ALNYLAM PHARMACEUTICALS, INC. (ALNY) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a global commercial-stage biopharmaceutical company that discovers, develops, manufactures and commercializes novel therapeutics based on RNAi. Our commercial products and broad pipeline of investigational RNAi therapeutics are focused in four STArs: Genetic Medicines, Cardio-Metabolic Diseases, Hepatic Infectious Diseases and CNS/Ocular Diseases.

As described in Part I, Item 1. "Business," of this Annual Report on Form 10-K, we currently have four products that have received marketing approval, including one partnered product, and five late-stage investigational programs advancing towards potential commercialization. In Part I, Item 1. "Business" you can also find a summary of key events in 2021 and 2022 to-date related to our marketed products and our clinical development programs.

We have incurred significant losses since we commenced operations in 2002 and as of December 31, 2021, we had an accumulated deficit of $5.44 billion. Historically, we have generated losses principally from costs associated with research and development activities, acquiring, filing and expanding intellectual property rights, and selling, general and administrative costs. As a result of planned expenditures for research and development activities relating to our research platform, our drug development programs, including clinical trial and manufacturing costs, the establishment of late-stage clinical and commercial capabilities, including global commercial operations, continued management and growth of our patent portfolio, collaborations and general corporate activities, we expect to incur additional operating losses, however we expect 2019 represents our peak non-GAAP operating loss year as we transition towards a self-sustainable financial profile. We anticipate that our operating results will continue to fluctuate for the foreseeable future. Therefore, period-to-period comparisons should not be relied upon as predictive of the results in future periods.

We currently have programs focused on a number of therapeutic areas and, as of December 31, 2021, we generate worldwide product revenues from three commercialized products, ONPATTRO, GIVLAARI and OXLUMO, primarily in the U.S., Europe and Japan. However, our ongoing development efforts may not be successful and we may not be able to commence sales of any other products and/or successfully market and sell ONPATTRO, GIVLAARI, OXLUMO or any other approved products in the future. A substantial portion of our total revenues in recent years has been derived from collaboration revenues from strategic alliances with Regeneron, Vir and Novartis. In addition to revenues from the commercial sales of our approved products and potentially from sales of future products, we expect our sources of potential funding for the next several years to continue to be derived in part from existing and new strategic alliances. Such alliances include, or may include in the future, license and other fees, funded research and development, milestone payments and royalties on product sales by our licensors, including royalties on sales of Leqvio made by our partner Novartis, as well as proceeds from the sale of equity or debt.

Results of Operations

The following data summarizes the results of our operations:

For discussion of our 2020 results and a comparison with 2019 results please refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 that was filed with the SEC on February 11, 2021.

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Discussion of Results of Operations

Revenues

Total revenues consist of the following:

Net Product Revenues

Net product revenues consist of the following:

Net product revenues increased during the year ended December 31, 2021, compared to the year ended December 31, 2020, as a result of the continued, global expansion of ONPATTRO and GIVLAARI into additional major markets and increased patients on therapy, in addition to sales generated from our third commercial product, OXLUMO, following regulatory approvals in the fourth quarter of 2020.

We expect net product revenues to increase during 2022, as compared to 2021, as we continue to add new patients onto our commercial products, as well as launch vutrisiran in the U.S. and our approved products into additional markets, assuming regulatory approvals.

Please read Note 3 to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for balances and activity in each product revenue allowance and reserve category for the years ended December 31, 2021 and 2020.

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Net Revenues from Collaborations and Royalty Revenue

Net revenues from collaborations consist of the following:

Net revenues from collaborations increased during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to increased revenue recognized in connection with our collaboration agreements with Regeneron and Novartis, including the achievement of a $25 million regulatory milestone payment for Leqvio associated with FDA approval in Q4 2021. These increases were offset by decreased activities in connection with our collaboration agreement with Vir.

We earn royalty revenue from global net sales of Leqvio by our partner, Novartis. In December 2020, Leqvio received marketing authorization from the EC for the treatment of adults with hypercholesterolemia or mixed dyslipidemia, and in December 2021, Leqvio was approved by the FDA for the treatment of adults with HeFH or ASCVD. During the year ended December 31, 2021, we earned $1.2 million in royalty revenue.

We expect combined net revenues from collaborations and royalty revenue to moderately increase in 2022, as compared to 2021, due to increased reimbursable activities, anticipated achievement of milestones under our collaboration agreements, and increased royalties associated with sales of Leqvio.

Operating Costs and Expenses

Operating costs and expenses consist of the following:

Cost of Goods Sold

Cost of goods sold as a percentage of net product revenues decreased to 17.4% for the year ended December 31, 2021, as compared to 20.5% for the year ended December 31, 2020, primarily due to decreased charges in 2021 as a result of manufacturing facilities operating at near full capacity compared to 2020.

We anticipate variability in our cost of goods sold as a percentage of net product revenues due to the timing of manufacturing runs and utilization and the depletion of zero-cost inventories, as well as future product launches. We expect cost of goods sold will increase during 2022, as compared to 2021, primarily as a result of an expected increase in net product sales as well as the sale of capitalized inventory.

Cost of collaborations and royalties

Cost of collaborations and royalties increased during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to an increase in GalNAc material supply to Novartis to support its continued, global launch of Leqvio, as well as its ongoing clinical trials.

We expect cost of collaborations and royalties to remain relatively consistent during 2022, as compared to 2021, due to variability of GalNAc material supplied to Novartis to support the manufacturing of Leqvio.

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Research and Development

Research and development expenses consist of the following:

Research and development expenses increased during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to the following:

•Increased clinical trial and manufacturing expenses primarily related to increased expenses associated with activities related to the advancement of our HELIOS B, APOLLO B, KARDIA-1 and KARDIA-2 clinical programs; and

•Increased license fees expense resulting from upfront payments due upon the execution of certain collaboration agreements.

During the years ended December 31, 2021 and 2020, in connection with advancing activities under our collaboration agreements, we incurred research and development expenses, primarily related to external development and clinical expenses, including the manufacture of clinical product.

The following table summarizes research and development expenses incurred, for which we recognize net revenue, that are directly attributable to our collaboration agreements, by collaboration partner:

Selling, General and Administrative

Selling, general and administrative expenses consist of the following:

Selling, general and administrative expenses increased during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to the following:

•Increased compensation and related expenses and stock-based compensation expense as a result of increased commercial and medical affairs headcount to support our Alnylam P5x25 strategy; and

•Increased consulting and professional services expenses as a result of increased commercial-related services as well as the continued expansion of our commercial products into additional major markets.

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Offset by:

•Decreased other expenses due to a change in an estimate of contingent liabilities related to our arbitration with Ionis in 2020.

We expect that research and development expenses combined with selling, general and administrative expenses will increase during 2022, as compared to 2021, as we continue to advance and develop our platform and pipeline, advance our product candidates, including partnered programs, into later-stage development, prepare regulatory submissions and continue to build-out our global commercial and compliance infrastructure and field team to support ONPATTRO, GIVLAARI, OXLUMO and potentially additional product launches, including vutrisiran. However, we expect that certain expenses will be variable depending on the timing of manufacturing batches, clinical trial enrollment and results, regulatory review of our product candidates and programs, and stock-based compensation expenses due to our determination regarding the probability of vesting for performance-based awards.

Other (Expense) Income

Other (expense) income consists of the following:

Total other expense increased during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to increased interest expense associated with the sale of future royalties and the drawdown of our credit facility beginning in December 2020, increased expense associated with the mark-to-market adjustment related to the development derivative liability and increased other expense as a result of unfavorable foreign currency remeasurement.

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Liquidity and Capital Resources

The following table summarizes our cash flow activities:

Operating Activities

Net cash used in operating activities increased during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to increased cash disbursements related to working capital payments partially offset by stronger cash receipts from increased product sales.

Investing Activities

Net cash used in investing activities decreased during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to decreased purchases, sales and maturities of our marketable securities.

Financing Activities

Net cash provided by financing activities increased during the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to proceeds of $500.0 million in connection with drawdown on our credit agreement and increased net proceeds of $45.8 million from the issuance of common stock in connection with stock option exercises and other types of equity, compared to the prior year proceeds of $200.0 million in connection with the first drawdown on our credit facility and net proceeds of $99.5 million from our issuance of common stock to certain affiliates of The Blackstone Group Inc.

Additional Capital Requirements

We currently have programs focused on a number of therapeutic areas and, as of December 31, 2021, have received regulatory approval and commercially launched three products: ONPATTRO, GIVLAARI and OXLUMO. In early 2021, we announced Alnylam P5x25, which is aimed at our planned transition to a top five biotech. As part of this strategy, our goal is to achieve sustainable non-GAAP profitability by the end of 2025. However, our ongoing development efforts may not be successful and we may not be able to commence sales of any other products, including vutrisiran, or successfully expand the indication for our approved products, including ONPATTRO (and vutrisiran, if approved), in the future. In addition, we anticipate that we will continue to generate losses as a result of planned expenditures for research and development activities relating to our research platform, our drug development programs, including clinical trial and manufacturing costs, the establishment of late-stage clinical, manufacturing, commercial and compliance capabilities, including global operations, continued management and growth of our intellectual property including our patent portfolio, collaborations and general corporate activities.

Based on our current operating plan, we believe that our cash, cash equivalents and marketable securities as of December 31, 2021, together with the cash we expect to generate from product sales and under our current alliances, including milestones and royalties on Leqvio sales, will be sufficient to enable us to advance our long-term strategic goals for at least the next 12 months from the filing of this Annual Report on Form 10-K. Recent and expected working and other capital requirements, in addition to the above matters, also include the items described below:

•Amounts related to future lease payments for operating lease obligations at December 31, 2021 totaled $503.6 million, with$41.8 million expected to be paid within the next 12 months.

•Our cash operating expenditures were $641.7 million in 2021 and $615.0 million in 2020, and we expect to increase our investment in operations in 2022.

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•Cash outflows for capital expenditures were $76.4 million in 2021 and $70.4 million in 2020. We expect capital expenditures to increase in 2022 to support the increase in our manufacturing and production capacity needs.

•Amounts related to future long-term debt total $675.7 million, of which we do not expect to make payments on principal within the next 12 months.

•Payments associated with the liability related to the sale of future royalties were approximately $0.4 million in 2021, with $37.1 million to be paid within the next 12 months.

Since we commenced operations in 2002, we have generated significant losses and as of December 31, 2021, we had an accumulated deficit of $5.44 billion. As of December 31, 2021, we had cash, cash equivalents and marketable securities of $2.44 billion, compared to $1.87 billion as of December 31, 2020.

Due to numerous factors described in more detail under the caption Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K, we may require significant additional funds earlier than we currently expect in order to continue to commercialize ONPATTRO, GIVLAARI and OXLUMO, and to develop, conduct clinical trials for, manufacture and, if approved, commercialize additional product candidates, including vutrisiran.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities in our consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions and could have a material impact on our reported results. While our significant accounting policies are more fully described in the Notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be the most critical in understanding the judgments and estimates we use in preparing our consolidated financial statements:

Net Product Revenues

Our net product revenues are recognized, net of variable consideration related to certain allowances and accruals, at the time the customer obtains control of our product. We record reserves, based on contractual terms, for components related to product sold during the reporting period, as well as our estimate of product that remains in the distribution channel inventory at the end of the reporting period that we expect will be sold to qualified healthcare providers. On a quarterly basis, we update our estimates and record any needed adjustments in the period we identify the adjustments.

The estimates for our product revenue allowances and accruals are most significantly affected by chargebacks, which are contractual commitments with the government and other entities to sell products to qualified healthcare providers at prices lower than the list prices charged to the customer who directly purchases from us, and rebates that represent discount obligations under government programs, including Medicaid in the U.S. and similar programs in certain other countries, including countries in which we are accruing for estimated rebates because final pricing has not yet been negotiated. We are also subject to potential rebates in connection with our VBAs with certain commercial payors.

We use the expected value method, which is the sum of probability-weighted amounts in a range of possible consideration amounts, or the most likely amount method, which is the single most likely amount in a range of possible considerations, to estimate variable consideration related to our product revenues. We use the expected value method to estimate variable consideration for chargebacks, certain rebates, and other incentives and we use the most likely amount method for certain rebates and trade discounts and allowances.

A 10% increase or decrease in these estimates impacts net sales by a corresponding increase or decrease of approximately $5.0 million.

Net Revenues from Collaborations

We earn revenue in connection with collaboration agreements which allow our collaboration partners to utilize our technology platforms and develop product candidates.

For elements of collaboration arrangements that are accounted for pursuant to ASC Topic 606, Revenue from Contracts with Customers, or ASC 606, we identify the performance obligations and allocate the total consideration we expect to receive on a relative standalone selling price basis to each performance obligation. Key assumptions to determine the standalone selling price may include forecasted revenues, development timelines, reimbursement rates for personnel costs, the expected number of targets or indications expected to be pursued under each license, discount rates and probabilities of technical and regulatory success. We recognize revenue associated with each performance obligation as the control over the promised goods or services transfer to our collaboration partner which occurs either at a point in time or over time. If control transfers over time, revenue is recognized by using a method of measuring progress that best depicts the transfer of goods or services, for example based on actual costs incurred relative to total forecasted costs to be incurred over the period the transfer of goods or services occurs. We

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evaluate the measure of progress and related inputs each reporting period and any resulting adjustments to revenue are recorded on a cumulative catch-up basis. Revenue to be recognized is equal to the total transaction price multiplied by the ratio of actual expense incurred divided by total forecasted expense.

A 10% increase or decrease in the transaction price impacts net revenues from collaborators by a corresponding increase or decrease of approximately $26.0 million. A 10% increase or decrease in the total forecasted costs to be incurred over the period the transfer of goods or services occurs impacts net revenues from collaborators by a corresponding decrease or increase of approximately $24.0 million.

Liability Related to the Sale of Future Royalties

We account for the liability related to the sale of future royalties as a debt financing, as we have significant continuing involvement in the generation of the cash flows. Interest on the liability related to the sale of future royalties will be recognized using the effective interest rate method over the life of the related royalty stream.

The liability related to the sale of future royalties and the related interest expense are based on our current estimates of future royalties and commercial milestones expected to be paid over the life of the arrangement, which we determine by using third-party forecasts of Leqvio's global net revenue. Third-party forecasts are updated periodically as new data is obtained with regards to Leqvio's global launch progress or as sales information becomes available. Increases, decreases or a shift in timing of estimated revenues affects the interest rate utilized in the calculation of the liability related to the sale of future royalties. An increase or decrease of 5% to the interest rate would result in an increase or decrease to our liability related to the sale of future royalties of approximately $14.5 million.

Development Derivative Liability

In August 2020, we entered into a co-development agreement, referred to as the Funding Agreement, with BXLS V Bodyguard – PCP L.P. and BXLS Family Investment Partnership V – ESC L.P., collectively referred to as Blackstone Life Sciences, pursuant to which Blackstone Life Sciences will provide up to $150.0 million in funding for the clinical development of vutrisiran and zilebesiran, two of our cardiometabolic programs. As consideration for Blackstone Life Sciences’ funding for certain vutrisiran and zilebesiran clinical development costs, we have agreed to pay Blackstone Life Sciences fixed success-based payments upon achievement of specific milestones for vutrisiran and zilebesiran as well as a 1% royalty on net sales of vutrisiran for ten years.

The development derivative liability is recorded at fair value and represents our current estimate of the expected future payments to Blackstone Life Sciences. The development derivative liability is based on the probability weighted present value of the estimated cash flows pursuant to contractual terms of the Funding Agreement. The most significant assumptions in determining the development derivative liability are the probability of success for the clinical development and regulatory approval of vutrisiran and zilebesiran and our current cost of borrowing. Estimates of the probability of success and our cost of borrowing are based on what we believe to be reasonable and supportable assumptions and require management’s judgment. Actual results could vary materially from these estimates.

Recent Accounting Pronouncements

Please read Note 2 to our consolidated financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K for a description of recent accounting pronouncements applicable to our business.