Back to GetFilings.com

Use these links to rapidly review the document
FORM 10-K INDEX
VERTEX PHARMACEUTICALS INCORPORATED Index to Consolidated Financial Statements

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission file number 000-19319

Vertex Pharmaceuticals Incorporated
(Exact name of registrant as specified in its charter)

(617) 444-6100

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:    None

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

Common Stock, $0.01 Par Value Per Share
(Title of class)

        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.  [X]

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes [X]  No [    ]

        The aggregate market value of the registrant's common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) based on the last reported sale price of the Common Stock on The Nasdaq Stock Market on June 28, 2002, was $893,950,000.

        As of March 26, 2003, the registrant had 76,502,161 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be held on May 21, 2003 are incorporated by reference into Part III.

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" and "NanoWell" are registered trademarks of Vertex, and "E-VIPR", "Flying Reagent Dispenser" or "FRD", "GenomeScreen," "Screening Island" and "Topology-Compensating Plate Reader" or "tcPR" are trademarks of Vertex. "Agenerase" is a registered trademark of GlaxoSmithKline. "Prozei" is a trademark of Kissei Pharmaceutical Co., Ltd. "GeneBLAzer", "Vivid" and "PhosphoryLIGHT" are trademarks assigned by Vertex to Invitrogen Corporation. 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, development and maintenance 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 also 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, neurological disorders and genetic diseases. Our research 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® (amprenavir). We have one product, 908 (GW433908 or VX-175), for which a New Drug Application (NDA) is pending with the U.S. FDA, and we have a total of 15 drug candidates in clinical or preclinical development. Vertex is currently developing approximately half of these drug candidates independently and half with pharmaceutical partners.

        We intend to concentrate our independent development and commercialization efforts on certain products for high-value markets where Vertex can effectively reach large patient populations with a sales force focused on specialists. At the same time, we are collaborating with partners to develop and market other Vertex-discovered products for selected major therapeutic areas. We believe this two-pronged approach will provide us with the opportunity to build long-term value for Vertex shareholders and create the greatest number of product development opportunities for Vertex. In 2003, we are focusing internal development efforts on five major programs for which we presently retain most or all of the downstream commercial rights. These development programs are: VX-148, our second generation IMPDH inhibitor for the treatment of psoriasis; VX-702, our second generation p38 MAP kinase inhibitor for the treatment of acute and chronic inflammatory diseases; VX-563, a small molecule modulator of gene expression with potential application in genetic disorders; VX-765, a second generation ICE inhibitor for chronic and acute inflammatory diseases; and VX-950, a small molecule inhibitor of hepatitis C virus protease. Based on clinical activities planned or underway for 2003, we expect to have clinical data in hand by the end of this year which will help us to select two drug candidates from this portfolio as priority candidates for clinical development and commercialization by Vertex in the U.S.

        Partnerships remain a key component of Vertex's corporate strategy. We have collaborations with Aventis, GlaxoSmithKline, Kissei, Novartis, Schering AG (Germany), Serono 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 through these partnerships, which we expect will generate significant downstream economic benefit to Vertex in the form of increased milestone payments, product revenues and royalty payments. We currently have drug candidates in clinical development under collaborations with GlaxoSmithKline and Aventis. In December, 2002, GSK submitted regulatory applications for market approval of 908 in the United States and Europe. With our partner Aventis we have demonstrated clinical proof of mechanism of pralnacasan (VX-740), a novel oral drug, in the treatment of rheumatoid arthritis, and have initiated a Phase II proof of concept clinical study of pralnacasan in osteoarthritis. We anticipate that Aventis will initiate a Phase IIb study of pralnacasan in rheumatoid arthritis during the first half of 2003.

        Collaborations also are fueling progress in our early-stage pipeline. In 2002, as part of our broad research and development collaboration with Novartis, signed May 2000, Vertex selected three novel small molecule kinase inhibitors for preclinical development. We also have drug candidates in preclinical development under our collaboration with Serono. We have additional research programs underway, and additional novel Vertex drug candidates targeting bacterial gyrase, specific kinases and proteases could enter preclinical studies within the next 12 months. These drug candidates may have application in the treatment of bacterial or viral infection, cancer, inflammation and neurological diseases.

1

        Recent advances in biological understanding, including the complete sequencing of the human genome, have elucidated a wide array of biological targets and mechanisms that could be modulated by novel small molecule drugs for the treatment of disease. We have dedicated a substantial portion of our research organization to pursue what we believe is a highly efficient and proprietary approach to discovering novel drugs directed at the most relevant of these targets and mechanisms. Our approach organizes and prioritizes targets within gene families, which are groups of genes with similar sequences that code for structurally similar proteins. This approach essentially clusters targets according to how they interact with chemical inhibitors, and allows us to use high-throughput screening technologies, informatics and medicinal chemistry to rapidly identify drug-like classes of compounds in parallel for multiple targets. In concert with this approach, we use a variety of biological and chemical methodologies that interrogate the function of newly discovered proteins in order to focus our drug discovery and development efforts on the most promising targets within the most promising gene families. We believe that our systematic application of this drug discovery approach is increasing the speed and efficiency of drug design efforts directed at novel biological targets, and is securing valuable intellectual property for us in gene families of interest. Ultimately, we believe that our use of this approach will result in the development and market introduction of many major new drugs.

        We are presently applying our expertise in drug discovery to focus on the protein kinase, protease, caspase, and ion channel gene families, four areas in which we believe we can apply our drug design expertise to create product candidates that address a variety of sizable therapeutic indications. Our collaboration with Novartis 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 has enabled us to expand both our infrastructure and our drug discovery efforts in the protein kinase gene family. Technology and expertise acquired through our acquisition of Aurora Biosciences Corporation in July 2001 have led to a significant expansion of our drug discovery efforts directed at ion channels, a major class of membrane-bound drug targets, and other target classes. We now have a substantial drug discovery organization focused on these target-rich gene families operating at our San Diego, CA site. We are employing a number of proprietary technologies that enhance our drug discovery efforts in these gene families including our E-VIPR system, a high throughput electophysiology system for use in our ion channel drug discovery program, and Screening Island, which includes our Topology-Compensating Plate Reader (tcPR) and Flying Reagent Dispenser (FRD). We anticipate establishing new collaborations with major pharmaceutical companies in order to help provide the funding and resources needed to support these and other drug discovery efforts.

        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.

        The Company's internet address is www.vrtx.com. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available to you free of charge through the "Investors" section of our website as soon as reasonably practicable after those materials have been electronically filed with, or furnished to, the Securities and Exchange Commission.

Product Pipeline

        Vertex has a broad pipeline of novel, small molecule drug candidates targeted at areas of high unmet medical need. We have concentrated our independent development and commercialization efforts on certain products for high-value markets where Vertex can effectively reach large patient populations with a sales force focused on specialists. At the same time, we are collaborating with partners to develop and market other Vertex-discovered products for selected major therapeutic areas. We believe this two-pronged approach will provide us with the opportunity to build long-term value for

2

Vertex shareholders and create the greatest number of product development opportunities for the Company.

VERTEX-DRIVEN PROGRAMS

PARTNER-DRIVEN PROGRAMS

3

*

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.

*

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

4

Commercial Product and Clinical Development Programs

        Our first product, Agenerase, received accelerated approval from the FDA in April 1999 and was launched in May 1999. We have one product, 908, for which an NDA is pending with the U.S. FDA, and an MAA is pending in the European Union. We have a total of 15 drug candidates in clinical and preclinical development to treat viral diseases, inflammation, cancer, autoimmune diseases, neurological disorders, and genetic disorders.

VERTEX-DRIVEN DEVELOPMENT PROGRAMS

Infectious Disease Programs

Hepatitis C Virus Infection

        Vertex is developing two drug candidates that target hepatitis C virus (HCV) 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 the human enzyme inosine 5'-monophosphate dehydrogenase (IMPDH). The second compound, VX-950, is in preclinical development. It targets the hepatitis C virus directly, by inhibiting the hepatitis C viral protease enzyme.

IMPDH Program: Infectious Diseases

        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 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.

        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, such as IMPDH, an attractive target for pharmacological intervention aimed at selectively inhibiting proliferation of such cells.

        Vertex is developing novel, orally administered inhibitors of IMPDH, targeting the treatment of both viral and autoimmune diseases. Our most advanced IMPDH-inhibiting 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-naïve patients with HCV infection in order to assess the safety, tolerability and clinical activity of this combination. 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 generated by Vertex demonstrates that merimepodib also has an additive antiviral effect in combination with pegylated interferon and ribavirin. In 2002, we initiated a triple combination Phase II study of merimepodib with pegylated interferon and ribavirin. The study was designed to establish the safety of the triple

5

combination. It is a 6-month study, with an optional 6-month extension phase for patients who have responded to treatment. In addition, we will look for evidence of an additive antiviral effect for merimepodib when combined with pegylated interferon and ribavirin. The enrollment period for this study is complete. We expect to provide an update on the status of this development program in the second half of 2003.

        We have two additional IMPDH inhibitors, VX-148 and VX-944, in development, targeting autoimmune and oncology indications. More information on VX-148 and VX-944 is available in the section titled "Autoimmune Diseases," beginning on page 8.

        We retain all commercial rights to merimepodib and second generation compounds resulting from our IMPDH research and development program.

Hepatitis C Protease Program

        In 2001, Vertex and Eli Lilly selected VX-950, a potent, oral HCV protease inhibitor, for preclinical development. In the first quarter of 2003, Vertex announced that it had restructured its collaboration with Eli Lilly and now holds worldwide rights to VX-950. Based on preclinical work begun in 2002, we expect to begin Phase I clinical development of VX-950 in the second half of 2003. We believe that VX-950 is among the first reported drug development candidates of a new class of antiviral drugs being studied to inhibit hepatitis C NS3-4A protease, an enzyme considered essential for HCV 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. We have ongoing drug discovery efforts in the area of HCV protease inhibitors and we plan to select one additional drug candidate in the next 12 months. We hold worldwide rights to VX-950 and all other second-generation HCV protease inhibitors discovered in our collaboration with Eli Lilly.

Background: Hepatitis C

        Identified in 1989, hepatitis C virus (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. 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 World Health Organization (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 viral infection 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.

Inflammation and Autoimmune Disease

Inflammatory Disease

Interleukin-1b Converting Enzyme Program

        Vertex is conducting research and development on inhibitors of interleukin-1b converting enzyme (ICE; caspase-1) for the treatment of acute and chronic inflammatory conditions. We are collaborating with Aventis S.A. in the development of the lead ICE inhibitor compound, pralnacasan (VX-740). Vertex has independently 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

6

VX-765 reduces inflammation and cytokine levels in animal dermatitis and arthritis models. We expect to begin Phase I clinical studies of VX-765 in the second quarter of 2003. We hold worldwide rights to VX-765 and other compounds emerging from our second generation ICE inhibitor research program. For more information on ICE inhibitors, see the Interleukin-1b Converting Enzyme Program section of "Partner-Driven Programs" below.

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-1b. We have extensive pre-clinical and clinical experience with p38 MAP kinase inhibitors, which have the potential to be a powerful and broadly useful new class of oral anti-inflammatory drugs. The objective of our research collaboration with Kissei was 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. We 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 MAP kinase inhibitor development efforts with Kissei around a second generation compound, VX-702, which does not cross the blood brain barrier and represents a chemical class that is distinct from VX-745. We also have a third p38 MAP kinase inhibitor, VX-850, which is in preclinical development.

        In June 2002, we initiated a Phase I clinical study of VX-702. The double-blind, placebo-controlled, randomized clinical trial was designed to test the safety, tolerability, pharmacokinetics and pharmacodynamics of VX-702 in single and multiple doses in healthy volunteers.

        Vertex expects to begin Phase II development of VX-702 in the second quarter of 2003. As a novel p38 MAP kinase inhibitor, VX-702 would be expected to have benefit in a variety of diseases where inflammation plays an essential role. We intend to explore the potential of VX-702 in a variety of disease settings and have made a strategic decision to advance the clinical development of VX-702 in both acute and chronic disease indications. The initial focus of the Phase II program will be aimed at the use of VX-702 in acute coronary syndromes (ACS). ACS is a broad term that includes unstable angina and certain types of myocardial infarctions. We expect to provide further information on our development strategy for VX-702, including plans for a chronic indication, in the first half of 2003.

        We have collaborated with Kissei on the discovery and development of novel p38 MAP kinase inhibitors since 1997. The research portion of our collaboration with Kissei was completed in 2000. Under the agreement with Kissei, we hold development and commercial rights in the United States and Europe for our p38 MAP kinase inhibitors. Kissei holds development and commercial rights in Japan and certain Asian countries for VX-745 and VX-702, but not VX-850.

Background: p38 MAP Kinase 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.

        The central role of inflammation in many cardiovascular diseases has been well established in scientific literature. Specifically, inflammation is being increasingly recognized as a key component of the overall process in the development of coronary artery disease and particularly acute coronary syndromes. The p38 MAP kinase enzyme regulates the production of key proinflammatory cytokines

7

implicated in the pathogenesis of ACS, including tumor necrosis factor-alpha (TNF-alpha), interleukin-1b (IL-1b) and interleukin-6 (IL-6). As a potential once-daily therapy addressing a novel target for ACS, VX-702 could provide a first-in-class approach to complement current therapies for this disease, which affects nearly 1.9 million individuals in the U.S. each year.

        We are aware of several other companies that are developing p38 MAP kinase inhibitors, and competition could also come from other drugs, in development or approved, that have different mechanisms of action for treating rheumatoid arthritis and other inflammatory diseases.

Autoimmune Diseases

IMPDH program

        We are independently developing novel, orally administered inhibitors of the enzyme inosine 5'-monophosphate dehydrogenase (IMPDH), targeting the treatment of both autoimmune diseases and cancer. In 2000, we designated two 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, discussed above under the heading "IMPDH Program: Infectious Diseases". VX-148 and VX-944 are in Phase II and Phase I development, respectively.

        In December 2002, we initiated a Phase II clinical trial with VX-148 for the treatment of moderate to severe psoriasis. The Phase II double blind, randomized, placebo-controlled study will evaluate two different doses of VX-148 in 75 psoriasis patients who will be treated twice daily (BID) for 12 weeks, with a 12-week follow-up period. The primary objective of the study is to evaluate the safety, tolerability and pharmacokinetics of VX-148. The secondary objective is to preliminarily evaluate the clinical activity of VX-148, as assessed by various accepted measures of clinical outcomes for psoriasis treatment evaluation.

        We also initiated a Phase I clinical trial of VX-944 in healthy volunteers in November 2002. The primary objective of this study will be to evaluate the safety, tolerability, and pharmacokinetics of VX-944 compared to placebo.

        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®), 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®) 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 and cell growth, we believe that VX-148 and VX-944 have the potential to treat a wide variety of autoimmune diseases including such diseases as psoriasis, multiple sclerosis and rheumatoid arthritis, as well as many hematological and solid tumors.

Genetic Disorders

        In the first quarter of 2003, Vertex began a Phase I clinical trial of VX-563, an oral, small molecule modulator of gene expression that has potential application in sickle cell disease and other genetic disorders. The primary objective of the study is to evaluate the safety, tolerability and pharmacokinetics of VX-563 compared to placebo. VX-563 has been tested in vitro, and in vivo in animal models, for several disease indications including sickle cell disease and Huntington's disease.

        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

8

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. Current treatments for sickle cell disease are ineffective and often 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 sickle cell disease. 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 sickle cell disease 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.

PARTNER-DRIVEN DEVELOPMENT PROGRAMS

Infectious Disease Programs

HIV/AIDS Program (GlaxoSmithKline)

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. Agenerase received regulatory approval in the U.S. in April 1999, and it is now marketed 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™. 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 receive royalties on sales of amprenavir by GlaxoSmithKline and Kissei. We also supply amprenavir bulk drug substance to Kissei. We believe that approximately 15,000 patients in 51 countries worldwide take Agenerase as part of combination therapy for the treatment of HIV. Agenerase's share of HIV protease inhibitor prescriptions in the U.S. was approximately 6.2% as of December 31, 2002.

        Agenerase has been approved for once-daily use based on data that demonstrates that the protease inhibitor ritonavir significantly boosts levels of Agenerase in the bloodstream in both once-daily and twice-daily dosing regimens. Co-administration of protease inhibitors 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 2002, 60% to 70% of Agenerase used in the United States was estimated to be in combination with ritonavir.

908 (VX-175)

        Our second HIV protease inhibitor, 908 (also known as VX-175) is being developed by our partner GlaxoSmithKline as part of our collaboration with them.

        908 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. In view of the large number of pills that HIV-infected patients typically require daily as part of combination drug regimens, the dosing benefit of 908 could provide a material increase in physician

9

acceptance of and patient compliance with this product as compared to currently marketed protease inhibitors. VX-175 was synthesized at Vertex and then selected for development by GlaxoSmithKline.

        Our partner GlaxoSmithKline has conducted and substantially completed a state-of-the-art Phase III clinical program for 908. This pivotal program included trials in both treatment-naïve and treatment-experienced patients. The first study (NEAT) compared 908 to nelfinavir in treatment-naïve patients. The second study (SOLO) compared 908 in combination with ritonavir, administered once-daily, to nelfinavir in treatment-naïve patients. The third study (CONTEXT) evaluated both once-daily and twice-daily dosing of 908 in combination with ritonavir, compared to lopinavir/ritonavir, in treatment-experienced patients. In all of these studies, patients received reverse transcriptase inhibitors as part of the combination regimen. In 2002, Vertex and GlaxoSmithKline reported that the NEAT and SOLO studies met their endpoints at 48 weeks, and that the CONTEXT study met its endpoints at 24 weeks. Based on data collected from all three pivotal trials, 908 demonstrated good tolerability. On December 20, 2002, GlaxoSmithKline filed a New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA) and a Marketing Authorization Application (MAA) in the European Union (E.U.) for marketing approval of 908 in the U.S. and E.U. The submissions for registration included data from more than 1,100 treatment-naïve and treatment-experienced patients who participated in the Phase III trials. The FDA has informed GlaxoSmithKline that the NDA covering 908 has been accepted for filing and that 908 will receive a standard review. We have been informed by GlaxoSmithKline that its collection and submission of certain additional data requested by the FDA regarding 908 is proceeding as planned. We expect that 908 can be approved and launched in the U.S. in the fourth quarter of 2003.

        Data from the Phase III clinical program was presented at various medical conferences in 2002 and 2003. In the NEAT trial, 66% of 166 HIV positive patients achieved an undetectable viral load with 908, compared to 51% of 83 patients taking nelfinavir. In the SOLO study, 68% of 322 HIV-positive patients achieved undetectable viral load with 908/ritonavir compared to 65% of 327 patients taking nelfinavir. The preliminary 24-week data from the CONTEXT study has shown similar efficacy responses in both the 908/ritonavir regimens and the lopinavir/ritonavir regimen, meeting the primary endpoint of non-inferiority in the study at 24 weeks. Data from the three pivotal trials has shown that the incidence of adverse events was low in 908 treatment groups.

        908 will offer important new benefits as well as retaining many of the favorable properties associated with amprenavir including:

•

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



•

ability to be dosed once daily when co-administered with ritonavir;



•

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



•

well tolerated;



•

relatively low levels of cross-resistance to other protease inhibitors; and



•

a favorable lipid profile.

        GlaxoSmithKline is developing 908 and has marketing rights in the United States, Europe and certain countries of the Far East. We currently hold the option to develop and commercialize 908 in Japan. We also have a co-promotion option in the United States and the European Union, and we will receive royalties on any sales of 908 by GlaxoSmithKline. We also retain rights to supply bulk drug substance to GlaxoSmithKline.

VX-385

        In 2001, GlaxoSmithKline advanced into preclinical development a third novel, orally available HIV protease inhibitor discovered by Vertex, VX-385 (GW640385). In November 2002, we announced

10

that GlaxoSmithKline had begun Phase I evaluation of VX-385. We expect that GlaxoSmithKline will continue clinical development of this compound in 2003. 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, 908, and other currently marketed protease inhibitors.

Background: Treatment of HIV/AIDS

        Infection with HIV 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 are infected with HIV. The U.S. Centers for Disease Control estimates that there are 980,000 patients in the United States 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 non-infectious viral particles. Currently, more than 174,000 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 estimated at more than $1.6 billion in 2002, and U.S. sales alone were estimated at more than $950 million in 2002.

        There are now four 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; the fusion inhibitor enfuvirtide; and PIs, including Agenerase.

Sepsis (Serono; Taisho)

        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. Under an agreement signed in 2000, Serono S.A. holds an option to 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 Program" on page 15. 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.

11

Inflammation and Autoimmune Disease

Inflammatory Disease

Interleukin-1b Converting Enzyme Program (Aventis)

        We are conducting research and development on inhibitors of interleukin-1b converting enzyme (ICE; caspase-1) for the treatment of acute and chronic inflammatory conditions. We are collaborating with Aventis S.A. in the development of the lead ICE inhibitor compound, pralnacasan (VX-740), and Aventis is investing to develop pralnacasan in parallel for both rheumatoid arthritis and osteoarthritis. In January 2003, Aventis began a Phase II proof-of-concept study of pralnacasan in patients with osteoarthritis. The study will evaluate 400 patients treated with pralnacasan or placebo for 12 weeks. The study is intended to enable Vertex and Aventis to evaluate the safety and efficacy of pralnacasan in osteoarthritis patients. We expect that Aventis will begin a Phase IIb study of pralnacasan in patients with rheumatoid arthritis in the second quarter of 2003.

        In 2002, Aventis completed a 250 patient Phase IIa 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. Data from the Phase IIa clinical trial demonstrated that treatment with pralnacasan was well tolerated and led to positive anti-inflammatory effects in patients with rheumatoid arthritis. More specifically, the Phase IIa data demonstrated that:

•

Patients receiving pralnacasan exhibited a dose-dependent trend towards improvement in signs and symptoms of disease as measured by ACR20 response rates after 12 weeks.



•

Patients receiving 1200 mg/day of pralnacasan in the intention-to-treat population exhibited ACR20 response rates of 44% compared to a response rate of 32.7% in the group receiving placebo.



•

In post-hoc subset analyses, both patients receiving stable concomitant methotrexate (MTX) treatment for >6 months and patients not receiving concomitant MTX treatment exhibited statistically significant, dose-dependent improvement in ACR20 response rates with pralnacasan treatment.



•

Patients receiving the higher dose of pralnacasan (1200 mg/day) had statistically significant reductions in the inflammatory biomarkers C-reactive protein, erythrocyte sedimentation rate, and serum amyloid A.



•

Treatment with pralnacasan enabled patients to reduce their concomitant corticosteroid therapy.



•

Pralnacasan was well tolerated. The incidence of dose limiting adverse events (AEs) were similarly distributed among treatment groups overall. The most common AEs judged to be treatment-related were mild to moderate diarrhea and nausea, which were seen in <5% of the study population and were generally unrelated to dose.

        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 the production of interleukin-1b, a cytokine 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 certain other compounds discovered under our previous research collaboration with Aventis. We will receive milestone payments for successful development of pralnacasan in rheumatoid arthritis, as well as for each additional indication for which it is developed (including osteoarthritis). Additionally, we will receive royalties on any sales of pralnacasan and Aventis will partially fund a Vertex co-promotion effort in the U.S.

12

Background: ICE Inhibitors for Inflammatory Disease

        ICE (caspase-1) is an enzyme that controls the release of active interleukin-1 beta (IL-1b) (one of two forms of IL-1) and IL-18 from white blood cells into the bloodstream and within tissues. IL-1b 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-1b 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-1b and IL-18 levels has been correlated with disease states in a number of acute and chronic inflammatory diseases.

        Rheumatoid arthritis (RA) is the lead indication for the pralnacasan development program. In patients with RA, increased activity of IL-1b and IL-18 is observed in joint tissues during disease flare-ups, and IL-1b and IL-18 are known to activate osteoclasts, a cell type important in bone erosion characteristic of rheumatoid arthritis.

        There are more than 6 million patients with RA worldwide, including approximately 2.1 million in the United States. The main drugs currently used to treat RA 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 liver toxicity. Even when tolerated well, over the long term many patients become unresponsive to methotrexate. Newer therapies including Enbrel® (etanercept) and Remicade® (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® (anakinra) became the first therapy approved for RA targeting the cytokine IL-1b. However, these newer agents are injectable, and can be inconvenient and painful to administer. We believe that a well tolerated oral cytokine inhibitor such as pralnacasan may have significant commercial advantages.

        Osteoarthritis (OA) is the second indication for which pralnacasan is being developed. The inflammatory response plays a large role in the joint damage characteristic of OA, and increased cytokine activity has been observed in OA. Specifically, IL-1b is a key driver of pathology in OA, and animal models provide a strong rationale for pursuing IL-1b modulation for the treatment of OA.

        OA, a degenerative joint disease, is the most common form of arthritis, afflicting more than 240 million patients worldwide, including more than 21 million in the United States alone. Onset generally occurs after middle age, and as the disease progresses, it causes the loss of cartilage, damage to bone, formation of bone spurs, and inflammation of the soft tissues. OA may also occur in joints that have suffered previous injury, have been subjected to prolonged heavy use, or have been damaged by prior infection or inflammatory arthritis. Patients with OA experience pain, tenderness, swelling and progressive loss of mobility. OA is currently treated with over-the-counter drugs as well as palliative treatment such as NSAIDS and COX-2 inhibitors. These drugs do not address the underlying progressive joint destruction, while patients with more severe cases may become candidates for partial or total joint replacement surgery.

        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. We believe that pralnacasan is the only specific ICE inhibitor to be advanced into clinical trials and is the most advanced oral cytokine inhibitor in development.

13

RESEARCH PROGRAMS

Vertex Drug Design Platform and Drug Discovery Strategy

        We believe that our integrated drug design approach 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 orally-available 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.

        Focused Drug Discovery in Target-Rich Gene Families.    Vertex has pioneered a novel approach to drug discovery in target-rich gene families. Our approach organizes and prioritizes targets within gene families, which are groups of genes with similar sequences that code for structurally similar proteins. This approach essentially clusters targets according to how they interact with chemical inhibitors, and allows us to use high-throughput screening technologies, informatics and medicinal chemistry to rapidly identify drug-like classes of compounds in parallel for multiple targets. In concert with this approach, we use a variety of biological and chemical methodologies that interrogate the function of newly discovered proteins in order to focus our drug discovery and development efforts on the most promising targets within the most promising gene families. We believe that our systematic application of this drug discovery approach is increasing the speed and efficiency of drug design efforts directed at novel biological targets, and is securing valuable intellectual property for us in gene families of interest. Ultimately, we believe that our use of this approach will result in the development and market introduction of many major new drugs.

Target-Rich Gene Family Drug Discovery Programs

        We have four major research programs in target-rich gene families. These research programs utilize our focused 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.

Kinase Program

        We have a broad-based drug discovery effort targeting the human protein kinase family, which consists of approximately 500 members. Protein 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. Kinase activity has been implicated in most major diseases, including cancer and autoimmune, inflammatory, cardiovascular, metabolic, and neurological diseases. Thus, kinases can be ideal targets for therapeutic intervention. The clinical success of the oncology drugs Gleevec (Novartis) and Iressa (Astra Zeneca) offer examples of how small molecule kinase inhibitors can be tailored to address specific diseases.

        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 protein kinases. The support provided by Novartis is enabling us to further expand both our infrastructure and parallel drug

14

design efforts within this family. The collaboration addresses all human protein kinases excluding a small number of targets for which the two companies had substantial efforts underway prior to initiation of the agreement. For example, the p38 MAP kinase, excluded from our Novartis collaboration, is the molecular target for the Vertex drug candidates VX-702 and VX-850, which are in different stages of clinical development for inflammatory disease.

        In 2002, we selected three novel, small molecule kinase inhibitors from our program with Novartis for preclinical and clinical development. VX-528 is a small molecule inhibitor of Aurora kinases, which are three closely-related proteins required in rapidly dividing cells. Inhibition of Aurora kinase activity with a small molecule may provide a means of slowing or reversing the uncontrolled cell growth observed in cancer. VX-680 is a potent small molecule inhibitor of Aurora kinases and of FLT3 kinase. More than 30% of patients with acute myelogenous leukemia (AML) have activating mutations of FLT3. Thus VX-680 could provide therapeutic benefits for solid tumors and for hematological malignancies including AML. We also selected VX-608, a small molecule inhibitor of GSK3-b kinase. In June, 2001 we reported the 3-dimensional atomic structure of GSK3-b. Vertex researchers have developed proprietary information on the function of GSK3-b in the onset and progression of stroke, and have used that information to design and optimize VX-608. VX-608 has demonstrated broad activity in reducing tissue damage and improving outcomes in several preclinical models of stroke.

        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.

        The infrastructure created over the first 3 years of the Novartis/Vertex collaboration has enabled a parallel approach to drug discovery in the kinase gene family. This unique approach has Vertex poised for continued productivity. Over the next five years, we envision advancing a significant number of kinase inhibitors into clinical development targeting multiple therapeutic areas.

Caspase Program

        Caspases are a subfamily of proteases that 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 applying 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 small molecule caspase inhibitor drug candidate for clinical development in the coming years. VX-799 is currently in preclinical development.

        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 medicinal and computational chemistry tools, Vertex scientists made rapid progress in the design and

15

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 (caspase-1). In November 1999, we began collaborating with Taisho Pharmaceutical Co., Ltd. to discover, develop, and commercialize other 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 the option to establish a joint venture with Serono.

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 proprietary technologies. 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, and lamotrigine and carbamezepine which are sodium channel inhibitors for the treatment of epilepsy, 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. 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. Within the next 18 months we expect to select novel small molecule drug candidates from this program for preclinical development.

Protease Program

        We also have a drug discovery effort targeting both human and viral proteases. The protease gene family consists of approximately 400 proteases that play a role in many different diseases. 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.

        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, including 908, which has a pending NDA filed with the U.S. FDA. 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 a broad Phase II development program. We also have two additional drug candidates targeting caspases in development. In 2003, Vertex expects to advance VX-950, an inhibitor of HCV protease (a serine protease), into Phase I 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.

Additional Gene Families

        We plan to utilize our 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 g-protein coupled receptors (GPCRs), nuclear receptors and phosphatases.

16

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 worldwide sales of nearly $4 billion in 2001. 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 have discovered a class of molecules that also shows activity against the highly similar par E subunit of topoisomerase IV, another essential bacterial enzyme. These dual gyrB/parE inhibitors not only appear to be potent in preclinical testing, but may also be less susceptible to the development of drug resistance, a major and growing problem with marketed antibiotics. We are currently optimizing this dual inhibitor class and plan to select a clinical candidate in 2003.

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.

        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 neurorestorative agents for the treatment of a variety of neurological disorders. During 1999, we announced that orally administered neurophilin compounds 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. Some compounds have been chosen for a more detailed investigation with the objective of selecting compounds for preclinical development in the future.

17

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. Since our inception in 1989, we have advanced more than 15 drug candidates into development directed at biologically complex targets in areas of unmet medical need. Selected technologies include:

        Genomics and Bioinformatics.    To further our parallel drug design strategy, we place a great emphasis on collecting, annotating, and organizing scientific information from both public and private sources. This information can be from scientific sources (biological, genomic, chemical, or clinical) and from patents. We have developed proprietary software to help scientists access and learn from this information.

        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. We also use antisense, siRNA, dominant negative cell lines, and other biological approaches to better characterize the role played by specific targets in 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. Recent improvements in protein production and automated liquid handling have dramatically increased our ability to perform parallel crystallization trials. 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 the evaluation and selection of compounds for synthesis. During our virtual ("in silico") screening process, in excess of one billion compounds can be evaluated in one day to select several hundred or several thousand candidate compounds for synthesis and screening. These in silico tools enable us to analyze libraries of compounds for their potency, cell permeability, solubility, and other physical and biological properties relevant for drug design. Based on experimental results, new information is added to the process and the cycle is repeated. By using proprietary algorithms to sort and filter compounds for specific properties, our chemists can focus on synthesizing compounds that are more likely to lead to the rapid identification of development candidates.

        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 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.

18

        Assay Development.    We have premier capabilities in assay development and screening that allow us to rapidly generate large numbers of high quality lead compounds and drug candidates across all major gene families. We conduct several hundred assays per year, and are utilizing our assay development to develop novel proprietary assays to establish the ADME/toxicology profiles for compounds in our screening library. We believe that our assay capabilities allow us to gain useful information about our compounds early in the discovery process, which furthers research productivity.

        Assay Technologies.    Our assay development and screening platform is built upon a number of capabilities and gene reporter technologies, such as green florescent protein (GFP) and beta lactamase, to which we acquired rights through our 2001 acquisition of Aurora Biosciences Corporation. A key technology for the assay development platform is beta lactamase, which enables fluorescence-activated cell sorting, and is readily adapted to a broad range of target classes. Vertex continues to find useful applications of beta-lactamase, such as GenomeScreen.

        High-Throughput Screening.    Vertex significantly enhanced its chemical management and screening capabilities with the acquisition of Aurora Biosciences Corporation. These capabilities include aspects of the proprietary ultra high-throughput screening (UHTSS) system which integrates compound management, plate replication with miniaturized screening, hit (potential lead) identification and follow-up. The ultra high-throughput capability is achieved through the use of our NanoWell® assay plate, which contains 3,456 wells in a standard microplate footprint. Assays for most enzyme and receptor targets are conducted in this format.

        Ion Channel Platform.    Our patented universal ion channel technology platform, includes the VIPR (Voltage/Ion Probe Reader) and VIPR II subsystems, proprietary voltage sensor probes and assay methods. 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. Vertex has developed advanced proprietary applications of these technologies which enable high-throughput, mechanistic studies of compound action on ion channels. These applications include the development of our E-VIPR platform which enables optical membrane potential assays for detecting activity of rapidly gating channels, such as certain voltage-gated channels.

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 a $15 million up-front 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 further amounts are based on the development of eight drug candidates. We are responsible for drug discovery and clinical proof-of-concept testing of all drug candidates. Under our agreement, Novartis has also created a $200 million loan facility to support our clinical studies, which we may draw down in amounts of up to $25 million for each drug candidate. The loans are interest free and Novartis will forgive the full amount of any advances with respect to a particular drug candidate if Novartis accepts the drug candidate for further development under our agreement. During 2002 we drew a $5 million advance against the loan facility to support our early development efforts related to a particular drug candidate. Novartis will have exclusive worldwide development, manufacturing and marketing rights to clinically and commercially

19

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. Upon one year's written notice, Novartis may terminate this agreement without cause, effective no earlier than May, 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 certain other compounds discovered as part of the research collaboration between HMR and us 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 has paid us a $20 million up-front payment for prior research costs, and has agreed to pay us up to $62 million in milestone payments for successful development by Aventis of pralnacasan in rheumatoid arthritis, the first targeted indication. Milestone payments are also due for each additional indication. Aventis initiated a Phase IIa clinical study of pralnacasan in osteoarthritis in January 2003. The agreement also provides that Aventis will partially fund a Vertex co-promotion effort in the U.S. Aventis has the right to terminate this agreement without cause upon six months' written notice. Termination by Aventis will end any license we have granted Aventis under the agreement.

GlaxoSmithKline

        In December 1993, we entered into a collaboration with GlaxoSmithKline covering the research, development and commercialization of HIV protease inhibitors, including Agenerase (amprenavir), 908 (an amprenavir prodrug), 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 up-front 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. We have received the entire $42 million and in 1999 began receiving royalties on sales of Agenerase. GlaxoSmithKline is also obligated to pay us additional development and commercialization milestone payments for subsequent drug candidates, including 908 and VX-385. In the fourth quarter of 2002 we received a milestone payment of $1.5 million from GlaxoSmithKline in connection with the submission of an application for marketing approval for 908 in the U.S. and the European Union. 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 (now owned by Pharmacia/Pfizer) patent applications claiming HIV protease inhibitors, to permit Vertex and GlaxoSmithKline to develop, manufacture and market Agenerase and 908 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.

Serono S.A.

        In December 2000, we entered into a collaboration with Serono S.A. to discover, develop, and market caspase inhibitors. The Agreement covers caspase inhibitors other than certain ICE inhibitors

20

and related compounds which are the subject of our agreement with Aventis described above. 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. We have received $5 million in up-front payments for prior research, and could also receive up to $20 million in research funding, some of which has been paid, over the five year agreement term. We could also receive up to $70 million in milestone payments for the successful development and commercialization of one or more drug candidates. The two companies will share development costs. We have the option to establish a joint venture with Serono for the commercialization of products in North America, where we will share marketing rights and profits from the sale of drug products. 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 supplies of drug substance. Serono has the right to terminate the agreement without cause upon 90 days' written notice, effective at July 1, 2004.

Taisho Pharmaceutical Co., Ltd.

        In November 1999, we entered into a collaboration with Taisho covering the discovery, development, and commercialization of caspase inhib