VERTEX PHARMACEUTICALS INC / MA - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION FILE NUMBER 000-19319

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VERTEX PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)

MASSACHUSETTS 04-3039129
(State of incorporation) (I.R.S. Employer
Identification No.)

130 WAVERLY STREET
CAMBRIDGE, MASSACHUSETTS 02139-4242
(Address of principal executive offices) (Zip Code)

(617) 444-6100

(Registrant's telephone number, including area code)

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Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.01 PAR VALUE
(Title of class)

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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____

As of March 26, 2002 there were outstanding 75,334,652 shares of Common
Stock, $.01 par value per share. The aggregate market value of shares of Common
Stock held by non-affiliates of the registrant, based upon the last sales price
for such stock on that date as reported by the Nasdaq Stock Market, was
approximately $2,058,900,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the 2002 Annual Meeting of
Stockholders to be held on May 17, 2002 are incorporated by reference into
Part III.

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FORM 10-K INDEX

The "Company," "Vertex," "we" and "us," as used in this Annual Report on
Form 10-K, refer to Vertex Pharmaceuticals Incorporated, a Massachusetts
corporation, and its subsidiaries.

"Vertex," "UHTSS" and "Beacon" are registered trademarks of Vertex, and
"Incel," "GeneBLAzer," "GenomeScreen," "Vivid" and "PhosphoryLIGHT" are
trademarks of Vertex. "Agenerase" is a registered trademark of GlaxoSmithKline.
"Prozei" is a trademark of Kissei Pharmaceutical Co., Ltd. Other brands, names
and trademarks contained in this Annual Report are the property of their
respective owners.

FORWARD-LOOKING STATEMENTS

Our disclosure in this Annual Report on Form 10-K contains some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. Such
statements may include words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe" and other words and terms of similar
meaning in connection with any discussion of future operating or financial
performance. In particular, these statements include, among other things,
statements relating to:

- our business strategy;

- our predicted development and commercial timelines;

- the selection, development and approval of our products;

- the establishment and development of collaborative partnerships;

- our ability to identify new potential products;

- our ability to achieve commercial acceptance of our products;

- our ability to scale up our manufacturing capabilities and facilities;

- the potential for the acquisition of new and complementary technologies,
resources and products;

- our projected capital expenditures; and

- our liquidity.

Any or all of our forward-looking statements in this Annual Report may turn
out to be wrong. They can be affected by inaccurate assumptions we might make or
by known or unknown risks and uncertainties. Many factors mentioned in our
discussion in this Annual Report will be important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially. A more detailed reference to our
forward-looking statements can be found under "Forward-looking Statements" in
Item 7 of this Annual Report.

We provide a cautionary discussion of risks and uncertainties under "Risk
Factors" in Item 1 of this Annual Report. These are factors that we think could
cause our actual results to differ materially from expected results. Other
factors besides those listed there could also adversely affect us.

PART I

ITEM 1. BUSINESS

We are a biotechnology company that seeks to discover, develop and
commercialize novel small molecule drugs that address significant markets with
major unmet medical needs, including the treatment of viral diseases, cancer,
autoimmune and inflammatory diseases, and neurological disorders. Our drug
design platform integrates advanced biology, chemistry, biophysics, automation
and information technologies to make the drug discovery process more efficient
and productive. To date, we have discovered and advanced one product that has
reached the market--the HIV protease inhibitor Agenerase-Registered Trademark-
(amprenavir)--and we have more than 12 additional drug candidates in
development.

We intend to commercialize some of our products independently and some with
collaborators. We have collaborations with Aventis, Eli Lilly, GlaxoSmithKline,
Kissei, Novartis, Schering AG (Germany), Serono and Taisho and other companies.
These collaborations provide us with financial support and other valuable
resources for our research programs, development of our clinical drug
candidates, and marketing and sales of our products. We believe that we are
positioned to commercialize multiple products in the coming years, which we
expect will generate increased milestone payments, product revenues and royalty
payments. We have additional research programs underway, and novel Vertex drug
candidates targeting bacterial gyrase, specific kinases, caspases and proteases
could enter preclinical studies within the next 12 months. These drug candidates
may have application in the treatment of bacterial infection, cancer,
inflammation, neurological diseases, and HCV infection.

We believe that the emergence of large amounts of information from genomic
research represents an unprecedented opportunity for drug discovery directed at
novel biological targets. Chemogenomics, our proprietary, systematic,
genomics-based platform, is designed to speed drug discovery as well as to
expand intellectual property coverage of drug candidate compounds and classes of
related compounds. As part of this approach, we are pursuing a strategy of
parallel drug design directed at gene families, which are groups of genes with
similar sequences that code for structurally similar proteins. Using this
strategy, we seek to identify classes of chemical inhibitors (drug-like
molecules) that are applicable for clusters of closely related targets that have
different biological functions. We believe that chemogenomics will enhance the
speed and productivity of drug design efforts directed at novel biological
targets, secure for us valuable intellectual property in gene families of
interest, and ultimately result in the discovery, development and market
introduction of major new drugs.

We are presently applying our expertise in chemogenomics to focus on the
protein kinase, caspase, human protease and ion channel gene families, four
areas in which we believe we can leverage our drug design expertise to create
product candidates that address a variety of sizable therapeutic indications. In
May 2000, we entered into a collaboration with Novartis which could provide us
up to $800 million in pre-commercial payments to discover, develop and
commercialize up to eight kinase inhibitors for the treatment of a range of
diseases, including cancer, cardiovascular diseases, and inflammatory diseases.
The financial and technological support provided by Novartis have enabled us to
expand both our infrastructure and our chemogenomics efforts in the protein
kinase gene family. Technology and expertise acquired through our acquisition of
Aurora Biosciences Corporation in July 2001 are leading to a significant
expansion of our drug discovery efforts directed at ion channels, a major class
of membrane-bound drug targets, and other drug targets. We anticipate
establishing new collaborations with major pharmaceutical companies in order to
obtain the funding and resources needed to expand these and other discovery
efforts.

Aurora, a wholly-owned subsidiary of Vertex, develops and commercializes
technologies, products and services to accelerate the discovery of new medicines
by the pharmaceutical and biopharmaceutical industries. Our acquisition of
Aurora unites Aurora's industry-leading assay development, screening and cell
biology capabilities with our integrated drug discovery expertise, creating a
comprehensive, scalable platform which we believe will systematically accelerate
drug-candidate output in target-rich gene families.

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Over the next few years, we expect to continue our research and development
efforts and to bring drug candidates through late stage clinical development and
into commercialization. We also expect to license and acquire technologies,
resources and products that have the potential to strengthen our drug discovery
platform, product pipeline and commercial capabilities.

MARKETED AND DEVELOPMENT STAGE PRODUCTS

Our first product, Agenerase, received accelerated approval from the FDA in
April 1999 and was launched in May 1999. Agenerase, which was designed by
Vertex, is marketed in the United States, Europe and certain other countries by
GlaxoSmithKline. We co-promote Agenerase in the United States and in key
countries of the European Union (E.U.). Total sales of the drug worldwide for
the twelve months ended December 31, 2001 were $71.9 million, resulting in
$10.8 million in royalty revenue to Vertex.

Agenerase is the first of many Vertex-discovered products that we intend to
commercialize, by ourselves and with partners, in the coming years. The
accompanying chart describes our product pipeline. One of our drug candidates is
presently in Phase III clinical development, four are presently in Phase II
clinical development, three are presently in Phase I clinical development, and
eight are in preclinical development.

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* Development option

RESEARCH PROGRAMS

We have several research programs underway at the discovery stage, including
multi-target programs that are representative of our gene family-based drug
discovery approach, as well as single-target programs. We expect to advance
numerous drug candidates into development in the next several years that are
based on this ongoing research.

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* Vertex retains rights in the protease gene family except for certain targets
and compounds covered in existing collaborations

COMMERCIAL PRODUCT AND CLINICAL DEVELOPMENT PROGRAMS

We have one product on the market and more than 12 additional drug
candidates in clinical and preclinical development to treat viral diseases,
inflammation, cancer, autoimmune diseases, neurological disorders, and genetic
disorders.

INFECTIOUS DISEASE PROGRAMS

HIV/AIDS PROGRAM

AGENERASE

Our first marketed product is Agenerase (amprenavir), an orally deliverable
drug for the treatment of HIV infection and AIDS. We created and developed
Agenerase in collaboration with GlaxoSmithKline, using our expertise in
structure-based drug design, to address unmet needs in the treatment of HIV.
Agenerase received regulatory approval in the U.S. in April 1999, and it is now
marketed in more than 30 countries worldwide. GlaxoSmithKline is marketing
Agenerase worldwide except for the Far East. We co-promote Agenerase in the U.S.
and Europe. In Japan, we collaborated with Kissei Pharmaceutical Co., Ltd., in
the development of amprenavir, which is sold by Kissei under the trade name
Prozei-TM-. We receive royalties on sales of amprenavir by GlaxoSmithKline and
Kissei. We also supply amprenavir bulk drug substance to Kissei. We believe that
more than 14,000 patients worldwide take Agenerase as part of combination
therapy for the treatment of HIV. Agenerase's share of the HIV protease
inhibitor prescriptions in the U.S. was approximately 6.8% as of December 31,
2001.

To support the use of Agenerase in the marketplace, GlaxoSmithKline has
undertaken a broad Phase IV clinical program aimed at evaluating the drug's use
as part of different drug combinations in a variety of patient populations. In
collaboration with GlaxoSmithKline, we have initiated several of our own
post-marketing clinical studies.

Kissei received approval for amprenavir under a special fast-track
initiative by the Ministry of Health and Welfare in Japan in September 1999.
Amprenavir's market launch as Prozei followed shortly thereafter.

We believe that Agenerase is distinguished from other protease inhibitors by
its:

- longer half-life, which allows for convenient twice-daily dosing and
provides high levels of the drug in the bloodstream;

- ability to be dosed effectively with or without food, providing
convenience for patients; and

- lower levels of cross-resistance to other protease inhibitors.

Preliminary data indicate that Agenerase is less associated with high
cholesterol and triglyceride levels, and less associated with syndromes of fat
redistribution than have been reported for other anti-HIV drugs. Studies are
ongoing to confirm this preliminary data. Combination studies of Agenerase and
the protease inhibitor ritonavir presented at major medical conferences,
including the

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8th Conference on Retroviruses and Opportunistic Infections in Chicago in
February 2001, suggest that ritonavir significantly boosts levels of Agenerase
in the bloodstream in both once-daily and twice-daily dosing regimens.
Co-administration with ritonavir has become progressively more frequent in
clinical practice as a strategy for achieving maximum antiviral activity,
reducing the likelihood of treatment failure (viral breakthrough), and lowering
the overall pill count for patients. As of December 2001, more than 60% of
Agenerase used in the United States was in combination with ritonavir. In
February 2002, Agenerase became the first HIV protease inhibitor indicated as
part of a once-daily dosing regimen, based on research results in combination
with the protease inhibitor ritonavir.

VX-175

We are developing a second HIV protease inhibitor, VX-175 (also known as
GW433908 or 908) as part of the GlaxoSmithKline collaboration. A Phase III
clinical program has been initiated by our partner, GlaxoSmithKline. This
pivotal program includes trials in both treatment-naive and treatment-
experienced patients. The first study compares VX-175 to nelfinavir in
treatment-naive patients. The second study compares VX-175 in combination with
ritonavir, administered once-daily, to nelfinavir in treatment-naive patients.
The third study evaluates both once-daily and twice-daily dosing of VX-175 in
combination with ritonavir, compared to lopinavir/ritonavir, in
treatment-experienced patients. In all of these studies, patients receive
reverse transcriptase inhibitors as part of the combination regimen. More than
1,100 patients have been enrolled in these trials, which are designed to provide
a robust data package for anticipated regulatory filings in 2002 for market
approval in the U.S. and E.U. VX-175 is a prodrug of amprenavir designed to
provide more compact dosing for patients. A prodrug is an inactive compound that
is changed metabolically by the body to become active against disease. VX-175
was synthesized at Vertex and then selected for development by GlaxoSmithKline.
In view of the large number of pills that HIV infected patients typically
require daily as part of combination drug regimens, the prodrug's dosing benefit
could provide a material increase in physician acceptance of and patient
compliance with this product as compared to currently marketed protease
inhibitors.

A Phase II clinical study of VX-175 showed that VX-175 possesses potent
antiviral activity and a strong pharmacokinetic and safety profile. Preclinical
studies and Phase I studies found that administration of VX-175 delivered
amprenavir, the active ingredient of Agenerase, and also showed
dose-proportionality. The FDA has given VX-175 fast track designation. Fast
track designation is granted to products that may provide significant
improvement in the safety or effectiveness of the treatment for a serious or
life-threatening disease. GlaxoSmithKline is developing VX-175 and has marketing
rights in the United States, Europe and certain countries of the Far East.
Vertex currently holds the option to develop and commercialize VX-175 in Japan.
Vertex has an option to co-promote the prodrug in the United States and the
E.U., and we will receive royalties on any sales of VX-175 by GlaxoSmithKline.
We also retain rights to supply bulk drug substance to GlaxoSmithKline.

VX-385

In 2001, GlaxoSmithKline advanced another novel, orally available HIV
protease inhibitor, VX-385 (GW640385), into preclinical development. VX-385 is
the third drug candidate that GlaxoSmithKline and Vertex have advanced into
development as part of an ongoing collaboration to develop and commercialize HIV
protease inhibitors. VX-385 is chemically distinct from Agenerase, VX-175, and
other currently marketed protease inhibitors.

BACKGROUND: HIV/AIDS

Infection with the HIV virus leads to AIDS, a severe, life-threatening
impairment of the immune system. The World Health Organization (WHO) estimates
that approximately 36.1 million individuals worldwide, including approximately
920,000 patients in North America, are infected with HIV.

Protease inhibitors (PIs) are used as part of combination regimens for the
treatment of HIV. PIs block the cleavage of HIV polyproteins into active
proteins, and result in the production of

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non-infectious viral particles. Currently, more than 198,000 of the HIV patients
receiving drug treatment in the U.S. take at least one PI. The market for HIV
PIs is highly competitive, with seven different PIs vying for a share of the
market. Worldwide sales of HIV PIs were an estimated $1.75 billion in 2000, and
U.S. sales alone were an estimated $1 billion in 2001.

There are now three classes of antiviral drugs approved for the treatment of
HIV infection and AIDS: nucleoside reverse transcriptase inhibitors (NRTIs),
such as AZT and 3TC; non-nucleoside reverse transcriptase inhibitors (NNRTIs),
such as efavirenz; and PIs, including Agenerase.

HEPATITIS C VIRUS (HCV) INFECTION

Vertex is developing two drug candidates that target hepatitis C viral
infection by different mechanisms. The most advanced compound is merimepodib
(VX-497), currently in Phase II development. Merimepodib targets hepatitis C
indirectly through the inhibition of inosine 5'-monophosphate dehydrogenase. The
second compound, VX-950, is in preclinical development. It targets the hepatitis
C virus directly, by inhibiting the hepatitis C protease.

Identified in 1989, hepatitis C (HCV) causes chronic inflammation in the
liver. In a majority of patients, HCV establishes a chronic infection that can
persist for decades and eventually lead to cirrhosis, liver failure and liver
cancer. HCV infection represents a significant medical problem worldwide for
which there is inadequate or no therapy for a majority of patients. Sources at
the Centers for Disease Control and Prevention (CDC) have estimated that
approximately 2.7 million Americans, or more than 1% of the population, are
chronically infected with HCV, and the WHO estimates that there are as many as
185 million chronic carriers of the virus worldwide. Currently, there is no
vaccine available to prevent hepatitis C infection. The current standard
treatment of hepatitis C is a combination of pegylated interferon-alpha and
ribavirin. At present, however, approximately 50% of patients still fail to show
long-term sustained response to pegylated interferon-alpha/ribavirin combination
therapy. As a result, new safe and effective treatment options for HCV infection
are needed.

IMPDH PROGRAM

Vertex is developing novel, orally administered inhibitors of the enzyme
inosine 5'-monophosphate dehydrogenase (IMPDH), targeting the treatment of both
viral and autoimmune diseases. We retain all commercial rights to merimepodib
and second generation compounds resulting from our IMPDH research and
development program.

Our lead compound, merimepodib, has demonstrated potent biological activity
and oral bioavailability in preclinical and early clinical studies. Data from a
Phase I trial in healthy volunteers, completed in 1998, show that merimepodib is
well-tolerated in single escalating doses and achieves blood levels well above
those necessary to achieve potent inhibition of IMPDH IN VITRO. In
November 1999, we announced preliminary data from a Phase II clinical trial of
merimepodib indicating that merimepodib, when given as monotherapy to HCV
patients who were unresponsive to prior treatment with interferon-alpha, was
well tolerated and appeared to reduce levels of serum alanine aminotransferase,
a marker of liver inflammation, in HCV patients treated for 28 days.

We conducted a Phase II study of merimepodib combined with interferon-alpha
in treatment-naive patients with HCV infection in order to assess the safety,
tolerability and clinical activity of the combination of merimepodib and
interferon. The viral load data from this study showed a trend toward enhanced
antiviral activity in patients given one of two doses of merimepodib combined
with interferon as compared to patients receiving interferon alone. This is
consistent with an additive antiviral effect mediated by merimepodib, when given
in combination with interferon-alpha. Recent IN VITRO data demonstrates that
merimepodib also has an additive antiviral effect in combination with pegylated
interferon and ribavirin. We have initiated a 12-month triple combination Phase
II study with merimepodib, pegylated interferon, and ribavirin with the goal of
evaluating safety, pharmacokinetics, and clinical activity, including an
assessment of whether patients show an enhanced additive antiviral

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effect as a result of the triple combination. The study is designed to allow
patients to exit the study or continue treatment after six months.

We have two additional IMPDH inhibitors, VX-148 and VX-944, in development
or preclinical development, targeting antiviral and autoimmune indications.
VX-148 and VX-944 are chemically distinct from merimepodib. We began Phase I
clinical development of VX-148 in December 2000. Three Phase I studies have been
completed. We anticipate moving VX-148 into a Phase II clinical study in an
autoimmune indication during the second half of 2002. In addition, we plan to
begin Phase I clinical studies of VX-944 this year. More information on VX-148
and VX-944 is available in the section titled Autoimmune Diseases.

BACKGROUND: IMPDH AND HCV

Cells require adequate nucleotide levels to sustain RNA and DNA synthesis.
Nucleotides can be made available for nucleic acid synthesis via two distinct
pathways, the "salvage pathway" and "DE NOVO synthesis." Using the salvage
pathway, cells recycle nucleosides derived from breakdown of nucleic acids,
whereas with DE NOVO synthesis the purine or pyrimidine ring systems of the
nucleotides are assembled in a stepwise manner. The enzyme inosine
5'-monophosphate dehydrogenase (IMPDH) catalyzes an essential step in the DE
NOVO biosynthesis of guanine nucleotides, namely the conversion of inosine
5'-monophosphate (IMP) to xanthosine 5'-monophosphate (XMP).

Different cell types rely on these two pathways of nucleotide biosynthesis
to varying degrees. Cells that proliferate relatively rapidly, such as
lymphocytes and virus-infected cells, often rely more on the DE NOVO pathway
because they require more nucleotides than can be provided by the salvage
pathway. This observation makes enzymes of the DE NOVO pathway an attractive
target for pharmacological intervention aimed at selectively inhibiting
proliferation of such cells.

HEPATITIS C PROTEASE PROGRAM

In December 2001, Vertex and Eli Lilly selected VX-950 (LY570310), a potent,
oral HCV protease inhibitor, for preclinical development. We believe that this
compound is the first reported drug development candidate of a new class of
antiviral drugs being studied to inhibit hepatitis C NS3-4A protease, an enzyme
considered essential for HCV viral replication. We believe that therapeutics
such as VX-950 which directly target viral replication may significantly
increase the number of patients that achieve a complete viral response, in which
the virus is cleared from the body permanently. VX-950 has shown promising
results in cellular assays and preclinical studies. VX-950 has the potential to
become a first-in-class therapeutic and could provide an important treatment
advance for individuals with chronic HCV infection. Under our agreement, Eli
Lilly holds primary responsibility for formulation, preclinical and clinical
development, and global marketing. We will receive royalties on product sales
and retain the option to supply all of Eli Lilly's commercial drug substance
supply needs. We have ongoing drug discovery efforts in the area of HCV protease
inhibitors and selection of one or more additional drug candidates in the next
12-18 months is possible.

SEPSIS

In 2001, Vertex advanced VX-799, a small molecule caspase inhibitor, into
preclinical development targeting the treatment of sepsis. Sepsis is a
life-threatening bacterial infection of the bloodstream that overwhelms the
body's immune system and most commonly occurs among patients who have underlying
conditions such as trauma, surgery, burns, cancer and pneumonia. Caspases play
integral roles in both programmed cell death and inflammation, which have been
implicated in sepsis. Sepsis may progress to multi-organ failure, shock and
death. A potent caspase inhibitor may have the potential to provide a powerful
treatment option for sepsis patients. Sepsis affects approximately 700,000
individuals in the U.S. each year and an additional 1.2 million in Europe and
Japan. Sepsis results in an estimated 200,000 deaths each year.

Vertex is currently conducting a range of preclinical studies with VX-799,
and we anticipate that clinical studies will begin in 2003. Under an agreement
signed in 2000, Serono S.A. holds an option to

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develop and commercialize VX-799 in Europe and as part of a joint venture with
Vertex in the U.S. Taisho holds the option to develop and commercialize VX-799
in Japan and certain Asian markets.

BACKGROUND: CASPASES AND SEPSIS

Caspases are a family of 11 enzymes that play roles in numerous biological
processes, including programmed cell death (apoptosis) and inflammation. More
information on caspases is available in the section titled "Caspase Inhibitor
Program." VX-799 has produced encouraging results in an apoptosis-dependent
model of organ failure and several models of bacterial-induced sepsis. VX-799
may also have the potential to treat other diseases in which increased caspase
activity is implicated.

INFLAMMATION AND AUTOIMMUNE DISEASE

INFLAMMATORY DISEASE

INTERLEUKIN-1 BETA CONVERTING ENZYME (ICE; CASPASE-1) PROGRAM

We are conducting research and development on inhibitors of interleukin-1
beta converting enzyme (ICE; caspase-1) for the treatment of acute and chronic
inflammatory conditions, including rheumatoid arthritis. We are collaborating
with Aventis S.A. in the development of the lead ICE inhibitor compound,
pralnacasan (VX-740). Aventis is conducting a 250 patient Phase II study in
rheumatoid arthritis to evaluate clinical activity using standard measures of
response to treatment, including the American College of Rheumatology (ACR)
response criteria, which measure improvement in patient-and
professionally-reported disease severity and activity. We anticipate that
Aventis will begin a Phase II study in an additional indication in 2002.
Inhibitors of ICE may have application to a wide range of chronic and acute
inflammatory diseases, such as rheumatoid arthritis, osteoarthritis, congestive
heart failure, psoriasis and inflammatory bowel disease.

In 2000, Aventis completed a Phase IIa 28-day clinical trial of pralnacasan
in patients with rheumatoid arthritis to evaluate the safety and
pharmacokinetics of multiple doses of pralnacasan. Results showed dose-dependent
suppression of interleukin-1 beta production, an enzyme that plays a role in
inflammation and tissue damage. A Phase I clinical trial of the compound,
completed by Aventis in 1999, showed that the compound was well-tolerated in
humans in a range of single doses. Under our 1999 agreement, Aventis holds an
exclusive worldwide license to develop, manufacture and market pralnacasan in
any indication, as well as an exclusive option for all other compounds
discovered under our previous research collaboration with Aventis. We will
receive royalties on any sales of pralnacasan.

Vertex has continued research into second generation ICE inhibitors, as well
as other caspase inhibitors. In 2000, we advanced VX-765, an ICE inhibitor
representing a chemical class distinct from pralnacasan, into preclinical
development. Preclinical data reported in 2001 showed that VX-765 reduces
inflammation and cytokine levels in animal dermatitis and arthritis models. We
may begin Phase I clinical studies with VX-765 by the end of 2002. We hold
worldwide rights to compounds emerging from our second generation ICE inhibitor
research program.

BACKGROUND: ICE INHIBITORS FOR INFLAMMATORY DISEASE

ICE (caspase-1) is an enzyme that controls the release of active
interleukin-1 (IL-1) beta (one of two forms of IL-1) and IL-18 from white blood
cells into the bloodstream and within tissues. IL-1 beta and IL-18 are cytokines
that mediate a wide range of immune and inflammatory responses in many cell
types. Early in the inflammatory process, IL-1 beta is released from white blood
cells, initiating a complex cascade of events that results in inflammation and
tissue damage. IL-18 is an important factor in the activation of lymphocytes, a
type of white blood cell. Elevation of IL-1 beta and IL-18 levels has been
correlated to disease state in a number of acute and chronic inflammatory
diseases.

Rheumatoid arthritis is the lead indication of the pralnacasan development
program. In patients with rheumatoid arthritis, increased activity of IL-1 beta
and IL-18 is observed in joint tissues during disease flare-ups, and IL-1 beta
and IL-18 are known to activate osteoclasts, a cell type important in bone
erosion characteristic of rheumatoid arthritis. In mice in which arthritis is
induced by collagen

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immunization, treatment with pralnacasan significantly reduces the severity of
arthritis compared to vehicle-treatment.

There are more than 6 million patients with rheumatoid arthritis worldwide,
including approximately 2.1 million in the United States. The main drugs used to
treat rheumatoid arthritis are non-steroidal anti-inflammatory drugs (NSAIDs)
such as Motrin (ibuprofen) and Celebrex (celecoxib). These drugs are
palliative--they relieve pain and swelling but do not reverse or prevent the
progression of the disease. Methotrexate is a disease-modifying drug that is
widely used, but its use is associated with side effects that include bone
marrow suppression and liver toxicity. Even when tolerated well, over the long
term many patients become unresponsive to methotrexate. Newer therapies
including Enbrel-Registered Trademark- (etanercept) and
Remicade-Registered Trademark- (infliximab) provide a strong rationale for a new
kind of disease-modifying therapy that involves inhibition of the cytokine tumor
necrosis factor (TNF) alpha. In 2001 Kineret-Registered Trademark- (anakinra)
became the first therapy approved for rheumatoid arthritis targeting the
cytokine IL-1b. However, these agents are injectable, and can be inconvenient
and painful to administer. We believe that an oral cytokine inhibitor such as
pralnacasan may have significant commercial advantages.

Vertex and Aventis scientists began collaborating in 1993 to discover and
develop orally available inhibitors of ICE. Our design efforts were based on the
three-dimensional atomic structure of ICE, which was solved by Vertex
researchers in 1994. As the result of an extensive, jointly conducted synthesis
and research program, pralnacasan was selected as a development candidate in
1997. Pralnacasan is the first caspase inhibitor to be advanced to Phase II
clinical trials.

P38 MAP KINASE PROGRAM

The p38 MAP kinase is a human enzyme involved with the onset and progression
of inflammation and apoptosis. This enzyme plays a central role in regulating
the cytokines TNF-alpha and IL-1 beta. We have extensive clinical experience
with p38 MAP kinase inhibitors, which hold the potential to be a powerful and
broadly useful new class of oral anti-inflammatory drugs. Vertex and Kissei
selected VX-745 as a drug development candidate in 1998. In 2001, we obtained
what we believe is the first clinical "proof of principle" data correlating
inhibition of p38 MAP kinase with a significant anti-inflammatory effect,
although we subsequently suspended development of VX-745 based on adverse
neurological effect findings in long-term, high dose studies in one of two
species of animals. We have refocused our p38 inhibitor development efforts
around two second generation compounds, VX-702 and VX-850, which do not cross
the blood brain barrier and which we believe have commercial advantages over
VX-745. Phase I studies of one or both drug candidates are scheduled to begin in
the first half of 2002. Both VX-850 and VX-702 represent chemical classes that
are distinct from VX-745. The objective of our research collaboration with
Kissei is to identify and extensively evaluate compounds that target p38 MAP
kinase to develop novel, orally active drugs for the treatment of inflammatory
diseases, such as rheumatoid arthritis, asthma, Crohn's disease, certain
hematologic disorders, congestive heart failure, and neurological diseases such
as stroke.

In a collaboration with Kissei that began in 1997, Vertex is pioneering the
discovery and development of novel p38 MAP kinase inhibitors. Under the
agreement, Vertex holds development and commercial rights in the United States
and Europe for its p38 MAP kinase inhibitors. Kissei holds development and
commercial rights in Japan and certain Asian countries for VX-745 and VX-702.

BACKGROUND: P38 INHIBITORS FOR INFLAMMATORY DISEASE

The mitogen-activated protein (MAP) kinases are a family of
structurally-related human enzymes involved in intracellular signaling pathways
that enable cells to respond to their environment. When activated, the p38 MAP
kinase triggers production of the cytokines IL-1, TNF-alpha, and IL-6. Excess
levels of IL-1 and TNF-alpha are associated with a broad range of acute and
chronic inflammatory diseases. We believe that an oral cytokine inhibitor such
as VX-702 or VX-850 has significant dosing advantages over other available
therapies.

Excess TNF-alpha and IL-1 levels also play an important role in programmed
cell death associated with ischemia and stroke, and possibly in
neurodegenerative diseases such as Alzheimer's disease. We

9

are aware of several other companies that are developing p38 MAP kinase
inhibitors. In addition, there are other drugs, in development or approved, that
have different mechanisms of action for treating rheumatoid arthritis and other
inflammatory diseases.

AUTOIMMUNE DISEASES

IMPDH PROGRAM

Vertex is developing novel, orally administered inhibitors of the enzyme
inosine 5'-monophosphate dehydrogenase (IMPDH), targeting the treatment of both
viral and autoimmune diseases. In 2000, we designated the second-generation
IMPDH inhibitors, VX-148 and VX-944, as drug development candidates. VX-148 and
VX-944 are chemical compounds structurally distinct from merimepodib. We are
completing Phase I development of VX-148, and Phase II studies are planned to
begin during the second half of 2002. Preclinical studies of VX-944 are ongoing.

IMPDH is a validated target for immunosuppressive drug development as
evidenced by the presence of two marketed drugs that function through the
inhibition of this enzyme:

- Mycophenolate mofetil (MMF, or CellCept-Registered Trademark-), the
prodrug ester of mycophenolic acid, has been developed and approved for
the prevention of acute rejection in kidney, heart, and liver
transplantation when used in combination with steroids and cyclosporin A
(CsA).

- Mizoribine (Bredinin-Registered Trademark-) is approved in Japan for
multiple indications, including prevention of rejection after renal
transplantation, idiopathic glomerulonephritis, lupus nephritis, and
rheumatoid arthritis.

Based on the broad role of IMPDH in the regulation of immune system
activity, we believe that VX-148 has the potential to treat a wide variety of
autoimmune diseases including such diseases as psoriasis, multiple sclerosis and
rheumatoid arthritis.

NEUROLOGICAL DISEASES

BACKGROUND: NEUROLOGICAL DISEASES

Neurodegenerative disorders are among the diseases with the fewest available
effective treatments. Central nervous system disorders such as Alzheimer's
disease, Parkinson's disease and multiple sclerosis affect millions of patients
worldwide, and for some of these there are no approved therapies that alter the
course of disease progression. Peripheral neuropathies encompass a wide spectrum
of clinical syndromes for which treatments of only limited efficacy are
available. Diabetic neuropathy is the most common identifiable cause of
neuropathy. There are approximately 1.3 million patients with moderate to severe
diabetic neuropathy in the United States.

Effective treatment of both central and peripheral neurological disorders
has long been hampered by the inability to slow, arrest, or reverse nerve damage
or progression. Other companies are developing various neurotrophic factors
(proteins) for these indications, but we believe that their clinical utility is
likely to be limited because of the difficulty of the delivery of protein drugs
to nervous system tissues. Based on our extensive research in the field of
immunosuppressive drugs, we have generated a large number of compounds, known as
neurophilin ligands or neurophilin compounds, that improve outcomes in various
models of neurological diseases. Extensive IN VITRO and IN VIVO studies
conducted with a reference compound designed by Vertex support the broad
potential of our neurophilin ligands in the treatment of degenerative central
nervous system and peripheral nervous system diseases. Our researchers are
seeking to determine the mechanism of action of neurophilin ligands.

RESEARCH COMPOUNDS

We are engaged in a worldwide strategic collaboration with Schering AG
(Germany) for research, development and commercialization of neurophilin ligands
for the treatment of a variety of neurological disorders. During 1999, we
announced that orally administered neurophilin compounds

10

discovered at Vertex, including compounds that do not interact with FKBP-12,
significantly improve outcome in two different preclinical models of Parkinson's
disease. We also reported for the first time that compounds that do not interact
with FKBP-12 can improve outcomes in animal models of peripheral neuropathies.
We continue to characterize the potential of compounds from this program in a
variety of neurological disease models. We have used an integrated drug design
technique to synthesize a library of orally available small molecule compounds
that have the potential to prevent nerve damage or improve recovery following
nerve injury. Our research program remains active in this area, with the
objective of selecting additional compounds for preclinical development in the
future.

TIMCODAR

Timcodar dimesylate is a novel, orally administered drug candidate that may
be useful in the treatment of neurological disorders such as peripheral
neuropathies (including diabetic neuropathy), Parkinson's disease, trauma, and
amyotrophic lateral sclerosis (ALS). A single-dose Phase I study of four
different doses of timcodar in healthy volunteers was completed in 1998,
providing support for Phase II clinical development in the indication of
diabetic neuropathy. IN VIVO results in animals have shown that timcodar can
prevent neural dysfunction in models of neuropathies. Schering AG has an option
to co-develop timcodar with us under the collaboration agreement. We are
evaluating novel testing approaches that have the potential to elucidate the
clinical activity of timcodar in neuropathies. We have completed a Phase IIa
28-day study of more than 70 patients with diabetic neuropathy. The results
showed that timcodar is bioavailable and well-tolerated at a range of doses. An
evaluation of timcodar following topical administration of capsaicin in 62
healthy volunteers has also been completed. This study was designed to measure
timcodar's ability to accelerate innervation following capsaicin-induced
denervation of the epidermal layer. A goal was to obtain data showing that
timcodar has a positive effect in recovery of human nerve function. The results
of the study indicate that timcodar was well tolerated but did not enhance
epidermal nerve fiber regeneration significantly relative to placebo. Given
these findings, we do not currently plan to conduct further development of
timcodar for the treatment of neurodegenerative diseases.

CANCER

MDR PROGRAM

We are developing novel compounds to treat and prevent the occurrence of
drug resistance associated with the failure of cancer chemotherapy. Incel (also
referred to as biricodar dicitrate or VX-710), our lead compound, blocks major
multidrug resistance (MDR) mechanisms, including P-glycoprotein, or P-gp, and
multidrug resistance associated protein, or MRP. P-gp and MRP are proteins that
are overexpressed on the cell surface of many different tumor types that can
prevent the effectiveness of chemotherapy by actively pumping out cytotoxic
agents from within the cancer cell. Incel is designed to block these molecular
pumps, allowing chemotherapy to affect the targeted tumor. Incel, an intravenous
compound, is intended to be administered in combination with cancer chemotherapy
agents such as doxorubicin, paclitaxel, vincristine, etoposide and mitoxantrone.
We have completed Phase II clinical trials of Incel in ovarian, breast, small
cell lung and prostate cancers and in soft tissue sarcoma. An exploratory study
has also been conducted in liver cancer. In addition, we have conducted a Phase
I/II clinical trial of the compound VX-853, an oral MDR inhibitor, in patients
with solid tumors. We retain all commercial rights to Incel worldwide. We are
actively seeking corporate collaborators for our MDR program to help support
Phase III clinical development and commercialization.

The American Cancer Society estimates that during 2001 more than
1.2 million people in the United States were diagnosed with invasive cancer and
more than 550,000 people in the U.S. died from such cancers. A significant
number of these patients failed to respond or relapsed following chemotherapy
because of MDR.

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GENETIC DISORDERS

At the end of 2001, Vertex advanced VX-563 into preclinical development.
VX-563 is an orally available compound with potential application across a range
of genetic diseases. It is being tested IN VITRO, and IN VIVO in animal models,
for several disease indications ranging from sickle cell disease to Huntington's
disease. A Phase I clinical study could potentially be initiated in either late
2002 or early 2003.

VX-563 is thought to exert its effects pleiotropically, and we are working
to better understand its exact mechanism of action in particular disease states.
One mechanism that appears to be important is the inhibition of histone
deacetylation. Histones are small proteins that bind tightly to DNA and play a
crucial role in the packing and folding of DNA into the nucleus. The acetylation
state of histones can modulate gene expression, and VX-563 has been shown to
affect histone acetylation IN VITRO.

Preclinical studies have demonstrated that VX-563 can selectively stimulate
embryonic or fetal globin gene expression in a variety of experimental systems,
suggesting that VX-563 may have therapeutic potential for the treatment of
sickle cell disease (SCD). Current treatments are ineffective and may require a
multi-disciplinary program including antibiotics, pain management, intravenous
fluids, blood transfusion, and surgery. Hydroxyurea is the only chronic drug
therapy commonly used to treat SCD. Due to safety concerns, hydroxyurea is
currently only used in patients with severe disease.

VX-563 has the potential to be a novel, first-in-class treatment for SCD
with the potential to treat as many as 70,000 patients who currently have
limited treatment options. VX-563 also has potential application to other
genetic disorders such as Huntington's disease, cystic fibrosis, and a-1
antitrypsin deficiency.

VERTEX DRUG DESIGN PLATFORM AND DRUG DISCOVERY STRATEGY

We believe that our integrated drug design approach, together with our
strategy of parallel drug design in gene families, has significantly enhanced
our ability to discover and develop small molecule drugs directed at
biologically complex targets, including novel targets identified in genomic
research. Our approach has been validated through our collaborations and success
in moving drug candidates into clinical trials.

INTEGRATED DRUG DESIGN APPROACH. Our drug design platform integrates
advanced biology, biophysics, chemistry, automation and information technologies
in a coordinated and simultaneous fashion throughout the discovery process. The
goal of this interdisciplinary integration is to increase the speed and
certainty of drug discovery and development. Early in the drug design process,
we focus on qualities that are critical to the successful development of oral
small molecules, including sufficient potency, oral bioavailability, adequate
pharmacokinetics and safety. Our consistent achievement of these parameters in
discovery efforts directed at biologically complex molecular targets has been a
major reason for our high rate of productivity and success in competitive areas
of drug discovery.

GENE FAMILY-BASED DRUG DISCOVERY. Vertex has pioneered a novel approach to
drug discovery in which drugs are designed in parallel across gene families.
Vertex's proprietary, systematic, gene family-based platform is designed to
accelerate the discovery of new drugs and to expand intellectual property
coverage of drug candidate compounds and classes of related compounds. This
approach represents an intersection of medicinal chemistry with genomics: the
organized pursuit of small molecule drugs directed at genomically identified
targets. To date, using our integrated approach, we have been able to design
multiple, distinct lead classes of compounds for certain protein targets, and to
identify many or all of the critical interactions that a compound must have in
order to bind to a target or group of targets. In doing so, we have been able to
design and file patent applications covering many of the possible drugs for
selected protein targets. For example, in our caspase program, we have obtained
a pharmacophore patent that we believe describes a large number of the possible
ways of inhibiting caspase-1 with drug-like small molecules, and we believe that
chemical scaffolds useful for caspase-1 inhibition may also be useful starting
points for inhibiting other targets in the caspase gene family. In

12

our kinase program, we have filed patents on more than 340 different chemical
scaffolds that inhibit one or more kinases.

The complete sequence of the human genome, which represents all of the genes
that code for proteins in the human body, is now known. The number of human
proteins that represent targets for currently marketed drugs is approximately
500. In the next several years, genomic and proteomic research is expected to
reveal as many as 5,000 novel protein targets that represent promising points of
therapeutic intervention with small molecule drugs. We believe that the
traditional approach to drug discovery, which focuses on one target at a time,
is not the most efficient way to exploit this expected increase in the number of
"druggable" targets.

To maximize productivity for drug discovery directed at novel protein
targets, we are pursuing a strategy of parallel drug design in gene families.
This approach applies our integrated strategy across groups of structurally
similar targets to pursue rapid and simultaneous generation of lead compounds.
Our goal is to use this approach to describe and patent many or all of the
possible drug candidates for a protein target or a group of targets.
Specifically, we are seeking to:

- design multiple lead classes of compounds that are applicable to clusters
of structurally similar targets;

- leverage our knowledge of one target's active site to design inhibitor
classes for related targets; and

- identify all of the critical interactions a compound must have to bind to
a particular target, and use this information as a basis for obtaining
patents that describe many or all of the possible drugs for a target or
cluster of targets.

We believe that our integrated approach to drug design is unique among small
molecule-based biotechnology companies, and has led to significant
collaborations and an extensive intellectual property portfolio covering lead
classes of compounds directed at gene families of interest.

We also have a single target research program underway for specific
infectious diseases, in areas of high commercial potential and significant unmet
medical need.

MULTI-TARGET RESEARCH PROGRAMS

We have four major multi-target research programs underway that utilize our
parallel drug design approach in the kinase, caspase, protease, and ion channel
gene families. We believe that our integrated approach and our proprietary
technologies allow us to rapidly identify appropriate chemical side chains for
these scaffolds that will provide specificity for a particular target of
interest within a cluster of related protein targets. In the coming years, we
expect to initiate discovery efforts in one or more additional gene families.

KINASE PROGRAM

We have a broad-based drug discovery effort targeting the human kinase
protein family, which consists of approximately 500 kinases. Kinases are enzymes
that play a key role in transmitting signals between and within cells. Kinases
exert their effect by phosphorylating other proteins, which then become
activated and perform a specific function. Kinases are implicated in most major
diseases, including cancer, autoimmune and inflammatory disease, cardiovascular
disease, metabolic disease, and neurological disease. Thus, kinases can be ideal
targets for intervention with small molecule drugs. In the next six to seven
years, we envision advancing eight kinase inhibitors into clinical development
targeting multiple therapeutic areas.

13

We have advanced discovery efforts underway targeting several human MAP
kinases. MAP kinases form a group of related enzymes that include
extracellular-signal regulated kinase (ERK), p38 MAP kinase, and Jun N-terminal
kinase (JNK). As a neuronal-specific isoform of JNK, JNK3 is a member of the MAP
kinase family and is implicated in the pathogenesis of certain neurological
diseases such as epilepsy, stroke and Alzheimer's disease. We have identified
several novel classes of JNK3 inhibitors and are advancing lead compounds toward
clinical candidate status. We are also engaged in the discovery of inhibitors of
the enzyme ERK2, which plays a role in cell proliferation. We believe that ERK2
inhibitors may have a role in the treatment of cancer. Our p38 MAP kinase
inhibitors are discussed earlier in the section titled "Autoimmune and
Inflammatory Diseases."

In addition, we have made key research advances in our study of glycogen
synthase kinase 3-b (GSK3-b), an enzyme involved in the regulation of blood
glucose and a potentially important diabetes target. In June 2001, we reported
the three-dimensional atomic structure of GSK3-b. Our understanding of the
structural biology of this enzyme is potentially useful in driving medicinal and
computational chemistry efforts for enzymes across the entire kinase family.

Vertex has advanced drug discovery efforts underway targeting several
additional, undisclosed kinase targets, including targets that play a role in
the development and progression of cancer, inflammation and cardiovascular
disease. As part of our kinase research program, we have designed numerous
kinase inhibitors that have demonstrated pharmacodynamic activity in animal
models of diabetes, cancer, restenosis, and stroke. We expect to advance two or
more novel kinase inhibitors into preclinical development in the next
12 months.

In May 2000 we entered into an agreement with Novartis Pharma AG to
collaborate on the discovery, development and commercialization of small
molecule drugs directed at targets in the kinase protein family. Certain
targets, where we or Novartis already had a substantial program underway prior
to May 2000, are excluded from the collaboration. For example, p38 MAP kinase,
which is the molecular target for VX-850 and VX-702, our compounds in
development for inflammatory diseases, is not included within the scope of the
Novartis collaboration. The financial and technological support provided by
Novartis is enabling us to further expand both our infrastructure and parallel
drug design efforts in the protein kinase gene family.

CASPASE PROGRAM

Caspases are a subfamily of proteases which play specific roles in apoptosis
and inflammation. The human caspase family presently includes 11 structurally
related enzymes. We are designing novel small molecule inhibitors of selected
caspase enzyme targets to treat a variety of diseases in which inflammation and
apoptosis play a role. Our scientists are leveraging the expertise gained
through our successful design and optimization of ICE inhibitors. We applied our
knowledge of ICE and other caspases to the design of VX-799, a small molecule
caspase inhibitor with the potential to treat sepsis, and we anticipate
selecting an additional drug candidate for clinical development in the years to
come.

All cells have the ability to self-destruct via a tightly-regulated pathway
known as apoptosis in response to certain signals. Apoptosis is an essential
component of numerous biological processes, including tissue remodeling and
immune system regulation. When not properly regulated, apoptosis can have
damaging effects and contribute to a variety of diseases. Our discovery effort
is focused on the design of small molecules for inhibiting caspase-mediated
apoptotic and inflammatory processes, thereby exerting a protective effect on
cells in specific tissues. Potential indications include tissue damage related
to acute conditions such as stroke and myocardial ischemia, and
neurodegenerative disorders such as Alzheimer's disease and Parkinson's disease.

Through gene knockout studies, our scientists have gained important insight
into the biological role of different caspases in the activation of apoptosis in
specific cells and tissues. Vertex research teams have solved the
three-dimensional atomic structures of four caspases, including one caspase from
each of the three caspase subfamilies, and more than 50 enzyme/inhibitor
complexes. Different caspases share similar structural features, and by using
parallel structural approaches combined with new

14

medicinal and computational chemistry tools, Vertex scientists made rapid
progress in the design and synthesis of multiple lead classes of compounds. Our
caspase research effort reflects the implementation of our strategy for
exploiting emerging genomic information by targeting families of
structurally-related proteins for drug discovery.

In September 1999, Vertex signed an expanded agreement with Aventis to
collaborate on the development of pralnacasan, an orally active inhibitor of
ICE. In November 1999, we began collaborating with Taisho Pharmaceutical
Co., Ltd. to discover, develop, and commercialize caspase inhibitors in Japan
and certain Far East markets. In December 2000, we entered into a collaboration
with Serono S.A. to discover, develop, and market caspase inhibitors in other
territories, including North America, where we have agreed to establish a joint
venture with Serono.

PROTEASE PROGRAM

We have a broad-based drug discovery effort targeting the human protease
family. The protease gene family consists of approximately 400 proteases that
play a role in many different diseases in several therapeutic areas. As in our
kinase program, we are using an approach that leverages structural similarity to
create chemical scaffolds applicable to a range of protease targets. We intend
to leverage our expertise in proteases to discover and develop additional drug
candidates targeting members of the protease family. We are currently
establishing a research program in beta-secretase, an aspartic protease
implicated in the pathogenesis of Alzheimer's disease, and will target
additional proteases in the coming years.

Vertex has broad experience across the protease family and has successfully
designed drug candidates targeting aspartyl, cysteine, and serine proteases,
representing three of the four protease subfamilies. Our efforts targeting HIV
protease (an aspartyl protease) have resulted in one marketed drug, Agenerase,
and two additional drugs in clinical development. Vertex, together with Aventis,
Serono and Taisho have pioneered research and development efforts to design
drugs targeting caspases (which are cysteine proteases). Our lead drug candidate
targeting caspase-1, pralnacasan, is now in Phase II clinical development. We
also have two additional drug candidates targeting caspases in development. In
2001, Vertex and Eli Lilly advanced VX-950, an inhibitor of HCV protease (a
serine protease), into preclinical development. We believe our extensive
experience in proteases will allow us to design additional drugs targeting
protease enzymes that have high clinical and commercial potential.

ION CHANNEL PROGRAM

Vertex is making a significant investment in the creation of a broad-based
ion channel drug discovery effort that incorporates our medicinal chemistry and
modeling expertise, augmented by significant technology and expertise obtained
through our acquisition of Aurora. The ion channel gene family contains numerous
druggable targets that play a role in the pathogenesis of cancer as well as
inflammatory, cardiovascular and metabolic diseases. Existing therapies such as
amlodipine and nifedipine, which are calcium channel blockers for the treatment
of hypertension, provide a strong rationale for developing drugs targeting ion
channels. Important targets for a range of therapeutic indications are
potentially found across all ion channel subfamilies. For example, lamotrigine
and carbamezepine are sodium channel inhibitors for the treatment of epilepsy.
Vertex will utilize its expertise in assay development and screening to advance
discovery efforts within this family. We also have extensive experience in the
development of proprietary and highly sensitive instruments which detect changes
in a cell membrane's electrical potential due to ion channel activity. We are
developing next generation ion channel screening technology to enable the
discovery of ion channel modulators with appropriate drug-like characteristics.

15

ADDITIONAL GENE FAMILIES

Vertex plans to utilize its proprietary gene family-based platform and
experience in structure based drug design to pursue targets in additional,
medically important gene families. We have exploratory efforts underway in
phosphatases, G protein coupled receptors (GPCRs), and nuclear receptors.

SINGLE TARGET RESEARCH PROGRAM

BACTERIAL GYRASE

We are engaged in the discovery of novel antibiotics that target DNA gyrase
B, an essential enzyme found in many bacteria. DNA gyrase is utilized during the
bacterial replication process. DNA gyrase inhibitors already on the market have
proven to be potent, broad-spectrum antibiotics and are used to treat a variety
of common gram-positive and gram-negative infections in various treatment
settings. Existing gyrase inhibitors, which work by interacting with the gyrase
A subunit, achieved sales of more than $2.85 billion in 2000. In contrast, we
are targeting the gyrase B subunit, and specifically the ATP-binding site that
is highly conserved across multiple species of bacteria. We are currently
optimizing lead classes of inhibitors and plan to select a drug development
candidate in 2002.

KEY COMPONENTS OF OUR TECHNOLOGY PLATFORM

We have created an integrated technology platform which employs a variety of
technologies, and which uses information from many different scientific
disciplines early and continuously throughout the drug discovery process. We
believe that our integrated approach, as demonstrated by our track record in
drug design directed at biologically complex targets, provides for faster and
more productive drug discovery compared to historical averages for the
pharmaceutical industry. Selected technologies include:

GENOMICS AND BIOINFORMATICS. We have an agreement with Incyte
Pharmaceuticals for access to its Lifeseq Gold database, a comprehensive
portfolio of genomic information. We anticipate accessing or acquiring
additional technology, as well as information from both public and private
databases, to further our parallel drug design strategy.

FUNCTIONAL GENOMICS. We use a number of functional genomics techniques,
such as gene knock-out mice, to help guide target selection and test the
potential of chemical compounds in disease models. Site-directed mutagenesis is
used to identify critical residues for drug interaction in the active site of a
molecular target. Our patented GenomeScreen technology allows us to identify and
validate targets by scanning the genome of living human cells and identifying
those genes activated or repressed in various disease states. We have used
GenomeScreen to assist us in mapping gene activation and cell signaling pathways
and in characterizing poorly understood cellular processes.

BIOPHYSICS. One of our core strengths is the generation of atomic
structural information on molecular targets using X-ray crystallography and
nuclear magnetic resonance (NMR) spectroscopy to guide design and optimization
of lead classes of drugs. Our scientists have also pioneered innovative NMR
techniques, including a proprietary technology called NMR SHAPES, which can
screen molecular subunits for weak affinity to a molecular target. This initial
screening can quickly identify lead classes of molecules for further evaluation.

COMPUTER-BASED MODELING. We apply advanced, proprietary computational
modeling tools to guide early evaluation of compounds. During initial virtual
compound screening ("IN SILICO"), we can evaluate up to 10(14) compounds in one
day to select fewer than 100 or as many as 1,000 compounds or more for synthesis
and traditional screening, and repeat the cycle thereafter based on initial
results. By using proprietary algorithms to sort and filter compounds for
specific properties, our scientists can efficiently focus on compounds that are
more likely to be useful leads.

MEDICINAL AND COMBINATORIAL CHEMISTRY. Medicinal chemistry expertise is a
key part of our drug discovery process. Medicinal chemists visually evaluate
each compound that emerges through IN SILICO

16

screening processes and provide insight into the creation of focused libraries
for screening. We use combinatorial chemistry to design diverse libraries based
on promising early leads.

PHARMACOLOGY. We employ a number of approaches designed to provide
predictive information on the bioavailability and pharmacokinetic profile of
potential compounds at the earliest stages of the drug discovery process. These
approaches, which include IN VITRO metabolism and toxicological studies and IN
VIVO assessment of leads in predictive animal models, provide greater certainty
that a compound will have the desired properties of an oral drug.

ASSAY TECHNOLOGIES. Our 2001 acquisition of Aurora has provided us with
premier capabilities in assay development and screening to rapidly generate
large numbers of high quality lead compounds and drug candidates across all
major gene families. We can now conduct 200 assays per year, a level of
screening capability on par with that of major pharmaceutical companies. We are
leveraging our abilities in assay development, screening, proprietary reagents,
proteomics, and ADME/toxicology to accelerate drug discovery. Our assay
technology platform allows us to identify medically important targets and small,
drug-like molecules early in the discovery process.

ASSAY DEVELOPMENT. Our patented cell-based assay technologies include
GenomeScreen and GeneBLAzer. GeneBLAzer, which enables fluorescence-activated
cell sorting, is readily adapted to a broad range of target classes. In
addition, we utilize fluorescence polarization technology to study molecular
interactions and have developed a number of proprietary fluorescent proteins and
substrates. Drug discovery-related applications of our patented fluorescent
proteins include various methods of functional genomics, high throughput
screening assays, and gene profiling to assess the potential toxicity of
compounds.

HIGH THROUGHPUT SCREENING. Our patented ultra high throughput screening
(UHTSS) platform is designed to screen over 100,000 compounds per day. The UHTSS
Platform combines compound management, plate replication, assay preparation, hit
(potential lead) identification, selection and re-tests of the hits,
fluorescence detection and data analysis into one fully-integrated and automated
system. The ultra high throughput capability is achieved through the use of our
NanoWell-Registered Trademark- Assay Plate, which contains 3,456 wells in a
standard microplate footprint.

ION CHANNEL PLATFORM. Our patented universal ion channel technology
platform, which includes the VIPR subsystem, our proprietary voltage ion sensor
probes and voltage ion probe reader, was first developed in 1997. This platform
facilitates the rapid generation of screening assays and the high throughput
screening of ion channel targets by optically measuring changes in membrane
potential in live cells in an automated, microtiter plate format. The second
generation, VIPR II subsystem is capable of screening in 96-well and 384-well
microplate formats with a significant increase in throughput over the original
VIPR subsystem. We are developing next-generation ion channel screening
technology to facilitate drug discovery in this area.

CORPORATE COLLABORATIONS

We have entered into corporate collaborations with pharmaceutical companies
that provide financial and other resources, including capabilities in research,
development, manufacturing, and sales and marketing, to support our research and
development programs. At present, we have the following major corporate
collaborations:

NOVARTIS PHARMA AG

In May 2000 we entered into an agreement with Novartis Pharma AG to
collaborate on the discovery, development and commercialization of small
molecule drugs directed at targets in the kinase protein family. Under the
agreement, Novartis agreed to pay us up to approximately $600 million in
pre-commercial payments, comprised of $15 million paid upon signing of the
agreement, up to $200 million in product research funding over six years and up
to approximately $400 million in further license fees, milestone payments and
cost reimbursements. These amounts are based on the

17

development of eight drug candidates. In addition, Novartis created a
$200 million loan facility to support certain clinical studies, which we may
draw down in increments of up to $25 million for each drug candidate. The loan
is interest free and Novartis will forgive the full amount of any advances if
Novartis accepts the drug candidate for development under our agreement. We will
have the responsibility for drug discovery and clinical proof-of-concept testing
of drug candidates. Novartis will have exclusive worldwide development,
manufacturing and marketing rights to clinically and commercially relevant drug
candidates that it accepts from us for development. We will receive royalties on
any products that are marketed as part of the collaboration. Subject to certain
conditions, we will have co-promotion rights in the United States and Europe. We
will retain the rights to any intellectual property resulting from this
collaboration. Novartis may terminate this agreement without cause after four
years upon one year's written notice.

TAISHO PHARMACEUTICAL CO., LTD.

In November 1999, we entered into a collaboration with Taisho covering the
discovery, development, and commercialization of caspase inhibitors for the
treatment of cerebrovascular, cardiovascular and neurodegenerative diseases.
Taisho will have an option to obtain marketing rights in Japan and certain Far
East markets for any compounds arising from the collaboration. Under the
agreement, Taisho agreed to pay us up to $43 million comprised of research
funding and milestone payments, including $4.5 million for prior research costs.
These amounts are based on the development of two compounds. We will also
receive royalties on future product sales, if any. In addition, Taisho will also
pay for certain costs of developing compounds that emerge from the caspase
research program.

SERONO S.A.

In December 2000, we entered into a collaboration with Serono S.A. to
discover, develop, and market caspase inhibitors. Under the terms of the
agreement, we could receive up to $95 million to support and expand our drug
discovery activities in the caspase protein family, including milestone payments
as drug candidates move through development. Under the terms of the agreement,
we will receive a total of up to $5 million in payments for prior research, and
could also receive up to $20 million in research funding over the next five
years. We could also receive an additional $70 million in milestone payments for
the successful development and commercialization of more than one drug
candidate. The two companies will share development costs. Vertex and Serono
will establish a joint venture for the commercialization of products in North
America, where we will share marketing rights and profits from the sale of
caspase inhibitors. Serono will have exclusive rights to market caspase
inhibitors in other territories, excluding Japan and certain other countries in
the Far East, and will pay us for the supply of drug substance. Serono has the
right to terminate the agreement without cause upon 90 days written notice,
effective either at September 30, 2002 or September 30, 2004.

AVENTIS S.A.

In September 1999, we entered into an expanded agreement with Hoechst Marion
Roussel (HMR) covering the development of pralnacasan. HMR and Rhone-Poulenc
Rorer merged to form Aventis in December 1999. Aventis has an exclusive
worldwide license to develop, manufacture and market pralnacasan, as well as an
exclusive option for all other compounds discovered as part of the research
collaboration between Vertex and HMR that ended in 1997. Aventis will fund the
development of pralnacasan. We may co-promote the product in the United States
and Europe and will receive royalties on global sales, if any. Under the
agreement, Aventis agreed to pay us $20 million for prior research costs, and
$62 million in milestone payments for successful development by Aventis of
pralnacasan in rheumatoid arthritis, the first targeted indication, as well as
similar milestone payments for each additional indication. Aventis has the right
to terminate this agreement without cause upon six months' written notice.

18

SCHERING AG (GERMANY)

In August 1998, we entered into a collaboration with Schering AG covering
the research, development and commercialization of novel, orally active
neurophilin ligand compounds to promote nerve regeneration for the treatment of
a number of neurological diseases. Vertex and Schering AG will have an equal
role in management of neurophilin ligand research and product development. In
North America, we will have manufacturing rights, and we will share equally with
Schering AG in the marketing expenses and profits from commercialized compounds.
In addition to having manufacturing rights in North America, we retain the
option to manufacture bulk drug substance for sales in territories outside
Europe, the Middle East and Africa. Schering AG will have the right to
manufacture and market any commercialized compounds in Europe, the Middle East
and Africa, and will pay us a royalty on any product sales. Under the terms of
the agreement, Schering AG will pay us up to $88 million, comprised of
$6 million paid upon signing in September 1998, up to $22 million of product
research funding over five years and $60 million of development and
commercialization milestone payments. Schering AG has the right to terminate the
agreement without cause upon six months' written notice.

KISSEI PHARMACEUTICAL CO., LTD.

HIV PROTEASE INHIBITORS. In April 1993, we entered into a collaboration
with Kissei covering the development of amprenavir, our HIV protease inhibitor.
Kissei has exclusive rights to develop and commercialize amprenavir in Japan and
will pay us a royalty on sales. We are responsible for the manufacture of bulk
product for Kissei. Under the collaborative agreement, Kissei agreed to pay us
up to $20 million, comprised of $9.8 million of product research funding over
three years, $7 million of development and commercialization milestone payments
and a $3.2 million equity investment. We have received the full amount of
research funding specified under the agreement.

P38 MAP KINASE. In September 1997, we entered into a collaboration with
Kissei to identify and develop compounds that target p38 MAP kinase, including
VX-745 and VX-702. We will collaborate with Kissei in the development and
commercialization of novel, orally active p38 MAP kinase inhibitors as drugs for
the treatment of inflammatory and neurological diseases. Kissei has exclusive
rights to develop and commercialize these compounds in Japan and certain
Southeast Asian countries and semi-exclusive rights in China, Taiwan and South
Korea. We retain exclusive marketing rights in the United States, Canada,
Europe, and the rest of the world. In addition, we will have the right to supply
bulk drug material to Kissei for sale in its territory, and will receive
royalties and drug supply payments on any product sales. Under the terms of the
agreement, Kissei agreed to pay us up to $22 million, comprised of a $4 million
license payment paid in September 1997, $11 million of product research funding
over three years and $7 million of development and commercialization milestone
payments. Additionally, Kissei agreed to pay certain costs. The research program
ended on June 30, 2000, and we have received the full amount of research funding
specified under the agreement. Kissei has the right to terminate the agreement
without cause upon six months' notice.

ELI LILLY & COMPANY

In June 1997, we entered into a collaboration with Eli Lilly covering the
development of novel small molecule compounds to treat hepatitis C infection,
including VX-950. Vertex and Eli Lilly will jointly manage the research,
development, manufacturing and marketing of drug candidates emerging from the
collaboration. We will have primary responsibility for drug design, process
development and pre-commercial drug substance manufacturing, and Eli Lilly will
have primary responsibility for formulation, preclinical and clinical
development and global marketing. Vertex has retained options to assist with the
promotion of drugs from the collaboration in the United States and other
selected territories. We have the option to supply 100% of Eli Lilly's
commercial drug substance supply needs. We will receive royalties on future
product sales, if any. If we exercise our commercial supply option, we will
receive drug supply payments, in addition. Under the terms of the agreement, Eli
Lilly will pay us up to $51 million, comprised of a $3 million payment made in
June 1997, $33 million of product

19

research funding over six years and $15 million of development and
commercialization milestone payments. Eli Lilly has the right to terminate the
agreement without cause upon six months' notice.

GLAXOSMITHKLINE

In December 1993, we entered into a collaboration with GlaxoSmithKline
covering the research, development and commercialization of HIV protease
inhibitors, including Agenerase (amprenavir), its prodrug, VX-175 (also referred
to as GW433908), and VX-385, a chemically distinct protease inhibitor.
GlaxoSmithKline has exclusive rights to develop and commercialize our HIV
protease inhibitors in all parts of the world except the Far East and pays us a
royalty on sales. We have retained certain bulk drug manufacturing rights and
certain co-promotion rights in the territories licensed to GlaxoSmithKline.
Under the collaborative agreement, GlaxoSmithKline agreed to pay us up to
$42 million, comprised of a $15 million license payment paid in 1993,
$14 million of product research funding over five years and $13 million of
development and commercialization milestone payments for an initial drug
candidate. GlaxoSmithKline is also obligated to pay us additional development
and commercialization milestone payments for subsequent drug candidates,
including VX-175. We have received the full amount of research funding specified
under the agreement. In addition, GlaxoSmithKline is required to bear the costs
of development in its territory under the collaboration.

GlaxoSmithKline has the right to terminate its agreement with us without
cause upon twelve months' notice. Termination of the agreement by
GlaxoSmithKline will relieve it of its obligation to make further
commercialization and development milestone and royalty payments, and will end
any license granted to GlaxoSmithKline by us.

We and GlaxoSmithKline have a non-exclusive, worldwide license under certain
Searle patent applications claiming HIV protease inhibitors, to permit Vertex
and GlaxoSmithKline to develop, manufacture and market Agenerase free of the
risk of intellectual property claims by Searle. The terms of the license require
us to pay Searle a royalty on net sales.

AURORA BIOSCIENCES

OVERVIEW

We acquired Aurora Biosciences in July 2001. Aurora uses proprietary
advances in biology, chemistry and automation to accelerate the discovery of new
medicines. Aurora's core technologies include a broad portfolio of proprietary
fluorescence assay technologies and screening platforms designed to provide an
integrated solution for drug discovery. Its fluorescence assay technologies
include GeneBLAzer-TM-, GenomeScreen-TM-, Vivid-TM- and PhosphoryLIGHT-TM-
technologies, as well as a broad collection of fluorescent proteins. Aurora's
screening platforms include its ultra-high throughput screening system, the
UHTSS-Registered Trademark- Platform, and its automated master compound store,
the AMCS Platform, as well as its ion channel screening platform, which includes
proprietary voltage sensor probes and voltage ion probe reader, the VIPR-TM-
subsystem. Aurora also provides target discovery, assay development, screening
and other services to its customers.

Aurora's technologies have been used by over 20 major life sciences
companies and research organizations, including:

- - Allergan - Genentech
- - American Home Products - The Hereditary Disease Foundation
- - Bristol-Myers Squibb - Johnson & Johnson
- - The Cystic Fibrosis Foundation - Merck & Co.
- - Families of SMA - NV Organon Laboratories
- - F. Hoffmann-La Roche - Pfizer
- - GlaxoSmithKline - Pharmacia & Upjohn

20

A number of these organizations currently contract directly with Aurora for
assay development, screening, target identification and other services. The
agreements vary in duration and size and typically provide that Aurora will
develop assays, deliver instrumentation, and provide ongoing scientific and
technical support.

TECHNOLOGIES, PRODUCTS AND SERVICES

Aurora focuses on the development and commercialization of technologies,
products and services that provide solutions to bottlenecks in the drug
discovery process. Aurora has developed and commercialized a broad range of
technologies and products to facilitate drug discovery. Its technologies and
products assist scientists by improving their ability to rapidly identify
targets, develop assays and screen compounds to be used as potential new
medicines.

TARGET IDENTIFICATION AND ASSAY DEVELOPMENT

- GENOMESCREEN TECHNOLOGY. Aurora uses its patented GenomeScreen technology
to identify and validate targets by scanning the genome of living human
cells and identifying those genes activated or repressed in disease
states. GenomeScreen also facilitates the rapid development of cell-based
assays for endogenously expressed targets, without having to utilize
cloned cDNAs for those targets. Aurora has used this technology to
generate hundreds of cell-based assays. In addition, Aurora has used
GenomeScreen to assist in mapping gene activation and cell signaling
pathways and characterizing poorly understood cellular processes.

- GENEBLAZER TECHNOLOGY. Aurora's patented GeneBLAzer technology enables
scientists to rapidly develop cell-based assays with
fluorescence-activated cell sorting (FACS). GeneBLAzer is readily adapted
to a broad range of target classes, including G protein-coupled receptors
(GPCRs), chemokine receptors, transcription factors and intracellular
cis-acting proteases. Using GeneBLAzer, Aurora has developed over 150
assays relating to various therapeutic areas, including inflammation,
oncology, metabolic, infectious and central nervous system diseases, for
our collaborators and ourselves.

- FLUORESCENCE POLARIZATION TECHNOLOGY. Scientists use Aurora's fluorescence
polarization technology to study molecular interactions in a number of
drug discovery-related applications, including protein-DNA interactions,
immunoassays, protease assays, epitope mapping, DNA hybridization and
receptor-ligand binding studies. Aurora's fluorescence polarization
technology includes its Beacon-Registered Trademark- fluorescence
polarization system and a wide range of homogeneous, solution-based
high-throughput screening assays.

- FLUORESCENT PROTEINS. Fluorescent proteins are widely used as research
tools, with over 2,300 related publications to date. Drug
discovery-related applications of Aurora's patented fluorescent proteins
include various methods of functional genomics, high throughput screening
assays and gene profiling to assess the potential toxicity of compounds.
Aurora's issued patents on fluorescent proteins, which include over 400
claims, are directed toward nucleic acids encoding fluorescent proteins,
the fluorescent proteins themselves, various fusion proteins and methods
of use.

- UNIVERSAL G-PROTEINS. Scientists can use Aurora's patented universal
G-proteins to measure the activity of different kinds of receptors in
living human cells and to identify the function of receptors without
previously known function.

- VIVID FLUOROGENIC SUBSTRATES. Aurora's patented Vivid fluorogenic
substrates are useful for the rapid assessment of individual compounds and
compound libraries to determine whether they may have potentially
unfavorable interactions with key metabolic enzymes known as cytochrome
P450 isozymes. Currently, these unwanted characteristics are identified
later in the drug development process, after significant investment has
been made in chemistry and pharmacology research.

21

- PHOSPHORYLIGHT TECHNOLOGY. Aurora's PhosphoryLIGHT technology facilitates
the development of assays to measure the activity of enzymes controlling
cellular activity. These enzymes are significant therapeutic targets for a
wide range of diseases, including cancer, inflammation, nervous system
conditions and metabolic diseases.

- CELLSENSOR TECHNOLOGY. Aurora uses its CellSensor technology to identify
the function of novel biologics (such as orphan secreted proteins) and
compounds.

- LRET TECHNOLOGY. Aurora uses its luminescent resonance energy transfer
(LRET) technology to develop biochemical and cell-based assays that
require time resolved readouts. Time resolved assay formats avoid many of
the common artifacts found in standard fluorescence readouts.

ION CHANNEL ASSAY DEVELOPMENT AND HIGH THROUGHPUT SCREENING

Aurora's patented ion channel technology platform, which includes the VIPR
subsystem, its proprietary voltage sensor probes and voltage ion probe reader,
was first released in 1997. This platform facilitates the rapid generation of
screening assays and the high throughput screening of ion channel targets by
optically measuring changes in membrane potential in live cells in an automated,
microtiter plate format. In late 2000, Aurora began marketing its
second-generation voltage ion probe reader, the VIPR II subsystem, which has
increased functionality and higher screening capacity. The VIPR II subsystem is
capable of screening in 96-well and 384-well microplate formats, with a
significant increase in throughput over the original VIPR subsystem. Because
Aurora's ion channel technology platform focuses on changes in membrane
potential, it is a universal platform that is independent of the particular ion
being transported by the target channel. It is applicable to the majority of ion
channel families, including voltage-gated and ligand-gated potassium, sodium,
calcium and chloride channels, as well as other types of channels. Using this
patented functional assay and screening technology, Aurora has developed over 50
assays relating to therapeutic areas, including cardiovascular, metabolic and
nervous system diseases, for our collaborators and ourselves.

ASSAY DEVELOPMENT AND SCREENING SERVICES

Aurora provides assay development and screening services which generate
revenue and also provide Aurora with valuable experience working with difficult
drug targets.

PROTEIN MANUFACTURING, SALES AND SERVICES

Aurora produces and sells proteins and provides protein cloning, expression
and purification services through its subsidiary PanVera. Pan Vera has produced
hundreds of recombinant proteins for commercial sale, focusing on protein
families that are of broad interest from a therapeutic perspective, including
nuclear receptors, protein kinases and drug metabolizing enzymes.

INTELLECTUAL PROPERTY

We vigorously pursue patents to protect our intellectual property. As of
December 31, 2001, we had 150 issued U.S. patents and 186 pending U.S. patent
applications covering proprietary technologies and intellectual property within
our discovery and development programs, as well as foreign counterparts in many
other countries. As of January 18, 2002, Aurora and its subsidiary PanVera owned
or exclusively licensed 84 issued patents covering their technologies and had
received notices of allowance with respect to five patent applications. Certain
aspects of Aurora's fluorescent protein technology and ion channel technology
are exclusively licensed from the Regents of the University of California.

We actively seek, when appropriate, protection for our products and
proprietary information by means of United States and foreign patents,
trademarks and contractual arrangements. In addition, we rely upon trade secrets
and contractual arrangements to protect certain of our proprietary information
and products. In addition to patents and pending patent applications that relate
to potential drug

22

targets, compounds we are developing to modulate those targets, and methods of
using those compounds, we have several patents and pending patent applications
directed to proprietary elements of our drug discovery platform. These include a
patent application on our SHAPES approach to NMR-based screening and on the use
of a protein or a mutant of that protein to design inhibitors of other related
proteins. We have also filed patent applications and obtained patents related to
the three-dimensional atomic structures of targets of interest, the use of those
structures to design drugs, classes of compounds that bind to a target of
interest, and the interactions required between a compound and a target of
interest.

Much of our technology and many of our processes depend upon the knowledge,
experience and skills of key scientific and technical personnel. To protect our
rights to our proprietary know-how and technology, we require all employees,
consultants and advisors to enter into confidentiality agreements that prohibit
the disclosure of Vertex confidential information to anyone outside Vertex.
These agreements typically require disclosure and assignment to Vertex of ideas,
developments, discoveries and inventions made by employees, consultants and
advisors.

PATENTS AND PENDING APPLICATIONS

We have issued patents and pending applications in the United States, and in
foreign countries we deem appropriate, covering intellectual property developed
as part of each of our most advanced research, development and commercialized
programs. These include:

- issued United States patents that cover classes of chemical compounds,
pharmaceutical formulations and/or uses of the same for treating HIV
infection and AIDS. The patents include specific coverage for amprenavir,
pharmaceutical formulations containing amprenavir and methods of using of
amprenavir to treat HIV infection or AIDS-related central nervous system
disorders. Another issued United States patent covers processes for
preparing synthetic intermediates useful in the synthesis of a class of
compounds that includes amprenavir. We have a non-exclusive, worldwide
license under certain Searle patent applications claiming HIV protease
inhibitors. We have applications pending in the United States and other
countries claiming VX-175 and related compounds. We also have applications
pending in the United States and other countries claiming VX-385 and
related compounds.

- issued United States patents that cover classes of chemical compounds,
pharmaceutical compositions containing such compounds, and methods of
using those compounds to treat or prevent IMPDH-mediated diseases. The
class of compounds covered by one of these patents includes merimepodib.
We also have applications pending in the United States and other countries
claiming VX-148, VX-944, and related compounds.

- issued United States patents claiming Incel and structurally related
compounds, VX-853 and structurally related compounds, and other compounds
for treating multidrug resistance, as part of our MDR research and
development program.

- issued United States patents covering pralnacasan, the active metabolite
of pralnacasan, and several different classes of compounds useful as
inhibitors of ICE, as well as pharmaceutical compositions containing those
compounds and methods of using those compounds to treat ICE-related
diseases. These patents and applications also include a series of patents
and applications purchased from Sanofi S.A., in July 1997. We also have a
United States patent obtained from Sanofi S.A. that covers DNA sequences
encoding ICE. We also have applications pending in the United States and
other countries claiming VX-765 and related compounds.

- an issued patent that covers a class of chemical compounds that includes
VX-745, as well as applications claiming VX-745 specifically, compositions
comprising those compounds and the use of those compounds to treat
p38-related disorders, as part of our p38 MAP kinase research and
development program. We also have applications pending in the United
States and other countries claiming VX-702, VX-850, and related compounds.

23

- issued United States patents covering various classes of chemical
compounds and their use to treat a wide variety of neurological disorders.

- issued United States patents and pending applications covering assays
useful to evaluate potential inhibitors of hepatitis C protease. We also
have issued United States patents covering the X-ray crystal structures of
hepatitis C protease and hepatitis C helicase, including the use of those
structures to develop hepatitis C protease inhibitors and hepatitis C
helicase inhibitors, respectively. Other issued United States patents and
worldwide pending applications cover VX-950, additional hepatitis C
protease inhibitors and hepatitis C helicase inhibitors.

- applications pending in the United States and other countries claiming
VX-799 and related compounds. We also have filed applications claiming
other classes of caspase inhibitors and a caspase target discovered under
our caspase inhibitors program.

- issued United States patents claiming pharmaceutical compositions
comprising VX-563 and related compounds, and methods of treating various
diseases with such compositions.

- filed applications claiming inhibitors of multiple kinases, as part of our
kinase research programs.

- filed applications and an issued United States patent for methods of
designing novel chemical inhibitors of protein kinases. The patented
method involves using mutagenesis techniques to create hybrid kinases that
act as surrogate targets for drug design and compound screening. This
method, which combines the disciplines of cell biology, structural
genomics, computational chemistry and medicinal chemistry, may accelerate
the design and development of new drug candidates by reducing lead
discovery and optimization timelines.

- filed applications claiming inhibitors of bacterial gyrase.

We do not know whether any patents will issue from any of our patent
applications or, even if patents issue or have issued, that the issued claims
will provide us with any significant protection against competitive products or
otherwise be valuable commercially. Legal standards relating to the validity of
patents and the proper scope of their claims in the biopharmaceutical field are
uncertain. We also cannot be sure that we will be able to avoid infringing, and
thus having to negotiate a license under, any patents issued to others, or that
a license to such patents would be available on commercially acceptable terms,
if at all.

MANUFACTURING

We rely on third party manufacturers and collaborative partners to produce
our compounds for preclinical and clinical purposes and may do so for commercial
production of any compounds that are approved for marketing. Commercial
manufacturing of Agenerase is being done by GlaxoSmithKline. We retain the
option to manufacture a portion of GlaxoSmithKline's requirements for bulk drug
substance for Agenerase and its prodrug, VX-175. If we were to exercise that
option, we would rely upon one or more contract manufacturers to manufacture the
bulk drug substance on our behalf.

We have established a quality assurance program, including a set of standard
operating procedures, intended to ensure that third party manufacturers under
contract produce our compounds in accordance with the FDA's current Good
Manufacturing Practices, or cGMP, and other applicable regulations.

We believe that all of our existing compounds can be produced using
established manufacturing methods, primarily through standard techniques of
pharmaceutical synthesis. We believe that we will be able to continue to
negotiate third party manufacturing arrangements on commercially reasonable
terms and that it will not be necessary for us to develop internal manufacturing
capability in order to successfully commercialize our products. Our objective is
to maintain flexibility in deciding whether to develop internal manufacturing
capabilities for certain of our potential products. However, in the event that
we are unable to obtain contract manufacturing, or obtain such manufacturing on
commercially

24

reasonable terms, we may not be able to commercialize our products as planned.
We have limited experience in manufacturing pharmaceutical or other products or
in conducting manufacturing testing programs required to obtain FDA and other
regulatory approvals, and there can be no assurance that we will further develop
such capabilities successfully.

Since most of our potential products are at an early stage of development,
we will need to improve or modify our existing manufacturing processes and
capabilities to produce commercial quantities of any drug product economically.
We cannot quantify the time or expense that may ultimately be required to
improve or modify our existing process technologies, but it is possible that
such time or expense could be substantial.

The production of our compounds is based in part on technology that we
believe to be proprietary. We may license this technology to contract
manufacturers to enable them to manufacture compounds for us. In addition, a
contract manufacturer may develop process technology related to the manufacture
of our compounds that the manufacturer owns either independently or jointly with
us. This would increase our reliance on such manufacturer or require us to
obtain a license from such manufacturer in order to have our products
manufactured.

Aurora manufactures the UHTSS Platform, the AMCS Platform, the sample
distribution system, and the VIPR and VIPR II at its facilities in San Diego,
California, except certain components of the UHTSS Platform and AMCS Platform,
which are purchased from Universal Technologies, Inc., and the enclosures for
the UHTSS Platform and AMCS Platform, which are purchased from Environmental
Specialties, Inc.

COMPETITION

We are engaged in biopharmaceutical fields characterized by extensive
research efforts, rapid technological progress and intense competition. There
are many public and private companies, including pharmaceutical companies,
chemical companies and biotechnology companies, engaged in developing products
for the same human therapeutic applications as those that we are targeting. In
order for us to compete successfully, we must demonstrate improved safety,
efficacy, ease of manufacturing and market acceptance of our products over those
of our competitors who have received regulatory approval and are currently
marketing their drugs. In the field of HIV protease inhibition, Merck &
Co., Inc., Abbott Laboratories, Inc., Hoffmann-La Roche, and Pfizer Inc. have
other HIV protease inhibitor drugs on the market. Many of our competitors have
substantially greater financial, technical and human resources than ours and
more experience in the development of new drugs.

There are a number of companies that compete with Aurora in various aspects
of its business. For instance, companies such as Cellomics, Discovery Partners
International, Evotec and Molecular Devices develop and commercialize
proprietary research tools, reagents, instruments and systems which compete with
Aurora's proprietary screening platforms and reagents. There are also a number
of companies such as Albany Molecular Research, ArQule, Array Biopharma,
Cambridge Drug Discovery, Discovery Partners International, Oxford Asymmetry,
Pharmacopeia and Tripos, that develop and commercialize compound libraries and
use chemistry capabilities to test and screen potential drug candidates.

GOVERNMENT REGULATION

Our development, manufacture and potential sale of therapeutics are subject
to extensive regulation by United States and foreign governmental authorities.
In particular, pharmaceutical products are subject to rigorous preclinical and
clinical testing and to other approval requirements by the FDA in the United
States under the Food, Drug and Cosmetic Act, and by comparable agencies in most
foreign countries.

As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animals to identify potential safety
problems. For certain diseases, animal models exist that are believed to be
predictive of human efficacy. For such diseases, a drug candidate is tested in
an

25

animal model. The results of the studies are submitted to the FDA as a part of
the Investigational New Drug application (IND) which is filed to comply with FDA
regulations prior to commencement of human clinical testing in the U.S. For
diseases for which no appropriately predictive animal model exists, no such
results can be filed. For several of our drug candidates, no appropriately
predictive model exists. As a result, no IN VIVO evidence of efficacy would be
available until such compounds progress to human clinical trials.

Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. In Phase I, which frequently begins with the initial
introduction of the drug into healthy human subjects prior to introduction into
patients, the compound will be tested for safety, dosage tolerance, absorption,
bioavailability, biodistribution, metabolism, excretion, clinical pharmacology
and, if possible, for early information on effectiveness. Phase II typically
involves studies in a small sample of the intended patient population to assess
the efficacy and duration of the drug for a specific indication, to determine
dose tolerance and the optimal dose range and to gather additional information
relating to safety and potential adverse effects. Phase III trials are
undertaken to further evaluate clinical safety and efficacy in an expanded
patient population at geographically dispersed study sites, to determine the
overall risk-benefit ratio of the drug and to provide an adequate basis for
physician labeling. Each trial is conducted in accordance with certain standards
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety and the efficacy criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the IND. Further, each clinical study
must be evaluated by an independent Institutional Review Board at the
institution at which the study will be conducted. The Institutional Review Board
will consider, among other things, ethical factors, the safety of human subjects
and the possible liability of the institution.

Data from preclinical testing and clinical trials are submitted to the FDA
in a New Drug Application (NDA) for marketing approval. The process of
completing clinical testing and obtaining FDA approval for a new drug is likely
to take a number of years and require the expenditure of substantial resources.
Preparing an NDA involves considerable data collection, verification, analysis
and expense, and there can be no assurance that approval will be granted on a
timely basis, if at all. The approval process is affected by a number of
factors, including the severity of the disease, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials. The FDA
may deny an NDA if applicable regulatory criteria are not satisfied or may
require additional testing or information. Among the conditions for marketing
approval is the requirement that the prospective manufacturer's quality control
and manufacturing procedures conform to the FDA's cGMP regulations, which must
be followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, monies and effort in
the area of production and quality control to ensure full technical compliance.
Manufacturing establishments, both foreign and domestic, also are subject to
inspections by or under the authority of the FDA and by or under the authority
of other federal, state or local agencies.

Even after initial FDA approval has been obtained, further studies,
including post-marketing studies, may be required to provide additional data on
safety and will be required to gain approval for the use of a product as a
treatment for clinical indications other than those for which the product was
initially tested. Also, the FDA will require post-marketing reporting to monitor
the side effects of the drug. Results of post-marketing programs may limit or
expand further marketing of the drug products. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process, labeling or manufacturing facilities, an NDA supplement may be required
to be submitted to the FDA.

The Orphan Drug Act provides incentives to drug manufacturers to develop and
manufacture drugs for the treatment of diseases or conditions that affect fewer
than 200,000 individuals in the United States. Orphan drug status can also be
sought for diseases or conditions that affect more than 200,000 individuals in
the United States if the sponsor does not realistically anticipate its product
becoming profitable from sales in the United States. Under the Orphan Drug Act,
a manufacturer of a designated orphan product can seek tax benefits, and the
holder of the first FDA approval of a

26

designated orphan product will be granted a seven-year period of marketing
exclusivity for that product for the orphan indication. While the marketing
exclusivity of an orphan drug would prevent other sponsors from obtaining
approval of the same compound for the same indication, it would not prevent
other types of drugs from being approved for the same use. We may apply for
orphan drug status for certain indications of MDR in cancer.

Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
sponsor may be granted marketing exclusivity for a period of time following FDA
approval of certain drug applications if FDA approval is received before the
expiration of the patent's original term. This marketing exclusivity would
prevent a third party from obtaining FDA approval for a similar or identical
drug through an Abbreviated New Drug Application, which is the application form
typically used by manufacturers seeking approval of a generic drug. The statute
also allows a patent owner to extend the term of the patent for a period equal
to one-half the period of time elapsed between the filing of an IND and the
filing of the corresponding NDA plus the period of time between the filing of
the NDA and FDA approval. We intend to seek the benefits of this statute, but
there can be no assurance that we will be able to obtain any such benefits.

Whether or not FDA approval has been obtained, approval of a drug product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. Historically,
the requirements governing the conduct of clinical trials and pro