committee considered the compensation of our 2009 peer group and the larger survey group described above. The peer group for our named executive officers is approved by our compensation committee annually.

 

We believe that the compensation practices of our 2009 peer group provide us with appropriate compensation benchmarks for evaluating the compensation of our named executive officers. Notwithstanding the similarities of the 2009 peer group 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 prestigious academic and non-profit institutions. Accordingly, our compensation committee generally targets the base salaries of our executives between the 50^th and 60^th percentile of the range of salaries in our peer group, annual cash incentive award opportunities, which commenced in 2009, at or below the 25^th percentile, and total annual equity incentive awards at or above the 75^th percentile, resulting in total compensation for our executives between the 50^th and 75^th percentile of

compensation paid to similarly situated executives of the companies in our 2009 peer group. Other considerations, including market factors, the experience level of the executive and the executive’s performance against established corporate goals and individual objectives, may dictate variations to this general target range.

 

Other Key Factors in Determining Executive Compensation

 

As the biopharmaceutical industry is characterized by a very long product development cycle, including a lengthy research and development 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 our compensation committee considers when determining the compensation of our named executive officers include:

 

 

These factors are considered by our compensation committee in connection with our annual performance reviews described below and are a critical component in the evaluation of annual cash and equity incentive awards for our executives.

 

Annual Performance Reviews

 

Our compensation committee conducts an annual performance review of our senior management team. During the first quarter of each year, annual corporate goals and individual performance objectives are determined and set forth in writing. At the end of each year, our compensation committee determines executive compensation levels after carefully reviewing overall corporate performance and performing a detailed evaluation of each named executive officer’s annual performance against established corporate goals and individual objectives. In addition, our compensation committee applies its discretion, as it deems appropriate, in determining executive compensation.

 

Annual corporate goals are proposed by our senior management team and approved by our board. Individual objectives focus on contributions that facilitate the achievement of the corporate goals and are proposed by each member of senior management. Our compensation committee approves the individual objectives for each of our named executive officers and the remaining members of our senior management team. Any increases in base salary, annual stock option awards or cash awards under our annual incentive program are tied to the achievement of these corporate and individual performance goals and objectives. In 2009, our compensation committee established the maximum cash bonus opportunity for each member of our senior management team under the 2009 annual incentive program, representing a percentage of each individual’s base salary.

 

During the last quarter of each year, our senior management team evaluates our corporate performance and each officer’s individual performance, as compared to the corporate goals and individual objectives for that year. Based on this evaluation, our chief executive officer recommends to our compensation committee any increases in base salary and the amounts of any annual stock option awards and/or cash awards under our annual incentive program. Our compensation committee, with input from the chairman of our board, evaluates our chief executive officer’s individual performance and determines whether to change his base salary, grant him an annual stock option award and/or grant him a cash award under our annual incentive program. Our

board typically grants annual stock option awards at its last meeting of the year. Any changes in base salary are effective at the beginning of the following year. The cash incentive payments awarded under our 2009 annual incentive program were paid in January 2010 and we expect any cash incentive payments awarded under our 2010 annual incentive program will be paid in January 2011.

 

Base Salary

 

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

 

Merit-based increases in base salary for all of our executives, other than our chief executive officer, are determined by our compensation committee based upon a written summary of the executive’s performance and a recommendation from our chief executive officer. Any merit-based increase in base salary for our chief executive officer is based upon an assessment of his performance by our compensation committee, input from the chairman of our board of directors and a review by our compensation committee of the base salary of chief executive officers in our peer group.

 

2009 Annual Incentive Program

 

Our compensation committee’s goal is to determine an appropriate mix of cash payments and equity incentive awards to meet short- and long-term goals and objectives. During 2008, our compensation committee engaged Towers Watson to assist it with its review of the compensation of our executive officers relative to marketplace norms and practices by comparing current proxy statement data and salary survey data. This review was intended to evaluate the competitiveness of our executive compensation through comparisons with a peer group, assess our corporate performance to ensure compensation was appropriately tied to performance and inform our compensation committee as to whether changes to our compensation plan were needed. Results of the review conducted by Towers Watson indicated that the executive compensation programs of our peer group companies all included a cash-based annual incentive component. Based upon this analysis, in February 2009, our compensation committee authorized the implementation of an annual cash incentive program for 2009.

 

Under the 2009 annual incentive program, specified employees, including our named executive officers and the other members of our senior management team, were eligible to receive an annual cash incentive award based upon the achievement of corporate goals and individual objectives for 2009. The corporate goals for 2009 were proposed by our executive officers and approved by our board. Individual objectives for 2009 were focused on contributions that would facilitate the achievement of our corporate goals. The compensation committee approved the individual objectives for our named executive officers and the other members of our senior management team. The individual objectives for the other eligible participants were approved by our chief executive officer.

 

Awards under the 2009 annual incentive program were determined by first establishing a participant’s individual award, which was based upon that individual’s performance against individual objectives for 2009. Each participant had an established maximum cash award opportunity under the incentive program, as set forth in the table below, representing a percentage of the participant’s base salary for 2009. Each individual

award ranged from 0% to 100% of the participant’s maximum cash award opportunity based upon the participant’s individual performance against his or her 2009 objectives.

 

 

A corporate performance modifier was then applied to the individual award. The corporate performance modifier could range from 0% to 100% and was based upon our performance against the 2009 corporate goals approved by our board. The 2009 annual cash incentive program provided that in the event overall corporate performance for 2009 fell below a threshold of 50%, the corporate performance modifier would be 0%. Our compensation committee retained the discretion under the 2009 annual incentive program to adjust an award higher or lower as it deemed appropriate under the specific circumstances. At the end of 2009, our compensation committee evaluated individual and corporate performance against the established goals and objectives and determined the amount of the annual cash incentive award, if any, to be paid under the program to each of our named executive officers. For 2009, our compensation committee determined that the company achieved 60% of its corporate goals for that year, based primarily on the advancement of our clinical pipeline, major advances in our therapeutic delivery platform and the completion of our strategic alliance with Cubist Pharmaceuticals, Inc., or Cubist, for our ALN-RSV program. The annual cash incentive awards approved for each named executive officer and the basis for determining each such award are discussed below. Cash awards made under the 2009 annual incentive program were paid in January 2010.

 

In February 2010, our compensation committee authorized the implementation of an annual cash incentive program for 2010. The terms of the 2010 annual incentive program are the same as the terms of the 2009 annual incentive program described above. Any cash awards made under the 2010 annual incentive program will be paid in January 2011.

 

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 talent with many companies that have greater resources than we do. Accordingly, we believe equity compensation is a crucial component of any competitive executive compensation package we offer.

 

Historically, 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 awards to our executive officers are approved by our compensation committee and, other than stock option awards to new hires, are typically granted at our compensation committee’s regularly scheduled meeting at the end of the year. Stock option awards vary among our executive officers based on their positions and annual performance assessments. In addition, our compensation committee reviews all

components of the executive’s compensation to ensure that his or her total compensation is aligned with our overall philosophy and objectives. 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 not earn any compensation from his or her options unless our share price increases above the exercise price.

 

In addition, the stock options granted to our executive officers 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. 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 does not have any 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 during 2009, and the value of those awards determined in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 718 (formerly SFAS 123R), are shown in the 2009 Grants of Plan-Based Awards table below. We do not have any equity ownership guidelines for our executives.

 

In 2007 and 2008, each of our named executive officers and other members of our senior management team was also eligible to receive an annual incentive award in the form of stock options based upon the achievement of individual and corporate goals and objectives under our executive stock option bonus plan. As described above, in February 2009, following a review of our executive compensation programs, our compensation committee authorized the implementation of an annual incentive program beginning in 2009, pursuant to which executives were eligible to receive cash only awards.

 

Benefits and Other Compensation

 

Other compensation to our executives consists primarily of the broad-based benefits we provide to all employees, including health and dental insurance, life and disability insurance, an employee stock purchase plan and a 401(k) plan, except that executive officers are not eligible to participate in our employee stock purchase plan. Our 401(k) plan is a tax-qualified retirement savings plan pursuant to which all U.S. based employees, including 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 the form of shares of 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 number of shares with a value of $5,250 for each participant. Our matching contributions become 50% vested after the employee has been employed by us for one year and fully vested after the employee has been employed by us for two years.

 

Compensation for Our Named Executive Officers in 2009

 

Chief Executive Officer Compensation

 

In determining the 2009 compensation and annual incentive award for our chief executive officer, John M. Maraganore, Ph.D., our compensation committee reviewed the performance of our company during 2009 and Dr. Maraganore’s performance as compared to his individual corporate, financial, strategic and operational objectives for the year. In particular, in making its determination for a cash incentive award, our compensation committee determined that Dr. Maraganore successfully achieved certain of his goals and objectives, including: partnering our ALN-RSV program with Cubist and successfully completing separate Phase II studies in naturally infected patients and in lung transplant patients; advancing our ALN-VSP program into a Phase I study and advancing our ALN-TTR program through the filing of regulatory applications to initiate a clinical trial; building our 2010 clinical pipeline by transitioning an additional program into development; achieving major advances in our therapeutic delivery platform; managing key financial goals; building and developing the organization; advancing new, longer-range business opportunities, including Alnylam Biotherapeutics; and leading our external interface with investors, academic and industry leaders. Our

compensation committee reviewed the company’s performance against corporate goals, which was weighted at 60% achievement, and Dr. Maraganore’s performance against his objectives. Our compensation committee determined that under the 2009 annual incentive program, Dr. Maraganore was entitled to a cash incentive award of $86,625, representing 33% of his target cash award opportunity. In addition, as a result of our compensation committee’s determination regarding the company’s and Dr. Maraganore’s performance and its desire to provide an annual equity award consistent with our compensation philosophy, Dr. Maraganore received an annual stock option award to purchase 105,000 shares of common stock.

 

Notwithstanding the company’s and Dr. Maraganore’s accomplishments in 2009, as reflected by the cash incentive and annual equity award granted by the compensation committee to Dr. Maraganore, our compensation committee decided to accept the request by Dr. Maraganore that he forego a merit increase in his base salary in 2010. Accordingly, Dr. Maraganore’s annual base salary for 2010 remains $525,000.

 

Compensation for Our Other Named Executive Officers

 

2010 Base Salary.  With respect to Barry E. Greene, our president and chief operating officer, notwithstanding the company’s and Mr. Greene’s accomplishments in 2009, as described below, and as reflected by the cash incentive and annual equity awards granted by the compensation committee to Mr. Greene, our compensation committee decided to accept the request by Mr. Greene that he forego a merit increase in his base salary in 2010. Accordingly, Mr. Greene’s annual base salary for 2010 remains $390,000. For the remaining named executive officers, our compensation committee approved a merit increase for 2010 based upon each individual’s performance against his or her 2009 objectives. Our senior vice president of clinical research, Akshay K. Vaishnaw, M.D., Ph.D., received a merit increase of 3.8%, and his 2010 salary increased from $340,000 to $352,750. Our vice president of finance and treasurer, Patricia L. Allen, received a 2010 merit increase and an additional base pay market adjustment to better align her base pay with our compensation philosophy. As a result, the 2010 salary for Ms. Allen increased 7.8%, from $227,830 to $245,487.

 

2009 Annual Cash Incentive and Stock Awards.  In determining the 2009 annual cash incentive awards for Mr. Greene, Dr. Vaishnaw and Ms. Allen, our compensation committee reviewed the performance of the company during 2009 and their individual performances as compared to their individual corporate, financial, strategic and operational objectives for the year.

 

The individual objectives for Mr. Greene involved meeting specified targets in the following areas: business development achievements; external alliance management and funding; pipeline development; organizational growth; and operating performance. Our compensation committee also considered Dr. Maraganore’s recommendations with respect to Mr. Greene’s performance. For the cash incentive award, our compensation committee determined that Mr. Greene successfully achieved certain key objectives for the year, including: providing leadership, planning and executing key alliance management initiatives; achieving key pipeline objectives specific to advancing our clinical programs; and building and developing the organization for long-term growth. Our compensation committee reviewed the company’s performance against corporate goals, which was weighted at 60% achievement, and Mr. Greene’s performance against his objectives. Our compensation committee determined that under the 2009 annual incentive program, Mr. Greene was entitled to receive a cash incentive award of $38,610, representing 33% of his target cash award opportunity. In addition, as a result of our compensation committee’s determination regarding the company’s performance and Mr. Greene’s performance against his objectives, and its desire to provide an annual equity award consistent with our compensation philosophy, Mr. Greene received an annual stock option award to purchase 65,000 shares of common stock.

 

The individual objectives for Dr. Vaishnaw involved meeting specified targets in the following areas: advancing our ALN-RSV, ALN-VSP and ALN-TTR programs in the clinic; developing our discovery pipeline programs; and continuing to work on advances in our therapeutic delivery platform. Our compensation committee also considered both Dr. Maraganore’s and Mr. Greene’s recommendations with respect to Dr. Vaishnaw’s performance. For the cash incentive award, our compensation committee determined that Dr. Vaishnaw successfully achieved many objectives for the year, including meeting our goals for building a

sustainable clinical pipeline, advancing our ALN-VSP program into a Phase I study and advancing our ALN-TTR program towards the clinic through the filing of regulatory applications to initiate a clinical trial, transitioning our discovery pipeline programs into development, and achieving major advances in our therapeutic delivery platform. Our compensation committee reviewed the company’s performance against corporate goals, which was weighted at 60% achievement, and Dr. Vaishnaw’s performance against his objectives. Our compensation committee determined that under the 2009 annual incentive program, Dr. Vaishnaw was entitled to an incentive cash award of $35,700, representing 52.5% of his target cash award opportunity. In addition, as a result of our compensation committee’s determination regarding the company’s performance and Dr. Vaishnaw’s performance against his objectives, and its desire to provide an annual equity award consistent with our compensation philosophy, Dr. Vaishnaw received an annual stock option award to purchase 45,000 shares of common stock.

 

The individual objectives for Ms. Allen involved meeting specified targets in the following areas: financial leadership in support of our corporate goals; long-range planning; external guidance; and overall financial management, including meeting specified operating expense levels and minimum cash balance requirements at year-end. Our compensation committee also considered both Dr. Maraganore’s and Mr. Greene’s recommendations with respect to Ms. Allen’s performance. For the cash incentive award, our compensation committee determined that Ms. Allen successfully achieved certain key objectives for the year, including: meeting our goals for year-end cash and operating budget; providing financial leadership in support of our investment planning objectives; and developing financial systems to support our research and development efforts. Our compensation committee reviewed the company’s performance against corporate goals, which was weighted at 60% achievement, and Ms. Allen’s performance against her objectives. Our compensation committee determined that under the 2009 annual incentive program, Ms. Allen was entitled to receive a cash incentive award of $19,138, representing 42% of her target cash award opportunity. In addition, as a result of our compensation committee’s determination regarding the company’s performance and Ms. Allen’s performance against her objectives, and its desire to provide an annual equity award consistent with our compensation philosophy, Ms. Allen received an annual stock option award to purchase 25,000 shares of common stock.

 

In September 2009, Dr. John Schmidt resigned from his position as our senior vice president and chief scientific officer and his employment terminated. In connection with the termination of Dr. Schmidt’s employment with the company, he received certain severance payments, which are described in more detail above under the section entitled “Related Person Transactions — Severance Agreement.” Dr. Schmidt was not eligible to receive an award under our 2009 annual incentive program.

 

Cash Incentive Compensation for Our Named Executive Officers in 2010

 

In determining the 2010 cash incentive compensation for our named executive officers under the 2010 annual incentive program, our compensation committee will review the performance of the company during 2010 and the individual performance of each named executive officer as compared to such named executive officer’s individual corporate, financial, strategic and operational objectives for the year. In particular, in making its determination, our compensation committee will consider our success against the following corporate goals: advancing ALN-RSV01 in a Phase IIb clinical study for the treatment of RSV infection in adult lung transplant patients; continuing Phase I clinical development of ALN-VSP for the treatment of liver cancers; advancing the development of ALN-TTR01 through initiation of a Phase I clinical study in patients with transthyretin-mediated amyloidosis; advancing ALN-PCS for the treatment of hypercholesterolemia towards clinical development; advancing additional pre-clinical RNAi and microRNAi-based therapeutic programs; expanding our therapeutic delivery platform through the advancement of novel delivery solutions; continuing scientific leadership with multiple peer reviewed papers; funding our business with the formation of additional strategic alliances and new business ventures; continuing to advance our intellectual property portfolio; and maintaining solid financial performance, including ending the year with a specified minimum cash balance. In addition, the compensation committee will evaluate the performance of each named executive officer as compared to his or her individual objectives for 2010. Dr. Maraganore’s individual objectives are heavily weighted toward achieving corporate goals, but also include specific targets with respect to achieving

human proof of concept in our clinical programs, maintaining a strong cash position and developing organizational capabilities. Mr. Greene’s individual objectives are also heavily weighted toward achieving corporate goals, but also include specific targets with respect to aligning our research and development capabilities with alliance management, and business development goals. Dr. Vaishnaw’s individual objectives focus on continuing to advance our discovery programs and our clinical development programs with focus on human proof of concept. Ms. Allen’s individual objectives focus on meeting specified financial goals, managing our investment portfolio and providing support to our business development team.

 

Compliance with IRS Code Section 162(m)

 

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), 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 three other officers (other than the chief financial officer) whose compensation is required to be disclosed to stockholders pursuant to the Exchange Act by reason of being among the company’s most highly compensated 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 consider whether to structure the performance-based portion of our executive compensation to comply with exemptions in Section 162(m), so that the compensation remains tax deductible to us. However, our 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 our best interest and that of 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 Amended and Restated 2004 Stock Incentive Plan and our 2009 Stock Incentive Plan. All new full-time employees are granted stock options when they start employment and all continuing employees are eligible for stock option awards on an annual basis based on performance and upon promotions to positions of greater responsibility. Our compensation committee has delegated to Dr. Maraganore, our chief executive officer, the authority to make stock option awards under our Amended and Restated 2004 Stock Incentive Plan and our 2009 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 our board for these awards. 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. With respect to stock option awards to new hires other than vice presidents and executive officers, Dr. Maraganore approves the award prior to the employee’s first date of employment with such authority and provides that the award is to be granted to the new hire on his or her first date of regular employment, with a price equal to the fair market value of the common stock (as defined in the Amended and Restated 2004 Stock Incentive Plan or the 2009 Stock Incentive Plan) on the first day of regular employment. Dr. Maraganore is required to maintain a list of stock options granted pursuant to such delegated authority and report to our compensation committee regarding such awards.

 

Report of the Compensation Committee on Executive Compensation

 

Our 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, our compensation committee recommended to our board that such section be included in this proxy statement and incorporated by reference in our Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on February 26, 2010.

 

By the compensation committee of the board of directors of Alnylam,

 

Vicki L. Sato, Ph.D., Chair

Kevin P. Starr

James L. Vincent

 

Executive Compensation

 

The following table sets forth the total compensation paid or accrued for the years ended December 31, 2009, 2008 and 2007 to our named executive officers.

 

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, 2009 under any plan, contract, authorization or arrangement pursuant to which cash, securities, similar instruments or other property may be received:

 

2009 Grants of Plan-Based Awards

 

 

 

 

The amounts reported in the 2009 Grants of Plan-Based Awards table for these stock option awards reflect our accounting expense and may not represent the amounts our named executive officers will actually realize from the awards. Whether, and to what extent, a named executive officer realizes value will depend on our actual operating performance, stock price fluctuations and that 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 our named executive officers outstanding at December 31, 2009.

 

Outstanding Equity Awards at Fiscal Year-End for 2009

 

 

 

 

 

The following table sets forth information concerning the exercise of stock options during 2009 for each of our named executive officers.

 

2009 Option Exercises and Stock Vested

 

 

 

 

Potential Payments Upon Termination or Change-in-Control

 

We do not have agreements with any of our executive officers pursuant to which they are eligible for potential payments upon termination or change in control of Alnylam.

 

As described above in “Related Person Transactions,” in connection with Dr. Schmidt’s resignation, we agreed to provide Dr. Schmidt with the following severance pay and benefits: (i) severance in the gross amount of $212,500 (an amount equal to six months of Dr. Schmidt’s gross base salary); (ii) the full cost of any COBRA premiums until the earlier of March 31, 2010 and the date Dr. Schmidt becomes eligible for coverage under the group health plan of another employer; and (iii) reimbursement of outplacement services up to a maximum amount of $10,000. In addition, we waived our right to repayment by Dr. Schmidt of a sign-on bonus and certain relocation and related expenses provided pursuant to the terms of Dr. Schmidt’s offer of employment.

 

Employment Arrangements

 

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 eighteen months after termination of employment.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table provides information as of December 31, 2009 about the securities authorized for issuance under our equity compensation plans, consisting of our 2002 Employee, Director and Consultant Stock Option Plan (the “2002 Plan”), our 2003 Employee, Director and Consultant Stock Option Plan (the “2003 Plan”), our Amended and Restated 2004 Stock Incentive Plan, our 2009 Stock Incentive Plan and our Existing ESPP. 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 our 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.

 

Our compensation committee periodically reviews the compensation we pay our non-employee directors. Our compensation committee compares our board compensation to compensation paid to non-employee directors of similarly sized public companies at a similar stage of development in the biotechnology industry. Our compensation committee also considers the responsibilities we ask of our board members along with the amount of time required to perform those responsibilities. In addition, during 2009, our compensation committee engaged Towers Watson for assistance with its review of the compensation we pay to our non-employee directors. Based on this review and the ongoing review of board compensation by the compensation committee, in September 2009, our compensation committee recommended, and our board approved, certain changes to such compensation, effective as of September 2009. These changes are reflected below.

 

Prior to September 2009, each non-employee director was eligible to receive a cash fee of $20,000 per year. In September 2009, our board approved an increase in the annual cash fee paid to non-employee directors to $50,000 per year, beginning on a pro-rated basis at the September 2009 board meeting. The chairs of our board and our nominating and corporate governance committee are each entitled to receive an additional $5,000 per year. In September 2009, our board approved an increase in the additional amount payable to the chair of our compensation committee from $5,000 to $10,000 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 our board a stock option award for 30,000 shares of common stock, vesting annually over three years, and an additional stock option award to purchase 15,000 shares of common stock at each year’s annual meeting at which he or she served as a director, vesting in full on the first anniversary of the date of grant. In addition, the chair of our audit committee is entitled to an additional stock option award to purchase 10,000 shares of common stock per year. Our board may, in its discretion, increase or decrease the size of the award made to a director upon election or in connection with the annual stock option award or make other option awards to our directors. The exercise price of these stock options is the fair market value of our common stock on the date of grant.

 

We also reimburse our directors for reasonable travel and other related expenses incurred in connection with their service on our board.

 

The following table sets forth information concerning the compensation of our non-employee directors in 2009.

 

Director Compensation

 

 

 

 

 

 

 

 

 

 

Compensation Committee Interlocks and Insider Participation

 

During 2009, the members of our compensation committee were Dr. Sato and Messrs. Starr and Vincent, none of whom was a current or former officer or employee of Alnylam and none of whom had any related person transaction involving Alnylam.

 

Overview

 

On March 3, 2010, upon the recommendation of our compensation committee, our board of directors approved the amendment of our 2004 Employee Stock Purchase Plan, as amended, or the Existing ESPP, which, as amended by this proposal, we refer to as the ESPP, to increase the number of shares of common stock authorized for issuance thereunder from 315,789 shares to 715,789 shares (subject to adjustment in the event of stock splits and other similar events).

 

The ESPP permits eligible employees the option to purchase shares of our common stock through payroll deductions at 85% of the fair market value of the common stock as of the applicable grant date. Our board of directors believes that it is in our best interests to encourage stock ownership by our employees and the ESPP is an important benefit in recruiting and retaining employees. As of March 31, 2010, there were an aggregate of 99,412 shares available for future awards under the Existing ESPP. Our board of directors believes that it is necessary to adopt the amendment to the Existing ESPP in order to ensure that there are sufficient shares for all stock purchases under the ESPP through approximately 2012.

 

Our board of directors is submitting the ESPP for approval by our stockholders and has specifically conditioned its effectiveness on such approval. If our stockholders do not approve the ESPP, the Existing ESPP, excluding the proposed increase in shares available for issuance thereunder, will remain in effect. In such event, our board of directors will consider whether to adopt alternative arrangements based on its assessment of our needs.

 

Our Board believes that the adoption of the ESPP is in the best interests of our company and our stockholders and recommends a vote “FOR” this proposal.

 

Description of the ESPP

 

The following summary is qualified in its entirety by reference to the ESPP, a copy of which is attached as Appendix A to the electronic copy of this proxy statement filed with the SEC and may be accessed from the SEC’s website at www.sec.gov. In addition, a copy of the ESPP may be obtained by writing to: Alnylam Pharmaceuticals, Inc., 300 Third Street, Cambridge, Massachusetts 02142, Attention: Investor Relations and Corporate Communications. References to our board of directors in this summary shall include the compensation committee of our board of directors or similar committee appointed by the board of directors to administer the ESPP.

 

Eligibility

 

Generally, our employees or the employees of a Designated Subsidiary of ours (as defined in the ESPP) who are customarily employed by us or our subsidiary for more than 20 hours a week and for more than five months in a calendar year, who have been employed by us or a Designated Subsidiary for at least three months prior to enrolling in the ESPP and who are our employees or those of a Designated Subsidiary on the first day of the applicable Plan Period (as defined in the ESPP) are eligible to participate in the ESPP; provided however, any employee who, immediately after the grant of an option under the ESPP would own stock or hold outstanding options to purchase stock constituting five percent or more of the total combined voting power of our capital stock or that of our subsidiary shall not be eligible to participate in the ESPP. In addition, any executive officer considered a “highly compensated individual” as defined by the Code shall not be eligible to participate in the ESPP.

 

Administration, Delegation and Termination

 

The ESPP is administered by our board of directors. Our board of directors has authority to make rules and regulations for the administration of the ESPP and its interpretation and decisions with regard thereto shall be final and conclusive. Our board of directors may terminate the ESPP at any time.

Offerings