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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-19319
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VERTEX PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3039129
(State of incorporation) (I.R.S. Employer Identification No.)
130 WAVERLY STREET 02139-4242
CAMBRIDGE, MASSACHUSETTS (Zip Code)
(Address of principal
executive offices)
(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)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _________
As of February 28, 2000 there were outstanding 26,009,481 shares of Common
Stock, $.01 par value per share. The aggregate market value of shares of Common
Stock held by non-affiliates of the registrant, based upon the last sales price
for such stock on that date as reported by The Nasdaq National Stock Market, was
approximately $1,575,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held on May 23, 2000 are incorporated by reference into
Part III.
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The "Company," "Vertex," "we" and "us," as used in this Annual Report on
Form 10-K, refer to Vertex Pharmaceuticals Incorporated, a Massachusetts
corporation.
This Annual Report on Form 10-K contains forward-looking statements based on
current management expectations. When used in this Report, the words "expects,"
"anticipates," "estimates," "plans," "believes," and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
risks and uncertainties. Factors that could cause actual results to differ from
these expectations include, but are not limited to, those discussed in the
section of Item 1 entitled "Risk Factors." These forward-looking statements
speak only as of the date of this Report. Vertex 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 Vertex's
expectations with regard thereto or any change in the events, conditions or
circumstances on which any such statement is based.
"Vertex" is a registered trademark of Vertex Pharmaceuticals Incorporated,
and "Incel" is a trademark of Vertex Pharmaceuticals Incorporated. "Agenerase"
is a trademark of the Glaxo Wellcome Group of companies. "Prozei" is a trademark
of Kissei Pharmaceutical Co., Ltd.
PART I
ITEM 1. BUSINESS
BUSINESS
We design, develop and commercialize novel small molecule drugs that address
significant markets with major medical needs, including the treatment of viral
diseases, cancer, autoimmune and inflammatory diseases, and neurological
disorders. Our drug discovery platform integrates advanced biology, chemistry,
biophysics and information technologies in order to increase the speed and
success rate of pharmaceutical research and development. We are distinguished by
our research and development productivity. We have discovered and advanced nine
drug candidates into clinical development, including one product--the HIV
protease inhibitor Agenerase-TM- (amprenavir)--that has reached the market. We
have a broad product pipeline, with seven drug candidates in Phase II clinical
development.
We have significant collaborations with Glaxo Wellcome, Aventis, Schering AG
(Germany), Eli Lilly, Kissei, and Taisho that provide us with financial support
and other valuable resources for our research programs for the development of
our clinical drug candidates, and for the marketing and sales of our marketed
products. We believe that we are positioned to commercialize multiple products
over the next two to five years, which we expect will generate increased product
revenues and royalty payments. We have additional research programs underway,
and we expect to advance novel drug candidates directed at hepatitis C and
stroke into pre-clinical studies within the next 12 to 18 months.
We have extended our technology platform to exploit the opportunities being
generated by the wealth of information emerging from genomics research. By
applying our structure based design techniques and other technologies to
families of related proteins (as opposed to single proteins), we believe that we
can obtain higher levels of drug discovery productivity and valuable
intellectual property. We refer to this approach as "chemogenomics."
AGENERASE
Our first product, Agenerase, received accelerated approval from the FDA in
April 1999 and was launched in May 1999. Agenerase, which was designed by
Vertex, is marketed in the United States by Glaxo Wellcome. We co-promote
Agenerase in the United States and, if approved, will also co-promote Agenerase
in the European Union. Total sales of the drug for the last seven months of 1999
were $49.7 million, and we received $7.5 million in royalties in 1999 from Glaxo
Wellcome. More than 10,000 patients
2
take Agenerase as part of combination therapy for the treatment of HIV. We
believe that Agenerase is distinguished from other protease inhibitors by its:
- longer half-life, which allows for convenient twice-daily dosing;
- ability to be dosed effectively on a full or empty stomach; and
- lower levels of cross-resistance to other protease inhibitors.
Agenerase has also received regulatory approval in other countries,
including Japan where the drug is sold under the trade name Prozei-TM- by
Kissei. Approval of Agenerase is pending in other jurisdictions, including the
European Union, where we anticipate approval in 2000 and the drug is being made
available through early access programs.
3
PRODUCTS IN RESEARCH AND DEVELOPMENT
Agenerase is the first of many Vertex-discovered products that we intend to
commercialize, by ourselves and with partners, in the coming years. The
accompanying chart describes our drug candidates in Phase II clinical trials and
our research programs.
COMPANY WITH ESTIMATED U.S. PATIENT
DRUG CLINICAL INDICATIONS MARKETING RIGHTS (REGION) POPULATION (MILLIONS)
- ---- -------------------- ------------------------- ---------------------
PHASE II CLINICAL TRIALS
ANTIVIRALS
VX-175 HIV Glaxo Wellcome (Worldwide) 0.9
Vertex co-promote
(U.S. & E.U.)
VX-497 Chronic hepatitis C Vertex (Worldwide) 2.7
CANCER
Incel-TM- Multidrug resistant tumor Vertex (Worldwide) 0.5 (tumor incidence in
cancers target diseases)
VX-853 Multidrug resistant solid Vertex (Worldwide) 0.5 (tumor incidence in
tumor cancers target diseases)
AUTOIMMUNE AND INFLAMMATION
VX-497 Psoriasis Vertex (Worldwide) 0.9 (moderate-to-severe)
VX-740 Rheumatoid arthritis Aventis (Worldwide) 2.1
Vertex co-promote
(U.S. & E.U.)
VX-745 Rheumatoid arthritis Kissei (Japan); 2.1
Vertex (Rest of world)
NEUROLOGICAL
Timcodar Diabetic neuropathy Schering AG (Option) 1.3 (symptomatic)
Vertex co-promote
(U.S. & E.U.)
RESEARCH
HCV protease Hepatitis C Eli Lilly (Worldwide) 2.7
Vertex co-promote
(U.S. & E.U.)
HCV helicase Hepatitis C Vertex (Worldwide) 2.7
Caspases Stroke, Taisho (Japan); NA
Cardiovascular disease Vertex (Rest of world)
Kinases Cancer, Vertex (Worldwide) NA
Neurodegenerative diseases
We are evaluating second generation compounds in the Company's IMPDH, ICE,
p38, and neurophilin ligand programs, and expect to advance second generation
candidates in each program in the next one to two years.
4
COMMERCIAL PRODUCT AND CLINICAL DEVELOPMENT PROGRAMS
We have one product on the market and seven drug candidates in clinical
development to treat viral diseases, cancer, autoimmune and inflammatory
diseases and neurological disorders, as well as a number of earlier stage
research programs.
ANTIVIRAL PROGRAMS
HIV/AIDS
AGENERASE-TM---OVERVIEW
Our first marketed product is Agenerase (amprenavir), an orally deliverable
drug for the treatment of HIV infection and AIDS. A second generation HIV
protease inhibitor, Agenerase was developed by us in collaboration with Glaxo
Wellcome plc. Glaxo Wellcome is marketing Agenerase worldwide except for the Far
East, and we have U.S. and European co-promotion. Agenerase received regulatory
approval in the United States in April 1999, and has also been approved in
Brazil, Mexico, Uruguay, Argentina, Israel, and Switzerland. Agenerase has been
submitted for approval in other markets worldwide, including the European Union
(EU). In Japan, we collaborated with Kissei Pharmaceutical Co., Ltd. in the
development of amprenavir, which is sold by Kissei under the trade name
Prozei-TM-. We receive royalties on sales of amprenavir by Glaxo Wellcome and
Kissei. We also supply amprenavir bulk drug substance to Kissei.
We anticipate market approval in the EU in 2000. To support the use of
Agenerase in the marketplace, we and Glaxo Wellcome have undertaken a broad
Phase IV clinical program aimed at evaluating the drug's use as part of
different combinations in a variety of patient populations.
Kissei received approval for amprenavir under a special fast-track
initiative by the Ministry of Health and Welfare in Japan in September 1999.
Amprenavir's market launch as Prozei followed shortly thereafter. As a condition
of accelerated approval, Kissei is conducting a Phase II/III clinical trial of
amprenavir.
VX-175--OVERVIEW
We first synthesized the compound VX-175 (also referred to as GW433908) as
part of our HIV research and development collaboration with Glaxo Wellcome.
VX-175 is a prodrug of amprenavir that is designed to provide more compact
dosing for patients. A prodrug is an inactive compound that is changed
metabolically by the body to become active against disease. Preclinical studies
showed the prodrug to be highly water-soluble and bioavailable in animals. In a
Phase I study of 16 healthy volunteers completed during 1999, the prodrug
formulation was found to be bioequivalent to amprenavir and also showed
dose-proportionality. A dose-ranging Phase II clinical study to assess
preliminary safety and efficacy and to help determine pharmacokinetics in HIV
patients is now underway to determine the optimal dose of VX-175. We anticipate
that Glaxo Wellcome will begin Phase III trials of VX-175 in 2000. The FDA has
given VX-175 fast track designation. Fast track designation is granted to
products that may provide a significant improvement in the safety or
effectiveness of the treatment for a serious or life-threatening disease. Glaxo
Wellcome is developing the prodrug and has marketing rights in the United
States, Europe and certain countries of the Far East. Kissei has an option to
develop and commercialize the prodrug in Japan. We have an option to co-promote
the prodrug in the United States and the EU, and we will receive royalties on
sales of VX-175, if any. We also retain rights to supply bulk drug substance to
Glaxo Wellcome.
BACKGROUND: HIV/AIDS
Infection with the HIV virus leads to AIDS, a severe, life-threatening
impairment of the immune system. The World Health Organization (WHO) estimates
that approximately 33.6 million persons worldwide, including approximately
920,000 patients in North America, are infected with HIV.
5
Protease inhibitors (PIs) are used as part of combination regimens for the
treatment of HIV. Currently, about 66% of the HIV patients receiving drug
treatment in the U.S. take at least one protease inhibitor. The market for HIV
protease inhibitors is highly competitive, with five different PIs vying for a
share of a $1 billion U.S. market. Worldwide sales of HIV protease inhibitors
were an estimated $2.2 billion in 1999, compared to $1.8 billion in 1998. There
are now three classes of antiviral drugs approved for the treatment of HIV
infection and AIDS: nucleoside reverse transcriptase inhibitors (NRTIs), such as
AZT and 3TC, non-nucleoside reverse transcriptase inhibitors (NNRTIs), such as
nevarapine, and protease inhibitors, including Agenerase. In the United States,
more than 10,000 patients take Agenerase as part of combination therapy for the
treatment of HIV infection.
We used our expertise in structure-based drug design to create and develop
Agenerase to address critical unmet needs in the treatment of HIV. We believe
that Agenerase has several advantages over other PIs in the market including:
- The pharmacological half-life in the body of Agenerase is 7 to 9.5 hours,
which is longer than any other currently available protease inhibitor.
- Agenerase absorption is not significantly affected by the presence or
absence of food (although the drug should not be taken with a high fat
meal), and there are no substantial hydration requirements. In practical
clinical terms, this allows the drug to be dosed twice daily regardless of
meal times, without compromising the antiviral activity of the drug.
- Agenerase appears to have less cross-resistance with other PIs, allowing
the drug to be used as a first or a follow-on PI.
Preliminary data have also shown that Agenerase is less associated with high
cholesterol and triglyceride levels, and less associated with syndromes of fat
redistribution than have been reported for other protease inhibitors. Further
study will be required to confirm these preliminary data and to understand more
fully the clinical significance of Agenerase's resistance profile.
HEPATITIS C VIRUS (HCV) INFECTION
VX-497-- OVERVIEW
VX-497 is a novel, orally administered IMPDH inhibitor that we designed.
VX-497 has demonstrated potent biological activity and oral bioavailability in
preclinical and early clinical studies. We are conducting a Phase II clinical
trial of VX-497 for the treatment of hepatitis C virus (HCV) infection. We
retain all commercial rights to VX-497 and any second generation compounds
resulting from our IMPDH research and development program.
In November 1999, we announced preliminary data from a Phase II clinical
trial of VX-497, indicating that VX-497 was well tolerated and appears to reduce
liver inflammation in patients with HCV infection. Preliminary Phase II data
also indicate that the drug was well-tolerated and resulted in reduced levels of
serum alanine aminotransferase, a marker of liver inflammation, in HCV patients
treated for 28 days. We are now conducting a three-month extension study to
further explore the safety and pharmacokinetics of VX-497 as a monotherapy in
patients with HCV, treating a continuing group of patients who were unresponsive
to prior treatment with interferon-alpha. In 2000, we plan to begin a Phase II
study of VX-497 combined with interferon-alpha in treatment-naive patients.
VX-497 is also in Phase II clinical trials for psoriasis.
BACKGROUND: HCV
IMPDH is a cellular enzyme that regulates the production of nucleotides
which are the building blocks of RNA and DNA. Viruses that invade the body
depend on these nucleotides for replication, and depletion of nucleotides may
cripple a virus's ability to replicate and infect new cells. IMPDH catalyzes a
6
key step in nucleotide biosynthesis. Most cell types can use an alternative
pathway if IMPDH is inhibited, but a few cell types, such as lymphocytes and
virus-infected cells, are completely dependent on this enzyme. IMPDH inhibitors
thus selectively block the proliferation of lymphocytes and the replication of
certain viruses, and we believe that IMPDH inhibitors may be useful both in
immunosuppression and as antiviral agents.
Data from a Phase I trial in healthy volunteers, completed in early 1998,
show that VX-497 is well-tolerated in single escalating doses and achieves blood
levels well above those necessary to achieve potent inhibition of IMPDH IN
VITRO. As an immunosuppressive, VX-497 may block the activity of certain
lymphocyte populations that result in inflammation of the liver in HCV patients.
VX-497 may also have a direct antiviral effect on HCV and other viruses.
CANCER
MDR PROGRAM--OVERVIEW
We are developing novel compounds to treat and prevent the occurrence of
drug resistance associated with the failure of cancer chemotherapy. We are
developing Incel-TM- (also referred to as biricodar dicitrate or VX-710), a
compound that blocks major multidrug resistance (MDR) mechanisms, including
P-glycoprotein, or P-gp, and multidrug resistance associated protein, or MRP.
Incel, an intravenous compound, is intended to be administered in combination
with cancer chemotherapy agents, such as doxorubicin, paclitaxel, vincristine,
etoposide and mitoxantrone. We are conducting Phase II clinical trials of Incel
in five different types of cancer. In addition, we are conducting a Phase I/II
clinical trial of the compound VX-853, an oral MDR inhibitor, in patients with
solid tumors. We retain all commercial rights to Incel worldwide.
Our development strategy is to evaluate Incel in a broad range of tumor
types in combination with widely used anti-cancer agents. Multiple Phase II
clinical studies have been undertaken in ovarian, breast, small cell lung and
prostate cancers, and in soft tissue sarcoma. Exploratory studies have also been
conducted in liver cancer. The objective of these trials is to assess Incel's
safety and pharmacokinetics and identify the tumor type, drug and dosage
regimens to be studied further in Phase III clinical trials. Incel is being
evaluated in combination with doxorubicin and paclitaxel, two of the most widely
used anti-cancer agents, as well as with mitoxantrone, prednisone and
vincristine. Historical response rates of patients who have failed first-line
chemotherapy (refractory patients) who attempt chemotherapy a second time are
extremely low. Preliminary analysis of response rates using Incel in conjunction
with chemotherapy suggests a potential benefit to combination therapy for
refractory patients.
7
There are currently five Phase II studies underway that we expect to
complete in 2000, in ovarian cancer, breast cancer, soft tissue sarcoma,
prostate cancer, and small cell lung cancer, the details of which are described
in the following table:
INCEL-TM- PHASE II CLINICAL DEVELOPMENT SUMMARY
NUMBER OF
PATIENT POPULATION REGIMEN PATIENTS STATUS CLINICAL RESPONSE RATE
- ------------------ ------- -------- ------ ----------------------
Refractory ovarian Incel/paclitaxel 25 Ongoing 12% (1 CR, 2 PR)
cancer
Refractory breast Incel/paclitaxel 38 Final data analysis 17% (4 PR, 2 MR)
cancer
Refractory soft Incel/doxorubicin 37 Final data analysis 10% (2 PR, 8 SD)
tissue sarcoma
Hormone refractory Incel/mitoxantrone & 40 Final data analysis 27%
prostate cancer prednisone
Small cell lung Incel/doxorubicin/ N/A Ongoing N/A
cancer vincristine
- ------------------------
PR=partial response; MR=minor response; CR=complete response; SD=stable disease;
N/A=not available
A second compound, VX-853, has been optimized by Vertex for oral
administration. IN VITRO results show that VX-853 potently blocks MDR mediated
by both P-gp and MRP. We are conducting a Phase I/II clinical trial with VX-853
to assess the safety and pharmacokinetics of the compound in combination with
doxorubicin.
BACKGROUND: MDR
The American Cancer Society estimates that during 1999 more than
1.2 million people in the United States were diagnosed with invasive cancer and
more than 560,000 people in the U.S. died from such cancers. A significant
number of these patients failed to respond or relapsed following chemotherapy
because of MDR.
A major contributing factor to MDR is the presence of molecular pumps,
including P-gp and MRP, that expel chemotherapeutic agents from cancer cells,
preventing the sustained delivery of the potent levels of the chemotherapeutic
agents required for therapeutic benefit. As a consequence, these resistant tumor
cells cannot be killed efficiently by anticancer drugs such as doxorubicin,
vincristine, etoposide and paclitaxel. P-gp has been associated with MDR in a
variety of cancers including liver cancer, breast cancer, soft tissue sarcoma,
prostate cancer, colon cancer, pancreatic cancer, acute myelogenous leukemia,
multiple myeloma and certain lung cancers. MRP has been identified as another
drug efflux pump and is also associated with resistance.
No drug has been approved by the FDA specifically for the treatment of MDR,
but several compounds are in advanced clinical studies. Certain agents, such as
dex-verapamil and cyclosporin A, have been shown in preliminary human studies to
have some promise for overcoming clinical resistance to certain commonly used
chemotherapeutic agents. We believe that these drugs affect only a subset of the
MDR pumps and may have side effects that could limit broad use. Second
generation multidrug reversing agents, such as PSC 833 (valspodar), a
cyclosporine derivative, are also currently being evaluated by other companies.
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AUTOIMMUNE AND INFLAMMATORY DISEASES
AUTOIMMUNE DISEASE
VX-497--OVERVIEW
We are conducting a Phase II clinical trial of our IMPDH inhibitor VX-497 in
psoriasis patients, to make a preliminary assessment of its clinical efficacy.
There are approximately 900,000 patients in the U.S. with moderate to severe
psoriasis.
We may expand clinical development of VX-497 into additional autoimmune,
transplant and antiviral indications in the future. We are also continuing
research and development activities to identify second generation IMPDH
inhibitors.
INFLAMMATORY DISEASE
VX-740--OVERVIEW
We are conducting research and development on inhibitors of interleukin-1
beta converting enzyme (ICE) for the treatment of acute and chronic inflammatory
conditions, including rheumatoid arthritis. We are collaborating with Aventis
S.A. in the development of the ICE inhibitor compound VX-740 (which Aventis
calls HMR 3480). Aventis is conducting a Phase II clinical trial of VX-740 in
patients with rheumatoid arthritis. Inhibitors of ICE may have application to a
wide range of chronic and acute inflammatory diseases, such as rheumatoid
arthritis, osteoarthritis, inflammatory bowel disease, atherosclerosis, sepsis,
and pancreatitis. We are also independently conducting research into second
generation ICE inhibitors.
In September 1999, we announced an agreement under which Aventis holds an
exclusive worldwide license to develop, manufacture and market VX-740 in any
indication, as well as an exclusive option for all other compounds discovered
under a previous research collaboration between Vertex and Hoechst Marion
Roussel (HMR). HMR and Rhone-Poulenc Rorer merged to form Aventis in
December 1999. As part of the agreement, Aventis may pay us up to $62 million
for the development of VX-740 in rheumatoid arthritis, the first targeted
indication, and Aventis will pay for all development costs. Aventis is
conducting a Phase II clinical trial of VX-740 in patients with rheumatoid
arthritis which began in September 1999. The primary goal of the study is to
evaluate the safety and pharmacokinetics of multiple doses of VX-740 in
rheumatoid arthritis patients. We anticipate that a larger Phase II study of
VX-740 will be initiated by Aventis in 2000. A Phase I clinical trial of the
compound, completed by Aventis earlier in 1999, showed that the compound was
well-tolerated in humans in a range of single doses. We are continuing research
into second generation ICE inhibitors, as well as other caspase inhibitors.
BACKGROUND: ICE INHIBITORS FOR INFLAMMATORY DISEASE
ICE is an enzyme that controls the release of active Interleukin-1 (IL-1)
beta (one of two forms of Interleukin-1) from white blood cells into the
bloodstream and within tissues. IL-1 beta is a cytokine that mediates a wide
range of immune and inflammatory responses in many cell types. Early in the
inflammatory process, IL-1 beta is released from white blood cells, initiating a
complex cascade of events that results in inflammation and tissue damage.
Elevation of IL-1 beta levels has been correlated to disease state in a number
of acute and chronic inflammatory diseases.
Rheumatoid arthritis is the lead indication of the VX-740 development
program. In patients with rheumatoid arthritis, increased activity of IL-1 beta
is seen in joint tissues during disease flare-ups, and IL-1 beta is known to
activate osteoclasts, a cell type important in bone erosion characteristic of
rheumatoid arthritis. In mice genetically modified to lack the ICE gene,
systemic IL-1 beta levels are sharply reduced, and the mice are resistant to
experimentally induced arthritis. In normal mice in which
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arthritis has been successfully induced, treatment with VX-740 significantly
reduces severity of arthritis compared to control.
There are more than six million patients with rheumatoid arthritis
worldwide, including approximately 2.1 million in the United States. The main
drugs used to treat rheumatoid arthritis are non-steroidal anti-inflammatory
drugs (NSAIDs) such as Motrin (ibuprofen) and Celebrex (celecoxib). These drugs
are palliative--they relieve pain and swelling but do not reverse or prevent the
progression of the disease. Methotrexate is a disease-modifying drug that is
widely used, but its use is limited by side effects that include bone marrow
suppression and liver toxicity. Even when tolerated well, over the long term
many patients become unresponsive to methotrexate. Newer therapies including
Enbrel (etanercept) and Remicade (infliximab) provide a strong rationale for a
new kind of disease modifying therapy that involves inhibition of the cytokine
tumor necrosis factor (TNF) alpha. However, both Enbrel and Remicade are
injectable, and therefore, we believe that an oral cytokine inhibitor such as
VX-740 has significant dosing advantages.
Vertex and Aventis scientists began collaborating in 1993 to discover and
develop orally available inhibitors of ICE. Their design efforts were based on
the three-dimensional atomic structure of ICE, which was solved by Vertex
researchers in 1994. As the result of an extensive, jointly conducted synthesis
and research program, HMV 3480/VX-740 was selected as a development candidate in
1996. HMR 3480/VX-740 is the first caspase inhibitor to be advanced to Phase II
clinical trials.
VX-745--OVERVIEW
We are collaborating with Kissei on the design, development and
commercialization of inhibitors of p38 MAP kinase. During 1999, we started a
Phase II clinical trial with VX-745 in patients with rheumatoid arthritis.
VX-745 is a novel orally administered investigational drug targeting p38 MAP
kinase. The p38 MAP kinase is a human enzyme involved with the onset and
progression of inflammation and apoptosis, or programmed cell death. The enzyme
plays a central role in regulating the cytokines TNF alpha and IL-1 beta. The
objective of our research collaboration with Kissei is to identify and
extensively evaluate compounds that target p38 MAP kinase to develop novel,
orally active drugs for the treatment of inflammatory diseases, such as
rheumatoid arthritis, asthma, and Crohn's disease, and neurological diseases
such as stroke.
During 1998, Vertex and Kissei selected VX-745 as a lead drug development
candidate targeting p38 MAP kinase. We conducted a Phase I clinical trial of the
compound in healthy volunteers in early 1999. Based on the results of that
study, we began an exploratory Phase II trial in rheumatoid arthritis patients
in Europe in October 1999. This trial is a 28-day study designed to test the
tolerability and pharmacokinetics of VX-745 in ten patients with rheumatoid
arthritis. The trial will also assess the pharmacodynamic activity of VX-745,
and clinical disease activity markers will be monitored.
BACKGROUND: P38 INHIBITORS FOR INFLAMMATORY DISEASE
The mitogen-activated protein (MAP) kinases are a family of
structurally-related human enzymes involved in intracellular signaling pathways
that enable cells to respond to their environment. When activated, the p38 MAP
kinase triggers production of the cytokines IL-1, IL-6 and tumor necrosis factor
TNF-alpha. Excess levels of IL-1 and TNF-alpha are associated with a broad range
of acute and chronic inflammatory diseases. They also play an important role in
programmed cell death associated with ischemia and stroke, and in
neurodegenerative diseases such as Alzheimer's and Parkinson's Disease. We are
aware of several other companies that are developing p38 MAP kinase inhibitors.
In addition, there are other drugs, in development or approved, that have
different mechanisms of action for treating rheumatoid arthritis and other
inflammatory diseases.
10
NEUROLOGICAL DISEASES
TIMCODAR--OVERVIEW
Timcodar dimesylate (also referred to as VX-853) is a novel, orally
administered drug that may be useful in the treatment of neurological disorders
such as peripheral neuropathies (including diabetic neuropathy), Parkinson's
Disease, trauma, and amyotrophic lateral sclerosis, or ALS. In addition to
timcodar, we are conducting research to discover and develop drugs through our
Neurophilin Ligand Program. We have used an integrated drug design technique to
synthesize a library of orally available small molecule compounds that have the
potential to promote recovery of nerve function and nerve growth. We are engaged
in a worldwide strategic partnership with Schering AG (Germany) for research,
development and commercialization of neurophilin ligands for the treatment of a
variety of neurological disorders. In 1999, we completed a Phase II clinical
trial of timcodar in diabetic neuropathy patients. Schering AG has an option to
co-develop timcodar with us under the collaboration agreement.
During 1999, we announced that orally administered neurophilin compounds
discovered at Vertex, including compounds that do not interact with FKBP-12,
significantly improve outcome in two different preclinical models of Parkinson's
Disease. We also reported for the first time that compounds that do not interact
with FKBP-12 can improve outcomes in animal models of peripheral neuropathies.
In 1999, we completed a Phase II clinical trial with timcodar demonstrating that
the drug was well-tolerated and was orally bioavailable in the range of doses
tested. A single-dose Phase I study of four different doses of timcodar in
healthy volunteers was completed in 1998, providing support for Phase II
clinical development in the indication of diabetic neuropathy. IN VITRO results
have shown timcodar's ability to promote neurite outgrowth, and IN VIVO results
have shown that timcodar can prevent neural dysfunction in a model of diabetic
polyneuropathy.
BACKGROUND: NEUROLOGICAL DISEASES
Neurodegenerative disorders are among the diseases with the fewest available
effective treatments. Central nervous system disorders such as Alzheimer's
Disease, Parkinson's Disease and multiple sclerosis affect millions of patients
worldwide, and for some of these there are no approved therapies that alter the
course of disease progression. Peripheral neuropathies encompass a wide spectrum
of clinical syndromes for which treatments of only limited efficacy are
available. Diabetic neuropathy is the most common identifiable cause of
neuropathy. There are approximately 1.3 million patients with moderate to severe
diabetic neuropathy in the United States.
Effective treatment of both central and peripheral neurological disorders
has long been hampered by the inability to slow, arrest, or reverse nerve damage
or progression. Other companies are developing various neurotrophic factors
(proteins) for these indications, but we believe that their clinical utility is
likely to be limited because of the difficulty of the delivery of protein drugs.
Based on our extensive research in the field of immunosuppressive drugs, we have
been able to generate a large number of compounds, known as neurophilin ligands,
that trigger nerve growth activity. Extensive IN VITRO and IN VIVO studies
conducted with a reference compound designed by Vertex support the broad
potential of our neurophilin ligands in the treatment of degenerative central
nervous system and peripheral nervous system diseases. Our clinical neurophilin
ligand candidate, timcodar, has demonstrated potent activity in accelerating
recovery of nerve function following injury and reversing experimental nerve
damage in preclinical studies. Our researchers are still seeking to determine
the mechanism of action of neurophilin ligands.
BACKGROUND TO DRUG DISCOVERY
Drugs are natural or synthetic compounds that interact with a target
molecule, typically a protein, either to induce or to inhibit that molecule's
function within the human body. Traditionally, pharmaceutical products have been
discovered through screening thousands of compounds in predictive assays for a
chosen disease target.
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The drug discovery process is complex and involves multiple steps and
disciplines. The key steps in the discovery and development of a compound for
human testing (a drug candidate) typically include:
- identification of a drug target;
- development of a relevant biological assay;
- selection of compounds for screening;
- identification of a lead molecule;
- optimization of a lead molecule; and
- preclinical development.
Qualities that are critical to the successful development of an oral small
molecule include sufficient potency, oral bioavailability, adequate
pharmacokinetics, and safety. Failure to achieve any one of these parameters is
a major reason for a molecule failing early in the development process.
OUR INTEGRATED APPROACH TO DRUG DISCOVERY
We use a broad-based, proprietary approach to drug design that integrates
multiple advanced technologies early in the drug design process, to increase the
speed and certainty of drug development. We have consistently shown the ability
of our approach to advance drug candidates directed at biologically complex
targets. We believe that our track record compares favorably with industry
standards. Our drug discovery platform integrates advanced biology, biophysics
chemistry and information technologies in a coordinated and simultaneous fashion
throughout the discovery process. We employ a variety of technologies to
accelerate the drug discovery process and to provide a more certain outcome in
clinical development, including:
FUNCTIONAL GENOMICS. We use a number of functional genomics techniques,
such as gene knock-out mice, to help guide target selection and test the
potential of its compounds in disease models. We also use techniques such as
site-directed mutagenesis to identify critical residues for drug interaction in
the active site of a molecular target.
BIOPHYSICS. A core strength of Vertex is the generation of atomic
structural information on molecular targets using x-ray crystallography and
nuclear magnetic resonance (NMR) spectroscopy to guide design of optimization of
lead classes of drugs. Our scientists have also pioneered innovative NMR
techniques, including a proprietary technology called NMR SHAPES which can
screen molecular subunits for weak affinity to a molecular target. This initial
screening can quickly identify lead classes of molecules for further evaluation.
COMPUTER-BASED MODELING. We apply advanced, proprietary computational
modeling tools to guide early evaluation of compounds. During initial virtual
compound screening ("IN SILICO"), we can evaluate 10(14) compounds in one day to
select 100 or 1,000 compounds for synthesis and traditional screening, and
repeat the cycle on subsequent days based on initial results. By using
proprietary algorithms to sort and filter compounds for specific properties, our
scientists can efficiently focus on compounds that are more likely to be useful
leads.
MEDICINAL AND COMBINATORIAL CHEMISTRY. Medicinal chemistry expertise is a
key part of our drug discovery process. Medicinal chemists visually evaluate
each compound which emerges through IN SILICO screening process and provide
insight into the creation of focused libraries for screening. We use
combinatorial chemistry to design diverse libraries based on promising early
leads.
PHARMACOLOGY. We employ a number of approaches designed to provide
predictive information on the bioavailability and pharmacokinetic profile of
potential compounds at the earliest stages of the drug discovery process. These
approaches, which include IN VITRO metabolism and toxicological studies and IN
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VIVO assessment of leads in predictive animal models, provide greater certainty
that a compound will have properties desired of an oral drug.
RESEARCH PROGRAMS
SINGLE TARGET PROGRAMS
HEPATITIS C VIRUS PROGRAMS
We are conducting two discovery research programs to develop compounds to
treat hepatitis C. Identified in 1989, the hepatitis C virus (HCV) causes
chronic inflammation in the liver. In a majority of patients, HCV establishes a
chronic infection that can persist for decades and eventually lead to cirrhosis,
liver failure and liver cancer. HCV infection represents a significant medical
problem worldwide for which there is inadequate or no therapy for a majority of
patients. Sources at the CDC have estimated that approximately 2.7 million
Americans, or more than 1% of the population, are chronically infected with HCV,
and the WHO estimates that there are more than 170 million chronic carriers of
the virus worldwide. Currently, there is no vaccine available to prevent
hepatitis C infection. The only drugs approved for the treatment of hepatitis C
are interferon alpha and ribavirin. Combination therapy with interferon alpha
and ribavirin is the most successful treatment currently available, but over 50%
of patients still failed to show long-term sustained response to that
combination, and safe and effective treatments for HCV infection are needed.
HEPATITIS C PROTEASE
The hepatitis C NS3-4A serine protease is a virally encoded enzyme generally
believed to be essential for replication of HCV. Under an agreement signed
during 1997, we are collaborating with Eli Lilly and Company on the research,
development and commercialization of novel, orally active HCV protease
inhibitors for the treatment of hepatitis C infection. This research derives
heavily from detailed structural information about the protease, discovered and
developed by our researchers.
HEPATITIS C HELICASE
We are also conducting discovery research to design orally deliverable drugs
to inhibit the hepatitis C virus helicase. The NS3 helicase enzyme is believed
to play an essential role in the infectious cycle of the hepatitis C virus by
aligning viral DNA in its proper configuration for replication. Therefore, the
HCV helicase represents an attractive target for drug discovery.
Researchers from Vertex solved the three-dimensional atomic structure of the
hepatitis C virus NS3 helicase. We are using this 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 the HCV
helicase for clinical development as new antiviral drugs to treat HCV infection.
DISCOVERY OPPORTUNITY: CHEMOGENOMICS
Genomics and related biological approaches are producing a wealth of
information on new molecular targets. New drugs, however, have not emerged at
the same rate as new targets, since the technological and organizational
advances in potential target identification have proceeded much faster
industrywide compared to advances in drug discovery. The number of new targets
now emerging is outpacing the capability of pharmaceutical research and
development groups to discover efficiently drugs based on those targets. We
believe that those companies that can best utilize genomic information will be
the ultimate beneficiaries of the genomics revolution. Vertex is uniquely
positioned to translate genomics information into targeted drug candidates.
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Our approach to drug discovery to date has focused on discrete and unrelated
molecular targets, such as HIV protease, IMPDH, and ICE. We are now engaged in a
discovery approach designed to generate drugs directed at structurally related
molecular targets in protein families. This approach applies our integrated
strategy across a range of molecular targets to pursue rapid and simultaneous
generation of lead compounds.
We believe that our skills in designing drugs based on the atomic structure
of a molecular target's active site will allow us to:
- efficiently design multiple chemical scaffolds that bind to many different
related proteins and
- rapidly identify appropriate chemical side chains for these scaffolds that
will provide specificity for a particular target of interest within a
group of related proteins.
This strategy has already enabled us to describe large numbers of lead
classes of novel chemical compounds directed at the caspase and kinase protein
families, and to describe the interactions of these compounds with a variety of
molecular targets in these families.
We use the term CHEMOGENOMICS to describe this discovery approach.
Chemogenomics is the discovery and description of all possible drug compounds
directed at all possible drug targets. We believe that we will be able to use
our integrated technological approach to describe many, and in some cases, all
of the possible novel chemical classes of compounds and their interactions with
specific molecular targets in protein families of our choosing. We will seek
intellectual property protection for compound classes not previously described
for a given target. We believe that the chemogenomics approach will accelerate
drug discovery directed at important novel targets as well as provide the
company with broad and enabling intellectual property. We also believe that our
chemogenomics strategy will create opportunities for broad corporate
partnerships directed at the discovery of new drugs.
To further accelerate this strategy, on February 28, 2000, we entered into
an agreement with Incyte Pharmaceuticals to gain access to its Lifeseq Gold
database, a comprehensive portfolio of genomic information. We anticipate
integrating such information, as well as information from both public and
private databases, to further our chemogenomics approach.
MULTI-TARGET RESEARCH PROGRAMS
CASPASE INHIBITORS PROGRAM
We are designing novel small molecule inhibitors of selected caspase enzyme
targets to treat a variety of diseases in which apoptosis, or programmed cell
death, plays a role. Our scientists are leveraging the expertise gained through
our successful design and optimization of inhibitors of ICE (caspase-1). In
November 1999, we began collaborating with Taisho Pharmaceutical Co., Ltd. to
discover, develop, and commercialize caspase inhibitors in Japan and certain Far
East markets. We retain exclusive rights to the caspase program in the United
States, Europe and the rest of the world.
All cells have the ability to self-destruct via a tightly-regulated pathway
known as apoptosis in response to certain signals. Apoptosis is an essential
component of numerous biological processes, including tissue remodeling and
immune system regulation. When not properly regulated, apoptosis can have
damaging effects and contribute to a variety of diseases. Caspases are a family
of 11 structurally related human enzymes which play specific roles in apoptosis
and inflammation. Our discovery effort is focused on the design of small
molecules for inhibiting caspase-mediated apoptotic processes, thereby exerting
a protective effect on cells in specific tissues. Potential indications include
tissue damage related to acute conditions such as stroke and myocardial
ischemia, and neurodegenerative disorders such as Alzheimer's Disease and
Parkinson's Disease.
In our caspase inhibitors program, we are implementing our strategy for
exploiting emerging genomic information by targeting large families of
structurally-related proteins for drug discovery. Different
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caspases share similar structural features, and by using parallel structural
approaches combined with new medicinal and computational chemistry tools, our
scientists have been able to make rapid progress in the design and synthesis of
multiple lead classes of compounds. Our scientists have solved the three-
dimensional atomic structures of four caspases, including one caspase from each
of the three caspase subfamilies, and more than 50 enzyme/inhibitor complexes.
Through gene knockout studies, our scientists have been able to gain important
insight into the biological role of different caspases in the activation of
apoptosis in specific cells and tissues. We intend to use this information to
design novel small molecule caspase inhibitors for development and
commercialization in several indications in collaboration with Taisho.
MAP KINASE INHIBITORS PROGRAM
We have undertaken a broad-based drug discovery effort targeting MAP kinase
intracellular signaling pathways. Human mitogen-activated protein (MAP) kinases
form a group of structurally-related enzymes that include extracellular-signal
regulated kinase (ERK), p38 MAP kinase, and Jun N-terminal kinase (JNK). In
response to specific biological and chemical signals, MAP kinases become
activated by specific upstream kinases, called MAP kinase kinases (MKK). The
activated MAP kinases in turn activate other downstream kinases, transcription
factors, and translation factors, resulting in cellular responses including
apoptosis, cell proliferation and cytokine release.
We are currently focused on discovery and development of inhibitors of MAP
kinases, including JNK and ERK, as well as other related kinases. As a
neuronal-specific isoform of JNK, JNK3 is a member of the MAP kinase family and
is implicated as a key mediator of signal transduction pathways central to the
pathogenesis of certain neurological diseases involving apoptosis-driven
neurodegeneration. Recent findings suggest that JNK3 plays an important role in
central nervous system disorders such as epilepsy, stroke and Alzheimer's
Disease. Our scientists are leveraging the expertise gained through our p38 MAP
kinase program. We have identified several novel classes of JNK3 MAP kinase
inhibitors and are currently using advanced drug discovery technology to move
lead compounds toward clinical candidate status.
We are also engaged in the discovery of inhibitors of the enzyme ERK2, which
plays a role in the activation of enzymes and other factors involved in cell
division. We believe that ERK2 inhibitors may have a role in the treatment of
cancer. We are also applying our discovery expertise in the MAP kinase area to
the discovery of inhibitors targeting a wide variety of structurally related
kinases.
CORPORATE COLLABORATIONS
We have entered into corporate collaborations with pharmaceutical companies
that provide financial and other resources, including capabilities in research,
development, manufacturing, and sales and marketing, to support our research and
development programs. At present, we have the following major corporate
collaborations.
GLAXO WELLCOME PLC.
In December 1993, we entered into a collaboration with Glaxo Wellcome
covering the development and commercialization of Agenerase (amprenavir) and its
prodrug, VX-175 (also referred to as GW433908). Glaxo Wellcome has exclusive
rights to develop and commercialize our HIV protease inhibitors in all parts of
the world except the Far East and pays us a royalty on sales. We have retained
certain bulk drug manufacturing rights and certain co-promotion rights in the
territories licensed to Glaxo Wellcome. Under the collaborative agreement, Glaxo
Wellcome agreed to pay us up to $42 million, comprised of a $15 million license
payment paid in December 1993, $14 million of product research funding over five
years and $13 million of development and commercialization milestone payments
for an initial drug candidate. Glaxo Wellcome is also obligated to pay us
additional development and commercialization milestone payments for subsequent
drug candidates, including VX-175. From the inception of the
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agreement in December 1993 through December 31, 1999, we recognized $40 million
as revenue. We have received the full amount of research funding specified under
the agreement. In addition, Glaxo Wellcome is required to bear the costs of
development in its territory under the collaboration. During 1999, we received a
$5 million milestone payment from Glaxo Wellcome for Agenerase marketing
approval in the United States.
Glaxo Wellcome has the right to terminate its agreement with us without
cause upon twelve months' notice. Termination by Glaxo Wellcome of the agreement
will relieve Glaxo Wellcome of its obligation to make further commercialization
and development milestone and royalty payments, and will end any license granted
to Glaxo Wellcome by us.
We and Glaxo Wellcome have a non-exclusive, worldwide license under certain
Searle patent applications claiming HIV protease inhibitors to permit Vertex and
Glaxo Wellcome to develop, manufacture and market Agenerase free of the risk of
intellectual property claims by Searle. The terms of the license require us to
pay Searle a royalty on net sales.
KISSEI PHARMACEUTICAL CO., LTD.
HIV PROTEASE INHIBITORS. In April 1993, we entered into a collaboration
with Kissei covering the development of amprenavir, our HIV protease inhibitor.
Kissei has exclusive rights to develop and commercialize amprenavir in Japan and
will pay us a royalty on sales. Kissei also has an exclusive option to develop
and commercialize the amprenavir prodrug VX-175 in Japan. We are responsible for
the manufacture of bulk product for Kissei. Under the collaborative agreement,
Kissei agreed to pay to us up to $20 million, comprised of $9.8 million of
product research funding over three years, $7 million of development and
commercialization milestone payments and a $3.2 million equity investment. From
the inception of the agreement in April 1993 through December 31, 1999,
$15.6 million has been recognized as revenue. In addition, $4 million has been
recognized related to reimbursements of certain development costs. We have
received the full amount of research funding specified under the agreement.
P38 MAP KINASE. In September 1997, we entered into a collaboration with
Kissei to identify and develop compounds that target p38 MAP kinase, including
VX-745. We will collaborate with Kissei in the development and commercialization
of novel, orally active p38 MAP kinase inhibitors as drugs for the treatment of
inflammatory and neurological diseases. Kissei 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. We
retain exclusive marketing rights in the United States, Canada, Europe, and the
rest of the world. In addition, we will have the right to supply bulk drug
material to Kissei for sale in its territory, and will receive royalties and
drug supply payments on any product sales. Under the terms of the agreement,
Kissei agreed to pay us up to $22 million, comprised of a $4 million license
payment paid in September 1997, $11 million of product research funding over
three years and $7 million of development and commercialization milestone
payments. Additionally, Kissei agreed to pay certain costs. From the inception
of the agreement in September 1997 through December 31, 1999, $15 million has
been recognized as revenue. Kissei has the right to terminate the agreement
without cause upon six months' notice.
BIOCHEM PHARMA INC.
In May 1996, we entered into a collaboration with BioChem for the
development and commercialization in Canada of Incel, our cancer multidrug
resistance inhibitor. From the inception of the agreement in May 1996 through
December 31, 1998, we recognized $0.8 million as revenue. BioChem also paid
certain costs of development of Incel in Canada. We have received the full
amount of research funding specified under the agreement, and BioChem has no
further license rights with respect to Incel.
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AVENTIS S.A.
In September 1, 1999, we entered into an expanded agreement with HMR
covering the development of HMR 3480/VX-740. HMR and Rhone-Poulenc Rorer merged
to form Aventis in December 1999. Aventis has an exclusive worldwide license to
develop, manufacture and market VX-740, as well as an exclusive option for all
other compounds discovered as part of the research collaboration between Vertex
and HMR that ended in 1997. Aventis will fund the development of VX-740. We may
co-promote the product in the United States and Europe and will receive
royalties on global sales, if any. Under the agreement, Aventis agreed to pay us
$20 million for prior research costs, and $62 million in milestone payments for
successful development by Aventis of VX-740 in rheumatoid arthritis, the first
targeted indication, as well as similar milestone payments for each additional
indication. Aventis has the right to terminate this agreement without cause upon
six months' written notice.
ELI LILLY & COMPANY
In June 1997, we entered into a collaboration with Lilly covering the
development of novel small molecule compounds to treat hepatitis C infection.
Vertex and Lilly will jointly manage the research, development, manufacturing
and marketing of drug candidates emerging from the collaboration. We will have
primary responsibility for drug design, process development and pre-commercial
drug substance manufacturing, and Lilly will have primary responsibility for
formulation, preclinical and clinical development and global marketing. We have
the option to supply 100% of Lilly's commercial drug substance supply needs. We
will receive royalties on future product sales, if any. If we exercise our
commercial supply option, we will receive drug supply payments in addition to
royalties on future product sales, if any. Under the terms of the agreement,
Lilly will pay us up to $51 million, comprised of a $3 million 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, 1999,
$16.2 million has been recognized as revenue. Lilly has the right to terminate
the agreement without cause upon six months' notice.
SCHERING AG (GERMANY)
In August 1998, we entered into a collaboration with Schering AG covering
the research, development and commercialization of novel, orally active
neurophilin ligand compounds to promote nerve regeneration for the treatment of
a number of neurological diseases. Vertex and Schering AG will have an equal
role in management of neurophilin ligand research and product development. In
North America, we will have manufacturing rights, and we will share equally with
Schering AG in the marketing expenses and profits from commercialized compounds.
In addition to having manufacturing rights in North America, we retain the
option to manufacture bulk drug substance for sales and marketing in territories
outside Europe, the Middle East and Africa. Schering AG will have the right to
manufacture and market any commercialized compounds in Europe, the Middle East
and Africa, and pay us a royalty on product sales. Under the terms of the
agreement, Schering AG will pay us up to $88 million, comprised of $6 million
paid upon signing in September 1998, $22 million of product research funding
over five years and $60 million of development and commercialization milestone
payments. From the inception of the agreement in August 1998 through
December 31, 1999, $14 million has been recognized as revenue. After
December 2000, Schering AG has the right to terminate without cause upon six
months' written notice.
TAISHO PHARMACEUTICAL CO., LTD.
In November 1999, we entered into a collaboration with Taisho covering the
discovery, development, and commercialization of caspase inhibitors for the
treatment of cerebrovascular, cardiovascular and neurodegenerative diseases.
Taisho will have an option to obtain marketing rights in Japan and certain Far
East markets for any compounds arising from the collaboration. Under the
agreement, Taisho agreed to pay us up to $43 million comprised of research
funding, milestone payments, including $4.5 million for
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prior research costs. These amounts are based on the development of two
compounds. We will also receive royalties on future product sales, if any. In
addition, Taisho will also pay for certain costs of developing compounds that
emerge from the caspase research program. From inception of the agreement in
November 1999 through December 31, 1999, $3.9 million has been recognized as
revenue.
INTELLECTUAL PROPERTY
We vigorously pursue patents to protect our intellectual property. As of
February 25, 2000, we have 69 issued U.S. patents and have 108 pending U.S.
patent applications covering proprietary technologies and intellectual property
within our discovery and development programs, as well as foreign counterparts
in many other countries.
We actively seek, when appropriate, protection for our products and
proprietary information by means of United States and foreign patents,
trademarks and contractual arrangements. In addition, we rely upon trade secrets
and contractual arrangements to protect certain of our proprietary information
and products. In addition to patents and pending patent applications that relate
to potential drug targets, compounds we are developing to modulate those
targets, and methods of using such compounds, we have several pending patent
applications directed to proprietary elements of our drug discovery platform.
These include patent applications on our SHAPES approach to NMR-based screening
and on the use of a protein or a mutant of that protein to design inhibitors of
other related proteins. We have also filed patent applications related to the
three-dimensional atomic structures of targets of interest, the use of those
structures to design drugs, classes of compounds that bind to a target of
interest, and the interactions required between a compound and a target of
interest.
Much of our technology and many of our processes depend upon the knowledge,
experience and skills of key scientific and technical personnel. To protect our
rights to our proprietary know-how and technology, we require all employees,
consultants, advisors and collaborators to enter into confidentiality agreements
that prohibit the disclosure of confidential information to anyone outside
Vertex. These agreements require disclosure and assignment to Vertex of ideas,
developments, discoveries and inventions made by employees, consultants,
advisors and collaborators.
PATENTS AND PENDING APPLICATIONS
We have issued patents and pending applications in the United States, and in
foreign countries we deem appropriate, covering intellectual property developed
as part of each of our most advanced research, development and commercialized
programs. These include:
- issued United States patents that cover classes of chemical compounds,
pharmaceutical formulations and/or uses of the same for treating HIV
infection and AIDS. The patents include specific coverage for amprenavir,
pharmaceutical formulations containing amprenavir and methods of using of
amprenavir to treat HIV infection or AIDS-related central nervous system
disorders. Another issued United States patent covers processes for
preparing synthetic intermediates useful in the synthesis of a class of
compounds that includes amprenavir. We have a non-exclusive, worldwide
license under certain Searle patent applications claiming HIV protease
inhibitors. We also have applications pending in the United States and
other countries claiming VX-175 and related compounds.
- an issued United States patent which covers a class of chemical compounds,
pharmaceutical compositions containing such compounds, and methods of
using those compounds to treat or prevent IMPDH-mediated diseases. The
class of compounds covered by this patent includes VX-497.
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- issued United States patents claiming Incel and structurally related
compounds, VX-853 and structurally related compounds, and other compounds
for treating multidrug resistance, as part of our MDR research and
development program.
- issued United States patents covering the active metabolite of VX-740,
several different classes of compounds useful as inhibitors of ICE,
pharmaceutical compositions containing those compounds and methods of
using those compounds to treat ICE-related diseases. We have also received
a Notice of Allowance in an application claiming VX-740. These patents and
applications also include a series of patents and applications purchased
from Sanofi S.A., in July 1997. We also have a United States patent
obtained from Sanofi S.A. that covers DNA sequences encoding ICE.
- an issued patent that covers a class of chemical compounds that includes
VX-745, as well as applications claiming VX-745 specifically, compositions
comprising those compounds and the use of those compounds to treat
p38-related disorders, as part of our p38 MAP kinase research and
development program.
- issued United States patents covering various classes of chemical
compounds and their use to treat a wide variety of neurological disorders.
One of these patents specifically covers the use of timcodar to treat
neurological disorders, as part of our neurophilin research and
development program.
- an issued United States patent covering an assay useful to evaluate
potential inhibitors of hepatitis C protease. Other applications cover
hepatitis C protease and hepatitis C helicase inhibitors and the X-ray
crystal structures of hepatitis C protease and hepatitis C helicase,
including the use of those structures to develop hepatitis C protease
inhibitors and hepatitis C helicase inhibitors, respectively.
- filed applications claiming classes of caspase inhibitors and a caspase
target discovered under our caspase inhibitors program.
- filed applications claiming inhibitors of JNK and ERK, in addition to p38
MAP kinase, as part of our kinase research programs.
We do not know whether any patents will issue from any of our patent
applications or, even if patents issue or have issued, that the issued claims
will provide us with any significant protection against competitive products or
otherwise be valuable commercially. Legal standards relating to the validity of
patents and the proper scope of their claims in the biopharmaceutical field are
uncertain. We also cannot be sure that we will be able to avoid infringing, and
thus having to negotiate a license under, any patents issued to others, or that
a license to such patents would be available on commercially acceptable terms,
if at all. (See "Risk Factors--Our patents may not protect our products, and our
products may infringe third-party patents".)
MANUFACTURING
We rely on third party manufacturers and collaborative partners to produce
our compounds for preclinical and clinical purposes and may do so for commercial
production of any compounds that are approved for marketing. Commercial
manufacturing of Agenerase is being done by Glaxo Wellcome. We retain the option
to manufacture a portion of Glaxo Wellcome's requirements for bulk drug
substance for Agenerase and its prodrug. If we were to exercise that option, we
would rely upon one or more contract manufacturers to manufacture the bulk drug
substance on our behalf.
We have established a quality assurance program, including a set of standard
operating procedures, intended to ensure that third party manufacturers under
contract produce our compounds in accordance with the FDA's current Good
Manufacturing Practices, or cGMP, and other applicable regulations.
We believe that all of our existing compounds can be produced using
established manufacturing methods, primarily through standard techniques of
pharmaceutical synthesis. We believe that we will be able to continue to
negotiate third party manufacturing arrangements on commercially reasonable
terms
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and that it will not be necessary for us to develop internal manufacturing
capability in order to successfully commercialize our products. Our objective is
to maintain flexibility in deciding whether to develop internal manufacturing
capabilities for certain of its potential products. However, in the event that
we are unable to obtain contract manufacturing, or obtain such manufacturing on
commercially reasonable terms, we may not be able to commercialize our products
as planned. We have limited experience in manufacturing pharmaceutical or other
products or in conducting manufacturing testing programs required to obtain FDA
and other regulatory approvals, and there can be no assurance that we will
further develop such capabilities successfully.
Since most of our potential products are at an early stage of development,
we will need to improve or modify our existing manufacturing processes and
capabilities to produce commercial quantities of any drug product economically.
We cannot quantify the time or expense that may ultimately be required to
improve or modify our existing process technologies, but it is possible that
such time or expense could be substantial.
The production of our compounds is based in part on technology that we
believe to be proprietary. We may license this technology to contract
manufacturers to enable them to manufacture compounds for us. In addition, a
contract manufacturer may develop process technology related to the manufacture
of our compounds that the manufacturer owns either independently or jointly with
us. This would increase our reliance on such manufacturer or require us to
obtain a license from such manufacturer in order to have our products
manufactured.
COMPETITION
We are engaged in biopharmaceutical fields characterized by extensive
research efforts, rapid technological progress and intense competition. There
are many public and private companies, including pharmaceutical companies,
chemical companies and biotechnology companies, engaged in developing products
for the same human therapeutic applications as those that we are targeting. In
order for us to compete successfully, we must demonstrate improved safety,
efficacy, ease of manufacturing and market acceptance of our products over those
of our competitors who have received regulatory approval and are currently
marketing their drugs. In the field of HIV protease inhibition, Merck &
Co., Inc., Abbott Laboratories, Inc., Hoffmann-La Roche, and Warner Lambert have
other HIV protease inhibitor drugs on the market. Many of our competitors have
substantially greater financial, technical and human resources than ours and
more experience in the development of new drugs.
GOVERNMENT REGULATION
Our development, manufacture and potential sale of therapeutics are subject
to extensive regulation by United States and foreign governmental authorities.
In particular, pharmaceutical products are subject to rigorous preclinical and
clinical testing and to other approval requirements by the FDA in the United
States under the Food, Drug and Cosmetic Act and by comparable agencies in most
foreign countries.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animals to identify potential safety
problems. For certain diseases, animal models exist that are believed to be
predictive of human efficacy. For such diseases, a drug candidate is tested in
an animal model. The results of the studies are submitted to the FDA as a part
of the Investigational New Drug application (IND) which is filed to comply with
FDA regulations prior to commencement of human clinical testing in the U.S. For
diseases for which no appropriately predictive animal model exists, no such
results can be filed. For several of our drug candidates, no appropriately
predictive model exists. As a result, no IN VIVO evidence of efficacy would be
available until such compounds progress to human clinical trials.
Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. In Phase I, which frequently begins with the initial
introduction of the drug into healthy human subjects prior to introduction into
patients, the compound will be tested for safety, dosage tolerance, absorption,
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bioavailability, biodistribution, metabolism, excretion, clinical pharmacology
and, if possible, for early information on effectiveness. Phase II typically
involves studies in a small sample of the intended patient population to assess
the efficacy and duration of the drug for a specific indication, to determine
dose tolerance and the optimal dose range and to gather additional information
relating to safety and potential adverse effects. Phase III trials are
undertaken to further evaluate clinical safety and efficacy in an expanded
patient population at geographically dispersed study sites, to determine the
overall risk-benefit ratio of the drug and to provide an adequate basis for
physician labeling. Each trial is conducted in accordance with certain standards
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety and the efficacy criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the IND. Further, each clinical study
must be evaluated by an independent Institutional Review Board at the
institution at which the study will be conducted. The Institutional Review Board
will consider, among other things, ethical factors, the safety of human subjects
and the possible liability of the institution.
Data from preclinical testing and clinical trials are submitted to the FDA
in a New Drug Application (NDA) for marketing approval. The process of
completing clinical testing and obtaining FDA approval for a new drug is likely
to take a number of years and require the expenditure of substantial resources.
Preparing an NDA involves considerable data collection, verification, analysis
and expense, and there can be no assurance that approval will be granted on a
timely basis, if at all. The approval process is affected by a number of
factors, including the severity of the disease, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials. The FDA
may deny an NDA if applicable regulatory criteria are not satisfied or may
require additional testing or information. Among the conditions for marketing
approval is the requirement that the prospective manufacturer's quality control
and manufacturing procedures conform to the FDA's cGMP regulations, which must
be followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, monies and effort in
the area of production and quality control to ensure full technical compliance.
Manufacturing establishments, both foreign and domestic, also are subject to
inspections by or under the authority of the FDA and by or under the authority
of other federal, state or local agencies.
Even after initial FDA approval has been obtained, further studies,
including post-marketing studies, may be required to provide additional data on
safety and will be required to gain approval for the use of a product as a
treatment for clinical indications other than those for which the product was
initially tested. Also, the FDA will require post-marketing reporting to monitor
the side effects of the drug. Results of post-marketing programs may limit or
expand further marketing of the 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. We may apply for orphan drug status for certain indications of MDR
in cancer.
Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
sponsor may be granted marketing exclusivity for a period of time following FDA
approval of certain drug applications if FDA approval is received before the
expiration of the patent's original term. This marketing exclusivity would
prevent a third party from obtaining FDA approval for a similar or identical
drug through an Abbreviated New Drug Application, which is the application form
typically used by manufacturers seeking
21
approval of a generic drug. The statute also allows a patent owner to extend the
term of the patent for a period equal to one-half the period of time elapsed
between the filing of an IND and the filing of the corresponding NDA plus the
period of time between the filing of the NDA and FDA approval. We intend to seek
the benefits of this statute, but there can be no assurance that we will be able
to obtain any such benefits.
Whether or not FDA approval has been obtained, approval of a drug product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. Historically,
the requirements governing the conduct of clinical trials and product approvals,
and the time required for approval, have varied widely from country to country.
In addition to the statutes and regulations described above, we are 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.
EMPLOYEES
As of December 31, 1999, we had 353 full-time employees, including 240 in
research and development, 53 in support services and 60 in general and
administrative functions. 31 of these employees were located at our U.K.
research and development facility. Our scientific staff members (132 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. Our employees are not
covered by a collective bargaining agreement, and we consider our relations with
our employees to be good.
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions held by our executive officers and directors
are as follows:
NAME AGE POSITION
---- -------- --------
Joshua S. Boger, Ph.D..................... 48 Chairman, President and Chief Executive
Officer
Richard H. Aldrich........................ 45 Senior Vice President and Chief Business
Officer
Vicki L. Sato, Ph.D....................... 51 Senior Vice President of Research and
Development and Chief Scientific Officer;
Chair of the Scientific Advisory Board
John J. Alam, M.D......................... 38 Vice President of Clinical Development
Iain P. M. Buchanan....................... 46 Vice President of European Operations;
Managing Director of Vertex
Pharmaceuticals (Europe) Limited
Thomas G. Auchincloss, Jr................. 38 Vice President of Finance and Treasurer
Barry M. Bloom............................ 70 Director
Roger W. Brimblecombe, Ph.D., D.Sc........ 69 Director
Donald R. Conklin......................... 62 Director
Charles A. Sanders, M.D................... 67 Director
Elaine S. Ullian.......................... 51 Director
Bruce I. Sachs............................ 40 Director
All executive officers are elected by the Board of Directors to serve in
their respective capacities until their successors are elected and qualified or
until their earlier resignation or removal.
22
Dr. Boger is a founder of Vertex and was our President and Chief Scientific
Officer from our 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 Vertex's inception. Prior
to founding Vertex in 1989, Dr. Boger held the position of Senior Director of
Basic Chemistry at Merck Sharp & Dohme Research Laboratories in Rahway, New
Jersey, where he headed both the Department of Medicinal Chemistry of
Immunology & Inflammation and the Department of Biophysical Chemistry.
Dr. Boger is also a Director of Millennium Pharmaceuticals, Inc. Dr. Boger holds
a B.A. in chemistry and philosophy from Wesleyan University and M.S. and Ph.D.
degrees in chemistry from Harvard University.
Mr. Aldrich served as Vice President of Business Development of Vertex 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.
Dr. Alam has served as Vice President of Clinical Development since joining
Vertex in October 1997. Dr. Alam came to Vertex from Biogen, Inc., where he held
a variety of positions from 1991-1997, including Director of Medical Research
and Program Executive for Avonex (beta interferon). Prior to joining Biogen,
Dr. Alam was a Research Fellow at the Dana Farber Cancer Institute and had
completed an internal medicine residency at Brigham and Women's Hospital in
Boston. Dr. Alam holds an M.D. from Northwestern University Medical School and a
B.S. in Chemical Engineering from the Massachusetts Institute of Technology.
Mr. Buchanan joined Vertex 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 Vertex 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.
Dr. Bloom has served as our director since 1994. He was formerly with Pfizer
Inc. as Executive Vice President of Research and Development from 1992 to 1993,
and as Vice President from 1990 to 1992, and a director since 1973. He also
serves as a director of Catalytica Pharmaceuticals, Cubist Pharmaceuticals Inc.,
Incyte Genomics Inc., Neurogen Corporation and MICROBIA, Inc.
23
Dr. Brimblecombe has served as our director since 1993. He has served as
Chairman of Vanguard Medica Ltd. since 1991 and of Core Group plc since 1997. He
also served as Non-Executive Chairman of Oxford Asymmetry International plc
since 1997. From 1979 to 1990, he held various Vice Presidential posts in
SmithKline & French Laboratories research and development organization. He also
serves as a director of Ontogeny, Inc. and several other companies located in
the United Kingdom.
Mr. Conklin has served as our director since 1994. He served as Vice
President of Schering Plough from 1986 to 1996 and subsequently retired at the
end of 1996. He also serves as a director of AlfaCell Inc. and
BioTransplant Inc.
Dr. Sanders has served as our director since 1996. He retired in 1994 as
Chief Executive Officer and in 1995 as Chairman of Glaxo Inc. From 1990 to 1995,
he served as a member of the board of Glaxo plc. From 1981 to 1989, Dr. Sanders
held a number of positions at the Squibb Corporation, including that of Vice
Chairman. Has served on the boards of Merrill Lynch, Reynolds Metals and Morton
International Inc. He is currently a director of Biopure Corporation, Genentech,
Inc., Kendle International Inc., Magainin Pharmaceuticals Inc., Pharmacopeia
Inc., Scios, Inc., Staffmark Inc., Trimeris Inc.
Ms. Ullian has served as our director since 1997. Since 1996, she has served
as President and Chief Executive Officer of Boston Medical Center. From 1994 to
1996, she served as President and Chief Executive Officer of Boston University
Medical Center Hospital. From 1987 to 1994, Ms. Ullian served President and
Chief Executive Officer of Faulkner Hospital. She also serves as a director of
Hologics Inc.
Mr. Sachs has served as our director since 1998. He currently serves as a
General Partner at Charles River Ventures. From 1998 to 1999, he served as
Executive Vice President and General Manager of Ascend Communications, Inc. From
1997 until 1998, Mr. Sachs served as President and CEO of Stratus Computer, Inc.
From 1995 to 1997, he served as Executive Vice President and General Manager of
the Internet Telecom Business Group at Bay Networks, Inc. From 1993 to 1995, he
served as Chief Executive Officer at Xylogics, Inc. Mr. Sachs also serves as a
director of Media 100 Inc.
SCIENTIFIC ADVISORY BOARD
Vertex's Scientific Advisory Board consists of individuals with demonstrated
expertise in various fields who advise us concerning long-term scientific
planning, research and development. The Scientific Advisory
24
Board also evaluates our research programs, recommends personnel to us and
advises us on technological matters. The members of the Scientific Advisory
Board, which is chaired by Dr. Vicki L. Sato, are:
Vicki L. Sato, Ph.D........... Senior Vice President of Research and Development and Chief
Scientific Officer, Vertex Pharmaceuticals Incorporated.
Steven J. Burakoff, M.D....... Chair, Department of Pediatric Oncology, Dana-Farber Cancer
Institute; Margaret M. Dyson Professor of Pediatrics,
Harvard Medical School.
Eugene H. Cordes, Ph.D........ Professor of Pharmacy and Chemistry, University of Michigan
at Ann Arbor.
Jerome E. Groopman, M.D....... Chief, Division of Experimental Medicine, Beth Israel
Deaconess Medical Center; Recanati Chair of Medicine and
Professor of Medicine, Harvard Medical School.
Stephen C. Harrison, Ph.D..... Higgins Professor of Biochemistry, Harvard University;
Investigator, Howard Hughes Medical Institute; Professor of
Biological Chemistry and Molecular Pharmacology and
Professor of Pediatrics, Harvard Medical School.
Jeremy R. Knowles, D. Phil.... Dean of the Faculty of Arts and Sciences and Amory Houghton
Professor of Chemistry and Biochemistry, Harvard University.
Robert T. Schooley, M.D....... Tim Gill Professor of Medicine and Head of Infectious
Disease, University of Colorado Health Sciences Center.
Other than Dr. Sato, none of the members of the Scientific Advisory Board is
employed by Vertex, 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 us. Accordingly, such persons are expected to
devote only a small portion of their time to us. In addition to our Scientific
Advisory Board, we have established consulting relationships with a number of
scientific and medical experts who advise us on a project-specific basis.
RISK FACTORS
WE DO NOT KNOW HOW SUCCESSFUL AGENERASE WILL BE IN THE MARKET.
Agenerase was launched less than a year ago and is currently awaiting
marketing approval by regulatory authorities in a number of major markets,
including the EU. It is too early to predict the extent to which Agenerase will
be successful in the market. Four other HIV protease inhibitors are on the
market, as well as a number of other products for the treatment of HIV infection
and AIDS. In addition, other drugs are still in development by our competitors,
which may have more efficacy, fewer side effects, easier administration and/or
lower costs than Agenerase. HIV has been shown to develop resistance to
antiviral drugs, including currently marketed HIV protease inhibitors. We cannot
be sure whether such disease resistance or other factors may limit the efficacy
of Agenerase. Although we co-promote Agenerase in the U.S. and intend to
co-promote it in Europe, most of the marketing and sales efforts are being made
by Glaxo Wellcome, and we will have little control over the success of those
efforts. Glaxo Wellcome has the right to terminate its agreement with us without
cause upon twelve months' notice.
WE DO NOT KNOW WHETHER DEVELOPMENT OF OUR DRUG PIPELINE WILL BE SUCCESSFUL.
The products that we are pursuing will require extensive additional
development, testing and investment, as well as regulatory approvals, prior to
commercialization. We cannot be sure whether our product development efforts
will be successful, that required regulatory approvals will be obtained or that
any products, if introduced, will be commercially successful. The results of
preclinical and initial clinical
25
trials of products under development by us are not necessarily predictive of
results that will be obtained from large-scale clinical testing. We cannot be
sure that clinical trials of products under development will demonstrate the
safety and efficacy of such products or will result in a marketable product. In
addition, the administration alone or in combination with other drugs of any
product developed by us may produce undesirable side effects in humans.
The failure to demonstrate adequately the safety and efficacy of a
therapeutic drug under development could delay or prevent regulatory approval of
the product and could have a material adverse effect on our company. In
addition, the FDA may require additional clinical trials, which could result in
increased costs and significant development delays. Commercial formulation and
manufacturing processes have yet to be developed for our drug candidates other
than Agenerase. We or our collaborators may encounter difficulties in
manufacturing process development and formulation activities that could result
in delays in clinical trials, regulatory submissions, regulatory approvals, and
commercialization of our products, or cause negative financial and competitive
consequences.
DEVELOPMENT PROGRESS MAY BE SLOWED BY CLINICAL TRIAL DELAYS.
The rate of completion of clinical trials of our 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, the level of
compliance by the clinical sites to clinical trial protocols, 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 our company. We cannot be certain that
if clinical trials are completed, we 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.
WE MAY NOT OBTAIN REGULATORY APPROVAL FOR OUR PRODUCTS ON A TIMELY BASIS, OR AT
ALL.
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of therapeutic pharmaceutical products through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time-consuming procedures. Satisfaction of these
requirements typically takes several years or longer and may vary substantially
based upon the type, complexity and novelty of the pharmaceutical product. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. In
addition, delays or rejections may be encountered based on changes in, or
additions to, regulatory policies for drug approval during the period of product
development and regulatory review. The effect of government regulation may be to
delay or prevent the commencement of clinical trials or marketing of our
products, if any are developed and submitted for approval, for a considerable
period of time, to impose costly procedures upon our activities and to provide
competitive advantages to companies more experienced in regulatory affairs that
compete with us. Moreover, even if approval is granted, such approval may entail
limitations on the indicated uses for which a compound may be marketed.
OUR PRODUCTS, EVEN IF APPROVED BY THE FDA OR FOREIGN REGULATORY AUTHORITIES, MAY
NOT BE ACCEPTED BY PHYSICIANS, INSURERS OR PATIENTS.
If any of our products after receiving FDA or other foreign regulatory
approval fails to achieve market acceptance, our ability to become profitable in
the future could be adversely affected. We believe that market acceptance
depends on our ability to provide acceptable evidence of safety, efficacy and
cost-effectiveness, among other factors.
26
WE DEPEND ON COLLABORATIVE PARTNERS FOR THE DEVELOPMENT AND COMMERCIALIZATION OF
OUR PRODUCTS.
Our collaborative partners have agreed to fund portions of our research and
development programs and/or to conduct certain research and development relating
to specified products. In exchange, we have given them technology, product and
marketing rights relating to those products. Some of our corporate partners have
rights to control the planning and execution of product development and clinical
programs. The corporate partners may exercise their control rights in ways that
may negatively impact the timing and success of those programs. Our
collaborations are subject to termination rights by the collaborators. If any of
our corporate collaborators were to terminate its relationship with us, it could
have a material adverse effect on our ability to fund related and other programs
and to develop, manufacture and market any products that may have resulted from
the collaboration. We expect to seek additional collaborative arrangements to
develop and commercialize our products in the future. We cannot be certain that
we will be able to establish acceptable collaborative arrangements in the future
or that such collaborative arrangements will be successful.
IT IS POSSIBLE THAT WE MAY LOSE OUR TECHNOLOGICAL ADVANTAGE BECAUSE
PHARMACEUTICAL RESEARCH TECHNOLOGIES CHANGE RAPIDLY.
The pharmaceutical research field is characterized by rapid technological
progress and intense competition. Further, we believe that interest in the
application of structure-based drug design and related technologies may continue
and may accelerate as the technologies become more widely understood.
Businesses, academic institutions, governmental agencies and other public and
private research organizations are conducting research to develop technologies
that may compete with those we use. It is possible that our competitors could
acquire or develop technologies that would render our technology obsolete or
noncompetitive. We cannot be certain that we will be able to access the same
technologies at an acceptable price, or at all.
OUR COMPETITORS MAY BRING SUPERIOR PRODUCTS TO MARKET OR MAY BRING THEIR
PRODUCTS TO MARKET BEFORE WE DO.
We do not know whether our products in development will be able to compete
effectively with products which are currently on the market or new products that
may be developed by others. There are many other companies developing products
for the same indications that we are pursuing in development. In order to
compete successfully in these areas, we must demonstrate improved safety,
efficacy, ease of manufacturing and market acceptance over competing products
which have received regulatory approval and are currently marketed. Many of our
competitors have substantially greater financial, technical and human resources
than we do. In addition, many of our competitors have significantly greater
experience than we do in conducting preclinical testing and human clinical
trials of new pharmaceutical products, and in obtaining FDA and other regulatory
approvals of products. Accordingly, our competitors may succeed in obtaining
regulatory approval for products more rapidly than we do. If we obtain
regulatory approval and launch commercial sales of our products, we will also
compete with respect to manufacturing efficiency and sales and marketing
capabilities, areas in which we currently have limited experience.
THE LOSS OF THE SERVICES OF KEY EMPLOYEES OR THE FAILURE TO HIRE QUALIFIED
EMPLOYEES WOULD NEGATIVELY IMPACT OUR BUSINESS AND FUTURE GROWTH.
Because our products are highly technical in nature, only highly qualified
and trained scientists have the necessary skills to develop our products. Our
future success will depend in large part on the continued services of our key
scientific and management personnel. We face intense competition for these
professionals from our competitors, our collaborative partners and other
companies throughout our industry. Our failure to retain, as well as hire, train
and effectively integrate into our organization, a sufficient number of
qualified scientists and professionals would negatively impact our business and
our ability to grow our business.
27
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY SUFFER.
Our ability to commercialize our products, achieve our expansion objectives
and manage our growth effectively depends on a variety of factors. Key factors
include our ability to develop products internally, enter into strategic
partnerships with collaborators, attract and retain skilled employees and
effectively expand our internal organization to accommodate anticipated growth.
If we are unable to manage growth effectively, there could be a material adverse
effect on our business, financial condition and results of operations.
WE DEPEND ON THIRD PARTY MANUFACTURERS.
Our ability to conduct clinical trials and our ability to commercialize our
potential products will depend, in part, on our ability to manufacture our
products on a large scale, either directly or through third parties, at a
competitive cost and in accordance with FDA and other regulatory requirements.
We currently do not have the capacity to manufacture drugs in large-scale
quantities. We depend on third party manufacturers or collaborative partners for
the production of our compounds for preclinical research, clinical trial
purposes and commercial production. If we are not able to obtain contract
manufacturing on commercially reasonable terms, we may not be able to conduct or
complete clinical trials or commercialize our products as planned. We have no
experience in manufacturing pharmaceutical or other products, and we do not know
whether we will be able to develop such capabilities. Some of our current
corporate partners have manufacturing rights with respect to our products under
development. If those partners do not either supply products to us promptly and
on acceptable terms or transfer the manufacturing technology to us, we may not
be able to conduct our development programs and commercialize any resulting
products in a timely and efficient manner.
OUR PATENTS MAY NOT PROTECT OUR PRODUCTS, AND OUR PRODUCTS MAY INFRINGE
THIRD-PARTY PATENTS.
Our success will depend, in significant part, on our ability to obtain and
maintain United States and foreign patent protection for our products, their
uses and our processes to preserve our trade secrets and to operate without
infringing the proprietary rights of third parties. We do not know whether any
patents will issue from any of our patent applications or, even if patents issue
or have issued, that the issued claims will provide us with any significant
protection against competitive products or otherwise be valuable commercially.
Legal standards relating to the validity of patents and the proper scope of
their claims in the biopharmaceutical field are still evolving, and there is no
consistent law or policy regarding the valid breadth of claims in
biopharmaceutical patents or the effect of prior art on them. If we are not able
to obtain adequate patent protection, our ability to prevent competitors from
making, using and selling competing products will be limited. Furthermore, our
activities may infringe the claims of patents held by third parties. We are
currently contesting a suit filed by Chiron Corporation claiming infringement of
three U.S. patents issued to Chiron. Although we believe that the ultimate
outcome of the action will not have a material impact on our consolidated
financial position, defense and prosecution of patent claims, including those at
issue in the Chiron case, as well as participation in other inter-party
proceedings, can be expensive and time-consuming, even in those instances in
which the outcome is favorable to us. If the outcome of any such litigation or
proceeding were adverse, we 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 our company.
WE EXPECT TO INCUR FUTURE LOSSES AND CANNOT BE CERTAIN THAT WE WILL BECOME A
PROFITABLE COMPANY.
We have incurred significant operating losses each year since our inception
and expect to incur a significant operating loss in 2000. We believe that
operating losses will continue beyond 2000, even if significant royalties are
realized on Agenerase sales, because we are planning to make significant
investments in research and development, and will incur significant selling,
general, and administrative expenses for our other potential products. We expect
that losses will fluctuate from quarter to quarter and
28
year to year, and that such fluctuations may be substantial. We cannot be
certain that we will ever achieve and sustain profitability.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
We expect to incur substantial research and development and related
supporting expenses as we design and develop existing and future compounds and
undertake clinical trials of potential drugs resulting from such compounds. We
also expect to incur substantial administrative and commercialization
expenditures in the future and substantial expenses related to the filing,
prosecution, defense and enforcement of patent and other intellectual property
claims. We anticipate that we will finance these substantial cash needs with:
- Agenerase royalty revenue;
- future product sales to the extent that we market products directly;
- future payments under our collaborative agreements;
- existing cash reserves, together with interest earned on those reserves;
- facilities and equipment financing; and
- additional collaborative agreements.
If funds from these sources are not sufficient to fund our activities, it
will be necessary to raise additional funds through public offerings or private
placements of equity or debt securities or other methods of financing. Any
equity financings could result in dilution to our then existing securityholders.
Any debt financing, if available at all, may be on terms which, among other
things, restrict our ability to pay dividends and interest (although we do not
intend to pay dividends for the foreseeable future). If adequate funds are not
available, we may be required to curtail significantly or discontinue one or
more of our research, drug discovery or development programs, including clinical
trials, or attempt to obtain funds through arrangements with collaborative
partners or others that may require us to relinquish rights to certain of our
technologies or products in research or development. We cannot know whether
additional financing will be available on acceptable terms, if at all.
GOVERNMENT AND PRIVATE INSURANCE PLANS MAY NOT PAY FOR OUR PRODUCTS.
The success of our 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. We
cannot always determine in advance the reimbursement status of newly approved
therapeutic products. Even if a product is approved for marketing, we cannot be
sure that adequate reimbursement will be available. Also, future legislation or
regulation relating to the health care industry or third-party coverage and
reimbursement may affect our business. In particular, legislation or regulation
limiting consumers' reimbursement rights could have a material adverse effect on
our company.
OUR SALES AND MARKETING EXPERIENCE IS LIMITED.
We currently have little experience in marketing and selling pharmaceutical
products. We must either develop a marketing and sales force or enter into
arrangements with third parties to market and sell any of our product candidates
which are approved by the FDA. In the territories where we retain marketing and
co-promotion rights, we may not be able to develop successfully our own sales
and marketing force. We do not know whether we will be able to enter into
marketing and sales agreements with others on acceptable terms, if at all. If we
develop our own marketing and sales capability, we may be competing with other
companies that currently have experienced and well-funded marketing and sales
operations. To the extent that our collaborative partners have commercial rights
to our products, any revenues we receive from those
29
products will depend on the sales and marketing efforts of others, and we do not
know how successful those efforts will be.
WE MAY INCUR PRODUCT LIABILITY EXPENSES.
Our business will expose us to potential product liability risks that arise
from the testing, manufacturing and sales of our products. In addition to direct
expenditures for damages, settlement and defense costs, there is the possibility
of adverse publicity as a result of product liability claims. These risks will
increase as our products receive regulatory approval and are commercialized. We
do not know whether we will be able to maintain our existing levels of product
liability insurance or be able to obtain or maintain any additional insurance we
may need in the future on acceptable terms. Nor can we be sure that our existing
insurance or any such additional insurance will provide adequate coverage
against potential liabilities.
SOME OF OUR OPERATIONS INVOLVE HAZARDOUS MATERIALS, WHICH COULD SUBJECT US TO
SIGNIFICANT LIABILITY.
Our research and development activities may from time to time involve the
controlled use of hazardous materials, including hazardous chemicals and
radioactive materials. Accordingly, we are subject to federal, state and local
laws governing the use, handling and disposal of these materials. Although we
believe that our safety procedures for handling and disposing of hazardous
materials comply with regulatory requirements, we cannot completely eliminate
the risk that accidental contamination or injury from these materials could
expose us to significant liability.
EVENTS WITH RESPECT TO OUR SHARE CAPITAL COULD CAUSE THE PRICE OF OUR COMMON
STOCK TO DECLINE.
Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. As of December 31, 1999, we had 25,685,364 shares of common stock
outstanding, excluding shares reserved for issuance upon the exercise of
outstanding stock options, employee stock purchase and 401(k) plans. We have
granted stock options to purchase 6,744,000 shares of our common stock at a
weighted average exercise price of approximately $23.50 per share (subject to
adjustment in certain circumstances). Of this total, 3,440,000 are currently
exercisable at an average exercise price of approximately $20.57 per share. The
shares of our common stock that may be issued under the options are either
currently registered with the SEC, or will be registered with the SEC before the
shares are purchased by the holders of the options.
WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT MAY DISCOURAGE A CHANGE OF
CONTROL.
Our corporate charter and by-law provisions and stockholder rights plan may
discourage certain types of transactions involving an actual or potential change
of control of Vertex which might be beneficial to the company or its
securityholders. Our charter provides for staggered terms for the members of the
Board of Directors. Our 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 our 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. We may issue shares of any class or series of preferred stock in the
future without stockholder approval and upon such terms as our 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.
ADOPTION OF SAB 101 MAY INCREASE OUR REPORTED NET LOSSES.
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" (SAB 101), which provides guidance related
to revenue recognition and disclosure. We plan to
30
adopt SAB 101 in the first quarter of 2000, and we are currently determining
what impact this will have on our financial statements. We cannot be certain
that our adoption of SAB 101 will not materially increase our reported net
losses in the quarter ended March 31, 2000.
OUR STOCK PRICE MAY FLUCTUATE BASED ON FACTORS BEYOND OUR CONTROL.
Market prices for securities of companies such as Vertex are highly
volatile. Within the last 12 months our common stock has traded between $19.38
and $82.56. The market for our stock, like that of other companies in the
biotechnology field, has from time to time experienced significant price and
volume fluctuations that are unrelated to our operating performance.
Fluctuations in the trading price of our common stock will affect the trading
price of the notes. The future market price of our securities could be
significantly and adversely affected by factors such as:
- announcements of results of clinical trials;
- technological innovations or the introduction of new products by our
competitors;
- government regulatory action;
- public concern as to the safety of products developed by others;
- patent or proprietary rights; and
- developments and market conditions for pharmaceutical and biotechnology
stocks, in general.
ITEM 2. PROPERTIES
PROPERTIES
We lease an aggregate of approximately 179,000 square feet of laboratory and
office space in seven facilities in Cambridge, Massachusetts. The leases have
expiration dates ranging from December 2000 to 2009. We have the option to
extend the lease for our headquarters facility at 130 Waverly Street, Cambridge,
for up to two additional terms, ending in 2015 with respect to one portion of
the building, and in 2019 for the other portion of the building. We have also
entered into an agreement to lease an additional 192,000 square feet of
laboratory and office space presently under construction adjacent to our
headquarters. That lease will expire in 2010 with the option to extend the lease
for up to two additional terms, ending in 2030.
We lease approximately 21,000 square feet of laboratory and office space in
Milton Park, Abingdon, England, under a lease expiring in 2013, with a right of
early termination in 2008, for our U.K. business and research and development
activities.
We believe our facilities are adequate for our current needs. We believe we
can obtain additional space on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
Chiron Corporation ("Chiron") filed suit on July 30, 1998 against Vertex and
Eli Lilly and Company in the United States District Court for the Northern
District of California, alleging infringement by the defendants of three U.S.
patents issued to Chiron. The infringement action relates to research activities
by the defendants in the hepatitis C viral protease field and the alleged use of
inventions claimed by Chiron in connection with that research. Chiron has
requested damages in an unspecified amount, as well as an order permanently
enjoining the defendants from unlicensed use of the claimed Chiron inventions.
During 1999, Chiron requested and was granted a reexamination by the U.S. Patent
and Trademark Office of all three of the patents in suit. Chiron also requested
and, over the opposition of Vertex and Lilly, was granted a stay in the
infrignement lawsuit, pending the outcome of the patent reexamination. While the
length of the stay, the outcome of the reexamination, the effect of that outcome
on the lawsuit and the final outcome of the
31
lawsuit cannot be determined, Vertex maintains that the plaintiff's claims are
without merit and intends to defend the lawsuit, if and when it resumes,
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our 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 on the Nasdaq:
YEAR ENDED DECEMBER 31, 1998: HIGH LOW CLOSE
- ----------------------------- ------------- ------------- -------------
First quarter............................................... $40 3/8 $31 1/4 $31 15/16
Second quarter.............................................. 33 7/8 21 1/2 22 1/2
Third quarter............................................... 27 7/8 14 1/2 23
Fourth quarter.............................................. 30 20 29 3/4
YEAR ENDED DECEMBER 31, 1999:
- ------------------------------------------------------------
First quarter............................................... $32 1/2 $22 1/2 $25 1/4
Second quarter.............................................. 26 3/8 19 3/8 24 1/8
Third quarter............................................... 34 13/16 22 1/8 31 1/16
Fourth quarter.............................................. 37 1/4 23 3/8 35
YEAR ENDED DECEMBER 31, 2000:
- ------------------------------------------------------------
First quarter (through March 3, 2000)....................... $82 9/16 $32 1/2 --
The last sale price of the common stock on February 28, 2000, as reported by
Nasdaq, was $62.00 per share. As of February 28, 2000, there were 213 holders of
record of the common stock (approximately 6,500 beneficial holders).
Vertex has never declared or paid any cash dividends on its Common Stock and
currently expects that future earnings, if any, will be retained for use in its
business.
RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1999 are derived from our Consolidated
Financial Statements. This data should be read in
32
conjunction with our audited financial statements and related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Consolidated Statement of Operations Data:
Revenues:
Royalties and product sales..................... $ 8,053 -- -- -- --
Collaborative and other research and development
revenues...................................... 42,507 $ 29,055 $ 29,926 $ 13,341 $ 22,081
Investment income............................... 11,088 15,343 13,873 5,257 5,453
--------- -------- -------- -------- --------
Total revenues............................ 61,648 44,398 43,799 18,598 27,534
--------- -------- -------- -------- --------
Costs and expenses:
Royalties and product costs................... 2,925 -- -- -- --
Research and development...................... 72,180 58,668 51,624 35,212 41,512
General and administrative.................... 26,131 18,135 11,430 7,929 7,069
License payment............................... -- -- -- 15,000 --
Loss in equity affiliate...................... 724 -- -- -- --
Interest...................................... 654 681 576 462 481
--------- -------- -------- -------- --------
Total costs and expenses.................. 102,614 77,484 63,630 58,603 49,062
--------- -------- -------- -------- --------
Net loss........................................ $ (40,966) $(33,086) $(19,831) $(40,005) $(21,528)
========= ======== ======== ======== ========
Basic and diluted net loss per common share... $ (1.61) $ (1.31) $ (0.82) $ (2.13) $ (1.25)
Basic and diluted weighted average number of
common shares outstanding..................... 25,518 25,299 24,264 18,798 17,231
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- -------- --------
Consolidated Balance Sheet Data:
Cash, cash equivalents and
investments........................... $ 187,802 $ 245,652 $ 279,671 $130,359 $ 86,978
Total assets............................ 232,445 266,346 295,604 143,499 98,981
Obligations under capital leases and
debt, excluding current portion....... 4,693 7,032 5,905 5,617 4,912
Accumulated deficit..................... (190,827) (149,861) (116,775) (96,944) (56,939)
Total stockholders' equity.............. 209,234 246,212 276,001 130,826 85,272
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS, WHICH ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT CAN CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE DESCRIBED. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE
BUT ARE NOT LIMITED TO THOSE DESCRIBED IN THE SECTION ENTITLED "RISK FACTORS."
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE NO OBLIGATION
TO PUBLICLY UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS
OR CIRCUMSTANCES AFTER THE DATE HEREOF.
We discover, develop and market small molecule drugs that address major
medical needs. We have seven drug candidates in clinical development to treat
viral diseases, inflammation, cancer, autoimmune
33
diseases and neurological disorders. We have created our pipeline using a
proprietary approach, information-driven drug design, that integrates multiple
technologies in biology, chemistry and biophysics aimed at increasing the speed
and success rate of drug discovery.
Our first approved product is Agenerase-TM- (amprenavir), an HIV protease
inhibitor, which we co-promote with Glaxo Wellcome plc ("Glaxo Wellcome"). We
earned a royalty from Glaxo Wellcome from sales of Agenerase in 1999. Agenerase
received U.S. Food and Drug Administration ("FDA") approval through an expedited
review process for the treatment of HIV infection. Agenerase has also received
approval in other countries, including Japan where the drug is sold under the
trade name Prozei-TM-. Approval of Agenerase is pending in other countries,
including the European Union, where the drug is being made available through
early access programs.
We have incurred operating losses since our inception and expect to incur a
loss in 2000. We believe that operating losses will continue beyond 2000, even
if significant royalties are realized on Agenerase sales, as we are planning to
make significant investments in research and development for our other potential
products. We expect that losses will fluctuate from year to year and that such
fluctuations may be substantial.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
The net loss for 1999 was $40,966,000 or $1.61 per share compared to
$33,086,000 or $1.31 per share in 1998.
Our total revenues increased to $61,648,000 in 1999 from $44,398,000 in
1998. In 1999, royalty and product sales revenue was $8,053,000, collaborative
and other research and development revenue was $42,507,000, and investment
income was $11,088,000. Revenue in 1998 consisted of $29,055,000 in
collaborative and other research and development and $15,343,000 in investment
income.
Royalties and product sales consist of Agenerase royalty revenue of
$7,461,000 from Glaxo Wellcome as well as initial sales of commercial drug
substance to Kissei in Japan. Agenerase royalty revenue from Glaxo Wellcome was
recognized for the first time in 1999 and is based upon worldwide net sales of
Agenerase as provided by Glaxo Wellcome. These sales reflect prescriptions as
well as initial trade stocking which is expected to be consistent with demand.
The growth in collaborative and other research and development revenue in
1999, as compared with 1998, is largely due to new collaborative agreements and
larger milestone payments during the year. In April of 1999, we earned a
$5,000,000 milestone payment from Glaxo Wellcome for U.S. FDA approval of
Agenerase. We recorded $15,000,000 in collaborative revenue from Aventis S.A.
("Aventis"), formerly Hoechst Marion Roussel Deutschland GmbH, in October of
1999, upon entering into an expanded agreement covering the development of
VX-740, an orally active inhibitor of interleukin-1 beta converting enzyme
(ICE). This consisted of a $10,000,000 payment for prior research costs and a
$5,000,000 milestone payment for entering Phase II clinical trials. In
November 1999, we agreed with Taisho Pharmaceutical Co., Ltd. of Japan to
collaborate to discover, develop and commercialize caspase inhibitors for the
treatment of cerebrovascular, cardiovascular and neurodegenerative diseases. In
connection with this contract, we recognized $3,000,000 for prior research costs
and approximately $900,000 in product research funding. Included in 1998
collaborative and other research and development revenue is a $6,000,000 payment
from Schering A.G. earned in connection with the signing of a new collaborative
agreement for our neurophilins ligand program and a $3,000,000 milestone payment
from Glaxo Wellcome for the NDA filing for Agenerase. Research funding decreased
from all collaborative partners, by approximately $1,380,000 in 1999 primarily
because the research funding requirements under the Glaxo Wellcome agreement
ended on December 31, 1998.
34
Interest income decreased in 1999 compared with 1998 due to a lower level of
cash and investments throughout the year as well as lower yields earned on
investment securities.
Total costs and expenses increased to $102,614,000 in 1999 from $77,484,000
in 1998. Royalties and product costs of $2,925,000 in 1999 consist of royalty
payments to G.D. Searle & Co. ("Searle") and the cost of commercial drug
substance sold to Kissei. Under the terms of the 1996 license agreement between
Glaxo Wellcome, Searle and us, we agreed to pay Searle a royalty on the sales of
Agenerase.
Research and development expenses increased to $72,180,000 in 1999 from
$58,668,000 in 1998 principally due to the continued expansion of our research
and development operations. Our UK subsidiary expanded from a business
development operation to include scientific research and development staff in
the second half of 1998. Related to our expansion were increases in facilities
expenses, lab supplies and increased equipment depreciation. Additionally, there
was an increase in development expenses due to the commencement of clinical
trials in the second half of 1998 and the increase in other development
activities associated with our IMPDH inhibitor, VX-497, for psoriasis and
hepatitis C, our neurophilins drug candidate, timcodar, for diabetic neuropathy,
and our p38 MAP kinase inhibitor, VX-745, for inflammatory diseases. We
anticipate research and development expenses to continue to increase as
personnel are added and additional research and development activities are
expanded to accommodate our existing collaborations and additional commitments
we may undertake in the future.
Sales, general and administrative expenses increased to $26,131,000 in 1999
from $18,135,000 in 1998 primarily as a result of increased personnel and
professional expenses associated with the marketing of Agenerase-TM- and related
corporate advertising activities. Legal and patent expenses increased as we
continue to protect our intellectual property and contest a suit filed by Chiron
Corporation ("Chiron") claiming infringement of three U.S. patents issued to
Chiron. While the final outcome of the litigation with Chiron cannot be
determined, we believe, based on information currently available, that the
ultimate outcome of the action will not have a material impact on our
consolidated financial position. We expect sales, general and administrative
expenses to continue to increase as we continue to grow and enter our first full
year of Agenerase sales.
In February 1999, we restructured our investment in Altus Biologics
("Altus"), which was a wholly owned subsidiary. As part of the transaction, we
provided Altus $3,000,000 of cash and surrendered our shares in Altus preferred
stock in exchange for two new classes of preferred stock and warrants. Altus now
operates independently from us. At December 31, 1999, we had a 29.5% equity
investment in Altus of approximately $2,276,000. For the year ending
December 31, 1999, we recorded $724,000 as our share of Altus' losses. Altus is
expected to incur additional losses in 2000 and we will record our proportionate
share of losses against the investment balance.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
The net loss for 1998 was $33,086,000 or $1.31 per share compared to
$19,831,000 or $0.82 per share in 1997.
Our total revenues were $44,398,000 in 1998 as compared to $43,799,000 in
1997. In 1998, revenues consisted of $27,939,000 under our collaborative
agreements, $15,343,000 in investment income and $1,116,000 in government grants
and other income. Collaborative revenue in 1998 included a $6,000,000 payment
from Schering AG associated with the signing of a collaborative agreement for
our neurophilin ligand program and $4,000,000 of research funding from Schering
AG, a $2,000,000 milestone payment from Kissei for the acceptance of VX-745 as
the lead development candidate for our p38 MAP kinase program, and a $3,000,000
milestone payment from Glaxo Wellcome for the NDA filing of Agenerase-TM-. Other
collaborative revenue in 1998 included $3,738,000 from Kissei, $3,457,000 from
Glaxo Wellcome, $5,193,000 from Eli Lilly and Company ("Lilly") and $551,000
from others. In 1997, revenues consisted of $27,703,000 under our collaborative
agreements, $13,873,000 in investment income, and $2,223,000 in government
grants and other income. Revenue from collaborative agreements in 1997 consisted
of
35
$3,275,000 from Glaxo Wellcome, $8,660,000 from HMR, $9,810,000 from Kissei,
$5,694,000 from Lilly and $264,000 from others.
Total costs and expenses increased to $77,484,000 in 1998 from $63,630,000
in 1997. Research and development expenses increased to $58,668,000 in 1998 from
$51,624,000 in 1997. We increased research staffing, including opening a
research site in the U.K., to fully staff a higher number of discovery programs.
In addition, we expanded our development infrastructure. General and
administrative expenses increased in 1998 to $18,135,000 from $11,430,000 in
1997 primarily as a result of headcount growth to handle the administrative
requirements of our growing research and development operation, legal expenses
associated with expansion of our intellectual property position and marketing
expenses associated with the anticipated launch of Agenerase-TM- and our
co-promotion preparations. Interest expense increased in 1998 to $681,000 from
$576,000 in 1997 due to higher levels equipment financing during 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been funded principally through strategic collaborative
agreements, public offerings and private placements of our equity securities,
equipment financing, government grants and investment income. With the approval
and launch of Agenerase, we began receiving product royalty revenues in 1999. We
have continued to increase and advance the products in our research and
development pipeline. Consequently, we expect to incur increased research and
development and related supporting expenses and are likely to continue
experiencing losses on a quarterly and annual basis as we continue to develop
existing and future compounds and to conduct clinical trials of potential drugs.
We also expect 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.
We expect to finance these substantial cash needs with royalties from the
sales of Agenerase, our existing cash and investments of approximately
$187,802,000 at December 31, 1999 and investment income earned thereon, future
payments under our existing and new collaborative agreements, facilities and
equipment financing and to the extent available, by raising 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. In December of 1999, we obtained a $20,000,000 line
of credit. The purpose of the line of credit is to fund equipment and leasehold
improvement expenditures in connection with the expansion of facilities. No
amounts were outstanding as of December 31, 1999. We believe that our existing
cash and investments should be sufficient to meet our anticipated requirements
for at least the next two years.
Our aggregate cash and investments decreased in 1999 by $57,850,000 to
$187,802,000 at December 31, 1999. Cash used by operations in 1999, principally
to fund research and development activities, was $31,806,000. Property and
equipment expenditures were $16,210,000 in 1999, $7,901,000 in 1998 and
$6,020,000 in 1997. The expenditures were principally for research equipment and
leasehold improvements to new and existing facilities. In 1999, we entered in
new operating lease agreements for additional space and facilities in the U.S.
In connection with the new leases, we were required to provide security deposits
in the form of stand-by letters of credit in the amount of $7,472,000, which is
reflected in the increase of restricted cash. We intend to make significant
investments in equipment and leasehold improvements in the future to support
research and development activities. At December 31, 1999, we leased
approximately 179,000 square feet of office and research space in the U.S. and
21,000 square feet in the U.K. We have also entered into an agreement to lease
an additional 192,000 square feet of new facilities presently under
construction. The leases have expiration dates ranging from December 2000 to
2009--subject to extension for additional terms ending in 2015. In addition, our
liability for capitalized equipment lease obligations and other equipment
financing totaled approximately $7,059,000 at December 31, 1999. During 1999, we
repaid $2,725,000 of our lease obligations.
36
During 1999, we entered into two new collaborative agreements. In
September 1999, we entered into an expanded agreement with Aventis covering the
development of VX-740, an orally active inhibitor of interleukin-1 beta
converting enzyme (ICE). Under the terms of the agreement Aventis agreed to pay
us $20,000,000 for prior research costs, up to $62,000,000 of development and
commercialization milestone payments, and royalties on sales, if any.
In November 1999, we entered into an agreement with Taisho Pharmaceutical
Co., LTD ("Taisho") to collaborate on the discovery, development and
commercialization of caspase inhibitors for the treatment of cerebrovascular,
cardiovascular and neurdegenerative diseases. Under the agreement, Taisho agreed
to pay us up to $43,000,000 in pre-commercial payments, comprised of research
funding, milestone payments and $4,500,000 in payments for prior research costs.
These amounts are based on the development of two compounds. In addition, Taisho
will also pay for certain of the costs of developing compounds that emerge from
the caspase research program.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101") which is effective no later than the quarter ending March 31, 2000.
SAB 101 clarifies the Securities and Exchange Commission's views related to
revenue recognition and disclosure. We will adopt SAB 101 in the first quarter
of 2000 and are presently determining the effect it will have on our financial
statements, although the amount could be material to net financial results.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The effective
date of this statement was deferred to fiscal years beginning after June 15,
2000. This statement requires the recognition of all derivative instruments as
either assets or liabilities in the statement of financial position and the
measurement of those instruments at fair value. The Company does not expect the
adoption of this statement to have a material impact on its financial
statements.
YEAR 2000
Beginning in late 1998, we conducted a program to address the impact of the
Year 2000 on the processing of date sensitive information by our computer
systems and software ("IT Systems"), embedded systems in our non-computer
equipment ("Non-IT Systems") and relationships with certain third parties.
In the first stage of the program, we determined which IT Systems, Non-IT
Systems and third party relationships were critical to our business.
Assessment, testing, and remediation of our critical IT Systems and Non-IT
Systems for Year 2000 compliance were completed by mid-November, 1999. Some
non-critical Non-IT Systems were non-compliant and, because of the age of those
systems or other factors, could not be made compliant. We formulated contingency
plans for each of those systems.
We also contacted third parties that provide goods, services and information
that were deemed critical to our business. Based on our review of the responses
and Year 2000 website statements of those entities, we assessed our Year 2000
compliance. We formulated contingency plans for the services provided by third
parties that were found to be non-compliant, or where we were unable to
determine whether a third party was compliant. However, it has not proven
necessary to implement any of the contingency plans, since there have been no
significant Year 2000 disruptions to the goods, services and information
provided by critical third parties.
We used both internal and external resources to conduct our Year 2000
program. The total costs, both out-of pocket and internal, of our Year 2000
program were not material. Other IT Systems projects were not significantly
deferred as a result of our Year 2000 program, because we were able to integrate
much of
37
our Year 2000 assessment and remediation efforts into our routine maintenance
and upgrade programs. We funded the Year 2000 costs through available cash and
have no remaining costs.
We have not to date experienced any significant problems with our own IT and
Non-IT Systems or third party relationships as a result of the January 1, 2000
date change. There has been no material adverse effect on our results of
operations as a result of Year 2000 computer problems or the assessment,
testing, and remediation program.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Vertex owns financial instruments that are sensitive to market risks as part
of its investment portfolio. The investment portfolio is used to preserve
Vertex's capital until it is required to fund operations, including Vertex's
research and development activities. None of these market-risk sensitive
instruments are held for trading purposes. Vertex does not own derivative
financial instruments in its investment portfolio.
INTEREST RATE RISK
Vertex invests its cash in a variety of financial instruments, principally
securities issued by the U.S. government and its agencies, investment grade
corporate and money market instruments. These investments are denominated in
U.S. dollars. These bonds are subject to interest rate risk, and could decline
in value if interest rates fluctuate. Vertex's investment portfolio includes
only marketable securities with active secondary or resale markets to help
ensure portfolio liquidity and Vertex has implemented guidelines limiting the
duration of investments. Due to the conservative nature of these instruments,
Vertex does not believe that it has a material exposure to interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is contained on pages F-1 through F-21 of
this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 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 Vertex's 2000 Annual Meeting of Stockholders, to
be filed with the Commission on or about April 11, 2000 (the "2000 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 2000 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 2000 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 2000 Proxy
Statement under "Security Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by reference.
38
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:
PAGE NUMBER
IN
THIS FORM
10-K
-----------
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998........................................................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997............................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997............................ F-6
Notes to Consolidated Financial Statements.................. F-7 to F-21
(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.
39
(a)(3) EXHIBITS.
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Articles of Organization filed with the
Commonwealth of Massachusetts on July 31, 1991 (filed as
Exhibit 3.1 to Vertex's 1997 Annual Report on Form 10-K
(File No. 0-19319) and incorporated herein by reference).
3.2 Articles of Amendment filed with the Commonwealth of
Massachusetts on June 4, 1997 (filed as Exhibit 3.2 to
Vertex's 1997 Annual Report on Form 10-K (File No. 0-19319)
and incorporated herein by reference).
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 as
Exhibit 3.3 to Vertex's 1997 Annual Report on Form 10-K
(File No. 0-19319) and incorporated herein by reference).
3.4 By-laws of Vertex (filed as Exhibit 3.2 to Vertex's
Registration Statement on Form S-1 (Registration No.
33-43874) and incorporated herein by reference).
4.1 Specimen stock certificate (filed as Exhibit 4.1 to Vertex'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 Vertex'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 Vertex'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
September 14, 1999 (filed herewith).*
10.2 1994 Stock and Option Plan, as amended and restated as of
September 14, 1999 (filed herewith).*
10.3 1996 Stock and Option Plan, as amended and restated as of
September 14, 1999 (filed herewith).*
10.4 Non-Competition and Stock Repurchase Agreement between
Vertex and Joshua Boger, dated April 20, 1989 (filed as
Exhibit 10.2 to Vertex's Registration Statement on Form S-1
(Registration No. 33-40966) or amendments thereto and
incorporated herein by reference).*
10.5 Form of Employee Stock Purchase Agreement (filed as Exhibit
10.3 to Vertex's Registration Statement on Form S-1
(Registration No. 33-40966) or amendments thereto and
incorporated herein by reference).*
10.6 Form of Employee Non-Disclosure and Inventions Agreement
(filed as Exhibit 10.4 to Vertex's Registration Statement on
Form S-1 (Registration No. 33-40966) or amendments thereto
and incorporated herein by reference).
10.7 Form of Executive Employment Agreement executed by Richard
H. Aldrich, Joshua S. Boger, and Vicki L. Sato (filed as
Exhibit 10.6 to Vertex's 1994 Annual Report on Form 10-K
(File No. 0-19319) and incorporated herein by reference).*
10.8 Form of Amendment to Employment Agreement executed by
Richard H. Aldrich, Joshua S. Boger and Vicki L. Sato (filed
as Exhibit 10.1 to Vertex's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 (File No. 0-19319) and
incorporated herein by reference).
40
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.9 Lease dated October 1, 1992 between C. Vincent Vappi and
Vertex relating to the premises at 40 Allston Street, 618
Putnam Street, 228 Sidney Street, and 240 Sidney Street
(filed as Exhibit 10.14 to Vertex's Annual Report on Form
10-K for the year ended December 31, 1992 (File No. 0-19319)
and incorporated herein by reference).
10.10 First Amendment as of March 1, 1995 to the lease between C.
Vincent Vappi and Vertex (filed as Exhibit 10.2 to Vertex's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1995 (File No. 0-19319) and incorporated herein by
reference).
10.11 Second Amendment as of February 12, 1997 to Lease between C.
Vincent Vappi and Vertex (filed as Exhibit 10.14 to Vertex's
Annual Report on Form 10-K for the year ended December 31,
1996 (File No. 0-19319) and incorporated herein by
reference).
10.12 Lease dated March 1, 1993, between Fort Washington Realty
Trust and Vertex, relating to the premises at 625 Putnam
Avenue, Cambridge, MA (filed as Exhibit 10.10 to Vertex's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 0-19319) and incorporated herein by
reference).
10.13 First Amendment, dated 1 December 1996, to Lease between
Fort Washington Realty Trust and Vertex dated 1 March 1993
(filed as Exhibit 10.16 to Vertex's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 0-19319)
and incorporated herein by reference).
10.14 Second Amendment, dated 1 February 1998, to Lease between
Fort Washington Realty Trust and Vertex dated 1 March 1993
(filed as Exhibit 10.17 to Vertex's 1997 Annual Report on
Form 10-K (File No. 0-19319) and incorporated herein by
reference).
10.15 Lease dated March 3, 1995, between Fort Washington Realty
Trust and Vertex, relating to the premises at 130 Waverly
Street, Cambridge, MA (filed as Exhibit 10.15 to Vertex's
1994 Annual Report on Form 10-K (File No. 0-19319) and
incorporated herein by reference).
10.16 First Amendment to Lease dated March 3, 1995 between Fort
Washington Realty Trust and Vertex (filed as Exhibit 10.15
to Vertex's 1995 Annual Report on Form 10-K (File No.
0-19319) and incorporated herein by reference).
10.17 Second Amendment to Lease and Option Agreement dated June
12, 1997 between Fort Washington Realty Trust and Vertex
(filed herewith).
10.18 Agreement for Lease of Premises at 88 Milton Park, Abingdon,
Oxfordshire between Milton Park Limited and Vertex
Pharmaceuticals (Europe) Limited and Vertex Pharmaceuticals
Incorporated (filed herewith)
10.19 Lease by and between Trustees of Fort Washington Realty
Trust, Landlord, and the Company as Tenant, executed
September 17, 1999 (filed as Exhibit 10.27 to Vertex's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, with certain confidential information
deleted (File No. 0-19319), and incorporated herein by
reference).
10.20 Research and Development Agreement dated April 13, 1993
between Vertex and Kissei Pharmaceutical Co., Ltd. (with
certain confidential information deleted) (filed as Exhibit
10.1 to Vertex's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993 (File No. 0-19319) and
incorporated herein by reference).
10.21 Research Agreement and License Agreement, both dated
December 16, 1993, between Vertex and Burroughs Wellcome Co.
(with certain confidential information deleted) (filed as
Exhibit 10.16 to Vertex's Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 0-19319) and
incorporated herein by reference).
41
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.22 License Agreement and Supply Agreement, both dated May 9,
1996, between Vertex and BioChem Pharma (International) Inc.
(with certain confidential information deleted) (filed as
Exhibit 10.1 to Vertex's Quarterly Report on 10-Q for the
quarter ended March 31, 1996 (File No. 0-19319) and
incorporated herein by reference).
10.23 Research and Development Agreement between Vertex and Eli
Lilly and Company effective June 11, 1997 (filed with
certain confidential information deleted as Exhibit 10.1 to
Vertex's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, and incorporated herein by reference).
10.24 Research and Development Agreement between Vertex and Kissei
Pharmaceutical Co. Ltd. effective September 10, 1997 (filed,
with certain confidential information deleted, as Exhibit
10.1 to Vertex's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, and incorporated herein by
reference).
10.25 Research Agreement between Vertex and Schering AG dated as
of August 24, 1998 (filed, with certain confidential
information deleted, as Exhibit 10.1 to Vertex's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1998, and incorporated herein by reference).
10.26 License, Development and Commercialization Agreement between
the Company and Hoechst Marion Roussel Deutschland GmbH
dated September 1, 1999 (filed as Exhibit 10.27 to Vertex's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999, with certain confidential information
deleted (File No. 0-19319), and incorporated herein by
reference).
10.27 Collaboration and Option Agreement between Vertex and Taisho
Pharmaceutical Co., Ltd. dated November 30, 1999 (with
certain confidential information deleted) (filed herewith).
10.28 Credit Agreement between Vertex and Fleet National Bank
(filed herewith).
21 Subsidiaries of Vertex (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).
- ------------------------
* Compensatory plan or agreement applicable to management and employees.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by Vertex during the
quarter ended December 31, 1999.
42
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
By: /s/ JOSHUA S. BOGER
-----------------------------------------
Joshua S. Boger
February 29, 1999 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.
NAME TITLE DATE
---- ----- ----
Director, Chairman,
/s/ JOSHUA S. BOGER President and Chief
------------------------------------------- Executive Officer February 29, 1999
Joshua S. Boger (Principal Executive
Officer)
Vice President of Finance
/s/ THOMAS G. AUCHINCLOSS, JR. and Treasurer (Principal
------------------------------------------- Financial and Accounting February 29, 1999
Thomas G. Auchincloss, Jr. Officer)
/s/ BARRY M. BLOOM
------------------------------------------- Director February 29, 1999
Barry M. Bloom
/s/ ROGER W. BRIMBLECOMBE
------------------------------------------- Director February 29, 1999
Roger W. Brimblecombe
/s/ DONALD R. CONKLIN
------------------------------------------- Director February 29, 1999
Donald R. Conklin
/s/ BRUCE I. SACHS
------------------------------------------- Director February 29, 1999
Bruce I. Sachs
/s/ CHARLES A. SANDERS
------------------------------------------- Director February 29, 1999
Charles A. Sanders
/s/ ELAINE S. ULLIAN
------------------------------------------- Director February 29, 1999
Elaine S. Ullian
43
EXHIBIT INDEX
10.1 1991 Stock Option Plan, as amended and restated as of
September 14, 1999 (filed herewith).
10.2 1994 Stock and Option Plan, as amended and restated as of
September 14, 1999 (filed herewith).
10.3 1996 Stock and Option Plan, as amended and restated as of
September 14, 1999 (filed herewith).
10.27 Collaboration and Option Agreement between Vertex and Taisho
Pharmaceutical Co., Ltd. dated November 30, 1999 (with
certain confidential information deleted) (filed herewith).
10.28 Credit Agreement between Vertex and Fleet National Bank
(with certain confidential information deleted) (filed
herewith).
21 Subsidiaries of Vertex (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).
VERTEX PHARMACEUTICALS INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NUMBER
-----------
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7 to F-21
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Vertex Pharmaceuticals
Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Vertex
Pharmaceuticals Incorporated and its subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with generally
accepted accounting principles in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 16, 2000, except as to the information
in Note R for which the date is
February 28, 2000
F-2
CONSOLIDATED BALANCE SHEETS
VERTEX PHARMACEUTICALS INCORPORATED
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............................... $ 31,548 $ 24,169
Investments............................................. 156,254 221,483
Accounts receivable..................................... 5,956 1,462
Prepaid expenses........................................ 1,439 1,594
--------- ---------
Total current assets................................ 195,197 248,708
Restricted cash........................................... 9,788 2,316
Property and equipment, net............................... 24,480 14,476
Investment in equity affiliate............................ 2,276 --
Other assets.............................................. 704 846
--------- ---------
Total assets........................................ $ 232,445 $ 266,346
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 2,979 $ 2,808
Accrued expenses........................................ 11,173 7,542
Deferred revenue........................................ 2,000 --
Obligations under capital lease and debt................ 2,366 2,752
--------- ---------
Total current liabilities........................... 18,518 13,102
Obligations under capital lease and debt, excluding
current portion......................................... 4,693 7,032
--------- ---------
Total liabilities................................... 23,211 20,134
--------- ---------
Commitments (Note I)
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued
Common stock, $.01 par value; 100,000,000 shares
authorized; 25,685,364 and 25,358,559 shares issued
and outstanding in 1999 and 1998, respectively........ 257 254
Additional paid-in capital.............................. 400,888 395,332
Deferred compensation................................... (114) (167)
Accumulated other comprehensive income (loss)........... (970) 654
Accumulated deficit..................................... (190,827) (149,861)
--------- ---------
Total stockholders' equity.......................... 209,234 246,212
--------- ---------
Total liabilities and stockholders' equity.......... $ 232,445 $ 266,346
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
1
CONSOLIDATED STATEMENTS OF OPERATIONS
VERTEX PHARMACEUTICALS INCORPORATED
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Royalties and product sales............................... $ 8,053 -- --
Collaborative and other research and development.......... 42,507 $ 29,055 $ 29,926
Investment income......................................... 11,088 15,343 13,873
-------- -------- --------
Total revenues.............................................. 61,648 44,398 43,799
Costs and expenses:
Royalties and product costs............................... 2,925 -- --
Research and development.................................. 72,180 58,668 51,624
Sales, general and administrative......................... 26,131 18,135 11,430
Loss in equity affiliate.................................. 724 -- --
Interest.................................................. 654 681 576
-------- -------- --------
Total costs and expenses................................ 102,614 77,484 63,630
======== ======== ========
Net loss.................................................... $(40,966) $(33,086) $(19,831)
======== ======== ========
Basic and diluted loss per common share..................... $ (1.61) $ (1.31) $ (0.82)
Basic and diluted weighted average number of common shares
outstanding............................................... 25,518 25,299 24,264
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
VERTEX PHARMACEUTICALS INCORPORATED
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INCOME (LOSS)
-------- -------- ---------- ------------- ------------ --------------
(IN THOUSANDS)
Balance, December 31, 1996.................... 21,097 $211 $227,557 $ (47) $ (96,944) $ 49
Net change in unrealized holding gains/losses
on investments.............................. 115
Translation adjustments....................... (12)
Net loss...................................... (19,831)
Comprehensive loss............................
Issuances of common stock:
Public offering of common stock............. 3,450 34 148,776
Private placement of common stock........... 264 3 9,997
Benefit plans............................... 405 4 6,115
Equity compensation for services rendered..... 44 (82)
Amortization of deferred compensation......... 12
------- ---- -------- ----- --------- -------
Balance, December 31, 1997.................... 25,216 252 392,489 (117) (116,775) 152
Net change in unrealized holding gains/losses
on investments.............................. 502
Translation adjustments
Net loss...................................... (33,086)
Comprehensive loss............................
Issuances of common stock:
Benefit plans............................... 143 2 2,784
Equity compensation for services rendered..... 59 (82)
Amortization of deferred compensation......... 32
------- ---- -------- ----- --------- -------
Balance, December 31, 1998.................... 25,359 254 395,332 (167) (149,861) 654
Net change in unrealized holding gains/losses
on investments.............................. (1,672)
Translation adjustments....................... 48
Net loss...................................... (40,966)
Comprehensive loss............................
Issuances of common stock:
Benefit plans............................... 326 3 5,497
Equity compensation for services rendered..... 59
Amortization of deferred compensation......... 53
------- ---- -------- ----- --------- -------
Balance, December 31, 1999.................... 25,685 $257 $400,888 $(114) $(190,827) $ (970)
======= ==== ======== ===== ========= =======
COMPREHENSIVE TOTAL
INCOME STOCKHOLDERS'
(LOSS) EQUITY
-------------- -------------
(IN THOUSANDS)
Balance, December 31, 1996.................... $130,826
Net change in unrealized holding gains/losses
on investments.............................. $ 115 115
Translation adjustments....................... (12) (12)
Net loss...................................... (19,831) (19,831)
--------
Comprehensive loss............................ (19,728)
========
Issuances of common stock:
Public offering of common stock............. 148,810
Private placement of common stock........... 10,000
Benefit plans............................... 6,119
Equity compensation for services rendered..... (38)
Amortization of deferred compensation......... 12
--------
Balance, December 31, 1997.................... 276,001
Net change in unrealized holding gains/losses
on investments.............................. 502 502
Translation adjustments
Net loss...................................... (33,086) (33,086)
--------
Comprehensive loss............................ (32,584)
========
Issuances of common stock:
Benefit plans............................... 2,786
Equity compensation for services rendered..... (23)
Amortization of deferred compensation......... 32
--------
Balance, December 31, 1998.................... 246,212
Net change in unrealized holding gains/losses
on investments.............................. (1,672) (1,672)
Translation adjustments....................... 48 48
Net loss...................................... (40,966) (40,966)
--------
Comprehensive loss............................ (42,590)
========
Issuances of common stock:
Benefit plans............................... 5,500
Equity compensation for services rendered..... 59
Amortization of deferred compensation......... 53
--------
Balance, December 31, 1999.................... $209,234
========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
VERTEX PHARMACEUTICALS INCORPORATED
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss.................................................. $ (40,966) $ (33,086) $ (19,831)
Adjustment to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................... 6,206 4,520 3,588
Amortization of deferred compensation................... 53 32 12
Equity compensation for services rendered............... 59 59 44
Realized (gains)/losses on investments.................. 655 (547) --
Loss in equity affiliate................................ 724 -- --
Changes in assets and liabilities:
Accounts receivable..................................... (4,494) -- --
Prepaid expenses........................................ 155 (1,104) (161)
Accounts payable........................................ 171 (1,439) 2,856
Accrued expenses........................................ 3,631 1,157 3,630
Deferred revenue........................................ 2,000 (556) 556
--------- --------- ---------
Net cash (used) by operating activities............... (31,806) (30,964) (9,306)
========= ========= =========
Cash flows from investing activities:
Purchases of investments.................................. (365,970) (507,540) (303,599)
Sales and maturities of investments....................... 428,872 495,323 191,005
Expenditures for property and equipment................... (16,210) (7,901) (6,020)
Restricted cash........................................... (7,472) -- --
Investment in equity affiliate............................ (3,000) -- --
Other assets.............................................. 142 (276) (200)
--------- --------- ---------
Net cash provided (used) by investing activities...... 36,362 (20,394) (118,814)
========= ========= =========
Cash flows from financing activities:
Repayment of capital lease obligations and debt........... (2,725) (2,716) (3,104)
Proceeds from equipment sale/leaseback.................... -- -- 1,179
Proceeds from debt........................................ -- 4,085 1,813
Proceeds from public offerings of common stock............ -- -- 148,810
Proceeds from private placement of common stock........... -- -- 10,000
Proceeds from other issuances of capital stock............ 5,500 2,704 6,037
--------- --------- ---------
Net cash provided by financing activities............. 2,775 4,073 164,735
--------- --------- ---------
Effect of exchange rates on cash.......................... 48 -- (12)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............ 7,379 (47,285) 36,603
Cash and cash equivalents at beginning of year.............. 24,169 71,454 34,851
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 31,548 $ 24,169 $ 71,454
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY
Vertex Pharmaceuticals Incorporated ("Vertex" or the "Company") uses a range
of drug discovery technologies to discover, develop and market small molecule
drugs that address major medical needs. The Company is headquartered in
Cambridge, Massachusetts and operates primarily in the U.S. Vertex also has a
research facility in the U.K. The Company has seven drug candidates in clinical
development. The Company's first product, the HIV protease inhibitor
Agenerase-TM- (amprenavir), received accelerated approval from the U.S. Food and
Drug Administration and was launched in May 1999. Agenerase is marketed in the
U.S. by Glaxo Wellcome plc ("Glaxo Wellcome") and is co-promoted in the U.S. by
Vertex. The Company expects to incur operating losses over the next two years
and possibly longer, as a result of expenditures for its research and
development programs.
The consolidated financial statements include the accounts of the Company
and the following subsidiaries: Vertex Securities Corp., Vertex Pharmaceuticals
(Europe) Limited and Altus Biologics, Inc. ("Altus"), until January, 1999. All
material intercompany transactions are eliminated. The Company restructured its
majority ownership investment in Altus during 1999. As a result of the
transaction, Vertex accounts for its investment in Altus under the equity
method.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, rapid technological change and
competition, dependence on key personnel, uncertainty of protection of
proprietary technology, clinical trial uncertainty, dependence on collaborative
partners, share price volatility, the possible need to obtain additional
funding, uncertainties relating to pharmaceutical pricing and reimbursement,
limited experience in manufacturing, sales and marketing, potential product
liability and the need for 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.
RECLASSIFICATION IN THE PREPARATION OF FINANCIAL STATEMENTS
Certain reclassifications have been made to prior year data to conform to
the current presentation.
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.
INVESTMENTS
Investments consist of marketable securities, which are classified as
available for sale. Investments are stated at fair value with unrealized gains
and losses included as a component of accumulated other comprehensive income
(loss) until realized. The fair value of these securities is based on quoted
market
F-7
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES (CONTINUED)
prices. Realized gains and losses are determined on the specific identification
method and are included in investment income.
CONCENTRATION OF CREDIT RISK
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.
Two collaborative partners represented approximately 52% and 29%,
respectively, of the Company's accounts receivable balance at December 31, 1999,
which potentially exposes the Company to a concentration of credit risk. At
December 31, 1998, three collaborative partners represented approximately 14%,
14% and 15%, respectively, of the Company's accounts receivable balance.
Management believes that credit risks associated with these partners are not
significant.
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 computers and purchased
software. Leasehold improvements are amortized over the life of the leases. 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 (loss).
STOCK-BASED COMPENSATION
In accounting for its stock-based compensation plans, the Company applies
Accounting Principles Board Opinion No. 25 ("APB 25") and related
interpretations for all awards granted to employees. Under APB 25, when the
exercise price of options granted to employees under these plans equals the
market price of the common stock on the date of grant, no compensation cost is
required. When the exercise price of options granted to employees under these
plans is less than the market price of the common stock on the date of grant,
compensation costs are expensed over the vesting period. For stock options
granted to nonemployees, the Company recognizes compensation costs in accordance
with the requirements of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that
companies recognize compensation expense for grants of stock, stock options and
other equity instruments based on fair value.
REVENUE RECOGNITION
Revenue under research and development arrangements is recognized as earned
under the terms of the respective agreements. License payments are recorded as
revenue when payment is assured and contractual obligations have been met.
Product research funding is recorded as revenue, generally on a quarterly basis,
as research effort is incurred. Deferred revenue arises from payments received
that have not yet been earned under research and development arrangements. The
Company recognizes milestone payments when the milestones are achieved. Royalty
revenue is recognized based on net sales
F-8
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES (CONTINUED)
of licensed products in licensed territories, as provided by the collaborative
partner. Product sales revenue is recorded upon shipment.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred.
ADVERTISING
All advertising costs are expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future
tax consequences, using current tax rates, of temporary differences between the
financial statement carrying amounts and the income tax bases of assets and
liabilities. A valuation allowance is applied against any net deferred tax asset
if, based on the weighted available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
BASIC AND DILUTED LOSS PER COMMON SHARE
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 using the
treasury stock method. Common equivalent shares have not been included in the
net loss per share calculations as the effect would be anti-dilutive. Potential
common equivalent shares consist of 6,744,000 stock options outstanding with a
weighted average exercise price of $23.50 as of December 31, 1999.
SEGMENT INFORMATION
The Company is in one business segment under the management approach, the
business of discovery, development and marketing of small molecule drugs that
address major medical needs.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101") which is effective no later than the quarter ending March 31, 2000.
SAB 101 clarifies the Securities and Exchange Commission's views regarding
recognition of revenue. The Company will adopt SAB 101 in the first quarter of
2000 and is presently determining the effect it will have on the financial
statements, although the amount could be material to net financial results.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The effective
date of this statement was deferred to fiscal years beginning after June 15,
2000. This statement requires the recognition of all derivative instruments as
either assets or liabilities in the statement of financial position and the
measurement of
F-9
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES (CONTINUED)
those instruments at fair value. The Company does not expect the adoption of
this statement to have a material impact on its financial statements.
C. INVESTMENTS
Investments consist of the following at December 31 (in thousands):
1999 1998
--------------------- ---------------------
COST FAIR VALUE COST FAIR VALUE
-------- ---------- -------- ----------
Cash and cash equivalents
Cash and money market funds....................... $ 27,339 $ 27,339 $ 20,888 $ 20,888
Corporate debt securities......................... 4,209 4,209 3,281 3,281
-------- -------- -------- --------
Total cash and cash equivalents..................... $ 31,548 $ 31,548 $ 24,169 $ 24,169
======== ======== ======== ========
Investments
US government securities
Due within 1 year............................... $ 12,318 $ 12,292 $ 18,383 $ 18,363
Due within 1 to 5 years......................... 18,054 17,702 28,734 28,834
Due over 5 years................................ -- -- 3,048 3,037
Corporate debt securities
Due within 1 year............................... 71,807 71,788 21,684 21,638
Due within 1 to 5 years......................... 31,647 31,304 133,039 133,665
Due over 5 years................................ 23,450 23,168 15,945 15,946
-------- -------- -------- --------
Total Investments................................... $157,276 $156,254 $220,833 $221,483
======== ======== ======== ========
Gross unrealized holding gains and losses at December 31, 1999 were
approximately $112,000 and $1,134,000, respectively, and at December 31, 1998
were $911,000 and $261,000, respectively. Gross realized gains and losses for
1999 were $106,000 and $761,000, respectively. Gross realized gains and losses
for 1998 were $852,000 and $305,000, respectively. The effect of gross realized
gains and losses on the financial statements for 1997 was immaterial. Maturities
stated are effective maturities.
D. RESTRICTED CASH
In accordance with operating lease agreements, at December 31, 1999 and 1998
the Company held in deposit approximately $9,788,000 and $2,316,000,
respectively, with its bank to collateralize conditional, stand-by letters of
credit in the name of the landlord. In 1999, the Company entered into new
operating leases for additional space and facilities. In connection with these
leases the Company was required to provide security deposits in the form of
stand-by letters of credit. The letters of credit are redeemable only if the
Company defaults on the leases 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.
F-10
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
E. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (in
thousands):
1999 1998
-------- --------
Leasehold improvements.................................... $15,851 $ 7,804
Furniture and equipment................................... 15,215 9,847
Computers................................................. 3,190 1,223
Software.................................................. 4,053 3,276
Equipment under capital lease............................. 20,522 20,471
------- -------
58,831 42,621
Less accumulated depreciation and amortization............ 34,351 28,145
------- -------
$24,480 $14,476
======= =======
The net book value of equipment under capital lease was $2,018,000 and
$3,687,000 at December 31, 1999 and 1998, respectively.
Financial information relating to the Company's operations by geographic
area was as follows (in thousands):
LONG-LIVED ASSETS
-------------------
1999 1998
-------- --------
United States............................................. $51,903 $41,712
United Kingdom............................................ 6,928 909
------- -------
Consolidated.............................................. $58,831 $42,621
======= =======
F. INVESTMENT IN AFFILIATE
In February 1999, Vertex restructured its investment in Altus, which was a
wholly owned subsidiary, so that Altus operates independently from Vertex. As
part of the transaction, Vertex provided Altus $3,000,000 of cash and
surrendered its shares in Altus preferred stock in exchange for two new classes
of preferred stock and warrants. At December 31, 1999, Vertex had a 29.5% equity
investment in Altus of approximately $2,276,000. For the year ending
December 31, 1999, Vertex recorded $724,000 as its share of Altus' losses.
G. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31 (in thousands):
1999 1998
-------- --------
Professional fees.......................................... $ 3,005 $2,134
Development contract costs................................. 3,331 2,391
Payroll and benefits....................................... 1,822 1,239
Other...................................................... 3,015 1,778
------- ------
$11,173 $7,542
======= ======
F-11
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
H. CAPITAL LEASES AND DEBT OBLIGATIONS
At December 31, 1999, long-term capital lease and debt obligations were due
as follows (in thousands):
YEAR ENDED DECEMBER 31, CAPITAL LEASES DEBT TOTAL
- ----------------------- -------------- -------- --------
2000........................................... $1,492 $1,027 $2,519
2001........................................... 1,335 1,114 2,449
2002........................................... 89 1,351 1,440
2003........................................... -- 873 873
------ ------ ------
Total...................................... 2,916 4,365 7,281
Less amount representing interest payments..... 222 -- 222
------ ------ ------
Present value of minimum lease and debt
payments..................................... 2,694 4,365 7,059
Less current portion........................... 1,339 1,027 2,366
------ ------ ------
$1,355 $3,338 $4,693
====== ====== ======
During 1997, the Company financed under capital lease arrangements an
aggregate of $1,179,000 of asset cost under 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 five years and require that the Company maintain a
certain level of cash and investments.
During 1998, the Company financed under a master debt agreement, assets with
a cost of $1,574,000, $1,506,000 and $1,005,000 with interest rates of 7.89%,
8.06% and 8.08%, respectively. During 1997, the Company financed under a master
debt agreement assets with a cost of $676,000 and $1,137,000 with the interest
rates of 8.59% and 8.38%, respectively. The Company has certain equipment with a
net book value of $3,765,000 designated as collateral under these agreements at
December 31, 1999. These agreements have a term of five years, and require that
the Company maintain a certain level of cash and investments. The carrying value
of these debt obligations approximates fair value.
In December 1999, the Company obtained a line of credit allowing for
borrowings in aggregate of up to $20,000,000 for equipment and leasehold
improvement expenditures. As of December 31, 1999, no amounts were outstanding
and $20,000,000 was available under the line of credit.
Interest paid under capital leases and debt was $654,000, $681,000 and
$576,000 in 1999, 1998 and 1997, respectively.
I. COMMITMENTS
The Company leases its facilities and certain equipment under operating
leases. The Company's leases have terms through the year 2009. In 1999, the
Company entered into new operating lease commitments for additional space and
facilities in the U.S.
F-12
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. COMMITMENTS (CONTINUED)
At December 31, 1999, future minimum commitments under leases with
non-cancelable terms of more than one year are as follows (in thousands):
YEAR OPERATING LEASES
- ---- ----------------
2000........................................................ $ 7,502
2001........................................................ $ 11,975
2002........................................................ $ 11,258
2003........................................................ $ 11,258
2004........................................................ $ 10,840
Thereafter.................................................. $ 50,714
--------
Total....................................................... $103,547
========
Rental expense was $6,235,000, $4,358,000 and $3,363,000 in 1999, 1998 and
1997, 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 2000 and 2001 the amounts
committed under these contracts are $811,000 and $766,000, respectively.
J. INCOME TAXES
The Company's federal statutory income tax rate for 1999, 1998 and 1997 was
34%. The Company recorded no income tax benefit for 1999, 1998 and 1997 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):
1999 1998
-------- --------
Net operating loss........................................ $66,001 $57,295
Tax credits carryforward.................................. 13,464 10,958
Property, plant and equipment............................. 676 1,345
Other..................................................... 411 572
------- -------
Gross deferred tax asset.................................. 80,552 70,170
Valuation allowance....................................... (80,552) (70,170)
------- -------
Net deferred tax balance.................................. $ -- $ --
======= =======
For federal income tax purposes, as of December 31, 1999, the Company has
net operating loss carryforwards of approximately $162,776,000 and $9,331,000 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 1999 deferred tax asset has been adjusted in connection
with the restructuring of the Company's investment in Altus. A valuation
allowance has been established for the full amount of the deferred tax asset
since it is more likely than not that the deferred tax asset will not be
realized.
F-13
J. INCOME TAXES (CONTINUED)
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 Section382. 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 1999, which
may also limit the amount of net operating loss and tax credit utilization in a
subsequent year.
K. COMMON AND PREFERRED STOCK
COMMON STOCK
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 June 1997, Eli Lilly and Company
("Lilly") purchased 263,922 shares of the Company's common stock for
$10,000,000.
During 1997, the Company increased the authorized number of shares of common
stock by 50,000,000 shares to 100,000,000 shares. In May 1999, the shareholders
approved an amendment to the Company's 1996 Stock and Option Plan and the
Employee Stock Purchase Plan authorizing the addition of 1,250,000 and 200,000
shares to the plans, respectively. At December 31, 1999, 8,873,000 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; 43,000 shares were reserved for exercise
of certain other options granted in 1991; approximately 57,000 shares of common
stock were reserved for issuance under the Company's 401(k) Plan, and
approximately 224,000 shares of common stock were reserved for issuance under
the Company's Employee Stock Purchase Plan.
STOCK OPTION PLANS
The Company has a 1991 Stock Option Plan (the "1991 Plan"), a 1994 Stock and
Option Plan (the "1994 Plan") and a 1996 Stock and Option Plan (the "1996
Plan"). Under the 1994 Plan and the 1996 Plan, stock rights, which are either
(i) incentive stock options when Internal Revenue Code requirements are met,
(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). Stock options granted under the 1996 Plan may not be granted
at a price less than the fair market 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. At December 31, 1999, the
Company had 2,173,000 shares of common stock available for future grant under
its stock option plans.
The Company issued options to purchase 20,000 shares of common stock in 1998
and 1997, at exercise prices below the fair market value of the common stock on
the date of grant. The Company recorded an increase to additional paid in
capital and a corresponding charge to deferred compensation to recognize the
aggregate difference between the exercise price and the fair market value of the
common stock in the amount of $82,000 and $82,000 for 1998 and 1997,
respectively. Deferred compensation is being amortized over the option vesting
period. Amortization of deferred compensation expense of $53,000, $32,000 and
$12,000 was recognized during 1999, 1998 and 1997, respectively.
F-14
K. COMMON AND PREFERRED STOCK (CONTINUED)
Compensation cost recognized in connection with the issuance of stock
options to nonemployees was $59,000, $59,000 and $44,000 in 1999, 1998 and 1997,
respectively.
Stock option activity for the years ended December 31, 1999, 1998 and 1997
is as follows (shares in thousands):
1999 1998 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year............ 5,837 $22.62 4,702 $22.03 4,033 $18.98
Granted..................................... 1,315 $25.99 1,341 $24.57 1,257 $29.78
Exercised................................... (244) $15.24 (78) $14.89 (375) $13.97
Canceled.................................... (164) $27.17 (128) $25.90 (213) $23.99
----- ----- -----
Outstanding at end of year.................. 6,744 $23.50 5,837 $22.62 4,702 $22.03
===== ===== =====
Options exercisable at year-end............. 3,440 $20.57 2,758 $18.76 1,944 $16.50
===== ===== =====
Weighted average fair value of options
granted during the year................... $13.05 $11.68 $13.94
The fair value of each option granted during 1999, 1998 and 1997 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
1999 1998 1997
-------- -------- --------
Expected life (years)................................. 5.5 5.11 5.18
Expected volatility................................... 45% 46.5% 44.7%
Risk free interest rate............................... 6.20% 4.86% 5.5%
Dividend yield........................................ 0 0 0
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
EXERCISE PRICES ----------- ---------------- -------- ----------- --------
$ 7.25-$15.75.......................... 1,535 3.96 $13.33 1,527 $13.32
$15.88-$26.22.......................... 2,445 8.50 $22.80 726 $19.63
$26.31-$27.34.......................... 1,438 8.36 $27.27 456 $27.29
$27.37-$48.81.......................... 1,317 7.31 $32.35 726 $32.38
$49.13-$49.13.......................... 9 7.45 $49.13 5 $49.13
----- ---- ------ ----- ------
$ 7.25-$49.13.......................... 6,744 7.20 $23.50 3,440 $20.57
===== ==== ====== ===== ======
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
F-15
K. COMMON AND PREFERRED STOCK (CONTINUED)
lesser of fair market value at the beginning or end of each six-month
withholding period. During 1999, 1998 and 1997 the following was issued under
the plan:
1999 1998 1997
-------- -------- --------
Number of shares.................................... 51,529 38,170 26,213
Average price paid.................................. $19.37 $22.66 $28.00
Had the Company adopted SFAS 123, the weighted average fair value of each
purchase right granted during 1999, 1998 and 1997 would have been $6.63, $7.65
and $9.16, 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 45%, 52% and 51% for 1999, 1998 and 1997,
respectively (3) risk-free interest rate of 5.72%, 4.70% and 5.43% for 1999,
1998 and 1997, respectively, and (4) no dividend yield.
PRO FORMA DISCLOSURES
Had compensation cost for the Company's grants for stock-based compensation
plans been determined consistent with SFAS 123, the Company's net loss and net
loss per share would approximate the pro forma amounts below (in thousands
except per share data):
1999 1998 1997
-------- -------- --------
Net Loss.......................................... As reported $(40,966) $(33,086) $(19,831)
Pro forma $(52,997) $(41,542) $(25,154)
Basic and diluted loss per share.................. As reported $ (1.61) $ (1.31) $ (0.82)
Pro forma $ (2.08) $ (1.64) $ (1.04)
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 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.
F-16
L. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
In November 1999, the Company and Taisho Pharmaceutical Co., LTD ("Taisho")
entered into an agreement to collaborate on the discovery, development and
commercialization of caspase inhibitors for the treatment of cerebrovascular,
cardiovascular and neurdegenerative diseases. Under the agreement, Taisho agreed
to pay the Company up to $43,000,000 in pre-commercial payments, comprised of
research funding, milestone payments and $4,500,000 for prior research costs.
These amounts are based on the development of two compounds. Vertex received and
recognized $3,000,000 in the fourth quarter of 1999 for prior research costs and
will receive $1,500,000 in November 2000. In addition, Taisho will also pay for
certain costs of developing compounds that emerge from the caspase research
program. From the inception of the agreement in November 1999 through
December 1999, $3,900,000 has been recognized as revenue. Taisho will have an
option to obtain marketing rights in Japan and certain Far East markets for any
compounds arising from the collaboration.
In September 1999, the Company and Aventis S.A. ("Aventis"), formerly
Hoechst Marion Roussel Deutschland GmbH ("HMR"), entered into an expanded
agreement covering the development of VX-740, an orally active inhibitor of
interleukin-1 beta converting enzyme ("ICE"). Under the agreement, Aventis
agreed to pay the Company $20,000,000 for prior research costs, and up to
$62,000,000 in milestone payments for successful development by Aventis of
VX-740 in rheumatoid arthritis, the first targeted indication, as well as
similar milestones for each additional indication. Vertex received $10,000,000
in the fourth quarter of 1999 for prior research costs and will receive
$10,000,000 in the second quarter of 2000. Aventis has an exclusive worldwide
license to develop, manufacture and market VX-740, as well as an exclusive
option for all other compounds discovered as part of the research collaboration
between the Company and HMR that ended in 1997 under which the Company received
research funding. Aventis will fund the development of VX-740. Vertex may
co-promote the product in the U.S. and Europe and will receive royalties on
global sales, if any. Aventis may terminate this agreement without cause upon
six months' written notice. Revenues earned under the 1999 agreement were
$15,000,000. Revenues earned under the previous agreement were $120,000,
$460,000 and $8,660,000 in 1999, 1998 and 1997, respectively.
The Company and Schering AG, Germany ("Schering AG") are collaborating on
the research, development and commercialization of novel, orally active
neurophilin ligand compounds to promote nerve regeneration for the treatment of
a number of neurological diseases. Under the terms of the agreement, Schering AG
agreed to pay the Company up to $88,000,000 comprised of $6,000,000 paid upon
signing in September 1998, $22,000,000 of product research funding over five
years and $60,000,000 of development and commercialization milestone payments.
From the inception of the agreement in August 1998 through December 31, 1999,
$14,000,000 has been recognized as revenue. Under terms of the agreement, Vertex
and Schering AG will have an equal role in management of neurophilin ligand
research and product development. In North America, Vertex will have
manufacturing rights, and Vertex and Schering AG will share equally in the
marketing expenses and profits from commercialized compounds. In addition to
having manufacturing rights in North America, the Company retains the option to
manufacture bulk drug substance for sales and marketing in territories outside
Europe, the Middle East and Africa. Schering AG will have the right to
manufacture and market any commercialized compounds in Europe, the Middle East
and Africa, and pay Vertex a royalty on product sales, if any. After
December 2000, Schering AG has the right to terminate without cause upon a six
months' written notice. Revenues earned from Schering AG under the neurophilin
ligand agreement were $4,000,000 and $10,000,000 in 1999 and 1998, respectively.
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 agreed to pay the Company up to
F-17
L. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
$22,000,000 composed of a $4,000,000 license payment, $11,000,000 of product
research funding over three years and $7,000,000 of development and
commercialization milestone payments. From the inception of the agreement in
September 1997 through December 31, 1999, $15,000,000 has been recognized as
revenue. 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. Additionally, Kissei agreed to pay
certain development costs. Revenues earned from Kissei under the p38 MAP kinase
agreement were $6,286,000, $5,521,000 and $5,500,000 in 1999, 1998 and 1997,
respectively.
The Company and Eli Lilly and Company ("Lilly") are collaborating on
designing inhibitors of the hepatitis C protease enzyme and developing them as
novel drugs to treat hepatitis C infection. Under the terms of the agreement,
Lilly agreed to pay the Company up to $51,000,000 composed of a $3,000,000
payment paid in June 1997, $33,000,000 of product research funding over six
years and $15,000,000 of development and commercialization milestone payments.
From the inception of the agreement in June 1997 through December 31, 1999,
$16,209,000 has been recognized as revenue. 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. In connection
with this collaboration, Lilly purchased 263,922 shares of the Company's common
stock for $10,000,000 in June 1997. Revenues earned from Lilly were $5,452,000,
$5,193,000 and $5,694,000 in 1999, 1998 and 1997, respectively.
The Company and BioChem Pharma ("BioChem") collaborated on the development
and commercialization in Canada of Incel-TM- (VX-710), Vertex's lead multidrug
resistance reversal agent. Under the development agreement, BioChem agreed to
pay Vertex an initial licensing fee of $500,000 and development and
commercialization milestone payments. From the inception of the agreement in
May 1996 through the year ended December 31, 1999, $750,000 has been recognized
as license and research revenue. BioChem also funded certain development
activities for Incel in Canada. The Company has received the full amount of
research funding specified under the agreement and BioChem has no further
license rights with respect to Incel. No revenues were earned from BioChem in
1999. Revenues earned from BioChem were $56,000 and $251,000 in 1998 and 1997,
respectively.
The Company and Glaxo Wellcome are collaborating on the development and
commercialization of Agenerase (amprenavir) and its prodrug VX-175. Under the
collaborative agreement, for research and development of HIV protease
inhibitors, Glaxo Wellcome agreed to pay the Company up to $42,000,000 comprised
of a $15,000,000 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 for an initial drug candidate. Glaxo Wellcome is also
obligated to pay additional development and commercialization milestone payments
for subsequent drug candidates, including VX-175. From the inception of the
agreement in December 1993 through the year ended December 31, 1999, $40,000,000
has been recognized as revenue. Research funding under this agreement ended on
December 31, 1998. In addition, Glaxo Wellcome is required to bear the costs of
development in its territory of drug candidates 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. The Company has retained certain bulk drug manufacturing
rights and certain
F-18
L. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
co-promotion rights in territories licensed to Glaxo Wellcome. Glaxo Wellcome
has the right to terminate its arrangement without cause upon twelve months'
notice given at any time. Termination by Glaxo Wellcome of 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. In 1999, the Company began earning a royalty from
Glaxo Wellcome from sales of Agenerase. Revenues and royalties earned from Glaxo
Wellcome were $13,927,000, $6,457,000 and $3,275,000 for 1999, 1998 and 1997,
respectively.
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. Based on sales of
Agenerase in 1999, the Company also began to pay Searle a royalty.
The Company and Kissei are collaborating on the development and
commercialization of amprenavir. Under the collaborative agreement, Kissei
agreed 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, 1999, $15,642,000
has been recognized as revenue. During 1997, the Company also received
$4,000,000 related to reimbursements of certain development costs. The Company
has received the full amount of research funding specified under the agreement.
Under the collaboration, Kissei has exclusive rights to develop and
commercialize amprenavir in Japan and will pay Vertex a royalty on sales, if
any. Vertex is responsible for the manufacture of bulk product for Kissei.
Kissei also has an exclusive option to develop and commercialize the amprenavir
prodrug VX-175 in Japan. Revenues earned under this Kissei agreement were
$1,000,000, $217,000 and $4,310,000 in 1999, 1998 and 1997, respectively.
M. 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 1999, the Company declared discretionary matching contributions
to the plan in the aggregate amount of $866,000, payable in the form of shares
of the Company's common stock. Of these shares, 23,854 were issued as of
December 31, 1999 with approximately 6,700 issuable in 2000. For 1998, the
Company declared discretionary matching contributions to the plan in the
aggregate amount of $672,000, payable in the form of shares of the Company's
common stock. Of these shares, 19,419 were issued as of December 31, 1998 with
the remaining 7,195 issued in 1999. 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 issued in 1998.
N. RELATED PARTY
A sibling of the Company's Chairman and Chief Executive Officer is a partner
in the law firm representing the Company to which $480,000, $333,000 and
$394,000 in legal fees were paid in 1999, 1998 and 1997, respectively.
O. LEGAL PROCEEDINGS
Chiron Corporation ("Chiron") filed suit on July 30, 1998 against Vertex and
Eli Lilly and Company in the United States District Court for the Northern
District of California, alleging
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O. LEGAL PROCEEDINGS (CONTINUED)
infringement by the defendants of three U.S. patents issued to Chiron. The
infringement action relates to research activities by the defendants in the
hepatitis C viral protease field and the alleged use of inventions claimed by
Chiron in connection with that research. Chiron has requested damages in an
unspecified amount, as well as an order permanently enjoining the defendants
from unlicensed use of the claimed Chiron inventions. During 1999, Chiron
requested and was granted a reexamination by the U.S. Patent and Trademark
Office of all three of the patents in suit. Chiron also requested and, over the
opposition of Vertex and Lilly, was granted a stay in the infringement lawsuit,
pending the outcome of the patent reexamination. While the length of the stay,
the outcome of the reexamination, the effect of that outcome on the lawsuit and
the final outcome of the lawsuit cannot be determined, Vertex maintains that the
plaintiff's claims are without merit and intends to defend the lawsuit, if and
when it resumes, vigorously.
P. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) consists of the following (in
thousands):
ACCUMULATED
CUMULATIVE UNREALIZED OTHER
TRANSLATION GAIN/(LOSS) ON COMPREHENSIVE
ADJUSTMENT INVESTMENTS INCOME (LOSS)
----------- -------------- -------------
Balance as of December 31, 1997........................ $ 4 $ 148 $ 152
Unrealized gains/(losses) on securities:
Unrealized holding gains arising during the period... -- 1,049 1,049
Less: reclassification adjustment for gains
Included in net loss............................... (547) (547)
---- ------- ------
Balance as of December 31, 1998........................ 4 650 654
Foreign currency translation adjustment................ 48 48
Unrealized gains/(losses) on securities:
Unrealized holding gains arising during the period... (1,672) (1,672)
---- ------- ------
Balance as of December 31, 1999........................ $ 52 $(1,022) $ (970)
==== ======= ======
Q. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE)
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- --------- --------
1999
Total revenues............................. $ 7,129 $ 15,328 $ 9,561 $ 29,630 $ 61,648
Total expenses............................. 24,683 26,169 23,847 27,915 102,614
Net loss................................... (17,554) (10,841) (14,286) 1,715 (40,966)
Basic earnings per share................... (.69) (.43) (.56) .07 (1.61)
Diluted earnings per share................. (.69) (.43) (.56) .06 (1.61)
1998
Total revenues............................. $ 7,169 $ 7,152 $ 18,417 $ 11,660 $ 44,398
Total expenses............................. 15,583 16,954 20,690 24,257 77,484
Net loss................................... (8,414) (9,802) (2,273) (12, 597) (33,086)
Basic and diluted earnings per share....... (0.33) (0.39) (0.09) (0.50) (1.31)
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R. SUBSEQUENT EVENT
On February 28, 2000, the Company entered into an agreement with Incyte
Pharmaceuticals, Inc. to gain access to one of Incyte's databases of genomic
information. Under the agreement, Vertex must make certain payments, including
milestone payments and royalties on sales of products developed with Incyte
technology, if any.
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