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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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
CAMBRIDGE, MASSACHUSETTS 02139-4242
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (617) 577-6000
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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 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
As of March 12, 2001 there were outstanding 60,150,471 shares of Common
Stock, $.01 par value per share. The aggregate market value of shares of Common
Stock held by non-affiliates of the registrant, based upon the last sales price
for such stock on that date as reported by the Nasdaq Stock Market, was
approximately $1,887,463,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders to be held on May 8, 2001 are incorporated by reference into
Part III.
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FORM 10-K INDEX
PAGE
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PART I
Item 1. Business.................................................... 1
Executive Officers and Directors............................ 22
Scientific Advisory Board................................... 24
Risk Factors................................................ 25
Item 2. Properties.................................................. 32
Item 3. Legal Proceedings........................................... 32
Item 4. Submission of Matters to a Vote of Security Holders......... 32
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 33
Item 6. Selected Financial Data..................................... 34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................... 35
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 39
Item 8. Financial Statements and Supplementary Data................. 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 40
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 40
Item 11. Executive Compensation...................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 40
Item 13. Certain Relationships and Related Transactions.............. 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 41
The "Company," "Vertex," "we" and "us," as used in this Annual Report on
Form 10-K, refer to Vertex Pharmaceuticals Incorporated, a Massachusetts
corporation.
"Vertex" is a registered trademark of Vertex Pharmaceuticals Incorporated,
and "Incel" is a trademark of Vertex Pharmaceuticals Incorporated. "Agenerase"
is a registered trademark of GlaxoSmithKline. "Prozei" is a trademark of Kissei
Pharmaceutical Co., Ltd. Other brands, names and trademarks contained in this
Report are the property of their respective owners.
All share and per share data in this Report give effect to the 2-for-1 stock
split that we effected as a stock dividend on August 23, 2000.
FORWARD-LOOKING STATEMENTS
Our disclosure in this Annual Report on Form 10-K contains some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. Such
statements may include words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe" and other words and terms of similar
meaning in connection with any discussion of future operating or financial
performance. In particular, these statements include, among other things,
statements relating to:
- our business strategy;
- our predicted development and commercial timelines;
- the development of our products;
- the establishment and development of collaborative partnerships;
- our ability to identify new potential products;
- our ability to achieve commercial acceptance of our products;
- our ability to scale-up our manufacturing capabilities and facilities;
- the potential for the acquisition of new and complementary technologies;
- our projected capital expenditures; and
- our liquidity.
Any or all of our forward-looking statements in this report may turn out to
be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Many factors mentioned in our
discussion in this report will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially.
We provide a cautionary discussion of risks and uncertainties under "Risk
Factors" in Item 1 of this Report. These are factors that we think could cause
our actual results to differ materially from expected results. Other factors
besides those listed there could also adversely affect us.
PART I
ITEM 1. BUSINESS
We are a biotechnology company that seeks to discover, develop and
commercialize novel small molecule drugs that address significant markets with
major unmet medical needs, including the treatment of viral diseases, cancer,
autoimmune and inflammatory diseases, and neurological disorders. Our drug
design platform integrates advanced biology, chemistry, biophysics and
information technologies to make the drug discovery process more efficient and
productive. To date, we have discovered and advanced one product that has
reached the market--the HIV protease inhibitor Agenerase-Registered Trademark-
(amprenavir)--and we have 12 additional drug candidates in development.
We intend to commercialize some of our products independently and some with
partners. We have significant collaborations with Aventis, Eli Lilly,
GlaxoSmithKline, Kissei, Novartis, Schering AG (Germany), Serono and Taisho.
These collaborations provide us with financial support and other valuable
resources for our research programs, development of our clinical drug
candidates, and marketing and sales of our products. We believe that we are
positioned to commercialize multiple products in the coming years, which we
expect will generate increased milestone payments, product revenues and royalty
payments. We have additional research programs underway, and novel Vertex drug
candidates targeting bacterial gyrase, specific kinases, caspases, and hepatitis
C virus (HCV) protease could enter preclinical studies within the next
12 months. These drug candidates may have application in the treatment of
bacterial infection, cancer, inflammation, and neurological disease, and HCV
infection.
We believe that the emergence of large amounts of information from genomic
research represents an unprecedented opportunity for drug discovery directed at
novel biological targets. Chemogenomics, our proprietary, systematic,
genomics-based platform, is designed to speed drug discovery as well as to
expand intellectual property coverage of drug candidate compounds and classes of
related compounds. As part of this approach, we are pursuing a strategy of
parallel drug design directed at gene families, which are groups of genes with
similar sequences that code for structurally similar proteins. Using this
strategy, we seek to identify classes of chemical inhibitors (drug-like
molecules) that are applicable for clusters of closely related targets that have
different biological functions. We believe that chemogenomics will enhance the
speed and productivity of drug design efforts directed at novel biological
targets, secure for us valuable intellectual property in gene families of
interest, and ultimately result in the market introduction of major new drugs.
We are presently applying our expertise in chemogenomics to focus on the
protein kinase and caspase gene families, two areas in which we believe we can
leverage our drug design expertise to create product candidates that address a
variety of sizable therapeutic indications. In May 2000, we entered into a
collaboration with Novartis which will provide us up to $800 million in
pre-commercial payments to discover, develop and commercialize up to eight
kinase inhibitors for the treatment of a range of diseases, including cancer,
cardiovascular diseases, and inflammatory diseases. The financial and
technological support provided by Novartis enables us to expand both our
infrastructure and our chemogenomics efforts in the protein kinase gene family.
In addition, we have begun exploring other gene families. We anticipate
establishing additional partnerships with major pharmaceutical companies in
order to obtain the funding and resources needed to expand our discovery efforts
in additional gene families.
Over the next few years, we expect to continue our research and development
efforts and to bring drug candidates through late stage clinical development and
into commercialization. We also expect to license and acquire technologies,
resources and products that have the potential to strengthen our drug discovery
platform, product pipeline and commercial capabilities.
1
MARKETED AND DEVELOPMENT STAGE PRODUCTS
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 GlaxoSmithKline. We co-promote
Agenerase in the United States and in key E.U. countries. Total sales of the
drug for the twelve months ended December 31, 2000 were $79.3 million, resulting
in $12.0 million in product sales and royalty revenue to Vertex.
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 product pipeline. One of our drug candidates in
development is presently in Phase III clinical development, six are presently in
Phase II clinical development, one is presently in Phase I clinical development,
four are in preclinical development.
ESTIMATED U.S.
COMPANY WITH PATIENT
MARKETING RIGHTS POPULATION
DRUG CLINICAL INDICATIONS PHASE (REGION) (MILLIONS)
- ---- --------------------- -------- --------------------- ------------------------
INFECTIOUS DISEASE
VX-175 HIV III GlaxoSmithKline 0.9
(Worldwide except Far
East); Vertex co-
promote (U.S. and
E.U.); Kissei
(Japan)*
VX-497 Chronic hepatitis C II Vertex (Worldwide) 2.7
(merimempodib)
CANCER
Incel-TM- Multidrug resistant II Vertex (Worldwide) 0.5 (tumor incidence in
solid tumor cancers target diseases)
VX-853 Multidrug resistant I/II Vertex (Worldwide) 0.5 (tumor incidence in
solid tumor cancers target diseases)
INFLAMMATION AND AUTOIMMUNE DISEASE
VX-740 Rheumatoid arthritis II Aventis (Worldwide); 2.1 (RA)
(pralnacasan) (RA); inflammatory Vertex co-promote
diseases (U.S. and E.U.)
VX-745 RA; inflammatory II Kissei (Japan) Vertex 2.1 (RA)
diseases (R.O.W.)
VX-148 Autoimmune diseases I Vertex (Worldwide) NA
VX-944 Autoimmune diseases Preclin Vertex (Worldwide) NA
VX-850 Inflammatory diseases Preclin Kissei (Japan)*; NA
Vertex (R.O.W.)
VX-702 Inflammatory diseases Preclin Kissei (Japan); NA
Vertex (R.O.W.)
VX-765 Inflammatory diseases Preclin Vertex (Worldwide) NA
NEUROLOGICAL DISEASE
Timcodar Diabetic neuropathy II Schering AG (E.U.; 1.3
(VX-853) profit sharing in
U.S.)*
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* Development option
2
RESEARCH PROGRAMS
We have several research programs underway at the discovery stage, including
multitarget programs that are representative of our chemogenomics approach, as
well as single target programs. We expect to advance numerous drug candidates
into development in the next several years that are based on this ongoing
research.
COMPANY WITH MARKETING
MOLECULAR TARGET CLINICAL INDICATIONS RIGHTS (REGION)
- ---------------- ----------------------------- -----------------------------
Caspases Neurological diseases; Taisho (Japan);
cardiovascular diseases Serono(R.O.W.); Vertex joint
venture (North America)
Kinases Cancer; inflammatory Novartis (Worldwide); Vertex
diseases; neurodegenerative co-promote (U.S. & E.U.)
diseases
HCV protease Hepatitis C Eli Lilly (Worldwide); Vertex
co-promote (U.S.)
HCV helicase Hepatitis C Vertex (Worldwide)
Bacterial DNA gyrase B Bacterial infections Vertex (Worldwide)
COMMERCIAL PRODUCT AND CLINICAL DEVELOPMENT PROGRAMS
We have one product on the market and eight additional drug candidates in
clinical development to treat viral diseases, cancer, autoimmune and
inflammatory diseases and neurological disorders.
ANTIVIRAL PROGRAMS
HIV/AIDS PROGRAM
AGENERASE
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
GlaxoSmithKline. We used our expertise in structure-based drug design to create
and develop Agenerase to address unmet needs in the treatment of HIV.
GlaxoSmithKline is marketing Agenerase worldwide except for the Far East. We
co-promote Agenerase in the U.S. and Europe. Agenerase received regulatory
approval in the U.S. in April 1999, and it has also been approved in the 15
member states of the European Union, as well as Argentina, Brazil, Colombia,
Chile, Ghana, Israel, Latvia, Malawi, Mexico, Switzerland, Uruguay, and other
countries. 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 GlaxoSmithKline and
Kissei. We also supply amprenavir bulk drug substance to Kissei. More than
16,000 patients in the U.S. take Agenerase as part of combination therapy for
the treatment of HIV. Agenerase's share of the HIV protease inhibitor
prescriptions in the U.S. was approximately 8% as of December 31, 2000.
To support the use of Agenerase in the marketplace, GlaxoSmithKline has
undertaken a broad Phase IV clinical program aimed at evaluating the drug's use
as part of different drug combinations in a variety of patient populations. In
collaboration with GlaxoSmithKline, we have initiated several of our own
post-marketing clinical studies.
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.
3
We believe that Agenerase is distinguished from other protease inhibitors by
its:
- longer half-life, which allows for convenient twice-daily dosing and
provides high levels of the drug in the bloodstream;
- ability to be dosed effectively with or without food, providing
convenience for patients; and
- lower levels of cross-resistance to other protease inhibitors.
Preliminary data have 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 anti-HIV drugs. Further study
will be required to confirm these preliminary data and to understand more fully
the clinical significance of Agenerase's resistance profile. Combination studies
of Agenerase and the protease inhibitor ritonavir presented at major medical
conferences, including the 8th Conference on Retroviruses and Opportunistic
Infections in Chicago in February 2001, have suggested that ritonavir
significantly boosts levels of Agenerase in the bloodstream in both once daily
and twice daily dosing regimens. Co-administration with ritonavir has become
progressively more frequent in clinical practice, as a strategy of achieving
maximum antiviral activity, reducing the likelihood of treatment failure (viral
breakthrough), and lowering the overall pill count for patients. More than 50%
of Agenerase use in the United States is in combination with ritonavir as of
December 2000.
VX-175
We are developing a second HIV protease inhibitor, VX-175 (also known as
GW433908) as part of the GlaxoSmithKline collaboration. In November, VX-175
began two Phase III trials, including one trial that is evaluating VX-175 in a
once-daily dosing combination with ritonavir. VX-175 is a prodrug of the HIV
protease inhibitor 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. VX-175 was synthesized first at
Vertex and then selected for development by GlaxoSmithKline. With the number of
pills that HIV infected patients require daily as part of combination drug
regimens, the prodrug's dosing benefit could provide a material increase in
physician acceptance of and patient compliance with this product as compared to
Agenerase.
A Phase II clinical study of VX-175 was completed in 2000, and results were
presented at the 8th Conference on Retroviruses and Opportunistic Infections in
February 2001. Phase II study results showed that VX-175 possesses potent
antiviral activity and a strong pharmacokinetic and safety profile. Preclinical
studies and Phase I studies found that administration of VX-175 delivered
amprenavir, the active ingredient of Agenerase, and also showed
dose-proportionality. 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. GlaxoSmithKline 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 E.U., and
we will receive royalties on sales of VX-175, if any. We also retain rights to
supply bulk drug substance to GlaxoSmithKline.
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.
Protease inhibitors (PIs) are used as part of combination regimens for the
treatment of HIV. PIs block the cleavage of HIV polyproteins into active
proteins, and result in the production of non-infectious viral particles.
Currently, more than 208,000 of the HIV patients receiving drug treatment in the
U.S. take at least one PI. The market for HIV PIs is highly competitive, with
five
4
different PIs vying for a share of an almost $1 billion U.S. market. Worldwide
sales of HIV PIs 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 PIs, including Agenerase. In the United States, more
than 16,000 patients take Agenerase as part of combination therapy for the
treatment of HIV infection.
HEPATITIS C VIRUS (HCV) INFECTION
IMPDH PROGRAM
Vertex is developing novel, orally administered inhibitors of the enzyme
inosine 5'-monophosphate dehydrogenase (IMPDH), targeting the treatment of both
viral and autoimmune diseases. We retain all commercial rights to VX-497 and any
second generation compounds resulting from our IMPDH research and development
program.
Our lead compound, VX-497, has demonstrated potent biological activity and
oral bioavailability in preclinical and early clinical studies. Data from a
Phase I trial in healthy volunteers, completed in 1998, show that 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. In
November 1999, we announced preliminary data from a Phase II clinical trial of
VX-497 indicating that VX-497, when given as monotherapy to HCV patients who
were unresponsive to prior treatment with interferon-alpha, was well tolerated
and appears to reduce levels of serum alanine aminotransferase, a marker of
liver inflammation, in HCV patients treated for 28 days.
We have now completed a preliminary analysis of a Phase II study of VX-497
combined with interferon-alpha in patients with HCV infection who have not
previously received antiviral treatment. This double-blind, placebo-controlled
study began in June 2000. The preliminary results indicate that further clinical
development of VX-497 is warranted. A kinetic analysis of viral decline showed
that the VX-497 treated patients had an accelerated decline in both the fast and
slow phases of viral reduction. This is consistent with an additive antiviral
effect mediated by VX-497, when given in combination with interferon alpha. We
expect that our next clinical study will investigate VX-497 in combination with
Pegylated (PEG) interferon-alpha. We believe that PEG interferon-alpha will soon
become the standard of care in the treatment of HCV, either alone or in
combination with other drugs, such as ribavirin. VX-497 may have certain safety
advantages compared with ribavirin, which is approved for use in combination
with interferon-alpha for the treatment of HCV. Ribavirin has been associated
with the side effect of hemolytic anemia. The majority of ribavirin treated
patients experience a drop in hemoglobin levels, and a significant fraction
require dose reduction or withdrawal of therapy.
In 2000, we advanced two additional IMPDH inhibitors, VX-148 and VX-944,
into preclinical development, targeting antiviral and autoimmune indications.
VX-148 and VX-944 are chemical compounds structurally distinct from VX-497. One
of these agents, VX-148, began a Phase I clinical study in December 2000. More
information on VX-148 and VX-944 is available in the section titled "Autoimmune
Diseases"
BACKGROUND: IMPDH AND HCV
Cells require adequate nucleotide levels to sustain RNA and DNA synthesis.
Nucleotides can be made available for nucleic acid synthesis via two distinct
pathways, the "salvage pathway" and "DE NOVO synthesis." Using the salvage
pathway, cells recycle nucleosides derived from breakdown of nucleic acids,
whereas with DE NOVO synthesis the purine or pyrimidine ring systems of the
nucleotides are assembled in a stepwise manner. The enzyme inosine
5'-monophosphate dehydrogenase (IMPDH) catalyzes an essential step in the DE
NOVO biosynthesis of guanine nucleotides, namely the conversion of inosine
5'-monophosphate (IMP) to xanthosine 5'-monophosphate (XMP).
5
Different cell types rely on these two pathways of nucleotide biosynthesis
to varying degrees. Cells that proliferate relatively rapidly, such as
lymphocytes and virus-infected cells, rely more on the de novo pathway because
they require more nucleotides than can be provided by the salvage pathway. This
observation makes enzymes of the de novo pathway an attractive target for
pharmacological intervention aimed at selectively inhibiting proliferation of
such cells.
CANCER
MDR PROGRAM
We are developing novel compounds to treat and prevent the occurrence of
drug resistance associated with the failure of cancer chemotherapy. Incel (also
referred to as biricodar dicitrate or VX-710), our lead compound, blocks major
multidrug resistance (MDR) mechanisms, including P-glycoprotein, or P-gp, and
multidrug resistance associated protein, or MRP. P-gp and MRP are proteins that
are overexpressed on the cell surface of many different tumor types that can
prevent the effectiveness of chemotherapy by actively pumping out cytotoxic
agents from within the cancer cell. Incel is designed to block these molecular
pumps, allowing chemotherapy to affect the targeted tumor. Incel, an intravenous
compound, is intended to be administered in combination with cancer chemotherapy
agents, such as doxorubicin, paclitaxel, vincristine, etoposide and
mitoxantrone. We have completed Phase II clinical trials of Incel in ovarian,
breast, small cell lung and prostate cancers and in soft tissue sarcoma. An
exploratory study has also been conducted in liver cancer. In addition, we have
conducted 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 has been to evaluate Incel in a broad range of
tumor types in combination with widely used anti-cancer agents. The objective of
these Phase II 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 low. Analysis of data using Incel in conjunction
with chemotherapy demonstrates that use of Incel in combination with a
chemotherapeutic agent can induce objective tumor responses (> 50% tumor
shrinkage) in a subset of patients resistant to therapy with the
chemotherapeutic agent alone. We have treated more than 250 patients as part of
clinical trials of Incel. We are now seeking a collaborative partnership to
develop and commercialize Incel.
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 have completed a Phase I/II clinical trial with VX-853
to assess the safety and pharmacokinetics of the compound in combination with
doxorubicin. This study demonstrated that the combination is well tolerated, and
that VX-853 does not affect the pharmacokinetics of doxorubicin.
BACKGROUND: MDR
The American Cancer Society estimates that during 2000 more than
1.2 million people in the United States were diagnosed with invasive cancer and
more than 550,000 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
6
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.
INFLAMMATORY AND AUTOIMMUNE DISEASES
INFLAMMATORY DISEASE
INTERLEUKIN-1 BETA CONVERTING ENZYME (ICE; CASPASE-1) PROGRAM
We are conducting research and development on inhibitors of interleukin-1
beta converting enzyme (ICE; caspase-1) for the treatment of acute and chronic
inflammatory conditions, including rheumatoid arthritis. We are collaborating
with Aventis S.A. in the development of the lead ICE inhibitor compound
pralnacasan (VX-740). Aventis has completed a Phase II clinical trial of
pralnacasan 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 expect Aventis to initiate more
comprehensive Phase II trials in rheumatoid arthritis in 2001. We expect that
Aventis will initiate clinical trials in additional indications within the next
1-2 years.
In 1999 we entered into an agreement under which Aventis holds an exclusive
worldwide license to develop, manufacture and market pralnacasan in any
indication, as well as an exclusive option for all other compounds discovered
under our previous research collaboration with Aventis. As part of the
agreement, Aventis may pay us up to $62 million for the development of
pralnacasan in rheumatoid arthritis, the first targeted indication, and Aventis
will pay for all development costs. Development of pralnacasan in two additional
indications could result in an additional $144 million in pre-commercial
payments. Aventis has completed a Phase II clinical trial of pralnacasan in
patients with rheumatoid arthritis which began in September 1999. The primary
goal of the study was to evaluate the safety and pharmacokinetics of multiple
doses of pralnacasan in rheumatoid arthritis patients. 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 have continued research into second generation ICE inhibitors, as well as
other caspase inhibitors. In 2000, we advanced VX-765, an ICE inhibitor
representing a distinct chemical class, into preclinical development. We hold
worldwide rights to compounds emerging from our second generation ICE inhibitor
research program.
BACKGROUND: ICE INHIBITORS FOR INFLAMMATORY DISEASE
ICE (caspase-1) is an enzyme that controls the release of active
Interleukin-1 (IL-1) beta (one of two forms of IL-1) and IL-18 from white blood
cells into the bloodstream and within tissues. IL-1 beta and IL-18 are a
cytokines that mediate 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. IL-18 is an important factor in the activation of
lymphocytes. Elevation of IL-1 beta and IL-18 levels has been correlated to
disease state in a number of acute and chronic inflammatory diseases.
Rheumatoid arthritis is the lead indication of the pralnacasan development
program. In patients with rheumatoid arthritis, increased activity of IL-1 beta
and IL-18 is seen in joint tissues during disease flare-ups, and IL-1 beta and
IL-18 are known to activate osteoclasts, a cell type important in
7
bone erosion characteristic of rheumatoid arthritis. In mice in which arthritis
is induced by collagen immunization, treatment with pralnacasan significantly
reduces the severity of arthritis compared to vehicle-treatment.
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 associated with 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 pralnacasan has significant dosing advantages.
Vertex and Aventis scientists began collaborating in 1993 to discover and
develop orally available inhibitors of ICE. Our design efforts were based on the
three-dimensional atomic structure of ICE, which was solved by Vertex
researchers in 1994. As the result of an extensive, jointly conducted synthesis
and research program, pralnacasan was selected as a development candidate in
1997. Pralnacasan is the first caspase inhibitor to be advanced to Phase II
clinical trials.
P38 MAP KINASE PROGRAM
We are collaborating with Kissei on the design, development and
commercialization of inhibitors of p38 MAP kinase. In early 2001, we began a
Phase II trial of our lead drug candidate, VX-745, in approximately 135 patients
with rheumatoid arthritis. VX-745 is a novel orally administered investigational
drug targeting p38 MAP kinase. In 2000, we completed a pilot Phase II clinical
trial with VX-745 in 12 patients with rheumatoid arthritis. 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, certain hematologic disorders, congestive heart failure, 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 conducted an exploratory Phase II trial in rheumatoid arthritis
patients in Europe starting in 1999. This 28-day study tested the tolerability
and pharmacokinetics of VX-745 in 12 patients with rheumatoid arthritis. The
trial also assessed the pharmacodynamic activity of VX-745, and clinical disease
activity markers were monitored. The results of this trial support further
development of this compound.
In 2000, we advanced two additional p38 MAP kinase inhibitors, VX-850 and
VX-702, into preclinical development, targeting inflammatory, neurological and
cardiovascular indications. Both VX-850 and VX-702 represent chemical classes
that are distinct from VX-745.
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, tumor necrosis factor
TNF-alpha, and IL-6. Excess levels of IL-1 and TNF-alpha are associated with a
broad range of acute and chronic inflammatory diseases. We believe that an oral
cytokine inhibitor such as VX-745 has significant dosing advantages over other
available therapies.
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Excess TNF alpha and IL-1 levels also play an important role in programmed
cell death associated with ischemia and stroke, and possibly in
neurodegenerative diseases such as Alzheimer'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.
AUTOIMMUNE DISEASES
IMPDH PROGRAM
Vertex is developing novel, orally administered inhibitors of the enzyme
inosine 5'-monophosphate dehydrogenase (IMPDH), targeting the treatment of both
viral and autoimmune diseases. In 2000, we designated the second-generation
IMPDH inhibitors, VX-148 and VX-944, as drug development candidates. VX-148 and
VX-944 are chemical compounds structurally distinct from VX-497. VX-148 began a
Phase I clinical study in December 2000.
IMPDH is a validated target for immunosuppressive drug development as
evidenced by the presence of two marketed drugs that function through the
inhibition of this enzyme:
- Mycophenolate mofetil (MMF, or CellCept-Registered Trademark-), the
prodrug ester of mycophenolic acid, has been developed and approved for
the prevention of acute rejection in kidney, heart, and liver
transplantation when used in combination with steroids and cyclosporin A
(CsA).
- Mizoribine (Bredinin-Registered Trademark-) is approved in Japan for
multiple indications, including prevention of rejection after renal
transplantation, idiopathic glomerulonephritis, lupus nephritis, and
rheumatoid arthritis.
Based on the broad role of IMPDH in the regulation of immune system
activity, we believe that VX-148 has the potential to treat a wide variety of
autoimmune diseases including such diseases as psoriasis, multiple sclerosis and
rheumatoid arthritis. We anticipate initiation of a Phase II trial with VX-148
in psoriasis by the end of 2001.
NEUROLOGICAL DISEASES
TIMCODAR
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 prevent nerve damage or improve recovery following nerve injury. 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. We
are evaluating novel testing approaches that have the potential to elucidate the
clinical activity of timcodar in neuropathies. Working with leaders in the field
of neuropathy, in January 2001 we began a clinical study with a novel trial
design. This trial is designed to assess the activity of timcodar in a novel
clinical paradigm.
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
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of timcodar in healthy volunteers was completed in 1998, providing support for
Phase II clinical development in the indication of diabetic neuropathy. IN VIVO
results have shown that timcodar can prevent neural dysfunction in models of
neuropathies. We continue to characterize the potential of timcodar and other
neurophilin compounds in a variety of neurological disease models.
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 improve outcomes in various models of neurological diseases. Extensive IN
VITRO and IN VIVO studies conducted with a reference compound designed by Vertex
support the broad potential of our neurophilin ligands in the treatment of
degenerative central nervous system and peripheral nervous system diseases. Our
researchers are still seeking to determine the mechanism of action of
neurophilin ligands.
VERTEX DRUG DESIGN PLATFORM AND DRUG DISCOVERY STRATEGY
We believe that our integrated drug design approach, together with our
strategy of parallel drug design in gene families, has provided us with the
ability to discover and develop small molecule drugs directed at biologically
complex targets, including novel targets identified in genomic research. Our
approach has been validated through our collaborations and success in moving
drug candidates into clinical trials.
INTEGRATED DRUG DESIGN APPROACH. Our drug design platform integrates
biology, biophysics, chemistry and information technologies in a coordinated and
simultaneous fashion throughout the discovery process to increase the speed and
certainty of drug discovery and development. Early in the drug design process,
we focus on qualities that are critical to the successful development of oral
small molecules, including sufficient potency, oral bioavailability, adequate
pharmacokinetics and safety. Our consistent achievement of these parameters in
discovery efforts directed at biologically complex molecular targets has been a
major reason for our high rate of productivity and success in competitive areas
of drug discovery.
CHEMOGENOMICS PLATFORM AND PARALLEL DRUG DESIGN STRATEGY. Chemogenomics,
the Company's proprietary, systematic, genomics-based platform, is designed to
accelerate the discovery of new drugs and to expand intellectual property
coverage of drug candidate compounds and classes of related compounds.
Chemogenomics represents an intersection of medicinal chemistry with
genomics--the organized pursuit of small molecule drugs directed at genomic
targets. To date, using our integrated approach, we have been able to design
multiple distinct lead classes of compounds for certain protein targets, and to
identify many or all of the critical interactions that a compound must have in
order to bind to these targets. In doing so, we have been able to design and
file patent applications covering many of the possible drugs for selected
protein targets. For example, in our caspase program, we have obtained a
pharmacophore patent that we believe describes a large number of the possible
ways of inhibiting caspase-1 with drug-like small molecules, and we believe that
chemical scaffolds useful for caspase-1 inhibition may also be useful for
inhibiting other targets in the caspase gene family.
10
The complete sequence of the human genome, which represents all of the genes
that code for proteins in the human body, is now known. The number of human
proteins that represent targets for currently marketed drugs is approximately
500. In the next several years, genomic and proteomic research is expected to
reveal as many as 5,000 novel protein targets that represent promising points of
therapeutic intervention with small molecule drugs. We believe that the
traditional approach to drug discovery, which focuses on one target at a time,
is not capable of exploiting efficiently this expected increase in the number of
"druggable" targets.
To maximize productivity for drug discovery directed at novel protein
targets, we are pursuing a strategy of parallel drug design in gene families.
This approach applies our integrated strategy across groups of structurally
similar targets to pursue rapid and simultaneous generation of lead compounds.
Our goal is to use this approach to describe and patent many or all of the
possible drug candidates for a protein target or a group of targets.
Specifically, we are seeking to:
- design multiple lead classes of compounds that are applicable to clusters
of structurally similar targets;
- leverage our knowledge of one target's active site to design inhibitor
classes for related targets; and
- identify all of the critical interactions a compound must have to bind to
a particular target, and use this information as a basis for obtaining
patents that describe many or all of the possible drugs for a target or
cluster of targets.
We believe that our integrated approach to drug design is unique among small
molecule-based biotechnology companies, and has led to significant
collaborations and an extensive intellectual property portfolio covering lead
classes of compounds directed at gene families of interest.
We also have several single target research programs underway for specific
infectious diseases, in areas of high commercial potential and significant unmet
medical need.
MULTI-TARGET RESEARCH PROGRAMS
We have two multi-target research programs underway that utilize our
parallel drug design approach, in the kinase and caspase gene families. We
believe that our integrated approach and our proprietary technologies are now
allowing us to rapidly identify appropriate chemical side chains for these
scaffolds that will provide specificity for a particular target of interest
within a cluster of related protein targets. In the coming years, we expect to
initiate discovery efforts in one or more additional gene families.
KINASE INHIBITORS PROGRAM
We have a broad-based drug discovery effort targeting the human kinase
protein family, which consists of approximately 500 kinases. Kinases are enzymes
that play a key role in transmitting signals between and within cells. Kinases
exert their effect by phosphorylating other proteins, which then become
activated and perform a specific function. Kinases are implicated in most major
diseases, including cancer, autoimmune and inflammatory disease, cardiovascular
disease, metabolic disease, and neurological disease. Thus kinases can be ideal
targets for intervention with small molecule drugs.
11
We have initiated research efforts on more than 30 kinase targets, and have
conducted preliminary evaluations of approximately 70 additional kinases. In the
next six to seven years, we envision advancing eight kinase inhibitors into
clinical development targeting multiple therapeutic areas.
We have advanced discovery efforts underway targeting several human MAP
kinases. MAP kinases form a group of related enzymes that include
extracellular-signal regulated kinase (ERK), p38 MAP kinase, and Jun N-terminal
kinase (JNK). As a neuronal-specific isoform of JNK, JNK3 is a member of the MAP
kinase family and is implicated to play a role in the pathogenesis of certain
neurological diseases such as epilepsy, stroke and Alzheimer's Disease. We have
identified several novel classes of JNK3 inhibitors, and are advancing lead
compounds toward clinical candidate status. We are also engaged in the discovery
of inhibitors of the enzyme ERK2, which plays a role in cell proliferation. We
believe that ERK2 inhibitors may have a role in the treatment of cancer. Our p38
MAP kinase inhibitors are discussed earlier in the section titled "Autoimmune
and Inflammatory Diseases."
We have advanced drug discovery efforts underway targeting several
additional, undisclosed kinase targets, including targets that play a role in
the development and progression of cancer, inflammation and cardiovascular
disease. We expect to advance one or two novel kinase inhibitors into
preclinical development in the next 12 months.
In May 2000 we entered into an agreement with Novartis Pharma AG to
collaborate on the discovery, development and commercialization of small
molecule drugs directed at targets in the kinase protein family. Certain
targets, where we or Novartis already had a substantial program underway prior
to May 2000, are excluded from the collaboration. For example, p38 MAP kinase,
which is the molecular target for VX-745, our compound in development for
inflammatory diseases, is not included within the scope of the Novartis
collaboration. The financial and technological support provided by Novartis is
enabling us to further expand both our infrastructure and parallel drug design
efforts in the protein kinase gene family.
CASPASE INHIBITORS PROGRAM
We are designing novel small molecule inhibitors of selected caspase enzyme
targets to treat a variety of diseases in which inflammation and 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).
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. The human caspase
family presently includes 11 structurally related 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 and
inflammatory processes, thereby exerting a protective effect on cells in
specific tissues. Potential indications include tissue damage related to acute
conditions such as stroke and myocardial ischemia, and neurodegenerative
disorders such as Alzheimer's Disease and Parkinson's Disease.
Through gene knockout studies, our scientists have been able to gain
important insight into the biological role of different caspases in the
activation of apoptosis in specific cells and tissues. Vertex research teams
have solved the three-dimensional atomic structures of four caspases, including
one caspase from each of the three caspase subfamilies, and more than 50
enzyme/inhibitor complexes. Different caspases share similar structural
features, and by using parallel structural approaches combined with new
medicinal and computational chemistry tools, our scientists have been able to
make rapid progress in the design and synthesis of multiple lead classes of
compounds. Our caspase research effort reflects the implementation of our
strategy for exploiting emerging genomic information by targeting families of
structurally-related proteins for drug discovery.
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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. In December 2000, we entered into a collaboration
with Serono S.A. to discover, develop, and market caspase inhibitors in other
territories, including North America, where we have agreed to establish a joint
venture with Serono.
SINGLE TARGET RESEARCH PROGRAMS
HEPATITIS C VIRUS PROGRAMS
We are conducting two discovery research programs to develop compounds to
treat hepatitis C. Identified in 1989, 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. A new form of interferon-alpha,
PEG-interferon, has recently been approved. Although the active drug is
unchanged, this new prodrug may prove to be more effective than interferon
itself, and it is also more convenient for the patient. At present more than 50%
of patients still failed to show long-term sustained response to the
interferon-alpha/ribavirin combination therapy, 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. We are currently optimizing lead classes of
inhibitors and plan to select a drug development candidate in 2001.
HEPATITIS C HELICASE
We are also conducting discovery research to design orally deliverable drugs
to inhibit the HCV virus helicase. The NS3 helicase enzyme is believed to play
an essential role in the infectious cycle of HCV by aligning viral DNA in its
proper configuration for replication. Therefore, the HCV helicase represents an
attractive target for drug discovery.
Our researchers solved the three-dimensional atomic structure of the HCV NS3
helicase. We are using this structural information to identify inhibitors of the
enzyme, employing structure-based techniques, including cluster-based screening,
and computational, combinatorial, and medicinal chemistry. The aim is to design
novel small molecule inhibitors of the HCV helicase for clinical development as
new antiviral drugs to treat HCV infection.
BACTERIAL GYRASE
We are engaged in the discovery of novel antibiotics that target the enzyme
DNA gyrase, which is an essential enzyme found in many bacteria. DNA gyrase is
utilized during the replication process for these bacterial pathogens. DNA
gyrase inhibitors already on the market have proven to be potent, broad-spectrum
antibiotics, and are used to treat a variety of common gram (+) and gram (-)
infections in various treatment settings. Existing gyrase inhibitors, which work
by interacting with the
13
gyrase A subunit, achieved sales of more than $2.7 billion in 1999. In contrast,
we are targeting the gyrase B subunit, and specifically the ATP-binding site
that is highly conserved across multiple species of bacteria. We are currently
optimizing lead classes of inhibitors and plan to select a drug development
candidate in 2001.
KEY COMPONENTS OF OUR TECHNOLOGY PLATFORM
Our integrated technology platform employs a variety of technologies to
accelerate the drug discovery process and to provide a more certain outcome in
clinical development. Selected technologies include:
GENOMICS AND BIOINFORMATICS. We have an agreement with Incyte
Pharmaceuticals for access to its Lifeseq Gold database, a comprehensive
portfolio of genomic information. We anticipate accessing or acquiring
additional technology, as well as information from both public and private
databases, to further our parallel drug design strategy.
FUNCTIONAL GENOMICS. We use a number of functional genomics techniques,
such as gene knock-out mice, to help guide target selection and test the
potential of chemical compounds in disease models. 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. One of our core strengths is the generation of atomic
structural information on molecular targets using X-ray crystallography and
nuclear magnetic resonance (NMR) spectroscopy to guide design 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
VIVO assessment of leads in predictive animal models, provide greater certainty
that a compound will have properties desired of an oral drug.
We have created an organizational framework in which information from many
different scientific disciplines is used early and continuously throughout the
drug discovery process. We believe that our integrated approach, as demonstrated
by our track record in drug design directed at biologically complex targets,
provides for faster and more productive drug discovery compared to historical
averages for the pharmaceutical industry.
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
14
and marketing, to support our research and development programs. At present, we
have the following major corporate collaborations.
NOVARTIS PHARMA AG
In May 2000 we entered into an agreement with Novartis Pharma AG to
collaborate on the discovery, development and commercialization of small
molecule drugs directed at targets in the kinase protein family. Under the
agreement, Novartis agreed to pay us up to approximately $600 million in
pre-commercial payments, comprised of $15 million paid upon signing of the
agreement, up to $200 million in product research funding over six years and up
to approximately $400 million in further license fees, milestone payments and
cost reimbursements. These amounts are based on the development of eight drug
candidates. In addition, Novartis created a $200 million loan facility to
support certain clinical studies which we may draw down in increments up to
$25 million for each drug candidate. The loan is interest free and Novartis will
forgive the full amount of any advances if Novartis accepts the drug candidate
for development under our agreement with Novartis. We will have the
responsibility for drug discovery and clinical proof-of-concept testing of drug
candidates. Novartis will have exclusive worldwide development, manufacturing
and marketing rights to clinically and commercially relevant drug candidates
that it accepts for development from us. We will receive royalties on any
products that are marketed as part of the collaboration. Subject to certain
conditions, we will have co-promotion rights in the United States and Europe. We
will retain the rights to any intellectual property resulting from this
collaboration. Novartis may terminate this agreement without cause after four
years upon one year's 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 and milestone payments, including $4.5 million for 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.
SERONO S.A.
In December 2000, we entered into a collaboration with Serono S.A. to
discover, develop, and market caspase inhibitors. Under the terms of the
agreement, we could receive up to $95 million to support and expand our drug
discovery activities in the caspase protein family, including milestone payments
as drug candidates move through development. Under the terms of the agreement,
we will receive a total of up to $5 million in payments for prior research, and
could also receive up to $20 million in research funding over the next five
years. We could also receive an additional $70 million in milestone payments for
the successful development and commercialization of more than one drug
candidate. The two companies will share development costs. Vertex and Serono
will establish a joint venture for the commercialization of products in North
America, where we will share marketing rights and profits from the sale of
caspase inhibitors. Serono will have exclusive rights to market caspase
inhibitors in other territories, excluding Japan and certain other countries in
the Far East, and will pay us for the supply of drug substance. Serono has the
right to terminate the agreement without cause upon 90 days written notice,
effective either at September 30, 2002 or September 30, 2004.
AVENTIS S.A.
In September 1999, we entered into an expanded agreement with Hoechst Marion
Roussel (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
15
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.
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, up to $22 million of product research
funding over five years and $60 million of development and commercialization
milestone payments. Schering AG has the right to terminate without cause upon
six months' written notice.
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. 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 has exclusive rights to develop
and commercialize these 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. The research program ended on
June 30, 2000, and we have received the full amount of research funding
specified under the agreement. Kissei has the right to terminate the agreement
without cause upon six months' 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,
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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. Vertex has retained options to assist with the promotion of
drugs from the collaboration in the United States and other selected
territories. 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. Lilly has the right to terminate the agreement without cause upon six
months' notice.
GLAXOSMITHKLINE
In December 1993, we entered into a collaboration with GlaxoSmithKline
covering the development and commercialization of Agenerase (amprenavir) and its
prodrug, VX-175 (also referred to as GW433908). GlaxoSmithKline has exclusive
rights to develop and commercialize our HIV protease inhibitors in all parts of
the world except the Far East and pays us a royalty on sales. We have retained
certain bulk drug manufacturing rights and certain co-promotion rights in the
territories licensed to GlaxoSmithKline. Under the collaborative agreement,
GlaxoSmithKline agreed to pay us up to $42 million, comprised of a $15 million
license payment paid in 1993, $14 million of product research funding over five
years and $13 million of development and commercialization milestone payments
for an initial drug candidate. GlaxoSmithKline is also obligated to pay us
additional development and commercialization milestone payments for subsequent
drug candidates, including VX-175. We have received the full amount of research
funding specified under the agreement. In addition, GlaxoSmithKline is required
to bear the costs of development in its territory under the collaboration.
GlaxoSmithKline has the right to terminate its agreement with us without
cause upon twelve months' notice. Termination by GlaxoSmithKline of the
agreement will relieve GlaxoSmithKline of its obligation to make further
commercialization and development milestone and royalty payments, and will end
any license granted to GlaxoSmithKline by us.
We and GlaxoSmithKline have a non-exclusive, worldwide license under certain
Searle patent applications claiming HIV protease inhibitors to permit Vertex and
GlaxoSmithKline 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.
INTELLECTUAL PROPERTY
We vigorously pursue patents to protect our intellectual property. As of
December 31, 2000, we had 89 issued U.S. patents and 95 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 patents and
pending patent applications directed to proprietary elements of our drug
discovery platform. These include a patent application 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 and obtained patents related to the three-dimensional atomic
structures of targets of interest, the use of those structures to design drugs,
classes
17
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.
- issued United States patents that cover classes of chemical compounds,
pharmaceutical compositions containing such compounds, and methods of
using those compounds to treat or prevent IMPDH-mediated diseases. The
class of compounds covered by one of these patents includes VX-497.
- 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.
- issued United States patents covering assays useful to evaluate potential
inhibitors of hepatitis C protease. We also have both allowed and pending
applications covering the X-ray crystal structures of hepatitis C protease
and hepatitis C helicase, including the use of those structures
18
to develop hepatitis C protease inhibitors and hepatitis C helicase
inhibitors, respectively. Other applications cover hepatitis C protease
inhibitors and hepatitis C helicase inhibitors.
- filed applications claiming classes of caspase inhibitors and a caspase
target discovered under our caspase inhibitors program.
- filed applications claiming inhibitors of multiple kinases, as part of our
kinase research programs.
- filed applications and an issued patent for methods of designing novel
chemical inhibitors of protein kinases. The patented method involves using
mutagenesis techniques to create hybrid kinases that act as surrogate
targets for drug design and compound screening. This method, which
combines the disciplines of cell biology, structural genomics,
computational chemistry and medicinal chemistry, may accelerate the design
and development of new drug candidates by reducing lead discovery and
optimization timelines.
- filed applications claiming inhibitors of bacterial gyrase.
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.
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 GlaxoSmithKline. We retain the
option to manufacture a portion of GlaxoSmithKline's requirements for bulk drug
substance for Agenerase and its prodrug, VX-175. 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 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 our 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.
19
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 Pfizer Inc. 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,
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.
20
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 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
21
Control Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state and local regulations.
EMPLOYEES
As of December 31, 2000, we had 455 full-time employees, including 300 in
research and development, 32 in support services and 123 in general and
administrative functions. 52 of these employees were located at our U.K.
research and development facility. Our scientific staff members (174 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..................... 49 Chairman and Chief Executive Officer
Vicki L. Sato, Ph.D....................... 52 President
John J. Alam, M.D......................... 39 Senior Vice President of Drug Evaluation
and Approval
Lynne H. Brum............................. 37 Vice President of Corporate Communications
and Market Development
Iain P. M. Buchanan....................... 47 Vice President of European Operations;
Managing Director of Vertex
Pharmaceuticals (Europe) Limited
Barry M. Bloom, Ph.D...................... 72 Director
Roger W. Brimblecombe, Ph.D., D.Sc........ 71 Director
Donald R. Conklin......................... 64 Director
Charles A. Sanders, M.D................... 69 Director
Elaine S. Ullian.......................... 53 Director
Bruce I. Sachs............................ 41 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.
Dr. Boger is a founder of Vertex. He has been Chief Executive Officer since
1992 and Chairman of the Board since 1997. He was our President from our
inception in 1989 until December 2000, and Chief Scientific Officer from 1989
until May 1992. 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 holds a B.A.
in chemistry and philosophy from Wesleyan University and M.S. and Ph.D. degrees
in chemistry from Harvard University.
Dr. Sato joined Vertex in September 1992 as Vice President of Research and
Chief Scientific Officer. She was appointed Senior Vice President of Research
and Development in September 1994.
22
She served as Chair of the Scientific Advisory Board from 1992 until
December 2000. 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. Alam served as Vice President of Clinical Development of the Company
from October 1997 until January 2001, when was appointed Senior Vice President
of Drug Evaluation and Approval. 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 S.B. in Chemical Engineering from the Massachusetts
Institute of Technology.
Ms. Brum joined Vertex as Director, Corporate Communications in 1994 and was
Vice President of Corporate Communications of the Company from 1998 until
January 2001, when she was appointed Vice President of Corporate Communications
and Market Development. Ms. Brum came to Vertex from Feinstein Kean Healthcare,
a communications and business consulting practice, where she was a vice
president. Previously, she held corporate communications and research positions
at Biogen, Inc. Ms. Brum holds an M.B.A. from the Simmons Graduate School of
Management, and a B.A. in biological sciences from Wellesley College.
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.
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 from 1973 to 1993.
He also serves as a director of Cubist Pharmaceuticals Inc., Incyte
Genomics Inc., Neurogen Corporation and Microbia.
Dr. Brimblecombe has served as our director since 1993. He served as
Chairman of Vanguard Medica Ltd. from 1991 to 2000, as Chairman of Core Group
plc since 1997, and as Non-Executive Chairman of Oxford Asymmetry International
plc from 1997 to 2000. 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 several companies located in Europe.
Mr. Conklin has served as our director since 1994. He served as Executive
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 Ventiv 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 President and Chief Executive Officer at
Xylogics, 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,
23
including that of Vice Chairman. Has served on the boards of Merrill Lynch,
Reynolds Metals Co. and Morton International Inc. He is currently a director of
Biopure Corporation, Edgewater Inc., Genentech, Inc., Kendle
International Inc., Magainin Pharmaceuticals Inc., Pharmacopeia Inc.,
Scios, Inc., and 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
Hologic 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 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. Mark Murcko, our Chief Technology Officer, are:
Mark Murcko, Ph.D............... Vice President and Chief Technology Officer, Vertex
Pharmaceuticals Incorporated.
Vicki L. Sato, Ph.D............. President, Vertex Pharmaceuticals Incorporated.
Steven J. Burakoff, M.D......... Laura and Isaac Perlmutter Professor, New York University
School of Medicine; Director, Kaplan Comprehensive Cancer
Center, New York University School of Medicine; Director,
Skirball Institute of Biomolecular Medicine, New York
School of Medicine.
Eugene H. Cordes, Ph.D.......... Professor of Medicinal Chemistry, College of Pharmacy,
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. Murcko and 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.
24
RISK FACTORS
WE DO NOT KNOW HOW SUCCESSFUL AGENERASE WILL BE IN EUROPE, OR WHETHER U.S.
AGENERASE SALES WILL CONTINUE AT CURRENT LEVELS.
Agenerase was only recently launched in Europe. It is too early to predict
the extent to which Agenerase will be successful in Europe. Also, Agenerase's
share of the U.S. protease inhibitor market may decrease due to competitive
forces and market dynamics. Five other HIV protease inhibitors and a number of
other products, including DuPont's Sustiva and GlaxoSmithKline's Ziagen, are on
the market for the treatment of HIV infection and AIDS. Other drugs are still in
development by our competitors, including Bristol Myers Squibb and Boehringer
Ingelheim, which may have better efficacy, fewer side effects, easier
administration and/or lower costs than Agenerase. Moreover, the growth in the
worldwide market for HIV protease inhibitors has, to a certain extent, occurred
as a result of early and aggressive treatment of HIV infection with a protease
inhibitor-based regimen. Changes in treatment strategy, in which treatment is
initiated later in the course of infection, or in which treatment is more often
initiated with a regimen that does not include a protease inhibitor, may result
in less use of HIV protease inhibitors. In addition, the clinical benefit of
strategies used to boost drug levels of Agenerase by co-administering other
antiretrovirals may not prove to be effective, or may not result in increased
revenues. As a result, the total market for protease inhibitors, in the U.S. and
Europe, may decline, decreasing Agenerase sales potential. Consequently, we may
not recognize additional royalty and milestone revenues on Agenerase as soon as
we have planned. Further, although we co-promote Agenerase in the U.S. and
Europe, GlaxoSmithKline is making most of the marketing and sales efforts and we
will have little control over the success of those efforts. GlaxoSmithKline has
the right to terminate its agreement with us without cause upon twelve months'
notice.
IF WE DO NOT SUCCESSFULLY DEVELOP OUR DRUG PIPELINE, WE MAY NOT GENERATE
SUFFICIENT FUNDS TO ACHIEVE OR SUSTAIN PROFITABILITY IN THE FUTURE.
As of December 31, 2000, our collaborators and we were conducting clinical
trials for eight product candidates resulting from our research and development
programs, including additional clinical trials of VX-175, VX-497, VX-740 and
VX-745, and preclinical testing of four product candidates from these programs.
All of the products that we are pursuing will require extensive additional
development, testing and investment, as well as regulatory approvals, prior to
commercialization. Our product research and development efforts may not be
successful. Our drug candidates may not enter preclinical or clinical studies as
or when anticipated or receive the required regulatory approvals. Moreover, our
products, if introduced, may not be commercially successful. The results of
preclinical and initial clinical trials of products under development by us are
not necessarily predictive of results that will be obtained from large-scale
clinical testing. Clinical trials of products under development may not
demonstrate the safety and efficacy of such products or 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. While all or a portion of
these additional costs may be covered by payments under our collaborative
agreements, we bear all of the costs for our development candidates that are not
partnered.
IF DELAYS IN PATIENT ENROLLMENT SLOW OUR DEVELOPMENT PROCESS WE MAY LOSE OUR
COMPETITIVE ADVANTAGE OR BE UNABLE TO BRING OUR DRUGS TO MARKET.
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
25
of compliance by the clinical sites to clinical trial protocols, and the
availability of clinical trial material. Our drug candidate VX-745 is the first
p38 MAP kinase inhibitor to enter Phase II clinical trials. While none of our
clinical trials are currently experiencing slower than expected patient accrual,
delays in patient enrollment in our planned clinical trials for VX-745 may
result in increased costs, program delays or both, which could have a material
adverse effect on our company. While all or a portion of these additional costs
may be covered by payments under our collaborative agreements, we bear all of
the costs for our development candidates that are not partnered. If our clinical
trials are not completed, we may not be able to submit a new drug application
and any such application may not be reviewed and approved by the FDA in a timely
manner, if at all.
IF WE DO NOT OBTAIN REGULATORY APPROVAL FOR OUR PRODUCTS ON A TIMELY BASIS, OR
AT ALL, OUR REVENUES WILL BE NEGATIVELY IMPACTED.
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 planned clinical trials for our drug
candidates in clinical development, including VX-175, VX-497, VX-740, VX-745,
VX-148 and timcodar. It may also delay the commercialization of our products, if
any are developed and submitted for approval, for a considerable period of time,
impose costly procedures upon our activities and 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.
IF WE ARE UNABLE TO ATTRACT AND RETAIN COLLABORATIVE PARTNERS FOR RESEARCH
SUPPORT AND THE DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS, WE MAY NOT BE
ABLE TO FUND OUR RESEARCH AND DEVELOPMENT ACTIVITIES.
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,
including Novartis, GlaxoSmithKline, Aventis and Eli Lilly, 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 Novartis,
GlaxoSmithKline, Aventis or Eli Lilly were to terminate its relationship with
us, or fail to meet its contractual obligations, it could have a material
adverse effect on our ability to undertake research, to fund related and other
programs and to develop, manufacture and market any products that may have
resulted from the collaboration. For example, if Novartis were to terminate its
collaboration with us before the end of the research term specified in the
contract, we would no longer be eligible to receive milestone payments and
reimbursements worth as much as $400 million from Novartis. We expect to seek
additional collaborative arrangements to provide research support and to develop
and commercialize our products in the future. We may not be able to establish
acceptable collaborative arrangements in the future and even if we establish
such collaborations, they may not be successful. Under certain of our
collaborative agreements, our partners have agreed to provide funding for only a
portion of our research and development activities and we are committed to
investing our own capital to fund the remainder of the agreed upon programs.
However, we may not have adequate financial resources to satisfy those
requirements.
26
IF WE LOSE OUR TECHNOLOGICAL ADVANTAGES, WE MAY NOT BE ABLE TO COMPETE IN THE
MARKETPLACE.
We believe that our chemogenomics platform and parallel drug design strategy
give us a technological advantage. However, the pharmaceutical research field is
characterized by rapid technological progress and intense competition. As a
result, we may not realize the expected benefits of these technologies. For
example, a large pharmaceutical company, with significantly more resources than
we have, could pursue a novel, systematic approach to discover drugs based on
gene families using proprietary drug targets, compound libraries, compound
approaches, structural protein analysis and information technologies. Such a
company might identify broadly applicable compound classes faster and more
effectively than we do, impeding our ability to develop and market drugs based
on our approach. Further, we believe that interest in the application of
structure-based drug design, parallel drug design and related approaches may
continue and may accelerate as the strategies 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. For example, a competitor could develop information technologies
that accelerate the atomic-level analysis of potential compounds that bind to
the active site of a drug target, and predict the absorption, toxicity, and
relative ease-of-synthesis of candidate compounds. If we were unable to access
the same technologies at an acceptable price, our business could be adversely
affected.
IF OUR COMPETITORS BRING SUPERIOR PRODUCTS TO MARKET OR BRING THEIR PRODUCTS TO
MARKET BEFORE WE DO, WE MAY BE UNABLE TO FIND A MARKET FOR OUR PRODUCTS.
Our products in development may not 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. For example, we know of at
least 10 drugs in development for HIV, 5 drugs in development for the treatment
of hepatitis C infection, and 20 drugs in development for the treatment of
rheumatoid arthritis, by competitors in the pharmaceutical and biotechnology
industries. In order to compete successfully in these areas, we must demonstrate
improved safety, efficacy, ease of manufacturing and gain market acceptance over
competing products which have received regulatory approval and are currently
marketed. Many of our competitors, including major pharmaceutical companies such
as GlaxoSmithKline, Novartis, Abbott and Merck, 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, including Dr. Joshua S. Boger, our Chief
Executive Officer, and Dr. Vicki L. Sato, our President. While we have entered
into employment agreements with Dr. Boger and Dr. Sato, they may be terminated
by the employee upon six months' notice.
27
We face intense competition for our scientific personnel from our
competitors, our collaborative partners and other companies throughout our
industry. Moreover, the growth of local biotechnology companies and the
expansion of major pharmaceutical companies into the Cambridge area has
increased competition for the available pool of skilled employees, especially in
technical fields, and the high cost of living in the Boston area makes it
difficult to attract employees from other parts of the country. A 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. In addition, the level
of funding under certain of our collaborative agreements, in particular the
Novartis collaboration, depends on the number of our scientists performing
research under those agreements. If we cannot hire and retain the required
personnel, funding received under the agreements may be reduced.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY SUFFER.
During the year 2000, we added approximately 100 employees, increasing the
size of our organization by almost 30%, and we intend to continue to grow. This
growth requires a significant investment in personnel, management systems and
resources. Our ability to commercialize our products, achieve our research and
development objectives, and satisfy our commitments under our collaboration
agreements depends on our ability to respond effectively to these demands and
expand our internal organization to accommodate additional anticipated growth.
If we are unable to manage growth effectively, there could be a material adverse
effect on our business.
WE DEPEND ON THIRD PARTY MANUFACTURERS, AND IF WE ARE UNABLE TO OBTAIN CONTRACT
MANUFACTURING ON REASONABLE TERMS, WE MAY NOT BE ABLE TO DEVELOP OR
COMMERCIALIZE OUR PRODUCTS.
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 have no experience in manufacturing pharmaceuticals or other products, and we
may not be able to develop such capabilities in the foreseeable future. In
addition, some of our current corporate partners have manufacturing rights with
respect to our products under development. We are, therefore, dependent on third
party manufacturers and our collaborative partners for the production of our
compounds for preclinical research, clinical trial purposes and commercial
production. Accordingly, if we are not able to obtain contract manufacturing
from these third parties on commercially reasonable terms, we may not be able to
conduct or complete clinical trials or commercialize our products as planned.
Further, commercial formulation and manufacturing processes have yet to be
developed for our drug candidates other than Agenerase. As a result, our
collaborators or we may encounter difficulties developing commercial
formulations and manufacturing processes for our drug candidates that could
result in delays in clinical trials, regulatory submissions, regulatory
approvals and commercialization of our products.
IF OUR PATENTS DO NOT PROTECT OUR PRODUCTS, OR OUR PRODUCTS INFRINGE THIRD-PARTY
PATENTS, WE COULD BE SUBJECT TO LITIGATION AND SUBSTANTIAL LIABILITIES.
As of December 31, 2000, we had 103 patent applications pending in the
United States, as well as foreign counterparts in other countries. 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,
28
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 WE MAY NEVER BECOME PROFITABLE.
We have incurred significant operating losses each year since our inception
and expect to incur a significant operating loss in 2001. We believe that
operating losses will continue beyond 2001, even if we receive significant
future payments under our existing and future collaborative agreements and
royalties 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 potential products. We expect that
losses will fluctuate from quarter to quarter and year to year, and that such
fluctuations may be substantial. We may never achieve or 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:
- future payments under our collaborative agreements;
- additional collaborative agreements;
- Agenerase royalty revenue;
- existing cash reserves, together with interest earned on those reserves;
- facilities and equipment financing; and
- future product sales to the extent that we market products directly.
We expect that funds from these sources will be sufficient to fund our
planned activities for at least the next 18 months. If not, 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). The required interest payments
associated with any significant additional debt financing could materially
adversely impact our ability to service the notes. The terms of any additional
debt financing may also, under certain circumstances, restrict or prohibit us
from making interest payments on the notes. 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
29
or products in research or development. Additional financing may not be
available on acceptable terms, if at all.
IF GOVERNMENT AND PRIVATE INSURANCE PLANS DO NOT PAY FOR AGENERASE, AGENERASE
MAY NOT BE SUCCESSFUL.
The success of Agenerase in Europe will depend, in part, upon the extent to
which a consumer will be able to obtain reimbursement for the cost of Agenerase
from government health administration authorities, third-party payors and other
organizations. Agenerase has been approved for marketing in the European Union
but reimbursement amounts are determined on a country by country basis, and in
some countries these reimbursement amounts have not yet been finalized. Even if
a product is approved for marketing, the amount paid by reimbursing
organizations may not be adequate. Also, future legislation or regulation, or
related announcements or developments, concerning the health care industry or
third-party or governmental coverage and reimbursement may adversely affect
reimbursement policies. In particular, legislation or regulation limiting
consumers' reimbursement rights could limit reimbursement amounts for the cost
of Agenerase.
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. We currently intend to bring VX-497 and VX-745 to
market ourselves. For these drug candidates and our other drug candidates for
which we have retained marketing or 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. We have granted
exclusive marketing rights for Agenerase and VX-175 to Glaxo SmithKline
worldwide except the Far East, and for VX-740 to Aventis worldwide. Kissei has
exclusive marketing rights to Agenerase, VX-745 and VX-702 in Japan and an
option for VX-850. Even though we retain some co-promotion rights, to the extent
that our collaborative partners have commercial rights to our products, any
revenues we receive from those products will depend primarily on the sales and
marketing efforts of others.
IF WE INCUR PRODUCT LIABILITY EXPENSES, OUR EARNINGS COULD BE NEGATIVELY
IMPACTED.
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
currently carry $10 million (aggregate) of product liability insurance. This
level of insurance may not be sufficient. Moreover, we may not be able to
maintain our existing levels of insurance or be able to obtain or maintain
additional insurance that we may need in the future on acceptable terms.
In addition, 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.
30
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, 2000, we had 59,612,816 shares of common stock
outstanding, excluding shares reserved for issuance upon the exercise of
outstanding stock options, employee stock purchase and 401(k) plans and upon
conversion of our outstanding notes. As of December 31, 2000, we had granted
stock options to purchase 12,195,000 shares of our common stock at a weighted
average exercise price of approximately $24.35 per share, subject to adjustment
in certain circumstances. Of this total, 5,194,000 were currently exercisable at
a weighted average exercise price of approximately $11.84 per share. The shares
of our common stock that may be issued under the options will generally be
freely tradeable or transferable pursuant to an effective registration
statement.
WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT MAY FRUSTRATE ANY ATTEMPT TO
REMOVE OR REPLACE OUR CURRENT MANAGEMENT.
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. 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. As a
result, shareholders or other parties may find it more difficult to remove or
replace our current management.
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 12 months ended December 31, 2000 our common stock traded
between $11.68 and $99.25. 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. 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;
- developments in patent or other intellectual property rights or
announcements relating to these matters;
- developments in domestic and international governmental policy or
regulation, for example relating to intellectual property rights; and
- developments and market conditions for pharmaceutical and biotechnology
stocks, in general.
31
OUR OUTSTANDING INDEBTEDNESS MAY INCREASE OUR COSTS AND MAKE IT MORE DIFFICULT
TO OBTAIN ADDITIONAL FINANCING.
As of December 31, 2000, we had approximately $347 million in long-term
debt. The high level of our indebtedness will impact us by:
- significantly increasing our interest expense and related debt service
costs;
- making it more difficult to obtain additional financing for working
capital, capital expenditures, debt service requirements or other
purposes; and
- constraining our ability to react quickly in an unfavorable economic
climate.
ITEM 2. PROPERTIES
We lease an aggregate of approximately 340,000 square feet of laboratory and
office space in seven facilities in Cambridge, Massachusetts. The leases have
expiration dates ranging from 2001 to 2010. 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. The lease for the
laboratory and office building adjacent to our headquarters will expire in 2010
with the option to extend the lease for up to two additional terms, ending in
2030. We have entered into another agreement to lease approximately 275,000
square feet of laboratory and office space presently under construction in
Kendall Square, Cambridge, Massachusetts. That lease will expire in 2017 with
the option to extend the lease for two consecutive terms of 10 years each
ultimately expiring in 2037.
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 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 involved in the 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.
The reexamination process is still ongoing. 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, we maintain that the
plaintiff's claims are without merit and intend 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, 2000.
32
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Nasdaq Stock Market ("Nasdaq") under the
symbol "VRTX." The following table sets forth the high, low and last sale prices
of each quarter for the common stock as reported by Nasdaq:
YEAR ENDED DECEMBER 31, 1999: HIGH LOW CLOSE
- ----------------------------- -------- -------- --------
First quarter....................................... $16.25 $11.25 $12.63
Second quarter...................................... 13.19 9.69 12.06
Third quarter....................................... 17.41 11.06 15.53
Fourth quarter...................................... 18.63 11.69 17.50
YEAR ENDED DECEMBER 31, 2000:
- ----------------------------------------------------
First quarter....................................... $45.19 $16.50 $23.41
Second quarter...................................... 58.00 18.88 52.69
Third quarter....................................... 96.00 46.00 84.50
Fourth quarter...................................... 99.25 51.50 71.50
The last sale price of the common stock on March 12, 2001, as reported by
Nasdaq, was $32.00 per share. As of March 12, 2001, there were approximately 200
holders of record of the common stock (approximately 35,000 beneficial holders).
We have never declared or paid any cash dividends on our common stock, and
we currently expect that future earnings, if any, will be retained for use in
our business.
RECENT SALES OF UNREGISTERED SECURITIES
On September 15, 2000, the Company issued a call for redemption of its
outstanding 5% Convertible Subordinated Notes due March 2007 (the "March
Notes"). As of October 4, 2000, all of the March Notes were converted by holders
into 4,340,260 shares of common stock at a price of $40.32 per share. The shares
of common stock issued upon conversion of the March Notes were issued in
reliance on Section 3(a)(9) of the Securities Act of 1933 as securities
exchanged by the issuer with its existing security holders exclusively where no
commission or other remuneration is paid or given directly or indirectly for
soliciting such exchange.
33
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 2000 are derived from our Consolidated
Financial Statements. This data should be read in 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,*
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Consolidated Statement of Operations Data:
Revenues:
Royalties and product sales................ $ 12,036 $ 8,053 -- -- --
Collaborative and other research and
development revenues..................... 66,091 42,507 $ 29,055 $ 29,926 $ 13,341
-------- -------- -------- -------- --------
Total revenues......................... 78,127 50,560 29,055 29,926 13,341
Costs and expenses:
Royalties and product costs.............. 4,082 2,925 -- -- --
Research and development................. 84,921 72,180 58,668 51,624 35,212
General and administrative............... 27,806 26,131 18,135 11,430 7,929
License payment.......................... -- -- -- -- 15,000
-------- -------- -------- -------- --------
Total costs and expenses............... 116,809 101,236 76,803 63,054 58,141
-------- -------- -------- -------- --------
Net loss from operations................... (38,682) (50,676) (47,748) (33,128) (44,800)
-------- -------- -------- -------- --------
Interest income, net..................... 17,110 10,434 14,662 13,297 4,795
Debt conversion expense.................. (14,375) -- -- -- --
Equity in losses of unconsolidated
subsidiary............................. (550) (724) -- -- --
-------- -------- -------- -------- --------
Net loss before cumulative effect of change
in accounting principle.................. $(36,497) $(40,966) $(33,086) $(19,831) $(40,005)
Cumulative effect of change in accounting
principle................................ (3,161) -- -- -- --
-------- -------- -------- -------- --------
Net loss................................... $(39,658) $(40,966) $(33,086) $(19,831) $(40,005)
======== ======== ======== ======== ========
Basic and diluted net loss per common
share.................................... $ (0.73) $ (0.80) $ (0.65) $ (0.41) $ (1.06)
Basic and diluted weighted average number
of common shares outstanding............. 54,322 51,036 50,598 48,528 37,596
DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- --------
Consolidated Balance Sheet Data:
Cash, cash equivalents and
investments.......................... $ 707,424 $ 187,802 $ 245,652 $ 279,671 $130,359
Total assets........................... 772,881 232,445 266,346 295,604 143,499
Obligations under capital leases and
debt, excluding current portion...... 347,313 4,693 7,032 5,905 5,617
Accumulated deficit.................... (230,485) (190,827) (149,861) (116,775) (96,944)
Total stockholders' equity............. 386,897 209,234 246,212 276,001 130,826
* Note: Previously reported financial data for the years ended December 31,
1996 through 1999 has not been restated to give the pro forma effect of the
adoption of the provisions of SAB 101 as the effect could not be reasonably
determined. See "Note C: Change in Accounting Principle" in the Notes to the
Consolidated Financial Statements for further information.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a biotechnology company that seeks to 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 diseases and neurological disorders. We have created our
pipeline using a proprietary approach, information-driven drug design, that
integrates advanced biology, chemistry, biophysics and information technologies
to make the drug discovery process more efficient and productive.
Our first approved product is Agenerase (amprenavir), an HIV protease
inhibitor, which we co-promote with GlaxoSmithKline. We earn a royalty from
GlaxoSmithKline from sales of Agenerase. Agenerase received U.S. Food and Drug
Administration approval through an expedited review process for the treatment of
HIV infection in 1999. Agenerase has also received approval in other countries,
including the 15 member states of the European Union and Japan where the drug is
sold under the trade name Prozei.
We have significant collaborations with Aventis, Eli Lilly, GlaxoSmithKline,
Kissei, Novartis, Schering AG (Germany), Serono and Taisho. These collaborations
provide us with financial support and other valuable resources for our research
programs, development of our clinical drug candidates, and marketing and sales
of our products.
We have incurred operating losses since our inception and expect to incur a
loss in 2001. We believe that operating losses will continue beyond 2001 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.
In the fourth quarter of 2000, Vertex adopted SAB 101, "Revenue Recognition
in Financial Statements" retroactive to January 1, 2000. SAB 101 was issued by
the Securities and Exchange Commission in December 1999 and provides guidance
related to revenue recognition policies based on interpretations and practices
followed by the SEC. Prior to adoption of SAB 101, we recognized revenue from
collaborative research and development arrangements as earned under the terms of
the arrangements. License payments were recorded as revenue when payment was
assured and contractual obligations met. Payments from contractual milestones
were recognized when achieved, and product research funding was recorded on a
quarterly basis, when research effort was incurred. In adopting SAB 101, we
recognize revenue from research and development arrangements over the period of
continuing involvement as the lessor of the non-refundable cash received or the
result achieved using percentage of completion accounting under Emerging Issues
Task Force No. 91-6. Where we have no continuing involvement, we will record
nonrefundable license fees as revenue upon receipt and milestone revenue upon
achievement of the milestone by the collaborative partner. Pursuant to the
adoption of SAB 101, we recorded a cumulative effect of change in accounting
principle related to collaborative research and development revenues recognized
in prior periods. As a result, we recorded a one-time, non-cash charge of
$3,161,000. The impact of our adoption of SAB 101 was to defer revenue
recognition for certain portions of revenue previously recognized under our
collaborative agreements into future accounting periods. During the year ended
December 31, 2000, we recorded as revenue the full amount of the $3,161,000, the
cumulative effect of the change in accounting principle. The results of the
first three quarters of the fiscal year ending December 31, 2000 have been
restated in accordance with SAB 101.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Our net loss for 2000 was $39,658,000 or $0.73 per basic and diluted share,
including the cumulative effect of a change in accounting principle, compared to
$40,966,000 or $0.80 per basic and diluted share in 1999.
35
Our total revenues increased to $78,127,000 in 2000 from $50,560,000 in
1999. In 2000, revenues consisted of $12,036,000 in royalty and product sales
revenue and $66,091,000 in collaborative and other research and development
revenue. Revenue in 1999 consisted of $8,053,000 in royalty and product sales
revenue and $42,507,000 in collaborative and other research and development
revenue.
Royalties and product sales include Agenerase royalty revenue from
GlaxoSmithKline as well as sales of commercial drug substance to Kissei in
Japan. Agenerase royalty revenue from GlaxoSmithKline was recognized for the
first time in 1999 and is based upon worldwide net sales of Agenerase as
provided by GlaxoSmithKline.
The growth in collaborative and other research and development revenue in
2000, as compared with 1999, is largely due to new collaborative agreements
signed during the year. In May 2000, we agreed with Novartis to collaborate to
discover, develop and commercialize small molecule drugs targeted at the kinase
protein family. In connection with this contract, we recognized approximately
$27,910,000 in revenue during 2000. In December 2000 we entered into a
collaboration with Serono to discover, develop and market caspase inhibitors.
Previously, in November 1999, we entered into a collaborative agreement with
Taisho for our caspase program. In connection with these contracts, we
recognized approximately $6,974,000 of revenue in 2000, compared with $3,900,000
in 1999. Additionally, we received and recognized as revenue a $10,000,000
payment from Aventis under a collaborative agreement signed in October 1999
covering the development of VX-740, an orally active inhibitor of interleukin-1
beta converting enzyme (ICE). In November 2000 we received and recognized as
revenue a $3,000,000 milestone from GlaxoSmithKline for the approval of
Agenerase by the European Union. As of June 30, 2000, the research support
payments from Kissei under the p38 MAP Kinase collaboration ended. Collaborative
and other research and development revenue for the year ended December 31, 1999
includes $15,000,000 recognized under the Aventis agreement signed in October
1999 and a $5,000,000 milestone payment received from GlaxoSmithKline for U.S.
FDA approval of Agenerase. The balance of collaborative and other research and
development revenue for 2000 and 1999 is made up of development reimbursements
and research support payments from other collaborative partners.
Total costs and expenses increased to $116,809,000 in 2000 from $101,236,000
in 1999. Royalties and product costs of $4,082,000 consist of royalty payments
to G.D. Searle & Co. and the cost of commercial drug substance sold to Kissei.
Under the terms of the 1996 license agreement between GlaxoSmithKline, Searle
and us, we agreed to pay Searle a royalty on sales of Agenerase.
Research and development expenses increased to $84,921,000 in 2000 from
$72,180,000 in 1999 principally due to the continued expansion of our research
and development operations and an increase in the number of drug development
candidates. Related to our expansion were increases in personnel, facilities
expenses, equipment depreciation and increased technology license payments for
access to gene database information. The expenses associated with the expansion
were partially offset by a decrease in external development activities
associated with certain drug candidates. We anticipate research and development
expenses to continue to increase as personnel are added and 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 were $27,806,000 in 2000 compared
with $26,131,000 in 1999. The increase was primarily a result of increased
personnel and professional expenses. Additionally, marketing expenses associated
with Agenerase increased in 2000. We expect sales, general and administrative
expenses to continue to increase as we continue to grow.
Interest income increased by $16,591,000 to $27,679,000 in 2000 compared
with 1999 due to a higher level of cash and investments throughout the year as a
result of the proceeds received from the issuance of $520,000,000 of convertible
subordinated notes in March and September of 2000.
36
Interest expense increased by $9,915,000 to $10,569,000 for the year ended
December 31, 2000 from $654,000 for the year ended December 31, 1999. The
increase is due to interest expense associated with the convertible subordinated
notes issued in March and September of 2000.
In the third quarter of 2000 we recognized debt conversion expense of
$14,375,000, representing the "make-whole" payment resulting from the call of
our $175,000,000 aggregate principal amount of 5% Convertible Subordinated Notes
due March 2007 ("March Notes"). As a result of the call for redemption, the
holders of the March Notes were entitled to a "make-whole" payment of $82.14 per
$1,000 principal amount of notes.
At December 31, 2000, we had a 23.5% equity investment in Altus of
approximately $1,726,000. Using the equity method of accounting, we recorded
$550,000 as our share of the loss in Altus for the twelve months ended
December 31, 2000, compared with $724,000 for the twelve months ended
December 31, 1999. Altus is expected to incur additional losses in 2001 and we
will record our proportionate share of losses against the investment balance.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
The net loss for 1999 was $40,966,000 or $0.80 per basic and diluted share
compared to $33,086,000 or $0.65 per basic and diluted share in 1998.
Our total revenues were $50,560,000 in 1999 as compared to $29,055,000 in
1998. In 1999, revenues consisted of $8,053,000 in royalty and product sales
revenue and $42,507,000 in collaborative and other research and development
revenue. Revenue in 1998 consisted of $29,055,000 in collaborative and other
research and development revenue.
Collaborative and other research and development revenue increased in 1999,
as compared with 1998, due primarily to new collaborative agreements and larger
milestone payments earned during the year. In 1999, we earned a $5,000,000
milestone payment from GlaxoSmithKline for U.S. FDA approval of Agenerase. We
recorded $15,000,000 in collaborative revenue from Aventis as part of an
expanded collaborative agreement covering the development of VX-740. In
connection with a collaborative agreement signed with Taisho for our caspase
program, 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 earned in
connection with the signing of a collaborative agreement for our neurophilins
ligand program and a $3,000,000 milestone payment from GlaxoSmithKline for the
NDA filing for Agenerase. Total research funding from our collaborative partners
decreased by approximately $1,380,000 in 1999 primarily because the research
funding requirements under the GlaxoSmithKline agreement ended on December 31,
1998.
Total costs and expenses increased to $101,236,000 in 1999 compared to
$76,803,000 in 1998. Royalties and product costs of $2,925,000 in 1999 consist
of royalty payments to Searle and the cost of commercial drug substance sold to
Kissei. Research and development expenses increased to $72,180,000 in 1999 from
$58,668,000 in 1998. The increase was mainly due to expansion of our operations
in the U.K., as well as increased 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.
Sales, general and administrative expenses increased to $26,131,000 in 1999 from
$18,135,000 in 1998, primarily as a result of increased administrative
requirements of our growing research and development operation, legal expenses
associated with expansion of our intellectual property position and marketing
expenses associated with Agenerase.
37
Interest income decreased $4,255,000 to $11,088,000 in 1999 from $15,343,000
in 1998 due to lower levels of cash and investments throughout the year as well
as lower yields earned on investment securities. Interest expense decreased
slightly in 1999 to $654,000 from $681,000 in 1998, primarily due to lower
levels of equipment financing during 1999.
In February 1999, we restructured our investment in Altus, which was a
majority 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. 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.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have been funded principally through strategic collaborative
agreements, public offerings and private placements of our equity and debt
securities, equipment lease financing, and investment income. With the approval
and launch of Agenerase in April 1999, we began receiving product royalty
revenues. During the twelve months ended December 31, 2000, we completed a
private placement of $175,000,000 of 5% Convertible Subordinated Notes due
March 2007 and $345,000,000 of 5% Convertible Subordinated Notes due
September 2007. We have continued to increase and advance products in our
research and development pipeline. Consequently, we expect to incur 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 filing, prosecution, defense and
enforcement of patent and other intellectual property rights.
We expect to finance these substantial cash needs with future payments under
our existing and future collaborative agreements, royalties from the sales of
Agenerase, existing cash and investments of $707,424,000 at December 31, 2000,
together with investment income earned thereon, and facilities and equipment
financing. To the extent that 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 securities or other methods of
financing. There can be no assurance that such financing will be available on
acceptable terms, if at all.
Our aggregate cash and investments increased by $519,622,000 during the
twelve months ended December 31, 2000 to $707,424,000. Cash used by operations
was $16,644,000 during the same period. We received $37,458,000 from Novartis in
connection with the collaborative agreement signed in May of 2000 of which
approximately $27,910,000 was recognized as revenue during the twelve months
ended December 31, 2000. Under the collaborative agreement with Aventis signed
in October 1999, we received a $10,000,000 payment in May 2000, all of which was
recognized as revenue during 2000. We continue to invest in equipment and
leasehold improvements for facilities to meet the operating needs associated
with the growth in our headcount. In 2000, property and equipment expenditures
were $11,913,000. Cash provided by financing activities for the twelve months
ended December 31, 2000 was $544,031,000, including $503,962,000 in net proceeds
from the issuance of $520,000,000 of convertible subordinated notes in March and
September of 2000, as well as $42,438,000 from the issuance of common stock
under employee stock option and benefit plans.
On September 15, 2000, we announced the call of our March Notes. As of
December 31, 2000, $175,000,000 of the March Notes had been converted into
4,340,260 shares of common stock at a price of $40.32 per share. We reclassified
$4,917,000 of related unamortized deferred debt issuance costs to stockholders'
equity as part of the conversion in 2000. In connection with the call for
redemption, the holders of the notes were entitled to a "make-whole" payment of
$82.14 per $1,000 principal amount of notes, which resulted in a one-time charge
to earnings of $14,375,000.
During 2000, we entered into two new collaborative agreements. In May 2000,
we entered into an agreement with Novartis to collaborate on the discovery,
development, and commercialization of small molecule drugs directed at targets
in the kinase protein family. Under the agreement, Novartis agreed
38
to pay us approximately $600,000,000 in pre-commercial payments, comprised of
$15,000,000 paid upon signing of the agreement, up to $200,000,000 in product
research funding over six years and up to approximately $400,000,000 in further
license fees and milestone payments. These amounts are based on the development
of eight drug candidates. In addition, Novartis created a $200,000,000 loan
facility to support certain clinical studies which we may draw down in
increments up to $25,000,000 for each drug candidate. The loan is interest free
and Novartis will forgive the full amount of any advances if Novartis accepts
the drug candidate for development under our agreement with Novartis.
In December 2000, we entered into an agreement with Serono to collaborate on
the discovery, development, and commercialization of caspase inhibitors. Under
the agreement, we could receive up to $95,000,000 in pre-commercial payments,
comprised of $5,000,000 in payments for prior research, up to $20,000,000 in
product research funding over five years and up to $70,000,000 in further
license fees and milestone payments. These amounts are based on the development
of more than one drug candidate.
LEGAL PROCEEDINGS
Chiron Corporation 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 involved in the 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.
That reexamination process is still ongoing. 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, we maintain that the
plaintiff's claims are without merit and intend to defend the lawsuit, if and
when it resumes, vigorously.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments an amendment of SFAS No. 133" ("Accounting for
Certain Derivative Instruments and Hedging Activities"). This statement
establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. The statement requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for changes in fair value, gains or losses, depends
on the intended use of the derivative and its resulting designation. We will
adopt SFAS No. 138 in 2001, in accordance with SFAS No. 137, which deferred the
effective date of SFAS No. 133. To date, we have not engaged in derivative or
hedging activities and accordingly do not believe the adoption of SFAS No. 138
will have a material impact on our financial statements and related disclosures.
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.
39
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-24 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 2001 Annual Meeting of Stockholders, to
be filed with the Commission on or about April 3, 2001 (the "2001 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 2001 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 2001 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 2001 Proxy
Statement under "Security Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
40
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, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 2000,
1999 and 1998............................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7 to F-24
(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.
41
(a)(3) EXHIBITS.
EXHIBIT
NUMBER EXHIBIT 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. 000-19319) 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.
000-19319) 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. 000-19319) and incorporated herein by reference).
3.4 By-laws of Vertex as amended and restated as of March 12,
2001 (filed herewith).
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. 000-19319) and incorporated herein by
reference).
4.4 Indenture dated as of September 19, 2000 between Vertex and
State Street Bank and Trust Company (filed as Exhibit 4.1 to
Vertex's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 000-19319) and incorporated
herein by reference).
4.5 Supplemental Indenture dated as of December 12, 2000 between
Vertex and State Street Bank and Trust Company (filed as
Exhibit 4.2 to Pre-Effective Amendment No. 1 to the Form S-3
filed by Vertex (Registration No. 333-49844) and
incorporated herein by reference.
4.6 Registration Rights Agreement dated as of September 19, 2000
among Vertex and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Credit Suisse First Boston
Corporation, Robertson Stephens, Inc., Chase Securities Inc.
and J.P. Morgan Securities Inc., as Initial Purchasers
(filed as Exhibit 4.2 to Vertex's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 (File No.
000-19319) and incorporated herein by reference).
10.1 1991 Stock Option Plan, as amended and restated as of
September 14, 1999 (filed as Exhibit 10.1 to Vertex 1999
Annual Report on Form 10-K (File No. 000-19319) and
incorporated herein by reference).*
10.2 1994 Stock and Option Plan, as amended and restated as of
September 14, 1999 (filed as Exhibit 10.1 to Vertex 1999
Annual Report on Form 10-K (File No. 000-19319) and
incorporated herein by reference).*
10.3 1996 Stock and Option Plan, Amended and Restated as of March
12, 2001 (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).*
42
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------
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 Joshua S.
Boger and Vicki L. Sato (filed as Exhibit 10.6 to Vertex's
1994 Annual Report on Form 10-K (File No. 000-19319) and
incorporated herein by reference).*
10.8 Form of Amendment to Employment Agreement executed by 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. 000-19319) and incorporated herein
by reference).*
10.9 Executive Employment Agreement between Vertex and Iain P.M.
Buchanan (filed herewith).*
10.10 Agreement dated December 21, 2000 between Vertex and Richard
H. Aldrich (filed herewith).*
10.11 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. 000-19319) and
incorporated herein by reference).
10.12 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.
000-19319) and incorporated herein by reference).
10.13 Second Amendment to Lease and Option Agreement dated June
12, 1997 between Fort Washington Realty Trust and Vertex
(filed as Exhibit 10.17 to Vertex 1999 Annual Report on Form
10-K (File No. 000-19319) and incorporated herein by
reference).
10.14 Third, Fourth and Fifth Amendments to Lease between Fort
Washington Realty Trust and Vertex (with certain
confidential information deleted) (filed herewith).
10.15 Lease by and between Trustees of Fort Washington Realty
Trust, Landlord, and Vertex, 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. 000-19319), and
incorporated herein by reference).
10.16 Lease by and between Kendall Square, LLC, Landlord, and
Vertex, executed January 18, 2001 (with certain confidential
information deleted) (filed herewith).
10.17 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 as Exhibit 10.18 to Vertex 1999 Annual
Report on Form 10-K (File No. 000-19319) and incorporated
herein by reference)
10.18 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. 000-19319) and
incorporated herein by reference).
10.19 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. 000-19319) and
incorporated herein by reference).
43
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- ------------------------------------------------------------
10.20 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, (File No. 000-19319) and incorporated herein
by reference).
10.21 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, (File No. 000-19319) and
incorporated herein by reference).
10.22 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, (File No. 000-19319) and incorporated herein by
reference).
10.23 License, Development and Commercialization Agreement between
the Company and Hoechst Marion Roussel Deutschland GmbH
dated September 1, 1999 (filed with certain confidential
information deleted as Exhibit 10.27 to Vertex's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999, (File No. 000-19319), and incorporated herein by
reference).
10.24 Collaboration and Option Agreement between Vertex and Taisho
Pharmaceutical Co., Ltd. dated November 30, 1999 (filed,
with certain confidential information deleted, as Exhibit
10.27 to Vertex's 1999 Form 10-K, (File No. 000-19319) and
incorporated herein by reference).
10.25 Research and Early Development Agreement between Vertex and
Novartis Pharma AG dated May 8, 2000 (filed, with certain
confidential information deleted, as Exhibit 10.1 to
Vertex's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000, (File No. 000-19319) and incorporated herein
by reference).
10.26 Research Agreement between Vertex and Laboratoires Serono
S.A. dated December 11, 2000 (with certain confidential
information deleted) (filed herewith).
21 Subsidiaries of Vertex (filed as Exhibit 21 to Vertex's 1999
Form 10-K, (File No. 000-19319) and incorporated herein by
reference).
23 Consent of Independent Accountants (filed herewith).
- ------------------------
* Compensatory plan or agreement applicable to management and employees.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed by Vertex
during the quarter ended December 31, 2000:
Report dated October 5, 2000 reporting the conversion of our 5% Convertible
Subordinated Notes Due March 2007.
Report dated December 21, 2000 reporting the resignation of Richard H.
Aldrich from his position as Senior Vice President and Chief Business
Officer of the Company.
44
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
March 23, 2001 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 and
/s/ JOSHUA S. BOGER Chief Executive Officer
------------------------------------------- (Principal Executive March 23, 2001
Joshua S. Boger Officer)
/s/ JOHANNA MESSINA POWER
------------------------------------------- Controller (Principal March 23, 2001
Johanna Messina Power Accounting Officer)
/s/ BARRY M. BLOOM
------------------------------------------- Director March 23, 2001
Barry M. Bloom
/s/ ROGER W. BRIMBLECOMBE
------------------------------------------- Director March 23, 2001
Roger W. Brimblecombe
/s/ DONALD R. CONKLIN
------------------------------------------- Director March 23, 2001
Donald R. Conklin
/s/ BRUCE I. SACHS
------------------------------------------- Director March 23, 2001
Bruce I. Sachs
/s/ CHARLES A. SANDERS
------------------------------------------- Director March 23, 2001
Charles A. Sanders
/s/ ELAINE S. ULLIAN
------------------------------------------- Director March 23, 2001
Elaine S. Ullian
45
VERTEX PHARMACEUTICALS INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NUMBER
-----------
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 2000,
1999 and 1998............................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
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 comprehensive
loss and cash flows present fairly, in all material respects, the financial
position of Vertex Pharmaceuticals Incorporated and its subsidiaries at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. 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 of
America, 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 our opinion.
As discussed in Note C to the consolidated financial statements, during the year
ended December 31, 2000 the Company changed its method of accounting for revenue
recognition.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 22, 2001
F-2
VERTEX PHARMACEUTICALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE AND PER
SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $322,090 $ 31,548
Short-term investments, available for sale................ 66,509 84,080
Accounts receivable....................................... 12,262 5,956
Prepaid expenses.......................................... 2,325 1,439
-------- --------
Total current assets.................................. 403,186 123,023
Restricted cash........................................... 9,788 9,788
Long-term investments, available for sale................. 318,825 72,174
Property and equipment, net............................... 28,149 24,480
Investment in equity affiliate............................ 1,726 2,276
Other assets.............................................. 11,207 704
-------- --------
Total assets.......................................... $772,881 $232,445
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,847 $ 2,979
Accrued expenses.......................................... 14,994 11,173
Accrued interest.......................................... 4,879 --
Deferred revenue.......................................... 12,574 2,000
Obligations under capital lease and debt.................. 2,377 2,366
-------- --------
Total current liabilities............................. 38,671 18,518
Obligations under capital lease and debt, excluding current
portion................................................... 2,313 4,693
Convertible subordinated notes.............................. 345,000 --
-------- --------
Total liabilities..................................... 385,984 23,211
-------- --------
Commitments (Note K)
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; none issued and outstanding at December 31,
2000 and 1999, respectively............................. -- --
Common stock, $0.01 par value; 100,000,000 shares
authorized; 59,612,816 and 51,370,728 shares issued and
outstanding at December 31, 2000 and 1999,
respectively............................................ 596 514
Additional paid-in capital................................ 613,166 400,631
Deferred compensation, net................................ (61) (114)
Accumulated other comprehensive income (loss)............. 3,681 (970)
Accumulated deficit....................................... (230,485) (190,827)
-------- --------
Total stockholders' equity............................ 386,897 209,234
-------- --------
Total liabilities and stockholders' equity............ $722,881 $232,445
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
VERTEX PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Royalties and product sales............................... $ 12,036 $ 8,053 $ --
Collaborative and other research and development
revenues................................................ 66,091 42,507 29,055
-------- -------- --------
Total revenues........................................ 78,127 50,560 29,055
Costs and expenses:
Royalties and product costs............................... 4,082 2,925 --
Research and development.................................. 84,921 72,180 58,668
Sales, general and administrative......................... 27,806 26,131 18,135
-------- -------- --------
Total costs and expenses.............................. 116,809 101,236 76,803
-------- -------- --------
Net loss from operations.................................. (38,682) (50,676) (47,748)
-------- -------- --------
Interest income........................................... 27,679 11,088 15,343
Interest expense.......................................... (10,569) (654) (681)
Debt conversion expense................................... (14,375) -- --
Equity in losses of unconsolidated subsidiary............. (550) (724) --
-------- -------- --------
Net loss before cumulative effect of change in accounting
principle................................................. $(36,497) $(40,966) $(33,086)
Cumulative effect of change in accounting principle......... (3,161) -- --
-------- -------- --------
Net loss.................................................... $(39,658) $(40,966) $(33,086)
======== ======== ========
Basic and diluted net loss per common share before
cumulative effect of change in accounting principle....... $ (0.67) $ (0.80) $ (0.65)
Cumulative effect of change in accounting principle--basic
and diluted............................................... $ (0.06) -- --
-------- -------- --------
Basic and diluted net loss per common share................. $ (0.73) $ (0.80) $ (0.65)
======== ======== ========
Basic and diluted weighted average number of common shares
outstanding............................................... 54,322 51,036 50,598
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
VERTEX PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN DEFERRED ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INCOME (LOSS)
-------- -------- ---------- ------------ ----------- -------------
(IN THOUSANDS)
Balance, December 31, 1997......... 50,432 $504 $392,237 $ (117) $(116,775) $ 152
Net change in unrealized holding
(gains)/losses on investments.... 502
Net loss........................... (33,086)
Comprehensive loss.................
Issuances of common stock:
Benefit plans.................... 286 3 2,783
Equity compensation for services
rendered......................... 59 (82)
Amortization of deferred
compensation..................... 32
-------- ---- -------- ------- --------- ------
Balance, December 31, 1998......... 50,718 507 395,079 (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.................... 652 7 5,493
Equity compensation for services
rendered......................... 59
Amortization of deferred
compensation..................... 53
-------- ---- -------- ------- --------- ------
Balance, December 31, 1999......... 51,370 514 400,631 (114) (190,827) (970)
Net change in unrealized holding
(gains)/losses on investments.... 5,167
Translation adjustments............ (516)
Net loss........................... (39,658)
Comprehensive loss.................
Issuance of common stock:
Benefit plans.................... 3,903 39 42,399
Convertible subordinated notes... 4,340 43 170,040
Equity compensation for services
rendered......................... 96
Amortization of deferred
compensation..................... 53
-------- ---- -------- ------- --------- ------
Balance, December 31, 2000......... 59,613 $596 $613,166 $ (61) $(230,485) $3,681
======== ==== ======== ======= ========= ======
COMPREHENSIVE TOTAL
INCOME STOCKHOLDERS'
(LOSS) EQUITY
------------- -------------
(IN THOUSANDS)
Balance, December 31, 1997......... $276,001
Net change in unrealized holding
(gains)/losses on investments.... $ 502 502
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
Net change in unrealized holding
(gains)/losses on investments.... 5,167 5,167
Translation adjustments............ (516) (516)
Net loss........................... (39,658) (39,658)
--------
Comprehensive loss................. $(77,597)
========
Issuance of common stock:
Benefit plans.................... 42,438
Convertible subordinated notes... 170,083
Equity compensation for services
rendered......................... 96
Amortization of deferred
compensation..................... 53
--------
Balance, December 31, 2000......... $386,897
========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
VERTEX PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 1999 1998
----------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss................................................ $ (39,658) $ (40,966) $ (33,086)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of change in accounting principle..... 3,161 -- --
Depreciation and amortization........................... 9,095 6,206 4,520
Amortization of deferred compensation................... 53 53 32
Equity compensation for services rendered............... 96 59 59
Realized (gains)/losses on investments.................. 270 655 (547)
Equity in losses of unconsolidated subsidiary........... 550 724 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (6,306) (4,494) --
Prepaid expenses........................................ (886) 155 (1,104)
Accounts payable........................................ 868 171 (1,439)
Accrued expenses........................................ 3,821 3,631 1,157
Accrued interest........................................ 4,879 -- --
Deferred revenue........................................ 7,413 2,000 (556)
----------- --------- ---------
Net cash used in operating activities............. (16,644) (31,806) (30,964)
----------- --------- ---------
Cash flows from investing activities:
Purchases of investments................................ (1,312,765) (365,970) (507,540)
Sales and maturities of investments..................... 1,088,582 428,872 495,323
Expenditures for property and equipment................. (11,913) (16,210) (7,901)
Restricted cash......................................... -- (7,472) --
Investment in equity affiliate.......................... -- (3,000) --
Other assets............................................ (233) 142 (276)
----------- --------- ---------
Net cash (used in) provided by investing
activities...................................... (236,329) 36,362 (20,394)
----------- --------- ---------
Cash flows from financing activities:
Repayment of capital lease obligations and debt......... (2,369) (2,725) (2,716)
Proceeds from debt...................................... -- -- 4,085
Proceeds from the sale of convertible subordinated
notes................................................. 520,000 -- --
Costs associated with the sale of convertible
subordinated notes.................................... (16,038) -- --
Proceeds from other issuances of common stock........... 42,438 5,500 2,704
----------- --------- ---------
Net cash provided by financing activities......... 544,031 2,775 4,073
----------- --------- ---------
Effect of changes in exchange rates on cash............. (516) 48 --
----------- --------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 290,542 7,379 (47,285)
Cash and cash equivalents at beginning of year............ 31,548 24,169 71,454
----------- --------- ---------
Cash and cash equivalents at end of year.................. $ 322,090 $ 31,548 $ 24,169
=========== ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 19,214 $ 654 $ 681
=========== ========= =========
Noncash financing activities:
Conversion of convertible subordinated notes, net of
unamortized deferred debt issuance cost of $4,917,000... $ 170,083 $ -- $ --
=========== ========= =========
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") seeks to use
a range of drug discovery technologies to design, 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 twelve drug candidates in
development. The Company has significant collaborations with Aventis S.A., Lilly
& Company, GlaxoSmithKline, Kissei Pharmaceuticals Co. Ltd, Novartis Pharma AG,
Schering AG (Germany), Serona S.A. and Taisho Pharmaceutical Co. These
collaborations provide them with financial support and other valuable resources
for their programs, development of clinical drug candidates and marketing and
sales of their products. The Company's first product, the HIV protease inhibitor
Agenerase-Registered Trademark- (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 GlaxoSmithKline ("Glaxo") and is co-promoted 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, until January 1999, Altus Biologics, Inc. ("Altus"). The
Company restructured its majority ownership investment in Altus during 1999.
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
BASIS OF PRESENTATION
The consolidated financial statements reflect the operations of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. Investments in affiliated companies which are
50% owned or less and where the Company does not exercise control are accounted
for using the equity method.
USE OF ESTIMATES
The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and
expenses during the reported periods. Significant estimates in these
consolidated financial statements include useful lives for depreciation and
amortization and contract revenues and related costs used in estimates to
complete under percentage of completion accounting. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents, which are money market funds and debt securities, are
valued at cost plus accrued interest. The Company considers all highly liquid
investments with original maturities of three months or less at the date of
purchase to be cash equivalents. Changes in cash and cash equivalents
F-7
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES (CONTINUED)
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), which is a separate component of stockholder's equity, until realized.
The fair value of these securities is based on quoted market prices. Realized
gains and losses are determined on the specific identification method and are
included in interest 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.
The Company has no significant off balance sheet concentration of credit risk,
such as foreign exchange contracts, option contracts or other foreign hedging
arrangements.
GlaxoSmithKline represented approximately 26% and 52% of the Company's
accounts receivable balance at December 31, 2000 and 1999, respectively, while
Kissei Pharmaceuticals, Co., Ltd. represented approximately 14% and 29% of the
Company's accounts receivable balance at December 31, 2000 and 1999,
respectively. Management believes that credit risks associated with these
collaborative 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 lesser of the useful
life of the improvements or the remaining life of the lease. 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
F-8
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES (CONTINUED)
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
The Company enters into licensing and development agreements with
collaborative partners for the development of small molecule drugs that address
major medical needs. The terms of the agreements typically include nonrefundable
license fees, funding of research and development, payments based upon the
achievement of certain milestones and royalties on product sales.
Nonrefundable license fees, milestones, and collaborative research and
development revenues under collaborative agreements, where the Company has
continuing involvement, are recognized as revenue over the period of continuing
involvement, using the model prescribed by Emerging Issues Task Force Issue No
91-6 (EITF 91-6). Under that model, revenue is recognized for nonrefundable
license fees, milestones, and collaborative research and development using the
lesser of non-refundable cash received or the result achieved using percentage
of completion accounting. Under percentage of completion accounting, revenue is
based on the cost of effort since the contract's commencement up to the
reporting date, divided by the total expected research and development costs
from the contract's commencement to the end of the research and development
period, multiplied by the total expected contractual payments under the
arrangement. Revisions in cost estimates and expected contractual payments as
contracts progress have the effect of increasing or decreasing profits in the
current period. Provisions for anticipated losses are made in the period in
which they first become determinable. Payments received in advance of being
earned are recorded as deferred revenue.
Where the Company has no continuing involvement, it will record
nonrefundable license fees as revenue upon receipt and will record milestone
revenue upon achievement of the milestone by the collaborative partner.
Royalty revenue is recognized based upon actual net sales of licensed
products in licensed territories as provided by the collaborative partner and is
generally recognized in the period the sales occur.
Product sales revenue is recognized upon shipment, when title to product and
associated risk of loss has passed to the customer.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred.
ADVERTISING
All advertising costs are expensed as incurred. During the years ended
December 31, 2000 and 1999, advertising expenses totaled $1,376,000 and
$2,211,000 respectively. The Company did not incur advertising expense in 1998.
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
F-9
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES (CONTINUED)
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.
DEBT ISSUANCE COSTS
Debt issuance costs, costs relating to expenses incurred to complete
convertible subordinated debenture offerings, are deferred and amortized based
on the effective interest method over the term of the related debt issuance. The
amortization expense is included in interest expense on the consolidated
statement of operations.
COMPREHENSIVE INCOME
Comprehensive income (loss) consists of net income (loss) and other
comprehensive income (loss), which includes foreign currency translation
adjustments and unrealized gains and losses on certain investments. For purposes
of comprehensive income (loss) disclosures, the Company does not record tax
provisions or benefits for the net changes in foreign currency translation
adjustment, as the Company intends to permanently reinvest undistributed
earnings in its foreign subsidiaries.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's foreign subsidiary is the local
currency. Assets and liabilities of the foreign subsidiary are remeasured into
U.S. dollars at rates of exchange in effect at the end of the year. Revenue and
expense amounts are remeasured using the average exchange rates for the period.
Net unrealized gains and losses resulting from foreign currency remeasurement
are included in other comprehensive income (loss), which is a separate component
of stockholders' equity.
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic loss 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, and the assumed conversion of convertible notes. 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 of the following at December 31 (shares
in thousands):
2000 1999 1998
-------- -------- --------
Stock options outstanding................................... 12,195 13,488 11,674
Weighted average exercise price............................. $24.35 $11.75 $11.31
Convertible notes........................................... 3,739 -- --
Weighted average exercise price............................. $92.26 -- --
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.
F-10
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATION IN THE PREPARATION OF FINANCIAL STATEMENTS
All references to share and per-share data for all periods presented have
been have adjusted to reflect the two-for-one stock split, effected in the form
of a 100% stock dividend, distributed on August 23, 2000 to shareholders of
record as of August 9, 2000.
Certain amounts in prior years' financial statements have been reclassified
to conform to the current presentation. These reclassifications had no effect on
the reported net loss.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments an amendment of SFAS No. 133" ("Accounting for
Certain Derivative Instruments and Hedging Activities"). This statement
establishes accounting and reporting standards for derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. The statement requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for changes in fair value, gains or losses, depends
on the intended use of the derivative and its resulting designation. The Company
will adopt SFAS 138 in 2001, in accordance with SFAS 137, which deferred the
effective date of SFAS 133. To date, the Company has not engaged in derivative
or hedging activities and accordingly does not believe the adoption of SFAS 138
will have a material impact on its financial statements and related disclosures.
C. CHANGE IN ACCOUNTING PRINCIPLE
In the fourth quarter of 2000, Vertex adopted SAB 101, "Revenue Recognition
in Financial Statements" retroactive to January 1, 2000. SAB 101 was issued by
the Securities and Exchange Commission ("SEC") in December 1999 and provides
guidance related to revenue recognition policies based on interpretations and
practices followed by the SEC. Prior to adoption of SAB 101, Vertex recognized
revenue from collaborative research and development arrangements as earned under
the terms of the arrangements. License payments were recorded as revenue when
payment was assured and contractual obligations met. Payments from contractual
milestones were recognized when achieved, and product research funding was
recorded on a quarterly basis, when research effort was incurred. In adopting
SAB 101, Vertex recognizes revenue from research and development arrangements
over the period of continuing involvement as the lessor of the non-refundable
cash received or the result achieved using percentage of completion accounting.
Where Vertex has no continuing involvement, nonrefundable license fees will be
recorded as revenue upon receipt and milestone's will be recorded as revenue
upon achievement of the milestone by the collaborative partner. Pursuant to the
adoption of SAB 101, the Company recorded the cumulative effect of a change in
accounting principle related to collaborative research and development revenues
recognized in prior periods. As a result, the Company recorded a one-time,
non-cash charge of $3,161,000. The impact of the adoption of SAB 101 was to
defer revenue recognition for certain portions of revenue previously recognized
under our collaborative agreements into future accounting periods. During the
year ended December 31, 2000, the full amount of the $3,161,000, the cumulative
effect of the change in accounting principle was recognized as revenue. The
results of the first three quarters of the fiscal year ending December 31, 2000
have been restated in accordance with SAB 101. Previously reported financial
data for the years ended December 31, 1999 and 1998 has not been restated to
give the pro forma effect of the adoption of the provisions of SAB 101 as the
effect could not be reasonably determined.
F-11
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
D. INVESTMENTS
Investments consist of the following at December 31 (in thousands):
2000 1999
---------------------- ----------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
Cash and cash equivalents
Cash and money market funds....................... $301,028 $301,028 $ 27,339 $ 27,339
Corporate debt securities......................... 21,062 21,062 4,209 4,209
-------- -------- -------- --------
Total cash and cash equivalents..................... $322,090 $322,090 $ 31,548 $ 31,548
======== ======== ======== ========
Investments
US government securities
Due within 1 year............................... $ 24,736 $ 24,769 $ 12,318 $ 12,292
Due within 1 to 5 years......................... 40,363 40,788 18,054 17,702
Due over 5 years................................ 2,003 1,975 -- --
Corporate debt securities
Due within 1 year............................... 41,739 41,740 71,807 71,788
Due within 1 to 5 years......................... 265,256 268,847 31,647 31,304
Due over 5 years................................ 7,092 7,215 23,450 23,168
-------- -------- -------- --------
Total Investments................................... $381,189 $385,334 $157,276 $156,254
======== ======== ======== ========
Gross unrealized gains and losses for government securities were $477,000
and $38,000 at December 31, 2000, respectively. Gross unrealized gains and
losses for corporate debt securities were $3,877,000 and $171,000 at
December 31, 2000, respectively. Gross unrealized gains and losses for
government securities were $0 and $364,000 at December 31, 1999, respectively.
Gross unrealized gains and losses for corporate debt securities were $112,000
and $770,000 at December 31, 1999, respectively. Gross realized gains and losses
for 2000 were $69,000 and $339,000, 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. Maturities stated
are effective maturities.
E. RESTRICTED CASH
In accordance with operating lease agreements, at December 31, 2000 and 1999
the Company held in deposit approximately $9,788,000 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-12
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (in
thousands):
2000 1999
-------- --------
Leasehold improvements.................................... $19,915 $15,851
Furniture and equipment................................... 21,390 15,215
Computers................................................. 3,861 3,190
Software.................................................. 5,066 4,053
Equipment under capital lease............................. 20,512 20,522
------- -------
70,744 58,831
Less accumulated depreciation and amortization............ 42,595 34,351
------- -------
$28,149 $24,480
======= =======
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was $8,244,000, $6,206,000 and $4,520,000, respectively. The accumulated
depreciation and amortization of equipment under capital leases was $19,759,000
and $18,504,000 at December 31, 2000 and 1999, respectively. Assets under
capital leases collateralize the related lease obligations.
G. INVESTMENT IN AFFILIATE
In February 1999, Vertex restructured its investment in Altus, which was a
majority 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. Vertex had a 23.5% and 29.5% equity investment
in Altus of approximately $1,726,000 and $2,276,000 at December 31, 2000 and
December 31, 1999, respectively. For the years ending December 31, 2000 and
December 31, 1999, Vertex recorded $550,000 and $724,000, respectively, as its
share of Altus' losses.
H. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31 (in thousands):
2000 1999
-------- --------
Development contract costs................................ $ 6,417 $ 3,331
Payroll and benefits...................................... 3,529 1,822
Professional fees......................................... 2,242 3,005
Other..................................................... 2,806 3,015
------- -------
$14,994 $11,173
======= =======
F-13
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
I. OBLIGATIONS UNDER CAPITAL LEASE AND DEBT
At December 31, 2000, long-term capital lease and debt obligations were due
as follows (in thousands):
CAPITAL
YEAR ENDED DECEMBER 31, LEASES DEBT TOTAL
- ----------------------- -------- -------- --------
2001........................................................ $1,332 $1,114 $2,446
2002........................................................ 89 1,351 1,440
2003........................................................ -- 873 873
------ ------ ------
Total minimum lease and debt payments..................... 1,421 3,338 4,759
Less amount representing interest payments.................. 69 -- 69
------ ------ ------
Present value of minimum lease and debt payments............ 1,352 3,338 4,690
Less current portion........................................ 1,264 1,113 2,377
------ ------ ------
$ 88 $2,225 $2,313
====== ====== ======
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 $2,586,000 designated as collateral under these agreements at
December 31, 2000. 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, 2000 and 1999, no amounts were
outstanding, and $20,000,000 was available under the line of credit.
J. CONVERTIBLE SUBORDINATED NOTES
On March 14, 2000, the Company issued $175,000,000 of 5% Convertible
Subordinated Notes due March 2007 ("March Notes"). The notes were convertible,
at the option of the holder, into common stock at a price equal to $40.32 per
share, subject to adjustment under certain circumstances. The deferred cost
associated with issuance of the March Notes were $5,340,000, of which $423,000
was amortized to expense in 2000.
On September 15, 2000, the Company announced the call of its March Notes. By
October 4, 2000, $175,000,000 of the March Notes were converted by holders into
4,340,260 shares of common stock at a price of $40.32 per share. The Company
reclassified $4,917,000 of related unamortized deferred debt issuance costs to
stockholders' equity as part of the conversion. In connection with the call for
redemption, the holders of the March Notes were entitled to a "make-whole"
payment of $82.14 per $1,000 principal amount of notes, which resulted in a
one-time charge to earnings of $14,375,000 in the third quarter of 2000. The
"make-whole" payment was paid in cash in the fourth quarter of 2000.
On September 19, 2000, the Company issued $345,000,000 of 5% Convertible
Subordinated Notes due September 2007 ("September Notes"). The September Notes
are convertible, at the option of the holder, into common stock at a price equal
to $92.26 per share, subject to adjustment under certain circumstances. The
September Notes bear an interest rate of 5% per annum, and the Company is
required to make semi-annual interest payments on the outstanding principal
balance of the notes on
F-14
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. CONVERTIBLE SUBORDINATED NOTES (CONTINUED)
March 19 and September 19 of each year. The September Notes are redeemable by
the Company at any time on or after September 19, 2003 at specific redemption
prices if the closing price of the Company's common stock exceeds 120% of the
conversion price then in effect for at least 20 trading days within a period of
30 consecutive trading days. Before September 19, 2003 the Company may redeem
the notes at a redemption price equal to the principal amount of notes, plus
accrued and unpaid interest, if any, and a specified additional payment amount,
if the closing price of the Company's common stock exceeds 150% of the
conversion price then in effect for at least 20 trading days within a period of
30 consecutive trading days. The deferred costs associated with the sale of the
convertible notes were $10,698,000 of which $428,000 was amortized to expense in
2000. The fair value of the notes at December 31, 2000 is $336,651,000, as
obtained from a quoted market source.
K. COMMITMENTS
The Company leases its facilities and certain equipment under non-cancelable
operating leases. The Company's leases have terms through the year 2017. The
Company did not enter into any new operating leases during the year 2000.
At December 31, 2000 (adjusted for the lease commitments in connection with
the January 2001 lease agreement described below), future minimum commitments
under operating leases with non-cancelable terms of more than one year are as
follows (in thousands):
YEAR OPERATING LEASES
- ---- ----------------
2001........................................................ $ 13,068
2002........................................................ 26,747
2003........................................................ 29,192
2004........................................................ 28,705
2005........................................................ 28,705
Thereafter.................................................. 265,817
--------
Total minimum lease payments................................ $392,234
========
Rental expense was $6,722,000, $6,235,000 and $4,358,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
In January 2001, the Company entered into an agreement to lease
approximately 275,000 square feet of laboratory and office space presently under
construction. The lease will expire in 2017 with the option to extend the lease
for two consecutive terms of 10 years each ultimately expiring in 2037. The
Company's future minimum commitments under this lease are included in the table
above.
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 2001, 2002, 2003 and 2004 the
amounts committed under these contracts are $4,295,000, $3,704,000, $856,000 and
$85,000, respectively.
F-15
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
L. SEGMENT REPORTING
The following table presents long-lived assets by geographic area as of
December 31, 2000 and 1999 (in thousands):
LONG-LIVED ASSETS
-------------------
2000 1999
-------- --------
United States............................................... $21,292 $18,289
United Kingdom.............................................. 6,857 6,191
------- -------
Consolidated................................................ $28,149 $24,480
======= =======
M. INCOME TAXES
The Company's federal statutory income tax rate for 2000, 1999 and 1998 was
34%. The Company recorded no income tax benefit for 2000, 1999 and 1998 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):
2000 1999
--------- ---------
Net operating loss.................................... 116,515 $ 66,001
Tax credits carryforward.............................. 23,938 13,464
Property, plant and equipment......................... 585 676
Other................................................. 29,508 411
--------- ---------
Gross deferred tax asset.............................. 170,546 80,552
Valuation allowance................................... (170,546) (80,552)
--------- ---------
Net deferred tax balance.............................. $ -- $ --
========= =========
Of the $170,546,000 valuation allowance at December 31, 2000, $71,603,000
relates to deductions for nonqualified stock options which will be credited to
additional paid-in capital, if realized.
For federal income tax purposes, as of December 31, 2000, the Company has
net operating loss carryforwards of approximately $295,997,000 and $16,026,000
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.
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 382. This limitation arises whenever a cumulative change in
ownership in excess of 50% occurs. A change of ownership has occurred which will
limit the amount of net operating loss and tax credits available prior to the
change. There may also be further changes of ownership subsequent to 2000, which
may also limit the amount of net operating loss and tax credit utilization in a
subsequent year.
F-16
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. COMMON AND PREFERRED STOCK
COMMON STOCK
At December 31, 2000, 13,033,240 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; 10,098 shares were reserved for exercise of certain other options granted
in 1991; approximately 85,000 shares of common stock were reserved for issuance
under the Company's 401(k) Plan, and approximately 369,000 shares of common
stock were reserved for issuance under the Company's Employee Stock Purchase
Plan. Additionally, at December 31, 2000 there were approximately 3,739,000
shares reserved for the conversion of the Company's September Notes.
In August 2000, the Company effected a two-for-one stock split of all common
stock in the form of a stock dividend. All common stock share and per share
amounts in these consolidated financial statements have been restated to reflect
this stock split.
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"). Stock options may be granted under the Plans either as options intended
to qualify as "incentive stock options" ("ISOs") under the Internal Revenue Code
or as non-qualified stock options ("NQSOs"). Under the 1991 Plan, stock options
may be granted to employees (including officers and directors who are employees)
and to consultants of the Company (NQSOs only). Under the 1994 Plan and the 1996
Plan, stock rights, which may be (i) ISOs when Internal Revenue Code
requirements are met, (ii) NQSOs, or (iii) 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). Under the 1991 and 1994 Plans ISOs may be granted at a price not
less than the fair market value of the common stock on the date of the grant,
and NQSOs may be granted at an exercise price established by the Compensation
Committee of the Board of Directors, which may be less than, equal to or greater
than the fair value of the common stock on the date of the grant. 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 for all
plans are generally four or five years, and are determined by the Compensation
Committee. ISOs granted under the Plans must expire not more than ten years from
the date of grant.
The Company has reserved 8,000,000 shares under the 1991 Plan and 1994 Plan.
The 1996 Plan reserved an additional 10,500,000 shares, of which 1,500,000 were
reserved during 2000. At December 31, 2000, the Company had a total of 848,245
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
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 for 1998. Deferred compensation is being
amortized over the option vesting period. Amortization of deferred compensation
expense of $53,000, $53,000 and $32,000 was recognized during 2000, 1999 and
1998, respectively.
Compensation cost recognized in connection with the issuance of stock
options to nonemployees was $96,000, $59,000 and $59,000 in 2000, 1999 and 1998,
respectively.
F-17
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. COMMON AND PREFERRED STOCK (CONTINUED)
Stock option activity for the years ended December 31, 2000, 1999 and 1998
is as follows (shares in thousands):
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year................. 13,488 $11.75 11,674 $11.31 9,404 $11.01
Granted.......................................... 2,741 66.50 2,630 13.00 2,682 12.29
Exercised........................................ (3,788) 10.57 (488) 7.62 (156) 7.45
Canceled......................................... (246) 15.18 (328) 13.59 (256) 12.95
------ ------ ------ ------ ------ ------
Outstanding at end of year....................... 12,195 24.35 13,488 11.75 11,674 11.31
====== ====== ======
Options exercisable at year-end.................. 5,194 $11.84 6,880 $10.29 5,516 $ 9.38
Weighted average fair value of options granted
during the year:............................... $38.36 $ 6.53 $ 5.84
The fair value of each option granted during 2000, 1999, and 1998 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions:
2000 1999 1998
-------- -------- --------
Expected life (years)................................ 5.50 5.50 5.11
Expected volatility.................................. 58.00% 45.00% 46.50%
Risk free interest rate.............................. 5.63% 6.20% 4.86%
Dividend yield....................................... -- -- --
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2000 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------- ----------- ---------------- -------- ----------- --------
$3.88-$9.50......................... 2,252 3.76 $ 7.69 2,210 $ 7.67
9.94-12.22......................... 1,058 7.72 10.46 413 10.44
12.25-13.11........................ 2,060 8.86 13.08 344 13.06
13.17-13.67........................ 2,354 7.37 13.64 1,017 13.64
13.69-19.78........................ 1,752 6.38 15.99 1,102 15.91
20.10-68.71........................ 548 9.31 47.29 97 36.39
70.75-70.75........................ 2,005 9.93 70.75 6 70.75
71.62-93.12........................ 166 9.76 82.88 5 83.03
------ -----
$3.88-$93.12........................ 12,195 7.38 $24.35 5,194 $11.84
====== =====
F-18
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. COMMON AND PREFERRED STOCK (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan, substantially all
permanent employees may, through payroll withholdings, purchase shares of the
Company's common stock at a price of 85% of the lesser of fair market value at
the beginning or end of each six-month withholding period. During 2000, 1999,
and 1998 the following was issued under the plan:
2000 1999 1998
-------- -------- --------
Number of shares................................ 80,367 103,058 76,340
Average price paid.............................. $ 16.05 $ 9.69 $ 11.33
Had the Company adopted SFAS 123, the weighted average fair value of each
purchase right granted during 2000, 1999 and 1998 would have been $6.07, $3.32
and $3.83, 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 58%, 45%, and 52% for 2000, 1999, and 1998,
respectively (3) risk-free interest rate of 5.98%, 5.72% and 4.70% for 2000,
1999 and 1998, respectively, and (4) no dividend yield.
PRO FORMA DISCLOSURES
Had compensation expense for the all stock awards been determined consistent
with SFAS 123, the Company's net loss and net loss per common share would
approximate the pro forma amounts below (in thousands except per share data):
2000 1999 1998
-------- -------- --------
Net Loss.......................................... As reported $(39,658) $(40,966) $(33,086)
Pro forma $ 56,983 $(52,997) $(41,542)
Basic and diluted loss per common share........... As reported $ (0.73) $ (0.80) $ (0.65)
Pro forma $ (1.05) $ (1.04) $ (0.82)
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 half of one-hundredth of a share of
Series A junior participating preferred stock, $0.01 par value (the "Junior
Preferred Shares"), of the Company at a price of $135 per one half of
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.
F-19
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. COMMON AND PREFERRED STOCK (CONTINUED)
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 half of
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 $0.01 per Right.
O. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
TAISHO PHARMACEUTICAL CO., LTD AND SERONO S.A.
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 including $4,500,000 for prior research
costs. These amounts are based on the development of two compounds. In addition,
Taisho will also pay for certain costs of developing compounds that emerge from
the caspase research program. Vertex will also receive royalties on future
product sales. Taisho will have an option to obtain marketing rights in Japan
and certain Far East markets for any compounds arising from the collaboration.
In December 2000, the Company and Serono S.A. ("Serono") entered into an
agreement to collaborate on the discovery, development, and commercialization of
caspase inhibitors. Under the agreement, the Company could receive up to
$95,000,000 in pre-commercial payments, comprised of $5,000,000 in payments for
prior research, up to $20,000,000 in product research funding over five years
and up to $70,000,000 in further license fees and milestone payments. These
amounts are based on the development of more than one drug candidate. The two
companies will share equally in development costs. The Company and Serono will
establish a joint venture for the commercialization of products in North
America, where they will share marketing rights and profits from the sale of
caspase inhibitors. Serono will have exclusive rights to market caspase
inhibitors in other territories, excluding Japan and certain other countries in
the Far East, and will pay Vertex for the supply of drug substance. Serono has
the right to terminate the agreement without cause upon 90 days written notice,
effective either at September 30, 2002 or September 30, 2004.
For the years ended December 31, 2000 and 1999, the Company recognized
approximately $6,974,000 and $3,900,000 as revenue, respectively, under the
caspase program. At December 31, 2000, there was approximately $2,026,000 in
deferred revenue under the caspase program, which the Company expects to record
as revenue in 2001.
NOVARTIS PHARMA AG
In May 2000, the Company and Novartis Pharma AG ("Novartis") entered into an
agreement to collaborate on the discovery, development and commercialization of
small molecule drugs directed at targets in the kinase protein family. Under the
agreement, Novartis agreed to pay the Company approximately $600,000,000 in
pre-commercial payments, comprised of $15,000,000 paid upon signing of the
agreement, up to $200,000,000 in product research funding over six years and up
to approximately $400,000,000 in further license fees, milestone payments and
cost reimbursements. These amounts are based on the development of eight drug
candidates. In addition, Novartis created a $200,000,000 loan facility to
support certain clinical studies, which the Company may draw down in increments
up to
F-20
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
O. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
$25,000,000 for each drug candidate. The loan is interest free and Novartis will
forgive the full amount of any advances if Novartis accepts the drug candidate
for development under the agreement. The Company will have the responsibility
for drug discovery and clinical proof-of-concept testing of drug candidates.
Novartis will have exclusive worldwide development, manufacturing and marketing
rights to clinically and commercially relevant drug candidates that it accepts
for development from the Company. Vertex will receive royalties on any products
that are marketed as part of the collaboration. Subject to certain conditions,
the Company will have co-promotion rights in the United States and Europe, and
will retain the rights to any intellectual property resulting from the
collaboration. Novartis may terminate this agreement without cause after four
years upon one year's written notice. For the year ended December 31, 2000, the
Company recognized approximately $27,910,000 in revenue under the kinase
program. At December 31, 2000 there was approximately $9,548,000 in deferred
revenue under the contract, which the Company expects to record as revenue in
2001.
AVENTIS S.A.
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 milestone payments for each additional indication. 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. Collaborative and other research
and development revenues earned under the 1999 expanded development agreement
were $10,000,000 and $15,000,000, in the years ended December 31, 2000 and 1999,
respectively. The Company did not earn any revenue under the previous agreement
during 2000. Revenues earned under the previous agreement were $120,000 and
$460,000 in the years ended December 31, 1999 and 1998, respectively.
SCHERING AG
In 1998 the Company and Schering AG, Germany ("Schering") entered into an
agreement to collaborate 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 agreed to pay the Company up to $88,000,000 comprised of
$6,000,000 paid upon signing in September 1998, up to $22,000,000 of product
research funding over five years and $60,000,000 of development and
commercialization milestone payments. Under terms of the agreement, Vertex and
Schering 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 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 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. Schering has the right to terminate without
cause upon a six months' written
F-21
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
O. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
notice. For the years ended December 31, 2000, 1999 and 1998, approximately
$6,027,000, $4,000,000 and $10,000,000, was recognized as revenue under the
contract program, respectively. The balance in deferred revenue was $1,000,000
for the year ended December 31, 1999.
ELI LILLY & COMPANY
The Company and Eli Lilly and Company ("Lilly") entered into a collaborative
agreement to design inhibitors of the hepatitis C protease enzyme for
development 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 comprised 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. The Company has the option to supply 100 percent of Lilly's commercial
drug substance supply needs. 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' written notice. Revenue recognized under the HCV
Protease program under the Lilly contract were $5,948,000, $5,452,000 and
$5,193,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
KISSEI PHARMACEUTICAL CO. LTD.
P38 MAP KINASE. The Company and Kissei Pharmaceutical Co., Ltd. ("Kissei")
entered into an agreement to collaborate on the 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 $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. Research funding ended
under this program on June 30, 2000 and the Company has received the full amount
of research funding specified under the agreement. Kissei has exclusive rights
to develop and commercialize these 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. For the years
ended December 31, 2000, 1999 and 1998, approximately $5,615,000, $6,286,000 and
$5,521,000 was recognized as revenue under the p38 MAP research and development
program, respectively. The balance in deferred revenue was $1,000,000 and
$1,000,000 for the years ended December 31, 2000 and 1999, respectively.
HIV PROTEASE INHIBITORS. The Company and Kissei are collaborating in 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. The
Company 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. 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. Revenue earned under the Kissei agreement for the years ended
December 31, 2000, 1999 and 1998 were $7,000, $1,000,000 and $217,000,
respectively.
F-22
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
O. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED)
GLAXOSMITHKLINE
The Company and GlaxoSmithKline ("Glaxo") entered into a collaborative
agreement to develop and commercialize Agenerase (amprenavir) and its prodrug
VX-175. Under the collaborative agreement, for research and development of HIV
protease inhibitors, Glaxo 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 is also obligated to pay
additional development and commercialization milestone payments for subsequent
drug candidates, including VX-175. Research funding under this agreement ended
on December 31, 1998. In addition, Glaxo is required to bear the costs of
development in its territory of drug candidates under the collaboration. Glaxo
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 co-promotion rights in territories licensed to Glaxo. Glaxo has the
right to terminate its arrangement without cause upon twelve months' notice.
Termination by Glaxo 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 by Vertex thereunder. In 1999, the Company
began earning a royalty from Glaxo from sales of Agenerase. Revenues and
royalties earned from Glaxo were $15,646,000, $13,927,000 and $6,457,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
In June 1996, the Company and Glaxo obtained a worldwide, non-exclusive
license under certain G.D. Searle & Co. ("Searle") patent applications in the
area of HIV protease inhibition. The Company pays Searle a royalty based on
sales of Agenerase.
P. 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 20% of their annual compensation to the plan, subject to statutory
limitations. For 2000, the Company declared discretionary matching contributions
to the plan in the aggregate amount of $1,148,000 payable in the form of shares
of the Company's common stock. Of these shares, 20,880 were issued as of
December 31, 2000 with approximately 10,000 issuable in 2001. 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, 47,708 were issued as of December 31, 1999 with
approximately 13,400 issued 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, 38,838 were issued as of December 31, 1998 with the remaining 14,390
issued in 1999.
Q. 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 $736,000, $480,000 and
$333,000 in legal fees were paid in 2000, 1999 and 1998, respectively.
F-23
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
R. 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 involved in the 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.
That reexamination process is still ongoing. 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.
S. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
2000*
Total revenues......................................... $ 8,132 $ 27,023 $ 17,288 $25,684
Total expenses......................................... 26,053 27,386 28,797 34,573
Other income, net...................................... 2,371 2,965 4,448 6,776
Debt Conversion Expense................................ -- -- 14,375 --
Cumulative effect of change in accounting principle.... 3,161 -- -- --
Net loss............................................... (18,711) 2,602 (21,436) (2,113)
Basic net income/(loss) per share...................... $ (0.36) $ 0.05 $ (0.40) $ (0.04)
Diluted net income/(loss) per share.................... $ (0.36) $ 0.04 $ (0.40) $ (0.04)
1999
Total revenues......................................... $ 3,963 $ 12,516 $ 7,225 $26,856
Total expenses......................................... 24,499 25,997 23,692 27,772
Other income, net...................................... 2,982 2,640 2,181 2,631
Net loss............................................... (17,554) (10,841) (14,286) 1,715
Basic net income/(loss) per share...................... $ (0.34) $ (0.21) $ (0.28) $ 0.04
Diluted net income/(loss) per share.................... $ (0.34) $ (0.21) $ (0.28) $ 0.03
- ------------------------
* The 2000 quarterly financial data, as reported in the Company's previously
filed Quarterly Reports on Form 10-Q, has been adjusted to reflect the
adoption of SAB 101 in the fourth quarter of 2000, retroactive to
January 1, 2000, as discussed in Note C. Periods beginning before
January 1, 2000 have not been adjusted as the effect of the change in
accounting principle could not be reasonably determined.
F-24
EXHIBITS
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- ------------------------------------------------------------
3.4 By-laws of Vertex as amended and restated as of March 12,
2001.
10.3 1996 Stock and Option Plan, Amended and Restated as of
March 12, 2001.
10.9 Executive Employment Agreement between Vertex and Iain P.M.
Buchanan.
10.10 Agreement dated December 21, 2000 between Vertex and Richard
H. Aldrich.
10.14 Third, Fourth and Fifth Amendments to Lease between Fort
Washington Realty Trust and Vertex (with certain
confidential information deleted).
10.16 Lease by and between Kendall Square, LLC, Landlord, and
Vertex, executed January 18, 2001 (with certain confidential
information deleted).
10.26 Research Agreement between Vertex and Laboratoires Serono
S.A. dated December 11, 2000 (with certain confidential
information deleted).
23 Consent of Independent Accountants.