SPECIAL MEETING OF STOCKHOLDERS

MERGER PROPOSED — YOUR VOTE IS VERY IMPORTANT

 

Dear Sirna Therapeutics, Inc. stockholder:

 

 

 

 

 

[ • ], 2006

[ • ], local time

Grand Hyatt San Francisco

345 Stockton Street

San Francisco, CA 94108

 

 

 

 

 

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held on [ • ], 2006

 

To the Stockholders of Sirna Therapeutics, Inc.:

 

 

 

 

 

 

 

 

 

 

San Francisco, California

[ • ], 2006

 

 

 

 

Although we encourage you to read the enclosed proxy statement in its entirety, we include this question and answer section for your convenience and to briefly address some commonly asked questions about the proposed merger the special meeting of Sirna stockholders. In this proxy statement, the terms “we,” “us,” “our,” “our company,” and “Sirna” refer to Sirna Therapeutics, Inc. and the term “Merck” refers to Merck & Co., Inc.

 

 

 

 

This summary, together with the preceding question and answer section, highlights selected information from this proxy statement and may not contain all of the information that is important to you. To understand the merger fully and for a more complete description of the legal terms of the merger, you should read carefully this entire proxy statement and the documents we refer to herein. See “Where You Can Find More Information” on page 46. The merger agreement is attached as Annex A to this proxy statement. We encourage you to read the merger agreement as it is the legal document that governs the merger.

 

Sirna Therapeutics, Inc.

 

We are focused on developing therapeutics based on RNA interference (RNAi). We are using our expertise in nucleic acids to design, stabilize, manufacture and deliver short interfering nucleic acids (siRNAs and siNAs) that selectively activate the process of RNA interference. We are in research, preclinical and/or clinical development with product candidates in the following areas: Age-related Macular Degeneration (AMD), chronic hepatitis, dermatology (initially permanent hair removal), asthma, chronic obstructive pulmonary disease, respiratory syncytial virus, Huntington’s disease and diabetes. We are evaluating disease targets and indications for the development of RNA interference-based therapeutics on our own and in collaboration with academic research institutions and commercial enterprises such as our collaboration in AMD and other ocular indications with Allergan, Inc., our collaboration in respiratory diseases with GlaxoSmithKline and our collaboration in Huntington’s disease with Targeted Genetics. In addition, we manufacture and sell cGMP grade oligonucleotides to other companies under contract manufacturing agreements.

 

Since our inception as Ribozyme Pharmaceuticals, Inc. in 1992, we have dedicated ourselves to engineering RNA-based molecules for therapeutic and diagnostic purposes. In 2001, we began to study RNAi in greater detail and in 2003, based on scientific advancements and the potential of the field, we directed our research and development activities entirely to RNAi technology. Concurrent with our redirection, we changed our name to Sirna Therapeutics, Inc. Our principal executive offices are located at 185 Berry Street, Suite 6504, San Francisco, California 94107. Our telephone number is (415) 512-7200.

Merck & Co., Inc.

 

Merck is a global research-driven pharmaceutical company that discovers, develops, manufactures and markets a broad range of innovative products to improve human and animal health, directly and through its joint ventures. Merck sells its products primarily to drug wholesalers and retailers, hospitals, clinics, government agencies and managed health care providers such as health maintenance organizations and other institutions. Merck’s professional representatives communicate the effectiveness, safety and value of its products to health care professionals in private practice, group practices and managed care organizations.

 

Merck was incorporated in the State of New Jersey in 1927 and maintains its principal offices at Whitehouse Station, New Jersey. Its address is P.O. Box 100, One Merck Drive, Whitehouse Station, New Jersey 08889-0100, and its telephone number is (908) 423-1000.

Spinnaker Acquisition Corp.

 

Spinnaker Acquisition Corp. is a Delaware corporation and a wholly-owned subsidiary of Merck. Spinnaker Acquisition Corp. was organized solely for the purpose of entering into the merger agreement with Sirna and completing the merger and has not conducted any business operations.

 

You are being asked to vote to adopt a merger agreement pursuant to which Sirna will be acquired by Merck.

 

If the merger is completed, you will receive the merger consideration of $13.00 in cash, without interest, in exchange for each share of our common stock that you own. After the merger is completed, you will have the right to receive the merger consideration but you will no longer have any rights as a Sirna stockholder and will have no rights as a Merck stockholder. Our stockholders will receive the merger consideration after exchanging their Sirna stock certificates in accordance with the instructions contained in the letter of transmittal to be sent to our stockholders shortly after completion of the merger. See “The Merger — Merger Consideration” on page 26.

 

Our board of directors has unanimously:

 

 

Our board of directors recommends that our stockholders vote FOR adoption of the merger agreement and FOR the adjournment proposal.

 

See “The Merger — Reasons for the Merger and Board of Directors’ Recommendation” on page 16.

 

Our board of directors carefully considered the terms of the proposed transaction and the strategic alternatives available to Sirna in deciding to enter into the merger agreement and to recommend that stockholders vote FOR the adoption of the merger agreement. Among the factors considered by our board of directors were:

 

 

See “The Merger — Reasons for the Merger and Board of Directors’ Recommendation” on page 16.

 

Each stock option to purchase our common stock which has an exercise price of less than $13.00 per share that is outstanding immediately prior to the effective time of the merger (whether vested or unvested) will be cancelled in exchange for the right to receive a cash payment, without interest, in an amount equal to the difference between $13.00 and the exercise price of the option. We have agreed to use our commercially reasonable efforts to cause all holders of our warrants to fully exercise the warrants prior to the merger. Each warrant to purchase our common stock that is outstanding immediately prior to the effective time of the merger will receive a cash payment in accordance with its terms. See “The Merger — Effect on Awards Under Sirna’s Stock Plans and Other Convertible Securities” on page 27.

 

Our common stock is listed on The NASDAQ Global Market under the symbol “RNAI.” On October 27, 2006, the last full trading day prior to the public announcement of the proposed merger, our common stock closed at $6.50 on The NASDAQ Global Market. On [ • ], 2006, the last full trading day prior to the date of this proxy statement, our common stock closed at $[ • ] on The NASDAQ Global Market. See “Market Price and Dividend Data” on page 9.

 

The exchange of shares of our common stock for cash in the merger generally will be a taxable transaction to our stockholders for United States federal income tax purposes. A U.S. holder who exchanges shares of our common stock in the merger generally will recognize capital gain or capital loss equal to the difference between the cash received and such stockholder’s adjusted tax basis in the shares surrendered. See “The Merger — Material United States Federal Income Tax Consequences of the Merger” on page 27 for a more complete discussion of the United States federal income tax consequences of the merger. Tax matters can be complicated, and the tax consequences of the merger to you will depend on the facts of your own situation. Holders of our common stock are strongly urged to consult their tax advisors as to the specific tax consequences to them of the merger.

 

On October 30, 2006, Goldman, Sachs & Co., which we refer to in this proxy statement as Goldman Sachs, rendered its oral opinion, subsequently confirmed by delivery of its written opinion, dated October 30, 2006, to Sirna’s board of directors that, as of the date of its opinion and based upon and subject to the factors and assumptions set forth in the opinion, the $13.00 per share in cash to be received by the holders of the outstanding shares of Sirna common stock pursuant to the merger agreement was fair from a financial point of view to such holders.

 

The full text of the written opinion of Goldman Sachs, dated October 30, 2006, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex C to this proxy statement. Goldman Sachs provided its opinion for the information and assistance of Sirna’s board of directors in connection with its consideration of the merger. Goldman Sachs’ opinion is not a recommendation as to how any holder of Sirna common stock should vote with respect to the merger. Pursuant to an engagement letter between Sirna and Goldman Sachs, Sirna has agreed to pay Goldman Sachs a transaction fee of approximately $13.5 million, the principal portion of which is payable upon consummation of the merger.

 

See “The Merger — Opinion of Sirna’s Financial Advisor” on page 17.

 

Time, Date and Place.  A special meeting of our stockholders will be held on [ • ], 2006, at the Grand Hyatt San Francisco, 345 Stockton Street, San Francisco, California 94108 at [ • ], local time, to consider and vote upon a proposal to adopt the merger agreement.

 

Record Date and Voting Power.  You are entitled to vote at the special meeting if you owned shares of our common stock at the close of business on November 8, 2006, the record date for the special meeting. You will have one vote at the special meeting for each share of our common stock you owned at the close of business on the record date. On the close of business on the record date, there were 73,410,656 shares of our common stock outstanding and entitled to be voted at the special meeting.

 

Required Vote.  The adoption of the merger agreement requires the affirmative vote of a majority of the shares of our common stock outstanding at the close of business on the record date. The approval of the adjournment proposal requires the affirmative vote of a majority of the votes cast at the special meeting.

 

Share Ownership of Directors and Management.  Our directors and executive officers and their affiliates own approximately 36% of the shares entitled to vote at the special meeting.

 

See “Information about the Special Meeting” on page 10.

 

When considering the recommendation by our board of directors in favor of the merger, you should be aware that members of our board of directors and our executive officers have interests in the merger that are different from, or in addition to, yours, including, among others:

 

 

See “The Merger — Interests of Sirna’s Directors and Management in the Merger” on page 22.

 

 

Each party’s obligation to effect the merger is subject to the satisfaction or waiver of various conditions, which include the following:

 

Merck and we are obligated to effect the merger only if the following conditions are satisfied or waived:

 

 

In addition, Merck will not be obligated to effect the merger unless the following additional conditions are satisfied or waived:

 

 

In addition, we will not be obligated to effect the merger unless the representations and warranties of Merck and Spinnaker Acquisition Corp. are true and correct in all material respects as of the closing date of the merger with the same effect as though such representations and warranties had been made on and as of such date (except to the extent that any representation and warranty expressly speaks as of an earlier date, in which case the representation and warranty must be true and correct as of the earlier date).

 

See “The Merger Agreement and the Voting Agreements — Conditions to Completion of the Merger” on page 30.

 

Merck and we can terminate the merger agreement under certain circumstances, including:

 

 

 

 

 

 

See “The Merger Agreement and the Voting Agreements — Termination” on page 33.

 

We have agreed that neither we nor any of our subsidiaries nor any of our or our subsidiaries’ officers and directors will, and that we will not permit our or our subsidiaries’ employees, agents and representatives on our behalf to:

 

 

At any time prior to obtaining our stockholder approval for adoption of the merger agreement, we may nevertheless take the following actions in response to a bona fide acquisition proposal that did not result from a breach of our covenants relating to our consideration of alternative acquisition proposals, if our board of directors determines in good faith, after consultation with its outside legal and financial advisors, that the acquisition proposal constitutes, or is reasonably likely to lead to, an acquisition proposal that, if accepted, is reasonably likely to be consummated, and if consummated, would result in a more favorable transaction (taking into account legal, financial, regulatory and other aspects of such acquisition proposal, the identity of the third party making such acquisition proposal, the terms and conditions of the acquisition proposal and the anticipated timing and prospects for completion of such acquisition proposal) and after consultation with its outside legal advisor, that failure to do so would result in a breach of our board of directors’ fiduciary obligations under applicable law:

 

 

See “The Merger Agreement and the Voting Agreements — No Solicitation” on page 31.

 

The merger agreement provides that regardless of whether the merger is completed, all fees and expenses incurred by the parties shall be borne by the party incurring such fees and expenses. The merger agreement also requires that we pay Merck a termination fee of $42,100,000 under certain conditions. See “The Merger Agreement

and the Voting Agreements — Expenses” on page 38 and “The Merger Agreement and the Voting Agreements — Termination Fee” on page 38.

 

In connection with the merger agreement, Merck entered into voting agreements with certain of our stockholders that owned in the aggregate approximately 36% of our outstanding common stock as of October 30, 2006 or, if the stockholders fully exercised each of the warrants they hold, approximately 41% of our outstanding common stock as of October 30, 2006. The stockholders entering into these voting agreements include Howard Robin, our President and Chief Executive Officer; James Niedel, one of our directors; Sprout Capital IX, L.P., Sprout Entrepreneurs Fund, L.P. and Sprout IX Plan Investors, L.P., three funds affiliated with Dr. Niedel; Oxford Bioscience Partners IV L.P. and mRNA Fund II L.P., two funds affiliated with our director Douglas Fambrough; and Venrock Associates, Venrock Associates III, L.P. and Venrock Entrepreneurs Fund III, L.P., three funds affiliated with our director Bryan Roberts. Among other things, the voting agreements provide that the stockholder will vote all shares of our capital stock that such person beneficially owns in favor of the approval of the merger and the approval and adoption of the merger agreement and against any alternative proposal, and that the stockholder will not transfer any shares owned or grant any proxies or powers of attorney with respect to any shares in contravention of the obligations under the voting agreements, or subject any shares owned to any pledges, liens or other encumbrances or arrangements. In addition, the voting agreements provide that the stockholder will pay to Merck 50% of such stockholder’s profit above $13.00 generally in the event of (i) the termination of the merger agreement in circumstances under which we are or may become obligated to pay Merck a termination fee and (ii) the consummation of an alternative transaction (or a merger with Merck at a price greater than $13.00) within one year of such termination of the merger agreement. The stockholders signing the voting agreements granted a proxy and power of attorney with respect to any of our shares that they owned with respect to such matters to certain officers of Merck. Except with respect to the obligation to pay a percentage of the profits to Merck, the voting agreements terminate on the earlier of the effective date of the merger and the date that the merger agreement has been terminated. See “The Merger Agreement and the Voting Agreements — Voting Agreements” on page 40.

 

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 prohibits us from completing the merger until we have furnished certain information and materials to the Antitrust Division of the Department of Justice and the Federal Trade Commission and the required waiting period has ended. See “The Merger — Regulatory Matters” on page 29.

 

Our stockholders have the right under Delaware law to dissent from the adoption of the merger and to exercise appraisal rights and to receive payment in cash for the fair value of their shares of our common stock determined in accordance with Delaware law. The fair value of shares of our common stock as determined in accordance with Delaware law may be more or less than the merger consideration to be paid to non-dissenting Sirna stockholders in the merger. To preserve their rights, stockholders who wish to exercise appraisal rights must not vote in favor of the adoption of the merger agreement and must follow specific procedures. Dissenting Sirna stockholders must precisely follow these specific procedures to exercise appraisal rights, or their appraisal rights may be lost. These procedures are described in this proxy statement, and the provisions of Delaware law that grant appraisal rights and govern such procedures are attached as Annex D. You are encouraged to read these provisions carefully and in their entirety. See “The Merger — Appraisal Rights” on page 24.

 

Following the announcement of the merger agreement, several putative class action lawsuits have been filed challenging aspects of the proposed merger. The lawsuits, all filed in the Superior Court of California, County of San Francisco, name Sirna and all eight of our directors as defendants. The plaintiffs assert causes of action for breach of fiduciary duty and self-dealing, and causes of action of aiding and abetting breach of fiduciary duty. In the complaints, the plaintiffs allege generally that the proposed merger resulted from unfair dealing and the merger

consideration of $13.00 was an inadequate purchase price. The complaints seek certification as a class action and various forms of declaratory and injunctive relief, including an injunction against consummation of the merger or, in the alternative, rescission of the transaction and imposition of a constructive trust. The defendants deny any wrongdoing, believe that these actions are without merit and intend to defend the claims vigorously. See “The Merger — Litigation Relating to the Merger” on page 29.

 

Our common stock is traded on The NASDAQ Global Market under the symbol “RNAI.” The following table shows, for the periods indicated, the range of high and low bids for our common stock as quoted on The NASDAQ Global Market.

 

 

The following table sets forth the closing per share sales price of our common stock, as reported on The NASDAQ Global Market on October 27, 2006, the last full trading day before the public announcement of the proposed merger, and on [ • ], 2006, the latest practicable trading day before the printing of this proxy statement:

 

 

We have never declared or paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Following the merger there will be no further market for our common stock.

 

This proxy statement, and the documents to which we refer you in this proxy statement, contain “forward-looking statements,” as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that are based on our current expectations, assumptions, estimates and projections about our company and our industry. The forward-looking statements are subject to various risks and uncertainties. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should” and similar expressions. Those statements include, among other things, the risk that the merger may not be completed in a timely manner, if at all, and other risks detailed in our current filings with the United States Securities and Exchange Commission (referred to in this proxy statement as the SEC), including our most recent filings on Form 10-Q or Form 10-K, which discuss these and other important risk factors concerning our operations. We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe that the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and, as a result, the forward-looking statements based on those assumptions could be incorrect. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. Except as may be required by law, we do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

 

This proxy statement is being furnished to you in connection with the solicitation of proxies by our board of directors in connection with our special meeting of stockholders.

 

We will hold the special meeting of Sirna stockholders at Grand Hyatt San Francisco, 345 Stockton Street, San Francisco, CA 94108 at [ • ], local time on [ • ], 2006.

 

At the special meeting, Sirna stockholders will be asked to vote upon the following proposals that will be presented:

 

 

Sirna stockholders will also be asked to consider any other business that may properly come before the special meeting or any adjournment of the special meeting. We currently do not contemplate that any other matters will be considered at the special meeting.

 

Stockholders of record as of the record date, November 8, 2006, are entitled to notice of and to vote at the special meeting. As of the record date, 73,410,656 shares of our common stock were issued and outstanding. Each share of common stock outstanding as of the record date will be entitled to one vote and stockholders may vote in person or by proxy.

 

The proposal to adopt the merger agreement requires the affirmative vote of a majority of our outstanding shares to be approved by our stockholders. The adjournment proposal requires a majority of the votes cast in person or by proxy at the special meeting by the holders of shares of our common stock entitled to vote on that proposal.

 

Simultaneously with the execution and delivery of the merger agreement, certain of our stockholders that owned in the aggregate approximately 36% of our outstanding common stock as of October 30, 2006 or, if the stockholders fully exercised each of the warrants they hold, approximately 41% of our outstanding common stock as of October 30, 2006 entered into voting agreements with Merck. The stockholders entering into these voting agreements include Howard Robin, our President and Chief Executive Officer; James Niedel, one of our directors; Sprout Capital IX, L.P., Sprout Entrepreneurs Fund, L.P. and Sprout IX Plan Investors, L.P., three funds affiliated with Dr. Niedel; Oxford Bioscience Partners IV L.P. and mRNA Fund II L.P., two funds affiliated with our director Douglas Fambrough; and Venrock Associates, Venrock Associates III, L.P. and Venrock Entrepreneurs Fund III, L.P., three funds affiliated with our director Bryan Roberts.

 

At the close of business on the record date, these stockholders owned and were entitled to vote 26,159,391 shares of our common stock, which represented approximately 36% of the shares of our common stock outstanding on that date.

 

The stockholders signing the voting agreements agreed, among other things, that the stockholder would vote all shares of our capital stock that such person beneficially owns in favor of the approval of the merger and the approval and adoption of the merger agreement and against any alternative proposal, and that the stockholder would not transfer any shares owned or grant any proxies or powers of attorney with respect to any shares in contravention of the obligations under the voting agreement, or subject any shares owned to any pledges, liens or other encumbrances or arrangements. In addition, the voting agreements provide that the stockholder will pay to Merck 50% of such stockholder’s profit above $13.00 generally in the event of (i) the termination of the merger agreement in circumstances under which we are or may become obligated to pay Merck a termination fee and (ii) the consummation of an alternative transaction (or a merger with Merck at a price greater than $13.00) within one year of such termination of the merger agreement. The stockholders signing the voting agreements granted a proxy and power of attorney with respect to any of our shares that they owned with respect to such matters to certain officers of Merck. Except with respect to the obligation to pay a percentage of the profits to Merck, the voting agreements terminate on the earlier of the effective date of the merger and the date that the merger agreement has been terminated.

 

Mail.  You may vote by mail by signing the enclosed proxy card and mailing it in the enclosed, prepaid and addressed envelope.

 

Telephone.  You may vote by telephone by following the instructions set forth on the proxy card.

 

Internet.  You may vote over the Internet by following the instructions set forth on the proxy card.

 

In person at the meeting.  Written ballots will be passed out to anyone who is eligible and wants to vote at the meeting. If you hold your shares in “street name” (i.e., through a broker, bank or other nominee), you must request a legal proxy from your broker or other nominee before the meeting to vote at the meeting.

 

You have the option to vote over the Internet or by telephone. The Internet and telephone voting procedures are designed to authenticate stockholders’ identities, to allow stockholders to provide their voting instructions, and to confirm that their instructions have been recorded properly. We believe the procedures that have been put in place are consistent with the requirements of applicable law.

 

Stockholders of Record

 

If you are listed as a stockholder in our official records (which are maintained by our transfer agent), you are a stockholder of record. For example, if you hold a certificate for our stock issued in your name, you are a stockholder of record. Any stockholder of record giving a proxy pursuant to this solicitation has the power to revoke it at any time before it is voted. It may be revoked by:

 

 

If you choose any of the first three methods, you must submit the notice of revocation, the new proxy or the proxy instruction to us before the special meeting.

Holders in “Street Name”

 

If you hold a beneficial interest in shares of our common stock through a broker, bank or other nominee, you are called a holder in “street name.” If you hold in “street name”, you must contact the broker, bank or other nominee through which you hold a beneficial interest in shares of our common stock in order to determine how to revoke any proxies the record holder submitted on your behalf.

 

The presence in person or by proxy of the holders of at least a majority of the outstanding shares of our common stock entitled to vote at the special meeting is necessary to establish a quorum for the transaction of business. Votes cast by proxy or in person at the special meeting will be tabulated by the inspector of elections. The inspector of elections will also determine whether or not a quorum is present. Abstentions are included in the number of shares present or represented at the special meeting.

 

Shares held in “street name” by brokers or nominees who indicate on their proxies that they do not have discretionary authority to vote such shares as to a particular matter, referred to as “broker non-votes,” and shares which abstain from voting as to a particular matter, will not be voted in favor of such matters. The proposal to adopt the merger agreement requires the affirmative vote of a majority of our outstanding shares to be approved by our stockholders. Accordingly, abstentions and broker non-votes will have the effect of a vote against the proposal to adopt the merger agreement. The adjournment proposal requires a majority of the votes cast in person or by proxy at the special meeting by the holders of shares of our common stock entitled to vote on that proposal. For the purpose of determining whether the adjournment proposal has received the requisite number of votes, abstentions and broker non-votes will have no effect on the outcome of the proposal. In addition, assuming that there is a quorum established at the stockholder meeting, failing to vote will have no effect on the outcome of the adjournment proposal. Broker non-votes will be counted for purposes of determining the absence or presence of a quorum. We encourage all stockholders whose shares are held in “street name” to provide their brokers with instructions on how to vote.

 

Whether or not a quorum is established at a stockholder meeting, our bylaws permit the presiding officer at the meeting or the stockholders present in person or represented by proxy to adjourn the meeting from time to time by the vote of a majority of the shares represented at that meeting without notice. The DGCL requires that if a meeting is adjourned for more than 30 days after the date for which the meeting was originally noticed, or if a new record

date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned meeting must be given to the stockholders.

 

We will bear the cost of soliciting proxies. In addition, we may reimburse brokerage firms and other persons representing beneficial owners of shares for their expenses in forwarding solicitation material to such beneficial owners. Solicitation of proxies by mail may be supplemented by telephone, facsimile, e-mail or personal solicitation by our directors, officers or regular employees. We will not pay any additional compensation to such persons for such services. We have retained The Altman Group to assist in distribution of proxy materials and solicitation of votes. We will pay The Altman Group $10,000 for its services plus reimbursement for certain out-of-pocket expenses.

 

Our board of directors unanimously recommends that you vote FOR the adoption of the merger agreement and FOR the adjournment proposal.

 

You may vote in person by ballot at the special meeting if you own shares of Sirna common stock registered in your own name. If you bring a legal proxy from your broker, bank or other nominee and present it at the special meeting, you also may vote in person at the special meeting if your shares of Sirna common stock are held in “street name” through a broker, bank or other nominee. You should contact the person responsible for your account to make such arrangements. Please note that stockholders may be asked to present photo identification for admittance to the special meeting.

 

If you have any questions about the proposals or how to vote or revoke a proxy, or if you wish to obtain additional copies of this document free of charge, you should contact:

 

The Altman Group

1200 Wall Street West 3rd Floor

Lyndhurst, New Jersey 07071

Phone: (201) 806-7300

 

or

 

Sirna Therapeutics, Inc.

185 Berry Street, Suite 6504

San Francisco, California 94107

Attention: Bharat M. Chowrira, Secretary

Phone: (415) 512-7200

 

This section of the proxy statement describes material aspects of the merger, including the merger agreement and the voting agreements. This summary may not contain all of the information that is important to you. You should carefully read this proxy statement, including the full text of the merger agreement and the voting agreements, which are attached as Annex A and Annex B, respectively, for a more complete understanding of the merger.

 

From time to time, our board of directors discusses with management our business strategy and our plans to achieve our business strategy. In light of our primary strategy of concentrating on the discovery and development of proprietary products and the substantial expenditures for research, development, testing, manufacturing, sales and marketing of pharmaceutical products, we determined that we would enter into partnerships, collaborations or alliances with pharmaceutical and biotechnology companies to develop RNAi-based therapeutics, especially for targets and in therapeutic areas where partners would bring us unique capabilities. We believed that engaging corporate partners and other third parties to help develop, manufacture and market our RNAi-based products would be desirable or necessary for our success and would allow us to share the risks and opportunities associated with developing RNAi-based products.

 

From early 2005 until the Spring of 2006, our management was exploring potential opportunities to collaborate or form partnerships with at least 26 other parties. In the Summer of 2006, we began more in-depth discussions with several companies regarding potential opportunities to collaborate or form partnerships.

 

During August and September 2006, we continued our discussions with several companies regarding potential collaborations or partnerships, including Merck. On September 20, 2006, we discussed with Merck a potential licensing transaction. On September 22, 2006, Merck made a verbal and written offer regarding its interest in acquiring us without indicating a valuation.

 

On September 24, 2006, our board of directors met to consider our alternatives. Representatives of Goldman Sachs and O’Melveny & Myers LLP also attended the meeting. At the meeting, our board of directors discussed the indication of interest from Merck to acquire us.

 

On September 27, 2006, Merck reiterated in writing its interest in an acquisition and provided a price range of $9 to $10 per share for such a transaction. On September 27, 2006, our board of directors met to consider the Merck proposal. Representatives of Goldman Sachs and O’Melveny & Myers also attended the meeting. Representatives of O’Melveny & Myers reviewed with our board of directors their fiduciary duties in the context of a business combination. At the meeting, our board of directors discussed the valuation proposed by Merck and a strategy to move forward with such a transaction.

 

On September 28, 2006, Goldman Sachs contacted other parties with whom we had been negotiating a collaboration or partnership alliance to notify them of the proposal that we received regarding an acquisition. We engaged in discussions with several parties, one of which made a written offer regarding its interest in acquiring us and provided a price range in excess of the range of the September 27 Merck offer. However, none of these discussions, including discussions with the party that made the written offer, resulted in a proposed transaction that our board of directors preferred to the transaction that we negotiated with Merck. On September 29, 2006, our board of directors met to receive an update from Goldman Sachs regarding our discussions with interested parties. Representatives of O’Melveny & Myers also attended the meeting.

 

On October 2, 2006, our board of directors met to consider various potential transactions. Representatives of Goldman Sachs and O’Melveny & Myers also attended the meeting. The board of directors authorized us to enter into confidentiality agreements or amendments to pre-existing confidentiality agreements, as the case may be, that were appropriate in connection with acquisition discussions with interested parties.

 

On October 5, 2006, we delivered a draft merger agreement to interested parties, including Merck. On October 9, 2006, we amended our existing confidentiality agreement with Merck to encompass our acquisition

discussions. We proceeded with the due diligence process and made available documentary due diligence materials regarding us.

 

On October 10, 2006, representatives of Sirna, Goldman Sachs and Merck met in our Boulder, Colorado facility for due diligence meetings.

 

On October 17, 2006, our board of directors met to discuss the progress on the various transactions that we were considering. Representatives of Goldman Sachs and O’Melveny & Myers also attended the meeting.

 

On October 18, 2006, we engaged Goldman Sachs to act as our financial advisor in connection with a possible acquisition transaction involving us.

 

Merck continued its due diligence investigation. On October 25, 2006, Merck submitted a revised offer with a per share price of $12.25 for the acquisition and its comments on the merger agreement that had been provided by us.

 

On October 25, 2006, our board of directors met to review the status of discussions with interested parties, including the revised proposal from Merck. Representatives of Goldman Sachs and O’Melveny & Myers also attended the meeting. Representatives of O’Melveny & Myers reviewed with our board of directors their fiduciary duties in the context of a business combination. Then, representatives of Goldman Sachs discussed with our board of directors the status of the negotiations with all interested parties and Merck’s revised offer. Our board of directors authorized management, legal counsel and our financial advisor to request revised proposals from interested parties, including Merck.

 

On October 26 and October 27, 2006, our advisors had meetings with Merck and its advisors and requested Merck to improve its offer. In response, Merck offered $13.00 per share on the condition that we would negotiate exclusively with Merck. We entered into an agreement with Merck on October 27, 2006 providing that we would negotiate exclusively with Merck until November 3, 2006.

 

On October 27, we provided Merck with a draft form of voting agreement.

 

From October 27, 2006 through October 30, 2006, members of our management and our legal and financial advisors negotiated the final terms of the merger agreement and the voting agreements with Merck and its advisors. On October 29, 2006, our board of directors met to receive an update from management and our advisors on the status of negotiations with Merck. Representatives of O’Melveny & Myers and Goldman Sachs also attended the meeting. Representatives of O’Melveny & Myers then summarized the material terms of the merger agreement and the voting agreements and open issues under these agreements, among other issues. A representative of Goldman Sachs then reviewed with our board of directors its financial analyses with respect to the proposed transaction. Our board of directors then discussed with management and our legal and financial advisors the next steps to be taken in connection with the transaction. Our board of directors posed questions to Mr. Robin, legal counsel and our financial advisors. After extensive discussion and deliberation, our board of directors agreed to reconvene for a meeting on October 30, 2006 to review the final proposal from Merck.

 

On October 30, 2006, our board of directors met with representatives of Goldman Sachs and O’Melveny & Myers. Representatives of O’Melveny & Myers then summarized the resolution of the open issues under the merger agreement and the voting agreements. A representative of Goldman Sachs then reviewed with our board of directors its financial analyses with respect to the proposed transaction. Following its presentation, Goldman Sachs delivered its oral opinion to our board of directors, which was later confirmed by a written opinion dated October 30, 2006, to the effect that, as of October 30, 2006 and based on and subject to the assumptions, qualifications and limitations set forth in its written opinion, the consideration of $13.00 in cash per share offered by Merck and to be received by the holders of our common stock pursuant to the merger agreement with Merck was fair from a financial point of view to those holders (see “The Merger — Opinion of Sirna’s Financial Advisor” on page 17). Following discussion of the final proposal and Goldman Sachs’ presentation, our board of directors determined to proceed with Merck’s proposal. Our board of directors then discussed with management, legal counsel and our financial advisors the next steps to be taken in connection with the execution and announcement of the transaction. After posing questions to Mr. Robin, legal counsel and our financial advisors, our board of directors unanimously: (1) determined that the merger and the other transactions contemplated by the merger agreement are fair to and in the best interests of us and our stockholders, (2) declared advisable the merger agreement, the merger and the other transactions

contemplated by the merger agreement, (3) approved and adopted the merger agreement and the voting agreements and (4) authorized execution of the merger agreement.

 

During the afternoon of October 30, 2006, after the close of regular hours trading of the United States securities markets, the parties executed the merger agreement and the voting agreements. Sirna and Merck issued a joint press release announcing the execution of the merger agreement.

 

Reasons for the Merger

 

In the course of reaching its decision to approve the merger and approve and adopt the merger agreement, our board of directors consulted with our senior management, legal counsel and financial advisor, reviewed a significant amount of information and considered a number of factors, including, among others, the following factors:

 

 

In the course of its deliberations, our board of directors also considered, among other things, the following positive factors:

 

 

In the course of its deliberations, our board of directors also considered, among other things, the following negative factors:

 

 

The preceding discussion of the information and factors considered by our board of directors is not, and is not intended to be, exhaustive. In light of the variety of factors considered in connection with its evaluation of the merger and the complexity of these matters, our board of directors did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weights to the various factors considered in reaching its determination. In addition, our board of directors did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of our board of directors, but rather, our board of directors conducted an overall analysis of the factors described above, including discussions with and questioning of our senior management and legal and financial advisors.

Board of Directors Recommendation

 

After careful consideration, our board of directors has unanimously determined that the merger and the other transactions contemplated by the merger agreement are fair to and in the best interests of us and our stockholders, has declared advisable the merger agreement, the merger and the other transactions contemplated by the merger agreement and has approved and adopted the merger agreement. Our board of directors unanimously recommends that our stockholders vote FOR the adoption of the merger agreement.

 

On October 30, 2006, Goldman Sachs rendered its oral opinion, subsequently confirmed by delivery of its written opinion, dated October 30, 2006, to our board of directors that, as of the date of its opinion and based upon and subject to the factors and assumptions set forth in the opinion, the $13.00 per share in cash to be received by the holders of the outstanding shares of our common stock pursuant to the merger agreement was fair from a financial point of view to such holders.

 

The full text of the written opinion of Goldman Sachs, dated October 30, 2006, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex C to this proxy statement. Goldman Sachs provided its opinion for the information and assistance of our board of directors in connection with its consideration of the merger. Goldman Sachs’ opinion is not a recommendation as to how any holder of our common stock should vote with respect to the merger.

 

In connection with rendering the opinion described above and performing its related financial analyses, Goldman Sachs reviewed, among other things:

 

 

 

Goldman Sachs also held discussions with members of our senior management regarding their assessment of the past and current business operations, financial condition and future prospects of Sirna.

 

In addition, Goldman Sachs:

 

 

Goldman Sachs relied upon the accuracy and completeness of all of the financial, accounting, legal, tax and other information discussed with or reviewed by it and assumed such accuracy and completeness for purposes of rendering its opinion. In addition, Goldman Sachs did not make an independent evaluation or appraisal of our assets and liabilities (including any contingent, derivative or off-balance sheet assets and liabilities) or any of our subsidiaries and Goldman Sachs was not furnished with any such evaluation or appraisal. Goldman Sachs’ opinion does not address our underlying business decision to engage in the merger. Goldman Sachs’ opinion is necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to it as of, the date of its opinion.

 

The following is a summary of the material financial analyses presented by Goldman Sachs to our board of directors in connection with rendering the opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Goldman Sachs and is qualified by reference to the written opinion of Goldman Sachs attached as Annex C to this proxy statement. The order of analyses described does not represent the relative importance or weight given to those analyses by Goldman Sachs. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of Goldman Sachs’ financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before October 27, 2006, and is not necessarily indicative of current market conditions.

Historical Stock Trading Analysis

 

Goldman Sachs reviewed the reported price and trading activity for our common stock for the one-year period ended October 27, 2006, noting that our common stock traded at a low of $3.03 on December 30, 2005 and a high of $8.36 on April 20, 2006. Goldman Sachs also noted that the $13.00 per share of our common stock to be paid in cash in connection with the merger, which is referred to in this discussion as the offer price, represented:

 

Selected Companies Analysis

 

Goldman Sachs reviewed the reported price and trading activity of our common stock and the nine companies listed below for the one-year period ended October 27, 2006 and calculated the reported price for each company’s common stock as of October 27, 2006 as a percentage of the high trading price for each company’s common stock

for the 52-week period ended October 27, 2006. In addition, Goldman Sachs calculated and reviewed the market capitalization less the cash and cash equivalents for us and each of these nine companies based on the most recent publicly available financial statements for each, which value is referred to in this discussion as the technology value. Although these selected companies are not directly comparable to us, the companies included were chosen because they are publicly traded companies with operations that for purposes of this analysis may be considered similar to certain operations of ours. The nine selected companies were:

 

 

The results of the calculations described above are summarized as follows:

 

Illustrative Present Value of Future Stock Price Analysis

 

Goldman Sachs performed an illustrative analysis of the present value of the future price of our common stock, which is designed to provide an indication of the present value of a company’s potential future stock price as a function of our company’s estimated future earnings and its assumed price to future earnings per share, or EPS, multiple. For this analysis, Goldman Sachs used the financial forecasts for us prepared by our management assuming that we entered into additional partnerships with third parties. Goldman Sachs first calculated implied per share prices for our common stock for the end of fiscal year 2017 by applying price to forward EPS multiples ranging from 18.0x to 26.0x, based on the range of a selected group of currently profitable biotechnology companies, to estimates prepared by our management of our EPS for fiscal year 2018. Goldman Sachs then calculated the present values of the implied per share future stock prices for our common stock in fiscal year 2017 discounted to October 27, 2006, using discount rates ranging from 13.00% to 17.00% based on estimates relating to our weighted average cost of capital. This analysis resulted in a range of implied present values of $4.67 to $9.50 per share of our common stock.

 

Using the same set of forecasts, Goldman Sachs also performed a sensitivity analysis to analyze the effect of dilution from potential future financings on the illustrative analysis of the present value of the future price of our common stock. This analysis utilized:

 

 

 

This analysis resulted in a range of implied present values of $4.33 to $7.36 per share of our common stock.

Illustrative Discounted Cash Flow Analysis

 

Goldman Sachs performed an illustrative discounted cash flow analysis to determine a range of implied present values per share of our common stock. All cash flows were discounted to December 31, 2006, and terminal values were based upon price to forward EPS multiples ranging from 18.0x to 26.0x to estimates prepared by our management of our EPS for fiscal 2018, assuming that we entered into additional partnerships with third parties. For this analysis, Goldman Sachs used discount rates ranging from 13.0% to 17.0%, reflecting estimates of the weighted average cost of capital for us, and financial forecasts for us prepared by our management. This analysis resulted in a range of implied present values of $5.36 to $10.02 per share of our common stock. Goldman Sachs then performed this same analysis using estimates prepared by our management assuming that we operated on a theoretical standalone basis in lieu of entering into additional partnerships with third parties. This analysis resulted in a range of implied present values of $5.65 to $13.53 per share of our common stock.

 

Using the same set of forecasts, Goldman Sachs also performed a sensitivity analysis to analyze the effect of increases or decreases in our estimated peak sales of certain products that we might ultimately be able to sell and the probability of these products successfully reaching the market based on their current stages of pre-clinical or clinical development, as the case may be, on the illustrative discounted cash flow analysis. This analysis utilized:

 

 

This analysis resulted in a range of implied present value of $3.49 to $11.30 per share of our common stock. Goldman Sachs then performed this same analysis using estimates prepared by our management of our EPS for fiscal 2017 assuming that we operated on a standalone basis in lieu of entering into a strategic partnership with a third party. This analysis resulted in a range of implied present value of $4.22 to $14.19 per share of our common stock.

 

Goldman Sachs also performed an illustrative discounted cash flow analysis of the implied total value per share of our common stock to an acquirer of us that was able to avail itself of our United States federal net operating losses, or NOLs. This analysis utilized:

 

 

This analysis resulted in a range of implied total value of $7.62 to $15.69 per share of our common stock to an acquirer.

Selected Transactions Analysis

 

Goldman Sachs reviewed available information for the following announced merger or acquisition transactions involving companies in the pharmaceutical industry. While none of the companies participating in the selected transactions are directly comparable to us, the companies participating in the selected transactions are companies with operations that, for purposes of this analysis, may be considered similar to certain operations of ours. Goldman Sachs calculated and compared the premium implied by the per share consideration paid for the equity of the target company in the applicable transaction over the trading price for the common stock of the target company on both the trading day prior to and the 20th trading day prior to the announcement of the applicable transaction. The transactions reviewed, listed by acquirer/target and month and year announced, were:

 

 

The results of the calculations described above are summarized as follows:

 

 

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Goldman Sachs’ analyses and opinion. In arriving at its fairness determination, Goldman Sachs considered the results of all its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Goldman Sachs made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to us, our various businesses or the merger.

 

Goldman Sachs prepared these analyses for purposes of Goldman Sachs providing its opinion to our board of directors as to the fairness from a financial point of view of the $13.00 per share in cash to be received by the holders of the outstanding shares of our common stock pursuant to the merger agreement. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be

significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of us, Goldman Sachs or any other person assumes responsibility if future results are materially different from those forecast. As described above, Goldman Sachs’ opinion to our board of directors was one of many factors taken into consideration by our board of directors in making its determination to approve the merger agreement.

 

The merger consideration was determined through arm’s-length negotiations between us and Merck and was approved by our board of directors. Goldman Sachs provided advice to us during these negotiations. Goldman Sachs did not, however, recommend any specific amount of consideration to us or our board of directors or that any specific amount of consideration constituted the only appropriate consideration for the merger.

 

Goldman Sachs and its affiliates, as part of their investment banking business, are continually engaged in performing financial analyses with respect to businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and other transactions as well as for estate, corporate and other purposes. Goldman Sachs has acted as financial advisor to us in connection with, and has participated in certain of the negotiations leading to, the merger. In addition, Goldman Sachs has provided certain investment banking services to Merck, including having acted as co-manager with respect to a public offering of Merck’s 4.75% Notes due 2015 (aggregate principal amount $1,000,000,000) in February 2005. Goldman Sachs also may provide investment banking services to us and Merck in the future. In connection with the above-described investment banking services Goldman Sachs has received, and may receive, compensation.

 

Our board of directors selected Goldman Sachs as its financial advisor because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the merger. Pursuant to a letter agreement, dated October 18, 2006, we engaged Goldman Sachs to act as our financial advisor in connection with the exploration of the possible sale of all or a portion of us. Pursuant to the terms of this letter agreement, Goldman Sachs is entitled to receive a transaction fee of approximately $13.5 million, the principal portion of which is payable upon consummation of the merger. We have also agreed to reimburse Goldman Sachs for its reasonable expenses, including attorneys’ fees and disbursements, and to indemnify Goldman Sachs against various liabilities, including certain liabilities under the federal securities laws.

 

In considering the recommendation of our board of directors in favor of the merger, you should be aware that members of our board of directors and our executive officers have interests in the merger that are different from, or in addition to, yours.

 

All such additional interests are described below, to the extent material, and except as described below, such persons have, to our knowledge, no material interest in the merger apart from those of stockholders generally. Our board of directors was aware of, and considered the interests of, our directors and executive officers in approving the merger agreement and the merger.

Indemnification and Insurance

 

The merger agreement provides that the indemnification, advancement and exculpation provisions of our certificates of incorporation, by-laws and other indemnification agreements we have entered into in favor of our directors and certain executive officers in effect as of the date of the merger agreement will survive the merger. Merck and the surviving corporation will not amend, repeal or otherwise modify such provisions for a period of six years from the effective time of the merger in any manner that would adversely affect the rights under such provisions of our existing directors, officers or employees.

 

The merger agreement further provides that for six years after the effective time of the merger, Merck will cause the surviving corporation to maintain in effect the directors’ and officers’ liability insurance policies currently maintained by us covering acts or omissions occurring on or prior to the effective time of the merger with respect to those persons who are currently covered by our directors’ and officers’ liability insurance policies on terms with

respect to coverage and in amounts no less favorable than those set forth in the relevant policy in effect on the date of the merger agreement. However, in no event will Merck or the surviving corporation be required to expend annually in excess of 250% of the annual premium currently paid by us for our coverage, and to the extent the annual premium would exceed 250% of the annual premium currently paid by us for our coverage, the surviving corporation will use all reasonable efforts to maintain the maximum amount of coverage as is available for 250% of our current annual premium. In addition, we may satisfy the surviving corporation’s obligations by purchasing a six-year “tail” prepaid policy, at no more than three times the maximum annual premium currently paid by us for our coverage, on terms and conditions no less advantageous to the indemnified parties than the existing directors’ and officers’ liability insurance maintained by us.

Change of Control Payments

 

The merger agreement provides for us to adopt a severance plan prior to the closing of the merger, which plan will be maintained by Merck for a period of two years following the closing. The consummation of the merger will constitute a change of control for purposes of the severance plan. The severance plan will provide for 2006 bonus payments, aggregating up to $1,700,000, to be distributed to our employees at any time prior to the closing of the merger, at the discretion of our board and management; provided that no vice president level or more senior officer will be granted a bonus for 2006 of more than 200% of such officer’s target bonus for 2006.

 

The severance plan will also provide our employees with certain payments and benefits in the event that such employee is terminated without “cause” or resigns for “good reason” (each, as defined in the severance plan) within 18 months following the closing of the merger, including:

 

 

 

 

 

 

To the extent that the payments and benefits payable under the severance plan result in liability for excise taxes by reason of sections 280G and 4999 of the Internal Revenue Code, our CEO will be entitled to a full gross-up payment for any such excise taxes such that the amount he retains after-tax is equal to the after-tax amount he would have retained had no excise tax applied. Our board of directors may determine to provide such a gross-up payment to any named executive officers as well. We do not expect any section 280G tax liability for our CEO in connection with the merger.

 

In addition, we have previously entered into change of control severance agreements with certain executive officers at or around the time such executive officer’s employment with us originated. To the extent the severance plan provides better terms than those included in the pre-existing employment agreements for such officers, the corresponding provisions in such employment agreements will be superseded by the terms in the severance plan. The only executive officer with better terms in his employment agreement is Roberto Guerciolini, our Senior Vice President and Chief Medical Officer. Dr. Guerciolini’s employment agreement provides that if he is terminated without cause or terminates his employment for good reason (as such terms are defined in the agreement) at any

time following a change in control, he will be entitled to (1) a severance amount equal to one year of his base salary plus the lesser of 20% of his then current base salary or the average of his actual annual bonuses for the previous two years and (2) the payment of COBRA premiums for 18 months by the surviving company. The severance payment is subject to reduction for amounts earned with a subsequent employer and the payment of COBRA premiums terminates upon his obtaining comparable health care coverage from a future employer.

Stock Options

 

Each stock option to purchase our common stock that is outstanding immediately prior to the effective time of the merger (including those held by our directors and executive officers) will become fully vested at that time. Each such option will automatically be converted into cash in the amount, if any, by which $13.00 exceeds the exercise price of the option. Any options with an exercise price that is equal to or exceeds $13.00 will receive no cash payment. As of November 8, 2006, our directors and officers, in the aggregate, held options to purchase 1,516,848 unvested shares of common stock. Based upon the $13.00 being offered in the merger, these options, in the aggregate, have a value of $14,479,758 in excess of their exercise prices.

Employee Benefits

 

To the extent our employees remain employed by us after the closing of the merger, they will be entitled to certain of the employee benefits Merck has agreed to provide under the terms of the merger agreement. See “The Merger Agreement and the Voting Agreements — Employee Benefits” on page 40.

 

The discussion of the provisions set forth below is not a complete statement regarding your appraisal rights under Delaware law and is qualified in its entirety by reference to the text of the relevant provisions of Delaware law, which are attached to this proxy statement as Annex D. Stockholders intending to exercise appraisal rights should carefully review Annex D. Failure to follow precisely any of the statutory procedures set forth in Annex D may result in a termination or waiver of these rights.

 

If the merger is completed, dissenting holders of our common stock who follow the procedures specified in Section 262 of the DGCL within the appropriate time periods will be entitled to have their shares of our common stock appraised by a court and to receive the “fair value” of such shares in cash as determined by the Delaware Court of Chancery in lieu of the consideration that such stockholder would otherwise be entitled to receive pursuant to the merger agreement.

 

The following is a brief summary of Section 262 of the DGCL, which sets forth the procedures for dissenting from the merger and demanding statutory appraisal rights. Failure to follow the procedures set forth in Section 262 precisely could result in the loss of appraisal rights. This proxy statement constitutes notice to holders of our common stock concerning the availability of appraisal rights under Section 262 of the DGCL. A stockholder of record wishing to assert appraisal rights must hold the shares of stock on the date of making a demand for appraisal rights with respect to such shares and must continuously hold such shares through the effective time of the merger.

 

Stockholders who desire to exercise their appraisal rights must satisfy all of the conditions of Section 262 of the DGCL. A written demand for appraisal of shares must be filed with us before the special meeting on [ • ], 2006. This written demand for appraisal of shares must be in addition to and separate from a vote against the merger. Stockholders electing to exercise their appraisal rights must not vote “for” the merger. Any proxy or vote against the merger will not constitute a demand for appraisal within the meaning of Section 262 of the DGCL.

 

A demand for appraisal must be executed by or for the stockholder of record, fully and correctly, as such stockholder’s name appears on the stock certificate or on our transfer books. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, this demand must be executed by or for the fiduciary. If the shares are owned by or for more than one person, as in a joint tenancy or tenancy in common, such demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner and expressly disclose the fact that, in exercising the demand, he is acting as agent for the record owner. A person

having a beneficial interest in our common stock held of record in the name of another person, such as a broker or nominee, must act promptly to cause the record holder to follow the steps summarized below and in a timely manner to perfect whatever appraisal rights the beneficial owner may have.

 

A Sirna stockholder who elects to exercise appraisal rights should mail or deliver his, her or its written demand to us at our address at 185 Berry Street, Suite 6504, San Francisco, California 94107, Attention: Secretary. The written demand for appraisal should specify the stockholder’s name and mailing address, and that the stockholder is thereby demanding appraisal of his, her or its Sirna common stock. Within ten days after the effective time of the merger, we must provide notice of the effective time of the merger to all of our stockholders who have complied with Section 262 of the DGCL and have not voted for the merger.

 

Within 120 days after the effective time of the merger (but not thereafter), any stockholder who has satisfied the requirements of Section 262 of the DGCL may deliver to us a written demand for a statement listing the aggregate number of shares not voted in favor of the merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. We, as the surviving corporation in the merger, must mail such written statement to the stockholder no later than the later of ten days after the stockholders’ request is received by us or ten days after the latest date for delivery of a demand for appraisal under Section 262 of the DGCL.

 

Within 120 days after the effective time of the merger (but not thereafter), either we or any stockholder who has complied with the required conditions of Section 262 of the DGCL and who is otherwise entitled to appraisal rights may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the Sirna shares of stockholders entitled to appraisal rights. We have no present intention to file such a petition if demand for appraisal is made.

 

Upon the filing of any petition by a stockholder in accordance with Section 262 of the DGCL, service of a copy must be made upon us, which we must, within 20 days after service, file in the office of the Register in Chancery in which the petition was filed, a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by us. If we file a petition, the petition must be accompanied by the verified list. The Register in Chancery, if so ordered by the court, will give notice of the time and place fixed for the hearing of such petition by registered or certified mail to us and to the stockholders shown on the list at the addresses therein stated, and notice will also be given by publishing a notice at least one week before the day of the hearing in a newspaper of general circulation published in the City of Wilmington, Delaware, or such publication as the court deems advisable. The forms of the notices by mail and by publication must be approved by the court, and we will bear the costs thereof. The Delaware Court of Chancery may require the stockholders who have demanded an appraisal for their shares (and who hold stock represented by certificates) to submit their stock certificates to the Register in Chancery for notation of the pendency of the appraisal proceedings and the Delaware Court of Chancery may dismiss the proceedings as to any stockholder that fails to comply with such direction.

 

If a petition for an appraisal is filed in a timely fashion, after a hearing on the petition, the court will determine which stockholders are entitled to appraisal rights and will appraise the shares owned by these stockholders, determining the fair value of such shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest to be paid, if any, upon the amount determined to be the fair value.

 

Sirna stockholders considering seeking appraisal of their shares should note that the fair value of their shares determined under Section 262 of the DGCL could be more, the same or less than the consideration they would receive pursuant to the merger agreement if they did not seek appraisal of their shares. The costs of the appraisal proceeding may be determined by the court and taxed against the parties as the court deems equitable under the circumstances. Upon application of a dissenting stockholder, the court may order that all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding, including reasonable attorneys’ fees and the fees and expenses of experts, be charged pro rata against the value of all shares entitled to appraisal. In the absence of a determination or assessment, each party bears his, her or its own expenses. The exchange of shares for cash pursuant to the exercise of appraisal rights will generally be a taxable transaction for United States federal income tax purposes.

Any stockholder who has duly demanded appraisal in compliance with Section 262 of the DGCL will not, after the effective time of the merger, be entitled to vote for any purpose the shares subject to demand or to receive payment of dividends or other distributions on such shares, except for dividends or distributions payable to stockholders of record at a date prior to the effective time of the merger.

 

At any time within 60 days after the effective time of the merger, any stockholder will have the right to withdraw his demand for appraisal and to accept the terms offered in the merger agreement. After this period, a stockholder may withdraw his demand for appraisal and receive payment for his shares as provided in the merger agreement only with our consent. If no petition for appraisal is filed with the court within 120 days after the effective time of the merger, stockholders’ rights to appraisal (if available) will cease. Inasmuch as we have no obligation to file such a petition, any stockholder who desires a petition to be filed is advised to file it on a timely basis. No petition timely filed in the court demanding appraisal may be dismissed as to any stockholder without the approval of the court, which approval may be conditioned upon such terms as the court deems just.

 

Failure by any Sirna stockholder to comply fully with the procedures described above and set forth in Annex D to this proxy statement may result in termination of such stockholder’s appraisal rights.

 

Subject to the terms and conditions of the merger agreement and in accordance with Delaware law, at the effective time of the merger, Spinnaker Acquisition Corp., a wholly-owned subsidiary of Merck and a party to the merger agreement, will merge with and into us. We will survive the merger as a wholly-owned Delaware subsidiary of Merck.

 

At the effective time of the merger, each outstanding share of our common stock, other than treasury shares, shares held by Merck, shares held by our subsidiaries or subsidiaries of Merck (including Spinnaker Acquisition Corp.), and those shares held by stockholders who perfect their appraisal rights (as described in “The Merger — Appraisal Rights” on page 24), will be converted into the right to receive $13.00 in cash, without interest. Treasury shares and shares held by Merck and our subsidiaries or subsidiaries of Merck (including Spinnaker Acquisition Corp.) will be canceled immediately prior to the effective time of the merger.

 

As of the effective time of the merger, all shares of our common stock will no longer be outstanding and will automatically be canceled and will cease to exist and each holder of any shares of our common stock (other than stockholders who have perfected their appraisal rights) will cease to have any rights as a Sirna stockholder, except the right to receive $13.00 per share in cash. The price of $13.00 per share was determined through arm’s-length negotiations between Merck and us.

 

The conversion of our common stock into the right to receive $13.00 per share in cash, without interest, will occur automatically at the effective time of the merger. As soon as reasonably practicable after the effective time of the merger, a paying agent selected by Merck and reasonably acceptable to us will send a letter of transmittal to each former Sirna stockholder. The letter of transmittal will contain instructions for obtaining cash in exchange for shares of our common stock. You should not return stock certificates with the enclosed proxy.

 

Upon surrender of a stock certificate representing shares of our common stock or compliance with the instructions in the letter of transmittal for shares held in book entry form, together with a duly completed and validly executed letter of transmittal, and any other documents that may be reasonably required by the paying agent, a former holder of Sirna shares will be entitled to receive from the paying agent, on behalf of Merck, $13.00 in cash for each share of Sirna common stock and that holder’s shares of Sirna common stock will be cancelled.

In the event of a transfer of ownership of our common stock that is not registered in our stock transfer records, the merger consideration for shares of our common stock may be paid to a person other than the person in whose name the surrendered certificate is registered if:

 

 

No interest will be paid or accrue on any cash payable upon conversion of shares of our common stock. The cash paid upon conversion of shares of our common stock will be issued in full satisfaction of all rights relating to the shares of our common stock.

 

Stock Options

 

Each stock option to purchase our common stock which has an exercise price of less than $13.00 per share that is outstanding immediately prior to the effective time of the merger (whether vested or unvested) will be cancelled in exchange for the right to receive a cash payment, without interest, in an amount equal to the difference between $13.00 and the exercise price of the option less any applicable tax withholding. Any payment made with respect to stock options will be made within 10 business days of the effective time of the merger.

Employee Stock Purchase Plan

 

Our employee stock purchase plan, or ESPP, will be terminated prior to the effective time of the merger. In connection with that termination, any right to purchase a share of our common stock under the ESPP will be cancelled and each participant in the ESPP for the then-current offering period will be entitled to receive, within 10 business days after the effective time of the merger, an amount in cash equal to $13.00 multiplied by the number of whole and fractional shares of Sirna common stock that would have been issuable upon the exercise of the purchase right if it had been issued at the effective time of the merger and the participant in the ESPP purchased the maximum number of shares using his or her full contribution less any applicable tax withholding.

Warrants

 

We have agreed to use our commercially reasonable efforts to cause all holders of our warrants to fully exercise their warrants prior to the merger. Each warrant to purchase our common stock that is outstanding immediately prior to the effective time of the merger will be entitled to receive a cash payment in accordance with its terms.

 

The merger will become effective upon the filing of a certificate of merger with the Delaware Secretary of State or at such later time as is agreed upon by Merck and us and specified in the certificate of merger. The filing of the certificate of merger will occur on the closing date, which will not be later than the second business day after satisfaction or waiver of the conditions to the completion of the merger described in the merger agreement.

 

If the merger is completed, our common stock will no longer be traded on The NASDAQ Global Market and will be deregistered under the Securities Exchange Act of 1934.

 

This section discusses certain material United States federal income tax consequences of the merger to U.S. holders (as defined below) of our common stock whose shares are surrendered in the merger.

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of our common stock that is:

 

 

The discussion applies only to U.S. holders that hold our common stock as a capital asset at the time of the merger, and the discussion does not address all United States federal income tax considerations that may be relevant to particular stockholders that are subject to special rules or that may be important in light of such stockholders’ individual circumstances, such as:

 

 

Sirna did not obtain a ruling from the Internal Revenue Service or an opinion of counsel with respect to any of the matters discussed herein. The summary is not binding upon the Internal Revenue Service, and no assurance can be given that the Internal Revenue Service would not assert, or that a court would not sustain, a position contrary to any of the tax aspects set forth herein.

 

The discussion below is based upon United States federal income tax laws as in effect and interpreted as of the date of this proxy statement and does not take into account possible changes in these tax laws or interpretations, any of which may be applied retroactively. The discussion does not include any description of the tax laws of any state, local or foreign government that may be applicable to our stockholders.

 

Sirna stockholders are urged to consult their own tax advisors as to the specific tax consequences of the merger to them, including the applicable United States federal, state, local and foreign tax consequences of the merger.

 

For United States federal income tax purposes, a U.S. holder who exchanges shares of our common stock in the merger generally will recognize capital gain or capital loss equal to the difference between the cash received by such stockholder and the stockholder’s adjusted tax basis in the shares of our common stock surrendered. Gain or loss will be long-term capital gain or loss provided that such stockholder’s holding period for such shares is more than 12 months at the effective time of the merger. Long-term capital gain of individuals generally is subject to United States federal income tax at a maximum rate of 15%. If an individual stockholder’s holding period for the shares of common stock is one year or less at the effective time of the merger, any gain will be subject to United

States federal income tax at the same rate as ordinary income. There are limits on the deductibility of capital losses. U.S. holders who acquired different blocks of our common stock at different times or different prices must determine their tax basis and holding period separately with respect to each block of stock.

 

For corporations, capital gain is taxed at the same rate as ordinary income, and capital loss in excess of capital gain is not deductible. Corporations, however, generally may carry back capital losses up to three taxable years and carry forward capital losses up to five taxable years.

 

Under the Code, a holder of our common stock may be subject to backup withholding at a rate of 28% with respect to the amount of cash received in the merger, unless such holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the applicable requirements of the backup withholding rules. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against the stockholder’s United States federal income tax liability, if any, provided the stockholder furnishes the required information to the Internal Revenue Service in a timely manner.

 

This summary is of a general nature only and is not intended to be, nor should it be construed to be, tax advice to any particular holder of shares of our common stock. This summary does not purport to be a complete analysis or discussion of all potential tax effects relevant to our stockholders. Holders of our common stock are strongly urged to consult their tax advisors as to the specific tax consequences to them of the merger, including the applicability and effect of United States federal, state, local and foreign income and other tax laws in their particular circumstances.

 

Under the Hart-Scott-Rodino Act and the rules thereunder, certain transactions, including the merger, may not be completed unless certain waiting period requirements have been satisfied. Merck and we filed a notification and report forms pursuant to the Hart-Scott-Rodino Act with the Antitrust Division of the Department of Justice and the Federal Trade Commission on November 13, 2006. As a result, the waiting period under the Hart-Scott-Rodino Act will terminate on December 13, 2006, unless earlier terminated. Even if the waiting period is terminated, the Antitrust Division, the Federal Trade Commission or others could take action under the antitrust laws with respect to the merger, including seeking to enjoin the completion of the merger, to rescind the merger or to conditionally approve the merger. There can be no assurance that a challenge to the merger on antitrust grounds will not be made or, if such a challenge is made, that it would not be successful.

 

Following the announcement of the merger agreement several putative class action lawsuits, including Arnold Wandel, on behalf of himself and all others similarly situated, case number CGC06-457680, Sydney Eisikobic, on behalf of himself and all others similarly situated, case number CGC06-457682, and Sheet Metal Workers Local #218 Pension Fund, on behalf of itself and all others similarly situated, case number CGC06-457734, have been filed challenging aspects of the proposed merger. The lawsuits, filed in the Superior Court of California, County of San Francisco, name Sirna and all eight of our directors as defendants. The plaintiffs assert causes of action for breach of fiduciary duty and self-dealing and causes of action of aiding and abetting breach of fiduciary duty. In the complaints, the plaintiffs allege generally that the proposed merger resulted from unfair dealing and the merger consideration of $13.00 was an inadequate purchase price. The complaints seek certification as a class action and various forms of declaratory and injunctive relief, including an injunction against consummation of the merger or, in the alternative, rescission of the transaction and imposition of a constructive trust. The defendants deny any wrongdoing, believe that these actions are without merit and intend to defend the claims vigorously.

 

The following description summarizes the material provisions of the merger agreement and the voting agreements. Stockholders should read carefully the merger agreement and the voting agreement, which are attached as Annex A and Annex B, respectively, to this proxy statement.

 

The merger agreement has been included to provide you with information regarding its terms. It is not intended to provide any other factual information about us. Such information can be found elsewhere in this proxy statement and in the other public filings we make with the SEC, which are available without charge at www.sec.gov.

 

The merger agreement contains representations and warranties we, on the one hand, and Merck and Spinnaker Acquisition Corp., on the other hand, have made to each other as of specific dates. These representations and warranties have been made for the benefit of the other parties to the merger agreement and may be intended not as statements of fact but rather as a way of allocating the risk to one of the parties if those statements prove to be incorrect. In addition, the assertions embodied in our representations and warranties are qualified by information in confidential disclosure schedules that we have provided to Merck in connection with signing the merger agreement. While we do not believe that these schedules contain information required to be publicly disclosed by us under the applicable securities laws other than information that has already been so disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached merger agreement. Accordingly, you should not rely on the representations and warranties as current characterizations of factual information about us, since they were made as of specific dates, may be intended merely as a risk allocation mechanism between us and Merck and are modified in important part by the underlying disclosure schedules.

 

Each party’s obligation to effect the merger is subject to the satisfaction or waiver of various conditions, which include the following:

 

Merck, Spinnaker Acquisition Corp. and we are obligated to effect the merger only if the following conditions are satisfied or waived:

 

 

In addition, Merck and Spinnaker Acquisition Corp. will not be obligated to effect the merger unless the following conditions are satisfied or waived:

 

 

 

We will not be obligated to effect the merger unless the following conditions are satisfied or waived:

 

 

Several of our representations and warranties contained in the merger agreement, and certain conditions to closing and termination rights, are qualified by reference to whether the item in question is reasonably likely to have a “material adverse effect” on us. The merger agreement provides that a “material adverse effect” means, when used in connection with us, any change or effect, event, violation, circumstance, occurrence, state of facts or development that (i) is materially adverse to the business, assets, results of operations or financial condition of us or our subsidiaries, taken as a whole or (ii) would prevent or delay, beyond June 30, 2007, the consummation by us of the transactions contemplated by the merger agreement. However, none of the following effects will be taken into account in determining whether there has been or will be a material adverse effect:

 

 

We have agreed we will not, and will not permit any of our subsidiaries, any of our or our subsidiaries’ directors or officers, and any of our or our subsidiaries’ employees, agents and representatives (including any investment banker, attorney, consultant or accountant (“representatives”) retained by us or any of our subsidiaries) to initiate,

solicit or knowingly encourage any inquiries or the making of any proposal or offer from any person or group of persons other than Merck or its affiliates, with respect to any of the following:

 

 

any such proposal or offer referred to in this proxy statement as an “acquisition proposal.”

 

We have further agreed that we will not, and will not permit any or our subsidiaries, any of our or our subsidiaries’ officers and directors, and any of our or our subsidiaries representatives to:

 

 

We further agreed that we would, and would ensure our subsidiaries would immediately cease and cause to be terminated, and will not permit our representatives to continue, any existing activities, discussions or negotiations with any persons with respect to any acquisition proposal (except with respect to the transactions contemplated by the merger agreement).

 

Notwithstanding anything contained in the merger agreement, we are not prevented from complying with disclosure obligations under certain tender offer rules of the Securities Exchange Act of 1934 with regard to an acquisition proposal so long as any action taken or statement made does not include a withdrawal, modification, qualification or change of the recommendation of our board of directors to our stockholders regarding approval of the merger and the merger agreement.

 

Notwithstanding the foregoing, at any time prior to obtaining our stockholders’ approval of the merger and the merger agreement, we may nevertheless take the following actions in response to an unsolicited bona fide written acquisition proposal by another person that does not result in a breach of our covenants relating to our consideration of an acquisition proposal:

 

 

each, if any only to the extent that:

 

 

In addition, we have undertaken

 

 

The merger agreement provides that the term “superior proposal” means an acquisition proposal (which, for all such purposes, shall substitute 50% for 15% in the definition thereof) that, if accepted is reasonably likely to be consummated, and if consummated, would result in a more favorable transaction (taking into account legal, financial, regulatory and other aspects of such acquisition proposal and the merger and other transactions contemplated by the merger agreement deemed relevant by our board of directors, the identity of the third party making such acquisition proposal, the terms and conditions of the acquisition proposal and the anticipated timing and prospects for completion of such acquisition proposal) to our stockholders than the transactions contemplated by the merger agreement (taking into account all of the terms of any proposal by Merck to amend or modify the terms of the merger and other transactions contemplated by the merger agreement).

 

Merck and we can terminate the merger agreement under certain circumstances, including:

 

 

 

 

 

 

 

 

 

We have agreed to duly call and use commercially reasonable efforts to hold a meeting of our stockholders for the purpose of obtaining their approval of the merger agreement and the merger as promptly as practicable following the date of the merger agreement. We have also agreed to prepare and file with the SEC this proxy statement and any other materials necessary for calling our stockholders’ meeting for approval of the merger and the merger agreement, to respond as promptly as reasonably practicable to any comments received from the SEC with

respect to such filings and provide copies of such comments to Merck and Spinnaker Acquisition Corp., to prepare and file any amendments or supplements necessary to be filed in response to SEC comments or as required by law as promptly as reasonably practicable, to use commercially reasonable efforts to have cleared by the SEC this proxy statement and all other materials for the stockholders’ meeting, to prepare, file and distribute to our stockholders any supplement or amendment to the proxy statement as promptly as reasonably practicable if any event shall require such action at any time prior to our stockholders’ meeting for approval of the merger and the merger agreement and to otherwise comply with all requirements of law applicable to our stockholders’ meeting for approval of the merger and the merger agreement.

 

We have agreed, as to us and our subsidiaries, that from the date of the merger agreement and continuing until the effective time of the merger, except as expressly permitted by the merger agreement, as disclosed to Merck or to the extent that Merck otherwise consents in advance (which consent cannot be unreasonably delayed), that we and each of our subsidiaries will conduct our businesses only in the ordinary course of business, including using commercially reasonable efforts to:

 

 

We have also agreed, as to us and our subsidiaries, that from the date of the merger agreement and continuing until the effective time of the merger, except as expressly permitted by the merger agreement, as disclosed to Merck or to the extent that Merck otherwise consents in advance (which consent cannot be unreasonably delayed), neither we nor any of our subsidiaries will:

 

 

 

 

We, Merck and Spinnaker Acquisition Corp. have agreed to use commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things necessary, proper or advisable under any applicable laws to consummate and make effective the transactions contemplated by the merger agreement as promptly as practicable, including, but not limited to the following:

 

 

Subject to the terms and conditions of the merger agreement and applicable provisions of the Delaware law, each of us, Merck and Spinnaker Acquisition Corp. have agreed to use commercially reasonable efforts to cause the effective time of the merger agreement to occur as soon as practicable after adoption by our stockholders of the merger, the merger agreement and the transactions contemplated by the merger agreement.

 

We and Merck have agreed to, upon request by the other, furnish the other with all information concerning itself, its subsidiaries, directors, officers and stockholders and such other matters as made be reasonably necessary or advisable in connection with this proxy statement or any other statement, filing, notice or application made by or on behalf of us, Merck or any respective subsidiaries to any third party and/or governmental entity in connection with the merger and the transactions contemplated by the merger agreement.

 

Subject to applicable law, we and Merck have agreed to promptly furnish the other with copies of notices or other communications between us or Merck, as the case may be, or any respective subsidiaries, and any governmental entities with respect to the transactions contemplated by the merger agreement. We have also agreed to give Merck prompt notice of:

 

 

Merck has agreed to give us prompt notice of any change, fact or condition that is reasonably likely to result in a failure of any condition to our obligation to effect the merger. Further, we, Merck and Spinnaker Acquisition Corp.

have agreed not to independently participate in any meeting or engage in any substantive conversation with any governmental entity with respect to the transactions contemplated by the merger agreement without giving the other parties to the merger agreement prior notice of the meeting and the opportunity to attend or participate, if permitted by such governmental entity. Finally, we, Merck and Spinnaker Acquisition Corp. have agreed to consult and cooperate with one another in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted to any governmental entity by or on behalf of any party to the merger agreement in connection with the transactions contemplated by the merger agreement.

 

Pursuant to the terms of the merger agreement, we, Merck and Spinnaker Acquisition Corp. have agreed to certain additional covenants related to the following:

 

 

The merger agreement may be amended, modified or supplemented by the parties at any time, before or after our stockholder approval has been obtained. Any amendment must be in writing.

 

Any provisions of the merger agreement may be waived only in a writing executed by the party or parties against whom such waiver is asserted by action of such party or parties’ board of directors.

 

The merger agreement provides that regardless of whether the merger is completed, all costs and expenses incurred by the parties in connection with the merger agreement and the merger shall be paid by the party incurring such expenses.

 

We must pay Merck a termination fee of $42,100,000 if:

 

 

 

 

However, in the event that the merger agreement is terminated because (i) it has not been consummated by June 30, 2007, (ii) an alternative transaction is subsequently consummated or a definitive agreement with respect to an alternative transaction is subsequently entered into during the 12-month period following termination with a person other than the person making the alternative transaction at the time of such termination and (iii) the consideration per share of common stock to be paid in such alternative transaction is less that the merger consideration pursuant to the merger agreement, then the termination fee of $42,100,000 will be discounted in the same proportion as the consideration to the paid in the alternative transaction is less than the merger consideration pursuant to the merger agreement.

 

The merger agreement contains customary representations and warranties relating to, among other things:

 

 

 

Merck has agreed (i) to provide our and our subsidiaries’ employees (other than employees who are subject to collective bargaining agreements) with pension, health, life insurance, disability and vacation benefits that are no less favorable in the aggregate than the benefits provided to them immediately prior to the effective time of the merger for a period of one year after the effective time of the merger and (ii) that our and our subsidiaries’ employees will receive credit for their service with us and our subsidiaries before the effective time of the merger under the relevant employee benefit plans of Merck for purposes of eligibility, vesting and benefit accrual to the same extent as such employees were entitled to such credit under any comparable benefit plan before the effective time of the merger (except to the extent such credit would result in a duplication of accrual of benefits), subject to certain additional restrictions.

 

In connection with the merger agreement, Merck entered into voting agreements with certain of our stockholders that owned in the aggregate approximately 36% of our outstanding common stock as of October 30, 2006 or, if the stockholders fully exercised each of the warrants they hold, approximately 41% of our outstanding common stock as of October 30, 2006. The stockholders entering into these voting agreements include Howard Robin, our President and Chief Executive Officer; James Niedel, one of our directors; Sprout Capital IX, L.P., Sprout Entrepreneurs Fund, L.P. and Sprout IX Plan Investors, L.P., three funds affiliated with Dr. Niedel; Oxford Bioscience Partners IV L.P. and mRNA Fund II L.P., two funds affiliated with our director Douglas Fambrough; and Venrock Associates, Venrock Associates III, L.P. and Venrock Entrepreneurs Fund III, L.P., three funds affiliated with our director Bryan Roberts. Among other things, the voting agreements provide that the stockholder will vote all shares of our capital stock that such person beneficially owns in favor of the approval of the merger and the approval and adoption of the merger agreement and against any alternative proposal, and that the stockholder will not transfer any shares owned or grant any proxies or powers of attorney with respect to any shares in contravention of the obligations under the voting agreements, or subject any shares owned to any pledges, liens or other

encumbrances or arrangements. In addition, the voting agreements provide that the stockholder will pay to Merck 50% of such stockholder’s profit above $13.00 generally in the event of (i) the termination of the merger agreement in circumstances under which we are or may become obligated to pay Merck a termination fee and (ii) the consummation of an alternative transaction (or a merger with Merck at a price greater than $13.00) within one year of such termination of the merger agreement. The stockholders signing the voting agreements granted a proxy and power of attorney with respect to any of our shares that they owned with respect to such matters to certain officers of Merck. Except with respect to the obligation to pay a percentage of the profits to Merck, the voting agreements terminate on the earlier of the effective date of the merger and the date that the merger agreement has been terminated.

 

If at the special meeting of stockholders on [ • ], 2006, the number of shares of our common stock present or represented and voting in favor of adoption of the merger agreement is insufficient to adopt that proposal under the DGCL, proxy holders Howard W. Robin and Bharat M. Chowrira intend to move to adjourn the special meeting in order to enable our board of directors to solicit additional proxies in respect of such proposal. In that event, we will ask our stockholders to vote only upon the adjournment proposal, and not the proposal regarding the adoption of the merger agreement.

 

In this proposal, we are asking you to authorize the holder of any proxy solicited by our board of directors to vote in favor of granting discretionary authority to Messrs. Robin and Chowrira to adjourn the special meeting to another time and place for the purpose of soliciting additional proxies. If the stockholders approve the adjournment proposal, we could adjourn the special meeting and any adjourned session of the special meeting and use the additional time to solicit additional proxies, including the solicitation of proxies from stockholders that have previously voted. Among other things, approval of the adjournment proposal could mean that, even if we had received proxies representing a sufficient number of votes against the adoption of the merger agreement to defeat that proposal, we could adjourn the special meeting without a vote on the merger agreement and seek to convince the holders of those shares to change their votes to votes in favor of adoption of the merger agreement.

 

The adjournment proposal requires the approval of a majority of the votes cast on the proposal. Broker non-votes and abstentions will have no effect on the outcome of the vote on the adjournment proposal. No proxy that is specifically marked “against” adoption of the merger agreement will be voted in favor of the adjournment proposal, unless it is specifically marked “for” the adjournment proposal.

 

Our board of directors believes that if the number of shares of our common stock present or represented at the special meeting and voting in favor of adoption of the merger agreement is insufficient to approve that proposal, it is in the best interests of our stockholders to enable our board of directors to continue to seek to obtain a sufficient number of additional votes in favor of adoption of the merger agreement to bring about its approval.

 

Our board of directors recommends that you vote “FOR” the adjournment proposal.

 

The following table sets forth as of October 30, 2006 the names, addresses and holdings with respect to the beneficial ownership of our common stock by:

 

 

The table shows beneficial ownership in accordance with the rules of the SEC to include securities over which a named person has or shares voting or investment control (such as securities held by investment funds under his control), as well as securities over which a named person has the right to acquire voting or investment control within 60 days of October 30, 2006 (such as upon exercise of an option that is currently exercisable or that is scheduled to become exercisable within 60 days of October 30, 2006). Unless otherwise indicated by footnote:

 

 

 

 

We will hold a 2007 annual meeting of our stockholders only if the merger is not completed.

 

In accordance with Rule 14a-8 under the Securities Exchange Act of 1934, any stockholder who intends to submit a proposal at our 2007 Annual Meeting of Stockholders and who wishes to have the proposal considered for inclusion in the proxy statement and form of proxy for that meeting must, in addition to complying with the applicable laws and regulations governing submission of such proposals, deliver the proposal to us for consideration no later than January 15, 2007.

 

SEC rules also establish a different deadline for submission of stockholder proposals that are not intended to be included in our proxy statement. If a stockholder intends to submit a proposal at our 2007 Annual Meeting and the proposal is not intended to be included in our proxy statement relating to such meeting, the stockholder must have given proper notice no later than June 29, 2007. If a stockholder gives notice of such a proposal after the deadline, the proxy holders will be allowed to use their discretionary voting authority to vote against the stockholder proposal when and if the proposal is raised at our company’s 2007 Annual Meeting.

 

All notices of proposals, whether or not to be included in our proxy materials, should be sent to Bharat M. Chowrira, Secretary, Sirna Therapeutics, Inc., 185 Berry Street, Suite 6504, San Francisco, California 94107.

 

As of the date of this proxy statement, our board of directors knows of no matters that will be presented for consideration at the special meeting other than as described in this proxy statement.

 

Merck and we file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information that Merck and we file with the SEC at the SEC’s public reference room at the following location:

 

 

Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. These SEC filings are also available to the public from commercial document retrieval services and at the Internet World Wide Web site maintained by the SEC at http://www.sec.gov. Reports, proxy statements and other information concerning us may also be inspected at the offices of The NASDAQ Global Market at 1735 K Street, N.W., Washington, D.C. 20006.

 

Merck has supplied all information contained in this proxy statement relating to Merck and Spinnaker Acquisition Corp. and we have supplied all such information relating to us.

 

Our stockholders should not send in any Sirna certificates until they receive the transmittal materials from the paying agent. After receiving the transmittal materials, our stockholders of record who have further questions about their stock certificates or the exchange of our common stock for cash should contact the paying agent by calling the telephone number set forth in the transmittal materials.

 

You should rely only on the information contained in this proxy statement. We have not authorized anyone to provide you with information that is different from what is contained in this proxy statement. This proxy statement is dated [ • ], 2006. You should not assume that the information contained in this proxy statement is accurate as of any date other than that date (or as of an earlier date if so indicated in this proxy statement). Neither the mailing of this proxy statement to stockholders nor the completion of the merger described in this proxy statement creates any implication to the contrary.

 ANNEX A