##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended September 30, 2006
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition Period From  to
 Commission File Number: 0-27914
 
 SIRNA THERAPEUTICS, INC.
 (Exact name of registrant as specified in its charter)
 
 Delaware
(State of incorporation)
    
    34-1697351
(I.R.S. Employer Identification No.)
 185 Berry Street, Suite 6504
San Francisco, California 94107
(Address of principal executive 
offices and zip code)
    
    (415) 512-7200
(Registrants telephone number,
including area code):
 þ o
  o o þ
 o þ




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##### 



SIRNA THERAPEUTICS, INC.
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements:
    
    
    3a. Condensed Balance Sheets  September 30, 2006 (Unaudited) and December 31, 2005
    
    
    3b. Condensed Statements of Operations  Three and Nine Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    4c. Condensed Statements of Cash Flows  Nine Months Ended September 30, 2006 and 2005 (Unaudited)
    
    
    5d. Notes to Condensed Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATION
    
    
    20Item 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 6. Exhibits
    
    
    29SIGNATURES
    
    
    30EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. FINANCIAL STATEMENTS
 SIRNA THERAPEUTICS, INC.
 
 CONDENSED BALANCE SHEETS
 (In thousands, except par value and share data)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,892
    
    
    $
    19,519Securities available-for-sale
    
    
    53,934
    
    
    
    26,173Notes receivable  related parties
    
    
    65
    
    
    
    145Prepaid expenses and other current assets
    
    
    1,679
    
    
    
    439Total current assets
    
    
    84,570
    
    
    
    46,276Property and equipment, net
    
    
    3,516
    
    
    
    1,906Notes receivable  related parties, less current portion
    
    
    
    
    
    
    65Other assets, net of accumulated amortization of $0 and $1,370 at September
30, 2006 and December 31, 2005, respectively
    
    
    1,184
    
    
    
    1,270$
    89,270
    
    
    $
    49,517LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,033
    
    
    $
    1,174Accrued wages
    
    
    2,366
    
    
    
    1,054Accrued liabilities
    
    
    3,449
    
    
    
    2,338Deferred revenue, current portion
    
    
    3,681
    
    
    
    2,133Total current liabilities
    
    
    10,529
    
    
    
    6,699Other liabilities
    
    
    264
    
    
    
    275Deferred revenue, less current portion
    
    
    6,013
    
    
    
    2,917Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued and
outstanding at September 30, 2006 and December 31, 2005, respectively
    
    
    
    
    
    
    Common stock, $.01 par value; 120,000,000 shares authorized; 72,935,902 and
59,754,709 shares issued and outstanding at September 30, 2006 and December
31, 2005, respectively
    
    
    729
    
    
    
    598Additional paid-in capital
    
    
    376,376
    
    
    
    316,890Accumulated deficit
    
    
    (304,732
    )
    
    
    (277,124
    )Unearned deferred compensation
    
    
    
    
    
    
    (911
    )Unrealized gain on securities available-for-sale
    
    
    91
    
    
    
    173Total stockholders equity
    
    
    72,464
    
    
    
    39,626$
    89,270
    
    
    $
    49,517
 See accompanying notes to condensed financial statements.
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##### Table of Contents



SIRNA THERAPEUTICS, INC.
 
 CONDENSED STATEMENTS OF OPERATIONS
 (In thousands, except for per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Contract revenue
    
    $
    887
    
    
    $
    1,853
    
    
    $
    2,165
    
    
    $
    1,947Contract manufacturing revenue
    
    
    1,068
    
    
    
    (2
    )
    
    
    1,068
    
    
    
    1,940Total revenues
    
    
    1,955
    
    
    
    1,851
    
    
    
    3,233
    
    
    
    3,887Operating expenses:Cost of contract manufacturing
    
    
    1,039
    
    
    
    5
    
    
    
    1,039
    
    
    
    1,663Research and development
    
    
    7,660
    
    
    
    4,618
    
    
    
    20,486
    
    
    
    15,502General and administrative
    
    
    3,980
    
    
    
    1,682
    
    
    
    11,854
    
    
    
    5,402Total operating expenses
    
    
    12,679
    
    
    
    6,305
    
    
    
    33,379
    
    
    
    22,567Loss from operations
    
    
    (10,724
    )
    
    
    (4,454
    )
    
    
    (30,146
    )
    
    
    (18,680
    )Interest and other income
    
    
    1,168
    
    
    
    272
    
    
    
    2,538
    
    
    
    563Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )Net loss
    
    $
    (9,556
    )
    
    $
    (4,182
    )
    
    $
    (27,608
    )
    
    $
    (18,142
    )Net loss per common share, basic and diluted
    
    $
    (0.13
    )
    
    $
    (0.08
    )
    
    $
    (0.42
    )
    
    $
    (0.40
    )Weighted average common shares outstanding, basic and diluted
    
    
    72,897
    
    
    
    53,535
    
    
    
    66,421
    
    
    
    45,573
 See accompanying notes to condensed financial statements.
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SIRNA THERAPEUTICS, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (27,608
    )
    
    $
    (18,142
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,423
    
    
    
    1,453Compensation related to common stock and options
    
    
    2,995
    
    
    
    457Compensation for forgiveness of notes receivable  related parties
    
    
    145
    
    
    
    145Purchase of license through issuance of common stock
    
    
    
    
    
    
    488Accrued interest included in convertible debt  related parties
    
    
    
    
    
    
    20Changes in operating assets and liabilities:Prepaid expenses and other current assets
    
    
    (1,240
    )
    
    
    (134
    )Other assets
    
    
    (378
    )
    
    
    41Accounts payable
    
    
    (141
    )
    
    
    (314
    )Accrued wages
    
    
    1,916
    
    
    
    (327
    )Accrued liabilities
    
    
    1,236
    
    
    
    911Other liabilities
    
    
    (11
    )
    
    
    (100
    )Deferred revenue
    
    
    4,644
    
    
    
    (281
    )Net cash used in operating activities
    
    
    (17,019
    )
    
    
    (15,783
    )Cash flows from investing activities:Purchases of securities available-for-sale
    
    
    (37,761
    )
    
    
    (15,166
    )Sales of securities available-for-sale
    
    
    9,918
    
    
    
    14,471Additions to property, plant, and equipment
    
    
    (2,569
    )
    
    
    (412
    )Additions to patents
    
    
    
    
    
    
    (190
    )Net cash used in investing activities
    
    
    (30,412
    )
    
    
    (1,297
    )Cash flows from financing activities:Net proceeds from the sale of common stock
    
    
    47,599
    
    
    
    26,706Net proceeds from the issuance of common stock to collaboration partner
    
    
    5,045
    
    
    
    Net proceeds from the issuance of common stock under stock option and
employee stock purchase plans and from the exercise of warrants
    
    
    4,160
    
    
    
    1,037Payments under loan facilities
    
    
    
    
    
    
    (3,080
    )Conversion of debt
    
    
    
    
    
    
    5Net cash provided by financing activities
    
    
    56,804
    
    
    
    24,668Net increase in cash and cash equivalents
    
    
    9,373
    
    
    
    7,588Cash and cash equivalents, beginning of the period
    
    
    19,519
    
    
    
    16,817Cash and cash equivalents, end of the period
    
    $
    28,892
    
    
    $
    24,405Supplementary information:Common stock issued in settlement of accrued wages and liabilities
    
    $
    729
    
    
    $
    
 See accompanying notes to condensed financial statements.
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SIRNA THERAPEUTICS, INC.
 
 NOTES TO CONDENSED FINANCIAL STATEMENTS
 (Unaudited)
 1. Basis of Presentation
    2. Use of Estimates
  3. Employee Stock-Based Compensation
   Employee Stock Plans
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Adoption of FAS 123R
  (in
thousands, except for per share data):
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2006
    
    
    September 30, 2006Research and development
    
    $
    310
    
    
    $
    955General and administrative
    
    
    292
    
    
    
    1,235Effect on net loss
    
    $
    602
    
    
    $
    2,190Effect on net loss per common share, basic and diluted
    
    $
    (0.01
    )
    
    $
    (0.03
    )
  Pro Forma Information for Period Prior to Adoption of FAS 123R
 (in thousands, except for per share data)
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2005
    
    
    September 30, 2005Net loss, as reported
    
    $
    (4,182
    )
    
    $
    (18,142
    )Add: Stock-based employee compensation expense included in net loss, as reported
    
    
    135
    
    
    
    457Deduct:
Stock-based employee compensation expense determined under fair value method for all awards
    
    
    (820
    )
    
    
    (2,298
    )Pro forma net loss
    
    $
    (4,867
    )
    
    $
    (19,983
    )Loss per share:Basic and diluted net loss per common share, as reported
    
    $
    (0.08
    )
    
    $
    (0.40
    )Basic and diluted pro forma net loss per common share
    
    $
    (0.09
    )
    
    $
    (0.44
    )
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Valuation Assumptions
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2006
    
    2005
    
    2006
    
    2005Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Risk-free interest rate
    
    
    4.85
    %
    
    
    4.13
    %
    
    
    4.74
    %
    
    
    3.87
    %Expected volatility
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Weighted average expected term (years)
    
    
    5.2
    
    
    
    5.0
    
    
    
    5.5
    
    
    
    5.0
  Stock Option Activity
  WeightedAverageWeighted
    
    Remaining
    
    AggregateAverage
    
    Contractual
    
    Intrinsic ValueShares
    
    Exercise Price
    
    Life (Years)
    
    (000s)Options outstanding at December 31, 2005
    
    
    5,779,783
    
    
    $
    4.01
    
    
    
    7.44
    
    
    $
    3,588Options granted
    
    
    1,687,276
    
    
    $
    5.05Options exercised
    
    
    (579,032
    )
    
    $
    2.47Options cancelled
    
    
    (227,557
    )
    
    $
    4.11Options outstanding at September 30, 2006
    
    
    6,660,470
    
    
    $
    4.40
    
    
    
    7.32
    
    
    $
    14,616Options exercisable at September 30, 2006
    
    
    3,954,491
    
    
    $
    4.79
    
    
    
    6.53
    
    
    $
    9,783
   Options OutstandingWeighted
    
    
    
    
    
    Options ExercisableAverage
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Remaining
    
    Average
    
    Number
    
    AverageExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$
    1.62
    
    
    
    
    $
    1.86
    
    
    
    331,789
    
    
    
    8.52
    
    
    $
    1.64
    
    
    
    111,006
    
    
    $
    1.67$
    2.10
    
    
    
    
    $
    2.10
    
    
    
    2,840,033
    
    
    
    6.37
    
    
    $
    2.10
    
    
    
    2,203,142
    
    
    $
    2.10$
    2.34
    
    
    
    
    $
    4.20
    
    
    
    877,864
    
    
    
    7.52
    
    
    $
    3.51
    
    
    
    470,430
    
    
    $
    3.55$
    4.26
    
    
    
    
    $
    4.71
    
    
    
    1,198,336
    
    
    
    8.46
    
    
    $
    4.51
    
    
    
    549,794
    
    
    $
    4.39$
    5.06
    
    
    
    
    $
    5.33
    
    
    
    893,232
    
    
    
    9.13
    
    
    $
    5.16
    
    
    
    228,301
    
    
    $
    5.12$
    5.46
    
    
    
    
    $
    153.78
    
    
    
    518,050
    
    
    
    5.70
    
    
    $
    18.43
    
    
    
    390,652
    
    
    $
    22.22$
    155.88
    
    
    
    
    $
    155.88
    
    
    
    833
    
    
    
    3.88
    
    
    $
    155.88
    
    
    
    833
    
    
    $
    155.88$
    187.50
    
    
    
    
    $
    187.50
    
    
    
    333
    
    
    
    3.99
    
    
    $
    187.50
    
    
    
    333
    
    
    $
    187.50$
    1.62
    
    
    
    
    $
    187.50
    
    
    
    6,660,470
    
    
    
    7.32
    
    
    $
    4.40
    
    
    
    3,954,491
    
    
    $
    4.79
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4. Cash, Cash Equivalents and Securities Available-for-Sale
   Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedSeptember 30, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCommercial paper
    
    $
    45,650
    
    
    $
    91
    
    
    $
    
    
    
    $
    45,741Government notes
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    30,000Corporate notes
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    4,000Cash and money market funds
    
    
    3,085
    
    
    
    
    
    
    
    
    
    
    
    3,085$
    82,735
    
    
    $
    91
    
    
    $
    
    
    
    $
    82,826Classified as:Cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    28,892Securities available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,934$
    82,826
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedDecember 31, 2005
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCommercial paper
    
    $
    13,067
    
    
    $
    
    
    
    $
    
    
    
    $
    13,067Government notes
    
    
    26,000
    
    
    
    
    
    
    
    (5
    )
    
    
    25,995Corporate securities
    
    
    3,294
    
    
    
    178
    
    
    
    
    
    
    
    3,472Cash and money market funds
    
    
    3,158
    
    
    
    
    
    
    
    
    
    
    
    3,158$
    45,519
    
    
    $
    178
    
    
    $
    (5
    )
    
    $
    45,692Classified as:Cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,519Securities available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,173$
    45,692
  September 30, 2006
    
    
    December 31, 2005Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueMature in less than one year
    
    $
    45,650
    
    
    $
    45,741
    
    
    $
    16,361
    
    
    $
    16,539Mature in one to three years
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    995Mature in over three years
    
    
    34,000
    
    
    
    34,000
    
    
    
    25,000
    
    
    
    25,000$
    79,650
    
    
    $
    79,741
    
    
    $
    42,361
    
    
    $
    42,534
  9




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5. Loss per Share
   September 30,2006
    
    September 30, 2005Total stock options outstanding
    
    
    6,660
    
    
    
    6,117Warrants
    
    
    10,382
    
    
    
    11,880
 6. Collaboration with GlaxoSmithKline
     7. Proposed Merger with Merck & Co., Inc.
    10




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Statements in this Quarterly Report on Form 10-Q which are not strictly historical are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, Section 21E of the Securities Exchange Act of 1934, as amended and the Private Securities
Litigation Reform Act of 1995 which are subject to many risks and uncertainties. Forward-looking
statements give our current expectations or forecasts of future events. You can identify these
statements by the fact that they do not relate strictly to historical or current events.
Forward-looking statements use words such as anticipate, estimate, expect, will, may,
intend, plan, believe and similar expressions in connection with discussion of future
operating or financial performance. Forward-looking statements include statements relating to
future actions, prospective products and product approvals, future performance or results of
current and anticipated products, sales efforts, expenses and financial results. Forward-looking
statements are not guarantees of future performance and they can be affected by inaccurate
assumptions or by known or unknown risks and uncertainties. These include the failure to satisfy
the closing conditions set forth in the merger agreement between Sirna and Merck, the termination
of the merger agreement, the failure of the proposed acquisition to close or a significant delay in
the closing for any reason, and business uncertainty and contractual restrictions before closing.
Additionally, all of Sirnas programs are still at a relatively early stage of development and are
subject to significant risks and unknowns. In addition, patent applications may not result in
issued patents, and issued patents may not be enforceable or could be invalidated. Actual results
may differ materially from those projected in the forward-looking statements as a result of various
factors, including, without limitation, those listed under Part II, Item 1A, Risk Factors
included in this Quarterly Report on Form 10-Q and under Part I, Item 1A, Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 2005. Except to fulfill our obligations
under the federal securities laws, we undertake no obligation to revise or update forward-looking
statements in order to reflect events or circumstances that may arise after the date of this
Quarterly Report.
  Our Company
    11




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12




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RNA Interference Background
  i.e
 in vivo
   13




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Our Product Candidate Programs
  Age-Related Macular Degeneration (AMD)
   Chronic Hepatitis
  Respiratory Diseases
  Dermatology
  Huntingtons Disease
  14




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Type 2 Diabetes
  Our Patents and Proprietary Technology
     Patent Filings
    
    StatusSeminal RNAi or siRNA Technology Sirna  No-ribo and chemically-modified siNA Technology
    
    30 patent applications
    
    2 granted (UK)Sirna  Multifunctional siRNA Technology
    
    10 patent applications
    
    PendingSirna-Conserved Sequence Targeting Technology
    
    5 patent applications
    
    1 granted (UK)MicroRNA Technology (includes Worldwide Exclusive License from Univ.
Mass.
    
    7 patent applications
    
    PendingMedical School to the Zamore miRNA patents)Tuschl et al.Patent (Worldwide Exclusive License
from Univ. Mass. Medical School)
    
    2 patent applications
    
    PendingRana Patents on chemically-modified siRNAs (Worldwide
Exclusive License from the University of Massachusetts
Medical School)
    
    3 patent applications
    
    PendingFire et al.Patent ( Worldwide Non-exclusive License
from Carnegie Institution of Washington and the
University of Massachusetts)
    
    3 patent applications
    
    1 IssuedTuschl et al.micro RNA Patent (Worldwide Non-exclusive
License from the Rockefeller University)
    
    2 patent applications
    
    PendingTherapeutic Targets for siRNA Sirna  RNAi Gene Targets (including VEGF, IL-4, IL-13,
    
    
    
    1 issued (US), 5Hairless, PTP-1B, HD, HCV, RSV and other viruses)
    
    >135 patent applications
    
    granted (UK)Davidson et al.,Patents on siRNAs against neurological
disease targets such as Huntingtons Disease (Worldwide
Exclusive License from the University of Iowa Research Foundation)
    
    10 patent applications
    
    1 granted
(Australia)Christiano et al.,Patents on genes involved in hair
growth and hair loss (Worldwide Exclusive License from
Columbia University)
    
    5 patent applications
    
    PendingSirna  Oligonucleotide Chemistry & Delivery Technology
    
    >70 patent applications
    
    24 IssuedSirna  Oligonucleotide Manufacturing & Process Technology
    
    >25 patent applications
    
    17 IssuedSUMMARY OF INTELLECTUAL PROPERTY ESTATE
    
    >300 Patent Applications
    
    52 Issued
  15




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Our Business Strategy
  
    
    We intend to independently develop chemically optimized and formulated siRNA molecules
for therapeutic applications in several disease areas and dermatological conditions.
    
    We plan to pursue partnerships, collaborations or alliances with pharmaceutical and
biotechnology companies to develop RNA interference-based therapeutics.
    
    We seek to maintain and expand our patent portfolio and proprietary technology.
Worldwide, we have 52 patents and over 300 patent applications that we believe are important
to the identification, design, chemical modification, synthesis, formulation and manufacture
of RNAi-based and siRNA therapeutics for commercialization. These include license rights to
seven patent families bearing on both RNAi technology and specific therapeutic disease
areas. We intend to aggressively pursue patent protection to maintain worldwide rights
relating to the development, manufacture and sale of RNAi-based and siRNA therapeutics.
    
    We intend to leverage our expertise in the design, chemical modification, formulation and
manufacture of RNA-based therapeutics. We believe that we have established one of the
leading RNA-based therapeutic research and development teams. We can provide lead
optimization, process development and manufacturing to others in need of this expertise. We
plan to capitalize on our continuing investment in nucleic acid technology by entering into
technology transfer and contract manufacturing arrangements with collaborators to generate
revenues, while retaining the rights to our know-how for our own drug development.
  Licensing, Process Development and Pilot Manufacturing
  Critical Accounting Policies and Estimates
  Revenue Recognition
  16




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##### Table of Contents



Employee Stock-Based CompensationAdoption of FAS 123R
     Results of Operations for the Three and Nine Months Ended September 30, 2006 and 2005
 Revenues
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Contract revenues Allergan
    
    $
    417
    
    
    $
    
    
    
    $
    1,251
    
    
    $
    GSK
    
    
    435
    
    
    
    
    
    
    
    870
    
    
    
    Other
    
    
    35
    
    
    
    1,853
    
    
    
    44
    
    
    
    1,947887
    
    
    
    1,853
    
    
    
    2,165
    
    
    
    1,947Contract revenues  manufacturing Archemix
    
    
    1,068
    
    
    
    (2
    )
    
    
    1,068
    
    
    
    1,940Total revenues
    
    $
    1,955
    
    
    $
    1,851
    
    
    $
    3,233
    
    
    $
    3,887
  17




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##### Table of Contents



Expenses
 Research and development
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Salaries and benefits
    
    $
    2,454
    
    
    $
    1,659
    
    
    $
    6,432
    
    
    $
    5,857Chemicals and supplies
    
    
    1,003
    
    
    
    568
    
    
    
    2,697
    
    
    
    2,124Outside services
    
    
    1,735
    
    
    
    1,233
    
    
    
    3,667
    
    
    
    3,035Fair value of stock options granted to
Scientific Advisory Board
    
    
    
    
    
    
    
    
    
    
    384
    
    
    
    FAS 123R employee stock-based compensation
    
    
    310
    
    
    
    
    
    
    
    955
    
    
    
    Depreciation
    
    
    343
    
    
    
    295
    
    
    
    959
    
    
    
    887License fees
    
    
    240
    
    
    
    50
    
    
    
    1,065
    
    
    
    1,341All other
    
    
    1,575
    
    
    
    813
    
    
    
    4,327
    
    
    
    2,258Total research and development expenses
    
    $
    7,660
    
    
    $
    4,618
    
    
    $
    20,486
    
    
    $
    15,502Average research and development staffing
    
    
    62
    
    
    
    55
    
    
    
    59
    
    
    
    61
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Age-related Macular Degeneration (AMD)
    
    $
    207
    
    
    $
    446
    
    
    $
    438
    
    
    $
    1,544Chronic Hepatitis
    
    
    1,661
    
    
    
    469
    
    
    
    4,096
    
    
    
    1,407Asthma
    
    
    579
    
    
    
    367
    
    
    
    1,367
    
    
    
    998Hair removal
    
    
    252
    
    
    
    323
    
    
    
    1,015
    
    
    
    1,240Other RNAi programs and RNAi technology development
    
    
    282
    
    
    
    1,047
    
    
    
    2,198
    
    
    
    3,691Total project expenses
    
    $
    2,981
    
    
    $
    2,652
    
    
    $
    9,114
    
    
    $
    8,880
  General and administrative
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Salaries and benefits
    
    $
    1,105
    
    
    $
    556
    
    
    $
    3,378
    
    
    $
    2,010Patent and amortization
    
    
    578
    
    
    
    535
    
    
    
    2,223
    
    
    
    1,677FAS 123R employee stock-based compensation
    
    
    292
    
    
    
    
    
    
    
    1,235
    
    
    
    All other
    
    
    2,005
    
    
    
    591
    
    
    
    5,018
    
    
    
    1,715Total general and administrative expenses
    
    $
    3,980
    
    
    $
    1,682
    
    
    $
    11,854
    
    
    $
    5,402Average general and administrative staffing
    
    
    18
    
    
    
    13
    
    
    
    15
    
    
    
    14
  18




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##### Table of Contents



Interest and other income
  Liquidity and Capital Resources
      
    
    our research, drug discovery and development programs;
    
    preclinical and clinical studies of our product candidates, if developed;
    
    prosecuting and enforcing patent claims;
    
    general administrative and legal fees; and
    
    manufacturing and marketing of our products, if any.
   19




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##### Table of Contents



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
 Controls Evaluation and Related CEO and CFO Certifications
  
 PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
    
 Item 1A. RISK FACTORS
 Risks Related to Our Merger with Merck
 We cannot assure you that all conditions to the merger with Merck will be completed and the merger
consummated.
  20




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##### Table of Contents



If the merger is not completed, the share price of our common stock and future business and
operations could be significantly harmed.
  
    
    the share price of our common stock may change to the extent that the current market price of
our common stock reflects an assumption that the merger will be completed;
    
    our costs related to the merger, such as legal, accounting and some of the fees of our
financial advisors, must be paid even if the merger is not completed; and
    
    under certain circumstances, we may be required to pay Merck a termination fee of $42.1
million.
  Stockholders will receive $13 per share of our common stock in cash despite changes in market
value of our common stock.
  Risks Relating to our Business, Industry and Common Stock
 We are a biotechnology company in the early stage of development.
  
    
    obtain the human and financial resources necessary to develop, test, manufacture and market products;
    
    engage corporate partners to assist in developing, testing, manufacturing and marketing our products;
    
    satisfy the requirements of clinical trial protocols, including patient enrollment;
    
    establish and demonstrate the clinical efficacy and safety of our products;
    
    obtain necessary regulatory approvals; and
    
    market our products to achieve acceptance and use by the medical community in general.
 We have a history of losses, expect future losses, have a continuing need to raise additional
capital, and cannot assure you that we will ever become or remain profitable.
  21




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Our product development programs are based on novel technologies, are inherently risky and may
never lead to marketable products.
    Because we must obtain regulatory approval to market our products in the United States and foreign
jurisdictions, we cannot predict whether or when we will be permitted to commercialize our
products.
   
    
    must be conducted in conformity with the FDAs good laboratory practice regulations;
    
    must meet requirements for informed consent;
    
    must meet requirements for good clinical practices;
    
    are subject to continuing FDA oversight;
    
    may require large numbers of test subjects; and
    
    may be suspended by the FDA or us at any time if it is believed that the subjects
participating in these trials are being exposed to unacceptable health risks or if the FDA
finds deficiencies in the IND or the conduct of these trials.
  22




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We may experience negative results, problems or delays in our clinical trials with Sirna-027,
Sirna-034 or other product candidates that could adversely affect our stock price, financial
position and our commercial prospects.
  To develop, market or sell RNAi-based drugs, we currently depend upon collaborative relationships.
    
    
    our ability to find and enter into agreements with appropriate collaborators for our RNAi-based product candidates;
    
    the pace of development of our product candidates, including the achievement of performance milestones;
    
    development by our collaborators of competing technologies or products;
 23




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##### Table of Contents




    
    exercise by our collaborators of marketing or manufacturing rights; and
    
    the loss of our rights to products or the profits from our products if we are unable to fund our share of development costs.
    A majority of our patent applications have not yet been approved. We do not know which of these
applications will result in issued patents. Additionally, patent proceedings and litigation could
result in substantial costs and delays in obtaining and enforcing our patent rights. The ultimate
result of any patent litigation could be the loss of some or all protection for the patent involved
or the loss of ability to pursue business opportunities. We may also decide to oppose or challenge
third party patents.
       The manufacture, use or sale of our products may infringe on the patent rights of others. We may
not have identified all United States and foreign patents and patent applications that pose a risk
of infringement. We may be forced to in-license or litigate if an intellectual property dispute
arises.
  24




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##### Table of Contents




    
    incur substantial monetary damages;
    
    encounter significant delays in marketing our products;
    
    be unable to conduct or participate in the manufacture, use or sale of products or
methods of treatment requiring licenses; or
    
    lose patent protection for our inventions and products.
  Disclosure of our trade secrets could reduce our competitiveness.
  We have moved our headquarters and initiated the move of a majority of our research and development
operations from Colorado to California, and these moves could reduce employee retention and
efficiency and could add to our expenses.
   Our success depends on attracting and retaining qualified personnel.
  25




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##### Table of Contents



Our competitors may develop and market drugs that are more effective, safer, easier to use, or less
expensive than our product candidates.
  Our success may depend on third party reimbursement of patients costs for our products that could
result in price pressure or reduced demand for our products.
  We may in the future be exposed to product liability claims, which could adversely affect our
business, results of operations, financial condition and cash flow.
  Our products require materials that may not be readily available at commercially viable prices,
which may reduce our competitiveness or reduce our profitability.
  We have limited experience in manufacturing of our proprietary nanoparticle delivery formulations.
We are currently investing resources to develop this expertise, but we may be unsuccessful and may
be forced to rely on third parties to manufacture these formulated materials.
  26




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##### Table of Contents



Our common stock has a history of volatility, which could impair your investment.
  
    
    prospects that the merger with Merck & Co. may not be consummated;
    
    our ability to raise additional funds;
    
    the results of our preclinical studies or clinical trials;
    
    timing or denial by the FDA of clinical trial protocols or marketing applications;
    
    changes in the status of our corporate collaborative agreements;
    
    research activities, technological innovations or new products by us or our competitors;
    
    developments or disputes concerning patents or proprietary rights;
    
    quarterly variations in our operating results;
    
    changes in earnings estimates by market research analysts;
    
    concentrated ownership interest of our investors;
    
    purchases or sales of our stock by our executive officers, directors or substantial holders of our common stock;
    
    securities class actions or other litigation; and
    
    changes in government regulations.
  We deal with hazardous materials that may cause injury to others and are regulated by environmental
laws that may impose significant costs and restrictions on our business.
  We plan to use potential future operating losses and our federal and state net operating loss
carryforwards to offset taxable income from operations. However, our ability to use our net
operating loss carryforwards is limited as a result of previous issuances of equity securities and
could be further limited as a result of potential future issuances of equity securities.
  27




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##### Table of Contents



Concentration of ownership of our common stock may give stockholders affiliated with three of our
board members significant influence over our business.
   Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications
failure, terrorist activity and other events beyond our control, which could result in a material
adverse effect on our business.
  We have implemented anti-takeover provisions that may discourage transactions involving actual or
potential changes of control at premium prices.
   28




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##### Table of Contents



Item 6. EXHIBITS
 (a) Exhibits
 Number
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of October 30, 2006, by and among Merck, Spinnaker
Acquisition Corp. and the Company (8)3.1
    
    Amended and Restated Certificate of Incorporation of the Company (1)3.2
    
    Amended and Restated By-Laws of the Company, including amendment executed on February 22, 2006
[conformed copy] (2)4.1
    
    Specimen Stock Certificate (3)4.2
    
    Rights Agreement, dated November 22, 2000 between Ribozyme Pharmaceuticals, Inc. and American
Stock Transfer & Trust Company, which includes the form of Certificate of Designation of Series
AA Junior Participating Preferred Stock attached as Exhibit A thereto (4)4.3
    
    Amendment dated February 11, 2003 to Rights Agreement dated November 22, 2000 between Ribozyme
Pharmaceuticals, Inc. and American Stock Transfer & Trust Company (5)4.4
    
    Common Stock and Warrant Purchase Agreement dated as of February 11, 2003 by and among Ribozyme
Pharmaceuticals, Inc. and the Investors named therein (5)4.5
    
    Form of First Replacement Warrants (6)4.6
    
    Form of Second Replacement Warrant (6)4.7
    
    Form of Securities Purchase Agreement dated as of July 5, 2005 by and between the Company and
certain Investors (7)4.8
    
    Form of Warrant to Purchase Common Stock of the Company (7)4.9
    
    Amendment Number Two dated October 30, 2006 by and between the Company and American Stock Transfer
& Trust Company to Rights Agreement dated November 22, 2000, as amended on February 11, 2003 (8)10.1
    
    Form of Voting Agreement, dated as
of October 30, 2006, by and among Merck and certain stockholders of the Company (8)31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith.(1)
    
    Incorporated by reference to certain exhibits to the Companys Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 22, 2003 (File No. 333-107216).(2)
    
    Incorporated by reference to certain exhibits to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission on
March 31, 2006.(3)
    
    Incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form SB-2
Registration Statement filed with the Securities and Exchange Commission on April 11, 1996
(File No. 333-1908-D).(4)
    
    Incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 8-K filed
with the Securities and Exchange Commission on December 5, 2000.(5)
    
    Incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 8-K filed
with the Securities and Exchange Commission on February 14, 2003.(6)
    
    Incorporated by reference herein to certain exhibits to the Companys Current Report on Form
8-K filed with the Securities and Exchange Commission on January 6, 2005.(7)
    
    Incorporated by reference herein to certain exhibits to the Companys Current Report on Form
8-K filed with the Securities and Exchange Commission on July 11, 2005.(8)
    
    Incorporated by reference herein to certain exhibits to the Companys Current Report on Form
8-K filed with the Securities and Exchange Commission on November 2, 2006. 29




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##### Table of Contents



SIGNATURES
  SIRNA THERAPEUTICS, INC.By:
    /s/ Howard W. RobinHoward W. RobinPresident and Chief Executive Officer (Principal
Executive  Officer) By:
    /s/ Gregory L. WeaverGregory L. WeaverSenior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 30




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##### Table of Contents



EXHIBIT INDEX
 Number
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of October 30, 2006, by and among Merck, Spinnaker
Acquisition Corp. and the Company (8)3.1
    
    Amended and Restated Certificate of Incorporation of the Company (1)3.2
    
    Amended and Restated By-Laws of the Company, including amendment executed on February 22, 2006
[conformed copy] (2)4.1
    
    Specimen Stock Certificate (3)4.2
    
    Rights Agreement, dated November 22, 2000 between Ribozyme Pharmaceuticals, Inc. and American
Stock Transfer & Trust Company, which includes the form of Certificate of Designation of Series
AA Junior Participating Preferred Stock attached as Exhibit A thereto (4)4.3
    
    Amendment dated February 11, 2003 to Rights Agreement dated November 22, 2000 between Ribozyme
Pharmaceuticals, Inc. and American Stock Transfer & Trust Company (5)4.4
    
    Common Stock and Warrant Purchase Agreement dated as of February 11, 2003 by and among Ribozyme
Pharmaceuticals, Inc. and the Investors named therein (5)4.5
    
    Form of First Replacement Warrants (6)4.6
    
    Form of Second Replacement Warrant (6)4.7
    
    Form of Securities Purchase Agreement dated as of July 5, 2005 by and between the Company and
certain Investors (7)4.8
    
    Form of Warrant to Purchase Common Stock of the Company (7)4.9
    
    Amendment Number Two dated October 30, 2006 by and between the Company and American Stock Transfer
& Trust Company to Rights Agreement dated November 22, 2000, as amended on February 11, 2003 (8)10.1
    
    Form of Voting Agreement, dated as of October 30, 2006, by and among Merck and certain
stockholders of the Company (8)31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith.(1)
    
    Incorporated by reference to certain exhibits to the Companys Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on July 22, 2003 (File No. 333-107216).(2)
    
    Incorporated by reference to certain exhibits to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2005 filed with the Securities and Exchange Commission on
March 31, 2006.(3)
    
    Incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form SB-2
Registration Statement filed with the Securities and Exchange Commission on April 11, 1996
(File No. 333-1908-D).(4)
    
    Incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 8-K filed
with the Securities and Exchange Commission on December 5, 2000.(5)
    
    Incorporated by reference to certain exhibits to Ribozyme Pharmaceuticals Form 8-K filed
with the Securities and Exchange Commission on February 14, 2003.(6)
    
    Incorporated by reference herein to certain exhibits to the Companys Current Report on Form
8-K filed with the Securities and Exchange Commission on January 6, 2005.(7)
    
    Incorporated by reference herein to certain exhibits to the Companys Current Report on Form
8-K filed with the Securities and Exchange Commission on July 11, 2005.(8)
    
    Incorporated by reference herein to certain exhibits to the Companys Current Report on Form
8-K filed with the Securities and Exchange Commission on November 2, 2006. 31