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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
Rights to Purchase Series A Junior Participating Preferred Stock
(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 ý   No o

        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. ý

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

        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 30, 2004 was $503,370,650.

        As of March 14, 2005, the registrant had 81,206,723 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on May 11, 2005 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" is a registered trademark of Vertex. "Agenerase," "Lexiva" and "Telzir" are registered trademarks of GlaxoSmithKline plc. "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 forward-looking statements. Forward-looking statements give our current expectations or present 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 phrases 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:

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our business strategy;



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our predicted development and commercial timelines;



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the selection, development and approval of our products;

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the establishment, development and maintenance of collaborative relationships;



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our ability to identify and develop new potential products;



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our ability to achieve commercial acceptance of our products;



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our ability to scale up our manufacturing capabilities and facilities;



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our estimates regarding obligations associated with a lease of a facility in Kendall Square, Cambridge, Massachusetts;



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



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our projected capital expenditures; and



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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 description of 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

Overview

        We are a biotechnology company in the business of discovering, developing and commercializing small molecule drugs for serious diseases, including HIV infection, chronic hepatitis C virus (HCV) infection, inflammatory and autoimmune disorders, cancer, pain and bacterial infection, independently and with collaborators. Our principal focus at this time is on the development and commercialization of new treatments for viral diseases, inflammatory and autoimmune diseases and cancer. Two Vertex-discovered products for the treatment of HIV infection and AIDS have advanced to the market. Our pipeline of potential products includes several drug candidates targeting chronic HCV infection, inflammatory and autoimmune diseases such as rheumatoid arthritis and psoriasis, and cancer.

        Our goal is to mature into a profitable pharmaceutical company with industry-leading capabilities in research, development and commercialization of products. Our strategy is to continue building these capabilities as we advance our product candidates to market. We focus our efforts both on programs that we expect to control throughout the development and commercialization phases, and programs that we expect will be conducted principally by a collaborator. We expect to retain control of the development of certain product candidates for the treatment of chronic HCV infection and inflammation. We believe that we can effectively commercialize products in these therapeutic areas, while expending comparatively fewer resources, through the use of a specialist-focused sales force. We have focused our Vertex-controlled commercialization efforts in North America, and we expect to concentrate on identifying collaborative relationships for development of our HCV infection and inflammation product candidates outside of North America. The most advanced product candidates for which we control North American development are:

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merimepodib, an oral IMPDH inhibitor for the treatment for chronic HCV infection;



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VX-950, an oral hepatitis C protease inhibitor for the treatment of chronic HCV infection;



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VX-702, an oral p38 MAP kinase inhibitor for the treatment of inflammatory diseases; and



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VX-765, an oral ICE inhibitor for the treatment of autoimmune diseases.

        We expect to continue to invest in our research and development capabilities as we advance our product candidates to market.

        Collaborations will continue to be a key component of our corporate strategy. We currently are collaborating with Novartis Pharma AG, GlaxoSmithKline plc, Merck & Co., Inc., Mitsubishi Pharma Corp., Kissei Pharmaceutical Co., Ltd., Cystic Fibrosis Foundation Therapeutics Incorporated and other companies. Collaborations provide us with financial support and other valuable resources for our research programs, development resources for our clinical drug candidates and marketing and sales support for our products and product candidates. We have a collaboration with GlaxoSmithKline plc that has resulted in our two marketed products to date, the HIV protease inhibitors Agenerase and Lexiva (marketed under the name Telzir in the European Union) and the advancement of a third HIV protease inhibitor, VX-385, into Phase II clinical development. Our collaboration with Eli Lilly and Company, now ended, produced VX-950, one of our HCV drug candidates, and our collaboration with Novartis produced the potential oncology therapeutics VX-680, now in Phase I clinical development by Merck, and VX-322, now in preclinical development by Novartis.

        We plan to continue to add promising potential products to our development pipeline through our continuing commitment to discovery research. Our drug design approach integrates biology, chemistry, biophysics, automation and information technologies to make the drug discovery process more efficient and productive. We believe that our drug discovery expertise is one of our distinguishing features. In addition to our efforts to research and develop kinase inhibitors, we currently are conducting a productive research program in the area of ion channel modulation. We expect that future development

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candidates from our programs will be focused on the treatment of a wide variety of diseases and conditions, including cancer, cystic fibrosis and pain.

        We also seek to opportunistically 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.

        We were incorporated in Massachusetts in 1989, and our principal executive offices are located at 130 Waverly Street, Cambridge, Massachusetts 02139.

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COMMERCIAL PRODUCTS AND CLINICAL DEVELOPMENT PROGRAMS

        Our product pipeline is principally focused on viral diseases, inflammatory and autoimmune diseases, cancer, pain and bacterial infection.

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Fosamprenavir calcium is marketed under the trade names Lexiva in North America and Telzir in the European Union. Lexiva/Telzir, a prodrug of our first marketed HIV drug, Agenerase (amprenavir), also marketed by GlaxoSmithKline, is replacing Agenerase in world markets.

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Vertex has co-promotion rights in the United States and the European Union.

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Sanofi-Aventis has notified us that it intends to terminate our collaboration for the development of pralnacasan. Upon the effectiveness of that termination, all commercial and other rights to pralnacasan will revert to Vertex.

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Antiviral Programs

HIV Infection/AIDS

Background: Treatment of HIV Infection/AIDS

        Infection with human immunodeficiency virus (HIV) leads to AIDS, a severe, life-threatening impairment of the immune system. The World Health Organization estimates that approximately 39.4 million individuals worldwide are infected with HIV. The U.S. Centers for Disease Control and Prevention (CDC) has estimated that there are between 850,000 and 950,000 patients in the United States infected with HIV.

        There are 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 HIV protease inhibitors (PIs). PIs such as Lexiva commonly 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. The PI ritonavir has been shown to significantly boost the levels of certain other PIs in the bloodstream and therefore co-administration of PIs 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 the end of 2004, over 206,000 patients in the United States receiving drug treatment for HIV infection were taking at least one PI. The market for HIV PIs is highly competitive, with seven different PIs vying for a share. We estimate that worldwide sales of HIV PIs exceeded $2.0 billion in 2004, and U.S. sales alone during the same period were estimated at more than $1.1 billion. We believe that trends in the demographics of HIV-infected patients and recently evolving approaches to the treatment regimen for HIV infection have resulted in a recent increase in the use of PIs generally, including Lexiva. We believe that, in 2004, there was an increase in both the number and the percentage (from 47% to 53%) of HIV infected patients in the U.S. being treated with a PI. We attribute this growth, in part, to the use of new PIs, such as Lexiva, that offer potent therapy combined with greater tolerability and convenience, as compared with first-generation PIs.

Vertex HIV Infection/AIDS Products

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Lexiva/Telzir

        Our second generation PI Lexiva, which is sold in the European Union under the name Telzir, was co-discovered by Vertex and GlaxoSmithKline plc ("GlaxoSmithKline") and has been developed by GlaxoSmithKline pursuant to our collaboration agreement. GlaxoSmithKline has worldwide marketing rights for Lexiva/Telzir, and we have the right to co-promote Lexiva/Telzir in the United States and the European Union. We also have the right to supply bulk drug substance to GlaxoSmithKline. We receive royalties on GlaxoSmithKline's sales of Lexiva/Telzir.

        GlaxoSmithKline conducted an extensive Phase III clinical program for Lexiva, including trials in both treatment-naïve and treatment-experienced patients. The first study (NEAT) compared Lexiva to nelfinavir in treatment-naïve patients. The second study (SOLO) compared Lexiva 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 Lexiva in combination with ritonavir, compared to lopinavir/ritonavir, in treatment-experienced patients. In all of these studies, patients received NRTIs as part of the combination regimen.

        In December 2002, GlaxoSmithKline filed a New Drug Application with the U.S. Food and Drug Administration (FDA) and a Marketing Authorization Application in the European Union for marketing approval of Lexiva/Telzir in the U.S. and the European Union. The registration submissions included data from more than 1,100 treatment-naïve and treatment-experienced patients who

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participated in the Phase III trials. The FDA approved Lexiva on October 20, 2003. GlaxoSmithKline and Vertex launched Lexiva in the United States shortly thereafter. The European Commission granted marketing approval for Telzir in July 2004, and GlaxoSmithKline launched Telzir in certain European Union countries in the third quarter of 2004. Lexiva/Telzir currently is marketed in 17 countries. Lexiva currently holds a 9% share of the PI market in the United States, and is one of two HIV protease inhibitors that demonstrated an increase in the number of prescriptions written in the United States in 2004, compared to 2003.

        We believe that the favorable properties of Lexiva/Telzir include:

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potent anti-viral activity;



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



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



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



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good tolerability;



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ability to be co-administered with certain antacids and drugs such as ranitidine (Zantac);



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



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a favorable lipid profile.

        Lexiva/Telzir is a prodrug of amprenavir, our first generation HIV protease inhibitor, which also was discovered and developed in collaboration with GlaxoSmithKline. A prodrug is an inactive compound that is metabolized by the body to become the active drug. Due to the physical properties of a prodrug, in particular cases it may be possible to achieve a higher effective dose of the active drug for each prodrug pill administered, resulting in a smaller pill burden for patients.

        At the International AIDS conference held in July 2004, GSK presented data on the ability of patients taking PI regimens that included Lexiva to maintain viral suppression through nearly two years of therapy. At 96 weeks of therapy, of the 113 patients initially enrolled in the NEAT study for whom data were available, 109 (96%) had a viral load below 400 copies/ml HIV-RNA and 97 (86%) had a viral load below 50 copies/ml HIV-RNA. Also at 96 weeks of therapy, of the 60 patients initially enrolled in the SOLO study for whom data were available, 54 (90%) had a viral load below 400 copies/ml HIV-RNA and 51 (85%) had a viral load below 50 copies/ml HIV-RNA. The data presented also showed that after 96 weeks of treatment, no PI- resistance mutations were observed in patients. We believe that these data demonstrate that Lexiva-based regimens are durable, and support the use of Lexiva/Telzir as an element of both first-line therapies and second-line therapies for HIV infection.

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VX-385

        We have a third novel, orally available HIV protease inhibitor in clinical development, VX-385, which was co-discovered by Vertex and GlaxoSmithKline. VX-385 is chemically distinct from Agenerase, Lexiva/Telzir, and other currently marketed PIs. Preclinical results presented at medical meetings in 2003 demonstrate that VX-385 is a highly potent inhibitor that exhibits anti-HIV activity against HIV strains resistant to a number of currently marketed PIs. Phase I clinical results indicate that VX-385 is well-tolerated in single doses in healthy volunteers and achieves blood levels consistent with those believed to have an antiviral effect.

        Our collaborator GlaxoSmithKline controls development of VX-385. In the fourth quarter of 2004, GlaxoSmithKline initiated a pilot Phase II study of VX-385. The open-label Phase II trial is designed for approximately 30 patients with HIV infection who will receive VX-385 for up to 48 weeks. The trial will assess the safety, efficacy and clinical activity of VX-385, and will use a planned interim analysis as a basis for designing larger, randomized clinical trials to support product registration. We expect that GlaxoSmithKline will report interim results from the pilot Phase II VX-385 trial in 2005.

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Hepatitis C Virus Infection

Background: Treatment of Hepatitis C Virus Infection

        Hepatitis C virus (HCV) infection causes chronic inflammation in the liver. In a majority of patients, HCV infection 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 have estimated that approximately 2.7 million Americans are chronically infected with HCV, and the World Health Organization estimates that there are as many as 185 million chronic carriers of the virus worldwide.

        Currently, there is no vaccine available to prevent HCV infection. The current standard treatment for HCV infection is a combination of pegylated interferon and ribavirin. Not only is this treatment regimen associated with significant side effects, including fatigue, flu-like symptoms, depression and anemia, but approximately 50% of patients infected with HCV genotype I, the most common HCV genotype in the United States, fail to show long-term sustained response to the therapy. As a result, new safe and effective treatment options for HCV infection are needed.

Vertex HCV Drug Candidates

        We are developing two drug candidates targeting HCV infection through different mechanisms. Our most advanced compound is the IMPDH inhibitor merimepodib, which targets HCV indirectly and currently is in Phase IIb development. Vertex's second HCV drug candidate, VX-950, targets HCV directly, by inhibiting hepatitis C NS3-4A protease, an enzyme necessary for HCV replication. In 2004, we completed a Phase I clinical trial of VX-950 in healthy volunteers, and initiated a currently on-going Phase Ib clinical trial of VX-950 in both healthy volunteers and HCV-infected patients. In 2004, we were named a Business Leader in Medical Treatment by Scientific American magazine, based on our leadership in the search for new medicines for the treatment of HCV infection.

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Merimepodib

        Merimepodib is Vertex's most advanced orally available drug candidate for the treatment of HCV infection. Merimepodib targets HCV infection indirectly through inhibition of the human enzyme inosine 5'-monophosphate dehydrogenase (IMPDH). Merimepodib was discovered through Vertex's program to discover and develop novel orally administered IMPDH inhibitors. IMPDH inhibition selectively inhibits cell proliferation and/or the cycle of viral infection by interrupting the biosynthesis of guanine nucleotides and, indirectly, the synthesis of RNA and DNA in the cell, through one of two pathways available to cells for guanine synthesis. Accordingly, IMPDH is believed to be a target for inhibition of rapid cell proliferation and/or viral replication. In addition, IMPDH inhibitors appear to work additively or synergistically with other treatments for HCV, including ribavirin. The specific mechanism by which merimepodib enhances ribavirin activity is not known, but it has been suggested that merimepodib may increase the likelihood of ribavirin incorporation into viral RNA during replication, resulting either in decreased viral replication or in the production of immature or defective viral particles. We currently are conducting or planning a number of studies of merimepodib in order to position this compound as an additive anti-viral agent for use with evolving therapies to treat HCV infection.

        In 2004, we initiated a Phase IIb, double-blind, placebo-controlled randomized triple combination study (the METRO study) of merimepodib with Pegasys® (peginterferon alfa-2a) and Copegus® (ribavirin) in patients who are non-responders to prior treatment with pegylated interferon and ribavirin. The goal of the METRO study is to evaluate the safety, pharmacokinetics and efficacy of merimepodib in combination with pegylated interferon and ribavirin. The primary endpoint of the study is to evaluate the antiviral activity of merimepodib and perform an assessment of the proportion of merimepodib-treated patients who achieve a sustained virologic response, compared to placebo, at week 72 (end of follow-up). We also plan to conduct an analysis of the antiviral activity of merimepodib-treated patients at 12, 24 and 48 weeks of treatment. The study is designed to enroll approximately 315

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patients, and we expect to complete enrollment in the second quarter of 2005. Reaching our METRO enrollment goal will permit an interim analysis of data and, possibly, lead to discussions by the end of 2005 with the FDA about the registration path for triple combination treatment for patients who are non-responders to a combination of pegylated interferon and ribavirin alone.

        In early 2005, we initiated a 28-day clinical virology study to evaluate the effects of a combination of merimepodib and ribavirin on hepatitis C viral load. We also plan an additional triple combination study of merimepodib, in this case involving treatment-naïve patients with HCV infection, for later in 2005.

        In 2003, we completed the treatment arms of a triple combination Phase II study of merimepodib with pegylated interferon and ribavirin, to evaluate the safety of the triple combination, in 31 patients with genotype I HCV infection who did not respond to a previous course of alpha interferon in combination with ribavirin. The study provided for 24 weeks of treatment, with an optional 24 week extension phase for patients who responded to therapy. In 2003, we reported 24 weeks results from this study, indicating that merimepodib was well-tolerated and, in addition, that merimepodib treatment was associated with a statistically-significant, dose-dependent increase in the percentage of patients who had undetectable hepatitis C viral RNA after 24 weeks of treatment. With regard to the extension phase, eleven patients were eligible to participate, and ten of those patients completed the full 48 weeks of treatment. Of those completing the extension phase, one of three patients in the placebo group and three of seven patients in the merimepodib groups achieved a sustained viral response, measured 24 weeks after completing the 48 weeks of treatment. Vertex also has conducted experiments that demonstrate that merimepodib has an additive antiviral effect, in vitro, in combination with pegylated interferon and ribavirin.

        In preclinical and early clinical studies, merimepodib demonstrated potent biological activity and oral bioavailability. Data from a Phase I trial in healthy volunteers showed that merimepodib was well-tolerated in single escalating doses and achieved blood levels well above those we believe to be necessary, based on in vitro studies, to achieve potent inhibition of IMPDH. Data from a Phase II clinical trial indicated that merimepodib, when given for 28 days as monotherapy to HCV patients who were unresponsive to prior treatment with alpha interferon, was well tolerated and appeared to reduce levels of serum alanine aminotransferase, a marker of liver inflammation.

        We also have assessed the safety, tolerability and clinical activity of merimepodib combined with alpha interferon in another Phase II trial involving treatment-naïve patients with HCV infection. 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 alpha interferon, as compared to patients receiving alpha interferon alone. Merimepodib treatment was associated with statistically significant viral RNA decreases in this study when treatment-non-compliant patients were excluded from the analysis. These results are consistent with an additive antiviral effect mediated by merimepodib, when given in combination with alpha interferon.

        Vertex holds all development and commercial rights to merimepodib.

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VX-950

        VX-950 is Vertex's lead oral HCV protease inhibitor, and one of the most advanced of a new class of antiviral treatments in development for HCV infection. VX-950 is designed to inhibit NS3-4A protease, an enzyme thought to be necessary for HCV replication. We believe that therapeutics that directly target viral replication, such as VX-950, may significantly increase the number of patients who achieve a complete viral response.

        In 2004, we conducted and completed a Phase Ia placebo-controlled study of VX-950 in healthy volunteers. This study assessed safety, tolerability and pharmacokinetics in escalating, single oral doses of VX-950 ranging from 25 milligrams to 1250 milligrams. In this study, VX-950 was well-tolerated at all dose levels and was not associated with any serious adverse events. There did not seem to be an increase in adverse events with increasing dose levels. Pharmacokinetic assessments from this trial

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showed that VX-950 is orally bioavailable and achieved desired blood concentrations at and above the middle range of the doses tested. The liver is the target organ for antiviral therapies directed against HCV infection. Using a combination of preclinical and clinical data, analyses by Vertex researchers suggest that average liver concentration values of VX-950 are predicted to be up to 57-fold above the 90% inhibitory concentration IC⁹⁰ and up to 113-fold above the 50% inhibitory concentration IC⁵⁰, based on the antiviral activity of VX-950 in the replicon assay, a commonly used laboratory test of antiviral activity.

        Later in 2004, we initiated a Phase Ib clinical study of VX-950 in HCV-infected patients. This Phase Ib study will investigate three doses of VX-950 for a period of 14 days in three serially-scheduled dose groups. The results from this study should provide Vertex with important information on the ability of VX-950 to reduce viral load. We plan to conduct the first interim analysis of the study results, which will include all on-treatment data from the three dose groups of HCV-infected patients, in the second quarter of 2005. If the study is successfully completed, we expect to file an IND in the United States in the second half of 2005 to support the start of Phase II clinical development of VX-950.

        We hold worldwide marketing rights to VX-950, except for Japan and certain Far East countries, where we are collaborating with Mitsubishi Pharma Corporation. We hold worldwide rights to all other second-generation HCV protease inhibitors discovered by us during our collaboration with Eli Lilly. We will owe Eli Lilly royalties on any future sales of VX-950 and certain other HCV protease inhibitors.

Inflammatory and Autoimmune Diseases

Background: ICE Inhibitors for Inflammatory and Autoimmune Diseases

        Interleukin-1b converting enzyme (ICE; caspase-1) is an enzyme that controls the release of active interleukin-1beta (IL-1b, one of two forms of IL-1) and interleukin-18 (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. Elevated IL-1b and IL-18 levels have been correlated with disease states in a number of acute and chronic inflammatory diseases.

        In particular, we believe that small molecule ICE inhibitors have potential as a treatment for psoriasis. In patients with psoriasis, increased activity of IL-18 has been closely correlated with disease severity. In a clinical trial of healthy volunteers, our ICE inhibitor VX-765 appeared to lower serum levels of IL-18 by 50% or more after treatment for two weeks. We believe there are as many as 2.7 million people in the United States suffering from psoriasis, and that approximately 900,000 of them have moderate-to-severe psoriasis requiring drug treatment and/or phototherapy. Existing oral therapies for psoriasis are effective, but are associated with significant organ toxicities. Newer biological therapies also are effective and are not associated with these types of toxicities, but all are administered by injection. We believe the major unmet need for patients with moderate-to-severe psoriasis is for treatments that are active upon oral administration and that are not associated with significant organ toxicities.

Vertex ICE Inhibitors for Inflammatory and Autoimmune Diseases

        We currently are developing our second generation ICE inhibitor, VX-765, in psoriasis. We also have collaborated with Sanofi-Aventis (successor to Aventis S.A.) in the development of our first generation ICE inhibitor, pralnacasan, which is chemically distinct from VX-765. Sanofi-Aventis has notified us that it intends to terminate our agreement to collaborate on the development of pralnacasan. Upon the effectiveness of that termination, we will hold worldwide rights to both VX-765 and pralnacasan. Depending upon outcomes from clinical and nonclinical studies currently underway for VX-765 and pralnacasan, respectively, we expect to move forward with development efforts relating to VX-765 or pralnacasan in the second half of 2005.

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VX-765

        VX-765 was selected for clinical development from our second generation ICE inhibitor research program. In late 2004, we initiated a four week Phase IIa safety and pharmacokinetic study of VX-765 in psoriasis. The results of this study, anticipated in the second half of 2005, could provide the basis for larger and longer term efficacy-based studies of VX-765 in psoriasis and potentially other autoimmune diseases.

        In 2003, we completed Phase I clinical studies of VX-765 in healthy volunteers. Those studies demonstrated a dose-dependent decrease in levels of IL-18, the first time this has been demonstrated for any therapeutic agent. Preclinical data show that VX-765 reduces inflammation and cytokine levels in animal dermatitis and arthritis models.

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Pralnacasan

        Pralnacasan has been studied in both rheumatoid arthritis (RA) and osteoarthritis (OA), as well as in ongoing nonclinical toxicology studies. In 2003, Aventis (now Sanofi-Aventis) and Vertex voluntarily suspended the clinical development of pralnacasan pending full analysis of findings that had emerged from a nine-month nonclinical toxicology study. In that nonclinical study, high doses of pralnacasan were associated with the development of fibrosis in circumscribed areas of the liver of one species of animal. Nonclinical toxicology studies designed to explore this toxicology issue are ongoing and will be completed in 2005. We believe that the results of these studies will assist us in determining a path forward with respect to our ICE inhibitor compounds. If the toxicology findings cannot be satisfactorily resolved, we may discontinue development of pralnacasan.

        In 2002, Aventis completed a 284 patient Phase IIa study of pralnacasan in RA 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-reported and physician-assessed 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 RA. Aventis previously had completed a Phase IIa 28-day clinical trial of pralnacasan in patients with RA 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.

        In 2003, Aventis completed a Phase II study of pralnacasan in OA. The purpose of this study was to enable Vertex and Aventis to evaluate the safety and efficacy of pralnacasan in OA patients. More than 500 patients were enrolled in the OA study, and each patient received one of three doses of pralnacasan or placebo for 12 weeks. Pralnacasan was well-tolerated across all three dosage groups. There was improvement (29 to 35%) in the primary endpoint, total WOMAC scores, for all four treatment groups during the 12 weeks of study. The WOMAC is the "Western Ontario and McMasters Universities" scale for measuring signs and symptoms in OA studies. There were no statistically significant differences in the change in total WOMAC score between placebo treatment and any of the pralnacasan treatment groups. However, statistically significant changes in some urine and serum markers of bone and cartilage turnover were observed. Interpretation of these results in the context of modifying OA disease progression requires additional scientific understanding, which will require further clinical validation.

Background: p38 MAP Kinase Inhibitors for Inflammatory Diseases

        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. The p38 MAP kinase is involved in a variety of cellular processes, including the onset and progression of inflammation. When activated, the p38 MAP kinase triggers production of multiple cytokines, including IL-1b, tumor necrosis factor-alpha (TNF-alpha), and interleukin-6 (IL-6). Excess levels of IL-1b and TNF-alpha are associated with a broad range of acute and chronic inflammatory diseases.

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        We have extensive preclinical and clinical experience with p38 MAP kinase inhibitors, which we believe have the potential to be a powerful and broadly useful new class of oral anti-inflammatory drugs. The initial objective of our p38 MAP kinase program was to identify and evaluate compounds 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. More recently, the central role of inflammation in many cardiovascular diseases has become well established. Inflammation increasingly is recognized as a key component of the overall process in the development of coronary artery disease and particularly, acute coronary syndromes (ACS). ACS is a broad term that includes unstable angina and certain types of myocardial infarctions.

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VX-702

        Study results from clinical and other trials of our p38 MAP kinase inhibitor, VX-702, indicate that VX-702 has the potential to be a very potent therapy in a variety of inflammatory disorders. We are currently planning to initiate a three-month Phase II study of VX-702 in 200 or more patients with rheumatoid arthritis (RA), to assess the safety and pharmacokinetics of VX-702 when dosed as a monotherapy in RA patients. The study also will be designed to evaluate clinical activity as measured by ACR20 and ACR50 responses and to provide us with important information about the general safety of administering VX-702 in a chronic indication such as RA.

        Studies of a number of other p38 MAP kinase inhibitors have demonstrated dose-dependent elevations in liver enzymes, which generally are thought to be markers for liver injury. In 2004, we completed a 28-day study of VX-702 in healthy volunteers designed specifically to evaluate the effect of the compound on liver enzymes. This study showed some transient elevations in liver enzymes in a small number of patients. However, the magnitude of those enzyme elevations did not reach clinical significance and did not require treatment discontinuation. The enzyme levels returned to normal during continued treatment. Using data from this study and other trials of VX-702, we have identified a dosing level for VX-702 that we expect will be both well-tolerated and therapeutically active in treatment of a chronic indication such as RA.

        In 2004, we completed a Phase IIa double-blind, randomized, placebo-controlled, dose-escalation clinical trial of VX-702 in the treatment of patients with acute coronary syndromes (ACS) undergoing percutaneous coronary intervention (PCI), such as stent placement. p38 MAP kinase regulates the production of key inflammatory cytokines implicated in the pathogenesis of ACS. As a potential once-daily therapy for ACS addressing a novel target, a potent p38 MAP kinase inhibitor could provide an approach to complement current therapies for this disease, which affects nearly 1.9 million individuals in the United States each year.

        The Phase IIa study of VX-702 was designed to evaluate the safety, tolerability and pharmacokinetics of VX-702 in 45 unstable angina patients with elevated CRP levels undergoing PCI. Preliminary results indicated that there were no clinically significant differences between treatment and placebo groups with respect to adverse events, and VX-702 met pre-established safety and pharmacokinetic objectives. The study also included an evaluation of the drug's anti-inflammatory activity, as measured by c-reactive protein (CRP) levels, a marker of inflammation measured in the blood. VX-702 significantly reduced serum levels of CRP in patients undergoing PCI. Assessment of the laboratory data indicated a potent and sustained anti-inflammatory effect as measured by CRP levels at multiple time points in the trial. For example, at 48 hours post-procedure, median CRP levels had decreased from baseline in a highly statistically significant, dose-dependent manner in all VX-702 treatment groups. CRP remained significantly lowered out to four weeks beyond the five-day dosing period. By contrast, in patients in the placebo group at 48 hours post-procedure, CRP had increased from baseline. Patients in this trial also underwent Holter (continuous ECG) monitoring for 72 hours to evaluate effects of VX-702 on silent ischemia. Asymptomatic ventricular ectopy (VE) (ventricular extra beats), which was observed in all treatment groups, was recorded during this monitoring at a higher incidence in the higher dose VX-702 treatment groups. In addition, during routine (non-continuous) ECG monitoring, small (not clinically significant) changes in QT interval (a measure of

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electrical conduction within the heart) were seen in the patients treated with VX-702. In view of the limited number of patients in the ACS trial, the high underlying variability in both VE and QT intervals, evaluation while undergoing an acute cardiac intervention, and variable past cardiac histories, the significance of both findings is at present unclear. In planning for any clinical RA study, we would expect to include further Holter monitoring and multiple routine ECG determinations, to allow assessments of VE and QT intervals in a more stable clinical setting.

        We conducted a Phase I clinical study of VX-702 in June 2002. This 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. Results from this Phase I study supported further clinical development of VX-702. Another compound discovered by Vertex, VX-850, is in preclinical development and serves as a backup to VX-702.

Oncology

        Vertex is developing three drug candidates targeting cancer, each by a different mechanism, in collaboration with three different pharmaceutical companies. The most advanced is VX-680, which targets the Aurora kinases and Flt-3 kinase, in Phase I clinical trials with Merck & Co., Inc. In collaboration with Novartis Pharma AG, we have advanced a dual inhibitor of the Flt-3 and c-kit kinases, VX-322, into pre-clinical development for the treatment of certain leukemias as well as other hematological malignancies and solid tumors. We also have an IMPDH inhibitor, VX-944, in development by our collaborator Avalon Pharmaceuticals, Inc. for the treatment of both hematological and solid tumor cancers.

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VX-680

        We are collaborating with Merck & Co., Inc. in the clinical development of VX-680. VX-680 is a potent inhibitor of Aurora kinases and of Flt-3 kinase. Aurora kinases are enzymes thought to play multiple roles in the development and progression of cancer, acting as regulators of cell proliferation, transforming normal cells into cancer cells and downregulating p53, one of the body's natural tumor suppressors. Flt-3 is a receptor tyrosine kinase that is known to be inappropriately activated in several different types of leukemia. Inhibitors of Aurora kinases and Flt-3 kinase have the potential to be useful as highly targeted treatments for a range of oncology indications.

        Vertex researchers published the three-dimensional atomic structure of Aurora-A kinase in 2002, and published the structure of Flt-3 kinase in January 2004. We also presented preclinical data in a number of research and medical venues in 2003 that indicate the potential of VX-680 to treat several different cancer types for which there are currently few or no available treatments. In a paper published in February 2004, researchers at Vertex reported demonstrating for the first time that a selective small molecule inhibitor of Aurora kinase (VX-680) inhibits tumor growth and induces tumor regression in xenograft models of human pancreatic and colon cancer. In addition, Vertex researchers have presented data showing that VX-680 prolonged survival and induced sustained remission in an oncogene-driven model of acute myelocytic leukemia.

        VX-680 currently is in Phase I clinical development by Merck. The first Phase I clinical study, initiated early in 2005, is an open-label, dose-escalation study in patients with solid tumor cancers. This study is designed to evaluate the safety and tolerability of VX-680 when administered in multiple cycles to patients with solid tumors refractory to prior chemotherapy treatment. Merck and Vertex expect to initiate additional Phase I studies of VX-680 in 2005.

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VX-322

        We are collaborating with Novartis in the preclinical development of VX-322, a dual inhibitor of the Flt-3 and c-kit kinases, for the treatment of cancer. Flt-3 kinase and c-kit kinase function as molecular switches that regulate the growth of certain cancers. Flt-3 kinase inhibition has attracted significant attention among cancer researchers as a highly targeted approach to the treatment of certain leukemias as well other hematological malignancies and solid tumors. Flt-3 kinase is abnormally activated or upregulated in a wide range of leukemias, including in more than 70% of patients with acute myelogenous leukemia (AML). Current treatment for AML generally involves aggressive chemotherapy with "non-specific" agents that cannot discriminate between healthy and diseased cells, resulting in significant toxicity and limited efficacy. New targeted approaches hold the potential to transform the treatment of AML, reducing side effects, improving tolerability and increasing the efficacy of chemotherapeutic regimens.

        VX-322 was discovered in a joint effort by scientists in our San Diego and Cambridge research sites, taking advantage of expertise in protein biochemistry, structural biology, high throughput cell assays and medicinal chemistry. Our determination of the crystal structure of Flt-3 kinase in 2004 was a key scientific advance. It provided insight into the mechanism by which mutated forms of the Flt-3 receptor on a cell membrane can activate themselves, triggering uncontrolled proliferation of immature blood cells characteristic in several types of leukemia. Specific mutations of Flt-3 kinase that are believed to be drivers of cell proliferation are present in up to 40% of AML patients. In addition, the protein c-kit has been found at high levels in 60%-80% of AML patients. Preclinical studies conducted at Vertex using cells isolated from AML patients suggested that dual Flt-3/c-kit inhibition provides more potent reduction in cell proliferation than is provided by inhibition of Flt-3 kinase or c-kit kinase alone.

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VX-944

        We are collaborating with Avalon Pharmaceuticals, Inc. in the clinical development and potential commercialization of VX-944, an oral IMPDH inhibitor, for the treatment of cancer. Recent reports in medical literature and presentations at scientific conferences provide a clinical rationale for the development of IMPDH inhibitors generally, and VX-944 specifically, for the treatment of hematologic malignancies. Results from certain preclinical studies of VX-944 indicated that VX-944 inhibited the in vitro proliferation of lymphoid and myeloid cells, the principal cells involved in the most common types of human leukemias. VX-944 also was shown to significantly prolong survival in a model of aggressive mouse leukemia. A single-dose, dose-escalation Phase I clinical study of VX-944 in healthy volunteers demonstrated that VX-944 was orally bioavailable and well-tolerated. We expect that Avalon Pharmaceuticals, Inc. will initiate a clinical study of VX-944 in a hematologic cancer indication in the second half of 2005.

Pain

        The first compound to be selected for development from our ion channels research program is VX-409, a selective voltage-gated sodium channel (Na_V) inhibitor for the treatment of pain. Specific sodium channels in peripheral nerve cells are involved in transmitting pain signals to the central nervous system, making them novel and attractive targets for the treatment of pain. For example, a majority of patients suffering from neuropathic pain do not obtain adequate relief from any of the four classes of drugs currently approved in the United States for treatment of that indication. In addition to limited efficacy, many agents also have dose-limiting side effects. A highly selective Na_V inhibitory compound such as VX-409 may have the potential to be more efficacious with fewer side effects than currently available non-selective sodium channel inhibitors. Vertex holds worldwide development and commercial rights to VX-409. We are evaluating the possibility of entering into a collaborative relationship to advance development of VX-409.

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Bacterial Infection

        We are engaged in the discovery of novel antibiotics that target DNA gyrase B and topoisomerase IV, essential enzymes found in many bacteria. DNA gyrase and topoisomerase IV are utilized during the bacterial replication process. DNA gyrase and topoisomerase IV 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 work by interacting with the gyrase A subunit. In contrast, Vertex researchers have targeted the gyrase B subunit, and specifically the ATP-binding site that is common to multiple species of bacteria. We have discovered a class of molecules that also shows activity against the highly similar subunit of topoisomerase IV (GyrB/GrIB). These dual gyrase/topoisomerase IV inhibitors not only appear to be potent in preclinical testing, but may also be less susceptible than agents targeting only one of the enzymes to the development of drug resistance, a major and growing problem with marketed antibiotics.

        In 2004, Vertex advanced VX-692, a novel inhibitor of the ATPase of both gyrase and topoisomerase IV, to preclinical development for the treatment of bacterial infection. VX-692 is active against both Gram-positive and select Gram-negative pathogens prevalent in both community and hospital settings. We hold worldwide development and commercial rights to VX-692. We are evaluating the possibility of entering into a collaborative relationship to advance development of VX-692.

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 drug candidates directed at biologically complex targets, including novel targets identified in genomic research. We believe that 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 biology, biophysics, chemistry, automation and information technologies in a coordinated and simultaneous fashion throughout the discovery process. The goal of our integrated, interdisciplinary approach is to make the drug discovery and development process more efficient and productive.

        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.

Technology Platform

        Our integrated technology platform employs a variety of technologies and uses information from a number of different scientific disciplines. The most significant of them are as follows.

        Functional Genomics.    We use functional genomics techniques, such as gene knock-out mice, to help guide target selection and test the potential of chemical compounds in disease models. We also use antisense, siRNA, dominant negative cell lines, transcriptional profiling, proteomics, and

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other biological approaches to better characterize the role played by specific targets in cellular processes.

        Biophysics.    We generate 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.

        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, candidate compounds are selected for synthesis and screening. We use proprietary algorithms to sort and filter compounds for specific properties in order to seek compounds that are more likely to become development candidates.

        Pharmacology.    We employ a number of approaches to obtain predictive information on the bioavailability and pharmacokinetic profile of potential drug candidates. These approaches include in vitro metabolism and toxicological studies and in vivo assessment of leads in predictive animal models.

        Assay Development.    We use assay development and screening techniques, built upon a number of gene reporter technologies such as green fluorescent protein (GFP) and beta lactamase, to rapidly generate large numbers of lead compounds and drug candidates across certain gene families. We also are utilizing our assay development capabilities to develop novel proprietary assays to establish ADME/toxicology profiles for compounds in our screening library.

        High-Throughput Screening.    We conduct assays for most enzyme and receptor targets using very high-throughput screening approaches, many of which are proprietary. These approaches integrate compound management, plate replication with miniaturized screening, hit (potential lead) identification and follow-up.

        Instrumentation.    Most of our ion channel research is conducted using E-VIPR, our proprietary screening technology that uses fluorescent probes and waves of electrical stimulation to study ion channels. E-VIPR provides an automated, high-throughput platform that enables us to collect high quality data at speeds up to a thousand times faster than patch clamping. We can use E-VIPR to study both fast and slow channel activity and state dependence, a phenomenon in which compounds bind preferentially to certain conformations of channels. With respect to voltage-gated channels, electrical stimulation eliminates the need for the addition of liquids and pharmacological modifiers that often distort the native conformation and activity of ion channels.

Current Research Programs

        Our past drug discovery efforts have produced a variety of drug candidates for development by Vertex or its collaborators. We believe our ongoing research programs, particularly those directed at the kinase and ion channel gene families, continue to create potential value for Vertex by generating new product candidates in areas of significant unmet medical need.

Kinase Program

        We have a broad-based drug discovery effort targeting the human protein kinase family, of which there are more than 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. As a result, kinases can be ideal targets for therapeutic intervention. The clinical success of the oncology drugs Gleevec (Novartis) and Tarceva (OSI Pharmaceuticals) offer examples of how small molecule kinase inhibitors can be tailored to address specific diseases.

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        In May 2000 we entered into an agreement with Novartis Pharma AG ("Novartis") to collaborate on the discovery, development and commercialization of small molecule drugs directed at protein kinases. We expect the research effort under this agreement to continue through April 2006. The support provided by Novartis is enabling us to conduct extensive parallel drug design efforts within the kinase target family.

        In 2004, Novartis selected VX-322, a novel dual Flt-3/c-kit kinase inhibitor, for preclinical development. Over the remaining period of the Novartis collaboration, we expect to advance additional kinase inhibitors as development candidates targeting multiple therapeutic areas.

        Also in 2004, we entered into a collaboration agreement with Merck and Co., Inc. for the development of VX-680, an Aurora kinase inhibitor, in cancer, and for continuing collaborative research in the area of Aurora kinase inhibition. We expect this joint research effort to continue until June 2006.

        Vertex has drug discovery efforts underway targeting several other kinases, including those that play a role in the development and progression of cancer, inflammation and autoimmune disease.

        The prosecution of drug discovery over numerous targets in the kinase gene family continues to refine our understanding of kinase biology and the design of kinase inhibitors. Our researchers have determined the atomic structure of more than 20 kinase drug targets and hundreds of kinase/inhibitor co-complexes. This information continues to be of critical importance in the design of selective inhibitors for ongoing research projects. Vertex has designed a diverse library of proprietary kinase inhibitors and we continue to expand our chemical library. Using this foundation, we expect to continue to optimize a number of chemical scaffolds against targets of interest in the area of kinase inhibition, which is a competitive area in the field of drug discovery.

Ion Channel Program

        We are conducting a broad-based drug discovery program targeting the ion channel family. Ion channels are a gene family of more than 650 proteins that act as cellular gatekeepers, controlling the flow of ions across cell membranes. The ion channel target family contains numerous druggable targets representing potential therapeutic intervention points for indications including cystic fibrosis, pain and inflammatory, cardio-vascular, 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.

        Our ion channel research extends across several ion channel subfamilies, including sodium channels and calcium channels, and is principally focused on the design and development of small molecule drugs for the treatment of pain and cystic fibrosis. For example, specific sodium channels have been shown to increase in expression and function in peripheral nerve cells at the site of injury, making them novel and attractive targets for the treatment of neuropathic pain. Ion channel modulators also could be important therapeutic agents for cystic fibrosis, a chronic, progressive genetic disorder. We have an ongoing research collaboration with Cystic Fibrosis Foundation Therapeutics Incorporated targeting the cystic fibrosis regulator protein (CFTR). The symptoms of cystic fibrosis, particularly the development of thick mucous that causes lung tissue inflammation and damage, are caused by a defect in CFTR. A CFTR channel modulator potentially may slow or halt the progression of cystic fibrosis.

        We are utilizing our expertise in assay development and screening to advance discovery efforts within the ion channel family. Our capabilities are augmented by the use of E-VIPR, our proprietary ion channel screening technology. E-VIPR uses fluorescent probes and waves of electrical stimulation to study ion channels in an automated high-throughput platform, enabling the collection of high quality data at speeds up to a thousand times faster than patch-clamping.

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Additional Discovery Efforts

        We plan to utilize our proprietary gene family-based platform and experience in structure-based drug design to pursue targets in other medically important gene families. We have exploratory efforts underway targeting g-protein coupled receptors (GPCRs) and nuclear receptors, among other things, as well as a program directed toward back-up hepatitis C protease inhibitors and gyrase inhibitors.

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 to collaborate on the discovery, development and commercialization of small molecule drugs directed at protein kinases. We amended this collaboration agreement in February 2004. Under the original agreement, we were responsible for drug discovery and clinical proof-of-concept testing of all drug candidates. Originally, Novartis agreed to pay us up to $200 million in product research funding through April 2006, and to loan us up to $200 million on a non-interest-bearing basis to support our clinical proof-of-concept studies. Under the amended agreement, we will continue to receive research funding through April 2006. Novartis holds an option to develop drug candidates meeting certain pre-agreed criteria. The option is exercisable with respect to each development candidate at the pre-development stage, at which point a $10 million milestone payment will be due from Novartis with up to $25 million in additional pre-commercial milestone payments due if the candidate progresses in development. We retain all rights to any candidate not selected by Novartis, as well as to all of our intellectual property generated under the collaboration that is not specific to candidates selected by Novartis for development. As part of the amended agreement, restrictions under the original agreement that limited Novartis' right to pursue kinase research and development outside our collaboration were removed, and the development loan facility was terminated. In November 2004, Novartis accepted VX-322 for preclinical development under the amended terms of our collaboration agreement, and made a $10 million milestone payment. Novartis will have exclusive worldwide development, manufacturing and marketing rights to VX-322 and any other drug candidates that it accepts from us for development. We will receive royalties on any products that are marketed as part of the collaboration.

        Also under the amended agreement, we retained the right either to develop VX-680 to proof-of-concept under the terms of the original agreement, or to elect to remove VX-680, and the Aurora kinases that it targets, from the Novartis collaboration. We exercised this election in June 2004, as part of our collaboration with Merck described below, and repaid to Novartis approximately $12.5 million in unspent and uncommitted development loans previously advanced on account of VX-680. Outstanding loans relating to collaboration compounds other than VX-680 will be forgiven on a compound-by-compound basis if any such compounds are selected by Novartis for development. All loans not forgiven under the facility will be repayable, without interest, in May 2008. At December 31, 2004 we had approximately $20 million in remaining loans outstanding under the loan facility.

GlaxoSmithKline plc

        In December 1993, we entered into a collaboration with GlaxoSmithKline plc ("GlaxoSmithKline") covering the research, development and commercialization of HIV protease inhibitors, including Agenerase (amprenavir), Lexiva/Telzir (fosamprenavir calcium) and VX-385. Under the original agreement, GlaxoSmithKline had exclusive rights to develop and commercialize our HIV protease inhibitors in all parts of the world except the Far East. In 2003, we amended the agreement to add the Far East to GlaxoSmithKline's territory for development and commercialization of Lexiva/Telzir.

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GlaxoSmithKline pays us a royalty on all sales of the HIV protease inhibitors covered by the agreement. 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 made 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 for the initial drug candidate, and additional milestones totalling $7.5 million for Lexiva/Telzir and VX-385. We began receiving royalties on sales of Agenerase in 1999 and on Lexiva/Telzir in 2003. GlaxoSmithKline is also obligated to pay us additional development and commercialization milestone payments for any subsequent drug candidates, including VX-385. GlaxoSmithKline bears the costs of development in its territory under the collaboration.

        GlaxoSmithKline has the right to terminate its agreement with us without cause upon 12 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 by us to GlaxoSmithKline under the agreement.

        In June 1996, we and GlaxoSmithKline obtained a worldwide, non-exclusive license under certain G.D. Searle & Co. (now owned by Pharmacia/Pfizer) patents in the area of HIV protease inhibition. We pay Searle a royalty based on sales of Agenerase and Lexiva/Telzir.

Merck & Co., Inc.

        In June 2004, we entered into a global collaboration with Merck & Co., Inc. ("Merck") to develop and commercialize VX-680, our lead Aurora kinase inhibitor, for the treatment of cancer. The Merck collaboration agreement provides for an up-front payment of $20 million, which was paid in June 2004, and research funding of $14 million over the first two years of the collaboration (from June 2004 to June 2006). In addition, the agreement provides for as much as $350 million in milestone payments, including up to $130 million for the successful development of VX-680 in the first oncology indication and additional milestone payments for development of VX-680 and follow-on compounds in subsequent major oncology indications. Under the agreement, Merck is responsible for clinical development and commercialization of VX-680 worldwide and will pay us royalties on product sales. Merck may terminate the agreement at any time without cause after June 30, 2005 upon 90 days' advance written notice, except that six months' advance written notice is required for termination during the second year of the research term (beginning June 2005), or at any time when a product has marketing approval in a major market and the termination is not for a valid safety reason.

Mitsubishi Pharma Corp.

        In June 2004, we entered into a license, development and commercialization agreement with Mitsubishi Pharma Corp. ("Mitsubishi") for the development and commercialization of VX-950, our oral HCV protease inhibitor, in Japan and certain other Far East countries. Under the terms of the agreement, Mitsubishi has the right to develop and commercialize VX-950 in its territory, and we have exclusive development and marketing rights to VX-950 in the rest of the world. The agreement provides that Mitsubishi will make up to $33 million in pre-commercial payments to us, including an up-front license fee, development stage milestone payments and contributions to certain drug development costs incurred by us for VX-950 through Phase II clinical development. We will also be entitled to royalties on sales of VX-950 in Mitsubishi's territory. Further cost sharing, beyond Phase II clinical development, will be determined by Mitsubishi and us based on the design of registration studies for VX-950. Mitsubishi may terminate the agreement at any time without cause upon 60 days' prior written notice.

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Cystic Fibrosis Foundation Therapeutics Incorporated

        In May 2004, we entered into a collaboration agreement with Cystic Fibrosis Foundation Therapeutics Incorporated ("CFFT") providing funding for our late-stage cystic fibrosis drug discovery effort through December 31, 2005. Under this agreement, we will retain the right to develop and commercialize any compounds discovered in the course of the research collaboration. The agreement provides that CFFT will make up to $21 million of research payments through December 31, 2005 and, potentially, a milestone payment upon advancement of the first compound from the research program into clinical development. CFFT has the right to terminate the agreement without cause effective on June 30, 2005, upon 60 days' prior written notice.

Other Collaborations

        Avalon Pharmaceuticals, Inc.    In February 2005, we entered into a license agreement with Avalon Pharmaceuticals, Inc. for the development and commercialization of the IMPDH inhibitor VX-944 for the treatment of cancer. Under the agreement, Avalon has exclusive worldwide right and sole responsibility to develop and commercialize VX-944 for the treatment of cancer. The agreement provides that Avalon will make up to $73 million in up-front license fees and milestone payments to Vertex for the successful development of VX-944 in multiple oncology indications. Avalon will pay us royalties on any product sales. The agreement provides us with certain rights to co-promote VX-944. Neither Avalon nor Vertex has the right to terminate the agreement other than for cause.

        Sanofi-Aventis.    In September 1999, we entered into an expanded agreement with Aventis S.A., formerly Hoechst Marion Roussel Deutschland GmbH (HMR) and now Sanofi-Aventis, covering the development of pralnacasan. Sanofi-Aventis has notified us that it intends to terminate that agreement. We expect that the in-life portion of certain nonclinical studies now being conducted by Sanofi-Aventis, relating to certain animal toxicology findings by Aventis in 2003, will be completed on or before the termination date. Upon termination of the collaboration agreement, all rights to pralnacasan will revert to us.

        Schering AG.    In August 1998, we entered into a collaboration with Schering AG ("Schering") 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. Research funding under this agreement has concluded. At Schering's request, we have agreed to extend until September 2005 Schering's option to designate a compound or compounds for development under the agreement. In North America, we will have manufacturing rights to, and we will share equally with Schering in the marketing expenses and profits from, any compounds which may be selected for development and commercialization. Schering 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.

        Kissei Pharmaceutical Co., Ltd.    Kissei Pharmaceuticals Co., Ltd. ("Kissei") launched amprenavir (Agenerase), our HIV protease inhibitor, in Japan under the name Prozei® in 1999. Kissei pays us a royalty on all sales of Prozei. In September 1997, we entered into a collaboration with Kissei to identify and develop compounds that target p38 MAP kinase. The research phase of the collaboration ended on June 30, 2000, and we have received the full amount of research funding specified under the agreement. We are working with Kissei to develop and commercialize VX-702, a novel, orally-active p38 MAP kinase inhibitor, discovered during our p38 MAP kinase research program, for the treatment of rheumatoid arthritis and other inflammatory diseases. Kissei has exclusive rights to develop and commercialize VX-702 in Japan and certain Far East countries, and co-exclusive rights (with Vertex) in China, Taiwan and South Korea. We retain exclusive marketing rights outside the Far East. Kissei is providing a portion of the funding for our planned clinical trials of VX-702 in rheumatoid arthritis. We will have the right to supply bulk drug material to Kissei for any resulting drug product, for sale in its territory, and will receive royalties and drug supply payments on any product sales.

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        Eli Lilly and Company.    In June 1997, we entered into a collaboration with Eli Lilly and Company ("Eli Lilly") covering the development of novel small molecule compounds to treat HCV infection, including VX-950. In December 2001, together with Eli Lilly, we selected VX-950 for development. In December 2002, we restructured our agreement with Eli Lilly, ending the research collaboration approximately six months early and providing us with worldwide rights to compounds identified during the collaboration. We will owe Eli Lilly a royalty on any future sales of VX-950 and certain other HCV protease inhibitors.

        Serono S.A.    In December 2000, we entered into a collaboration with Serono S.A. ("Serono") to discover, develop, and market certain types of caspase inhibitors. In May 2004, Serono terminated that agreement in accordance with its terms, effective September 30, 2004. We will hold worldwide rights to all intellectual property generated by us in the course of our collaboration with Serono, other than rights to any compounds that Serono selects on or before April 15, 2005, for development.

OTHER MATTERS

Intellectual Property

        We actively seek, when appropriate, protection for our products and proprietary information by means of United States and foreign patents, trademarks, and copyrights. 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 targets, compounds we are developing to modulate those targets, and methods of making or using those compounds, we have several patents and pending patent applications directed to proprietary elements of our drug discovery platform. These include patent applications claiming our e-VIPR platform that enables optical membrane potential assays for detecting activity of rapidly-gating ion channels, and methods of using our e-VIPR platform for high-throughput screening of voltage-gated ion channels.

        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, as well as our consultants and advisors when feasible, to enter into confidentiality agreements that require disclosure and assignment to Vertex of ideas, developments, discoveries and inventions made by these employees, consultants, and advisors.

Patents and Pending Patent Applications

        We have issued patents and pending patent 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 commercial programs. These include:

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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 fosamprenavir and its pharmaceutical formulations, methods of manufacture and methods to treat HIV infection or AIDS-related central nervous system disorders. In addition we have a non-exclusive, worldwide license under certain Searle patent applications claiming HIV protease inhibitors. We have an issued patent in the United States and patents and pending applications in other countries claiming amprenavir and related compounds, as well as VX-385.



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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, including HCV infection. These patents claim merimepodib and VX-944, their combination with certain other therapeutic agents and their use thereof for treating HCV infection and other IMPDH-mediated diseases.



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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

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compositions containing those compounds and methods of using those compounds to treat ICE-related diseases. These patents and applications include a series of patents and applications purchased from Sanofi S.A. in July 1997, including a United States patent that covers DNA sequences encoding ICE. We also have applications pending in the United States and other countries claiming VX-765 and related compounds.

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an issued United States patent that covers a class of chemical compounds that includes VX-702 as well as compositions comprising this and similar compounds and the use of those compounds to treat p38 MAP kinase related disorders.



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issued United States patents and pending applications covering assays useful to evaluate potential inhibitors of hepatitis C protease and 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 United States and worldwide pending applications cover VX-950, additional hepatitis C protease inhibitors and hepatitis C helicase inhibitors.



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issued United States patents and pending patent applications worldwide claiming inhibitors of multiple kinase proteins including the Aurora kinase/Flt-3 kinase inhibitor VX-680 and the Flt-3/c-kit kinase inhibitor VX-322.



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pending United States and foreign patent applications covering modulators of sodium ion channels and uses thereof, including VX-409 and many other related compounds.



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pending United States and foreign patent applications covering bacterial gyrase inhibitors and the use of these compounds for the treatment of bacterial infections including the compound VX-692.

Manufacturing

        We rely on third party manufacturers and collaborators to produce our compounds for clinical purposes and may do so for commercial production of any drug candidates that are approved for marketing. Commercial manufacturing of Lexiva/Telzir and Agenerase is being done by GlaxoSmithKline. We retain the option to manufacture a portion of GlaxoSmithKline's requirements for bulk drug substance for Lexiva/Telzir and Agenerase. If we were to exercise that option, we believe we would need to rely upon one or more contract manufacturers to manufacture the bulk drug substance on our behalf.

        We have established a quality assurance program 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 clinical drug candidates 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 an internal manufacturing capability in order to successfully commercialize our products. Our objective is to maintain flexibility in deciding if we should develop internal manufacturing capabilities for certain of our potential products. However, if we are unable to obtain contract manufacturing, or unable to obtain such manufacturing on commercially 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 those 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

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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 drug candidates 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 drug candidates for us. In addition, a contract manufacturer may develop process technology related to the manufacture of our drug candidates that the manufacturer owns either independently or jointly with us. This would increase our reliance on that manufacturer or require us to obtain a license from that manufacturer in order to have our products manufactured.

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 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 currently are marketing their drugs. For example, in the field of HIV protease inhibition, Abbott Laboratories, Bristol-Myers Squibb Company, Roche, Merck & Co., Inc., and Pfizer Inc., among others, have other HIV protease inhibitor drugs in development or on the market. Similarly, a variety of companies are attempting to develop new treatments for HCV infection. Many of our competitors have substantially greater financial, technical and human resources than ours and are more experi