##### 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 June 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 6504San Francisco, California 94107
    
    (415) 512-7200(Address of principal executive
    
    (Registrants telephone number,offices and zip code)
    
    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:a. Condensed Balance Sheets  June 30, 2006 (Unaudited) and December 31, 2005
    
    
    
    
    
    
    3b. Condensed Statements of Operations  Three and Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    
    
    
    
    4c. Condensed Statements of Cash Flows  Six Months Ended June 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
    
    
    
    
    
    
    19Item 4. Controls and Procedures
    
    
    
    
    
    
    19PART II. OTHER INFORMATION
    
    
    
    
    
    
    20Item 1. Legal Proceedings
    
    
    
    
    
    
    20Item 1A. Risk Factors
    
    
    
    
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    
    
    
    
    28Item 6. Exhibits
    
    
    
    
    
    
    29SIGNATURES
    
    
    
    
    
    
    30Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 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)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    42,407
    
    
    $
    19,519Securities available-for-sale
    
    
    49,770
    
    
    
    26,173Notes receivable  related parties
    
    
    65
    
    
    
    145Prepaid expenses and other current assets
    
    
    2,146
    
    
    
    439Total current assets
    
    
    94,388
    
    
    
    46,276Property and equipment, net
    
    
    2,954
    
    
    
    1,906Notes receivable  related parties, less current portion
    
    
    30
    
    
    
    65Other assets, net of accumulated amortization of $1,834
and $1,370 at June 30, 2006 and December 31, 2005,
respectively
    
    
    1,241
    
    
    
    1,270$
    98,613
    
    
    $
    49,517LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,012
    
    
    $
    1,174Accrued wages
    
    
    1,737
    
    
    
    1,054Accrued liabilities
    
    
    3,859
    
    
    
    2,338Deferred revenue, current portion
    
    
    4,010
    
    
    
    2,133Total current liabilities
    
    
    10,618
    
    
    
    6,699Other liabilities
    
    
    264
    
    
    
    275Deferred revenue, less current portion
    
    
    6,865
    
    
    
    2,917Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued and outstanding at June 30,
2006 and December 31, 2005, respectively
    
    
    
    
    
    
    Common stock, $.01 par value; 120,000,000 shares
authorized; 72,871,846 and 59,754,709 shares issued and
outstanding at June 30, 2006 and December 31, 2005,
respectively
    
    
    729
    
    
    
    598Additional paid-in capital
    
    
    375,221
    
    
    
    316,890Accumulated deficit
    
    
    (295,176
    )
    
    
    (277,124
    )Unearned deferred compensation
    
    
    
    
    
    
    (911
    )Unrealized gain on securities available-for-sale
    
    
    92
    
    
    
    173Total stockholders equity
    
    
    80,866
    
    
    
    39,626$
    98,613
    
    
    $
    49,517
 See accompanying notes to condensed financial statements.
 3




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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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Contract revenue
    
    $
    852
    
    
    $
    51
    
    
    $
    1,278
    
    
    $
    94Contract manufacturing revenue
    
    
    
    
    
    
    1,477
    
    
    
    
    
    
    
    1,942Total revenues
    
    
    852
    
    
    
    1,528
    
    
    
    1,278
    
    
    
    2,036Operating expenses:Cost of contract manufacturing
    
    
    
    
    
    
    1,264
    
    
    
    
    
    
    
    1,658Research and development
    
    
    7,186
    
    
    
    4,780
    
    
    
    12,826
    
    
    
    10,884General and administrative
    
    
    4,493
    
    
    
    1,550
    
    
    
    7,874
    
    
    
    3,720Total operating expenses
    
    
    11,679
    
    
    
    7,594
    
    
    
    20,700
    
    
    
    16,262Loss from operations
    
    
    (10,827
    )
    
    
    (6,066
    )
    
    
    (19,422
    )
    
    
    (14,226
    )Interest and other income
    
    
    753
    
    
    
    116
    
    
    
    1,370
    
    
    
    291Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25
    )Net loss
    
    $
    (10,074
    )
    
    $
    (5,950
    )
    
    $
    (18,052
    )
    
    $
    (13,960
    )Net loss per common share, basic and diluted
    
    $
    (0.15
    )
    
    $
    (0.14
    )
    
    $
    (0.29
    )
    
    $
    (0.34
    )Weighted average common shares outstanding, basic and diluted
    
    
    66,126
    
    
    
    41,577
    
    
    
    63,129
    
    
    
    41,527
 See accompanying notes to condensed financial statements.
 4




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SIRNA THERAPEUTICS, INC.
 
 CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005Cash flows from operating activities:Net loss
    
    $
    (18,052
    )
    
    $
    (13,960
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,080
    
    
    
    958Compensation related to common stock and options
    
    
    2,250
    
    
    
    321Compensation for forgiveness of notes receivable  related parties
    
    
    115
    
    
    
    115Purchase 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
    
    
    (1,707
    )
    
    
    (1,111
    )Other assets
    
    
    (435
    )
    
    
    (19
    )Accounts payable
    
    
    (162
    )
    
    
    (472
    )Accrued wages
    
    
    1,287
    
    
    
    (348
    )Accrued liabilities
    
    
    1,646
    
    
    
    297Other liabilities
    
    
    (11
    )
    
    
    (100
    )Deferred revenue
    
    
    5,825
    
    
    
    (267
    )Net cash used in operating activities
    
    
    (8,164
    )
    
    
    (14,078
    )Cash flows from investing activities:Purchases of securities available-for-sale
    
    
    (29,597
    )
    
    
    (1,975
    )Sales of securities available-for-sale
    
    
    5,919
    
    
    
    8,730Additions to property, plant, and equipment
    
    
    (1,664
    )
    
    
    (241
    )Additions to patents
    
    
    
    
    
    
    (123
    )Net cash (used in) provided by investing activities
    
    
    (25,342
    )
    
    
    6,391Cash flows from financing activities:Net proceeds from the issuance of common stock in public offering
    
    
    47,367
    
    
    
    Net 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
    
    
    3,982
    
    
    
    110Payments under loan facilities
    
    
    
    
    
    
    (3,080
    )Conversion of debt
    
    
    
    
    
    
    5Net cash provided by (used in) financing activities
    
    
    56,394
    
    
    
    (2,965
    )Net increase (decrease) in cash and cash equivalents
    
    
    22,888
    
    
    
    (10,652
    )Cash and cash equivalents, beginning of the period
    
    
    19,519
    
    
    
    16,817Cash and cash equivalents, end of the period
    
    $
    42,407
    
    
    $
    6,165Supplementary information:Common stock issued in settlement of accrued wages and liabilities
    
    $
    729
    
    
    $
    
 See accompanying notes to condensed financial statements.
 5




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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
  6




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Adoption of FAS 123R
  (in
thousands, except for per share data):
 Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2006
    
    June 30, 2006Research and development
    
    $
    325
    
    
    $
    645General and administrative
    
    
    588
    
    
    
    943Effect on net loss
    
    $
    913
    
    
    $
    1,588Effect 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
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2005
    
    
    June 30, 2005Net loss, as reported
    
    $
    (5,950
    )
    
    $
    (13,960
    )Add: Stock-based employee compensation expense included in net loss, as reported
    
    
    135
    
    
    
    321Deduct: Stock-based employee compensation expense determined under fair value
method for all awards
    
    
    (606
    )
    
    
    (1,478
    )Pro forma net loss
    
    $
    (6,421
    )
    
    $
    (15,117
    )Loss per share:Basic and diluted net loss per common share, as reported
    
    $
    (0.14
    )
    
    $
    (0.34
    )Basic and diluted pro forma net loss per common share
    
    $
    (0.15
    )
    
    $
    (0.36
    )
  7




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##### Table of Contents



Valuation Assumptions
  Three Months Ended June 30,
    
    Six Months Ended June 30,2006
    
    2005
    
    2006
    
    2005Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Risk-free interest rate
    
    
    5.00
    %
    
    
    4.00
    %
    
    
    4.71
    %
    
    
    3.72
    %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
    
    
    965,375
    
    
    $
    5.14Options exercised
    
    
    (316,947
    )
    
    $
    2.49Options cancelled
    
    
    (16,466
    )
    
    $
    3.04Options outstanding at March 31, 2006
    
    
    6,411,745
    
    
    $
    4.26
    
    
    
    7.53
    
    
    $
    22,489Options granted
    
    
    409,488
    
    
    $
    4.71Options exercised
    
    
    (198,029
    )
    
    $
    2.35Options cancelled
    
    
    (115,543
    )
    
    $
    3.66Options outstanding at June 30, 2006
    
    
    6,507,661
    
    
    $
    4.35
    
    
    
    7.45
    
    
    $
    15,676Options exercisable at June 30, 2006
    
    
    3,626,169
    
    
    $
    5.00
    
    
    
    6.65
    
    
    $
    9,306
   Options OutstandingWeighted
    
    
    
    
    
    Options ExercisableAverage
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Remaining
    
    Average
    
    Number
    
    AverageExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$    1.62
    
    
    
    
    
    $
    1.62
    
    
    
    300,000
    
    
    
    9.01
    
    
    $
    1.62
    
    
    
    
    
    
    $
    $    1.86
    
    
    
    
    
    $
    2.10
    
    
    
    2,925,401
    
    
    
    6.62
    
    
    $
    2.10
    
    
    
    2,082,673
    
    
    $
    2.10$    2.34
    
    
    
    
    
    $
    4.26
    
    
    
    1,345,656
    
    
    
    7.63
    
    
    $
    3.71
    
    
    
    836,469
    
    
    $
    3.86$    4.30
    
    
    
    
    
    $
    5.06
    
    
    
    1,185,875
    
    
    
    9.49
    
    
    $
    4.78
    
    
    
    196,083
    
    
    $
    4.75$    5.15
    
    
    
    
    
    $
    155.88
    
    
    
    750,396
    
    
    
    6.51
    
    
    $
    14.66
    
    
    
    510,611
    
    
    $
    18.70$187.50
    
    
    
    
    
    $
    187.50
    
    
    
    333
    
    
    
    4.24
    
    
    $
    187.50
    
    
    
    333
    
    
    $
    187.50$    1.62
    
    
    
    
    
    $
    187.50
    
    
    
    6,507,661
    
    
    
    7.45
    
    
    $
    4.35
    
    
    
    3,626,169
    
    
    $
    5.00
 8




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4. Cash, Cash Equivalents and Securities Available-for-Sale
   Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedJune 30, 2006
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueCommercial paper
    
    $
    53,968
    
    
    $
    92
    
    
    $
    
    
    
    $
    54,060Government notes
    
    
    30,000
    
    
    
    
    
    
    
    
    
    
    
    30,000Corporate notes
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    4,000Cash and money market funds
    
    
    4,117
    
    
    
    
    
    
    
    
    
    
    
    4,117$
    92,085
    
    
    $
    92
    
    
    $
    
    
    
    $
    92,177Classified as:Cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    42,407Short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,770$
    92,177
 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    19,519Short-term investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,173$
    45,692
  June 30, 2006
    
    
    December 31, 2005Amortized
    
    
    Estimated
    
    
    Amortized
    
    
    EstimatedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueMature in less than one year
    
    $
    53,968
    
    
    $
    54,060
    
    
    $
    16,361
    
    
    $
    16,539Mature in one to three years
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    995Mature in over three years
    
    
    34,000
    
    
    
    34,000
    
    
    
    25,000
    
    
    
    25,000$
    87,968
    
    
    $
    88,060
    
    
    $
    42,361
    
    
    $
    42,534
  9




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##### Table of Contents



5. Loss per Share
   June 30, 2006
    
    June 30, 2005Total stock options outstanding
    
    
    6,508
    
    
    
    6,236Warrants
    
    
    10,530
    
    
    
    5,584
 6. Collaboration with GlaxoSmithKline
     7. Public Offering of Common Stock
  10




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##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Statements in this Quarterly Report 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. The 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. For example, most drug candidates do not become approved
drugs. The development of Sirna-027 and Sirna-034 as well as Sirnas other programs are still at a
relatively early stage. All of these programs, and Sirnas ability to obtain milestone and royalty
payments for them, are subject to significant risks and unknowns, are highly contingent upon future
successes, and require significant funding. In addition, patent applications may not result in
issued patents, and issued patents may not be enforceable or could be invalidated. Other risks and
uncertainties include, among others, Sirnas early stage of development and short operating
history, Sirnas history and expectation of losses and need to raise capital, Sirnas need to
obtain clinical validation and regulatory approval for Sirna-027, Sirna-034 and Sirnas other
product candidates, any of which could have negative results, Sirnas need to engage collaborators,
Sirnas need to obtain and protect intellectual property, and the risk of third-party patent
infringement claims. 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. 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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RNA Interference Background
  i.e
 in vivo
  12




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##### Table of Contents



Our Product Candidate Programs
  Age-Related Macular Degeneration (AMD)
   Chronic Hepatitis
  Respiratory Diseases
  13




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##### Table of Contents



Dermatology
  Huntingtons Disease
  Type 2 Diabetes
  Our Patents and Proprietary Technology
     14




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##### Table of Contents



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, Hairless, PTP-1B,
HD, HCV, RSV and other viruses)
    
    >135 patent applications
    
    1 issued (US), 5
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
 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.
  15




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Licensing, Process Development and Pilot Manufacturing
  Critical Accounting Policies and Estimates
  Revenue Recognition
  Employee Stock-Based CompensationAdoption of FAS 123R
     16




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Results of Operations for the Three and Six Months Ended June 30, 2006 and 2005
 Revenues
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Contract revenues Allergan
    
    $
    417
    
    
    $
    
    
    
    $
    834
    
    
    $
    GSK
    
    
    435
    
    
    
    
    
    
    
    435
    
    
    
    Other
    
    
    
    
    
    
    51
    
    
    
    9
    
    
    
    94852
    
    
    
    51
    
    
    
    1,278
    
    
    
    94Contract revenues  manufacturingArchemix
    
    
    
    
    
    
    1,477
    
    
    
    
    
    
    
    1,942Total revenues
    
    $
    852
    
    
    $
    1,528
    
    
    $
    1,278
    
    
    $
    2,036
  Expenses
 Research and development
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Salaries and benefits
    
    $
    2,062
    
    
    $
    2,020
    
    
    $
    3,978
    
    
    $
    4,198Chemicals and supplies
    
    
    938
    
    
    
    651
    
    
    
    1,694
    
    
    
    1,556Outside services
    
    
    1,388
    
    
    
    1,251
    
    
    
    1,932
    
    
    
    1,802Fair value of stock options granted to Scientific Advisory Board
    
    
    
    
    
    
    
    
    
    
    384
    
    
    
    FAS 123R employee stock-based compensation
    
    
    325
    
    
    
    
    
    
    
    645
    
    
    
    Depreciation
    
    
    323
    
    
    
    297
    
    
    
    616
    
    
    
    592License fees
    
    
    567
    
    
    
    50
    
    
    
    825
    
    
    
    1,291All other
    
    
    1,583
    
    
    
    511
    
    
    
    2,752
    
    
    
    1,445Total research and development expenses
    
    $
    7,186
    
    
    $
    4,780
    
    
    $
    12,826
    
    
    $
    10,884Average research and development staffing
    
    
    57
    
    
    
    61
    
    
    
    55
    
    
    
    63
  17




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Age-related Macular Degeneration (AMD)
    
    $
    100
    
    
    $
    695
    
    
    $
    231
    
    
    $
    1,098Chronic Hepatitis
    
    
    1,737
    
    
    
    393
    
    
    
    2,435
    
    
    
    938Asthma
    
    
    393
    
    
    
    353
    
    
    
    788
    
    
    
    631Hair removal
    
    
    358
    
    
    
    597
    
    
    
    763
    
    
    
    917Other RNAi programs and RNAi technology development
    
    
    871
    
    
    
    638
    
    
    
    1,916
    
    
    
    2,644Total project expenses
    
    $
    3,459
    
    
    $
    2,676
    
    
    $
    6,133
    
    
    $
    6,228
  General and administrative
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Salaries and benefits
    
    $
    1,131
    
    
    $
    493
    
    
    $
    2,273
    
    
    $
    1,454Patent and amortization
    
    
    853
    
    
    
    590
    
    
    
    1,645
    
    
    
    1,142FAS 123R employee stock-based compensation
    
    
    588
    
    
    
    
    
    
    
    943
    
    
    
    All other
    
    
    1,921
    
    
    
    467
    
    
    
    3,013
    
    
    
    1,124Total general and administrative expenses
    
    $
    4,493
    
    
    $
    1,550
    
    
    $
    7,874
    
    
    $
    3,720Average general and administrative staffing
    
    
    16
    
    
    
    7
    
    
    
    16
    
    
    
    14
  Interest and other income
  Liquidity and Capital Resources
  18




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
    
    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.
   
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 Item 4. CONTROLS AND PROCEDURES
 Controls Evaluation and Related CEO and CFO Certifications
  19




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PART II. OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
 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.
   Our product development programs are based on novel technologies, are inherently risky and may
never lead to marketable products.
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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.
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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;
    
    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.
    22




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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.
  
    
    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.
  23




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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.
  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.
  24




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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.
  Our common stock has a history of volatility, which could impair your investment.
  
    
    our ability to raise additional funds;
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##### Table of Contents




    
    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.
  26




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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.
  Both our charter documents and Delaware law have anti-takeover provisions that may discourage
transactions involving actual or potential changes of control at premium prices.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1)
    
    The election of directors to serve for the ensuing three years until the
expiration of their terms in 2009 and until their respective successors shall be
elected and qualified.2)
    
    Proposal to approve amendments to the Companys 2005 Performance
Incentive Plan.3)
    
    Proposal to ratify the appointment of Ernst & Young LLP as the Companys
independent registered public accounting firm for the year fiscal year ended
December 31, 2006.
  Proposal 1
    
    Director
    
    For
    
    WithheldMr. Jeremy L. Curnock Cook
    
    
    54,761,693
    
    
    
    640,844Dr. Dennis H. Langer
    
    
    55,003,831
    
    
    
    398,706Mr. Lutz Lingnau
    
    
    55,000,651
    
    
    
    401,886Mr. Howard W. Robin
    
    
    55,002,489
    
    
    
    400,048
 Proposal 2
    
    For
    
    
    Against
    
    
    Abstained34,276,018
    
    
    
    4,341,456
    
    
    
    209,821
 Proposal 3
    
    For
    
    
    Against
    
    
    Abstained54,928,565
    
    
    
    344,473
    
    
    
    129,498
 28




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Item 6. EXHIBITS
 (a) Exhibits
 Number
    
    Description3.1
    
    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)10.1*
    
    2005 Performance Incentive Plan, as amended through June 14, 200610.2*
    
    Form and Terms and Conditions of Incentive Stock Option to 2005 Performance Incentive Plan10.3*
    
    Form and Terms and Conditions of Nonqualified Stock Option to 2005 Performance Incentive Plan10.4*
    
    Form and Notice of Stock Option Grant to 2005 Performance Incentive Plan31.1*
    
    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. 
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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