<PAGE>
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, 1997
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 0-19319
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. /X/
As of March 16, 1998 there were outstanding 25,267,905 shares of Common Stock,
$.01 par value per share. The aggregate market value of shares of Common Stock
held by non-affiliates of the registrant, based upon the last sales price for
such stock on that date as reported by The Nasdaq Stock Market, was
approximately $868,075,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders to be held on May 27, 1998 are incorporated by reference into Part
III.
Page 1
<PAGE>
The "Company" and "Vertex," as used in this Annual Report on Form 10-K,
refer to Vertex Pharmaceuticals Incorporated.
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.
CLEC is a registered trademark of the Company's subsidiary, Altus Biologics Inc.
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 and chemistry 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. The Company's drug candidates currently in
clinical trials include amprenavir for the treatment of human immunodeficiency
virus ("HIV") infection and acquired immune deficiency syndrome ("AIDS"), two
compounds for treatment of cancer multidrug resistance ("MDR") and an inosine
monophosphate dehydrogenase ("IMPDH") inhibitor for the treatment of autoimmune
diseases. In addition, the Company has preclinical and research programs aimed
at developing orally available small molecule compounds to treat inflammatory
diseases, neurodegenerative diseases and hepatitis C infection.
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 the screening of thousands of compounds, either from existing
chemical libraries or from fermentation broths, against a predictive assay for a
particular disease target. The Company believes that traditional pharmaceutical
discovery is an essentially random process which is costly and inefficient.
Advances in biotechnology have led to another method of developing drugs based
on the isolation and production of human recombinant proteins. The Company
believes that this approach also has limitations because the resulting
pharmaceuticals are large molecules that cannot be administered orally, are
difficult to manufacture and have applications which are limited to the disease
state in which the protein is involved.
Vertex is developing pharmaceutical products using a structure-based
drug design approach, which is distinct from the traditional pharmaceutical and
biotechnological approaches. By determining and modeling the three dimensional
atomic structure of a target protein, the
Page 2
<PAGE>
Company intends to rationally design or alter chemical compounds to specifically
interact with the targeted protein. The Company believes that structure-based
drug design increases the chances for the discovery of multiple lead compounds
for selected protein targets, including targets for which traditional drug
discovery has met with limited success. Moreover, the Company believes that the
structure-based drug design process may accelerate optimization of lead
compounds, since modification of a lead compound may be undertaken with
knowledge of the relationship between the compound's structure and its desired
therapeutic effect, rather than through experimentation with randomly generated
modifications to that compound.
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. To acquire structural information, Vertex applies
advanced biophysical and computational tools, including x-ray crystallography,
nuclear magnetic resonance spectroscopy and high resolution computer modeling.
As structural information is gathered, the Company uses combinatorial,
computational and medicinal chemistry to design and produce novel, highly
specific small molecule compounds that possess the characteristics required for
therapeutic benefit. To arrive at initial lead compounds, the Company may use
traditional approaches, such as screening chemical libraries, natural products
or combinatorial libraries in addition to using known chemical compounds or may
apply direct computational methods (de novo design). Throughout the process, the
Company develops biological assays and proprietary animal models, some of which
employ the latest advances in genomics techniques, in order to analyze the
function of target proteins. Using these tools, the Company optimizes compounds
for potency and pharmaceutical properties, including tolerability and
pharmacokinetics, and manufacturability. The Company selects clinical candidates
from among optimized compounds based on the results of in vitro and in vivo
tests designed to predict the compounds' safety and efficacy.
Vertex expects to employ all of its core technologies from the initial
phases of a program through the entire discovery process. Information generated
through the application of one scientific technique becomes part of the
information base from which further advances may be made by Vertex scientists
using other development techniques. Using its approach to structure-based drug
design, Vertex has demonstrated that it is able to solve atomic structures of
target proteins, generate lead compounds that bind to the target in vitro and
optimize those compounds to produce drug candidates with desirable
pharmaceutical attributes. 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 neurodegenerative 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 form collaborations
with pharmaceutical companies in programs for which they can provide resources
and access to competencies complementary to Vertex's in-house capabilities.
Product Development and Research Programs
The following are the Company's most advanced product development and
research programs.
Page 3
<PAGE>
Clinical Development Programs
HIV Program
Overview
Vertex is developing orally deliverable antiviral drugs to treat HIV
infection and AIDS. Vertex's HIV Program is focused on the HIV protease, a key
enzyme involved in viral replication. The Company is collaborating with Glaxo
Wellcome plc. ("Glaxo Wellcome") and Kissei Pharmaceutical Co., Ltd. ("Kissei")
in the development of its most advanced HIV protease inhibitor, amprenavir
(VX-478 or 141W94). Glaxo Wellcome has been conducting pivotal Phase III
clinical trials of amprenavir since early 1997. These Phase III clinical trials
are intended to support the submission of a New Drug Application ("NDA") for
market approval in the United States and equivalent submissions in Europe and
other territories. However, there can be no assurance that these clinical trials
will result in the submission or approval of an NDA for amprenavir.
Background
Recent World Health Organization ("WHO") estimates place the number of
people infected with HIV at 860,000 in the United States in 1997. The U.S.
Centers for Disease Control ("CDC") estimates that 240,000 HIV-infected
individuals in the United States have progressed to and are living with AIDS.
The WHO recently revised upward estimates of worldwide HIV prevalence to 30.6
million, with 5.8 million new infections and 2.3 million deaths in 1997.
With the advent of combination therapy strategies and the introduction
of several new drugs, world sales of antiviral drugs for the treatment of HIV
have increased fivefold over a period of two years, reaching approximately $2.5
billion in 1997. Despite this dramatic market increase and the success of new
agents, there remains a signficant 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 and untreated with any antiviral drug.
Three classes of antiviral drugs - nucleoside reverse transcriptase
inhibitors ("NRTIs"), non-nucleoside reverse transcriptase inhibitors
("NNRTIs"), and protease inhibitors - are currently approved for the treatment
of HIV/AIDS. NRTIs (which include AZT, ddI, ddC and 3TC) and NNRTIs (which
include nevirapine and delavirdine) both 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. HIV protease inhibitors work by an alternative
mechanism, blocking another viral enzyme involved in HIV replication. Indinavir,
saquinavir, ritonavir, and nelfinavir are protease inhibitors that have received
U.S. Food and Drug Administration ("FDA") marketing approval. 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. Amprenavir is being studied using twice daily dosing, without
restrictions regarding dosing with or without food, in contrast with certain of
the currently available protease inhibitors which are approved for dosage three
times daily with food restrictions. The Company believes that amprenavir will
compare favorably with the protease inhibitors currently on the market in terms
of potency, tolerability, dosing regimen and resistance profile, even if
twice-daily dosing regimens now being studied for some of the other protease
inhibitors receive FDA approval. See "Risk Factors--Early Stage of Development;
Technological Uncertainty" and "--Rapid Technological Change and Competition."
Clinical Status
Amprenavir is a second generation HIV protease inhibitor designed by
Vertex to effectively
Page 4
<PAGE>
block the replication of HIV and to possess key competitive characteristics.
Through a series of advanced clinical studies, underway or planned by Glaxo
Wellcome, amprenavir is being assessed in a wide array of clinical trials for
the treatment of HIV and AIDS. Glaxo Wellcome is conducting three Phase III
pivotal clinical trials in the US, Canada and Europe to assess the
tolerability and antiviral activity of amprenavir in combination therapy in
HIV-positive adults and children. Two Phase III clinical trials, including
one trial comparing amprenavir with indinavir, are fully enrolled. Three
different formulations of amprenavir are being tested in clinical trials: a
150 mg capsule, a 50 mg capsule, and an oral solution. Amprenavir is being
studied in Phase III pediatric trials utilizing the 50 mg capsule or the oral
solution. Data generated from 16 weeks of treatment in the Phase III studies
is intended to support filing for market approval of amprenavir. Glaxo
Wellcome is expected to file an NDA in the United States later in 1998 and to
seek regulatory approval for amprenavir in Europe and other countries shortly
thereafter. However, there can be no assurance that clinical trials will
result in the submission or approval of an NDA for amprenavir or that trials
that have not yet begun will commence. See "Risk Factors -- Uncertainties
Related to Clinical Trials."
In addition to the Phase III trials discussed above, Phase II trials
are being conducted evaluating amprenavir in combination with available and/or
experimental protease inhibitors, NRTIs, and NNRTIs. One study compares the
combinations of amprenavir and nelfinavir, amprenavir and indinavir, amprenavir
and saquinavir (soft gel caps), and amprenavir and the nucleoside analogues 3TC
and AZT over 16 weeks of treatment. Preliminary results presented in February
1998 at the 5th Conference on Retroviruses and Opportunistic Infections in
Chicago indicate that combining amprenavir with any one of three currently
available protease inhibitors may result in highly potent antiviral regimens
that appear to be generally well tolerated by patients.
Data from other studies presented at the same meeting suggested that
amprenavir in combination with Glaxo Wellcome's investigational NRTI abacavir
(1592) results in highly potent antiviral activity. In one study, 11 of 11
patients evaluated at 24 weeks achieved 99.9% reduction in viral load. This
result was consistent with another trial that compared amprenavir/abacavir
therapy with other protease inhibitor/abacavir combinations.
Data from these trials are preliminary and incomplete. Many trials are
ongoing. There can be no assurance that these results are predictive of results
that will be obtained in any future clinical trials. See "Risk Factors --
Uncertainties Related to Clinical Trials."
In 1995, Kissei completed single dose and multi-dose,
placebo-controlled, Phase I clinical trials. Vertex expects that in 1998 Kissei
will initiate Phase II/III efficacy trials in HIV-positive patients in Japan and
that 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. See "Risk Factors --
Uncertainties Related to Clinical Trials" and "-- Dependence on Collaborative
Partners."
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 efforts to develop new lead classes of HIV
protease inhibitors.
The Company has four issued United States patents, 13 United States
patent applications pending (including two which are under a Notice of
Allowance), and foreign counterparts to some of those applications, that claim
classes of chemical compounds, pharmaceutical formulations and/or uses of the
same for treating HIV infection and AIDS. Two of the issued patents and five of
the 13 United States patent applications (including both applications under a
Notice of Allowance), have claims that include amprenavir, the Company's lead
drug candidate for treating HIV infection and AIDS, pharmaceutical formulations
containing amprenavir or the use of amprenavir to treat HIV infection or
AIDS-related central nervous system disorders within their
Page 5
<PAGE>
literal scope. In addition, the Company has one issued United States patent that
claims 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 ("Searle")
patent applications claiming HIV protease inhibitors.
Cancer Multidrug Resistance Program
Overview
Vertex is developing novel compounds to treat and prevent the
occurrence of drug resistance associated with the failure of cancer chemotherapy
by inhibiting cellular mechanisms believed to be responsible for MDR. Vertex is
developing two compounds, Incel(TM) (biricodar dicitrate; VX-710) and VX-853,
that block two major multidrug resistance mechanisms, P-glycoprotein ("MDR1")
and multidrug resistance associated protein, ("MRP"). Incel, an intravenous
compound, and VX-853, an oral compound, are intended to be administered in
combination with cancer chemotherapy agents, such as doxorubicin and paclitaxel.
Vertex is conducting Phase II clinical trials of Incel in liver and breast
cancer. In addition, BioChem Therapeutic, Inc. ("BioChem"), a subsidiary of
Biochem Pharma (International) Inc., Vertex's partner for the development and
marketing of Incel in Canada, is conducting Phase II clinical trials of Incel in
soft tissue sarcoma and ovarian cancer. Vertex is conducting a Phase I/II
clinical trial of VX-853, initiated in 1996, in patients with solid tumors.
Background
The American Cancer Society estimates that during 1998 more than 1.2
million people in the United States will be diagnosed with invasive cancer and
more than 560,000 people in the U.S. will die from such cancers. The Company
believes that a significant number of these patients may not be effectively
treated by chemotherapy because of MDR.
Multidrug resistance is frequently associated with the failure of
chemotherapy. A major contributing factor to MDR is the presence of molecular
pumps, including MDR1 and MRP, that function to expel chemotherapeutic agents
from cancer cells, preventing the sustained delivery of 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. MDR1 has been implicated in
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 believed responsible for resistance observed
in additional tumor types.
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 an analog of cyclosporin A, have been shown in
preliminary human studies to have some effectiveness in overcoming clinical
resistance to certain commonly used chemotherapeutic agents. The Company
believes these drugs may have side effects that could limit broad use.
Clinical 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 initiated a Phase II
multi-center clinical trial in June 1996 to assess the safety and efficacy of
the co-administration of Incel and doxorubicin in patients with liver cancer in
comparison with doxorubicin alone. In 1997, the Company initiated a Phase II
multi-center trial to assess the safety
Page 6
<PAGE>
and efficacy of the co-administration of Incel and paclitaxel in patients with
breast cancer. In addition, in 1997 BioChem initiated Phase II clinical trials
of Incel in combination with paclitaxel in patients with ovarian cancer and in
combination with doxorubicin in patients with soft tissue sarcoma. The Company
intends to expand its Incel clinical development program to explore a variety of
alternative indications for the drug. However, there can be no assurance that
clinical trials will commence or proceed as currently anticipated. See "Risk
Factors -- Uncertainties Related to Clinical Trials," "-- Manufacturing
Uncertainties; Reliance on Third Party Manufacturers" and "-- Dependence on
Collaborative Partners."
A Phase I/II dose-escalating clinical trial of VX-853 in combination
with doxorubicin in patients with solid tumors is being conducted, based on
Vertex research that showed that VX-853 potently blocks MDR mediated by both
MDR1 and MRP. The current clinical trial is expected to provide data regarding
the safety of VX-853 at various dose levels, alone and in combination with
escalating doses of doxorubicin.
The Company has five issued United States patents, two United States
patent applications pending (one of which is under a Notice of Allowance) and
several foreign counterpart applications claiming Incel and other compounds for
treating multidrug resistance. One of the issued United States patents claims
Incel and structurally related compounds. One of the issued United States
patents claims VX-853 and structurally related compounds. The Company may seek
orphan drug status for certain indications of its MDR compounds. See "Risk
Factors - Extensive Government Regulation; Uncertainty of Product Clearance and
Approval."
IMPDH Program
Overview
Vertex is developing novel, orally deliverable immunosuppressive drugs
that it believes could selectively halt the growth of lymphocytes by blocking
IMPDH, an enzyme which controls DNA synthesis in lymphocytes. In 1997, Vertex
initiated a Phase I clinical trial with VX-497, a novel, orally administered
IMPDH inhibitor designed by Vertex.
Background
IMPDH is an enzyme involved in the immune response that enables
lymphocyte proliferation and recruitment by catalyzing a key step in one of
two DNA nucleotide biosynthesis pathways. 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 asthma,
psoriasis, rheumatoid arthritis and systemic lupus, as well as with
transplant rejection. Vertex believes that blocking the enzyme IMPDH with an
oral compound designed to specifically bind to IMPDH may provide a novel way
to inhibit the progress of autoimmune diseases. IMPDH inhibition may also
have an anti-inflammatory effect that may be useful in certain indications.
The Company is aware of only one specific inhibitor of IMPDH currently
on the market in the United States, Hoffmann-La Roche's mycophenolate mofetil,
which is approved for acute kidney transplant and heart transplant rejection.
The Company believes that compound-specific side effects of mycophenolate
mofetil may limit its use for chronic autoimmune disorders. See, however, "Risk
Factors--Early Stage of Development; Technological Uncertainty" and "--Rapid
Technological Change and Competition."
Page 7
<PAGE>
Clinical Status
Vertex research, using cluster-based screening to sort families of
compounds as potential inhibitors, led to the selection of VX-497 as a lead
candidate in 1996. VX-497 has displayed potent immunosuppressive activity in
animal models of rheumatoid arthritis and organ transplant rejection. A Phase
I clinical trial is currently under way to test the pharmacokinetics and
tolerability of VX-497 in escalating single doses in healthy subjects in the
United Kingdom. The Company plans to follow the current Phase I clinical
trial with multidose safety studies. Data from Phase I studies will be used
by Vertex to design dose-ranging trials to assess the safety and efficacy of
VX-497 in one or more indications. Phase II clinical trials in one or more
indications are planned for 1998. There can be no assurance, however, that
clinical trials will commence or proceed as currently anticipated. See "Risk
Factors -- Early Stages of Development; Technological Uncertainty," "--
Manufacturing Uncertainties; Reliance on Third Party Manufacturers" and " --
Uncertainties Related to Clinical Trials."
The Company has five United States patent applications pending,
claiming inhibitors of IMPDH, including VX-497 and related compounds. The
Company has two United States patent applications pending that claim the crystal
structure of IMPDH and the use of that structure to design inhibitors.
Preclinical Development Programs
ICE Program
Overview
Vertex is developing novel drugs to treat acute and chronic
inflammatory conditions, including rheumatoid arthritis and osteoarthritis. The
Company is collaborating with Hoechst Marion Roussel ("HMR") in the development
of VX-740 to block interleukin-1 beta converting enzyme ("ICE"), which mediates
the production and release of the inflammatory cytokine IL-1 beta, as well as
the production of gamma interferon. Inside specialized immune system cells, ICE
activates the proteins interleukin-1 beta (IL-1 beta) and gamma interferon, and
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. 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 IL-1 beta levels has been correlated to a number of acute
and chronic inflammatory diseases. There are approximately 2,100,000 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.
Preclinical Status
VX-740 has been designed by Vertex and HMR as a potential small
molecule inhibitor of ICE that could be used for the treatment of both acute and
chronic inflammatory disorders. VX-740 has been shown to be orally active in
several animal models of human inflammatory disease, including models for acute
and chronic arthritis. In December 1997, Vertex announced that it had earned the
first of a series of milestone payments to be made by HMR to Vertex as VX-740
Page 8
<PAGE>
advances through preclinical development, clinical development and
commercialization. The $3.0 million milestone payment related to progress
made in the preclinical development of VX-740 in 1997. Phase I clinical
trials are planned to start in 1998 for VX-740. However, there can be no
assurance that clinical trials will commence or proceed as currently
anticipated. See "Risk Factors--Uncertainties Related to Clinical Trials,"
"--Manufacturing Uncertainties; Reliance on Third Party Manufacturers" and
"--Dependence on Collaborative Partners." Based on Vertex's discovery of the
ICE's role in the production of gamma interferon, a key immunoregulator that
modulates antigen presentation, T-cell activation, and cell adhesion, Vertex
also plans to investigate ICE inhibitors for additional therapeutic uses such
as in metastatic cancer, and diabetes.
The Company has 10 issued United States patents, 28 United States
patent applications pending and several foreign counterpart patent applications
claiming inhibitors of ICE, including a series of patents and applications
purchased from Sanofi S.A., in July 1997. The Company has two patent
applications pending in the United States and several foreign counterpart
applications claiming the crystal structure of ICE and derivatives thereof and
various uses of those structures. The company also has one United States patent
that claims DNA sequences encoding ICE. That patent, which was purchased from
Sanofi S.A., is currently involved in an interference in the United States
Patent and Trademark Office.
Research Programs
Neurophilin Program
Vertex has designed orally administerable small molecule compounds that
promote nerve growth in central and peripheral nerve injury. Data supporting the
nerve regeneration in spinal cord and peripheral nerve injury models were
presented at the Society for Neuroscience 27th Annual Meeting in October 1997.
Vertex is testing neurophilin compounds in additional animal models of nerve
injury with the goal of selecting a compound for development to treat
neurodegenerative diseases, such as Alzheimer's and Parkinson's diseases,
peripheral neuropathies, which result from degeneration of sensory and motor
nerves, as well as to treat nerve injury resulting from trauma or stroke. The
Company expects to select a compound in 1998 as a clinical development
candidate.
The Company has five United States patent applications (one of which is
under a Notice of Allowance) claiming the use of certain of its
immunosuppressive compounds and certain of its multidrug resistance compounds
for nerve growth applications. The Company also has nine issued United States
patents and three United States patent applications pending (one of which is
under a Notice of Allowance) that claim compounds that are useful in nerve
growth applications.
MAP Kinase Program
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. Vertex is designing and
developing compounds that inhibit cytokine translation by blocking MAP kinases.
Vertex's first MAP kinase research program focuses on the p38 MAP
kinase, a human enzyme involved with the onset and progression of inflammation
and programmed cell death. When activated, the p38 MAP kinase triggers
production of interleukin-1 ("IL-1") and tumor necrosis factor TNF-alpha,
cytokines that play a central role in the body's inflammatory response. Excess
levels of IL-1 and TNF-alpha are associated with a broad range of acute and
chronic inflammatory diseases, as well as playing an important role in
programmed cell death associated with ischemia and stroke, and in
neurodegenerative diseases such as Alzheimer's and Parkinson's disease. In 1997
Vertex and Kissei signed an agreement to collaborate on the design, development
and commercialization of inhibitors of p38 MAP kinase. The objective of the
research collaboration is to identify and extensively evaluate compounds that
target p38 MAP kinase to develop novel, orally active drugs for the treatment of
inflammatory and neurological diseases. Vertex and Kissei
Page 9
<PAGE>
researchers are currently evaluating compounds in animal models and initial
preclinical toxicology tests to determine a potential clinical candidate.
Vertex expects to advance a compound from this program to preclinical testing
in 1998. However, there can be no assurance that studies will commence or
proceed as currently anticipated.
Vertex has two United States patent application pending claiming
inhibitors of p38 MAP kinase. Vertex also has one United States patent
application pending claiming methods of designing inhibitors of MAP kinases.
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 U.S. Centers for Disease
Control and Prevention have estimated that approximately 3.9 million Americans,
or more than one percent of the population, may be infected with HCV. Currently,
there is no vaccine available to prevent hepatitis C infection. In addition, the
only drug approved for the treatment of hepatitis C, interferon alpha, provides
long-term therapeutic benefit to less than 25 percent of patients treated.
Hepatitis C Protease
Hepatitis C protease is an enzyme generally believed to be essential
for replication of HCV. Under an agreement signed during 1997, Vertex and Eli
Lilly and Company ("Lilly") are collaborating on the research, development and
commercialization of novel, orally active protease inhibitors for the treatment
of chronic infection caused by HCV, using structural information developed by
Vertex researchers.
Vertex has one international patent application pending (which
designates the United States among other countries) claiming inhibitors of HCV
protease. Vertex also has one United States patent application pending claiming
the crystal structure of HCV protease and the use of that structure to design
inhibitors. Vertex has an additional United States patent application claiming
methods of identifying HCV protease inhibitors.
Hepatitis C Helicase
Vertex is also conducting discovery research to design orally
deliverable drugs to inhibit hepatitis C 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, helicase represents an attractive target for drug discovery.
Researchers from Vertex have solved the three-dimensional atomic
structure of the hepatitis C virus NS3 helicase. This achievement was described
in a paper published on January 15, 1998 in the journal Structure. Vertex is
using the structural information to identify and optimize inhibitors of the
enzyme, employing structure-based techniques, including cluster-based screening,
and computational, combinatorial, and medicinal chemistry, to design novel small
molecule inhibitors of HCV helicase for clinical development as new antiviral
drugs to treat HCV infection.
Vertex has one United States patent application pending disclosing the
crystal structure of HCV helicase.
Page 10
<PAGE>
Caspase Program
Vertex is conducting research to design novel drugs for apoptosis
(programmed cell death) for neurodegenerative diseases and other
neurodegenerative conditions. This drug discovery effort is based on the
Company's knowledge of ICE and its homologues, the caspases. Vertex has gained a
detailed understanding of apoptotic pathways using biological, genomic, and
structural data from ICE homologues. Vertex has solved the X-ray structure of
CPP32, a caspase believed to be important in neuronal apoptosis, and is using
structural information to design small molecule lead compounds that selectively
block CPP32 and other caspases. The goal of Vertex's caspases program is to
discover and develop drugs useful for treating neurodegenerative disorders such
as Alzheimer's disease and Parkinson's disease as well as for the prevention of
tissue damage resulting from myocardial and cerebral ischemia.
The Company has one United States patent application claiming a protein
involved in apoptosis.
Corporate Collaborations
Vertex has entered into corporate collaborations with pharmaceutical
companies that provide financial and other resources, including capabilities in
research, development 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 of
Vertex's HIV protease inhibitors. Under the collaborative agreement, which
commenced in December 1993, Glaxo Wellcome is obligated to pay Vertex up to
$42.0 million, comprised of a $15.0 million initial license payment paid in
December 1993, $14.0 million of product research funding over five years and
$13.0 million of development and commercialization milestone payments for an
initial drug candidate. From the inception of the agreement in December 1993
through December 31, 1997, Vertex has recognized as revenue $28 million. Glaxo
Wellcome is 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. See "-- HIV Program."
Glaxo Wellcome has the right to terminate the research collaboration
under its agreement with the Company without cause upon twelve months' notice
given at any time and has the right to terminate the license arrangements under
its agreement with the Company without cause upon twelve months' notice,
provided such notice is not given before the research collaboration has been
terminated. Termination by Glaxo Wellcome of the research collaboration under
its agreement with the Company will relieve Glaxo Wellcome of its obligation to
make further research support payments under the agreement. Termination by Glaxo
Wellcome of the license arrangements under 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. See "Risk Factors -Dependence on
Collaborative Partners."
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 amprenavir free of
the risk of intellectual property claims by
Page 11
<PAGE>
Searle. The terms of the license require Vertex to pay Searle a royalty on
sales. In connection with this transaction, Glaxo Wellcome purchased shares of
the Company's Common Stock for approximately $5.0 million in June 1996.
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 commenced in April 1993, Kissei is obligated to pay to
Vertex up to $20.0 million, comprised of $9.8 million of product research
funding over three years, $7.0 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, 1997, $14.6 million has
been recognized as revenue. During 1997, the Company also received $4.0
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. See "-- HIV
Program."
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
will 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, 1997, $5.5
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 after June 1998.
See "--MAP Kinase Program."
BioChem Therapeutic, 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 commenced in May
1996, BioChem is obligated to pay the Company up to $4.0 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, 1997, $0.8 million has been recognized as revenue. BioChem also is
obligated to bear the 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.
Page 12
<PAGE>
Termination will relieve BioChem of any further payment obligations and will end
any license granted to BioChem by Vertex under the agreement. See "-- Cancer
Multidrug Resistance Program."
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 $12.0
million of development and commercialization milestone payments. From the
inception of the agreement in September 1993 through December 31, 1997, $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.
HMR has the right to terminate the agreement at any time without cause
upon twelve months' notice. For a period of one year after any such termination,
HMR retains the right to select one or more compounds for development and to
license such compound or compounds from Vertex, provided HMR resumes research
funding and commercialization milestone payments and makes all such payments
that would otherwise have been due but for such termination. See "-- ICE
Program."
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, 1997, $5.7
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 percent 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. See "--Hepatitis C Protease."
Altus Biologics Inc.
Altus Biologics Inc. ("Altus") is a subsidiary of Vertex that develops,
manufactures and markets a unique class of products based on a novel and
proprietary technology for stabilizing proteins. This technology is used to
create cross-linked protein crystals ("CLPCs"), facilitating the use of proteins
in a broad array of applications, ranging from pharmaceutical to industrial
uses. CLPCs are high-performance products designed to solve critical process
chemistry and protein
Page 13
<PAGE>
stability issues in the development, manufacture and administration of
pharmaceutical substances. Altus has concentrated its early development efforts
on the application of the CLPC technology to enzymes, producing cross-linked
enzyme crystals. In addition, responding to expressions of interest for other
CLPCs to meet needs in a variety of areas, Altus intends to pursue with
collaborators the development of its technology for other high value
applications, such as consumer care products and catalysts for the destruction
of chemical warfare agents. Since 1994, Altus has introduced 10 CLEC(R) products
derived from five enzymes which are being used by pharmaceutical companies in
trial and scale-up stages of pharmaceutical development and manufacturing. Over
300 organizations in 29 countries have purchased trial stage quantities of
Altus' CLEC products, including over 70 companies which have purchased larger
scale-up quantities.
As of March 17, 1998, Altus owned seven pending United States patent
applications, and had been granted an exclusive, worldwide, royalty-free license
to one issued United States patent, six pending United States patent
applications and international and foreign counterparts thereof pursuant to an
exclusive, worldwide, royalty-free license from Vertex. Altus has also filed
international and foreign counterparts based on its United States patent
applications. Altus is also a co-owner with Vertex of an additional United
States patent application and an international counterpart thereof.
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. 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. In addition, the Company
relies upon trade secrets and contractual arrangements to protect certain of its
proprietary information and products.
As of March 13, 1997, the Company had a total of 27 United States
patents and 75 United States pending patent applications. The Company also has
an exclusive license under four United States patents, one of which is subject
to a reissue application that has been allowed. Three of the licensed patents
and the allowed reissue application claim the use of certain compounds for
treating hemoglobin disorders, including sickle cell disease and beta
thalassemia. The Company has a non-exclusive, worldwide license under certain
Searle patent applications claiming HIV protease inhibitors. The Company's
non-exclusive, worldwide license permits Vertex to develop, manufacture and
market amprenavir free of intellectual property claims by Searle. The Company
has four issued United States patents and 13 United States patent applications
claiming antiviral compounds, pharmaceutical formulations thereof and/or their
uses, for treating HIV infection and AIDS. Two of those 13 United States patent
applications are under a Notice of Allowance. Two of the issued patents and five
of the 13 applications (including the two under a Notice of Allowance) have
claims that include amprenavir, the Company's lead drug candidate, within their
literal scope. Another one of the three issued patents contains claims covering
the use of amprenavir to treat AIDS-related central nervous system disorders.
The Company also has a United States patent that claims processes for preparing
synthetic intermediates useful in the synthesis of a class of compounds that
includes amprenavir.
The Company has five issued United States patents and two United States
patent applications claiming Incel and other compounds for treating multidrug
resistance. One of those issued patents contains claims covering Incel and
structurally related compounds. Another of the issued patents claims VX-853 and
structurally related compounds. The Company has five United States patent
applications pending, claiming inhibitors of IMPDH, including VX-497 and related
compounds. The Company has two United States patent applications pending that
claim the crystal structure of IMPDH and the use of that structure to design
inhibitors. The Company has ten issued
Page 14
<PAGE>
United States patents and 28 United States patent applications pending claiming
inhibitors of ICE. The Company has two patent applications pending in the United
States claiming the crystal structure of ICE and derivatives thereof and various
uses of those structures. The company also has one United States patent that
claims DNA sequences encoding ICE. That patent, which was purchased from Sanofi
S.A., is currently involved in an interference in the United States Patent and
Trademark Office with an application filed by Merck & Co. The Company has five
United States patent applications pending claiming the use of certain of its
immunosuppressive compounds and certain of its multidrug resistance compounds
for nerve growth applications. Vertex recently received a Notice of Allowance in
one of those applications. The Company also has nine issued United States
patents and three patent applications pending that claim compounds that are
useful in nerve growth application. The Company has one United States patent
application claiming a protein involved in apoptosis. The Company has two United
States patent application pending claiming inhibitors of p38 MAP kinase. The
Company also has one United States patent application pending that claims
methods of designing inhibitors of MAP kinase. The Company also has one
international patent application pending (designating the United States and
other countries) claiming inhibitors of HCV protease. The Company has one United
States patent application pending claiming the crystal structure of HCV protease
and the use of that structure to design inhibitors. The Company has one United
States patent application pending claiming an assay for HCV protease activity.
The Company has one United States patent application pending disclosing the
crystal structure of HCV helicase. The Company has one United States patent
application pending claiming methods of assaying and designing inhibitors of
enzymes using proprietary technology. The Company has one United States patent
application pending claiming processes useful in NMR technology. The Company has
one United States patent claiming a novel device useful in pharmaceutical
research. The Company also has filed international and foreign counterparts
based on several of its United States patents and patent applications.
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. 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. See "Risk Factors -- Uncertainty
Related to Patents and Proprietary Information."
The Company has licensed on an exclusive basis four United States
patents from Children's Hospital. One of those patents was subject to a reissue
application for which the Company recently received a Notice of Allowance. The
patents and the allowed reissue application claim the use of certain compounds
in the treatment of hemoglobin disorders, including sickle cell disease and beta
thalassemia. Because Children's Hospital did not foreign file the application
corresponding to the reissue application within one year of filing its
corresponding United States application, the Company's foreign patent rights may
be limited. In addition, there can be no
Page 15
<PAGE>
assurance that others will not develop independently substantially equivalent
technology, obtain access to the Company's know-how or be issued patents which
may prevent the sale of Company products or require licensing and the payment of
significant fees or royalties by the Company in order for it to carry on its
business. Furthermore, there can be no assurance that any such license will be
available.
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. 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. Furthermore, in the absence of patent
protection, the Company's business may be adversely affected by competitors who
independently develop substantially equivalent technology. See "-- Corporate
Collaborations," and "Risk Factors -- Dependence on Collaborative Partners" and
"-- Uncertainty Relating to Patents and Proprietary Information."
Manufacturing
The Company relies on third party manufacturers to produce its
compounds for preclinical and clinical purposes and may do so for commercial
production of any compounds that are approved for marketing. The Company expects
that commercial manufacturing of amprenavir will be done, at least initially, by
Glaxo Wellcome. 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 ("cGMP") and other
applicable regulations. See "-- Government Regulation."
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 currently does not have the capacity to
manufacture its potential products, is dependent on third party manufacturers or
collaborative partners for the production of its compounds for preclinical
research and clinical trial purposes and expects to be dependent on such
manufacturers or collaborative partners for some or all commercial production of
any of its compounds that are approved for marketing. The Company believes that
it will be able to continue to negotiate such 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. 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's objective is to maintain
flexibility in deciding whether to develop internal manufacturing capabilities
for certain of its potential products. 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 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 it is possible that such time or expense could be substantial.
Page 16
<PAGE>
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. There can be no assurance that such manufacturers will abide by any
limitations or confidentiality restrictions in licenses with Vertex. In
addition, any such manufacturer may develop process technology related to the
manufacture of Vertex's compounds that such 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. There can be no
assurance that any such license would be available on terms acceptable to the
Company, if at all.
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. See "Risk
Factors -- Manufacturing Uncertainties; Reliance on Third Party
Manufacturers."
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 human therapeutic applications targeted by Vertex. 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. 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 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. The Company is also aware of other companies that have HIV
protease inhibitors in development. There also are a number of competitors
that have products under development for the treatment of MDR in cancer. 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. Furthermore, academic institutions, governmental
agencies and other public and private research organizations are conducting
research to develop technologies and products that may compete with those
under development by the Company. In addition, other technologies are, or may
in the future become, the basis for competing products. There can be no
assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than any being developed by
the Company or that would render the Company's technology and products
obsolete or noncompetitive. 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.
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. See "Risk Factors -- Rapid Technological Change and Competition."
Page 17
<PAGE>
Pharmaceutical Pricing and Reimbursement
The Company's ability to commercialize its products successfully
will depend in part on the extent to which appropriate reimbursement levels
for the cost of such products and related treatment are obtained from
government authorities, private health insurers and other organizations, such
as health maintenance organizations ("HMOs"). Third party payors and
government authorities are continuing efforts to contain or reduce the cost
of health care. For example, in certain foreign markets, pricing and/or
profitability of prescription pharmaceuticals are subject to government
control. There can be no assurance that similar controls will not be
implemented in the United States. Also, the trend toward managed health care
in the United States and the concurrent growth of organizations such as HMOs,
which could control or significantly influence the purchase of health care
services and products, may result in lower prices for the Company's products.
The cost containment measures that health care providers and third party
payors are instituting and any proposed or future health care reform
measures, including any reductions in Government reimbursement programs such
as Medicaid and Medicare, could affect the Company's ability to sell its
products and may have a material adverse effect on the Company.
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.
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 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
Page 18
<PAGE>
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 ("IRB") at the
institution at which the study will be conducted. The IRB 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 marketing
exclusivity would prevent a third party from obtaining FDA approval for a
similar or identical drug through an Abbreviated New Drug Application
("ANDA"), 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
Page 19
<PAGE>
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. See "Risk Factors -- Extensive
Government Regulation."
Human Resources
As of December 31, 1997, Vertex had 220 full-time employees, including 165
in research and development, 25 in laboratory support services and 30 in
general and administrative functions, and three part-time employees. The
Company's scientific staff members (79 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 24 full-time employees as of December 31,
1997. 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:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Joshua S. Boger, Ph.D................ 46 Chairman, President and Chief Executive Officer
Richard H. Aldrich..................... 43 Senior Vice President and Chief Business Officer
Vicki L. Sato, Ph.D..................... 49 Senior Vice President of Research and
Development and Chief Scientific Officer;
Chair of the Scientific Advisory Board
Iain P. M. Buchanan.................... 44 Vice President of European Operations;
Managing Director of Vertex Pharmaceuticals
(Europe) Limited
Thomas G. Auchincloss, Jr............ 36 Vice President of Finance and Treasurer
</TABLE>
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
Page 20
<PAGE>
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. and Altus biologics, 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 21
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
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........ Professor of Biochemistry and Molecular Biology, 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, Harvard
University; 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.
</TABLE>
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 22
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Report.
Early Stage of Development; Technological Uncertainty
The Company was founded in 1989 and has not generated any pharmaceutical
product sales. To achieve profitable operations, the Company, alone or with
others, must successfully develop, clinically test, market and sell its
products. Any products resulting from the Company's product development efforts
are not expected to be available for sale in the near future, if at all.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons. Such reasons include the possibilities that the potential products
are found ineffective or cause harmful side effects during preclinical testing
or clinical trials, fail to receive necessary regulatory approvals, are
difficult or uneconomical to manufacture on a large scale, fail to achieve
market acceptance or are precluded from commercialization by proprietary rights
of third parties.
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. Further, the Company has no sales and
marketing capabilities, and even if the Company's products in development are
approved for marketing, there can be no assurance that the Company will be
able to develop such capabilities. In addition, only a limited number of
drugs developed through structure-based drug design have completed clinical
trials successfully, been approved by the FDA and been marketed. One of the
Company's potential products, amprenavir, is an HIV protease inhibitor which
is currently in Phase III clinical trials. 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 the Company's HIV protease
inhibitor. 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. There also can be no
assurance that drug candidates being pursued by the Company will be safe and
efficacious, will receive regulatory approvals or will result in commercially
successful products. If any of the Company's development programs is not
successfully completed, required regulatory approvals are not obtained, or
products for which approvals are obtained are not commercially successful,
the Company's business, financial condition and results of operations would
be materially adversely affected. See "Business -- Product Development and
Research Programs."
Uncertainties Related to Clinical Trials
Before obtaining required regulatory approvals for the commercial sale of
products under development, the Company must demonstrate through preclinical
studies and clinical trials that such products are safe and efficacious for
use in each target indication. 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 safety and efficacy of a
therapeutic product under development by the Company must be supported by
extensive data from clinical trials. A number of companies have suffered
significant setbacks in advanced clinical trials, despite promising results
in earlier trials. The Company currently has four product candidates
undergoing
Page 23
<PAGE>
clinical trials, amprenavir, Incel, VX-853 and VX-497. In addition, the
Company has a number of products undergoing preclinical development. The data
observed to date is preliminary, and there can be no assurance that the
results of ongoing and future trials will be consistent with results observed
in earlier clinical trials or will be sufficient for approval. 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.
The administration alone or in combination with other drugs of any
product developed by the Company may produce undesirable side effects in
humans. The occurrence of such side effects could interrupt, delay or halt
clinical trials of such products and could ultimately prevent their approval
by the FDA or foreign regulatory authorities for any or all targeted
indications. The Company or the FDA may suspend or terminate clinical trials
at any time if it is believed that the trial participants are being exposed
to unacceptable health risks. Even after approval by the FDA and foreign
regulatory authorities, products may later exhibit adverse effects that
discourage widespread use or necessitate their withdrawal from the market.
There can be no assurance that any products under development by the Company
will be safe when administered to patients.
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. See "Business -- Government Regulation."
Dependence on Collaborative Partners
The Company is engaged in research and development collaborations with
Glaxo Wellcome, Kissei, BioChem, HMR, and Lilly, pursuant to which these
parties 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. There can be no assurance that these collaborations will be
completed or successful, or that the collaborative partners will not pursue
alternative means of developing treatments for the diseases targeted by their
collaborative programs with the Company. Glaxo Wellcome has the right to
terminate the research collaboration under its agreement with the Company
without cause at any time upon twelve months' notice and has the right to
terminate the license arrangements under its agreement with the Company
without cause upon twelve months' notice, provided such notice is not given
before the research collaboration has been terminated. Termination by Glaxo
Wellcome of the research collaboration under its agreement with the Company
will relieve Glaxo Wellcome of its obligation to make further research
support payments under the agreement. Termination by Glaxo Wellcome of the
license arrangements under the agreement will relieve it of its obligation to
make further commercialization and development milestone and royalty payments
and will end any
Page 24
<PAGE>
license granted to Glaxo Wellcome by Vertex. HMR has the right to terminate
its agreement with the Company without cause upon twelve months' notice at
any time. Termination by HMR will relieve HMR of any further payment
obligations under its agreement with the Company. In addition, for a period
of one year after any such termination, HMR retains the right to select one
or more compounds for development and to license such compound or compounds
from Vertex, provided HMR resumes research funding and commercialization
milestone payments and makes all such payments that would otherwise have been
due but for such termination. Lilly has the right to terminate its agreement
with the Company without cause upon six months' notice at any time after June
1999. Termination will relieve Lilly of any further payment obligations under
its agreement with the Company and will also terminate any license granted to
Lilly by Vertex. BioChem has the right to terminate its agreement with the
Company without cause upon six month's notice. Termination will relieve
BioChem of any further payment obligations under its agreement with the
Company and will terminate any license granted to BioChem thereunder. Kissei
has the right to terminate the p38 Map Kinase agreement without cause upon
six months' notice after June 1998. Termination will relieve Kissei of any
further payment obligations under that agreement with the Company and will
also terminate any license granted to Kissei by Vertex thereunder.
The Company may 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. In
addition, there can be no assurance that collaborative partners will not
pursue alternative technologies or develop alternative compounds either on
their own or in collaboration with others, including the Company's
competitors, as a means for developing treatments for the diseases targeted
by their collaborative programs with the Company or that disagreements over
rights to technology, other proprietary information or the course of the
research and development program will not occur. Such events could result in
the delay or cancellation of programs or product introduction even if
regulatory approvals are obtained. See "Business -- Corporate Collaborations."
Rapid Technological Change and 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 human therapeutic applications
targeted by Vertex. 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. The Company is aware of efforts by others to develop products in
each of the areas in which the Company has products in development. For
example, Merck & Co., Inc., Abbott Laboratories, Inc., Hoffmann-La Roche, and
Agouron Pharmaceuticals, Inc. have HIV protease inhibitors already on the
market. The Company is also aware of other companies that have HIV protease
inhibitors in development. There also are a number of competitors that have
products under development for the treatment of MDR in cancer. 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. Furthermore, academic institutions, governmental agencies and
other public and private research organizations are conducting research to
develop technologies and products that may compete with those under
development by the Company. In addition, other technologies are, or may in
the future become, the basis for competing products. There can be no
assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than any being developed by
the Company or that would render the Company's technology and products
obsolete or noncompetitive. 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.
Page 25
<PAGE>
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. See "Business -- Competition."
Manufacturing Uncertainties; Reliance 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
regulatory requirements. Furthermore, for all of the Company's drugs in
development, completion of clinical trials and submission of an NDA will be
subject to the establishment of a commercial formulation and manufacturing
process. As manufacturing process development and formulation activities are
ongoing throughout the development process, the Company or its collaborators
may encounter difficulties at any time that could result in delays in
clinical trials, regulatory submissions and commercialization of its
products, or cause negative financial and competitive consequences.
Manufacturing process development and formulation activities for VX-478 by
the Company and Glaxo Wellcome are continuing while clinical trials are
underway. There can be no assurance that such activities will be completed in
a timely and successful manner, if at all. The failure to complete such
activities in a timely and successful manner could have a material adverse
effect on the business, financial condition or results of operations of the
Company.
The Company currently does not have the capacity to manufacture its
potential products and is dependent on third party manufacturers or
collaborative partners for the production of its compounds for preclinical
research and clinical trial purposes. The Company expects to be dependent on
such manufacturers or collaborative partners for some or all commercial
production of any of its compounds that are approved for marketing. 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, if FDA approval is obtained, commercialize its
products as planned. The Company has no 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 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. See "Business -- Manufacturing."
Extensive Government Regulation; Uncertainty of Product Clearance and Approval
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. The
Company has had
Page 26
<PAGE>
only limited experience in conducting preclinical testing and human clinical
trials. In addition, the Company has not received FDA or other regulatory
approvals for any of its product candidates. 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. There can be no assurance
that FDA or other regulatory approval for clinical trials or marketing of any
products developed by the Company will be granted on a timely basis or at
all. Delay in obtaining or failure to obtain such approvals would adversely
affect the marketing of the Company's products and the Company's liquidity
and capital resources. Moreover, even if approval is granted, such approval
may entail limitations on the indicated uses for which a compound may be
marketed. Even if such regulatory approval is obtained, a marketed drug or
compound and its manufacturer are subject to continual review, and later
discovery of previously unknown problems with a product or manufacturer may
result in restrictions on such product or manufacturer, including withdrawal
of the product from the market. Failure to comply with applicable regulatory
requirements can, among other things, result in fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
prosecution. Further, additional government regulation may be established
which could prevent or delay regulatory approval of the Company's products.
The Company may apply for orphan drug status for certain indications of
MDR in cancer. Orphan drug status may, under present regulations, entitle the
Company to certain marketing exclusivity and tax benefits. 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 chemically distinct drugs from being approved for the same use. There
can be no assurance that the Company will receive FDA orphan drug status for
any of its compounds under development for which the Company seeks that
status. Moreover, there can be no assurance that the scope of protection or
the level of exclusivity that is currently afforded by orphan drug status
will remain in effect in the future. See "Business -- Government Regulation."
The Company's research and development activities involve the controlled
use of hazardous materials, chemicals and various radioactive compounds. The
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of an accident, the Company could be held
liable for any damages or fines that result, and the liability could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that statutes or
regulations, applicable to the Company's business which impose substantial
additional costs or otherwise materially adversely affect the Company's
operations, will not be adopted.
Uncertainty Related to Patents and Proprietary Information
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. Because of the substantial length of
time and expense associated with bringing new products through development
and regulatory approval to the marketplace, the pharmaceutical industry
places considerable importance on obtaining patents and maintaining trade
secret protection for new technologies, products and processes. Patent
protection may not be available, however, for compounds for use in certain
medical indications, without a demonstration of how to use the compounds and
proof in clinical trials that such
Page 27
<PAGE>
compounds may be useful for such target indications. As of March 13, 1998,
the Company had a total of 27 United States patents and 75 pending United
States patent applications. As of that date, the Company also had a
non-exclusive, worldwide license under certain Searle patent applications
claiming HIV protease inhibitors. The Company also has been granted an
exclusive license under four United States patents, one of which has been
subject to a reissue application and was recently allowed. The Company also
has filed foreign counterparts to some of its United States patents and
patent applications. There can be no assurance that patents will issue from
any of the Company's pending or future patent applications. There can be no
assurance that any issued, licensed, pending or future patent will not be
infringed by the products of others or provide sufficient protection to
exclude others from the Company's present or future technology or products.
The Company has in the past licensed and may in the future license patent
rights from others. There can be no assurance, however, that such licenses
will provide adequate protection for the Company's products.
Issued United States patents are presumed valid under United States
patent law. No assurance can be given, however, that one or more of the
Company's issued patents will not be declared invalid by a court. 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. Furthermore, no
assurance can be given as to the degree of protection any patents will afford
to the Company's technology or as to the Company's ability to avoid
infringing the claims of the patents held by third parties. Further, there
can be no assurance that a license to such patents would be available on
terms acceptable to the Company, if at all. There also can be no assurance
that any patents issued to or licensed by the Company will not be infringed
by others.
In addition to being a potential party to patent infringement litigation,
the Company could become involved in interference proceedings declared by the
United States Patent and Trademark Office. 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.
In addition, there can be no assurance that others will not develop
independently substantially equivalent technology, obtain access to the
Company's know-how or be issued patents which may prevent the sale of the
Company's products or require licensing and the payment of significant fees
or royalties by the Company in order for it to carry on its business.
Furthermore, there can be no assurance that any such license will be
available.
The Company's management and scientific personnel have been recruited
from other pharmaceutical and biotechnology companies and academic
institutions. In many cases these individuals are conducting research in
similar areas with which they were involved prior to joining Vertex. As a
result, the Company, as well as these individuals, could be subject to
allegations of violation of trade secrets and similar claims. See "--
Dependence on Collaborative Partners" and "Business -- Corporate
Collaborations" and "-- Patents and Proprietary Information."
Future Capital Needs; Uncertainty of Additional Funding
The Company expects to incur substantially increased 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
Page 28
<PAGE>
expenses related to the filing, prosecution, defense and enforcement of
patent and other intellectual property claims. The Company's future capital
requirements will depend on many factors, including the progress of its
research and development programs, the scope and results of preclinical
studies and clinical trials, the cost, timing and outcome of regulatory
reviews, the costs involved in filing, prosecuting and enforcing patent
claims, competing technological and market developments, the establishment of
additional collaborative arrangements and the cost of manufacturing
facilities and of commercialization activities and arrangements. The Company
anticipates that it will finance these substantial cash needs with its
existing cash reserves, together with interest earned thereon, future
payments under its collaborative agreements with Glaxo Wellcome, HMR, Kissei,
BioChem, and Lilly, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
History of Operating Losses and Accumulated Deficit
Vertex has incurred losses since its inception in January 1989. As of
December 31, 1997, the Company's accumulated deficit was approximately $117
million. Losses have resulted principally from costs incurred in research and
development of the Company's compounds in development, including clinical
trials and material manufacturing costs, the Company's other research
programs and from general and administrative costs. These costs have exceeded
the Company's revenues, which to date have been generated primarily from
collaborative arrangements, interest income and research grants. The Company
expects to incur additional significant operating losses in the future and
does not expect to achieve profitability from sales of its products in
development for several years, if ever. The Company expects that losses will
fluctuate from quarter to quarter and that such fluctuations may be
substantial. There can be no assurance that the Company will ever achieve
product revenues or profitable operations. Based on the Internal Revenue Code
of 1986, as amended, and changes in the Company's ownership, utilization of
net operating loss carry forwards and research and development credits for
federal income tax purposes may be subject to annual limitations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Uncertainty Related to Pharmaceutical Pricing and Reimbursement
The Company's ability to commercialize its products successfully will
depend in part on the extent to which appropriate reimbursement levels for
the cost of such products and related treatment are obtained from government
authorities, private health insurers and other organizations, such as health
maintenance organizations ("HMOs"). Third party payors and government
authorities are continuing efforts to contain or reduce the cost of health
care. For example, in certain foreign markets, pricing and/or profitability
of prescription pharmaceuticals are subject to government control. There can
be no assurance that similar controls will not be implemented in the United
States. Also, the trend toward managed health care in the United States and
the concurrent growth of organizations such as HMOs, which could control or
significantly influence the purchase of health care services and products,
may result in lower prices for the Company's
Page 29
<PAGE>
products. The cost containment measures that health care providers and third
party payors are instituting and any proposed or future health care reform
measures, including any reductions in government reimbursement programs such
as Medicaid and Medicare, could affect the Company's ability to sell its
products and may have a material adverse effect on the Company.
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.
Absence of Sales and Marketing Experience
The Company currently has no experience in marketing or 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.
Dependence on Key Management and Qualified Personnel
The Company is highly dependent upon the efforts of its senior management
and scientific team. The loss of the services of one or more members of the
senior management and scientific team might impede the achievement of the
Company's development objectives. Due to the specialized scientific nature of
the Company's business, the Company is also highly dependent upon its ability
to attract and retain qualified scientific, technical and key management
personnel. There is intense competition for qualified personnel in the areas
of the Company's activities, and there can be no assurance that the Company
will be able to continue to attract and retain qualified personnel necessary
for the development of its existing business and its expansion into areas and
activities requiring additional expertise, such as clinical testing,
government approvals, production and marketing. See "Human Resources."
Product Liability and Availability of Insurance
The Company's business will expose it to potential product liability
risks that are inherent in the testing, manufacturing and marketing of
pharmaceutical and other products developed by the Company. 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. The Company maintains product liability
insurance for clinical trials. The Company does not currently have any other
product liability insurance. There can be no assurance that the Company will
be able to maintain its existing insurance or be able to obtain or maintain
such additional insurance as it may need in the future on acceptable terms or
that the Company's existing insurance or any such
Page 30
<PAGE>
additional insurance will provide adequate coverage against potential
liabilities.
Volatility of Share Price; Option Grants
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 Common
Stock.
As of December 31, 1997, the Company had outstanding options for the
purchase of 4,702,000 shares of Common Stock at exercise prices ranging from
$6.48 per share to $49.13 per share. Options for the purchase of 1,944,000
shares of Common Stock were exercisable as of that date.
Anti-Takeover Provisions
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. These 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.
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. The
issuance of preferred stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of discouraging a third party from acquiring a majority of the outstanding
Common Stock of the Company. The Company has no present plans to issue any
shares of any class or series of Preferred Stock.
ITEM 2. PROPERTIES
The Company leases an aggregate of approximately 134,000 square feet of
laboratory and office space in five adjacent facilities at 40 Allston Street,
625 Putnam Avenue, 618 Putnam Avenue, 240 Sidney Street and 130 Waverly Street
in Cambridge, Massachusetts. The lease to the 40 Allston Street, 618 Putnam
Avenue and 240 Sidney Street facilities will expire in December 2003. The lease
to the 625 Putnam Avenue facility will expire in December 2000 with an option to
extend through 2003. The Company occupies approximately 60,000 square feet of
space at 130 Waverly Street under a lease expiring in December 2005. In 1999
that lease will include an additional 40,000 square feet at 130 Waverly Street,
with the lease as to that portion of the facility expiring in 2009. The Company
has the option to extend the lease as to both portions of the facility for
additional terms. In addition, the Company leases two smaller facilities
totaling approximately 27,000 square feet at 345 Vassar Street and 60 Hamilton
Street, also in Cambridge,
Page 31
<PAGE>
under leases expiring in 2000 with options to extend through 2002. 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
The Company is not a party to any material legal proceedings.
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, 1997.
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.
<TABLE>
<CAPTION>
1996 High Low Close
- ---- -------------------------------------------------------
<S> <C> <C> <C>
First quarter $29 7/8 $22 $26 1/2
Second quarter 38 26 30 3/8
Third quarter 36 1/4 23 1/4 29 1/2
Fourth quarter 40 1/4 28 7/8 40 1/4
1997
- ---- -------------------------------------------------------
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
</TABLE>
The last sale price of the Common Stock on March 16, 1998, as reported
by Nasdaq, was $35.06 per share. As of March 16, 1998, there were 273 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 will be retained for use in its
business.
Recent Sale 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, 1997 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,
Page 32
<PAGE>
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- ---------- ---------- ---------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Collaborative and other research and
development revenues.................. $29,926 $ 13,341 $ 22,081 $19,571 $ 27,885
Investment income............................. 13,873 5,257 5,453 3,574 1,409
-------- ---------- ---------- ---------- ---------
Total revenues......................... 43,799 18,598 27,534 23,145 29,294
-------- ---------- ---------- ---------- ---------
Costs and expenses:
Research and development...................... 51,624 35,212 41,512 34,761 23,164
General and administrative.................... 11,430 7,929 7,069 5,540 3,520
License Payment............................... 15,000 -- -- --
Interest ..................................... 576 462 481 439 493
-------- ---------- ---------- ---------- ---------
Total costs and expenses............... 63,630 58,603 49,062 40,740 27,177
-------- ---------- ---------- ---------- ---------
Net (loss) earnings before taxes................ (19,831) (40,005) (21,528) (17,595) 2,117
Tax provision................................... -- -- -- -- 80
-------- ---------- ---------- ---------- ---------
Net (loss) profit............................... $(19,831) $ (40,005) $ (21,528) $(17,595) $ 2,037
-------- ---------- ---------- ---------- ---------
-------- ---------- ---------- ---------- ---------
Basic and diluted net (loss) earnings per common
share........................................... $ (0.82) $ (2.13) $ (1.25) $ (1.11) $ 0.16
Weighted average number of common shares
outstanding:
Basic........................................ 24,264 18,798 17,231 15,818 12,384
Diluted...................................... 24,264 18,798 17,231 15,818 12,452
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments $279,671 $130,359 $86,978 $106,470 $52,103
Total assets......................... 295,604 143,499 98,981 116,175 60,992
Obligations under capital leases and
debt, excluding current portion...... 5,905 5,617 4,912 4,729 4,208
Accumulated deficit.................. (116,775) (96,944) (56,939) (35,411) (17,816)
Total stockholders' equity........... 276,001 130,826 85,272 105,478 49,520
</TABLE>
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 "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.
Page 33
<PAGE>
Since its inception in 1989, the Company has been 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 and chemistry. The Company is conducting research and development
programs to develop pharmaceuticals for the treatment of viral diseases,
multidrug resistance in cancer, inflammation, immunosuppression and
neurodegenerative disorders.
To date, the Company has not received any revenues from the sale of
pharmaceutical products. The Company's lead product candidate, amprenavir for
the treatment of HIV infection, is presently undergoing Phase III clinical
trials. If such clinical trials are concluded successfully and a New Drug
Application is approved by the FDA and product sales, if any, commence, the
Company will receive a royalty on sales of amprenavir by its partner Glaxo
Wellcome plc ("Glaxo Wellcome"). However, there can be no assurance that Phase
III clinical trials will be completed in a timely fashion, if at all, that such
trials will be successful, or that any approval will be granted by the FDA. The
Company has incurred operating losses since its inception and expects to incur a
loss in 1998. The Company believes that operating losses may continue for the
next several years even if significant royalties are realized on amprenavir
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, 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 principle reasons for
the increase in revenue in 1997 were the commencement of new collaborations
with Eli Lilly and Company ("Lilly") on the Company's Hepatitis C program and
with Kissei Pharmaceutical Co., Ltd. ("Kissei") on the Company's p38 MAP
kinase program, in addition to greater investment income from higher levels
of cash and investments. The 1997 collaborations with Lilly and Kissei
included up front payments of $3,000,000 and $4,000,000, respectively, and
collaborative revenue of $2,694,000 and $1,500,000, respectively. Other
collaborative revenue in 1997 included $4,310,000 from Kissei, $8,660,000
from Hoechst Marion Roussel ("HMR"), which included a $3,000,000 milestone
payment in December 1997, $3,275,000 from Glaxo Wellcome, and $264,000 from
others. Product research funding requirements under the HMR agreement ended
on December 31, 1997, although HMR continues to have certain development
funding obligations. In 1996, revenues consisted of $12,013,000 under the
Company's collaborative agreements, $5,257,000 in investment income and
$1,328,000 in government grants and other income. Revenue from collaborative
agreements consisted of $6,289,000 from Glaxo Wellcome, $4,196,000 from HMR,
$692,000 from Kissei, and $836,000 from others.
The Company's total costs and expenses increased to $63,630,000 in 1997
from $58,603,000 in 1996. In 1996, the Company paid $15,000,000 to obtain a
non-exclusive, world-wide license under certain G.D. Searle & Co. ("Searle")
patent applications claiming HIV protease inhibitors. Research and development
expenses increased to $51,624,000 in 1997 from $35,212,000 in 1996 principally
due to the commencement of pre-clinical development activities for drug
candidates in the ICE and IMPDH programs as well as the continued expansion of
the Company's core scientific staff. In addition, general and administrative
expenses increased to $11,430,000 in 1997 from $7,929,000 in 1996. The increase
in general and administrative expense principally reflects the impact of
personnel additions, an increase in legal expenses related to patent activity
and an increase in marketing activities. Interest expense increased to $576,000
in 1997 from $462,000 in 1996 due to higher levels of equipment lease financing
during the year.
Page 34
<PAGE>
The Company expects that research and development as well as general and
administrative expenses will continue to increase as the Company starts new
research projects, advances current clinical and preclinical candidates, and
expands its marketing and business development activities.
The Company recorded a net loss of $19,831,000 or $0.82 per share in
1997 compared to a net loss of $40,005,000 or $2.13 per share in 1996. The lower
loss per share reflects not only a lower aggregate loss but also an increase in
average common shares outstanding from 18,798,000 in 1996 to 24,264,000 in 1997
due to two Common Stock offerings in August 1996 and March 1997.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995.
The Company's total revenues decreased to $18,598,000 in 1996 from
$27,534,000 in 1995. In 1996, revenues consisted of $12,013,000 under the
Company's collaborative agreements, $5,257,000 in investment income and
$1,328,000 in government grants and other income. Revenue from collaborative
agreements consisted of $6,289,000 from Glaxo Wellcome, $4,196,000 from HMR,
$692,000 from Kissei, and $836,000 from others. The research funding
requirements of the Kissei HIV collaborative agreement concluded in 1995,
although Kissei continues to have certain development funding obligations. In
1995, revenues consisted of $21,587,000 under the Company's collaborative
agreements, $5,453,000 in investment income and $494,000 in government grants
and other income. Revenue from collaborative agreements consisted of $10,053,000
from Glaxo Wellcome, $5,370,000 from Kissei, $3,749,000 from HMR and $2,415,000
from others.
The Company's total costs and expenses increased to $58,603,000 in 1996
from $49,062,000 in 1995. The increase in total costs and expenses resulted
principally from the Company's payment of $15,000,000 to obtain a non-exclusive,
world-wide license under certain Searle patent applications claiming HIV
protease inhibitors. Research and development expenses declined to $35,212,000
in 1996 from $41,512,000 in 1995. Although the Company expanded scientific
staffing and facilities in 1996, overall research and development expense
decreased due to significant costs incurred in 1995 for manufacturing bulk drug
substance for use in clinical trials. In addition, general and administrative
expenses increased to $7,929,000 in 1996 from $7,069,000 in 1995. The increase
in general and administrative expense principally reflects the impact of
personnel additions, the Company's facilities expansion, and an increase in
marketing costs principally for the Company's subsidiary Altus Biologics Inc.
Interest expense decreased to $462,000 in 1996 from $481,000 in 1995 on higher
levels of equipment lease financing due to lower blended rates of interest
charged.
The Company recorded a net loss of $40,005,000 or $2.13 per share in
1996 compared to a net loss of $21,528,000 or $1.25 per share in 1995.
Liquidity and Capital Resources
The Company's operations have been funded principally through strategic
collaborative agreements, public offerings and private placements of the
Company's equity securities, equipment lease financing, government grants and
investment income. The Company expects to incur increased research and
development and related supporting expenses and, consequently, continued losses
on a quarterly and annual basis as it continues to develop existing and future
compounds and to conduct clinical trials of potential drugs. The Company also
expects to incur substantial administrative and commercialization expenditures
in the future and additional expenses related to the filing, prosecution,
defense and enforcement of patent and other intellectual property rights.
The Company expects to finance these substantial cash needs with its
existing cash and investments of approximately $280 million at December 31,
1997, together with investment
Page 35
<PAGE>
income earned thereon, future payments under its existing collaborative
agreements, and facilities and equipment financing. 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 securities or other methods of financing. There can be no
assurance that such financing will be available on acceptable terms, if at all.
The Company believes that its existing cash and investments should be sufficient
to meet its anticipated requirements for at least the next two years.
In September 1997, the Company and Kissei entered into a collaborative
agreement to design inhibitors of p38 MAP kinase and to develop them as novel,
orally active drugs for the treatment of inflammatory and neurological diseases.
Under the terms of the agreement, Kissei will pay the Company up to $22 million
composed of a $4 million upfront payment paid in September 1997, $11 million of
product research funding over three years and $7 million of development and
commercialization milestone payments. The Company and Kissei will collaborate to
identify and 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 after
June 1998.
In June 1997, the Company and Lilly entered into a collaborative
agreement to design inhibitors of the hepatitis C protease enzyme, and to
develop them as novel drugs 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 upfront payment paid in June 1997, $33 million of product research
funding over six years and $15 million of development and commercialization
milestone payments. 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
percent 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.
In connection with this collaboration, Lilly purchased 263,922 shares of the
Company's common stock for $10 million.
In March 1997, the Company completed a public offering of 3,450,000
shares of its Common Stock at $45.50 per share raising net proceeds after
commissions and expenses of $149 million.
At December 31, 1997, the Company leased approximately 134,000 square
feet of space under leases with terms ranging from 3 to 8 years. In addition,
the Company's liability for capitalized equipment lease obligations and other
equipment financing totaled $8.4 million at December 31, 1997.
The Company adopted requirements relating to basic and diluted earnings per
share in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" as of the fourth quarter of 1997. Basic earnings per share
is based upon the weighted average number of common shares outstanding during
the period. Diluted earnings per share is based upon the weighted
Page 36
<PAGE>
average number of common shares outstanding during the period plus additional
weighted average common equivalent shares outstanding during the period when
the effect is not anti-dilutive. Common equivalent shares result from the
assumed exercise of outstanding stock options, the proceeds of which are then
assumed to have been used to repurchase outstanding stock options using the
treasury stock method.
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income". This Statement requires that total comprehensive income be reported and
that changes be shown in a financial statement displayed with the same
prominence as other financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements for
earlier periods is required for comparative purposes. The Company does not
believe that this will have a material impact on net loss.
The Company is currently assessing the potential impact of the year 2000 on the
processing of date-sensitive information by the Company's computerized
information systems and products purchased by the Company. The Company believes
that its internal information systems are either year 2000 compliant or will be
so prior to the year 2000 without incurring material costs. There can be no
assurance, however, that the Company will not experience unexpected costs and
delays in achieving year 2000 compliance for its internal information systems
and current products, which could result in a material adverse effect on the
Company's future results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is contained on pages F - 1 through F - 17 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by this Item is included
in the definitive Proxy Statement for the Company's 1998 Annual Meeting of
Stockholders, to be filed with the Commission on or about April 14, 1998 (the
"1998 Proxy Statement"), under "Election of Directors" and is incorporated
herein by reference. The information regarding executive officers required by
this Item is included in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the 1998 Proxy
Statement under "Executive Compensation" and is incorporated herein by reference
(excluding, however, the "Report on Executive Compensation" and the Performance
Graph contained in the 1998 Proxy Statement, which shall not be deemed
incorporated herein).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the 1998 Proxy
Statement under "Security Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by reference.
Page 37
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The Financial Statements required to be filed
by Item 8 of this Annual Report on Form 10-K, and filed herewith, are
as follows:
<TABLE>
<CAPTION>
Page Number in
this Form 10-K
--------------
<S> <C>
Report of Independent Accountants............................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 ............................................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 ................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 ........................................... F-6
Notes to Consolidated Financial Statements................................... F-7
</TABLE>
(a)(2) Financial Statement Schedules.
Financial Statement Schedules have been omitted because they are either
not applicable or the required information is included in the
consolidated financial statements or notes thereto.
(a)(3) Exhibits.
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 Restated Articles of Organization filed with the Commonwealth of
Massachusetts on July 31, 1991 (filed herewith).
3.2 Articles of Amendment filed with the Commonwealth of Massachusetts on
June 4, 1997 (filed herewith).
3.3 Certificate of Vote of Directors Establishing a Series of a Class of
Stock, as filed with the Secretary of the Commonwealth of Massachusetts
on July 31, 1991 (filed herewith).
3.4 By-laws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-43874) and
incorporated herein by reference).
Page 38
<PAGE>
4.1 Specimen stock certificate (filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-40966) or
amendments thereto and incorporated herein by reference).
4.2 Stockholder Rights Plan (filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-40966) or
amendments thereto and incorporated herein by reference).
4.3 First Amendment to Rights Agreement dated as of February 21, 1997
(filed as Exhibit 4.3 to the Company's 1996 Annual Report on Form 10-K
(File No. 0-19319) and incorporated herein by reference).
10.1 1991 Stock Option Plan, as amended and restated as of May 13, 1993
(filed as Exhibit 28.1 to the Company's Registration Statement on Form
S-8 (No. 33-65742) and incorporated herein by reference).*
10.2 1994 Stock and Option Plan (filed as Exhibit 10.2 to the Company's 1994
Annual Report on Form 10-K (File No. 0-19319) and incorporated herein
by reference).*
10.3 1996 Stock and Option Plan (filed as Exhibit 10.3 to the Company's 1996
Annual Report on Form 10-K (File No. 0-19319) and incorporated herein
by reference).*
10.4 Amendment to 1996 Stock and Option Plan adopted December 12, 1997
(filed herewith).*
10.5 Non-Competition and Stock Repurchase Agreement between the Company and
Joshua Boger, dated April 20, 1989 (filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (Registration No.
33-40966) or amendments thereto and incorporated herein by reference).*
10.6 Form of Employee Stock Purchase Agreement (filed as Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (Registration No.
33-40966) or amendments thereto and incorporated herein by reference).*
10.7 Form of Employee Non-Disclosure and Inventions Agreement (filed as
Exhibit 10.4 to the Company's Registration Statement on Form S-1
(Registration No. 33-40966) or amendments thereto and incorporated
herein by reference).
10.8 Form of Executive Employment Agreement executed by Richard H. Aldrich,
Joshua S. Boger, and Vicki L. Sato (filed as Exhibit 10.6 to the
Company's 1994 Annual Report on Form 10-K (File No. 0-19319) and
incorporated herein by reference).*
10.9 Form of Amendment to Employment Agreement executed by Richard H.
Aldrich, Joshua S. Boger and Vicki L. Sato (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995 (File No. 0-19319) and incorporated herein by reference).
10.10 Series C Convertible Preferred Stock Purchase Agreement between the
Company and the party named therein, dated September 21, 1990 (filed as
Exhibit 10.8 to the Company's Registration Statement on Form S-1
(Registration No. 33-40966) or amendments thereto and incorporated
herein by reference).
10.11 Stock Purchase Agreement dated November 10, 1994 between the Company
and
Page 39
<PAGE>
Biotech Target S.A. (filed as Exhibit 10.12 to the Company's 1994
Annual Report on Form 10-K (File No. 0-19319) and incorporated herein
by reference).
10.12 Lease dated October 1, 1992 between C. Vincent Vappi and the Company
relating to the premises at 40 Allston Street, 618 Putnam Street, 228
Sidney Street, and 240 Sidney Street (filed as Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 0-19319) and incorporated herein by reference).
10.13 First Amendment as of March 1, 1995 to the lease between C. Vincent
Vappi and the Company (filed as Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995 (File No.
0-19319) and incorporated herein by reference).
10.14 Second Amendment as of February 12, 1997 to Lease between C. Vincent
Vappi and the Company (filed as Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 (File No.
0-19319) and incorporated herein by reference ).
10.15 Lease dated March 1, 1993, between Fort Washington Realty Trust and the
Company, relating to the premises at 625 Putnam Avenue, Cambridge, MA
(filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993 (File No. 0-19319) and incorporated
herein by reference).
10.16 First Amendment, dated 1 December 1996, to Lease between Fort
Washington Realty Trust and the Company dated 1 March 1993 (filed as
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-19319) and incorporated herein by
reference).
10.17 Second Amendment, dated 1 February 1998, to Lease between Fort
Washington Realty Trust and the Company dated 1 March 1993 (filed
herewith).
10.18 Lease dated March 3, 1995, between Fort Washington Realty Trust and the
Company, relating to the premises at 130 Waverly Street, Cambridge, MA
(filed as Exhibit 10.15 to the Company's 1994 Annual Report on Form
10-K (File No. 0-19319) and incorporated herein by reference).
10.19 First Amendment to Lease dated March 3, 1995 between Fort Washington
Realty Trust and the Company (filed as Exhibit 10.15 to the Company's
1995 Annual Report on Form 10-K (File No. 0-19319) and incorporated
herein by reference).
10.20 Second Amendment to Lease and Option Agreement dated June 12, 1997
between Fort Washington Realty Trust and the Company (filed herewith).
10.21 Research and Development Agreement dated April 13, 1993 between the
Company and Kissei Pharmaceutical Co., Ltd. (with certain confidential
information deleted) (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
0-19319) and incorporated herein by reference).
10.22 Research, Development, and License Agreement dated September 8, 1993
between the Company and Roussel Uclaf (with certain confidential
information deleted) (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993 (File No.
0-19319) and incorporated herein by reference).
Page 40
<PAGE>
10.23 Research Agreement and License Agreement, both dated December 16, 1993,
between the Company and Burroughs Wellcome Co. (with certain
confidential information deleted) (filed as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 0-19319) and incorporated herein by reference).
10.24 License Agreement and Supply Agreement, both dated May 9, 1996, between
the Company and BioChem Pharma (International) Inc. (with certain
confidential information deleted) (filed as Exhibit 10.1 to the
Company's Quarterly Report on 10-Q for the quarter ended March 31, 1996
(File No. 0-19319) and incorporated herein by reference).
10.25 Research and Development Agreement between the Company and Eli Lilly
and Company effective June 11, 1997 (filed with certain confidential
information deleted as Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, and incorporated
herein by reference).
10.26 Research and Development Agreement between the Company and Kissei
Pharmaceutical Co. Ltd. effective September 10, 1997 (filed, with
certain confidential information deleted, as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997, and incorporated herein by reference).
21 Subsidiaries of the Company (filed herewith).
23 Consent of Independent Accountants (filed herewith).
27 Financial Data Schedule (submitted as an exhibit only in the electronic
format of this Annual Report on Form 10-K submitted to the Securities
and Exchange Commission).
</TABLE>
- ----------------
* Compensatory plan or agreement applicable to management and employees.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended December 31, 1997.
Page 41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VERTEX PHARMACEUTICALS INCORPORATED
March 26, 1998 By: /s/ Joshua S. Boger
-------------------
Joshua S. Boger
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Joshua S. Boger Director, Chairman, President March 26, 1998
- ---------------------------------
Joshua S. Boger and Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas G. Auchincloss, Jr. Vice President of Finance March 26, 1998
- ---------------------------------
Thomas G. Auchincloss, Jr. and Treasurer
(Principal Financial Officer)
/s/ Hans D. van Houte Controller March 26, 1998
- ---------------------------------
Hans D. van Houte
/s/ Barry M. Bloom Director March 26, 1998
- ---------------------------------
Barry M. Bloom
/s/ Donald R. Conklin Director March 26, 1998
- ---------------------------------
Donald R. Conklin
/s/ Roger W. Brimblecombe Director March 26, 1998
- ---------------------------------
Roger W. Brimblecombe
/s/ William W. Helman IV Director March 26, 1998
- ---------------------------------
William W. Helman IV
/s/ Charles A. Sanders Director March 26, 1998
- ---------------------------------
Charles A. Sanders
Page 42
<PAGE>
/s/ Elaine S. Ullian Director March 16, 1998
- ---------------------------------
Elaine S. Ullian
</TABLE>
Page 43
<PAGE>
VERTEX PHARMACEUTICALS INCORPORATED
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
Page F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Vertex Pharmaceuticals Incorporated:
We have audited the accompanying consolidated balance sheets of Vertex
Pharmaceuticals Incorporated as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vertex
Pharmaceuticals Incorporated as of December 31, 1997 and 1996,
and the consolidated results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 23, 1998
Page F-2
<PAGE>
Consolidated Balance Sheets
Vertex Pharmaceuticals Incorporated
<TABLE>
<CAPTION>
December 31,
-----------------
(Dollars in thousands) 1997 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $71,454 $34,851
Investments 208,217 95,508
Prepaid expenses and other current assets 1,952 1,791
- -------------------------------------------------------------------------------------------------------
Total current assets 281,623 132,150
Restricted cash 2,316 2,316
Property and equipment, net 11,095 8,663
Other assets 570 370
- -------------------------------------------------------------------------------------------------------
Total assets $295,604 $143,499
- -------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Obligations under capital lease and debt $2,510 $2,910
Accounts payable 4,247 1,391
Accrued expenses 6,385 2,755
Deferred revenue 556 --
- -------------------------------------------------------------------------------------------------------
Total current liabilities 13,698 7,056
Obligations under capital lease and debt,
excluding current portion 5,905 5,617
- -------------------------------------------------------------------------------------------------------
Total liabilities 19,603 12,673
- -------------------------------------------------------------------------------------------------------
Commitments (Note G)
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued
Common stock, $.01 par value; 100,000,000 shares authorized; 25,215,617
and 21,097,117 shares issued and outstanding
in 1997 and 1996, respectively 252 211
Additional paid-in capital 392,372 227,510
Equity adjustments 152 49
Accumulated deficit (116,775) (96,944)
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 276,001 130,826
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $295,604 $143,499
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page F-3
<PAGE>
Consolidated Statements of Operations
Vertex Pharmaceuticals Incorporated
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
(In thousands, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Collaborative and other research and development $29,926 $13,341 $ 22,081
Investment income 13,873 5,257 5,453
------ ------ ------
Total revenues 43,799 18,598 27,534
- -----------------------------------------------------------------------------------------------
Costs and expenses:
Research and development 51,624 35,212 41,512
General and administrative 11,430 7,929 7,069
License payment -- 15,000 --
Interest 576 462 481
------ ------ ------
Total costs and expenses 63,630 58,603 49,062
- -----------------------------------------------------------------------------------------------
Net loss $(19,831) $(40,005) $(21,528)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Basic and diluted loss per common share $(0.82) $(2.13) $(1.25)
Basic and diluted weighted average number of
common shares outstanding 24,264 18,798 17,231
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page F-4
<PAGE>
Consolidated Statements of Stockholders' Equity
Vertex Pharmaceuticals Incorporated
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------- Paid-In Equity Accumulated Stockholders'
(In thousands) Shares Amount Capital Adjustments Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 17,189 $172 $140,920 $ (203) $(35,411) $105,478
Issuances of common stock:
Benefit plans 93 1 1,118 1,119
Warrant exercise 17
Net change in unrealized holding gains/
losses on investments 203 203
Net loss (21,528) (21,528)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 17,299 173 142,038 -- (56,939) 85,272
Issuances of common stock:
Public offering of common stock 3,450 34 77,481 77,515
Private placement of common stock 152 2 4,998 5,000
Benefit plans 196 2 2,993 2,995
Net change in unrealized holding gains/
losses on investments 35 35
Translation adjustments 14 14
Net loss (40,005) (40,005)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 21,097 211 227,510 49 (96,944) 130,826
Issuances of common stock:
Public offering of common stock 3,450 34 148,776 148,810
Private placement of common stock 264 3 9,997 10,000
Benefit plans 405 4 6,089 6,093
Net change in unrealized holding gains/
losses on investments 115 115
Translation adjustments (12) (12)
Net loss (19,831) (19,831)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 25,216 $252 $392,372 $ 152 $(116,775) $276,001
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page F-5
<PAGE>
Consolidated Statements of Cash Flows
Vertex Pharmaceuticals Incorporated
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
(In thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(19,831) $(40,005) $(21,528)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 3,588 3,160 3,710
Changes in assets and liabilities:
Prepaid expenses and other current assets (161) (832) (549)
Accounts payable 2,856 (1,631) 1,624
Accrued expenses 3,630 (748) 1,231
Deferred revenue 556 (197) (438)
--------- ----- -----
Net cash provided (used) by operating activities (9,362) (40,253) (15,950)
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (303,599) (73,035) (61,862)
Sales and maturities of investments 191,005 36,150 38,304
Deposit to collateralize letter of credit -- -- (2,316)
Expenditures for property and equipment (6,020) (3,983) (3,078)
Other assets (200) 518 (65)
------------ --------- -----------
Net cash provided (used) by investing activities (118,814) (40,350) (29,017)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of capital lease obligations and debt (3,104) (2,187) (1,790)
Proceeds from equipment sale/leaseback 1,179 3,727 2,385
Proceeds from debt 1,813 -- --
Proceeds from public offerings of common stock 148,810 77,515 --
Proceeds from private placement of common stock 10,000 5,000 --
Proceeds from other issuances of capital stock 6,093 2,995 1,119
----- ----- -----
Net cash provided (used) by financing activities 164,791 87,050 1,714
- -----------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (12) 14 --
- -----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 36,603 6,461 (43,253)
Cash and cash equivalents at beginning of year 34,851 28,390 71,643
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $71,454 $34,851 $28,390
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page F-6
<PAGE>
Vertex Pharmaceuticals Incorporated
Notes to Financial Statements
A. The Company
Vertex Pharmaceuticals Incorporated ("Vertex" or the "Company") uses a range
of drug discovery technologies to identify, design and develop novel, orally
deliverable compounds that have the potential to treat major human diseases.
To date, the Company has not received any revenues from the sale of
pharmaceutical products. The Company's revenues during 1997, 1996 and 1995
principally resulted from research support payments from corporate partners.
The Company expects to incur significant operating losses over the next
several years as a result of expenditures for its research and development
programs.
The consolidated financial statements include the accounts of the Company and
its subsidiaries: Altus Biologics Inc., Vertex Securities Corp. and Vertex
Pharmaceuticals (Europe) Limited. All material intercompany transactions are
eliminated. The Company sold its majority interest in Versal Technologies,
Inc. at net book value during 1997 and currently accounts for its remaining 19%
ownership under the cost method.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, technological and clinical trial
uncertainty, dependence on collaborative partners, share price volatility, the
need to obtain additional funding, reliance on pharmaceutical pricing and
reimbursement, uncertainties regarding manufacturing and sales and marketing,
product liability and compliance with government regulations.
B. Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents, which are money market funds and debt securities, are valued
at cost plus accrued interest. The Company considers all highly liquid
investments with original maturities of three months or less at the date of
purchase to be cash equivalents. Changes in cash and cash equivalents may be
affected by shifts in investment portfolio maturities as well as by actual cash
receipts and disbursements. Financial instruments which potentially subject the
Company to concentration of credit risk consist principally of money market
funds and marketable securities. The Company places these investments in highly
rated financial institutions, and, by policy, limits the amounts of credit
exposure to any one financial institution. These amounts at times may exceed
federally insured limits. The Company has not experienced any losses in such
accounts and does not believe it is exposed to any significant credit risk on
these funds.
Investments
Investments consist of marketable securities which are classified as
available-for-sale. Investments
Page F-7
<PAGE>
are stated at fair value with unrealized gains and losses included as a
component of stockholders' equity until realized. The fair value of these
securities is based on quoted market prices. Realized gains and losses are
determined on the specific identification method and are included in investment
income.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the lesser of the lease terms or
the estimated useful lives of the related assets, generally four or five years
for equipment and furniture and three years for purchased software. When assets
are retired or otherwise disposed of, the assets and related allowances for
depreciation and amortization are eliminated from the accounts and any resulting
gain or loss is reflected in income.
Revenue Recognition
Revenue under research and development arrangements is recognized as earned
under the terms of the respective agreements. License payments are recorded when
received and the license agreements are signed. Product research funding is
recorded as revenue, generally on a quarterly basis, as research effort is
incurred. Deferred revenue arises from payments received which have not yet been
earned under research and development arrangements. The Company recognizes
milestone payments when the milestones are achieved.
Research and Development
All research and development costs are expensed as incurred.
Income Taxes
The Company provides for federal and state taxes on pretax income at applicable
rates in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Potential future income tax benefits resulting
from net operating losses and unused research and experimentation tax credits
are available to offset future income.
Basic and Diluted Loss per Common Share
The Company adopted requirements relating to basic and diluted earnings per
share in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" as of the fourth quarter of 1997. Basic earnings per
share is based upon the weighted average number of common shares outstanding
during the period. Diluted earnings per share is based upon the weighted
average number of common shares outstanding during the period plus additional
weighted average common equivalent shares outstanding during the period when
the effect is not anti-dilutive. Common equivalent shares result from the
assumed exercise of outstanding stock options, the proceeds of which are then
assumed to have been used to repurchase outstanding stock options using the
treasury stock method. Common equivalent shares have not been included in the
per-share calculations as the effect would be anti-dilutive. Total potential
common equivalent shares consist of 4,702,000 stock options outstanding which
has a weighted average excise price of $22.03 as of December 31, 1997.
Recently Issued Accounting Pronouncements
The FASB has recently issued Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income". This Statement requires that
total comprehensive income be reported and that changes be shown in a financial
statement displayed with the same prominence as other financial statements. SFAS
130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods is required for
Page F-8
<PAGE>
comparative purposes. The Company does not believe that this will have a
material impact on net loss.
C. Investments
Investments consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------
Cost Fair Value Cost Fair Value
------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents
Cash and money market funds $43,072 $43,072 $21,253 $21,253
Corporate debt securities 28,382 28,382 13,598 13,598
------- ------- ---------- ----------
Total cash and cash equivalents $71,454 $71,454 $34,851 $34,851
====== ====== ====== ======
Investments
US Government securities
Due within 1 year $4,719 $4,713 $7,555 $7,568
Due within 1 to 5 years 40,167 40,200 -- --
Corporate debt securities
Due within 1 year 71,136 71,165 64,140 64,155
Due within 1 to 5 years 69,771 69,851 23,780 23,785
Due over 5 years 22,276 22,288 -- --
------ ------ ----------- -----------
Total Investments $208,069 $208,217 $95,475 $95,508
======= ======= ====== ======
</TABLE>
Gross unrealized holding gains and losses at December 31, 1997 were $184,000
and $36,000, respectively, and at December 31, 1996 were $89,000 and $56,000,
respectively. The effect of gross realized gains and losses on the financial
statements for the years 1997, 1996 and 1995 was immaterial. Maturities
stated are final maturities, the effective maturities for certain securities
may be shorter in duration.
D. Restricted Cash
On March 16, 1995, the Company signed a ten-year operating lease for additional
facilities occupied in 1996. In accordance with the lease agreement, the Company
was required to deposit approximately $2,316,000 with its bank to collateralize
a conditional, stand-by letter of credit in the name of the landlord. The letter
of credit is redeemable only if the Company defaults on the lease under specific
criteria. These funds are restricted from the Company's use during the lease
period, although the Company is entitled to all interest earned on the funds.
E. Property and Equipment
Property and equipment consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Leasehold improvements $6,983 $4,719
Furniture and equipment 4,511 2,260
Purchased software 2,823 2,418
Equipment under capital lease 20,403 19,303
-------- -------
34,720 28,700
Less accumulated depreciation and amortization 23,625 20,037
-------- -------
$11,095 $8,663
-------- -------
-------- -------
</TABLE>
The net book value of equipment under capital lease was $5,811,000 and
$7,366,000 at December
Page F-9
<PAGE>
31, 1997 and 1996, respectively.
F. Accrued Expenses
Accrued expenses consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Professional fees $1,192 $1,196
Development contract costs 2,663 317
Payroll and benefits 1,145 567
Other 1,385 675
-------- -------
$6,385 $2,755
-------- -------
-------- -------
</TABLE>
G. Commitments, Capital Leases and Debt Obligations
Capital Leases and Debt Obligations
At December 31, 1997, long-term capital lease and debt obligations were
due as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31, Capital leases Debt Total
- ---------------------- -------------- ---- ------
<S> <C> <C> <C>
1998 $2,623 $276 $2,899
1999 2,034 300 2,334
2000 1,434 327 1,761
2001 1,294 355 1,649
2002 88 531 619
-------------- ----- ------
Total 7,473 1,789 9,262
-------------- ------ ------
Less amount representing
interest payments 847 -- 847
-------------- ------ ------
Present value of minimum
lease and debt payments 6,626 1,789 8,415
Less current portion 2,234 276 2,510
-------------- ------ -------
$4,392 $1,513 $5,905
-------------- ------ -------
-------------- ------ -------
</TABLE>
During 1997 and 1996, the Company financed under capital lease arrangements an
aggregate of $1,179,000 and $3,727,000, respectively, of asset cost under its
master lease agreements. At the end of the lease term, the Company has the right
to either return the equipment to the lessor or purchase the equipment for fair
market value at that time. These agreements have a term of four or five years,
and require that the Company maintain a certain level of cash and investments.
Also during 1997, the Company financed under a master debt agreement, asset cost
of $676,000 and $1,137,000 with interest rates of 8.59% and 8.38%, respectively.
The Company has certain equipment designated as collateral under these
agreements. These agreements have a term of five years, and require that the
Company maintain a certain level of cash and investments.
Interest paid under capital leases and debt was $576,000 and $462,000 in 1997
and 1996, respectively. At December 31, 1997, the Company had availability under
its 1997 master debt agreement to finance up to an additional $2,187,000 of
equipment.
Commitments
The Company leases its facilities and certain equipment under operating leases.
The Company's leases have terms through the year 2005. Noncancelable future
minimum payments are as follows: $3,742,000 in 1998, $3,499,000 in 1999, and
$3,326,000 in 2000, $2,786,000 in 2001 and $2,450,000 in 2002, and $6,515,000
thereafter. Rental expense was $3,363,000, $3,063,000
Page F-10
<PAGE>
and $1,281,000 in 1997, 1996 and 1995, respectively.
The Company has certain license and maintenance contracts that contain future,
committed payments for the support and upgrade of specific software programs
currently used in research. For the years 1998, 1999, 2000 and 2001 these
amounts are $210,000, $314,000, $343,000 and $349,000, respectively.
H. Income Taxes
The Company's federal statutory income tax rate for 1997, 1996 and 1995 was 34%.
The Company recorded no income tax benefit for 1997, 1996 and 1995 and recorded
a full valuation allowance against net operating losses due to uncertainties
related to realizability of these tax assets.
Deferred tax liabilities and assets are determined based on the difference
between financial statement and tax bases using enacted tax rates in effect for
the year in which the differences are expected to reverse. The components of the
deferred taxes at December 31, were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Net operating loss $38,434 $30,567
Tax credits carryforward 5,829 4,089
Property, plant and equipment 1,211 1,253
Other 468 526
---------------- ----------------
Gross deferred tax asset 45,942 36,435
Valuation allowance (45,942) (36,435)
---------------- ----------------
Net deferred tax balance $ -- $ --
---------------- ----------------
---------------- ----------------
</TABLE>
For federal income tax purposes, as of December 31, 1997, the Company has
regular tax net operating loss carryforwards of approximately $113,040,000 and
$5,829,000 of tax credits, which may be used to offset future income. These net
operating loss carryforwards expire beginning in 2005, and the tax credit
carryforwards begin to expire in 2004.
The amount of tax credits and net operating loss carryforwards that the Company
may utilize in any one year is limited in accordance with Internal Revenue Code
Section 382. This limitation arises whenever a cumulative change in ownership in
excess of 50% occurs. A change of ownership has occurred which will limit the
amount of net operating loss and tax credits available prior to the change.
There may also be further changes of ownership subsequent to 1997 which may also
limit the amount of net operating loss and tax credit utilization in a
subsequent year.
I. Common and Preferred Stock
Common Stock
In June 1997, Eli Lilly and Company ("Lilly") purchased 263,922 shares of the
Company's common stock for $10,000,000. In March 1997, the Company completed a
public offering of 3,450,000 shares of its common stock at a price of $45.50 per
share with net proceeds to the Company of approximately $148,810,000. In August
1996, the Company completed a public
Page F-11
<PAGE>
offering of 3,450,000 shares of its Common Stock at a price of $24 per share
with net proceeds to the Company of approximately $77,515,000. In June 1996,
Glaxo Wellcome purchased 151,792 shares of the Company's Common Stock for
approximately $5,000,000.
During 1997, the Company increased the authorized number of shares of Common
Stock by 50,000,000 shares to 100,000,000 shares. At December 31, 1997,
6,690,318 shares of the Company's Common Stock were reserved for exercise of
Common Stock options granted or to be granted under its 1991 Stock Option Plan,
1994 Stock and Option Plan, and 1996 Stock and Option Plan, 47,999 shares were
reserved for exercise of certain other options granted in 1991, 114,219 shares
of Common Stock were reserved for issuance under the Company's 401(k) Plan, and
113,898 shares of Common Stock were reserved for issuance under the Company's
Employee Stock Purchase Plan.
Stock Option Plans
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. However, pro forma
disclosures as if the Company adopted the cost recognition requirements under
FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123")
in 1997, 1996 and 1995 are presented below. Compensation expense of $66,000
was recognized during 1997. No compensation expense was recognized for these
plans in 1996 and 1995.
The Company has reserved 4,000,000 shares under its 1991 Stock Option Plan (the
"1991 Plan") and 1994 Stock and Option Plan (the "1994 Plan"). The Company's
1996 Stock and Option Plan (the "1996 Plan"; together with the 1991 Plan and the
1994 Plan, the "Plans") reserved an additional 3,250,000 shares, of which
1,250,000 shares were reserved during 1997. Under the 1994 Plan and the 1996
Plan, stock rights, which are either (i) incentive stock options, (ii)
non-qualified stock options ("NQSOs"), or (iii) award shares of Common Stock or
the opportunity to make a direct purchase of shares of Common Stock ("Stock
Awards"), may be granted to employees (including officers and directors who are
employees), consultants, advisors and non-employee directors (NQSOs and stock
awards only), either as options intended to qualify as "incentive stock options"
under the Internal Revenue Code or as non-qualified stock options. Incentive
stock options granted under the Plans may not be granted at a price less than
the fair market value of the Common Stock on the date of grant. Non-qualified
stock options may be granted at an exercise price established by the
Compensation Committee of the Board of Directors, which may be less than, equal
to or greater than the fair value of the Common Stock on the date of grant.
Vesting periods, generally four or five years, are determined by the
Compensation Committee. Incentive stock options granted under the Plans must
expire not more than ten years from the date of grant.
Page F-12
<PAGE>
Stock option activity for the years ended December 31, 1997, 1996 and 1995 is as
follows (shares in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 4,033 $18.98 3,196 $14.63 2,523 $13.13
Granted 1,257 $29.78 1,056 $31.11 829 $18.77
Exercised (375) $13.97 (139) $12.96 (42) $11.48
Canceled (213) $23.99 (80) $16.11 (114) $12.51
----- ---- -----
Outstanding at end
of year 4,702 $22.03 4,033 $18.98 3,196 $14.63
----- ----- -----
Options exercisable
at year-end 1,944 $16.50 1,625 $13.92 1,152 $12.99
----- ----- -----
Weighted average fair
value of options granted
during the year $13.94 $15.04 $9.05
------ ------ -----
</TABLE>
The fair value of each option granted during 1997, 1996 and 1995 was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: (1) expected life of 5.18 years for the
1997 grants and 5.41 years for the 1996 and 1995 grants (2) expected volatility
of 44.7% for the 1997 grants and 42% for the 1996 and 1995 grants (3) risk-free
interest rate of 5.5% for the 1997 grants and 6.30% for the 1996 and 1995 grants
and (4) no dividend yield.
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1997 (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
exercise prices Outstanding Contractual Life Price Exercisable Price
- ----------------- ----------- ------------------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 6.48 - $13.63 1,069 5.89 $11.58 824 $11.41
$13.75 - $19.00 1,416 6.89 $17.09 858 $16.57
$19.50 - $27.34 976 9.84 $27.07 22 $24.12
$27.38 - $33.06 945 8.99 $30.99 179 $31.01
$33.19 - $49.13 296 9.41 $38.12 61 $38.80
--- -----
$ 6.48 - $49.13 4,702 7.85 $22.03 1,944 $16.50
----- -----
</TABLE>
Page F-13
<PAGE>
Employee Stock Purchase Plan
Under the Company's Employee Stock Purchase Plan, substantially all permanent
employees may, through payroll withholdings, purchase shares of the Company's
Common Stock at a price of 85% of the lesser of fair market value at the
beginning or end of each six-month withholding period. During 1997, 26,213
shares were issued at an average price of $28.00 per share. During 1996, 32,296
shares of Common Stock at an average price of $19.21 per share were issued to
employees under the plan. During 1995, 42,445 shares of Common Stock at a price
of $11.26 per share were issued to employees under the plan. Had the Company
adopted SFAS 123, the weighted average fair value of each purchase right granted
during 1997, 1996 and 1995 would have been $9.16, $5.76 and $3.25, respectively.
The fair value was estimated at the beginning of the withholding period using
the Black-Scholes option-pricing model with the following weighted average
assumptions: (1) expected life of one half year for all years (2) expected
volatility of 51%, 41% and 35% for 1997, 1996 and 1995 respectively (3)
risk-free interest rate of 5.43% for 1997, 5.50% for 1996 and 1995 and (4) no
dividend yield.
Pro forma Disclosures
Had compensation cost for the Company's 1997, 1996 and 1995 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net loss and net loss per share for 1997, 1996 and 1995 would
approximate the pro forma amounts below (in thousands except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net loss As reported $(19,831) $(40,005) $(21,528)
Pro forma $(25,154) $(42,025) $(21,750)
Basic and diluted loss per share As reported $ (0.82) $(2.13) $(1.25)
Pro forma $ (1.04) $(2.24) $(1.26)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts since SFAS 123 does not apply to awards prior to 1995 and
additional awards in future years are anticipated.
Warrants
During 1995, all remaining warrants, originally issued in connection with
equipment lease financing transactions, were exercised in non-cash, net exercise
transactions to acquire an aggregate of 16,801 shares of Common Stock.
Rights
Each holder of a share of outstanding Common Stock also holds one share purchase
right (a "Right") for each share of Common Stock. Each Right entitles the holder
to purchase from the Company one one-hundredth of a share of Series A junior
participating preferred stock, $.01 par value (the "Junior Preferred Shares"),
of the Company at a price of $270 per one one-hundredth of a Junior Preferred
Share (the "Purchase Price"). The Rights are not exercisable until the earlier
of acquisition by a person or group of 15% or more of the outstanding Common
Stock (an "Acquiring Person") or the announcement of an intention to make or
commencement of a tender offer or exchange offer the consummation of which would
result in the beneficial ownership by a person or group of 15% or more of the
outstanding Common Stock. In the event that any person or group becomes an
Acquiring Person, each holder of a Right other than the Acquiring Person will
thereafter have the right to receive upon exercise that number of shares of
Common Stock
Page F-14
<PAGE>
having a market value of two times the Purchase Price and, in the event that the
Company is acquired in a business combination transaction or 50% or more of its
assets are sold, each holder of a Right will thereafter have the right to
receive upon exercise that number of shares of Common Stock of the acquiring
company which at the time of the transaction will have a market value of two
times the Purchase Price. Under certain specified circumstances, the Board of
Directors of the Company may cause the Rights (other than Rights owned by such
person or group) to be exchanged, in whole or in part, for Common Stock or
Junior Preferred Shares, at an exchange rate of one share of Common Stock per
Right or one one-hundredth of a Junior Preferred Share per Right. At any time
prior to the acquisition by a person or group of beneficial ownership of 15% or
more of the outstanding Common Stock, the Board of Directors of the Company may
redeem the Rights in whole at a price of $.01 per Right.
J. Collaborative Research and Development Agreements
The Company and Kissei Pharmaceutical Co., Ltd. ("Kissei") are collaborating to
design inhibitors of p38 MAP kinase and to develop them as novel, orally active
drugs for the treatment of inflammatory and neurological diseases. Under the
terms of the agreement, Kissei will pay the Company up to $22 million composed
of a $4 million license payment, $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, 1997, $5,500,000, including a $4,000,000 license payment in September 1997,
has been recognized as revenue. The Company and Kissei will collaborate to
identify and 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 future product sales, if any.
Kissei has the right to terminate the agreement without cause upon six months'
notice after June 1998. Revenues earned from Kissei under the MAP kinase
agreement were $5,500,000 in 1997.
The Company and Lilly are collaborating on designing inhibitors of the hepatitis
C protease enzyme and to develop them as novel drugs 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, 1997, $5,694,000, including a
$3,000,000 up-front payment, 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 percent 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. In connection with this
collaboration, Lilly purchased 263,922 shares of the Company's common stock for
$10,000,000. Revenues earned from Lilly were $5,694,000 in 1997.
The Company and BioChem Therapeutic Inc. ("BioChem") are collaborating on the
development and commercialization in Canada of Incel(TM) (VX-710), Vertex's lead
multidrug resistance reversal agent. Under the development agreement, BioChem is
obligated to pay Vertex up to $4,000,000
Page F-15
<PAGE>
comprised of an initial licensing fee of $500,000 and development and
commercialization milestones payments. From the inception of the agreement in
May 1996 through the year ended December 31, 1997, $750,000 has been
recognized as license and research revenue. BioChem will fund development of
Incel in Canada, including Phase II clinical trials in two different cancer
indications currently underway. Vertex will supply BioChem's clinical and
commercial drug supply needs. In 1996, the Company also received additional
revenues related to the sale of clinical trial material to BioChem. BioChem
will pay Vertex a portion of its net sales, which will cover Vertex's cost of
supplying material 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. Revenues earned
from BioChem were $251,000 and $577,000 in 1997 and 1996, respectively.
In October 1995, the Company and Alpha Therapeutic Corporation ("Alpha") entered
into an agreement to collaborate on the development and commercialization of
VX-366 for the treatment of sickle cell disease and beta thalassemia. From the
inception of the agreement in October 1995 through August, 1997, $500,000 has
been recognized as revenue. During 1997 and 1996 the Company received additional
revenues related to the sale of clinical trial material to Alpha. Revenues
earned from Alpha were $13,000, $225,000 and $500,000 in 1997, 1996 and 1995,
respectively. In August 1997, the Company and Alpha terminated this agreement.
The Company and Glaxo Wellcome plc ("Glaxo Wellcome") are collaborating on the
development of compounds in connection with the Company's HIV Program. Under the
collaborative agreement, Glaxo Wellcome agreed to pay the Company up to
$42,000,000 comprised of a $15,000,000 initial license payment paid in 1993,
$14,000,000 of product research funding over five years and $13,000,000 of
development and commercialization milestone payments. From the inception of the
agreement in December 1993 through the year ended December 31, 1997, $28,000,000
has been recognized as revenue. Glaxo Wellcome is also obligated to pay to the
Company additional development and commercialization milestone payments for
subsequent drug candidates. In addition, Glaxo Wellcome agreed to bear all costs
of development in its territory of drug candidates under the collaboration. In
1996 and 1995, the Company received additional revenue related to reimbursements
for clinical development. Under the agreement, Glaxo Wellcome is also required
to pay Vertex a royalty on sales. Glaxo Wellcome has the right to terminate the
research collaboration without cause upon twelve months' notice given at any
time and has the right to terminate the license arrangements without cause upon
twelve months' notice given at any time provided such notice is not given before
the research collaboration has been terminated. Termination by Glaxo Wellcome of
the research collaboration will relieve Glaxo Wellcome of its obligation to make
further research support payments under the agreement. Termination by Glaxo
Wellcome of the license arrangements under the agreement will relieve it 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. Revenues earned from Glaxo Wellcome were $3,275,000, $6,289,000 and
$10,053,000 for 1997, 1996 and 1995. In June 1996, the Company and Glaxo
Wellcome obtained a worldwide, non-exclusive license under certain G.D. Searle &
Co. ("Searle") patent applications in the area of HIV protease inhibition.
Vertex paid $15,000,000 and Glaxo Wellcome paid $10,000,000 to Searle for the
license. The Company also agreed to pay Searle a royalty on sales of amprenavir
(VX-478), the Company's lead HIV compound.
The Company and Hoechst Marion Roussel ("HMR") are collaborating on the
development of the interleukin-1 beta converting enzyme inhibitors, VX-740 as an
anti-inflammatory agent. Under the collaborative agreement, HMR is obligated to
pay the Company up to $30,500,000, comprised of $18,500,000 of product research
funding over five years and $12,000,000 of development and commercialization
milestone payments. From the inception of the agreement in September 1993
through the year ended December 31, 1997, $21,500,000, including a $3,000,000
milestone
Page F-16
<PAGE>
payment in December 1997 on the commencement of formal preclinical
development, has been recognized as revenue. The Company received additional
revenue related to reimbursements for clinical development in 1997. HMR has the
right to terminate the agreement without cause upon twelve months' notice at any
time. For a period of one year after any such termination, HMR retains the right
to select one or more compounds for development and to license such compound or
compounds from Vertex, provided HMR resumes all research funding and
commercialization milestone payments and makes all such payments that would
otherwise have been due but for such termination. Otherwise, in the case of such
termination, all rights to compounds developed under the research and license
agreements will revert to Vertex. The Company also received additional revenue
related to reimbursement for patent filings in HMR's territories. Revenues
earned under the HMR agreement were $8,660,000, $4,196,000 and $3,749,000 in
1997, 1996 and 1995, respectively. Product research funding under this agreement
ended on December 31, 1997.
The Company and Kissei are collaborating on the research and development of
compounds in connection with the Company's HIV Program. Under the
collaborative agreement, Kissei is obligated to pay the Company up to
$20,000,000, comprised of $9,800,000 of product research funding through
1995, $7,000,000 of development milestone and territory option payments and a
$3,200,000 equity investment. From the inception of the agreement in April
1993 through the year ended December 31, 1997, $14,642,000 has been
recognized as revenue. The Company received additional revenue related to
reimbursements for clinical development in 1997, 1996 and 1995. During 1997,
the Company also received $4,000,000 related to reimbursements of certain
development costs. Under the collaboration, Kissei is also required to pay
Vertex a royalty on sales. Revenues earned under this Kissei agreement were
$4,310,000, $692,000 and $5,370,000 in 1997, 1996 and 1995, respectively.
Product research funding under this agreement ended at December 31, 1995.
The Company and Chugai Pharmaceutical Co., Ltd. ("Chugai") entered into a
collaborative agreement for research and development of immunosuppressive
compounds in conjunction with Vertex's Autoimmune Diseases Program. Research
funding under this agreement ended in the first half of 1995 and the research
collaboration ended in October of 1995. Revenues earned under the Chugai
Agreement were $34,000 and $1,915,000 in 1996 and 1995, respectively.
K. Employee Benefits
The Company has a 401(k) retirement plan in which substantially all of its
permanent employees are eligible to participate. Participants may contribute up
to 15% of their annual compensation to the plan, subject to statutory
limitations. For 1997, the Company declared discretionary matching contributions
to the plan in the aggregate amount of $482,000, payable in the form of shares
of the Company's Common Stock. Of these shares, 6,458 were issued as of December
31, 1997 with the remaining 7,113 issuable in 1998. For 1996, the Company
declared discretionary matching contributions to the plan in the aggregate
amount of $426,000, payable in the form of shares of the Company's Common Stock.
Of these shares, 7,013 were issued as of December 31, 1996 with the remaining
5,278 issued in 1997. For 1995, the Company declared discretionary matching
contributions to the plan in the aggregate amount of $354,000, payable in the
form of 17,469 shares of the Company's Common Stock, issued in 1996.
L. Related Party
A sibling of the Company's President is a partner in the law firm representing
the Company to which $394,000, $472,000 and $255,000 in legal fees were paid in
1997, 1996 and 1995, respectively.
Page F-17
<PAGE>
Exhibits Filed With This Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Description
- ----------- ------------
<S> <C>
3.1 Restated Articles of Organization filed with the Commonwealth of Massachusetts on July 31, 1991.
3.2 Articles of Amendment Filed with the Commonwealth of Massachusetts on June 4, 1997.
3.3 Certificate of Vote of Directors Establishing a Series of a Class of Stock, as filed with the Secretary
of the Commonwealth of Massachusetts on July 31, 1991.
10.4 Amendment to 1996 Stock and Option Plan adopted December 12, 1997.*
10.17 Second Amendment, dated 1 February 1998, to Lease between Fort Washington Realty Trust and the Company
dated March 1 1993.
10.20 Second Amendment to Lease and Option Agreement dated June 12, 1997 between Fort Washington Realty Trust
and the Company.
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
27 Financial Data Schedule (submitted as an exhibit only in the electronic format of this format of this
Annual Report on Form 10-K submitted to the Securities and Exchange Commission.
</TABLE>
- ------------------------
* Compensatory plan or agreement applicable to management and employees.
<PAGE>
EXHIBIT 3.1
FEDERAL IDENTIFICATION
NO 04-3039129
The Commonwealth of Massachusetts
MICHAEL JOSEPH CONNOLLY
Secretary of State
ONE ASHBURTON PLACE, BOSTON, MASS: 02108
RESTATED ARTICLES OF ORGANIZATION
General Laws, Chapter 156B, Section 74
This certificate must be submitted to the Secretary of the Commonwealth
within sixty days after the date of the vote of stockholders adopting the
restated articles of organization. The fee for filing this certificate is
prescribed by General Laws, Chapter 156B Section 114. Make check payable to the
Commonwealth of Massachusetts.
We, Joshua Boger , President
Richard H. Aldrich , Clerk of
Vertex Pharmaceuticals Incorporated
(Name of Corporation)
located at 40 Allston Street, Cambridge, Massachusetts 02139 do hereby certify
that the following restatement of the articles of organization of the
corporation was duly adopted at a meeting held on May 24 , 1991, by vote of
1,080,000 shares of common out of 2,702,500 shares outstanding,
(Class of Stock)
5,051,955 shares of Series A
Convertible Preferred Stock out of 5,279,227 shares
outstanding, and
(Class of Stock)
1,343,655 shares of Series B
Convertible Preferred Stock out of 1,404,000 shares
outstanding,
(Class of Stock)
*
being at least two-third of each class of stock outstanding and entitled to vote
and of each class or series of stock adversely affected thereby:
1. The name by which the corporation shall be known is:
Vertex Pharmaceuticals Incorporated
2. The purpose for which the corporation is formed are as follows:
To develop, manufacture, market, and sell pharmaceutical products.
To carry on any business or other activity which may be lawfully
carried on by a corporation organized under the Business Corporation
Law of the Commonwealth of Massachusetts whether or not related to
those referred to in the foregoing paragraph.
* 571,429 shares of Series C Convertible Preferred Stock out of 571,429 shares
outstanding Note: If the space provided under any article or item on this form
is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of
paper leaving a left hand margin of at least 1 inch for binding. Additions to
more than one article may be continued on a single sheet so long as each article
requiring each such addition is clearly indicated.
<PAGE>
3. The total number of shares and the par value, if any, of each class of
stock which the corporation is authorized to issue is as follows:
Without Par Value With Par Value
Class of Stock Number of Shares Number of Shares Par Value
- -------------- ----------------- ---------------- ---------
Preferred None 1,000,000 $.01
Common None 25,000,000 $.01
*4. If more than one class is authorized, a description of each of the
different classes of stock with, if any, the preferences, voting
powers, qualifications, special or relative rights or privileges as to
each class thereof and any series now established:
See Attached.
*5. The restrictions, if any, imposed by the articles of organization upon
the transfer of shares of stock of any class are as follows:
None.
*6. Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary
dissolution, or for limiting, defining, or regulating the powers of
the corporation, or of its directors or stockholders, or of any class
of stockholders:
See Attached.
*If there are no such provisions, state "None".
<PAGE>
AMENDMENTS
1. Article 3 is amended as follows:
(i) Every three shares of the Common Stock, $.01 par value, of the Corporation
outstanding on the effective date of these Restated Articles of Organization
shall on such effective date be combined into two shares of Common Stock, $.01
par value; provided, that no fractional shares shall be issued in connection
with such combination and the fair value of fractional shares resulting
therefrom shall be paid in cash to holders who would otherwise have received
such fractional shares; and provided, further, that in connection with the
foregoing, no changes shall be made in the capital or surplus account of the
Corporation.
(ii) In connection and simultaneously with the combination described above, the
authorized Common Stock, $.01 par value, of the Corporation shall be reduced
from 11,024,000 shares to 7,349,333 shares; provided, that in connection with
the foregoing, no changes shall be made in the capital or surplus account of the
Corporation.
(iii) Every three shares of each series of the Convertible Preferred Stock, $.01
par value, of the Corporation outstanding on the effective date of these
Restated Articles of Organization shall on such effective date, pursuant to the
terms of such Convertible Preferred Stock, be automatically converted into two
shares of Common Stock, $.01 par value; provided, that no fractional shares
shall be issued in connection with said conversion and the fair value of
fractional shares resulting therefrom shall be paid in cash to holders who would
have otherwise received such fractional shares.
(iv) In connection and simultaneously with the conversion described above, the
entire class, including each series of such class, of Convertible Preferred
Stock, $.01 par value, of the Corporation shall be cancelled and withdrawn from
the authorized capital stock of the Corporation.
(v) Immediately following the foregoing, the amount of the authorized capital
stock of the Corporation shall be increased to 26,000,000 shares, consisting of
25,000,000 shares of Common Stock, $.01 par value, and 1,000,000 shares of
Preferred Stock, $.01 par value.
2. Article 4 is amended as follows:
(i) The class of Preferred Stock, S.01 par value, authorized pursuant to Article
3 is authorized to be issued by the Board of Directors, in one or more series,
as set forth in Article 4 of these Restated Articles of Organization.
<PAGE>
3. Article 6 is amended as follows:
(i) The first paragraph, relating to Amendment of the By-Laws, is designated as
Part A.
(ii) The second paragraph, relating to Meetings of Stockholders, is designated
as Part B.
(iii)The third paragraph, relating to Partnership Agreements, is designated as
Part C.
(iv) The fourth paragraph, relating to liability of Directors, is designated as
Part D.
(v) There is added as a new Part E provisions relating to (a) the election of a
classified Board of Directors, (b) nomination of directors, (c) filling of
newly created directorships and vacancies, (d) removal of directors, (e)
election of directors by holders of Preferred Stock, and (f) amendment or
repeal of the provisions set forth in Part E.
2
<PAGE>
ARTICLE 4
A. Common Stock
The holders of shares of Common Stock of the Corporation shall be entitled
to one vote for each share of such stock held by them, respectively, upon all
matters presented to the stockholders. The Common Stock shall be subject to the
special provisions applicable to any series of Preferred Stock issued by the
Board of Directors, as hereinafter provided.
B. Preferred Stock.
The Preferred Stock may be issued by the Board of Directors, in one or more
series and with such rights, powers, preferences, and terms and at such times
and for such consideration as the Board of Directors shall determine, without
further stockholder action. With respect to any such series of Preferred Stock,
prior to issuance, the Board of Directors by resolution shall designate that
series to distinguish it from other series and classes of stock of the
Corporation, shall specify that number of shares to be included in the series,
and shall fix the rights, powers, preferences, and terms of the shares of the
series, including but without limitation: (1) the dividend rate, its preference
as to any other class or series of capital stock, and whether dividends will be
cumulative or non cumulative; (ii) whether the shares are to be redeemable and,
if so, at what times and prices and on what other terms and conditions; (iii)
the terms and amount of any sinking fund provided for the purchase of redemption
for the shares; (iv) whether the shares shall be convertible or exchangeable
and, if so, the times, prices, rates, adjustments, and other terms of such
conversion or exchange; (v) the voting rights, if any, applicable to the shares
in addition to those prescribed by law; (vi) the restrictions and conditions, if
any, on the issue or reissue of any additional shares of such series or of any
other series of Preferred Stock ranking on a parity with or prior to the shares
of such series; and (vii) the rights of the holders of such shares upon
voluntary or involuntary liquidation, dissolution, or winding up of the
Corporation.
4A
<PAGE>
ARTICLE 6
A. Amendment of By-Laws
To the extent and the manner provided in the By-Laws, the Board of
Directors may make, amend, or repeal the By-Laws in whole or in part, except
with respect to any provision thereof which by law or by the By-Laws requires
action by the stockholders.
B. Meetings of Stockholders
To the extent and in the manner provided in the By-Laws, meetings of the
stockholders may be held anywhere within the Commonwealth of Massachusetts or
elsewhere in the United States.
C. Partnership Agreements
The Corporation may enter into partnership agreements (general or limited)
and joint ventures with any person, firm, association, or corporation engaged in
carrying on any business in which the Corporation is authorized to engage, or in
connection with carrying out all or any of the purposes of the Corporation.
D. Liability of Directors
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that this provision shall not
eliminate or limit the liability of a director to the extent provided by
applicable law (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of laws, (iii)
under Section 61 or 62 of the Business Corporation Law, Chapter 156B, of the
Commonwealth of Massachusetts, or (iv) for any transactions from which the
director derived an improper personal benefit. No amendment to or repeal of
this provision shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts
or omissions of such director occurring prior to such amendment or repeal.
E. Board of Directors
1. Number, Election and Terms. Subject to the rights of the holders of
any series of Preferred Stock to elect directors who shall serve for such term
and have such voting powers as shall be provided in Article 4 of these Articles,
the Board of Directors shall consist of such number of persons as shall be
provided in the Corporation's By-Laws. The Board of Directors shall be
classified with respect to the time for which its members shall severally hold
office by dividing them into three classes, as nearly equal in number as
possible, with the term of office of one class expiring at the annual meeting of
stockholders each year. At each annual meeting of the stockholders of the
Corporation, the successors to the class of directors whose term expires at that
meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election. If the number of directors
6A
<PAGE>
is changed, any increase or decrease shall be apportioned by the Board of
Directors among the classes so as maintain the number of directors in each class
as nearly equal as possible. Each director shall hold office until the annual
meeting for the year in which such director's term expires and until such
director's successor shall be elected and shall qualify. No director need be a
stockholder.
2. Nomination. Advance notice of nominations for the election of
directors, other than by the Board of Directors or a committee thereof, shall be
given within the time and in the manner provided in the By-Laws.
3. Newly Created Directorships and Vacancies. Newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal, or other cause shall be filled only by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the board of Director. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified. No decrease in the number of directors constituting
the Board of Directors shall shorten the term of any incumbent director.
4. Removal of Directors. Any director may be removed from office by
stockholder vote at any time, but only for cause, by the affirmative vote of the
holders of a majority of the voting power of the then outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class. Any director may also be removed
from office for cause by vote of a majority of the directors then in office.
5. Directors Elected by Holders of Preferred Stock. Whenever the holders
of any class or series of Preferred Stock or of any other class or series of
shares issued by the Corporation shall have the right, voting separately as a
class or series, to elect one or more directors under specified circumstances,
the election, term of office, filling of vacancies, and other features of such
directorships shall be governed by the terms of these Articles applicable to
such class or series, and none of the provisions of this Part E shall apply with
respect to directors so elected.
6. Amendment, Repeal, etc. Notwithstanding any other provision of these
Articles to the contrary, the affirmative vote of the holders of at least 80% of
the voting power of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to alter, amend, adopt any
provision inconsistent with, or repeal this Part E or any provision thereof.
6B
<PAGE>
*We further certify that the foregoing restated articles of organization effect
no amendments to the articles of organization of the corporation as heretofore
amended, except amendments to the following articles 3, 4 and 6.
(*If there are no such amendments, state "None".)
Briefly describe amendments in space below:
See Attached.
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed
our names this 30th day of July in the year 1991
/S
-------------------------------
Joshua Boger President
/S
-------------------------------
Richard H. Aldrich Clerk
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
I hereby approve the within restated articles of organization and, the
filing fee in the amount of $19,150.67 having been paid, said articles are
deemed to have been filed with me this 31st day of July, 1991
/S/
-----------------------
MICHAEL JOSEPH CONNOLLY
Secretary of State
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF RESTATED ARTICLES OF ORGANIZATION TO BE SENT TO:
Timothy B. Bancroft, Esq.
Warner & Stackpole
75 State Street, Boston, MA 02109
Telephone (617) 951-9000
Copy Mailed
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-3039129
The Commonwealth of Massachusetts
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF AMENDMENT
(General laws, Chapter 156B, Section 72)
We, Thomas G. Auchincloss, Jr. *<#>President</#>/Vice President,
---------------------------------------
and Richard H. Aldrich , *Clerk/<#>Assistant Clerk</#>,
---------------------------------------
of Vertex Pharmaceuticals Incorporated
---------------------------------------------------------------------------
(Exact name of corporation)
located at: 130 Waverly Street, Cambridge, Massachusetts 02139-4242
-------------------------------------------------------------------
(Street address of corporation in Massachusetts)
certify that these Articles of Amendments affecting articles numbered:
3
-------------------------------------------------------------
(number those articles 1, 2, 3, 4, 5, and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held on May 8,
1997, by vote of: 18,591,245 shares of Common Stock of 24,680,649 shares
outstanding.
(type, class & series if any)
shares of of shares outstanding and
- ---------- ------------- -----------
(type, class & series if any)
shares of of shares outstanding.
- ---------- ------------- -----------
(type, class & series if any)
** being at least a majority of each type, class or series outstanding and
entitled to vote thereon:/ or 2** <#>being at least two thirds of each </#>
<#>type, class or series outstanding and entitled to vote thereon and of </#>
<#>each type, class or series of stock whose rights are adversely affected </#>
<#>thereby:</#>
(see page 2)
*Delete the inapplicable words **Delete the inapplicable clause.
(1)For amendments adopted pursuant to Chapter 156B, Section 70. (2)For
amendments adopted pursuant to Chapter 156B, Section 71. Note: if the space
provided under any article or item on this form is insufficient, additions
shall be set forth on one side only of separate 8-1/2 x 11 sheets of paper
with a left margin of at least 1 inch. Additions to more than one article
may be made on a single sheet so long as each article requiring each addition
is clearly indicated.
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporation is authorized to issue, fill in the
following:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
<S> <C> <C> <C> <C>
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
Common: Common: 50,000,000 $.01______
Preferred: Preferred: 1,000,000 $.01______
</TABLE>
Change the total authorized to:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
<S> <C> <C> <C> <C>
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
Common: Common: 100,000,000 $.01______
Preferred: Preferred: 1,000,000 $.01______
</TABLE>
VOTED: To increase the number of shares of Common Stock, $.01 par value per
share that the Corporation shall have authority to issue from
50,000,000 shares to 100,000,000 shares; and that Article 3 of the
Corporation's Restated Articles of Organization be, and hereby is,
amended to read as follows:
3. The total number of shares and the par value, if any, of each class of
stock which the Corporation shall be authorized to issue is as
follows: 1,000,000 shares of Preferred Stock, $.01 par value per share
and 100,000,000 shares of Common Stock, $.01 par value per share.
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date: _______________________
SIGNED UNDER THE PENALTIES OF PERJURY, this 30th day of May , 1997.
/s/ , *<#>President</#>/ *Vice President,
- -----------------------------------
Thomas G. Auchincloss, Jr.
/s/
- -----------------------------------, *Clerk/ *<#>Assistant Clerk</#>
Richard H. Aldrich
*Delete the inapplicable words.
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
I hereby approve the within Articles of Amendment, and the filing fee in the
amount of $50,000 having been paid, said article is deemed to have been filed
with me this 4th day of June, 1997.
Effective date: _________________________
/S
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Sarah P. Cecil
Vertex Pharmaceuticals Incorporated
130 Waverly Street
Cambridge, MA 02139-4242
<PAGE>
EXHIBIT 3.3
Form CD-26-5M-8-83
Federal Identification
No. 04-3039129
The Commonwealth of Massachusetts
OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE
MICHAEL JOSEPH CONNOLLY, SECRETARY
ONE ASHBURTON PLACE, BOSTON, MASS. 02108
CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING
A SERIES OF A CLASS OF STOCK
General Laws, Chapter 156B, Section 26
We, Joshua Boger, President and
Richard H. Aldrich, Clerk of
Vertex Pharmaceuticals Incorporated
(Name of Corporation)
located at 40 Allston Street, Cambridge, Massachusetts 02139 do hereby certify
that by unanimous written consent of the Board of Directors as of July 1, 1991,
the following vote establishing and designating a series of class of stock and
determining the relative rights and preferences thereof was duly adopted.
See attached.
Note: Votes for which the space provided above is not sufficient should be set
out on continuation sheets to be numbered 2A, 2B etc. Continuation sheets must
have a left-hand margin 1 inch wide for binding and shall be 8 1/2" x 11". Only
one side should be used.
<PAGE>
VOTED, that pursuant to the authority granted to and vested in the Board
of Directors of this Corporation (hereinafter called the "Board of Directors"
or the "Board") by the provisions of the Restated Articles of Organization of
the Corporation approved by the Board on May 23, 1991 and approved by the
stockholders of the Corporation on May 24, 1991, the Board of Directors
hereby establishes a series of Preferred Stock (the "Preferred Stock") of
Restated Articles of Organization with the Secretary of the Commonwealth of
Massachusetts, and hereby states the designation and number of shares, and
prescribes the relative rights and preferences thereof as follows:
Series A Junior Participating Preferred Stock:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A
Preferred Stock shall be 250,000. Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided, that no decrease
shall reduce the number of shares of Series A Preferred Stock to a number
less than the number of shares then outstanding plus the number of shares
reserved for issuance upon the exercise of outstanding options, rights or
warrants, or the conversion of any outstanding securities, issued by the
Corporation exercisable for or convertible into Series A Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and superior
to the Series A Preferred Stock with respect to dividends, the holders of
shares of Series A Preferred Stock, in preference to the holders of Common
Stock, par value $.01 per share (the "Common Stock"), of the Corporation, and
of any other junior stock, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the first day of March, June,
September and December in each year (each such date being referred to herein
as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the first issuance of a share or fraction of a
share of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1 or (b) subject to the provisions
for adjustment hereinafter set forth, 100 times the aggregate per share
amount of all cash dividends, and 100 times the aggregate per share amount
(payable in kind) of all non-cash dividends or other distributions, other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock since the immediately preceding Quarterly
Continuation Sheet 2A
<PAGE>
Dividend Payment Date or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Preferred Stock. In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the amount to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided, that, in
the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share
on the Series A Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date
of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is
a Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of shares
of Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be
Continuation Sheet 2B
<PAGE>
not more than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(A) Each share of Series A Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the stockholders
of the Corporation.
(B) Except as otherwise provided herein, in any other Certificate
of Vote of Directors establishing a series of Preferred Stock or any similar
stock, or by law, the holders of shares of Series A Preferred Stock and the
holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class on
all matters submitted to a vote of the stockholders of the Corporation.
(C) Except as otherwise provided herein, or by law, holders of
shares of Series A Preferred Stock shall have no special voting rights and -
their consent shall not be required (except to the extent they are entitled
to vote with holders of shares of Common Stock as set forth herein) for
taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section
2 are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A Preferred
Stock and all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all such shares
are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Preferred Stock;
provided,
Continuation Sheet 2C
<PAGE>
that the Corporation may at any time redeem, purchase or otherwise acquire
shares of such junior stock in exchange for shares of stock of the Corporation
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A-Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any shares of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution
or winding up) with the Series A Preferred Stock, except-in accordance with a
purchase offer made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment
among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new series of
Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Restated Articles of Organization, or in any other
Certificate of Vote of Directors establishing a series of Preferred Stock or
any similar stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made
(1) to the holders of shares of stock ranking junior (either as to dividends
or upon liquidation, dissolution or winding up) to the Series A Preferred
Stock unless, prior thereto, the holders of shares of Series A Preferred
Stock shall have received $100 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the
date of such payment; provided, that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares
Continuation Sheet 2D
<PAGE>
of Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with
the Series A Preferred Stock, except distributions made ratably on the Series
A Preferred Stock and all such parity stock-in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Corporation shall
at any time declare or pay any dividend on the Common Stock payable in shares
of Common Stock, or effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount to which
holders or shares of Series A Preferred Stock were entitled immediately prior
to such event under the proviso to clause (1) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of which
is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other
stock or securities, cash and/or any other property, then in any such case
each share of Series A Preferred Stock shall at the same time be similarly
exchanged for or changed into an amount per share, subject to the provision
for adjustment hereinafter set forth, equal to 100 times the aggregate amount
of stock, securities, cash and/or any other property (payable in kind), as
the case may be, into which or for which each share of Common Stock is
changed or exchanged. In the event the Corporation shall at any time declare
or pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of shares
of Common Stock, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series A
Preferred Stock shall be adjusted by multiplying such amount by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Preferred Stock shall
not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets, junior to all series
of any other class of the Corporation's Preferred Stock.
Continuation Sheet 2E
<PAGE>
Section 10. Amendment. The Restated Articles of Organization of the
Corporation shall not be amended in any manner which would materially alter
or change the powers, preferences or special rights of the Series A Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of at least two-thirds of the outstanding shares of Series A
Preferred Stock, voting together as a single class.
Continuation Sheet 2F
<PAGE>
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our
names this 30th day of July in the year 1991.
/S/
- ----------------------------
Joshua Boger, President
/S/
- ----------------------------
Richard H. Aldrich, Clerk
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
Certificate of Vote of Directors Establishing
A Series of a Class of Stock
(General Laws, Chapter 156B, Section 26)
I hereby approve the within certificate and, the
filing fee in the amount of $100.00
having been paid, said certificate is hereby filed this
31st day of July, 1991
/S/
MICHAEL JOSEPH CONNOLLY
Secretary of State
TO BE FILLED IN BY CORPORATION
Photo copy of certificate to be sent
TO:
Timothy B. Bancroft, Esq.
Warner & Stackpole
75 State Street, Boston, MA 02109
Telephone: (617) 951-9000
<PAGE>
Exhibit 10.4
FIRST AMENDMENT
to
VERTEX PHARMACEUTICALS INCORPORATED
1996 STOCK AND OPTION PLAN
The Vertex Pharmaceuticals Incorporated 1996 Stock and Option Plan (the
"Plan") is hereby amended, effective as of December 12, 1997, as follows:
Section 3 of the Plan is hereby amended by deleting the first sentence
thereof and substituting therefor the following:
"The number of Shares subject to this Plan as to which Stock Rights may
be granted from time to time shall be 3,250,000 plus the number of shares of
Common Stock previously reserved for the granting of options under the Vertex
Pharmaceuticals Incorporated 1991 Stock Option Plan and 1994 Stock and Option
Plan but not granted thereunder, or the equivalent of such number of Shares
after the Committee, in its sole discretion, has interpreted the effect of
any stock split, stock dividend, combination, recapitalization or similar
transaction in accordance with Section 17 of this Plan."
As so amended, the Plan shall continue in full force and effect.
<PAGE>
EXHIBIT 10.17
Second Amendment, dated 1 February 1998, to Lease Agreement
between Fort Washington Realty Trust and Vertex Pharmaceuticals Incorporated
Dated 1 March 1993
Fort Washington Realty Trust and Vertex Pharmaceuticals Incorporated, hereby
agree to amend the First Amendment to and the current lease on 625 Putnam
Avenue, Cambridge, dated 1 March 1993, as follows:
page 2, Section 2 & 3 of original lease and line 3 of First
Amendment: Extension of term
Term: 1 February 1997 through 31 December 1998
Rent: 15,750 sq It at $15.24/sq ft/yr= $240,000/yr = $20,000/month
Additional Term: 1 January 1999 through 31 December 2000
Rent: 15,750 sq ft at $18.00/sq ft/yr= $283,500/yr = $23,625/month
page 36, Section 11.10: Option to extend beyond first extension:
Tenant's option to Extend: 1 January 2001 through 31 December 2003
Rent for Option Period: 15,750 sq ft at $21.33/sq ft/yr
= $336,000/yr = $28,000/month
Triple-net of all taxes, insurance, utilities, and operating expenses.
This Second Amendment replaces the First Amendment in its entirety
All other provisions of said lease shall remain unchanged.
Signatories certify that they are empowered to commit their respective
organizations in matters pertaining to this agreement, executed in
February 1998.
<TABLE>
<S> <C>
LESSOR: LESSEE:
/S /S
- -------------------------------- -------------------------------------
Fort Washington Realty Trust Vertex Pharmaceuticals Incorporated
By: Henry H. Kolm, Trustee By: Richard H. Aldrich,
Elizabeth C. Kolm, Trustee Senior VP, Chief Business Officer
Date: 30 January, 1998 Date: 2 February 1998
</TABLE>
<PAGE>
SECOND AMENDMENT TO LEASE
This SECOND AMENDMENT TO LEASE is made by and between David E. Clem and
David M. Roby, Trustees of Fort Washington Realty Trust under Declaration of
Trust dated June 19, 1995 and recorded with the Middlesex County (South
District) Registry of Deeds in Book 25422, Page 360 (the "Landlord") and
Vertex Pharmaceuticals Incorporated (the "Tenant").
Reference is hereby made to that certain lease (the "Lease") dated March
3, 1995, by and between Landlord's predecessor, Fort Washington Limited
Partnership and Tenant with respect to a portion of the property (the
"Premises") located at 40 Erie Street, Cambridge, Massachusetts, (the
"Building") as more particularly described in the Lease as amended by a First
Amendment to Lease (the "First Amendment").
WHEREAS, the Tenant has requested, and the Landlord has agreed, to
further amend the Lease to add additional space to the Premises upon the
terms and conditions set forth in this Second Amendment to Lease.
WHEREAS, Landlord and Tenant desire to amend and modify the terms of the
Lease to incorporate the additional space and to ratify and confirm the terms
of the Lease as amended by the First Amendment as more particularly set forth
below.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant agree as
follows:
1. Upon occupancy by Tenant, the definition of the Premises set forth
in the Lease shall be amended to include the addition of 41,132,
r.s.f. of space (the "Additional Space") in the Building currently
leased to Millennium Pharmaceuticals, Inc. ("Millennium"). See
Exhibit A annexed hereto for the layout of the Additional Space.
2. Tenant shall take occupancy of the Additional Space beginning on the
later of (I) the date upon which Millennium vacates the Additional
Space, or (ii) March 19, 1999, and continuing for a period of ten
(10) years from the date upon which Tenant occupies the Additional
Space (the "Additional Space Term"). On or after March 19, 1999, if
necessary, Landlord shall use best efforts to expedite
Millennium's departure from the Additional Space, including filing
an eviction proceeding. Landlord warrants and represents that
according to the terms of its lease with Millennium that the lease
expires on March 18, 1999 as to the Premises and the associated
parking spaces. As to the Premises and the associated parking
spaces, Landlord hereby agrees that Landlord will not extend or
renew the term of Millennium's lease or waive any failure by
Millennium to vacate. Landlord shall not be held liable for any
loss or damage incurred by Tenant as a result of hold-over by
Millennium. Landlord represents that in addition to other sums for
holding over, Millennium must pay a holdover premium equal to the
greater of (a) twice the then fair market rent as reasonably
determined by Landlord, or (b) the total of the Fixed Rent,
Additional
<PAGE>
Rent (as those terms are defined in the Millennium lease) and all other
payments then payable under the Millennium lease. Landlord agrees that it
shall not waive the payment to Landlord of any such holdover premium by
Millennium.
Provided that Tenant has exercised in each instance its options to
extend the Lease Term for the original Premises: (a) Tenant shall have two
(2) options to extend the Additional Space Term (the "Additional Space
Options") for successive periods of five (5) years each (the "Additional
Space Extension Periods"), subject to and on the terms set forth herein.
Tenant may only exercise the Additional Space Options with respect to the
entire Additional Space. If Tenant shall desire to exercise any Additional
Space Option, it shall give Landlord a notice (the "Additional Space Inquiry
Notice") of such desire not later than fifteen (15) months prior to the
expiration of the Additional Space Term of this Lease or the preceding
Additional Space Extension Period, as the case may be. Thereafter, the Fair
Market Rent (as defined in Subsection (c) below) for the applicable
Additional Space Extension Period shall be determined in accordance with
Subsection (d) below. After the applicable Fair Market Rent has been so
determined, Tenant shall exercise each Additional Space Option by giving
Landlord notice (the "Additional Space Exercise Notice") of its election to
do so not later than twelve (12) months prior to the expiration of the
Additional Space Term of this Lease, or the preceding Additional Space
Extension Period, as the case may be. If Tenant fails to timely give either
the Additional Space Inquiry Notice or the Additional Space Exercise Notice
to Landlord with respect to any Additional Space Option, Tenant shall be
conclusively deemed to have waived such Additional Space Option hereunder.
(b) Notwithstanding any contrary provision of this Lease, each
Additional Space Option and any exercise by Tenant thereof shall be void and of
no force or effect unless on the dates Tenant gives Landlord its Additional
Space Inquiry Notice and Additional Space Exercise Notice for each Additional
Space Option and on the date of commencement of each Additional Space Extension
Period (i) this Lease is in full force and effect, (ii) there is no Event of
Default of Tenant under this Lease, and (iii) Tenant has not assigned or
subleased (or agreed to assign or sublease) more than fifty percent (50%) of the
rentable floor area then comprising the Additional Space.
(c) All of the terms, provisions, covenants, and conditions of this
Lease shall continue to apply during each Additional Space Extension Period,
except that the Additional Space Annual Fixed Rent Rate during each Additional
Space Extension Period (the "Extension Rent") shall be equal to the fair market
rent for the Additional Space determined as of the date twelve (12) months prior
to expiration of the Additional Space Term or the preceding Additional Space
Extension Period, as the case may be, in accordance with the procedure set forth
in Subsection (d) below (the "Fair Market Rent").
2
<PAGE>
(d) The Fair Market Rent for each Additional Space Extension Period
shall be determined as follows: Within five (5) days after Tenant gives Landlord
its Additional Space Inquiry Notice with respect to any Additional Space Option,
Landlord shall give Tenant notice of Landlord's determination of the Fair Market
Rent for the applicable Additional Space Extension Period. Within ten (10) days
after Tenant receives such notice, Tenant shall notify Landlord of its agreement
with or objection to Landlord's determination of the Fair Market Rent, whereupon
the Fair Market Rent shall be determined by arbitration conducted in the manner
set forth below. If Tenant does not notify Landlord within such ten (10) day
period of Tenant's agreement with or objection to Landlord's determination of
the Fair Market Rent, then the Fair Market Rent for the applicable Additional
Space Extension Period shall be deemed to be Landlord's determination of the
Fair Market Rent as set forth in the notice from Landlord described in this
subsection.
(e) If Tenant notifies Landlord of Tenant's objection to Landlord's
determination of Fair Market Rent under the preceding subsection, such notice
shall also set forth a request for arbitration and Tenant's appointment of a
commercial real estate broker having at least ten (10) years experience in the
commercial leasing market in the City of Cambridge, Massachusetts (an
"Arbitrator"). Within five (5) days thereafter, Landlord shall by notice to
Tenant appoint a second Arbitrator. Each Arbitrator shall be advised to
determine the Fair Market Rent for the applicable Additional Space Extension
Period within thirty (30) days after Landlord's appointment of the second
Arbitrator. On or before the expiration of such thirty (30) day period, the two
Arbitrators shall confer to compare their respective determinations of the Fair
Market Rent. If the difference between the amounts so determined by the two
Arbitrators is less than or equal to ten percent (10%) of the lower of said
amounts then the final determination of the Fair Market Rent shall be equal to
the average of said amounts. If such difference between said amounts is greater
than ten percent (10%), then the two arbitrators within ten (10) days thereafter
shall appoint a third Arbitrator (the "Third Arbitrator"), who shall be
instructed to determine the Fair Market Rent for the applicable Additional Space
Extension Period within ten (10) days after his appointment by selecting one of
the amounts determined by the other two Arbitrators. Each party shall bear the
cost of the Arbitrator selected by such party. The cost for the Third
Arbitrator, if any, shall be shared equally by Landlord and Tenant.
3. Tenant shall accept the Additional Space in "as is" condition.
Tenant acknowledges that Landlord has made, in anticipation of
Tenant's future occupancy, for the benefit of Tenant at Landlord's
sole cost and expense, certain improvements to the Additional Space
as outlined in Exhibit B. Landlord agrees to consult with Tenant
prior to agreeing to any changes requested by Millennium to the
Additional Space.
3
<PAGE>
4. Upon execution of this Second Amendment to Lease, section 4.1(d) of
the Lease will be stricken in its entirety and be null and void and
of no further force and effect.
5. Upon occupancy by Tenant of the Additional Space, Tenant shall pay
to Landlord Annual Fixed Rent for the Additional Space in the
amount of $1,460,186.00 (the "Additional Space Annual Fixed Rent
Rate"), payable in equal monthly installments of $121,682.17 in
advance on the first day of each calendar month; and for any
portion of a calendar month at the beginning or end of the Term, at
that rate payable in advance for such portion.
6. Article 4.1(b) shall be renumbered as 4.l(b)(l) and the following
shall be added to the Lease as Article 4.1(b)(2):
(b) (2) Adjustment for CPI - Additional Space. (a) On December 31,
2000 (the "First Adjustment Date"), the Additional Space
Annual Fixed Rent Rate shall be increased by multiplying
said rate by the lesser of (i) a fraction, the numerator
of which shall be the Price Index (as hereinafter
defined) most recently established prior to the First
Adjustment Date, and the denominator of which shall be
the Base Price Index (as hereinafter defined), or (ii)
one hundred four percent (104%) per year, compounded
annually over the period of time beginning April 1, 1997
through the First Adjustment Date. (b) On December 31,
2005 (the "Second Adjustment Date"), the Additional Space
Annual Fixed Rent Rate (as adjusted) shall be increased
by multiplying said rate by the lesser of (i) a fraction,
the numerator of which shall be the Price Index (as
hereinafter defined) most recently established prior to
the Second Adjustment Date, and the denominator of which
shall be the Base Price Index (as hereinafter defined),
or (ii) one hundred four percent (104%) per year,
compounded annually over the five (5) years of the
Additional Space Term of this Lease. As used herein, the
term "Price Index" shall mean and refer to the "Consumer
Price Index for Urban Wage Earners and Clerical Workers,
for the Boston, Massachusetts area, All Items (1982-84 =
100)" published by the Bureau of Labor Statistics of the
United States Department of Labor or successor or
substitute index appropriately adjusted, and the term
"Base Price Index" shall mean and refer to the Price
Index most recently established prior to the Commencement
Date. In the event the Price Index (or a successor or
substitute index) shall not be published for the City of
Boston, Massachusetts area or for the months indicated
above, the corresponding index for the United States City
Average (and if this is not available, a reliable
governmental or other nonpartisan publication evaluating
similar or equivalent information as used in the Price
Index) shall be used. In the event the Price Index ceases
to use the 1982-84 average of
4
<PAGE>
100 as the basis of calculation, or if a substantial
change is made in the terms or numbers of items contained
in the Price Index, then the Price Index shall be
adjusted to the figure that would have been arrived at
had the manner of computing the Price Index in effect at
the date of this Lease not been changed.
7. Upon commencement of the Additional Space Term, the Tenant's
Proportionate Fraction as set forth in the Lease will be
amended to 100%.
8. The provisions of Paragraph 10.11 of the Lease shall include
reference to the Additional Space Annual Fixed Rent Rate
in determining the "Security Deposit Amount" as the same
may be adjusted. Upon commencement of the Additional
Space Term, the Tenant shall increase the Security
Deposit Amount by an amount equal to one (1) year
Additional Space Annual Fixed Rent plus additional
amounts, if any, as set forth in paragraph 10.11 as
amended. The Security Deposit Amount shall be adjusted as
provided in Section 10.11 by including the Additional
Space Annual Fixed Rent Rate and other rental amounts due
with respect to the Additional Space, as the same may be
adjusted in accordance with Section 4.1(b), Section
4.1(c), Section 10.12, Section 10.13 and Section 10.14 of
the Lease as amended. The additional Security Deposit
Amount may be in the form of a Letter of Credit in the
form of Exhibit L to the Lease and must be delivered on
the commencement of the Additional Space Term.
9. Upon tenant's reasonable request and subject to availability on
the lot upon which the Building is situated, Landlord
shall provide additional surface parking spaces to Tenant
on a tenancy-at-will basis for an additional charge of
$75.00 per space per month.
10. Landlord acknowledges that Tenant presently intends to
reconfigure the Additional Space upon taking occupancy.
The process for such reconfiguration of the Additional Space
shall be in accordance with paragraph 3.3 of the Lease.
However, Tenant shall be under no obligation to reconfigure the
Additional Space.
11. Exhibit I of the Lease is hereby replaced with Exhibit "I"
attached hereto.
All capitalized terms used herein shall have the same meaning as set
forth in the Lease.
Except as otherwise expressly set forth herein, all other terms of the
Lease shall apply to the Additional Space, are hereby ratified and confirmed and
shall remain unchanged and in full force and effect.
5
<PAGE>
Executed this 13th day of June, 1997.
LANDLORD
By: /S
-----------------------------------------------------
David E. Clem, Trustee as aforesaid and not individually
By: /S
-----------------------------------------------------
David M. Roby, Trustee as aforesaid and not individually
TENANT:
VERTEX PHARMACEUTICALS INCORPORATED
By:
-----------------------------------------------------
Name:
Title:
6
<PAGE>
Executed this 13th day of June, 1997.
LANDLORD
By:
-----------------------------------------------------
David E. Clem, Trustee as aforesaid and not individually
By:
-----------------------------------------------------
David M. Roby, Trustee as aforesaid and not individually
TENANT:
VERTEX PHARMACEUTICALS INCORPORATED
By: /s/
-----------------------------------------------------
Name: Richard H. Aldrich
Title: Senior Vice President
6
<PAGE>
EXHIBIT A
TENANT AREA TWO EQUALS ADDITIONAL SPACE
[Drawings Follow]
<PAGE>
EXHIBIT B
PLAN ENTITLED MILLENNIUM PHARMACEUTICAL INC.
FORT WASHINGTON RESEARCH CENTER
40 ERIE STREET, CAMBRIDGE, MA 02139
INCORPORATING BASE BUILDING RENOVATIONS
STAGE II & MILLENNIUM TENANT FIT-OUT
FINAL GMP/CONSTRUCTION SET ISSUED 1/7/97
<PAGE>
EXHIBIT I
SECOND FLOOR ADDITION PLAN
[DRAWING FOLLOWS]
<PAGE>
This OPTION AGREEMENT is entered into this l2th day of June, 1997, by
and between David E. Clem and David M. Roby, Trustees of Fort Washington Realty
Trust under Declaration of Trust dated June 19, 1995, and recorded in the
Middlesex South District Registry of Deeds in Book 25422, Page 360 (the "Owner")
with an address c/o of Lyme Timber Company, On the Common, P.O. Box 266, Lyme,
New Hampshire 03768, and Vertex Pharmaceuticals Incorporated ("Vertex") with an
address of 40 Erie Street, Cambridge, Massachusetts 02139.
WHEREAS, Owner intends to construct a parking garage (the "Garage")
upon its property located at 47 Erie Street, Cambridge, Massachusetts.
WHEREAS, Vertex is (i) currently a tenant in the building owned by
Owner located at and known as 40 Erie Street, Cambridge, Massachusetts under a
lease dated March 3, 1995, as amended (the "Lease") and (ii) the future Tenant
at 40 Erie Street, Cambridge, Massachusetts, of Additional Space as that term is
defined in a Second Amendment to Lease of even date herewith between Owner and
Vertex.
WHEREAS, Vertex has requested and Owner is willing to grant an option
to Vertex to lease fifty (50) enclosed parking spaces (the "Spaces") in the
Garage subject to the terms and conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Owner and Vertex agree as follows:
1. Commencing on the date of this Option Agreement and expiring on the
commencement of the Additional Space Term (the "Option Period"), and provided
Vertex is not in default under the Lease, Vertex shall have an option (the
"Option") to lease the Spaces from Owner or its successor in interest.
2. Vertex may exercise the Option at any time during the Option Period
by giving written notice to Owner or its successor at the address set forth
above.
3. Within a reasonable period of time after Owner is in receipt of
Vertex's notice of exercise of the Option, Owner shall notify Vertex of the
monthly rental (the "Rent") to be charged for the Spaces, which monthly rental
may include a schedule of incremental rental increases not to exceed one
increase per year of the Parking Space Term as hereinafter defined, which shall
be at Fair Market Rate as determined by Owner.
(a) Within ten (10) days after Vertex receives notice of the
Fair Market Rate to be charged for the Spaces from Owner, Vertex shall notify
Owner of its agreement with or objection to Owner's determination of the Fair
Market Rate, whereupon the Fair
<PAGE>
Market Rate shall be determined by arbitration conducted in the manner set forth
below. If Vertex does not notify Owner within such ten (10) day period of
Vertex's agreement with or objection to Owner's determination of the Fair Market
Rate, then the Fair Market Rate for the Spaces shall be deemed to be Owner's
determination of the Fair Market Rate as set forth in the notice from Owner
described in this subsection.
(b) If Vertex notifies Owner of Vertex's objection to Owner's
determination of Fair Market Rate under the preceding subsection, such notice
shall also set forth a request for arbitration and Vertex's appointment of a
commercial real estate broker having at least ten (10) years' experience in the
commercial leasing market in the City of Cambridge, Massachusetts (an
"Arbitrator"). Within five (5) days thereafter, Owner shall by notice to Vertex
appoint a second Arbitrator. Each Arbitrator shall be instructed to determine
the Fair Market Rate for the applicable Additional Space Extension Period within
thirty (30) days after Owner's appointment of the second Arbitrator. On or
before the expiration of such thirty (30) day period, the two Arbitrators shall
confer to compare their respective determinations of the Fair Market Rate. If
the difference between the amounts so determined by the two Arbitrators is less
than or equal to ten percent (10%) of the lower of said amounts then the final
determination of the Fair Market Rate shall be equal to the average of said
amounts. If such difference between said amounts is greater than ten percent
(10%), then the two arbitrators within ten (10) days thereafter shall appoint a
third Arbitrator (the "Third Arbitrator"), who shall be instructed to determine
the Fair Market Rate for the applicable Additional Space Extension Period within
ten (10) days after his appointment by selecting one of the amounts determined
by the other two Arbitrators. Each party shall bear the cost of the Arbitrator
selected by such party. The cost for the Third Arbitrator, if any, shall be
shared equally by Owner and Vertex.
4. Occupancy of the Spaces and the payment of the Rent shall commence
no later than the commencement of the Additional Space Term and shall continue
until the expiration of the term of the Lease (as may be extended in accordance
with the terms of the Lease), for Vertex's Additional Space at 40 Erie Street as
defined the Lease (the "Parking Space Term").
5. The parties agree to memorialize the Commencement Date of the
Parking Space Term.
6. Notwithstanding the foregoing, none of the terms set forth herein or
the existence of this Option Agreement shall create an obligation on the part of
Owner to construct the Garage.
7. Unless otherwise set forth herein, all capitalized terms used herein
shall have the same meaning as set forth in the Lease and Second Amendment to
Lease referred to herein.
2
<PAGE>
Executed as of the date first above written.
FORT WASHINGTON REALTY TRUST
/S
----------------------------------------------------------
By: David E. Clem, Trustee aforesaid and not individually
/S
----------------------------------------------------------
By: David M. Roby, Trustee as aforesaid and not individually
VERTEX PHARMACEUTICALS INCORPORATED
BY
Name:
Title:
3
<PAGE>
Executed as of the date first above written.
FORT WASHINGTON REALTY TRUST
By:
David E. Clem, Trustee as aforesaid and not individually
By:
David M. Roby, Trustee as aforesaid and not individually
VERTEX PHARMACEUTICALS INCORPORATED
By: /S
----------------------------------------------------------
Name: Richard H. Aldrich
Title: Senior Vice President
3
<PAGE>
EXHIBIT 21
EXHIBIT 21
Subsidiaries of the Registrant
Altus Biologics Inc. (incorporated in Massachusetts)
Vertex Securities Corp. (incorporated in Massachusetts)
Vertex Pharmaceuticals (Europe) Limited (incorporated in England)
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Vertex Pharmaceuticals Incorporated on Form S-8 (File Nos. 33-48030,
33-48348, 33-65742, 33-93224, 33-12325 and 333-27011) of our report dated
February 23, 1998 on our audits of the consolidated financial statements of
Vertex Pharmaceuticals Incorporated, as of December 31, 1997 and 1996, and
for years ended December 31, 1997, 1996 and 1995, which report is included in
this annual report on Form 10-K.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.0
<CASH> 71,454
<SECURITIES> 208,217
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 281,623
<PP&E> 34,720
<DEPRECIATION> 23,625
<TOTAL-ASSETS> 295,604
<CURRENT-LIABILITIES> 13,698
<BONDS> 0
0
0
<COMMON> 252
<OTHER-SE> 275,749
<TOTAL-LIABILITY-AND-EQUITY> 295,604
<SALES> 0
<TOTAL-REVENUES> 43,799
<CGS> 0
<TOTAL-COSTS> 63,054
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 576
<INCOME-PRETAX> (19,831)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,831)
<EPS-PRIMARY> (0.82)
<EPS-DILUTED> (0.82)
</TABLE>
