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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 000-19319
VERTEX PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3039129
(State of incorporation) (I.R.S. Employer Identification No.)
130 WAVERLY STREET
CAMBRIDGE, MASSACHUSETTS 02139-4242
(Address of principal executive offices) (Zip Code)
(617) 577-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __________
As of March 22, 1999 there were outstanding 25,400,241 shares of Common Stock,
$.01 par value per share. The aggregate market value of shares of Common Stock
held by non-affiliates of the registrant, based upon the last sales price for
such stock on that date as reported by The Nasdaq National Stock Market, was
approximately $637,750,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held on May 19, 1999 are incorporated by reference into Part
III.
Page 1
The "Company" and "Vertex," as used in this Annual Report on Form 10-K,
refer to Vertex Pharmaceuticals Incorporated, a Massachusetts corporation.
This Annual Report on Form 10-K contains forward-looking statements based
on current management expectations. When used in this Report, the words
"expects," "anticipates," "estimates," "plans," "believes," and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties. Factors that could cause
actual results to differ from these expectations include, but are not limited
to, those discussed in the section of Item 1 entitled "Risk Factors." These
forward-looking statements speak only as of the date of this Report. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in the events, conditions or circumstances on which any such statement is
based.
Vertex is a registered trademark of Vertex Pharmaceuticals Incorporated,
and Incel is a trademark of Vertex Pharmaceuticals Incorporated. Agenerase is a
trademark of the Glaxo Wellcome Group of companies.
PART I
ITEM 1. BUSINESS
Vertex is engaged in the discovery, development and commercialization of
novel, small molecule pharmaceuticals for the treatment of diseases for which
there are currently limited or no effective treatments. The Company is a
leader in the use of structure-based drug design, an approach to drug
discovery that integrates advanced biology, biophysics, chemistry, and
information technologies in a coordinated and simultaneous fashion. The
Company believes that this integrated approach is applicable to therapeutic
targets in a broad range of diseases. Vertex's goal is to create a portfolio
of highly specific, proprietary, small molecule drugs based on its knowledge
of the atomic structure of proteins involved in the control of disease
processes.
Agenerase-TM- for the treatment of HIV infection and AIDS is the Company's
first product to have a New Drug Application filed with the U.S. FDA for
marketing approval. The Company's drug candidates currently in clinical trials
include:
- - Two compounds, Incel-TM- in Phase II, and VX-853, in Phase I/II clinical
studies for treatment of cancer multidrug resistance;
- - VX-497, an inhibitor of the enzyme IMPDH, currently in Phase II studies for
the treatment of psoriasis and hepatitis C virus infection;
- - Timcodar dimesylate, a neurophilin ligand compound in a Phase II study for
the treatment of diabetic neuropathy;
- - VX-740, an inhibitor of the enzyme ICE, that recently completed a Phase I
clinical trial and may be useful in the treatment of inflammatory diseases;
and
- - VX-745, an inhibitor of the enzyme p38 MAP kinase, currently in a Phase I
clinical trial, that may be useful in the treatment of inflammatory and
neurological diseases.
In addition, the Company has research programs aimed at developing orally
available small molecule compounds targeting neurodegenerative disorders and
hepatitis C virus infection.
Page 2
STRUCTURE-BASED DRUG DESIGN
Drugs are natural or synthetic compounds that interact with a target
molecule, typically a protein, either to induce or to inhibit that molecule's
function within the human body. Traditionally, pharmaceutical products have
been discovered through screening thousands of compounds in predictive assays
for a chosen disease target. Vertex uses an information-driven drug design
approach that integrates multiple advanced technologies.
Vertex's discovery programs have yielded clinical drug candidates in an
average of 39 months from project initiation, two times faster than the
industry average. Also, Vertex has at least one product candidate in
clinical development from each of its first five research programs. In
contrast, across the pharmaceutical industry an average of just 25% of all
research projects result in a drug entering clinical trials.
The drug discovery process is complex and involves multiple steps and
disciplines. The key steps in the discovery and development of a compound for
human testing (a drug candidate) typically include:
- identification of a drug target;
- development of a relevant biological assay;
- selection of compounds for screening;
- identification of a lead molecule;
- optimization of the lead molecule; and
- preclinical development.
The Company's approach to structure-based design is an integrated approach
combining efforts in biology, biophysics and chemistry in a coordinated and
simultaneous fashion throughout the discovery process. This enables the Company
to capture and apply information generated in one scientific discipline across
an entire project. In addition, Vertex leverages the information base from its
programs to capitalize on emerging therapeutic opportunities as they are
discovered.
Vertex integrates a number of core technologies as part of the Company's
drug discovery platform. These include:
- - FUNCTIONAL GENOMICS. Vertex uses a number of functional genomics
techniques, such as gene knock-out mice, to help guide target selection and
test the potential of its compounds in disease models.
- - BIOPHYSICS. Vertex's crystallography group has solved more than a dozen
structures and more than 200 target/inhibitor complexes in the past eight
years. Vertex scientists have also pioneered innovative nuclear magnetic
resonance (NMR) techniques, including the use of NMR for screening and a
proprietary technology called NMR-SHAPES that can rapidly identify classes
of compounds with appropriate binding properties.
- - CHEMISTRY. Vertex applies combinatorial chemistry techniques together with
a strategy of parallel synthesis to explore the suitability and activity of
a wide range of compounds.
- - COMPUTER-BASED MODELING. Vertex applies advanced, proprietary
computational modeling tools to guide combinatorial and medicinal chemistry
efforts in identifying and optimizing leads.
- - PHARMACOLOGY. At Vertex, pharmacological testing and pharmacokinetic and
pharmacodynamic modeling are used early in the drug discovery process to
improve the likelihood that compounds will possess desirable
characteristics.
Page 3
The Company believes that its integrated structure-based approach to drug
discovery and the applicability of this approach to a broad range of protein
targets provides the Company with significant competitive advantages in the
discovery and development of novel therapeutics for a variety of diseases.
CORPORATE STRATEGY
Vertex is concentrating on the discovery and development of drugs for the
treatment of viral diseases, multidrug resistance in cancer, autoimmune
diseases, inflammatory diseases and neurological diseases. The Company's
research and development strategy is to identify therapeutic areas in which
there is (i) an unmet clinical need, (ii) evidence that interaction with known
protein targets will produce a therapeutic effect, and (iii) evidence that the
protein targets will be appropriate for structural analysis using Vertex's
scientific approach.
The Company's business strategy is to develop some products independently
and to form collaborations with pharmaceutical companies in other programs for
which they can provide resources and access to competencies complementary to
Vertex's in-house capabilities. Corporate collaborations with other
pharmaceutical companies allow Vertex to share the inherent risks of drug
development and allocate the Company's internal resources more effectively. The
financial support, as well as the resources in development, marketing and sales,
provided by corporate collaborators has allowed Vertex to focus on expanding its
clinical and discovery pipeline. As Vertex increases its capabilities in
manufacturing, marketing and sales, collaborative agreements will still remain
an important part of the Company's business strategy, allowing the Company to
select from its broad pipeline those products best suited to commercialization
by the Company, while retaining a substantial interest in the commercial success
of partnered projects. In its collaborative agreements, Vertex seeks to
participate, through manufacturing, co-promotion and marketing rights, in
generating significant downstream revenue for each of its products.
PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
The following are the Company's most advanced research and development
programs.
CLINICAL DEVELOPMENT PROGRAMS
AGENERASE-TM-
OVERVIEW
Agenerase-TM- (Glaxo Wellcome's brand name for the compound amprenavir) is
the Company's most advanced product. Agenerase, a second generation HIV
protease inhibitor, is an orally deliverable drug for the treatment of HIV
infection and AIDS. It was developed by Vertex in collaboration with Glaxo
Wellcome plc. and Kissei Pharmaceutical Co., Ltd. Glaxo Wellcome has filed a
New Drug Application for Agenerase with the U.S. Food and Drug Administration in
the United States and has made equivalent filings in Europe, Canada and other
countries. The U.S. FDA has designated Agenerase as a fast-track product, and
FDA review is expected to be completed by mid-April 1999. Upon approval by
regulatory authorities, Glaxo Wellcome will market Agenerase in the United
States and other countries, with co-promotion assistance by the Company. Kissei
is the Company's partner for the development and commercialization of amprenavir
in the Far East.
BACKGROUND
World sales of antiviral drugs for the treatment of AIDS and HIV infection
were an
Page 4
estimated $4 billion in 1998. Nevertheless, there remains a significant need
for new therapeutic options for the management of HIV infection. In the United
States and elsewhere, the majority of HIV-infected patients are undiagnosed or
untreated with any antiviral drug. The antiviral drugs currently on the market
have significant limitations, creating a significant market opportunity for
Agenerase. Suboptimal treatment strategies and poor adherence to complex drug
regimens result in the development of drug-resistant virus and need for
subsequent changes in treatment regimens for many patients. Switching antiviral
medications is therefore done on a routine basis, also resulting in the need for
new agents.
HIV protease is a key enzyme involved in the viral replication of HIV.
Agenerase is an HIV protease inhibitor designed by Vertex to effectively block
the replication of HIV and to possess key competitive characteristics. Four
other companies are marketing protease inhibitors approved by the FDA. However,
clinician and patient acceptance of these products may be limited by complex
dosing regimens, which can result in poor patient compliance, and by
dose-limiting side effects.
The Company believes that Agenerase compares favorably with the protease
inhibitors currently on the market in terms of potency, tolerability, dosing
regimen and resistance profile. Agenerase is taken twice daily, without
restrictions regarding dosing with or without food or water. In addition,
clinical studies have shown that Agenerase penetrates the tissues of the central
nervous system, which may be important in preventing the development of
resistance. Agenerase has a unique IN VITRO resistance profile, and preliminary
clinical data have shown that patients previously treated with Agenerase can be
successfully treated with a subsequent protease inhibitor. To date, HIV has been
shown to develop resistance to antiviral drugs, including currently marketed HIV
protease inhibitors. Preliminary data also suggest that Agenerase is less
associated with blood lipid abnormalities than other HIV protease inhibitors.
However, there can be no assurance that disease resistance or other factors will
not limit the efficacy of Agenerase.
In addition to protease inhibitors, there are two other classes of
antiviral drugs currently approved for the treatment of HIV/AIDS. Nucleoside
reverse transcriptase inhibitors, or NRTIs, include AZT, d4T, ddI, ddC, 3TC and
abacavir. Non-nucleoside reverse transcriptase inhibitors, or NNRTIs, include
efavirenz, nevirapine and delavirdine. Both classes of drugs act by inhibiting
reverse transcriptase, a viral enzyme required for replication. The clinical
utility of each of these drugs is limited by significant side effects and by the
development of viral resistance. Clinical studies have demonstrated that
therapies for HIV infection which comprise a combination of three or more drugs
including at least two drug classes ("drug cocktails") are superior in potency
and durability of response to those which do not. Such combinations are
currently accepted as the standard of care for HIV infection.
PROGRAM STATUS
Glaxo Wellcome, the Company's HIV research and development partner, has
filed for U.S. regulatory approval for marketing Agenerase and has made
equivalent regulatory filings in Europe, Canada and other countries. Glaxo
Wellcome is the global leader in sales of HIV therapeutics. To support
Agenerase in the marketplace, Vertex has established a small clinical liaison
force to build relationships with physicians and patient treatment advocates.
The Company will receive a royalty based on Glaxo Wellcome's sales of Agenerase.
Agenerase has already been made available to more than 2,000 patients through an
early access program.
Glaxo Wellcome filed the New Drug Application for Agenerase on October 15,
1998, and the FDA has designated Agenerase for review under the its guidelines
for accelerated approval. Vertex and Glaxo Wellcome are continuing development
activities with respect to Agenerase, including on-going Phase III studies to
support the full approval of the drug, and on-going and planned Phase IV studies
designed to further characterize and expand the utilization of the product.
Page 5
There can be no assurance, however, that the New Drug Application will be
approved within the expected time-frame or at all, that full approval will be
granted on the basis of ongoing Phase III studies, or that the Phase IV studies
will commence as planned or will be successful.
In 1995, Kissei completed single dose and multi-dose, placebo-controlled,
Phase I clinical trials. Vertex expects that in 1999 Kissei will initiate a
Phase II/III efficacy trial in HIV-positive patients in Japan. The results of
such trials, together with clinical data from the Glaxo Wellcome trials, could
form the basis for a filing for marketing approval of amprenavir in Japan. There
can be no assurance, however, that these clinical trials will commence or
proceed as currently anticipated.
In collaboration with Glaxo Wellcome, Vertex is also engaged in research to
develop new formulations of amprenavir. In addition, Vertex and Glaxo Wellcome
are continuing to evaluate new lead classes of third generation HIV protease
inhibitors discovered under their HIV research collaboration.
PATENTS
The Company has patents and pending patent applications in the United
States and in certain foreign countries covering intellectual property developed
as part of the Company's HIV research and development program. These include
issued United States patents that cover classes of chemical compounds,
pharmaceutical formulations and/or uses of the same for treating HIV infection
and AIDS. The patents include specific coverage for amprenavir, the Company's
lead drug candidate for treating HIV infection and AIDS, pharmaceutical
formulations containing amprenavir and methods of using of amprenavir to treat
HIV infection or AIDS-related central nervous system disorders. Another issued
United States patent covers processes for preparing synthetic intermediates
useful in the synthesis of a class of compounds that includes amprenavir. The
Company also has a non-exclusive, worldwide license under certain G.D. Searle &
Company patent applications claiming HIV protease inhibitors.
CANCER MULTIDRUG RESISTANCE (MDR) PROGRAM
OVERVIEW
Vertex is developing novel compounds to treat and prevent the occurrence of
drug resistance associated with the failure of cancer chemotherapy. Vertex is
developing Incel-TM- (also referred to as biricodar dicitrate or VX-710), a
compound that blocks major multidrug resistance mechanisms, including
P-glycoprotein, or P-gp, and multidrug resistance associated protein, or MRP.
Incel, an intravenous compound, is intended to be administered in combination
with cancer chemotherapy agents, such as doxorubicin, paclitaxel, vincristine,
etoposide and mitoxantrone. Vertex is conducting Phase II clinical trials of
Incel in five different types of cancer. In addition, Vertex is conducting a
Phase I/II clinical trial of the compound VX-853, an oral MDR inhibitor, in
patients with solid tumors. The Company retains all commercial rights to Incel
worldwide, except for Canada, where BioChem Pharma Inc. has rights under a
collaboration agreement with Vertex.
BACKGROUND
The American Cancer Society estimates that during 1998 more than 1.2
million people in the United States were diagnosed with invasive cancer and more
than 560,000 people in the U.S. died from such cancers. The Company believes
that a significant number of these patients fail to respond or relapse following
chemotherapy because of multidrug resistance, or MDR.
Multidrug resistance is frequently associated with the failure of
chemotherapy. A major contributing factor to MDR is the presence of molecular
pumps, including P-gP and MRP, that function to expel chemotherapeutic agents
from cancer cells, preventing the sustained delivery of
Page 6
potent levels of the chemotherapeutic agents required for therapeutic benefit.
As a consequence, such resistant tumor cells cannot be killed efficiently by
anticancer drugs such as doxorubicin, vincristine, etoposide and paclitaxel.
P-gp has been associated with MDR in a variety of cancers including liver
cancer, breast cancer, soft tissue sarcoma, prostate cancer, colon cancer,
pancreatic cancer, acute myelogenous leukemia, multiple myeloma and certain lung
cancers. MRP was recently identified as another drug efflux pump and is also
associated with resistance observed.
No drug has been approved by the FDA specifically for the treatment of MDR,
but several compounds are in advanced clinical studies. Certain agents, such as
dex-verapamil and cyclosporin A, have been shown in preliminary human studies to
have some promise for overcoming clinical resistance to certain commonly used
chemotherapeutic agents. The Company believes these drugs affect only a subset
of the MDR pumps and may have side effects that could limit broad use. Second
generation multidrug reversing agents, such as valspodar, a cyclosporin analog,
are also currently being evaluated by other companies.
PROGRAM STATUS
Vertex's lead compound, Incel, has displayed potent activity IN VITRO as an
inhibitor of MDR for a number of chemotherapeutic agents in a variety of tumor
types. Vertex has completed two Phase I/II studies with Incel in combination
with doxorubicin and with paclitaxel. Vertex also completed a Phase II study of
Incel in combination with doxorubicin in patients with liver cancer. Vertex does
not intend to pursue this indication further at the present time. The Company
is currently conducting five Phase II clinical studies of Incel. Preliminary
results from the Phase II studies indicate that sustained blood levels of Incel
in excess of those necessary to reverse MDR IN VITRO can be achieved.
Pharmacokinetic data of Incel in combination with paclitaxel indicated that the
compound has a dose sparing effect, suggesting that approximately one-half the
dose of paclitaxel can be used when that drug is administered with Incel.
Phase II clinical trials of Incel are currently being conducted in the
following indications:
- - BREAST CANCER. In 1997, the Company initiated a Phase II multi-center trial
to assess the safety and efficacy of the co-administration of Incel and
paclitaxel in patients with metastatic breast cancer. Interim data reported
at the 21st Annual Breast Cancer Symposium in 1998 suggest that Incel may
play a role in restoring the activity of paclitaxel in some patients with
advanced breast cancer whose tumors have previously been resistant to
paclitaxel therapy.
- - SOFT TISSUE SARCOMA. The Company began a Phase II trial in 1997 to study
Incel in combination with doxorubicin in patients with soft tissue sarcoma.
Preliminary results from 11 patients, announced at the 4th Connective Tissue
Oncology Society Meeting in 1998 indicated that treatment with Incel and
doxorubicin was well-tolerated, showed no marked drug interactions, and
indicated that Incel could also play a role in restoring the activity of
doxorubicin in this patient population.
- - OVARIAN CANCER. A study of Incel in combination with paclitaxel in patients
with ovarian cancer began in 1997. This open-label Phase II clinical trial
will evaluate the tolerability, safety, pharmacokinetics and efficacy of the
compound with paclitaxel.
- - PROSTATE CANCER. In 1998, Vertex began a Phase II clinical trial evaluating
the pharmacokinetics and efficacy of Incel in combination with mitoxantrone
and prednisone in patients with advanced hormone-refractory prostate cancer.
This study is the first to examine Incel's activity in an exclusively
chemotherapy-naive patient population.
- - SMALL CELL LUNG CANCER. Also begun in 1998, this is an open-label,
multi-center trial to evaluate the tolerability, pharmacokinetics and
anti-tumor activity of Incel in combination with doxorubicin and vincristine
in patients with progressive disease, who responded to initial
Page 7
therapy and subsequently relapsed. This study will try to correlate the
multidrug resistance profile of each patient with any therapeutic response to
Incel.
Preliminary results from some of these studies are expected in 1999. The
results will help to determine the most appropriate regimens and indications for
Phase III clinical development of Incel. However, there can be no assurance that
additional clinical trials will commence or trials currently under way will
proceed as currently anticipated. The clinical efficacy of the suppression of
mechanisms of action of MDR in chemotherapy in the treatment of cancer is
unproven, and, therefore, there can be no assurance that the Company's MDR
compounds in development will improve the efficacy of chemotherapy.
PATENTS
The Company has patents and pending patent applications in the United
States and in certain foreign countries covering intellectual property developed
as part of the Company's MDR research and development program. These include
issued United States patents claiming Incel and structurally related compounds,
VX-853 and structurally related compounds, and other compounds for treating
multidrug resistance.
IMPDH PROGRAM
OVERVIEW
IMPDH is an enzyme that controls the synthesis of certain nucleotides which
are required for RNA and DNA synthesis. Most cell types can use an alternative
pathway if IMPDH is inhibited, but a few cell types, such as lymphocytes and
virus-infected cells, are completely dependent on this enzyme. IMPDH inhibitors
thus selectively block the proliferation of lymphocytes and the replication of
certain viruses, and Vertex believes that IMPDH inhibitors may be useful both in
immunosuppression and as antiviral agents. VX-497 is a novel, orally
administered IMPDH inhibitor designed by Vertex. Vertex is conducting Phase II
clinical trials of VX-497 for the treatment of severe chronic plaque-type
psoriasis and for the treatment of hepatitis C virus ("HCV") infection. The
Company retains all commercial rights to compounds resulting from this program.
BACKGROUND
IMPDH catalyzes a key step in nucleotide biosynthesis. IMPDH inhibition
appears to selectively suppress immune system cells while leaving other cells
unaffected and may play an important role in down regulating inappropriate
immune responses common to a range of human diseases, including multiple
sclerosis, inflammatory bowel disease, psoriasis, rheumatoid arthritis and
systemic lupus erythematosus. IMPDH inhibitors can be used to prevent the
rejection of transplanted organs and may also have anti-viral effects.
The Company is aware of only two IMPDH inhibitors currently on the market
in the United States. Hoffmann-La Roche's mycophenolate mofetil is approved for
use in combination with cyclosporine to prevent acute rejection in kidney and
heart transplantation. Schering-Plough's ribavirin was approved in 1998 for
treatment, in combination with alpha interferon, of Hepatitis C infection. The
Company believes that compound-specific side effects of mycophenolate mofetil
and ribavirin may limit their use for chronic autoimmune disorders.
Psoriasis was selected as the first chronic autoimmune indication for
VX-497 development. There is a sigificant medical need for new therapies for
moderate to severe psoriasis patients. A chemically unrelated IMPDH inhibitor,
mycophenolic acid, was investigated in psoriasis in the 1970's. Despite
clear-cut efficacy, its development was terminated due to toxicity and
tolerability
Page 8
problems. It did however, establish proof of the principle of IMPDH inhibition
as a therapeutic approach for psoriasis. In addition to topical and
intralesional medications, moderate to severely afflicted patients are treated
with phototherapy (UVB and PUVA), and systemic drugs such as methotrexate,
retinoids, and cyclosporine. However, these treatments require extensive medical
supervision, and/or have serious toxic side effects.
As an immunosuppressive, VX-497 may block the growth of certain lymphocyte
populations that contribute to the inflammation of the liver in HCV patients.
VX-497 may also have a direct antiviral effect on HCV and other viruses.
Although it has not been possible to test potential drugs against hepatitis C IN
VITRO because an HCV replication model has not been available, studies of VX-497
against related viruses have demonstrated that VX-497 may be a powerful
inhibitor of viral replication.
According to the U.S. Center for Disease Control (CDC) estimates,
approximately 4 million people in the United States are infected with HCV, and
there are estimated to be approximately 170 million chronic carriers of the
virus worldwide. Current treatment options are limited. Various forms of
interferon alpha are the most common treatment used, but provide lasting benefit
in less than 20% of patients. Recent research results indicate that combination
therapy of interferon plus ribavirin may increase the long-term rate of
sustained response to treatment. Still, more than 50% of patients fail
combination ribavirin-interferon therapy, and additional safe and effective
treatments for HCV infection are needed.
PROGRAM STATUS
A Phase I clinical trial investigating the pharmacokinetics and
tolerability of VX-497 in escalating single doses in healthy subjects was
completed in the United Kingdom in early 1998. Data from that study show that
VX-497 is well tolerated and achieves blood levels well above the threshhold
necessary to inhibit IMPDH IN VITRO.
Vertex is now conducting a Phase II clinical trial of VX-497 to determine
the tolerability and pharmacokinetic profile of VX-497 in psoriasis patients.
This is a randomized, blinded dose range-finding study. Preliminary safety and
efficacy of VX-497 are being assessed in the 12-week trial. Vertex is also
conducting a Phase II study of VX-497 for the treatment of HCV infection.
Preliminary safety and efficacy are being assessed in this four-week dose
range-finding monotherapy trial.
Future clinical development of VX-497 in HCV may involve assessment of the
compound in combination with other agents such as interferon alpha. The Company
may also expand clinical development of VX-497 into additional autoimmune,
transplant and antiviral indications in the future. There can be no assurance,
however, that additional clinical trials will commence or that studies currently
under way will proceed as anticipated.
PATENTS
The Company has patents and pending patent applications in the United
States and in certain foreign countries covering intellectual property developed
as part of the Company's IMPDH research and development program. These include
an issued United States patent which covers a class of chemical compounds,
pharmaceutical compositions containing such compounds, and methods of using
those compounds to treat or prevent IMPDH-mediated diseases. The class of
compounds covered by this patent includes VX-497.
Page 9
ICE PROGRAM
OVERVIEW
Vertex is conducting research and development on inhibitors of
interleukin-1 beta converting enzyme (ICE) for the treatment of acute and
chronic inflammatory conditions, including rheumatoid arthritis (RA). The
Company is collaborating with Hoechst Marion Roussel (HMR) in the development
of the ICE inhibitor compound VX-740. A Phase I clinical trial of VX-740 in
healthy volunteers was recently completed. Inhibitors of ICE may have
application to a wide range of chronic and acute inflammatory diseases, such
as rheumatoid arthritis, osteoarthritis, inflammatory bowel disease, sepsis,
and pancreatitis.
BACKGROUND
Elevation of interleukin-1 beta (IL-1 beta) levels has been correlated to
a number of acute and chronic inflammatory diseases. There are approximately 2.1
million patients with rheumatoid arthritis in the United States alone. Numerous
companies are seeking to develop drugs to treat these conditions through various
mechanisms. However, although several companies are pursuing ICE as a drug
target, Vertex is not aware of any company with an ICE-inhibiting compound in
clinical development, and there currently are no IL-1 beta inhibitors approved
for marketing.
Inside specialized immune system cells, ICE activates the inflammatory
cytokine protein IL-1 beta and the protein gamma interferon, a key
immunoregulator that modulates antigen presentation, T-cell activation, and cell
adhesion. This triggers a cascade of events that produces inflammation. Vertex
and HMR scientists have designed several classes of small molecule ICE
inhibitors, including VX-740, the development candidate in the collaboration.
Currently, non-steroidal anti-inflammatory drugs and other
anti-inflammatory approaches which provide some symptomatic relief without
altering disease progression, are used extensively in the treatment of RA. A
few disease-modifying anti-rheumatic drugs such as methotrexate have been
available or have been investigated for a number of years, but have toxicities
that limit their long-term use. New biologics such as etanercept (Enbrel) and
infliximab (Remicade) seek to attenuate the anti-inflammatory process by
targeting TNF-alpha. In addition, studies with soluble IL-1 receptor and IL-1
receptor antagonist have shown reduced joint destruction in RA patients.
However, current anticytokine therapies for RA and inflammatory bowel disease
are protein-based and must be injected. The Company believes that an oral
therapy which can alter the course of disease with few side effects would be a
major addition to the RA therapeutic arsenal.
PROGRAM STATUS
The first clinical trial of VX-740 was a study involving 18 healthy
volunteers begun in 1998. This study was designed to test the pharmacokinetics
and tolerability of the compound in a range of single doses. Preliminary
results of this study indicate that the drug was well tolerated. VX-740 has
been shown to be orally active in several animal models of human inflammatory
disease, including models for acute and chronic arthritis. Vertex expects that
a Phase II study of VX-740 for the treatment of rheumatoid arthritis will be the
next step in the development program. However, there can be no assurance that
clinical trials will commence or proceed as currently anticipated.
PATENTS
The Company has patents and pending patent applications in the United
States and in certain foreign countries covering intellectual property developed
as part of the Company's ICE research and development program. These include
issued United States patents covering several
Page 10
different classes of compounds useful as inhibitors of ICE, pharmaceutical
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. The Company
also has a United States patent obtained from Sanofi S.A. that covers DNA
sequences encoding ICE.
NEUROPHILIN LIGAND PROGRAM
OVERVIEW
The goal of the Neurophilin Ligand Program is to discover and develop drugs
useful in the treatment of neurological disorders such as peripheral
neuropathies, including diabetic neuropathy, Parkinson's disease, trauma, and
amyotrophic lateral sclerosis, or ALS. Vertex has used information-driven drug
design to synthesize a library of orally available small molecule compounds that
have the potential to promote recovery of nerve function and nerve growth.
Vertex is engaged in worldwide strategic partnership with Schering AG, Germany
for research, development and commercialization of neurophilin ligands for the
treatment of a variety of neurological disorders. In November 1998, Vertex
started a Phase II clinical trial of timcodar dimesylate (also referred to as
VX-853) in diabetic neuropathy patients. Schering AG has an option to
co-develop timcodar dimesylate with Vertex under the collaboration agreement.
BACKGROUND
Neurodegenerative disorders are among the diseases with the fewest
available effective treatments. Central nervous system disorders such as
Alzheimer's disease, Parkinson's disease and multiple sclerosis affect millions
of patients worldwide, and for some of these there are no approved therapies
that alter the course of disease progression. Peripheral neuropathies encompass
a wide spectrum of clinical syndromes for which treatments of only limited
efficacy are available. Diabetic neuropathy, the indication for Vertex's
ongoing Phase II study of timcodar dimesylate, is the most common identifiable
cause of neuropathy. There are approximately 1.3 million patients with moderate
to severe diabetic neuropathy in the United States.
Effective treatment of both central and peripheral neurological disorders
has long been hampered by the inability to slow, arrest, or reverse nerve damage
or progression. Other companies are developing various neurotrophic factors
(proteins) for these indications, but the Company believes their clinical
utility is likely to be limited. Based on Vertex's extensive research in the
field of immunosuppressive drugs, the Company has been able to generate a large
number of compounds, known as neurophilin ligands, that trigger nerve growth
activity. Extensive IN VITRO and IN VIVO studies conducted with a reference
compound designed by Vertex support the broad potential of Vertex's neurophilin
ligands in the treatment of degenerative central nervous system and peripheral
nervous system diseases. Vertex's clinical neurophilin ligand candidate,
timcodar, has demonstrated potent activity in promoting neurite outgrowth and
functional recovery of nerves in preclinical studies. Vertex researchers are
still seeking to determine the mechanism of action of neurophilin ligands.
PROGRAM STATUS
In October 1998, Vertex started a Phase II clinical trial with timcodar
dimesylate. Approximately 70 patients will be enrolled in the trial, which is
expected to be conducted at eight centers in the United States. This is a
double-blind, placebo controlled trial. Primary objectives will be to evaluate
the safety and tolerability of six different dose regimens of timcodar
administered orally over a 28-day period. Nerve function will also be
monitored. A single-dose Phase I study of four different doses of timcodar in
healthy volunteers was completed in 1998, providing support for Phase II
clinical development in the indication of diabetic neuropathy. IN
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VITRO results have shown timcodar's ability to promote neurite outgrowth, and IN
VIVO results have shown that timcodar can prevent neural dysfunction in a model
of diabetic polyneuropathy.
PATENTS
The Company has patents and pending patent applications in the United
States and in certain foreign countries covering intellectual property developed
as part of the Company's Neurophilin research and development program. These
include issued United States patents covering the use of various classes of
chemical compounds to treat a wide variety of neurological disorders. One of
these patents specifically covers the use of timcodar to treat neurological
disorders.
P38 MAP KINASE PROGRAM
OVERVIEW
Vertex is collaborating with Kissei on the design, development and
commercialization of inhibitors of p38 MAP kinase. The p38 MAP kinase is a human
enzyme involved with the onset and progression of inflammation and programmed
cell death. The objective of Vertex's research collaboration with Kissei is to
identify and extensively evaluate compounds that target p38 MAP kinase to
develop novel, orally active drugs for the treatment of inflammatory diseases,
such as rheumatoid arthritis, asthma, and Crohn's disease, and neurological
diseases such as stroke. In March 1999, the Company initiated a Phase I
clinical trial with VX-745, a novel orally administered investigational drug
targeting p38 MAP kinase.
BACKGROUND
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 interleukin-1 (IL-1), interleukin-6
(IL-6) and tumor necrosis factor TNF-alpha. Excess levels of IL-1 and TNF-alpha
are associated with a broad range of acute and chronic inflammatory diseases.
They also play an important role in programmed cell death associated with
ischemia and stroke, and in neurodegenerative diseases such as Alzheimer's and
Parkinson's disease. Vertex is aware of several other companies that are
developing p38 MAP kinase inhibitors.
PROGRAM STATUS
During 1998, Vertex and Kissei selected VX-745 as a lead drug development
candidate targeting p38 MAP kinase. The Company began a Phase I clinical trial
of the compound in healthy volunteers in early 1999. The study, which is being
conducted in Europe, will assess the compound's safety and help to determine the
dose range for subsequent studies. The Phase I randomized, blinded clinical
trial is designed to test the pharmacokinetics and tolerability of
VX-745 in escalating single doses in healthy volunteers. The trial will assess
the ability of different doses of VX-745 to inhibit experimentally induced
TNF-alpha production using specific biochemical assays. Following completion of
the study, Vertex may conduct additional single or multidose trials of VX-745.
VX-745 has been shown to slow disease progression in animal models of
immune-mediated arthritis. However, there can be no assurance that clinical
trials will commence or proceed as currently anticipated.
Page 12
PATENTS
The Company has pending patent applications in the United States and in
certain foreign countries covering intellectual property developed as part of
the Company's p38 MAP Kinase research and development program. Certain of the
applications cover a class of chemical compounds that includes VX-745, as well
as VX-745 specifically, compositions comprising those compounds and the use of
those compounds to treat p38-related disorder.
RESEARCH PROGRAMS
HEPATITIS C VIRUS PROGRAMS
The Company is conducting two discovery research programs to develop
compounds to treat hepatitis C. Identified in 1989, the 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 for which there is inadequate or no
therapy for a majority of patients. Sources at the CDC have estimated that
approximately 4 million Americans, or more than 1% of the population, may be
infected with HCV, and there are estimated to be more than 100 million chronic
carriers of the virus worldwide. Currently, there is no vaccine available to
prevent hepatitis C infection. The only drugs approved for the treatment of
hepatitis C are interferon alpha and ribavarin. Combination therapy with
interferon alpha and ribavarin is the most successful treatment currently
available, but over 50% of patients still failed to show long-term sustained
response to that combination, and safe and effective treatments for HCV
infection are needed.
HEPATITIS C PROTEASE
The hepatitis C NS3-4A serine protease is a virally encoded enzyme
generally believed to be essential for replication of HCV. Under an agreement
signed during 1997, Vertex and Eli Lilly and Company are collaborating on the
research, development and commercialization of novel, orally active HCV protease
inhibitors for the treatment of hepatitis C infection. This research derives
heavily from detailed structural information about the protease, discovered and
developed by Vertex researchers.
The Company has pending patent applications in the United States and in
certain foreign countries covering intellectual property developed as part of
the Company's Hepatitis C Protease research and development program. Vertex has
an issued United States patent covering an assay useful to evaluate potential
inhibitors of Hepatitis C protease.
HEPATITIS C HELICASE
Vertex is also conducting discovery research to design orally deliverable
drugs to inhibit the hepatitis C virus helicase. The NS3 helicase enzyme is
believed to play an essential role in the infectious cycle of the hepatitis C
virus by aligning viral DNA in its proper configuration for replication.
Therefore, the HCV helicase represents an attractive target for drug discovery.
Researchers from Vertex solved the three-dimensional atomic structure of
the hepatitis C virus NS3 helicase. Vertex is using the structural information
to identify and optimize inhibitors of the enzyme, employing structure-based
techniques, including cluster-based screening, and
Page 13
computational, combinatorial, and medicinal chemistry, to design novel small
molecule inhibitors of the HCV helicase for clinical development as new
antiviral drugs to treat HCV infection.
The Company has pending patent applications in the United States covering
intellectual property developed as part of the Company's Hepatitis C Helicase
research and development program. These applications cover Hepatitis C helicase
inhibitors and the X-ray crystal structure of Hepatitis C helicase.
CASPASE INHIBITORS PROGRAM
Vertex is conducting a major multidisciplinary research effort to design of
novel, small molecule inhibitors of apoptosis (programmed cell death) for the
treatment of a variety of pathological conditions including major
neurodegenerative and cardiovascular diseases. In this separate caspase
inhibitor program, Vertex scientists are capitalizing on expertise gained
through the Company's successful design and optimization of inhibitors of ICE
(Caspase-1). Recent highlights include the solution of the caspase-3 structure
by X-ray crystallography and the first description of the caspase-9 gene
knockout mouse, establishing that this enzyme is of particular importance in
neurobiology. With respect to drug discovery, Vertex's caspase research has
resulted in the identification of novel compounds with activity in enzyme
assays, cellular assays, and animal models. The goal of Vertex's caspase
inhibitors program is to discover and develop novel drugs useful for treating
neurodegenerative disorders such as Alzheimer's and Parkinson's disease and for
decreasing the tissue damage in myocardial infarction and stroke.
JNK3 MAP KINASE INHIBITORS PROGRAM
Vertex is currently engaged in a research effort to identify JNK3 MAP
kinase inhibitors. Vertex's studies have been accelerated by the experience
gained in Vertex's p38 MAP kinase program with Kissei. Jun N-terminal kinase
(JNK) is a member of the same group of structurally-related enzymes as p38 MAP
kinase. Recent findings suggest that JNK3 plays an important role in central
nervous system disorders such as epilepsy, stroke and Alzheimer's Disease. JNK3
also has been implicated in Parkinson's disease. Vertex has solved and in 1998
reported in the journal STRUCTURE the X-ray crystal structure of JNK3 complexed
to an analog of the co-factor molecule ATP. Using proprietary structural
information of the JNK3 and other MAP kinase enzymes, Vertex scientists selected
initial compounds for investigation as potential inhibitors. Vertex has
identified several novel classes of JNK3 MAP kinase inhibitors and is currently
using advanced drug discovery technology to move lead compounds toward clinical
candidate status.
CORPORATE COLLABORATIONS
Vertex has 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 the
Company's research and development programs. At present, the Company has the
following major corporate collaborations.
GLAXO WELLCOME PLC.
Vertex and Glaxo Wellcome are collaborating on the development and
commercialization of Agenerase (amprenavir). Under the collaborative agreement
for research and development of HIV protease inhibitors, which began in December
1993, Glaxo Wellcome agreed to pay Vertex up to $42 million, comprised of a $15
million initial license payment paid in December 1993, $14 million of product
research funding over five years and $13 million of development and
commercialization milestone payments for an initial drug candidate. From the
inception of the agreement in December 1993 through December 31, 1998, Vertex
has recognized as revenue $34 million. The Company has received the full amount
of research funding specified under the agreement. Glaxo Wellcome is
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also obligated to pay to Vertex additional development and commercialization
milestone payments for subsequent drug candidates. In addition, Glaxo Wellcome
is required to bear the costs of development in its territory under the
collaboration. Glaxo Wellcome has exclusive rights to develop and commercialize
Vertex HIV protease inhibitors in all parts of the world except the Far East and
will pay Vertex a royalty on sales. Vertex has retained certain bulk drug
manufacturing rights and certain co-promotion rights in the territories licensed
to Glaxo Wellcome.
Glaxo Wellcome has the right to terminate its agreement with the Company
without cause upon twelve months' notice. Termination by Glaxo Wellcome of the
agreement will relieve Glaxo Wellcome of its obligation to make further
commercialization and development milestone and royalty payments, and will end
any license granted to Glaxo Wellcome by Vertex thereunder, and could have a
material adverse effect on the Company's business and result of operations.
Vertex and Glaxo Wellcome have a non-exclusive, worldwide license under
certain Searle patent applications claiming HIV protease inhibitors to permit
Vertex and Glaxo Wellcome to develop, manufacture and market Agenerase free of
the risk of intellectual property claims by Searle. The terms of the license
require Vertex to pay Searle a royalty on net sales.
KISSEI PHARMACEUTICAL CO., LTD.
AMPRENAVIR
Vertex and Kissei are collaborating on the development of amprenavir,
Vertex's HIV protease inhibitor. Under the collaborative agreement, which began
in April 1993, Kissei agreed to pay to Vertex up to $20 million, comprised of
$9.8 million of product research funding over three years, $7 million of
development and commercialization milestone payments and a $3.2 million equity
investment. From the inception of the agreement in April 1993 through December
31, 1998, $14.6 million has been recognized as revenue. During 1997, the
Company also received $4 million related to reimbursements of certain
development costs. The Company has received the full amount of research funding
specified under the agreement. Kissei has exclusive rights to develop and
commercialize amprenavir in Japan, the People's Republic of China and several
other countries in the Far East and will pay Vertex a royalty on sales. Vertex
is responsible for the manufacture of bulk product for Kissei.
P38 MAP KINASE
In September 1997, the Company and Kissei entered into a collaborative
agreement for the p38 MAP kinase program for the development and
commercialization of novel, orally active drugs for the treatment of
inflammatory and neurological diseases. Under the terms of the agreement,
Kissei agreed to pay the Company up to $22 million, composed of a $4 million
license payment paid in September 1997, $11 million of product research funding
over three years and $7 million of development and commercialization milestone
payments. From the inception of the agreement in September 1997 through
December 31, 1998, $11 million has been recognized as revenue. The Company and
Kissei will collaborate to identify and extensively evaluate compounds that
target p38 MAP kinase. Kissei will have the right to develop and commercialize
these compounds in its licensed territories. Kissei has exclusive rights to p38
MAP kinase compounds in Japan and certain Southeast Asian countries and
semi-exclusive rights in China, Taiwan and South Korea. The Company retains
exclusive marketing rights in the United States, Canada, Europe, and the rest of
the world. In addition, the Company will have the right to supply bulk drug
material to Kissei for sale in its territory, and will receive royalties and
drug supply payments on any product sales. Kissei has the right to terminate
the agreement without cause upon six months' notice.
Page 15
BIOCHEM PHARMA INC.
The Company and BioChem are collaborating on the development and
commercialization of Incel, the Company's lead compound in its cancer
multidrug resistance program. Under the collaborative agreement, which began
in May 1996, BioChem agreed to pay the Company up to $4 million comprised of
an initial license payment of $500,000 and development and commercialization
milestone payments. From the inception of the agreement in May 1996 through
December 31, 1998, $0.8 million has been recognized as revenue. BioChem also
agreed to bear certain costs of development of Incel in Canada. BioChem has
exclusive rights to develop and commercialize Incel in Canada. The Company
will supply BioChem's requirements of bulk and finished forms of Incel.
BioChem will make payments to the Company for those materials based on sales
of products by BioChem, which will cover Vertex's cost of supplying materials
and will provide a profit to Vertex. BioChem has the right to terminate the
agreement without cause upon six months' notice. Termination will relieve
BioChem of any further payment obligations and will end any license granted
to BioChem by Vertex under the agreement.
HOECHST MARION ROUSSEL
Vertex and HMR are collaborating on the development of ICE inhibitors as
anti-inflammatory agents. Under the collaborative agreement, which commenced in
September 1993, HMR is obligated to pay to Vertex up to $30.5 million, comprised
of $18.5 million of product research funding over five years and $12 million of
development and commercialization milestone payments. From the inception of the
agreement in September 1993 through December 31, 1998, $21.5 million has been
recognized as revenue. The Company received additional revenue related to
reimbursements for clinical development in 1997. The Company has received the
full amount of research funding specified under the agreement. HMR has exclusive
rights to develop and market drugs resulting from the collaborative effort in
Europe, Africa and the Middle East, and Vertex has exclusive development and
marketing rights in the rest of the world, except the Far East, where Vertex
shares those rights with HMR. HMR is obligated to pay a royalty to Vertex on any
sales made in Europe, and Vertex is obligated to pay a royalty to HMR on any
sales made in the United States or the rest of the Americas. Each party will
have the option to co-promote products in the other party's exclusive territory.
Vertex and HMR will each have rights to develop and market the drugs in Far
Eastern countries including Japan.
ELI LILLY & COMPANY
In June 1997, Vertex and Lilly entered into a collaborative agreement for
the research, development and commercialization of novel, small molecule
compounds to treat hepatitis C infection. Under the terms of the agreement,
Lilly will pay the Company up to $51 million composed of a $3 million up front
payment paid in June 1997, $33 million of product research funding over six
years and $15 million of development and commercialization milestone payments.
From the inception of the agreement in June 1997 through December 31, 1998,
$10.8 million has been recognized as revenue. The Company and Lilly will
jointly manage the research, development, manufacturing and marketing of drug
candidates emerging from the collaboration. The Company will have primary
responsibility for drug design, process development and pre-commercial drug
substance manufacturing, and Lilly will have primary responsibility for
formulation, preclinical and clinical development and global marketing. The
Company has the option to supply 100% of Lilly's commercial drug substance
supply needs. The Company will receive royalties on future product sales, if
any. If the Company exercises its commercial supply option, the Company will
receive drug supply payments in addition to royalties on future product sales,
if any. Lilly has the right to terminate the agreement without cause upon six
months' notice after June 1999.
Page 16
SCHERING AG
The Company and Schering AG, Germany are collaborating on 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. Under the terms of the agreement, Schering AG will pay
the Company up to $88 million composed of a $6 million upfront license payment
paid in September 1998, $22 million of product research funding over five years
and $60 million of development and commercialization milestone payments. From
the inception of the agreement in August 1998 through December 31, 1998, $10
million has been recognized as revenue. Under terms of the agreement, Vertex
and Schering AG will have an equal role in management of neurophilin ligand
research and product development. In North America, Vertex will have
manufacturing rights, and Vertex and Schering AG will share equally in the
marketing expenses and profits from commercialized compounds. In addition to
having manufacturing rights in North America, the Company retains the option to
manufacture bulk drug substance for sales and marketing in territories outside
Europe, the Middle East and Africa. Schering AG will have the right to
manufacture and market any commercialized compounds in Europe, the Middle East
and Africa, and pay Vertex a royalty on product sales. After December 2000,
Schering AG has the right to terminate without cause upon a six months' written
notice.
ALTUS BIOLOGICS INC.
Altus Biologics Inc. develops, manufactures and markets products based
on a novel and proprietary technology for stabilizing proteins. At December
31, 1998, Vertex owned approximately 70% of the capital stock of Altus. In
February 1999, Vertex restructured its investment in Altus. As part of the
transaction, Vertex provided Altus $3 million of cash and surrendered its
shares of Altus preferred stock in exchange for two new classes of preferred
stock and warrants. The new preferred stock provides Vertex with a minority
ownership position in Altus, and the warrants, which become exercisable upon
certain events, will provide Vertex with significant additional ownership
potential. As a result of the transaction, Altus now operates independently
from Vertex. In addition, Vertex has retained a non-exclusive royalty-free
right to use Altus' technology for discovering, developing and manufacturing
small molecule drugs.
PATENTS AND PROPRIETARY INFORMATION
The Company has rights in certain patents and pending patent applications
that relate to compounds it is developing and methods of using such compounds,
as discussed above. In addition, the Company actively seeks, when appropriate,
protection for its products and proprietary information by means of United
States and foreign patents, trademarks and contractual arrangements. Vertex has
pending applications in the United States, and foreign counterpart applications
in countries it deems appropriate, for all of its most advanced research and
development programs. In addition, the Company relies upon trade secrets and
contractual arrangements to protect certain of its proprietary information and
products.
There can be no assurance that any patents will issue from any of the
Company's patent applications or, even if patents issue or have issued, that the
claims thereof will provide the Company with any significant protection against
competitive products or otherwise be valuable commercially. Legal standards
relating to the validity of patents and the proper scope of their claims in the
biopharmaceutical field are still evolving, and there is no consistent policy
regarding the breadth of claims allowed in biopharmaceutical patents. No
assurance can be given as to the Company's ability to avoid infringing, and thus
having to negotiate a license under, any patents issued to others, or that a
license to such patents would be available on commercially acceptable terms, if
at all. See Item 3, "Legal Proceedings."
Page 17
Further, there can be no assurance that any patents issued to or licensed
by the Company will not be infringed by the products of others, which may
require the Company to engage in patent infringement litigation. In addition to
being a party to patent infringement litigation, the Company could be required
to participate in interference proceedings declared by the United States Patent
and Trademark Office. Defense or prosecution of patent infringement litigation,
as well as participation in interference proceedings, can be expensive and time
consuming, even in those instances in which the outcome is favorable to the
Company. If the outcome of any such litigation or proceeding were adverse, the
Company could be subject to significant liabilities to third parties, could be
required to obtain licenses from third parties or could be required to cease
sales of the affected products, any of which could have a material adverse
effect on the Company.
Much of the Company's technology and many of its processes are dependent
upon the knowledge, experience and skills of key scientific and technical
personnel. To protect its rights to its proprietary know-how and technology, the
Company requires all employees, consultants, advisors and collaborators to enter
into confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside the Company. These agreements require disclosure
and assignment to the Company of ideas, developments, discoveries and inventions
made by employees, consultants, advisors and collaborators. However, there can
be no assurance that these agreements will effectively prevent disclosure of the
Company's confidential information or will provide meaningful protection for the
Company's confidential information if there is unauthorized use or disclosure.
MANUFACTURING
The Company relies on third party manufacturers and collaborative partners
to produce its compounds for preclinical and clinical purposes and may do so for
commercial production of any compounds that are approved for marketing.
Commercial manufacturing of Agenerase will be done, at least initially, by Glaxo
Wellcome. Vertex retains the option to manufacture a portion of Glaxo
Wellcome's requirements for bulk drug substance. If Vertex were to exercise
that option, it would rely upon one or more contract manufacturers to
manufacture the Agenerase bulk drug substance on its behalf.
The Company has established a quality assurance program, including a set of
standard operating procedures, intended to ensure that third party manufacturers
under contract produce the Company's compounds in accordance with the FDA's
current Good Manufacturing Practices, or cGMP, and other applicable regulations.
The Company believes that all of its existing compounds can be produced
using established manufacturing methods, primarily through standard techniques
of pharmaceutical synthesis. The Company believes that it will be able to
continue to negotiate third party manufacturing arrangements on commercially
reasonable terms and that it will not be necessary for it to develop internal
manufacturing capability in order to successfully commercialize its products.
The Company's objective is to maintain flexibility in deciding whether to
develop internal manufacturing capabilities for certain of its potential
products. However, in the event that the Company is unable to obtain contract
manufacturing, or obtain such manufacturing on commercially reasonable terms, it
may not be able to commercialize its products as planned. The Company has
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 the Company will
further develop such capabilities successfully.
Since most of the Company's potential products are at an early stage of
development, the Company will need to improve or modify its existing
manufacturing processes and capabilities to produce commercial quantities of
any drug product economically. The Company cannot quantify the time or
expense that may ultimately be required to improve or modify its existing
process technologies, but
Page 18
it is possible that such time or expense could be substantial.
The production of Vertex's compounds is based in part on technology that
the Company believes to be proprietary. Vertex may license this technology to
contract manufacturers to enable them to manufacture compounds for the Company.
In addition, a contract manufacturer may develop process technology related to
the manufacture of Vertex's compounds that the manufacturer owns either
independently or jointly with the Company. This would increase the Company's
reliance on such manufacturer or require the Company to obtain a license from
such manufacturer in order to have its products manufactured.
Some of the Company's current corporate partners have certain manufacturing
rights with respect to the Company's products under development, and there can
be no assurance that such corporate partners' rights will not impede the
Company's ability to conduct the development programs and commercialize any
resulting products in accordance with the schedules and in the manner currently
contemplated by the Company.
COMPETITION
The Company is engaged in pharmaceutical 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 targeted by Vertex. In
order for the Company to compete successfully, it must demonstrate improved
safety, efficacy, ease of manufacturing and market acceptance of its products
over those of its competitors who have received regulatory approval and are
currently marketing their drugs. In the field of HIV protease inhibition, Merck
& Co., Inc., Abbott Laboratories, Inc., Hoffmann-La Roche, and Agouron
Pharmaceuticals, Inc. have HIV protease inhibitor drugs that are already on the
market. Many of the Company's competitors have substantially greater financial,
technical and human resources than those of the Company and more experience in
the development of new drugs. See "Risk Factors--Vertex Faces Substantial
Competition."
GOVERNMENT REGULATION
The Company's development, manufacture and potential sale of therapeutics
are subject to extensive regulation by United States and foreign governmental
authorities. In particular, pharmaceutical products are subject to rigorous
preclinical and clinical testing and to other approval requirements by the FDA
in the United States under the Food, Drug and Cosmetic Act and by comparable
agencies in most foreign countries.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animals to identify potential safety
problems. For certain diseases, animal models exist that are believed to be
predictive of human efficacy. For such diseases, a drug candidate is tested in
an animal model. The results of the studies are submitted to the FDA as a part
of the Investigational New Drug application (IND) which is filed to comply with
FDA regulations prior to commencement of human clinical testing. For other
diseases for which no appropriately predictive animal model exists, no such
results can be filed. For several of the Company's drug candidates, no
appropriately predictive model exists. As a result, no IN VIVO evidence of
efficacy would be available until such compounds progress to human clinical
trials.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which frequently begins with the
initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound will be tested for safety, dosage
tolerance, absorption, bioavailability, biodistribution, metabolism, excretion,
clinical pharmacology and, if possible, for early information on effectiveness.
Phase II typically involves
Page 19
studies in a small sample of the intended patient population to assess the
efficacy of the drug for a specific indication, to determine dose tolerance and
the optimal dose range and to gather additional information relating to safety
and potential adverse effects. Phase III trials are undertaken to further
evaluate clinical safety and efficacy in an expanded patient population at
geographically dispersed study sites, to determine the overall risk-benefit
ratio of the drug and to provide an adequate basis for physician labeling. Each
trial is conducted in accordance with certain standards under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Further, each clinical study must be evaluated by an
independent Institutional Review Board at the institution at which the study
will be conducted. The Institutional Review Board will consider, among other
things, ethical factors, the safety of human subjects and the possible liability
of the institution.
Data from preclinical testing and clinical trials are submitted to the FDA
in a New Drug Application (NDA) for marketing approval. The process of
completing clinical testing and obtaining FDA approval for a new drug is likely
to take a number of years and require the expenditure of substantial resources.
Preparing an NDA involves considerable data collection, verification, analysis
and expense, and there can be no assurance that approval will be granted on a
timely basis, if at all. The approval process is affected by a number of
factors, including the severity of the disease, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials. The FDA
may deny an NDA if applicable regulatory criteria are not satisfied or may
require additional testing or information. Among the conditions for marketing
approval is the requirement that the prospective manufacturer's quality control
and manufacturing procedures conform to the FDA's cGMP regulations, which must
be followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, monies and effort in
the area of production and quality control to ensure full technical compliance.
Manufacturing establishments, both foreign and domestic, also are subject to
inspections by or under the authority of the FDA and by or under the authority
of other federal, state or local agencies.
Even after initial FDA approval has been obtained, further studies,
including post-marketing studies, may be required to provide additional data on
safety and will be required to gain approval for the use of a product as a
treatment for clinical indications other than those for which the product was
initially tested. Also, the FDA will require post-marketing reporting to monitor
the side effects of the drug. Results of post-marketing programs may limit or
expand further marketing of the products. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process, labeling or manufacturing facilities, an NDA supplement may be required
to be submitted to the FDA.
The Orphan Drug Act provides incentives to drug manufacturers to develop
and manufacture drugs for the treatment of diseases or conditions that affect
fewer than 200,000 individuals in the United States. Orphan drug status can also
be sought for diseases or conditions that affect more than 200,000 individuals
in the United States if the sponsor does not realistically anticipate its
product becoming profitable from sales in the United States. Under the Orphan
Drug Act, a manufacturer of a designated orphan product can seek tax benefits,
and the holder of the first FDA approval of a designated orphan product will be
granted a seven-year period of marketing exclusivity for that product for the
orphan indication. While the marketing exclusivity of an orphan drug would
prevent other sponsors from obtaining approval of the same compound for the same
indication, it would not prevent other types of drugs from being approved for
the same use. The Company may apply for orphan drug status for certain
indications of MDR in cancer.
Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
sponsor may be granted marketing exclusivity for a period of time following FDA
approval of certain drug applications if FDA approval is received before the
expiration of the patent's original term. This
Page 20
marketing exclusivity would prevent a third party from obtaining FDA approval
for a similar or identical drug through an Abbreviated New Drug Application,
which is the application form typically used by manufacturers seeking approval
of a generic drug. The statute also allows a patent owner to extend the term of
the patent for a period equal to one-half the period of time elapsed between the
filing of an IND and the filing of the corresponding NDA plus the period of time
between the filing of the NDA and FDA approval. The Company intends to seek the
benefits of this statute, but there can be no assurance that the Company will be
able to obtain any such benefits.
Whether or not FDA approval has been obtained, approval of a drug product
by regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. Historically,
the requirements governing the conduct of clinical trials and product approvals,
and the time required for approval, have varied widely from country to country.
In addition to the statutes and regulations described above, the Company is
also subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state and local regulations.
HUMAN RESOURCES
As of December 31, 1998, Vertex had 304 full-time employees, including 219
in research and development, 38 in support services and 47 in general and
administrative functions, and one part-time employee. Fourteen of these
employees were located at Vertex's new U.K. research and development facility,
opened in 1998. The Company's scientific staff members (103 of whom hold Ph.D.
and/or M.D. degrees) have diversified experience and expertise in molecular and
cell biology, biochemistry, animal pharmacology, synthetic organic chemistry,
protein x-ray crystallography, protein nuclear magnetic resonance spectroscopy,
computational chemistry, biophysical chemistry, medicinal chemistry, clinical
pharmacology and clinical medicine. In addition, the Company's Altus subsidiary
had 30 full-time employees as of December 31, 1998. The Company's employees are
not covered by a collective bargaining agreement, and the Company considers its
relations with its employees to be good.
EXECUTIVE OFFICERS
The names, ages and positions held by the executive officers of the Company are
as follows:
Name Age Position
- ---- --- --------
Joshua S. Boger, Ph.D. . . . . . . . .47 Chairman, President and Chief
Executive Officer
Richard H. Aldrich . . . . . . . . . .44 Senior Vice President and Chief
Business Officer
Vicki L. Sato, Ph.D. . . . . . . . . .50 Senior Vice President of Research
and Development and Chief
Scientific Officer; Chair of the
Scientific Advisory Board
Iain P. M. Buchanan. . . . . . . . . .45 Vice President of European
Operations; Managing Director of
Vertex Pharmaceuticals (Europe)
Limited
Thomas G. Auchincloss, Jr. . . . . . .37 Vice President of Finance and
Treasurer
Page 21
All executive officers are elected by the Board of Directors to serve in
their respective capacities until their successors are elected and qualified or
until their earlier resignation or removal.
Dr. Boger is a founder of the Company and was its President and Chief
Scientific Officer from its inception in 1989 until May 1992, when he became
President and Chief Executive Officer. In 1997, Dr. Boger became Chairman,
President and Chief Executive Officer. Dr. Boger has been a director since the
Company's inception. Prior to founding the Company in 1989, Dr. Boger held the
position of Senior Director of Basic Chemistry at Merck Sharp & Dohme Research
Laboratories in Rahway, New Jersey, where he headed both the Department of
Medicinal Chemistry of Immunology & Inflammation and the Department of
Biophysical Chemistry. Dr. Boger is also a Director of Millennium
Pharmaceuticals, Inc. Dr. Boger holds a B.A. in chemistry and philosophy from
Wesleyan University and M.S. and Ph.D. degrees in chemistry from Harvard
University.
Mr. Aldrich served as Vice President of Business Development of the Company
from June 1989 to May 1992, when he became Vice President and Chief Business
Officer. In December 1993, Mr. Aldrich was promoted to Senior Vice President and
Chief Business Officer. He joined Vertex from Integrated Genetics, where he
headed that company's business development group. Previously, he served as
Program Executive at Biogen, Inc., where he coordinated worldwide commercial
development of several biopharmaceuticals, and as Licensing Manager at Biogen
S.A. in Geneva, Switzerland, where he managed European and Far Eastern
licensing. Mr. Aldrich previously worked at the Boston Consulting Group, an
international management consulting firm. Mr. Aldrich received a B.S. degree
from Boston College and an M.B.A. from the Amos Tuck School of Business,
Dartmouth College.
Dr. Sato joined Vertex in September 1992 as Vice President of Research and
was appointed Senior Vice President of Research and Development in September
1994. Previously, she was Vice President, Research and a member of the
Scientific Board of Biogen, Inc. As research head at Biogen, she directed
research programs in the fields of inflammation, immunology, AIDS therapy and
cardiovascular therapy from early research into advanced product development.
Dr. Sato received an A.B. in biology from Radcliffe College and A.M. and Ph.D.
degrees from Harvard University. Following postdoctoral work in chemistry and
immunology at the University of California at Berkeley and Stanford Medical
School, she was appointed to the faculty of Harvard University in the Department
of Biology. Dr. Sato is also a Director of Mitotix, Inc.
Mr. Buchanan joined the Company in April 1994 from Cilag AG, a subsidiary
of Johnson & Johnson based in Zug, Switzerland, where he served as its Regional
Licensing Director since 1987. He previously held the position of Marketing
Director of Biogen, Inc. in Switzerland. Prior to Biogen, Mr. Buchanan served in
Product Management at Merck Sharp & Dohme (UK) Limited. Mr. Buchanan holds a
B.Sc. from the University of St. Andrews, Scotland.
Mr. Auchincloss joined the Company in October 1994 after serving as an
investment banker at Bear, Stearns & Co. Inc. since 1988, most recently as
Associate Director of the Corporate Finance Department. Prior to Bear Stearns,
Mr. Auchincloss was a financial analyst for PaineWebber, Inc. Mr. Auchincloss
holds a B.S. from Babson College and an M.B.A. from The Wharton School,
University of Pennsylvania.
Page 22
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board consists of individuals with
demonstrated expertise in various fields who advise the Company concerning
long-term scientific planning, research and development. The Scientific Advisory
Board also evaluates the Company's research programs, recommends personnel to
the Company and advises the Company on technological matters. The members of the
Scientific Advisory Board, which is chaired by Dr. Vicki L. Sato, are:
Vicki L. Sato, Ph.D. . . . . . Senior Vice President of Research and
Development and Chief Scientific Officer,
Vertex Pharmaceuticals Incorporated.
Steven J. Burakoff, M.D. . . . Chair, Department of Pediatric Oncology,
Dana-Farber Cancer Institute; Professor
of Pediatrics, Harvard Medical School.
Eugene H. Cordes, Ph.D.. . . . Professor of Pharmacy and Chemistry,
University of Michigan at Ann Arbor.
Jerome E. Groopman, M.D. . . . Chief, Division of Experimental Medicine,
Beth Israel Deaconess Medical Center;
Recanati Chair of Medicine and
Professor of Medicine, Harvard Medical
School.
Stephen C. Harrison, Ph.D. . . Higgins Professor of Biochemistry,
Harvard University; Investigator, Howard
Hughes Medical Institute; Professor of
Biological Chemistry and Molecular
Pharmacology and Professor of Pediatrics,
Harvard Medical School.
Jeremy R. Knowles, D. Phil.. . Dean of the Faculty of Arts and Sciences
and Amory Houghten Professor of Chemistry
and Biochemistry, Harvard University.
Robert T. Schooley, M.D. . . . Tim Gill Professor of Medicine and
Head of Infectious Disease, University of
Colorado Health Sciences Center.
Other than Dr. Sato, none of the members of the Scientific Advisory Board is
employed by the Company, and members may have other commitments to or consulting
or advisory contracts with their employers or other entities that may conflict
or compete with their obligations to the Company. Accordingly, such persons are
expected to devote only a small portion of their time to the Company. In
addition to its Scientific Advisory Board, Vertex has established consulting
relationships with a number of scientific and medical experts who advise the
Company on a project-specific basis.
Page 23
RISK FACTORS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements in this Report or
presented elsewhere by Vertex.
Market Acceptance of Agenerase Cannot Yet Be Determined
Agenerase is currently awaiting marketing approval by regulatory
authorities, and it is too early to predict whether the product will be
successful in the market. Four other HIV protease inhibitors are on the market,
as well as a number of other products for the treatment of HIV infection and
AIDS. In addition, numerous other drugs are still in development by the
Company's competitors, which may have more efficacy, fewer side effects, easier
administration and/or lower costs. To date, HIV has been shown to develop
resistance to antiviral drugs, including currently marketed HIV protease
inhibitors. There can be no assurance that such disease resistance or other
factors will not limit the efficacy of Agenerase. Although Vertex will
co-promote Agenerase, most of the marketing effort and all of the sales effort
will be made by Glaxo Wellcome, and Vertex will have little control over the
success of those efforts.
SUCCESSFUL DEVELOPMENT OF PIPELINE CANNOT BE PREDICTED
The products that the Company is pursuing will require extensive additional
development, testing and investment, as well as regulatory approvals, prior to
commercialization. No assurance can be given that the Company's product
development efforts will be successful, that required regulatory approvals will
be obtained or that any products, if introduced, will be commercially
successful. The results of preclinical and initial clinical trials of products
under development by the Company are not necessarily predictive of results that
will be obtained from large-scale clinical testing, and there can be no
assurance that clinical trials of products under development will demonstrate
the safety and efficacy of such products or will result in a marketable product.
The administration alone or in combination with other drugs of any product
developed by the Company may produce undesirable side effects in humans. The
failure to demonstrate adequately the safety and efficacy of a therapeutic drug
under development could delay or prevent regulatory approval of the product and
could have a material adverse effect on the Company. In addition, the FDA may
require additional clinical trials, which could result in increased costs and
significant development delays. Commercial formulation and manufacturing
processes have yet to be developed for the Company's drug candidates other than
Agenerase. The Company or its collaborators may encounter difficulties in their
manufacturing process development and formulation activities that could result
in delays in clinical trials, regulatory submissions and commercialization of
its products, or cause negative financial and competitive consequences.
CLINICAL TRIAL TIMING MAY BE SUBJECT TO DELAYS
The rate of completion of clinical trials of the Company's products is
dependent upon, among other factors, the rate of patient accrual. Patient
accrual is a function of many factors, including the size of the patient
population, the proximity of patients to clinical sites, the eligibility
criteria for the trial and the availability of clinical trial material. Delays
in planned patient enrollment in clinical trials may result in increased costs,
program delays or both, which could have a material adverse effect on the
Company. There can be no assurance that if clinical trials are completed the
Company will be able to submit an NDA or that any such application will be
reviewed and approved by the FDA in a timely manner, if at all.
Page 24
VERTEX IS DEPENDENT ON COLLABORATIVE PARTNERS
The Company is engaged in research and development collaborations, pursuant
to which its partners have agreed to fund portions of the Company's research and
development programs and/or to conduct certain research and development relating
to specified products, in exchange for certain technology, product and marketing
rights relating to those products. Some of the Company's current corporate
partners have certain rights to control the planning and execution of product
development and clinical programs, and there can be no assurance that such
corporate partners' rights to control aspects of such programs will not impede
the Company's ability to conduct such programs in accordance with the schedules
and in the manner currently contemplated by the Company for such programs. If
any of the Company's corporate collaborators were to terminate its relationship
with Vertex, it could have a material adverse effect on the Company's ability to
fund related and other programs and to develop, manufacture and market any
products that may have resulted from such collaboration. The Company expects to
seek additional collaborative arrangements to develop and commercialize its
products in the future. There can be no assurance that the Company will be able
to establish acceptable collaborative arrangements in the future or that such
collaborative arrangements will be successful.
THE TECHNOLOGIES USED BY VERTEX ARE RAPIDLY CHANGING
The Company is engaged in pharmaceutical fields characterized by extensive
research efforts, rapid technological progress and intense competition. Further,
the Company believes that interest in the application of structure-based drug
design and related technologies may continue and may accelerate as the
technologies become more widely understood. Businesses, academic institutions,
governmental agencies and other public and private research organizations are
conducting research to develop technologies that may compete with those used by
the Company. It is possible that the Company's competitors could acquire or
develop technologies that would render the Company's technology obsolete or
noncompetitive.
VERTEX FACES SUBSTANTIAL COMPETITION
There are many public and private companies, including pharmaceutical
companies, chemical companies and biotechnology companies, engaged in developing
products for the human therapeutic applications targeted by Vertex. The Company
is aware of efforts by others to develop products in each of the areas in which
the Company has products in development. In addition, there can be no assurance
that the Company's products in development will be able to compete effectively
with products which are currently on the market. In order for the Company to
compete successfully in these areas, it must demonstrate improved safety,
efficacy, ease of manufacturing and market acceptance over its competitors, who
have received regulatory approval and are currently marketing. Many of the
Company's competitors have substantially greater financial, technical and human
resources than those of the Company. In addition, many of the Company's
competitors have significantly greater experience than the Company in conducting
preclinical testing and human clinical trials of new pharmaceutical products,
and in obtaining FDA and other regulatory approvals of products. Accordingly,
certain of the Company's competitors may succeed in obtaining regulatory
approval for products more rapidly than the Company. If the Company obtains
regulatory approval and commences commercial sales of its products, it will also
compete with respect to manufacturing efficiency and sales and marketing
capabilities, areas in which it currently has no experience.
VERTEX RELIES ON THIRD PARTY MANUFACTURERS
The Company's ability to conduct clinical trials and its ability to
commercialize its potential products will depend, in part, on its ability to
manufacture its products on a large scale, either directly or through third
parties, at a competitive cost and in accordance with FDA and other
Page 25
regulatory requirements. The Company currently does not have the capacity to
manufacture drugs in large-scale quanties and is dependent on third party
manufacturers or collaborative partners for the production of its compounds for
preclinical research, clinical trial purposes and commercial production. In the
event that the Company is unable to obtain contract manufacturing, or obtain
such manufacturing on commercially reasonable terms, it may not be able to
conduct or complete clinical trials or commercialize its products as planned.
The Company has no experience in manufacturing pharmaceutical or other products,
and there can be no assurance that the Company will successfully develop such
capabilities. Some of the Company's current corporate partners have certain
manufacturing rights with respect to the Company's products under development,
and there can be no assurance that such corporate partners' manufacturing rights
will not impede the Company's ability to conduct the development programs and
commercialize any resulting products in accordance with the schedules and in the
manner currently contemplated by the Company.
THE REGULATORY APPROVAL PROCESS IS SUBJECT TO UNCERTAINTIES
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of therapeutic pharmaceutical products through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time-consuming procedures. Satisfaction of these
requirements typically takes several years or longer and may vary substantially
based upon the type, complexity and novelty of the pharmaceutical product. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. In
addition, delays or rejections may be encountered based on changes in, or
additions to, regulatory policies for drug approval during the period of product
development and regulatory review. The effect of government regulation may be
to delay or prevent the commencement of clinical trials or marketing of Company
products, if any are developed and submitted for approval, for a considerable
period of time, to impose costly procedures upon the Company's activities and to
provide a competitive advantage to larger companies or companies more
experienced in regulatory affairs that compete with the Company. Moreover, even
if approval is granted, such approval may entail limitations on the indicated
uses for which a compound may be marketed.
THE SCOPE OF PATENT PROTECTION IS UNCERTAIN
The Company's success will depend, in part, on its ability to obtain United
States and foreign patent protection for its products and their uses, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. There can be no assurance that patents will issue from
any of the Company's pending or future patent applications. Legal standards
relating to the validity of patents and the proper scope of their claims in the
biopharmaceutical field are still evolving, and there is no consistent law or
policy regarding the valid breadth of claims in biopharmaceutical patents or the
effect of prior art on them. If the Company is unable to obtain adequate patent
protection, its ability to prevent competitors from making, using and selling
competing products will be limited. Furthermore, the Company's activities may
infringe the claims of the patents held by third parties. Defense and
prosecution of patent claims, as well as participation in interference
proceedings, can be expensive and time-consuming, even in those instances in
which the outcome is favorable to the Company. If the outcome of any such
litigation or proceeding were adverse, the Company could be subject to
significant liabilities to third parties, could be required to obtain licenses
from third parties or could be required to cease sales of the affected products,
any of which could have a material adverse effect on the Company.
Page 26
VERTEX WILL CONTINUE TO HAVE SIGNIFICANT FUTURE CAPITAL NEEDS; AVAILABILITY OF
ADDITIONAL FUNDING IS UNCERTAIN
The Company expects to incur substantial research and development and
related supporting expenses as it designs and develops existing and future
compounds and undertakes clinical trials of potential drugs resulting from such
compounds. The Company also expects to incur substantial administrative and
commercialization expenditures in the future and substantial expenses related to
the filing, prosecution, defense and enforcement of patent and other
intellectual property claims. The Company anticipates that it will finance
these substantial cash needs with Agenerase royalty revenue, its existing cash
reserves, together with interest earned thereon, future payments under its
collaborative agreements, facilities and equipment financing and additional
collaborative agreements. To the extent that funds from these sources are not
sufficient to fund the Company's activities, it will be necessary to raise
additional funds through public offerings or private placements of debt or
equity securities or other methods of financing. Any equity financings could
result in dilution to the Company's then existing stockholders. Any debt
financing, if available at all, may be on terms which, among other things,
restrict the Company's ability to pay dividends (although the Company does not
intend to pay dividends for the foreseeable future). If adequate funds are not
available, the Company may be required to curtail significantly or discontinue
one or more of its research, drug discovery or development programs, including
clinical trials, or attempt to obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies or products in research or development. No
assurance can be given that additional financing will be available on acceptable
terms, if at all.
THIRD PARTY PHARMACEUTICAL REIMBURSEMENT POLICIES MAY AFFECT PRODUCT PRICING
The success of the Company's products in the United States and other
significant markets will depend, in part, upon the extent to which a consumer
will be able to obtain reimbursement for the cost of such products from
government health administration authorities, third-party payors and other
organizations. Significant uncertainty exists as to the reimbursement status of
newly approved therapeutic products. Even if a product is approved for
marketing, there can be no assurance that adequate reimbursement will be
available. The Company is unable to predict what additional legislation or
regulation relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future or what effect the legislation or
regulation would have on the Company's business. Failure to obtain reimbursement
could have a material adverse effect on the Company.
THE COMPANY LACKS SALES AND MARKETING EXPERIENCE
The Company currently has little experience in marketing and no experience
selling pharmaceutical products. The Company must either develop a marketing and
sales force or enter into arrangements with third parties to market and sell any
of its product candidates which are approved by the FDA. In the territories
where the Company retains marketing and co-promotion rights, there can be no
assurance that the Company will successfully develop its own sales and marketing
experience or that it will be able to enter into marketing and sales agreements
with others on acceptable terms, if at all. If the Company develops its own
marketing and sales capability, it will compete with other companies that
currently have experienced and well-funded marketing and sales operations. To
the extent that the Company has or enters into co-promotion or other sales and
marketing arrangements with other companies, any revenues to be received by the
Company will be dependent on the efforts of others, and there can be no
assurance that such efforts will be successful.
Page 27
THERE IS A RISK OF PRODUCT LIABILITY
The Company's business will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of pharmaceutical
products. The use of the Company's products in clinical trials also exposes the
Company to the possibility of product liability claims and possible adverse
publicity. These risks will increase to the extent the Company's products
receive regulatory approval and are commercialized. There can be no assurance
that the Company will be able to maintain its existing levels of product
liability insurance or be able to obtain or maintain such additional insurance
as it may need in the future on acceptable terms. Nor can there be any assurance
that the Company's existing insurance or any such additional insurance will
provide adequate coverage against potential liabilities.
SHARE PRICE MAY FLUCTUATE BASED ON FACTORS BEYOND VERTEX'S CONTROL
Market prices for securities of companies such as Vertex are highly
volatile, and the market for the securities of such companies, including the
Common Stock of the Company, has from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of these
particular companies. Factors such as announcements of results of clinical
trials, technological innovations or new products by Vertex or its competitors,
government regulatory action, public concern as to the safety of products
developed by the Company or others, patent or proprietary rights developments
and market conditions for pharmaceutical and biotechnology stocks, in general,
could have a significant adverse effect on the future market price of the
Company's common stock.
VERTEX HAS ANTI-TAKEOVER PROVISIONS THAT MAY DISCOURAGE CHANGE IN CONTROL
The Company's charter and By-law provisions and the Company's Stockholder
Rights Plan may discourage certain types of transactions involving an actual or
potential change in control of the Company which might be beneficial to the
Company or its stockholders. The Company's charter provides for staggered terms
for the members of the Board of Directors. The Company's By-laws grant the
Directors a right to adjourn annual meetings of stockholders, and certain
provisions of the By-laws may be amended only with an 80% stockholder vote.
Pursuant to the Company's Stockholder Rights Plan, each share of Common Stock
has an associated preferred share purchase right (a "Right"). The Rights will
not trade separately from the Common Stock until, and are exercisable only upon,
the acquisition or the potential acquisition through tender offer by a person or
group of 15% or more of the outstanding Common Stock. Shares of any class or
series of preferred stock may be issued by the Company in the future without
stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any class or series of
preferred stock that may be issued in the future.
ITEM 2. PROPERTIES
The Company leases an aggregate of approximately 134,000 square feet of
laboratory and office space in seven facilities at in Cambridge, Massachusetts.
The leases have expiration dates ranging from December 2000 to 2009. The
Company has the option to extend the lease for the Company's headquarters
facility at 130 Waverly Street, Cambridge, for up to two additional terms,
ending in 2015.
During 1998, Vertex opened a research and development facility in the U.K.
of approximately 7,000 square feet of laboratory and office space located in
Swindon under a lease expiring in August 2000. The Company has the right to
terminate this lease at any time after June 1999. The Company has also leased
approximately 24,000 square feet of laboratory and office
Page 28
space in Milton Park under a lease expiring in 2013, with a right of early
termination in 2008. Upon completion of construction of the Milton Park
facility, expected by the third quarter of 1999, the Company will consolidate
its U.K. business and research and development activities from Ascot and Swindon
to Milton Park.
The Company believes its facilities are adequate for its current needs. The
Company believes it can obtain additional space on commercially reasonable
terms.
ITEM 3. LEGAL PROCEEDINGS
Chiron Corporation ("Chiron") filed suit on July 30, 1998 against the
Company and Eli Lilly and Company in the United States District Court for the
Northern District of California, alleging infringement by the defendants of
various U.S. patents issued to Chiron. The infringement action relates to
research activities by the defendants in the hepatitis C viral protease field
and the alleged use of inventions claimed by Chiron in connection with that
research and development. Chiron has requested damages in an unspecified
amount, as well as an order permanently enjoining the defendants from unlicensed
use of Chiron inventions. While the final outcome of these actions cannot be
determined, the Company believes that the plaintiff's claims are without merit
and intends to defend the actions vigorously.
ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market ("Nasdaq")
under the symbol "VRTX." The following table sets forth the high, low and last
sale prices of each quarter for the Common Stock as reported by Nasdaq for the
periods indicated.
1997 High Low Close
- ------------------------------------------------------------------------
First Quarter $52 3/4 $37 3/4 $40 1/2
Second Quarter 49 3/4 27 5/8 38 1/4
Third Quarter 41 5/8 29 3/8 37 3/4
Fourth Quarter 38 3/8 25 1/4 33
1998 High Low Close
- ------------------------------------------------------------------------
First Quarter $40 3/8 $31 1/4 $31 15/16
Second Quarter 33 7/8 21 1/2 22 1/2
Third Quarter 27 7/8 14 1/2 23
Fourth Quarter 30 20 29 3/4
Page 29
The last sale price of the Common Stock on March 12, 1999, as reported by
Nasdaq, was $26.75 per share. As of March 12, 1999, there were 254 holders of
record of the Common Stock (approximately 7,200 beneficial holders).
The Company has never declared or paid any cash dividends on its Common
Stock and currently expects that future earnings, if any, will be retained for
use in its business.
RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1998 are derived from the Company's
Consolidated Financial Statements. This data should be read in conjunction with
the Company's audited financial statements and related notes, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Consolidated Statement of Operations Data:
Revenues:
Collaborative and other research and
development revenues. . . . . . . . . . . $ 29,055 $ 29,926 $ 13,341 $ 22,081 $ 19,571
Investment income. . . . . . . . . . . . . . 15,343 13,873 5,257 5,453 3,574
-------- -------- -------- -------- --------
Total revenues. . . . . . . . . . . . . . 44,398 43,799 18,598 27,534 23,145
-------- -------- -------- -------- --------
Costs and expenses:
Research and development . . . . . . . . . 58,668 51,624 35,212 41,512 34,761
General and administrative . . . . . . . . 18,135 11,430 7,929 7,069 5,540
License Payment. . . . . . . . . . . . . . . -- -- 15,000 -- --
Interest . . . . . . . . . . . . . . . . . 681 576 462 481 439
-------- -------- -------- -------- --------
Total costs and expenses. . . . . . . . . 77,484 63,630 58,603 49,062 40,740
-------- -------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . $(33,086) $(19,831) $(40,005) $(21,528) $(17,595)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic and diluted net loss per common
share. . . . . . . . . . . . . . . . . . . . . $ (1.31) $ (0.82) $ (2.13) $ (1.25) $ (1.11)
Basic and diluted weighted average
number of common shares outstanding. . . . . . 25,299 24,264 18,798 17,231 15,818
DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments . . . $245,652 $279,671 $130,359 $86,978 $106,470
Total assets . . . . . . . . . . . . . . . . 266,346 295,604 143,499 98,981 116,175
Obligations under capital leases and debt,
excluding current portion. . . . . . . . . . 7,032 5,905 5,617 4,912 4,729
Accumulated deficit. . . . . . . . . . . . . (149,861) (116,775) (96,944) (56,939) (35,411)
Total stockholders' equity . . . . . . . . . 246,212 276,001 130,826 85,272 105,478
Page 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT CAN CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE DESCRIBED. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE BUT ARE NOT
LIMITED TO THOSE DESCRIBED IN THE SECTION ENTITLED "RISK FACTORS." READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF.
The Company is engaged in the discovery, development and commercialization
of novel, small molecule pharmaceuticals for the treatment of major diseases for
which there are currently limited or no effective treatments. The Company is a
leader in the use of structure-based drug design, an approach to drug discovery
that integrates advanced biology, biophysics, chemistry and information
technologies. The Company is conducting research and development programs to
develop pharmaceuticals for the treatment of viral diseases, multidrug
resistance in cancer, autoimmune and inflammatory diseases and neurodegenerative
disorders.
To date, the Company has not received any material revenues from the sale
of pharmaceutical products. A New Drug Application ("NDA") was submitted in
October 1998 for the Company's lead product, Agenerase-TM- (amprenavir) for the
treatment of HIV infection. Glaxo Wellcome plc ("Glaxo Wellcome"), Vertex's
partner, has also submitted applications for market approval to Canadian and
European regulatory agencies. Assuming the NDA is approved, the Company will
receive a royalty on sales of Agenerase from Glaxo Wellcome. The Company has
incurred operating losses since its inception and expects to incur a loss in
1999. The Company believes that operating losses may continue beyond 1999, even
if significant royalties are realized on Agenerase-TM- sales, because the
Company is planning to make significant investments in research and development
for its other potential products. The Company expects that losses will
fluctuate from quarter to quarter and that such fluctuations may be substantial.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997.
The Company's total revenues were $44,398,000 in 1998 as compared to
$43,799,000 in 1997. In 1998, revenues consisted of $27,939,000 under the
Company's collaborative agreements, $15,343,000 in investment income and
$1,116,000 in government grants and other income. Collaborative revenue in 1998
included a $6,000,000 payment from Schering AG, Germany ("Schering AG")
associated with the signing of a collaborative agreement for the Company's
neurophilin ligand program and $4,000,000 of research funding under that
agreement, a $2,000,000 milestone payment from Kissei Pharmaceutical Co., Ltd.
("Kissei") for the acceptance of VX-745 as the lead development candidate for
the Company's p38 MAP kinase program, and a $3,000,000 milestone payment from
Glaxo Wellcome for the NDA filing for Agenerase. Other collaborative revenue in
1998 included $3,738,000 from Kissei, $3,457,000 from Glaxo Wellcome, $5,193,000
from Eli Lilly and Company ("Lilly") and $551,000 from others. Research funding
requirements under the Glaxo Wellcome agreement ended on December 31, 1998,
although Glaxo Wellcome continues to have certain development funding
obligations. In 1997, revenues consisted of $27,703,000 under the Company's
collaborative agreements, $13,873,000 in investment income, and $2,223,000 in
government grants and other income. Revenue from collaborative agreements in
1997 consisted of $3,275,000 from Glaxo Wellcome, $8,660,000 from Hoechst Marion
Roussel ("HMR"), $9,810,000 from Kissei, $5,694,000 from
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Lilly and $264,000 from others.
Total costs and expenses increased to $77,484,000 in 1998 from $63,630,000
in 1997. Research and development expenses increased to $58,668,000 in 1998
from $51,624,000 in 1997. The Company increased research staffing, including
opening a research site in the U.K., to fully staff a higher number of discovery
programs. In addition, the Company expanded its development infrastructure.
General and administrative expenses increased in 1998 to $18,135,000 from
$11,430,000 in 1997 primarily as a result of headcount growth to handle the
administrative requirements of the Company's growing research and development
operation, legal expenses associated with expansion of the Company's
intellectual property position and marketing expenses associated with the
anticipated launch of Agenerase and the Company's co-promotion preparations.
Interest expense increased in 1998 to $681,000 from $576,000 in 1997 due to
higher levels of equipment financing during 1998.
The Company recorded a net loss of $33,086,000 or $1.31 per share in 1998
compared to a net loss of $19,831,000 or $0.82 per share in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996.
The Company's total revenues increased to $43,799,000 in 1997 from
$18,598,000 in 1996. In 1997, revenues consisted of $27,703,000 under the
Company's collaborative agreements, $13,873,000 in investment income, and
$2,223,000 in government grants and other income. The principal reasons for the