VERTEX PHARMACEUTICALS INC / MA - 10-K Annual Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------------

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, 2001
COMMISSION FILE NUMBER 000-19319

------------------------

VERTEX PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)

MASSACHUSETTS 04-3039129
(State of incorporation) (I.R.S. Employer
Identification No.)

130 WAVERLY STREET
CAMBRIDGE, MASSACHUSETTS 02139-4242
(Address of principal executive offices) (Zip Code)

(617) 444-6100

(Registrant's telephone number, including area code)

------------------------

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.01 PAR VALUE
(Title of class)

------------------------

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 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 26, 2002 there were outstanding 75,334,652 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 $2,058,900,000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the 2002 Annual Meeting of
Stockholders to be held on May 17, 2002 are incorporated by reference into
Part III.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

FORM 10-K INDEX

The "Company," "Vertex," "we" and "us," as used in this Annual Report on
Form 10-K, refer to Vertex Pharmaceuticals Incorporated, a Massachusetts
corporation, and its subsidiaries.

"Vertex," "UHTSS" and "Beacon" are registered trademarks of Vertex, and
"Incel," "GeneBLAzer," "GenomeScreen," "Vivid" and "PhosphoryLIGHT" are
trademarks of Vertex. "Agenerase" is a registered trademark of GlaxoSmithKline.
"Prozei" is a trademark of Kissei Pharmaceutical Co., Ltd. Other brands, names
and trademarks contained in this Annual Report are the property of their
respective owners.

FORWARD-LOOKING STATEMENTS

Our disclosure in this Annual Report on Form 10-K contains 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 selection, development and approval 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,
resources and products;

- our projected capital expenditures; and

- our liquidity.

Any or all of our forward-looking statements in this Annual Report may turn
out to be wrong. They can be affected by inaccurate assumptions we might make or
by known or unknown risks and uncertainties. Many factors mentioned in our
discussion in this Annual Report will be important in determining future
results. Consequently, no forward-looking statement can be guaranteed. Actual
future results may vary materially. A more detailed reference to our
forward-looking statements can be found under "Forward-looking Statements" in
Item 7 of this Annual Report.

We provide a cautionary discussion of risks and uncertainties under "Risk
Factors" in Item 1 of this Annual Report. These are factors that we think could
cause our actual results to differ materially from expected results. Other
factors besides those listed there could also adversely affect us.

PART I

ITEM 1. BUSINESS

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, automation
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 more than 12 additional drug candidates in
development.

We intend to commercialize some of our products independently and some with
collaborators. We have collaborations with Aventis, Eli Lilly, GlaxoSmithKline,
Kissei, Novartis, Schering AG (Germany), Serono and Taisho and other companies.
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 proteases
could enter preclinical studies within the next 12 months. These drug candidates
may have application in the treatment of bacterial infection, cancer,
inflammation, neurological diseases, 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 discovery, development and market
introduction of major new drugs.

We are presently applying our expertise in chemogenomics to focus on the
protein kinase, caspase, human protease and ion channel gene families, four
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 could 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 have enabled us to
expand both our infrastructure and our chemogenomics efforts in the protein
kinase gene family. Technology and expertise acquired through our acquisition of
Aurora Biosciences Corporation in July 2001 are leading to a significant
expansion of our drug discovery efforts directed at ion channels, a major class
of membrane-bound drug targets, and other drug targets. We anticipate
establishing new collaborations with major pharmaceutical companies in order to
obtain the funding and resources needed to expand these and other discovery
efforts.

Aurora, a wholly-owned subsidiary of Vertex, develops and commercializes
technologies, products and services to accelerate the discovery of new medicines
by the pharmaceutical and biopharmaceutical industries. Our acquisition of
Aurora unites Aurora's industry-leading assay development, screening and cell
biology capabilities with our integrated drug discovery expertise, creating a
comprehensive, scalable platform which we believe will systematically accelerate
drug-candidate output in target-rich gene families.

1

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.

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, Europe and certain other countries by
GlaxoSmithKline. We co-promote Agenerase in the United States and in key
countries of the European Union (E.U.). Total sales of the drug worldwide for
the twelve months ended December 31, 2001 were $71.9 million, resulting in
$10.8 million in 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 is
presently in Phase III clinical development, four are presently in Phase II
clinical development, three are presently in Phase I clinical development, and
eight are in preclinical development.

- ------------------------

* Development option

RESEARCH PROGRAMS

We have several research programs underway at the discovery stage, including
multi-target programs that are representative of our gene family-based drug
discovery 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.

- ------------------------

* Vertex retains rights in the protease gene family except for certain targets
and compounds covered in existing collaborations

COMMERCIAL PRODUCT AND CLINICAL DEVELOPMENT PROGRAMS

We have one product on the market and more than 12 additional drug
candidates in clinical and preclinical development to treat viral diseases,
inflammation, cancer, autoimmune diseases, neurological disorders, and genetic
disorders.

INFECTIOUS DISEASE PROGRAMS

HIV/AIDS PROGRAM

AGENERASE

Our first marketed product is Agenerase (amprenavir), an orally deliverable
drug for the treatment of HIV infection and AIDS. We created and developed
Agenerase in collaboration with GlaxoSmithKline, using our expertise in
structure-based drug design, to address unmet needs in the treatment of HIV.
Agenerase received regulatory approval in the U.S. in April 1999, and it is now
marketed in more than 30 countries worldwide. GlaxoSmithKline is marketing
Agenerase worldwide except for the Far East. We co-promote Agenerase in the U.S.
and Europe. 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. We believe that
more than 14,000 patients worldwide 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 6.8% as of December 31,
2001.

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.

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 indicate 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. Studies are
ongoing to confirm this preliminary data. Combination studies of Agenerase and
the protease inhibitor ritonavir presented at major medical conferences,
including the

4

8th Conference on Retroviruses and Opportunistic Infections in Chicago in
February 2001, suggest 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 for achieving maximum antiviral activity,
reducing the likelihood of treatment failure (viral breakthrough), and lowering
the overall pill count for patients. As of December 2001, more than 60% of
Agenerase used in the United States was in combination with ritonavir. In
February 2002, Agenerase became the first HIV protease inhibitor indicated as
part of a once-daily dosing regimen, based on research results in combination
with the protease inhibitor ritonavir.

VX-175

We are developing a second HIV protease inhibitor, VX-175 (also known as
GW433908 or 908) as part of the GlaxoSmithKline collaboration. A Phase III
clinical program has been initiated by our partner, GlaxoSmithKline. This
pivotal program includes trials in both treatment-naive and treatment-
experienced patients. The first study compares VX-175 to nelfinavir in
treatment-naive patients. The second study compares VX-175 in combination with
ritonavir, administered once-daily, to nelfinavir in treatment-naive patients.
The third study evaluates both once-daily and twice-daily dosing of VX-175 in
combination with ritonavir, compared to lopinavir/ritonavir, in
treatment-experienced patients. In all of these studies, patients receive
reverse transcriptase inhibitors as part of the combination regimen. More than
1,100 patients have been enrolled in these trials, which are designed to provide
a robust data package for anticipated regulatory filings in 2002 for market
approval in the U.S. and E.U. VX-175 is a prodrug of amprenavir 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 at Vertex and then selected for development by GlaxoSmithKline.
In view of the large number of pills that HIV infected patients typically
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 currently marketed protease
inhibitors.

A Phase II clinical study of VX-175 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 significant
improvement in the safety or effectiveness of the treatment for a serious or
life-threatening disease. GlaxoSmithKline is developing VX-175 and has marketing
rights in the United States, Europe and certain countries of the Far East.
Vertex currently holds the option to develop and commercialize VX-175 in Japan.
Vertex has an option to co-promote the prodrug in the United States and the
E.U., and we will receive royalties on any sales of VX-175 by GlaxoSmithKline.
We also retain rights to supply bulk drug substance to GlaxoSmithKline.

VX-385

In 2001, GlaxoSmithKline advanced another novel, orally available HIV
protease inhibitor, VX-385 (GW640385), into preclinical development. VX-385 is
the third drug candidate that GlaxoSmithKline and Vertex have advanced into
development as part of an ongoing collaboration to develop and commercialize HIV
protease inhibitors. VX-385 is chemically distinct from Agenerase, VX-175, and
other currently marketed protease inhibitors.

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 36.1 million individuals 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

5

non-infectious viral particles. Currently, more than 198,000 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 seven different PIs vying for a share of the
market. Worldwide sales of HIV PIs were an estimated $1.75 billion in 2000, and
U.S. sales alone were an estimated $1 billion in 2001.

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 efavirenz; and PIs, including Agenerase.

HEPATITIS C VIRUS (HCV) INFECTION

Vertex is developing two drug candidates that target hepatitis C viral
infection by different mechanisms. The most advanced compound is merimepodib
(VX-497), currently in Phase II development. Merimepodib targets hepatitis C
indirectly through the inhibition of inosine 5'-monophosphate dehydrogenase. The
second compound, VX-950, is in preclinical development. It targets the hepatitis
C virus directly, by inhibiting the hepatitis C protease.

Identified in 1989, hepatitis C (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 Centers for Disease Control and Prevention (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 as many as
185 million chronic carriers of the virus worldwide. Currently, there is no
vaccine available to prevent hepatitis C infection. The current standard
treatment of hepatitis C is a combination of pegylated interferon-alpha and
ribavirin. At present, however, approximately 50% of patients still fail to show
long-term sustained response to pegylated interferon-alpha/ribavirin combination
therapy. As a result, new safe and effective treatment options for HCV infection
are needed.

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 merimepodib
and second generation compounds resulting from our IMPDH research and
development program.

Our lead compound, merimepodib, 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 merimepodib 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
merimepodib indicating that merimepodib, when given as monotherapy to HCV
patients who were unresponsive to prior treatment with interferon-alpha, was
well tolerated and appeared to reduce levels of serum alanine aminotransferase,
a marker of liver inflammation, in HCV patients treated for 28 days.

We conducted a Phase II study of merimepodib combined with interferon-alpha
in treatment-naive patients with HCV infection in order to assess the safety,
tolerability and clinical activity of the combination of merimepodib and
interferon. The viral load data from this study showed a trend toward enhanced
antiviral activity in patients given one of two doses of merimepodib combined
with interferon as compared to patients receiving interferon alone. This is
consistent with an additive antiviral effect mediated by merimepodib, when given
in combination with interferon-alpha. Recent IN VITRO data demonstrates that
merimepodib also has an additive antiviral effect in combination with pegylated
interferon and ribavirin. We have initiated a 12-month triple combination Phase
II study with merimepodib, pegylated interferon, and ribavirin with the goal of
evaluating safety, pharmacokinetics, and clinical activity, including an
assessment of whether patients show an enhanced additive antiviral

6

effect as a result of the triple combination. The study is designed to allow
patients to exit the study or continue treatment after six months.

We have two additional IMPDH inhibitors, VX-148 and VX-944, in development
or preclinical development, targeting antiviral and autoimmune indications.
VX-148 and VX-944 are chemically distinct from merimepodib. We began Phase I
clinical development of VX-148 in December 2000. Three Phase I studies have been
completed. We anticipate moving VX-148 into a Phase II clinical study in an
autoimmune indication during the second half of 2002. In addition, we plan to
begin Phase I clinical studies of VX-944 this year. 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).

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, often 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.

HEPATITIS C PROTEASE PROGRAM

In December 2001, Vertex and Eli Lilly selected VX-950 (LY570310), a potent,
oral HCV protease inhibitor, for preclinical development. We believe that this
compound is the first reported drug development candidate of a new class of
antiviral drugs being studied to inhibit hepatitis C NS3-4A protease, an enzyme
considered essential for HCV viral replication. We believe that therapeutics
such as VX-950 which directly target viral replication may significantly
increase the number of patients that achieve a complete viral response, in which
the virus is cleared from the body permanently. VX-950 has shown promising
results in cellular assays and preclinical studies. VX-950 has the potential to
become a first-in-class therapeutic and could provide an important treatment
advance for individuals with chronic HCV infection. Under our agreement, Eli
Lilly holds primary responsibility for formulation, preclinical and clinical
development, and global marketing. We will receive royalties on product sales
and retain the option to supply all of Eli Lilly's commercial drug substance
supply needs. We have ongoing drug discovery efforts in the area of HCV protease
inhibitors and selection of one or more additional drug candidates in the next
12-18 months is possible.

SEPSIS

In 2001, Vertex advanced VX-799, a small molecule caspase inhibitor, into
preclinical development targeting the treatment of sepsis. Sepsis is a
life-threatening bacterial infection of the bloodstream that overwhelms the
body's immune system and most commonly occurs among patients who have underlying
conditions such as trauma, surgery, burns, cancer and pneumonia. Caspases play
integral roles in both programmed cell death and inflammation, which have been
implicated in sepsis. Sepsis may progress to multi-organ failure, shock and
death. A potent caspase inhibitor may have the potential to provide a powerful
treatment option for sepsis patients. Sepsis affects approximately 700,000
individuals in the U.S. each year and an additional 1.2 million in Europe and
Japan. Sepsis results in an estimated 200,000 deaths each year.

Vertex is currently conducting a range of preclinical studies with VX-799,
and we anticipate that clinical studies will begin in 2003. Under an agreement
signed in 2000, Serono S.A. holds an option to

7

develop and commercialize VX-799 in Europe and as part of a joint venture with
Vertex in the U.S. Taisho holds the option to develop and commercialize VX-799
in Japan and certain Asian markets.

BACKGROUND: CASPASES AND SEPSIS

Caspases are a family of 11 enzymes that play roles in numerous biological
processes, including programmed cell death (apoptosis) and inflammation. More
information on caspases is available in the section titled "Caspase Inhibitor
Program." VX-799 has produced encouraging results in an apoptosis-dependent
model of organ failure and several models of bacterial-induced sepsis. VX-799
may also have the potential to treat other diseases in which increased caspase
activity is implicated.

INFLAMMATION AND AUTOIMMUNE DISEASE

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 is conducting a 250 patient Phase II study in
rheumatoid arthritis to evaluate clinical activity using standard measures of
response to treatment, including the American College of Rheumatology (ACR)
response criteria, which measure improvement in patient-and
professionally-reported disease severity and activity. We anticipate that
Aventis will begin a Phase II study in an additional indication in 2002.
Inhibitors of ICE may have application to a wide range of chronic and acute
inflammatory diseases, such as rheumatoid arthritis, osteoarthritis, congestive
heart failure, psoriasis and inflammatory bowel disease.

In 2000, Aventis completed a Phase IIa 28-day clinical trial of pralnacasan
in patients with rheumatoid arthritis to evaluate the safety and
pharmacokinetics of multiple doses of pralnacasan. Results showed dose-dependent
suppression of interleukin-1 beta production, an enzyme that plays a role in
inflammation and tissue damage. A Phase I clinical trial of the compound,
completed by Aventis in 1999, showed that the compound was well-tolerated in
humans in a range of single doses. Under our 1999 agreement, 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. We will
receive royalties on any sales of pralnacasan.

Vertex has continued research into second generation ICE inhibitors, as well
as other caspase inhibitors. In 2000, we advanced VX-765, an ICE inhibitor
representing a chemical class distinct from pralnacasan, into preclinical
development. Preclinical data reported in 2001 showed that VX-765 reduces
inflammation and cytokine levels in animal dermatitis and arthritis models. We
may begin Phase I clinical studies with VX-765 by the end of 2002. 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 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, a
type of white blood cell. 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 observed in joint tissues during disease flare-ups, and IL-1 beta
and IL-18 are known to activate osteoclasts, a cell type important in bone
erosion characteristic of rheumatoid arthritis. In mice in which arthritis is
induced by collagen

8

immunization, treatment with pralnacasan significantly reduces the severity of
arthritis compared to vehicle-treatment.

There are more than 6 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-Registered Trademark- (etanercept) and
Remicade-Registered Trademark- (infliximab) provide a strong rationale for a new
kind of disease-modifying therapy that involves inhibition of the cytokine tumor
necrosis factor (TNF) alpha. In 2001 Kineret-Registered Trademark- (anakinra)
became the first therapy approved for rheumatoid arthritis targeting the
cytokine IL-1b. However, these agents are injectable, and can be inconvenient
and painful to administer. We believe that an oral cytokine inhibitor such as
pralnacasan may have significant commercial 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

The p38 MAP kinase is a human enzyme involved with the onset and progression
of inflammation and apoptosis. This enzyme plays a central role in regulating
the cytokines TNF-alpha and IL-1 beta. We have extensive clinical experience
with p38 MAP kinase inhibitors, which hold the potential to be a powerful and
broadly useful new class of oral anti-inflammatory drugs. Vertex and Kissei
selected VX-745 as a drug development candidate in 1998. In 2001, we obtained
what we believe is the first clinical "proof of principle" data correlating
inhibition of p38 MAP kinase with a significant anti-inflammatory effect,
although we subsequently suspended development of VX-745 based on adverse
neurological effect findings in long-term, high dose studies in one of two
species of animals. We have refocused our p38 inhibitor development efforts
around two second generation compounds, VX-702 and VX-850, which do not cross
the blood brain barrier and which we believe have commercial advantages over
VX-745. Phase I studies of one or both drug candidates are scheduled to begin in
the first half of 2002. Both VX-850 and VX-702 represent chemical classes that
are distinct from VX-745. 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, Crohn's disease, certain
hematologic disorders, congestive heart failure, and neurological diseases such
as stroke.

In a collaboration with Kissei that began in 1997, Vertex is pioneering the
discovery and development of novel p38 MAP kinase inhibitors. Under the
agreement, Vertex holds development and commercial rights in the United States
and Europe for its p38 MAP kinase inhibitors. Kissei holds development and
commercial rights in Japan and certain Asian countries for VX-745 and VX-702.

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, 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-702 or VX-850 has significant dosing advantages over other available
therapies.

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

9

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 merimepodib. We are
completing Phase I development of VX-148, and Phase II studies are planned to
begin during the second half of 2002. Preclinical studies of VX-944 are ongoing.

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.

NEUROLOGICAL DISEASES

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
to nervous system tissues. Based on our extensive research in the field of
immunosuppressive drugs, we have generated a large number of compounds, known as
neurophilin ligands or neurophilin compounds, 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
seeking to determine the mechanism of action of neurophilin ligands.

RESEARCH COMPOUNDS

We are engaged in a worldwide strategic collaboration with Schering AG
(Germany) for research, development and commercialization of neurophilin ligands
for the treatment of a variety of neurological disorders. During 1999, we
announced that orally administered neurophilin compounds

10

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.
We continue to characterize the potential of compounds from this program in a
variety of neurological disease models. 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. Our research program remains active in this area, with the
objective of selecting additional compounds for preclinical development in the
future.

TIMCODAR

Timcodar dimesylate is a novel, orally administered drug candidate 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 (ALS). A single-dose Phase I study of four
different doses of timcodar in healthy volunteers was completed in 1998,
providing support for Phase II clinical development in the indication of
diabetic neuropathy. IN VIVO results in animals have shown that timcodar can
prevent neural dysfunction in models of neuropathies. 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. We have completed a Phase IIa
28-day study of more than 70 patients with diabetic neuropathy. The results
showed that timcodar is bioavailable and well-tolerated at a range of doses. An
evaluation of timcodar following topical administration of capsaicin in 62
healthy volunteers has also been completed. This study was designed to measure
timcodar's ability to accelerate innervation following capsaicin-induced
denervation of the epidermal layer. A goal was to obtain data showing that
timcodar has a positive effect in recovery of human nerve function. The results
of the study indicate that timcodar was well tolerated but did not enhance
epidermal nerve fiber regeneration significantly relative to placebo. Given
these findings, we do not currently plan to conduct further development of
timcodar for the treatment of neurodegenerative diseases.

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. We are
actively seeking corporate collaborators for our MDR program to help support
Phase III clinical development and commercialization.

The American Cancer Society estimates that during 2001 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.

11

GENETIC DISORDERS

At the end of 2001, Vertex advanced VX-563 into preclinical development.
VX-563 is an orally available compound with potential application across a range
of genetic diseases. It is being tested IN VITRO, and IN VIVO in animal models,
for several disease indications ranging from sickle cell disease to Huntington's
disease. A Phase I clinical study could potentially be initiated in either late
2002 or early 2003.

VX-563 is thought to exert its effects pleiotropically, and we are working
to better understand its exact mechanism of action in particular disease states.
One mechanism that appears to be important is the inhibition of histone
deacetylation. Histones are small proteins that bind tightly to DNA and play a
crucial role in the packing and folding of DNA into the nucleus. The acetylation
state of histones can modulate gene expression, and VX-563 has been shown to
affect histone acetylation IN VITRO.

Preclinical studies have demonstrated that VX-563 can selectively stimulate
embryonic or fetal globin gene expression in a variety of experimental systems,
suggesting that VX-563 may have therapeutic potential for the treatment of
sickle cell disease (SCD). Current treatments are ineffective and may require a
multi-disciplinary program including antibiotics, pain management, intravenous
fluids, blood transfusion, and surgery. Hydroxyurea is the only chronic drug
therapy commonly used to treat SCD. Due to safety concerns, hydroxyurea is
currently only used in patients with severe disease.

VX-563 has the potential to be a novel, first-in-class treatment for SCD
with the potential to treat as many as 70,000 patients who currently have
limited treatment options. VX-563 also has potential application to other
genetic disorders such as Huntington's disease, cystic fibrosis, and a-1
antitrypsin deficiency.

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 significantly enhanced
our 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
advanced biology, biophysics, chemistry, automation and information technologies
in a coordinated and simultaneous fashion throughout the discovery process. The
goal of this interdisciplinary integration is 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.

GENE FAMILY-BASED DRUG DISCOVERY. Vertex has pioneered a novel approach to
drug discovery in which drugs are designed in parallel across gene families.
Vertex's proprietary, systematic, gene family-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. This
approach represents an intersection of medicinal chemistry with genomics: the
organized pursuit of small molecule drugs directed at genomically identified
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 a target or group of 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 starting
points for inhibiting other targets in the caspase gene family. In

12

our kinase program, we have filed patents on more than 340 different chemical
scaffolds that inhibit one or more kinases.

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 the most efficient way to exploit 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 a single target research program underway for specific
infectious diseases, in areas of high commercial potential and significant unmet
medical need.

MULTI-TARGET RESEARCH PROGRAMS

We have four major multi-target research programs underway that utilize our
parallel drug design approach in the kinase, caspase, protease, and ion channel
gene families. We believe that our integrated approach and our proprietary
technologies allow 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 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. In the next six to seven
years, we envision advancing eight kinase inhibitors into clinical development
targeting multiple therapeutic areas.

13

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 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."

In addition, we have made key research advances in our study of glycogen
synthase kinase 3-b (GSK3-b), an enzyme involved in the regulation of blood
glucose and a potentially important diabetes target. In June 2001, we reported
the three-dimensional atomic structure of GSK3-b. Our understanding of the
structural biology of this enzyme is potentially useful in driving medicinal and
computational chemistry efforts for enzymes across the entire kinase family.

Vertex has 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. As part of our kinase research program, we have designed numerous
kinase inhibitors that have demonstrated pharmacodynamic activity in animal
models of diabetes, cancer, restenosis, and stroke. We expect to advance two or
more 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-850 and VX-702, our compounds 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 PROGRAM

Caspases are a subfamily of proteases which play specific roles in apoptosis
and inflammation. The human caspase family presently includes 11 structurally
related enzymes. We are designing novel small molecule inhibitors of selected
caspase enzyme targets to treat a variety of diseases in which inflammation and
apoptosis play a role. Our scientists are leveraging the expertise gained
through our successful design and optimization of ICE inhibitors. We applied our
knowledge of ICE and other caspases to the design of VX-799, a small molecule
caspase inhibitor with the potential to treat sepsis, and we anticipate
selecting an additional drug candidate for clinical development in the years to
come.

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. 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 gained 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

14

medicinal and computational chemistry tools, Vertex scientists made 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.

In September 1999, Vertex signed an expanded agreement with Aventis to
collaborate on the development of pralnacasan, an orally active inhibitor of
ICE. 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.

PROTEASE PROGRAM

We have a broad-based drug discovery effort targeting the human protease
family. The protease gene family consists of approximately 400 proteases that
play a role in many different diseases in several therapeutic areas. As in our
kinase program, we are using an approach that leverages structural similarity to
create chemical scaffolds applicable to a range of protease targets. We intend
to leverage our expertise in proteases to discover and develop additional drug
candidates targeting members of the protease family. We are currently
establishing a research program in beta-secretase, an aspartic protease
implicated in the pathogenesis of Alzheimer's disease, and will target
additional proteases in the coming years.

Vertex has broad experience across the protease family and has successfully
designed drug candidates targeting aspartyl, cysteine, and serine proteases,
representing three of the four protease subfamilies. Our efforts targeting HIV
protease (an aspartyl protease) have resulted in one marketed drug, Agenerase,
and two additional drugs in clinical development. Vertex, together with Aventis,
Serono and Taisho have pioneered research and development efforts to design
drugs targeting caspases (which are cysteine proteases). Our lead drug candidate
targeting caspase-1, pralnacasan, is now in Phase II clinical development. We
also have two additional drug candidates targeting caspases in development. In
2001, Vertex and Eli Lilly advanced VX-950, an inhibitor of HCV protease (a
serine protease), into preclinical development. We believe our extensive
experience in proteases will allow us to design additional drugs targeting
protease enzymes that have high clinical and commercial potential.

ION CHANNEL PROGRAM

Vertex is making a significant investment in the creation of a broad-based
ion channel drug discovery effort that incorporates our medicinal chemistry and
modeling expertise, augmented by significant technology and expertise obtained
through our acquisition of Aurora. The ion channel gene family contains numerous
druggable targets that play a role in the pathogenesis of cancer as well as
inflammatory, cardiovascular and metabolic diseases. Existing therapies such as
amlodipine and nifedipine, which are calcium channel blockers for the treatment
of hypertension, provide a strong rationale for developing drugs targeting ion
channels. Important targets for a range of therapeutic indications are
potentially found across all ion channel subfamilies. For example, lamotrigine
and carbamezepine are sodium channel inhibitors for the treatment of epilepsy.
Vertex will utilize its expertise in assay development and screening to advance
discovery efforts within this family. We also have extensive experience in the
development of proprietary and highly sensitive instruments which detect changes
in a cell membrane's electrical potential due to ion channel activity. We are
developing next generation ion channel screening technology to enable the
discovery of ion channel modulators with appropriate drug-like characteristics.

15

ADDITIONAL GENE FAMILIES

Vertex plans to utilize its proprietary gene family-based platform and
experience in structure based drug design to pursue targets in additional,
medically important gene families. We have exploratory efforts underway in
phosphatases, G protein coupled receptors (GPCRs), and nuclear receptors.

SINGLE TARGET RESEARCH PROGRAM

BACTERIAL GYRASE

We are engaged in the discovery of novel antibiotics that target DNA gyrase
B, an essential enzyme found in many bacteria. DNA gyrase is utilized during the
bacterial replication process. 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-positive and gram-negative infections in various treatment
settings. Existing gyrase inhibitors, which work by interacting with the gyrase
A subunit, achieved sales of more than $2.85 billion in 2000. 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 2002.

KEY COMPONENTS OF OUR TECHNOLOGY PLATFORM

We have created an integrated technology platform which employs a variety of
technologies, and which uses information from many different scientific
disciplines 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. 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. Site-directed mutagenesis is
used to identify critical residues for drug interaction in the active site of a
molecular target. Our patented GenomeScreen technology allows us to identify and
validate targets by scanning the genome of living human cells and identifying
those genes activated or repressed in various disease states. We have used
GenomeScreen to assist us in mapping gene activation and cell signaling pathways
and in characterizing poorly understood cellular processes.

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 and 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 up to 10(14) compounds in one
day to select fewer than 100 or as many as 1,000 compounds or more for synthesis
and traditional screening, and repeat the cycle thereafter 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 that emerges through IN SILICO

16

screening processes 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 the desired properties of an oral drug.

ASSAY TECHNOLOGIES. Our 2001 acquisition of Aurora has provided us with
premier capabilities in assay development and screening to rapidly generate
large numbers of high quality lead compounds and drug candidates across all
major gene families. We can now conduct 200 assays per year, a level of
screening capability on par with that of major pharmaceutical companies. We are
leveraging our abilities in assay development, screening, proprietary reagents,
proteomics, and ADME/toxicology to accelerate drug discovery. Our assay
technology platform allows us to identify medically important targets and small,
drug-like molecules early in the discovery process.

ASSAY DEVELOPMENT. Our patented cell-based assay technologies include
GenomeScreen and GeneBLAzer. GeneBLAzer, which enables fluorescence-activated
cell sorting, is readily adapted to a broad range of target classes. In
addition, we utilize fluorescence polarization technology to study molecular
interactions and have developed a number of proprietary fluorescent proteins and
substrates. Drug discovery-related applications of our patented fluorescent
proteins include various methods of functional genomics, high throughput
screening assays, and gene profiling to assess the potential toxicity of
compounds.

HIGH THROUGHPUT SCREENING. Our patented ultra high throughput screening
(UHTSS) platform is designed to screen over 100,000 compounds per day. The UHTSS
Platform combines compound management, plate replication, assay preparation, hit
(potential lead) identification, selection and re-tests of the hits,
fluorescence detection and data analysis into one fully-integrated and automated
system. The ultra high throughput capability is achieved through the use of our
NanoWell-Registered Trademark- Assay Plate, which contains 3,456 wells in a
standard microplate footprint.

ION CHANNEL PLATFORM. Our patented universal ion channel technology
platform, which includes the VIPR subsystem, our proprietary voltage ion sensor
probes and voltage ion probe reader, was first developed in 1997. This platform
facilitates the rapid generation of screening assays and the high throughput
screening of ion channel targets by optically measuring changes in membrane
potential in live cells in an automated, microtiter plate format. The second
generation, VIPR II subsystem is capable of screening in 96-well and 384-well
microplate formats with a significant increase in throughput over the original
VIPR subsystem. We are developing next-generation ion channel screening
technology to facilitate drug discovery in this area.

CORPORATE COLLABORATIONS

We have entered into corporate collaborations with pharmaceutical companies
that provide financial and other resources, including capabilities in research,
development, manufacturing, and sales and marketing, to support our research and
development programs. At present, we have the following major corporate
collaborations:

NOVARTIS PHARMA AG

In May 2000 we entered into an agreement with Novartis 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

17

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 of 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. 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 from us for development. 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 pralnacasan. HMR and Rhone-Poulenc
Rorer merged to form Aventis in December 1999. Aventis has an exclusive
worldwide license to develop, manufacture and market pralnacasan, 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 pralnacasan. 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
pralnacasan 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.

18

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 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 will pay us a royalty on any 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 the
agreement 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. We are responsible for the manufacture of bulk
product for Kissei. Under the collaborative agreement, Kissei agreed to pay 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 and VX-702. 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 Eli Lilly covering the
development of novel small molecule compounds to treat hepatitis C infection,
including VX-950. Vertex and Eli Lilly will jointly manage the research,
development, manufacturing and marketing of drug candidates emerging from the
collaboration. We will have primary responsibility for drug design, process
development and pre-commercial drug substance manufacturing, and Eli 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 Eli 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. Under the terms of the agreement, Eli
Lilly will pay us up to $51 million, comprised of a $3 million payment made in
June 1997, $33 million of product

19

research funding over six years and $15 million of development and
commercialization milestone payments. Eli 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 research, development and commercialization of HIV protease
inhibitors, including Agenerase (amprenavir), its prodrug, VX-175 (also referred
to as GW433908), and VX-385, a chemically distinct protease inhibitor.
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 of the agreement by
GlaxoSmithKline will relieve it of its obligation to make further
commercialization and development milestone and royalty payments, and will end
any license granted 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.

AURORA BIOSCIENCES

OVERVIEW

We acquired Aurora Biosciences in July 2001. Aurora uses proprietary
advances in biology, chemistry and automation to accelerate the discovery of new
medicines. Aurora's core technologies include a broad portfolio of proprietary
fluorescence assay technologies and screening platforms designed to provide an
integrated solution for drug discovery. Its fluorescence assay technologies
include GeneBLAzer-TM-, GenomeScreen-TM-, Vivid-TM- and PhosphoryLIGHT-TM-
technologies, as well as a broad collection of fluorescent proteins. Aurora's
screening platforms include its ultra-high throughput screening system, the
UHTSS-Registered Trademark- Platform, and its automated master compound store,
the AMCS Platform, as well as its ion channel screening platform, which includes
proprietary voltage sensor probes and voltage ion probe reader, the VIPR-TM-
subsystem. Aurora also provides target discovery, assay development, screening
and other services to its customers.

Aurora's technologies have been used by over 20 major life sciences
companies and research organizations, including:

- - Allergan - Genentech
- - American Home Products - The Hereditary Disease Foundation
- - Bristol-Myers Squibb - Johnson & Johnson
- - The Cystic Fibrosis Foundation - Merck & Co.
- - Families of SMA - NV Organon Laboratories
- - F. Hoffmann-La Roche - Pfizer
- - GlaxoSmithKline - Pharmacia & Upjohn

20

A number of these organizations currently contract directly with Aurora for
assay development, screening, target identification and other services. The
agreements vary in duration and size and typically provide that Aurora will
develop assays, deliver instrumentation, and provide ongoing scientific and
technical support.

TECHNOLOGIES, PRODUCTS AND SERVICES

Aurora focuses on the development and commercialization of technologies,
products and services that provide solutions to bottlenecks in the drug
discovery process. Aurora has developed and commercialized a broad range of
technologies and products to facilitate drug discovery. Its technologies and
products assist scientists by improving their ability to rapidly identify
targets, develop assays and screen compounds to be used as potential new
medicines.

TARGET IDENTIFICATION AND ASSAY DEVELOPMENT

- GENOMESCREEN TECHNOLOGY. Aurora uses its patented GenomeScreen technology
to identify and validate targets by scanning the genome of living human
cells and identifying those genes activated or repressed in disease
states. GenomeScreen also facilitates the rapid development of cell-based
assays for endogenously expressed targets, without having to utilize
cloned cDNAs for those targets. Aurora has used this technology to
generate hundreds of cell-based assays. In addition, Aurora has used
GenomeScreen to assist in mapping gene activation and cell signaling
pathways and characterizing poorly understood cellular processes.

- GENEBLAZER TECHNOLOGY. Aurora's patented GeneBLAzer technology enables
scientists to rapidly develop cell-based assays with
fluorescence-activated cell sorting (FACS). GeneBLAzer is readily adapted
to a broad range of target classes, including G protein-coupled receptors
(GPCRs), chemokine receptors, transcription factors and intracellular
cis-acting proteases. Using GeneBLAzer, Aurora has developed over 150
assays relating to various therapeutic areas, including inflammation,
oncology, metabolic, infectious and central nervous system diseases, for
our collaborators and ourselves.

- FLUORESCENCE POLARIZATION TECHNOLOGY. Scientists use Aurora's fluorescence
polarization technology to study molecular interactions in a number of
drug discovery-related applications, including protein-DNA interactions,
immunoassays, protease assays, epitope mapping, DNA hybridization and
receptor-ligand binding studies. Aurora's fluorescence polarization
technology includes its Beacon-Registered Trademark- fluorescence
polarization system and a wide range of homogeneous, solution-based
high-throughput screening assays.

- FLUORESCENT PROTEINS. Fluorescent proteins are widely used as research
tools, with over 2,300 related publications to date. Drug
discovery-related applications of Aurora's patented fluorescent proteins
include various methods of functional genomics, high throughput screening
assays and gene profiling to assess the potential toxicity of compounds.
Aurora's issued patents on fluorescent proteins, which include over 400
claims, are directed toward nucleic acids encoding fluorescent proteins,
the fluorescent proteins themselves, various fusion proteins and methods
of use.

- UNIVERSAL G-PROTEINS. Scientists can use Aurora's patented universal
G-proteins to measure the activity of different kinds of receptors in
living human cells and to identify the function of receptors without
previously known function.

- VIVID FLUOROGENIC SUBSTRATES. Aurora's patented Vivid fluorogenic
substrates are useful for the rapid assessment of individual compounds and
compound libraries to determine whether they may have potentially
unfavorable interactions with key metabolic enzymes known as cytochrome
P450 isozymes. Currently, these unwanted characteristics are identified
later in the drug development process, after significant investment has
been made in chemistry and pharmacology research.

21

- PHOSPHORYLIGHT TECHNOLOGY. Aurora's PhosphoryLIGHT technology facilitates
the development of assays to measure the activity of enzymes controlling
cellular activity. These enzymes are significant therapeutic targets for a
wide range of diseases, including cancer, inflammation, nervous system
conditions and metabolic diseases.

- CELLSENSOR TECHNOLOGY. Aurora uses its CellSensor technology to identify
the function of novel biologics (such as orphan secreted proteins) and
compounds.

- LRET TECHNOLOGY. Aurora uses its luminescent resonance energy transfer
(LRET) technology to develop biochemical and cell-based assays that
require time resolved readouts. Time resolved assay formats avoid many of
the common artifacts found in standard fluorescence readouts.

ION CHANNEL ASSAY DEVELOPMENT AND HIGH THROUGHPUT SCREENING

Aurora's patented ion channel technology platform, which includes the VIPR
subsystem, its proprietary voltage sensor probes and voltage ion probe reader,
was first released in 1997. This platform facilitates the rapid generation of
screening assays and the high throughput screening of ion channel targets by
optically measuring changes in membrane potential in live cells in an automated,
microtiter plate format. In late 2000, Aurora began marketing its
second-generation voltage ion probe reader, the VIPR II subsystem, which has
increased functionality and higher screening capacity. The VIPR II subsystem is
capable of screening in 96-well and 384-well microplate formats, with a
significant increase in throughput over the original VIPR subsystem. Because
Aurora's ion channel technology platform focuses on changes in membrane
potential, it is a universal platform that is independent of the particular ion
being transported by the target channel. It is applicable to the majority of ion
channel families, including voltage-gated and ligand-gated potassium, sodium,
calcium and chloride channels, as well as other types of channels. Using this
patented functional assay and screening technology, Aurora has developed over 50
assays relating to therapeutic areas, including cardiovascular, metabolic and
nervous system diseases, for our collaborators and ourselves.

ASSAY DEVELOPMENT AND SCREENING SERVICES

Aurora provides assay development and screening services which generate
revenue and also provide Aurora with valuable experience working with difficult
drug targets.

PROTEIN MANUFACTURING, SALES AND SERVICES

Aurora produces and sells proteins and provides protein cloning, expression
and purification services through its subsidiary PanVera. Pan Vera has produced
hundreds of recombinant proteins for commercial sale, focusing on protein
families that are of broad interest from a therapeutic perspective, including
nuclear receptors, protein kinases and drug metabolizing enzymes.

INTELLECTUAL PROPERTY

We vigorously pursue patents to protect our intellectual property. As of
December 31, 2001, we had 150 issued U.S. patents and 186 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. As of January 18, 2002, Aurora and its subsidiary PanVera owned
or exclusively licensed 84 issued patents covering their technologies and had
received notices of allowance with respect to five patent applications. Certain
aspects of Aurora's fluorescent protein technology and ion channel technology
are exclusively licensed from the Regents of the University of California.

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

22

targets, compounds we are developing to modulate those targets, and methods of
using those 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 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 and advisors to enter into confidentiality agreements that prohibit
the disclosure of Vertex confidential information to anyone outside Vertex.
These agreements typically require disclosure and assignment to Vertex of ideas,
developments, discoveries and inventions made by employees, consultants and
advisors.

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 have applications pending in the United States and other
countries claiming VX-175 and related compounds. We also have applications
pending in the United States and other countries claiming VX-385 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 merimepodib.
We also have applications pending in the United States and other countries
claiming VX-148, VX-944, and related compounds.

- 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 pralnacasan, the active metabolite
of pralnacasan, and several different classes of compounds useful as
inhibitors of ICE, as well as pharmaceutical compositions containing those
compounds and methods of using those compounds to treat ICE-related
diseases. 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. We also have applications pending in the United States and
other countries claiming VX-765 and related compounds.

- 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. We also have applications pending in the United
States and other countries claiming VX-702, VX-850, and related compounds.

23

- issued United States patents covering various classes of chemical
compounds and their use to treat a wide variety of neurological disorders.

- issued United States patents and pending applications covering assays
useful to evaluate potential inhibitors of hepatitis C protease. We also
have issued United States patents covering the X-ray crystal structures of
hepatitis C protease and hepatitis C helicase, including the use of those
structures to develop hepatitis C protease inhibitors and hepatitis C
helicase inhibitors, respectively. Other issued United States patents and
worldwide pending applications cover VX-950, additional hepatitis C
protease inhibitors and hepatitis C helicase inhibitors.

- applications pending in the United States and other countries claiming
VX-799 and related compounds. We also have filed applications claiming
other classes of caspase inhibitors and a caspase target discovered under
our caspase inhibitors program.

- issued United States patents claiming pharmaceutical compositions
comprising VX-563 and related compounds, and methods of treating various
diseases with such compositions.

- filed applications claiming inhibitors of multiple kinases, as part of our
kinase research programs.

- filed applications and an issued United States 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

24

reasonable terms, we may not be able to commercialize our products as planned.
We have limited experience in manufacturing pharmaceutical or other products or
in conducting manufacturing testing programs required to obtain FDA and other
regulatory approvals, and there can be no assurance that we will further develop
such capabilities successfully.

Since most of our potential products are at an early stage of development,
we will need to improve or modify our existing manufacturing processes and
capabilities to produce commercial quantities of any drug product economically.
We cannot quantify the time or expense that may ultimately be required to
improve or modify our existing process technologies, but it is possible that
such time or expense could be substantial.

The production of our compounds is based in part on technology that we
believe to be proprietary. We may license this technology to contract
manufacturers to enable them to manufacture compounds for us. In addition, a
contract manufacturer may develop process technology related to the manufacture
of our compounds that the manufacturer owns either independently or jointly with
us. This would increase our reliance on such manufacturer or require us to
obtain a license from such manufacturer in order to have our products
manufactured.

Aurora manufactures the UHTSS Platform, the AMCS Platform, the sample
distribution system, and the VIPR and VIPR II at its facilities in San Diego,
California, except certain components of the UHTSS Platform and AMCS Platform,
which are purchased from Universal Technologies, Inc., and the enclosures for
the UHTSS Platform and AMCS Platform, which are purchased from Environmental
Specialties, Inc.

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.

There are a number of companies that compete with Aurora in various aspects
of its business. For instance, companies such as Cellomics, Discovery Partners
International, Evotec and Molecular Devices develop and commercialize
proprietary research tools, reagents, instruments and systems which compete with
Aurora's proprietary screening platforms and reagents. There are also a number
of companies such as Albany Molecular Research, ArQule, Array Biopharma,
Cambridge Drug Discovery, Discovery Partners International, Oxford Asymmetry,
Pharmacopeia and Tripos, that develop and commercialize compound libraries and
use chemistry capabilities to test and screen potential drug candidates.

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

25

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.

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 drug 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

26

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 Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state and local regulations.

EMPLOYEES

As of December 31, 2001, we had more than 1,000 employees, including
approximately 570 in research and development, 260 in support services and 161
in general and administrative functions. Approximately 66 of these employees
were located at our U.K. research and development facility, 103 of these
employees were located at our PanVera facility in Madison, Wisconsin, and
350 of these employees were located at our facility in San Diego (including
Aurora). Our scientific staff members (246 of whom hold Ph.D. and/or M.D.
degrees, including 52 at Aurora and PanVera) 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.

27

EXECUTIVE OFFICERS AND DIRECTORS

The names, ages and positions held by our executive officers and directors
are as follows:

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. Joshua 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. Boger is the brother of Mr. Kenneth
Boger, the Company's Senior Vice President and General Counsel.

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 and became President of Vertex in
December 2000. 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

28

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 he 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 The 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.

Mr. Kenneth Boger joined Vertex as Senior Vice President and General Counsel
in October 2001. He came to Vertex from the law firm of Kirkpatrick & Lockhart,
where he was a partner specializing in business and corporate law and was a
member of the firm's Management Committee. Prior to the merger of Kirkpatrick &
Lockhart with the Boston law firm of Warner & Stackpole in 1999, Mr. Boger was a
partner at Warner & Stackpole, where he served on the Executive Committee from
1988 to 1997. Mr. Boger holds a B.A. in history from Duke University, an MBA
from the Graduate School of Business at the University of Chicago, and a J.D.
from Boston College Law School. Mr. Boger is the brother of Dr. Joshua Boger,
the Company's Chairman and Chief Executive Officer.

Dr. Coles joined Vertex as Senior Vice President, Commercial
Operations-Pharmaceutical Products in March, 2002. He came to Vertex from
Bristol-Myers Squibb, where he served in a variety of positions since joining
BMS in 1996, including Senior Vice President of Strategy and Policy, Senior Vice
President, Marketing and Medical Affairs for the Neuroscience, Infectious
Disease, and Dermatology Division, and Vice President, West Area
Sales--Cardiovascular and Metabolic Business Unit for U.S. Primary Care. Prior
to joining BMS, Dr. Coles was Vice-President of the Hypertension and Heart
Failure Business Group at Merck. Dr. Coles holds an M.D. degree from Duke
University, a Masters Degree in Public Health from Harvard Universty and a B.S.
degree from Johns Hopkins University.

Mr. Smith joined Vertex as Vice President and Chief Financial Officer in
October 2001. He came to Vertex from Ernst & Young, LLP, an accounting firm,
where he had served as a partner in their Life Science and Technology Practice
since 1999. He had various responsibilities in the accounting, auditing and
mergers and acquisitions groups. Mr. Smith initially joined Ernst & Young's U.K.
firm in 1987, and then joined their Boston office in 1995. Mr. Smith holds a
B.A. in Accounting and Finance from Manchester Metropolitan University, U.K., is
a member of the American Institute of Certified Public Accountants and is a
Chartered Accountant of England and Wales.

29

Mr. Wokasch joined PanVera in July 2001 and currently serves as President of
PanVera and, effective March 2002, as President of Aurora. Prior to joining
PanVera, Mr. Wokasch served as Chief Executive Officer and President of Gala
Design, Inc. Prior to Gala Design, he served as Vice President, Marketing and
Sales, at Promega Corporation. From 1997 to 1999, he was Senior Vice President
and Group President at Covance. Prior to 1997, Mr. Wokasch held various
management positions at Abbott Laboratories, as well as sales and marketing
positions at Merck & Co., Inc. He obtained his Bachelor of Science degree in
Pharmacy from the University of Minnesota.

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, as Vice President from 1990 to 1992, and as 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.

Dr. Collinson joined us as a member of the Board of Directors in July 2001.
He currently serves as a Partner at Forward Ventures. Prior to our merger with
Aurora in 2001, Dr. Collinson served as the President, Chief Executive Officer
and Chairman of the Board of Aurora. Before joining Aurora, Dr. Collinson served
as a consultant to Aurora from December 1998 to May 1999 and as Chief Executive
Officer of Andaris, Ltd., a privately held biopharmaceutical company, from
June 1998 to November 1998. Prior to Andaris, Dr. Collinson held senior
management positions with Glaxo Wellcome from December 1994 through June 1998,
most recently serving as Co-Chairman, Hospital and Critical Care Therapy
Management Team and Director of Hospital and Critical Care. Dr. Collinson
received his Ph.D. in physical chemistry from the University of Oxford, England
and his M.B.A. from Harvard University.

Mr. Conklin has served as our director since 1994. He served as Executive
Vice President of Schering Plough from 1986 to 1996, when he retired. 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, including that of Vice
Chairman. Dr. Sanders 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.,Genaera 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 as President and
Chief Executive Officer of Faulkner Hospital. She also serves as a director of
Hologic Inc.

30

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, New York University Cancer
Institute; Director, Skirball Institute of Biomolecular
Medicine.
Eugene H. Cordes, Ph.D.......... Professor of Medicinal Chemistry, College of Pharmacy and
Adjunct Professor of Chemistry, College of Literature,
Science and the Arts, University of Michigan, Ann Arbor.
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 Art 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 the Division of
Infectious Disease, University of Colorado Health Sciences
Center.
Dr. Roger Tsien, Ph.D........... Investigator, Howard Hughes Medical Institute; Professor of
Pharmacology and Professor of Chemistry and Biochemistry,
University of California, San Diego.

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.

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's share of the worldwide protease inhibitor market may decrease
due to competitive forces and market dynamics. Six other HIV protease inhibitors
and a number of other products, including Gilead's Viread, 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 by clinicians 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. Further, although we co-promote Agenerase in the

31

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, 2001, our collaborators and we were conducting clinical
development of six product candidates resulting from our research and
development programs, including additional clinical trials of VX-175,
merimepodib, pralnacasan and VX-148, and preclinical testing of eight 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 of
compliance by the clinical sites to clinical trial protocols, and the
availability of clinical trial material. Delays in patient enrollment in
clinical trials 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,

32

merimepodib, pralnacasan, and VX-148. 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 $600 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 collaborators 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.

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 from 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.

33

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, we require the services
of highly qualified and trained scientists who 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.

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 2001, we added approximately 96 employees, increasing the
size of our organization by almost 21%, exclusive of approximately 450 employees
who came to us through our acquisition of Aurora, and we intend to continue to
grow. This growth, including growth resulting from the Aurora acquisition,
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 our growth effectively, there could be a material
adverse effect on our business.

34

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, 2001, we had 186 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, 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, and a suit filed by Oregon Health Sciences
University claiming part ownership of five of our neurophilia patents. Although
we believe that the ultimate outcome of these actions will not have a material
impact on our consolidated financial position, defense and prosecution of claims
such as those at issue in the Chiron and Oregon Health Sciences University
cases, 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 affected products, any of which could have a material adverse effect on
our consolidated financial position.

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 2002. We believe that
operating losses will continue beyond 2002, 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

35

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 existing collaborative agreements;

- payments under new 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 our convertible subordinated notes. The
terms of any additional debt financing may also, under certain circumstances,
restrict or prohibit us from making interest payments on our convertible
subordinated 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 or products in research or
development. Additional financing may not be available on acceptable terms, if
at all.

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 do not know whether we will be able to enter
into marketing and sales agreements with others on acceptable terms, if at all.
We may bring merimepodib to market ourselves. If so, we may not be able to
successfully develop our own sales and marketing force for this drug candidate
and our other drug candidates for which we have retained marketing or
co-promotion rights. 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 GlaxoSmithKline worldwide except the Far
East, and for pralnacasan to Aventis worldwide. Kissei has exclusive marketing
rights to Agenerase and VX-702 in Japan. 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.

36

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 $15 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.

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, 2001, our common stock traded
between $75.17 and $15.50. 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

37

- developments and market conditions for pharmaceutical and biotechnology
stocks, in general.

OUR OUTSTANDING INDEBTEDNESS MAY INCREASE OUR COSTS AND MAKE IT MORE DIFFICULT
TO OBTAIN ADDITIONAL FINANCING.

As of December 31, 2001, we had approximately $323 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 334,000 square feet of laboratory and
office space in seven facilities in Cambridge, Massachusetts. The leases have
expiration dates ranging from 2002 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 consecutive ten
year terms. 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.

We also lease approximately 81,200 square feet of laboratory and office
space in San Diego, California. The lease for this space will expire on
August 31, 2008, with an option to extend for up to two additional terms of
5 years each. We also sublease an additional 12,500 square feet of space for our
administrative functions in a nearby facility. The sublease for this additional
space will expire on March 31, 2004, subject to a six-month extension of the
sublease upon the mutual agreement of the parties. We also sublease an
additional 19,670 square feet of laboratory, office and equipment manufacturing
space under a sublease that will expire on July 31, 2002, subject to an option
to extend an additional three months expiring on October 31, 2002. To meet our
expected growth needs in San Diego, we are currently in negotiations for the
purchase of a parcel of land adjacent to our current main building on which we
plan to construct additional facilities.

We also currently occupy 1,236 square feet of space in Iowa City, Iowa under
a lease that expires April 30, 2003. Our Iowa facility houses the operations
Aurora acquired from Quorum Sciences in 2000. In addition, we own one building
in Madison, Wisconsin housing PanVera's operations, consisting of approximately
52,000 square feet for research and development, manufacturing, marketing and
sales administrative functions. The building is on leased land. The term of the
lease will expire on December 31, 2048, subject to our option to extend for an
additional twenty years.

We lease approximately 22,000 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
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 Vertex and Eli

38

Lilly 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 Vertex and
Eli Lilly 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 Eli Lilly, was granted a stay
in the infringement lawsuit, pending the outcome of the patent reexamination.
The reexamination process is still ongoing and the stay is still in effect.
However, a Notice of Intent to Issue a Reexamination Certificate has been issued
in two of the three Chiron patents in suit. While the length of the stay and the
final outcome of the lawsuit cannot be determined, we maintain that Chiron's
claims are without merit and intend to defend the lawsuit, if and when it
resumes, vigorously.

On December 7, 2001, Oregon Health Sciences University filed suit against
Vertex in the District Court of Oregon. The complaint in the suit seeks to name
Dr. Bruce Gold, an employee of Oregon Health Sciences University, as an inventor
and Oregon Health Sciences University as part owner of five of Vertex's
neurophilin patents. The suit stems from assays run on Vertex compounds by
Dr. Gold under a sponsored research agreement in 1996. We have investigated the
inventorship on these patents and believe that Dr. Gold is not an inventor,
Oregon Health Sciences University has no ownership interest in any of these
patents, and that the claims made in this complaint are without merit. We intend
to contest this claim vigorously.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 2001.

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 for the periods indicated the high and
low sale prices per share of the common stock as reported by Nasdaq:

The last sale price of the common stock on March 26, 2002, as reported by
Nasdaq, was $27.33 per share. As of March 26, 2002, there were 439 holders of
record of the common stock (approximately 23,500 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.

39

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)

The following selected financial data for each of the five years in the
period ended December 31, 2001 are derived from our consolidated financial
statements. This data should be read in conjunction with our audited
consolidated financial statements and related notes, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

(1) During 2001 we implemented a change in accounting principle relating to
revenue recognition that was retroactive to January 1, 2001. Please refer to
Note C: "Change in Accounting Principle--Revenue Recognition" in the notes
to our consolidated financial statements for further information.

(2) In the fourth quarter of 2000, we changed our method of accounting for
revenue recognition in conjunction with our adoption of the SEC's Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
which was retroactive to January 1, 2000. Please refer to Note C: "Change in
Accounting Principle--Revenue Recognition" in the notes to our consolidated
financial statements for further information.

40

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

We are a global biotechnology company. We seek to discover, develop, and
commercialize major pharmaceutical products independently and with
collaborators. Chemogenomics, our 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. We believe this approach, which targets gene families, has
formed the basis for successful drug discovery and for the advancement of drug
candidates by Vertex and its collaborators. We are developing several drug
candidates in commercial collaborations in which we retain rights to downstream
product revenue. We have four research facilities worldwide with over 1,000
employees. Our facilities are located in Cambridge, MA, Madison, WI, San Diego,
CA and Abingdon, UK.

Our first approved product is Agenerase (amprenavir), an HIV protease
inhibitor, which we co-promote with GlaxoSmithKline. We earn a royalty from
GlaxoSmithKline on sales of Agenerase. Agenerase has received approval in 34
countries worldwide, including the United States, the 15 member states of the
European Union (E.U.), and Japan, where the drug is sold under the trade name
Prozei. We have more than twelve drug candidates in development to treat viral
diseases, cancer, autoimmune and inflammatory diseases and neurological
disorders.

On July 18, 2001, we completed a merger with Aurora Biosciences Corporation
(Aurora). The merger unites Aurora's industry-leading cell biology capabilities
with Vertex's integrated drug discovery expertise creating a comprehensive,
scalable platform for systematically accelerating drug candidate output in
target-rich gene families. Aurora specializes in assay development, screening
and cell biology capabilities. Aurora generates revenue primarily from product
sales and services related to assay development and specialized screening
services and systems. We acquired all of Aurora's outstanding common stock in a
tax-free, stock for stock transaction, for approximately 14.1 million shares of
Vertex common stock; Aurora's outstanding options were converted into options to
purchase 2.6 million shares of Vertex common stock. The merger was accounted for
as a pooling of interests.

On March 1, 2001, Aurora completed a merger with PanVera Corporation
(PanVera). PanVera is a biotechnology company engaged in the development,
manufacture and supply of proteins for evaluation of targets and drug screening
assays for high-throughput screening. Aurora acquired all of PanVera's
outstanding common stock in a tax-free, stock for stock transaction. The merger
was accounted for as a pooling of interests. All references to "Aurora" refer to
the combined company of Aurora and PanVera.

Aurora will continue to operate as an independent commercial business,
although Vertex has incorporated certain of Aurora's existing and emerging drug
discovery technologies into its own gene family-based drug discovery platform.

All prior period consolidated financial statements presented have been
restated to include the consolidated results of operations, financial position
and cash flows of Aurora as though the merger had been in effect on the dates
indicated.

We have significant collaborations with large pharmaceutical companies
including Aventis, Eli Lilly, GlaxoSmithKline, Novartis, and Serono. With the
addition of Aurora, we have other collaborations with large pharmaceutical
companies for assay development, screening services and the development of
specialized screening platforms. These collaborations and contracts 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 consider our collaborations with Novartis and Aventis material to our
business. Novartis has agreed to pay us up to approximately $600 million in
pre-commercial payments, comprised of $15 million paid upon the signing of the
agreement in May 2000, up to $200 million in product research funding over six
years and up to approximately $400 million in further license fees, milestone

41

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 of up to $25 million for each drug candidate. To date we have not
drawn down against the loan facility. 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. We will receive royalties on any
products marketed as a part of the collaboration and under certain conditions
will have co-promotion rights in the U.S. and Europe. We retain the rights to
any intellectual property resulting from the collaboration.

Aventis has paid us $20 million for prior research costs associated with
pralnacasan (VX-740) and has agreed to pay us $62 million in milestone payments
for successful development by Aventis of pralnacasan in rheumatoid arthritis,
the first targeted indication, as well as similar milestone payments for each
additional indication. We have granted Aventis an exclusive worldwide license to
develop, manufacture and market pralnacasan as well as an exclusive option for
other compounds discovered as part of the research collaboration between Vertex
and Aventis that ended in 1997.

Aurora has contracts in place that require the delivery of products,
licenses and services throughout 2002. These contracts account for over
$70 million of potential 2002 revenue of which approximately $12 million relates
to one specific contract.

We have incurred operating losses since our inception and expect to incur
losses for the foreseeable future. We plan 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.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements that have been
prepared in accordance with generally accepted accounting principles in the
United States of America. The preparation of these financial statements requires
us to make certain estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenue and expense during the reported periods. These items are constantly
monitored and analyzed by management for changes in facts and circumstances, and
material changes in these estimates could occur in the future. Changes in
estimates are recorded in the period in which they become known. We base our
estimates on historical experience and various other assumptions that we believe
to be reasonable under the circumstances. Actual results may differ from our
estimates if past experience or other assumptions do not turn out to be
substantially accurate.

In December 2001, the SEC requested that all registrants discuss their
"critical accounting policies" in management's discussion and analysis of
financial condition and results of operations. A critical accounting policy is a
policy that is both important to the portrayal of the company's financial
conditions and results, and requires management's most difficult, subjective or
complex judgments and estimates. While our significant accounting polices are
more fully described in Note B to our consolidated financial statements included
in this Annual Report, we consider our revenue recognition policy critical and
therefore we have separately outlined this policy below.

Our revenue recognition policies are in accordance with the SEC's Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". We generate revenue through collaborative research and development
agreements, product sales, assay development and screening services and royalty
agreements.

Our collaborative and other research and development revenue is primarily
generated through collaborative research and development agreements with
strategic partners for the development of small molecule drugs that address
major unmet medical needs. The terms of the agreements typically

42

include non-refundable up-front license fees, funding of research and
development efforts, payments based upon achievement of certain at-risk and
substantive milestones and royalties on product sales.

Under the Substantive Milestone Method, adopted retroactively to January 1,
2001, we recognize revenue from non-refundable, up-front license fees and
milestones, not specifically tied to a separate earnings process, ratably over
the contracted or estimated period of performance. Changes in estimates could
impact revenue in the period the estimate is changed. Research funding is
recognized as earned, ratably over the period of effort. Milestones that are
based on designated achievement points and that are considered at risk and
substantive at the inception of the collaborative contract, are recognized as
earned, when the corresponding payment is considered reasonably assured. We
evaluate whether milestones are at risk and substantive based on the contingent
nature of the milestone, specifically reviewing factors such as the
technological and commercial risk that must be overcome and the level of
investment required.

Product sales include instrumentation system sales, technology licensing and
biotechnology product sales as well as commercial drug substance sales. Revenue
from licenses where we have continuing obligations is recognized over the period
of the license. Revenue from perpetual licenses is recognized when the license
is issued, provided that there are no significant continuing obligations and the
payment is non-refundable and non-creditable.

Revenue from sales of commercial drug substance, biotechnology products and
certain instrumentation system sales, is recognized upon shipment, when the
title to the product and associated risk of loss has passed to the customer,
collectibility is reasonably assured and, if applicable, upon acceptance when
acceptance criteria are specified or upon expiration of the acceptance period.
Sales under long-term production contracts are recognized using percentage of
completion accounting, based on actual costs incurred to date compared to total
estimated costs to complete. Funding for prototype instrumentation systems was
recognized ratably over the terms of the agreements, which approximated costs
incurred. Milestones related to delivery of the components of the prototype
systems were recognized when earned, as evidenced by written acknowledgement of
acceptance from the customer.

Service revenues include assay development, screening services and
contracted product development. Service revenue is recognized as the services
are performed or ratably over the service period if we believe such method will
approximate the expense being incurred. Revenue from upfront fees is deferred
and recognized over the service period.

Aurora has certain contracts under which it agrees to sell instrumentation
systems and technology licenses in addition to providing assay development and
screening services. Each of these separable elements may be individually
delivered and is not considered essential to the functionality of the others. We
allocate revenue under such contracts to each of the separable elements based on
the relative fair value of each element, which under most of our agreements
approximates the stated price in the contract.

Royalty revenue is recognized based upon actual and estimated net sales of
licensed products in licensed territories, as provided by our collaborative
partner, and is generally recognized in the period the sales occur. Differences
between actual royalty revenues and estimated royalty revenues, which have not
been historically significant, are reconciled and adjusted for in the quarter
they become known.

RESULTS OF OPERATIONS

In the third quarter of 2001, in connection with our overall review of
accounting policies concurrent with our merger with Aurora, we elected to change
our revenue recognition policy for collaborative and other research and
development revenues from the Emerging Issues Task Force No. 91-6 (EITF 91-6)
method to the Substantive Milestone Method. We believe this method is preferable
because it is reflective of the Company's on-going business operations and is
more consistent with the industry practices following the prior year
implementation of SAB 101 throughout the biotechnology industry.

43

In the fourth quarter of 2000, we changed our method of accounting for
revenue recognition for collaborative and other research and development
revenues to the EITF 91-6 method in conjunction with our adoption of SAB 101.
Under the EITF 91-6 method, adopted retroactively to January 1, 2000, we
recognized revenue from research and development arrangements, including
non-refundable upfront license fees, milestones and research and development
funding, over the period of our continuing involvement using the lesser of the
non-refundable cash received or the result achieved using percentage of
completion accounting. Where we had no continuing involvement, non-refundable
license fees were recorded as revenue upon receipt and milestones were recorded
as revenue upon achievement of the milestone by the collaborative partner.

The cumulative effect of the 2001 change in accounting principle related to
revenue recognition recorded in the third quarter of 2001, retroactive to
January 1, 2001, resulted in a non-cash charge to income of $25,901,000. The
cumulative effect of the change in accounting principle relating to the adoption
of SAB 101 in the fourth quarter of 2000, retroactive to January 1, 2000,
resulted in a non-cash charge to income of $3,161,000.

The January 1, 2001 charge to income resulted in revenue of $7,748,000 being
recognized in 2001 that was recognized in prior periods. Additionally,
$6,979,000, $2,809,000, $2,580,000 and $5,785,000 will be recognized as revenue
in 2002, 2003, 2004 and thereafter, respectively, which was included in the
January 2001 charge to income.

The following discussions relating to net loss, net loss per basic and
diluted common share and revenue for the years ended December 31, 2000 and 1999
reflect the pro forma results as if we had followed the Substantive Milestone
Method of revenue recognition from our inception. Actual results for 2001
reflect the adoption of the Substantive Milestone Method as of January 1, 2001.

YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000

Our net loss for 2001 was $40,332,000 or $0.54 per basic and diluted common
share including merger related expenses of $23,654,000, compared to a net loss
of $45,860,000 or $0.68 per basic and diluted share in 2000.

Total revenues increased to $167,490,000 in 2001 compared to $139,001,000 in
2000. In 2001, revenue was comprised of: $11,119,000 in royalty revenue,
$59,921,000 in product sales revenue, $27,466,000 in service revenue and
$68,984,000 in collaborative and other research and development revenue, as
compared with $12,361,000 in royalty revenue, $52,437,000 in product sales
revenue, $20,245,000 in service revenue and $53,958,000 in collaborative and
other research and development revenue in 2000.

Royalties consist primarily of Agenerase royalty revenue. Agenerase royalty
revenue is based on estimated and actual worldwide net sales of Agenerase.

Product sales include instrumentation sales, technology licensing and
biotechnology product sales as well as sales of commercial drug substance.

Product sales increased $7,484,000, or 14%, to $59,921,000 in 2001 from
$52,437,000 in 2000. The increase in product sales in 2001 from 2000 is due to
increased technology licensing revenue and increased biotechnology product
revenue, partially offset by a decrease in instrumentation revenue.
Instrumentation revenue decreased in 2001 from 2000 due to the completion and
delivery of several significant products and services in late 2000 and early
2001, that have not been replaced, due in part to Aurora's strategic shift in
focus toward technology licensing and discovery service activity. The increase
in biotechnology revenue is attributed to a continued increase in demand for
protein drug targets, drug screening assays and other biotechnology products.

Service revenue includes assay development, screening services and
contracted product development.

44

Service revenue increased to $27,466,000 in 2001 from $20,245,000 in 2000.
The increase in service revenue is attributable to new strategic alliances and
screening collaborations entered into in late 2000 and early 2001.

Collaborative and other research and development revenue consists of
research support payments, development reimbursements, milestones and
amortization of previously received up-front or license payments.

Collaborative and other research and development revenue increased in 2001
by 28% or $15,026,000 as compared with 2000 due primarily to collaborative
agreements signed in May and December of 2000. In 2001 we recognized $36,723,000
of revenue under the Novartis collaboration compared with $14,823,000 in 2000.
In an agreement signed in May 2000, we agreed with Novartis to collaborate to
discover, develop and commercialize small molecule drugs targeted at the kinase
protein family. Effort related to the kinase research program increased
significantly in 2001. In December 2000 we entered into a collaboration with
Serono to discover, develop and market caspase inhibitors. In connection with
the Serono agreement we recognized $4,802,000 in revenue during 2001 compared
with $397,000 during 2000. In May 2000 we received and recognized as revenue a
$10,000,000 license payment from Aventis under a collaborative agreement
covering the development of pralnacasan (VX-740), an orally active inhibitor of
interleukin-1 beta converting enzyme (ICE). Aventis has exclusive worldwide
license to develop, manufacture and market pralnacasan as well as an exclusive
option for other compounds discovered as part of the collaboration that ended in
1997. The balance of collaborative and other research and development revenue
for 2001 and 2000 is made up of research support payments, development
reimbursements and milestones from other collaborative partners.

Royalty costs of $3,786,000 and $4,134,000 in 2001 and 2000, respectively,
consist primarily of royalty payments on the sales of Agenerase.

Product costs decreased $5,885,0000 or 19% to $25,242,000 in 2001 from
$31,127,000 in 2000. The decrease in product costs is attributable to a
strategic shift in focus of the Aurora business towards technology licensing and
discovery services activity. Instrumentation revenue, which has lower gross
margins, decreased during the year, while technology license and biotechnology
product revenue, which has higher gross margins, increased during the year.

Cost of service revenue increased from $8,357,000 in 2000 to $10,601,000 in
2001, primarily due to a related increase in service revenue.

Research and development expenses increased to $148,673,000 in 2001 from
$101,093,000 in 2000 primarily due to the continued expansion of our research
and development operations, an increase in the number of drug development
candidates from eight candidates at December 31, 2000 to more than twelve
candidates at December 31, 2001 and the continued shift of Aurora's strategy
towards drug discovery activity. During 2001 there was a significant increase in
research and discovery activities associated with our gene family programs,
specifically our kinase research program being conducted under our Novartis
collaboration, and our protease research program. Development expenses increased
as we continued to advance our drug candidates with substantial investment in
our p38 MAP kinase (specifically VX-745) and our IMPDH programs. Also, related
to our expansion were increases in personnel, facilities expenses and equipment
depreciation.

We have more than 12 drug candidates in development targeting a range of
major diseases. Our collaborative partners have agreed to fund portions of our
research and development programs and/or

45

to conduct certain research and development related to specified drug
candidates. Collaborator and Company-sponsored research and development expenses
for 2001 and 2000 were as follows:

To date we have incurred in excess of $630,000,000 in research and
development costs associated with drug discovery and development. As of
December 31, 2001 we had 570 full-time employees dedicated to research and
development across our four research facilities. We anticipate research and
development expenses will continue to increase as we add personnel and expand
research and development activities to accommodate our existing collaborations
and additional commitments we may undertake in the future.

We estimate that it takes 10 to 15 years (industry average is 12 years) to
discover, develop and bring to market a pharmaceutical product. Drug development
in the U.S. is a process that includes several steps defined by the FDA as
outlined below:

The successful development of our products is highly uncertain and subject
to a number of risk factors. The duration of clinical trials may vary
substantially according to the type, complexity and novelty of the
pharmaceutical product. 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. Data obtained from pre-clinical and clinical activities are
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. The duration and the cost related to discovery,
pre-clinical and clinical trials may vary significantly over the life of a
project and are difficult to predict. The most significant costs associated with
drug discovery and development are those costs associated with Phase II and
Phase III clinical trials.

46

Below is a summary of our drug candidates currently in clinical development:

Sales, general and administrative expenses remained relatively consistent
totaling $47,337,000 in 2001 compared with $46,014,000 in 2000. We expect sales,
general and administrative expenses to remain consistent with current levels
over the next year.

Merger related costs of $23,654,000 consisted of investment banking, legal
and accounting fees associated with the acquisition of Aurora completed on
July 18, 2001.

Interest income increased approximately $11,821,000 to $45,133,000 in 2001
from $33,312,000 in 2000. The increase is due to a higher level of cash and
marketable securities for the full year of 2001 compared with 2000. The increase
in cash and marketable securities is primarily a result of the proceeds received
from the issuance in September 2000 of $345,000,000 of 5% convertible
subordinated notes due September 2007 (September Notes). In March 2000 we issued
$175,000,000 of convertible subordinated notes (March Notes), which we called
for redemption in September 2000 and which were subsequently converted to
equity.

Interest expense increased to approximately $19,318,000 in 2001 from
$11,653,000 in 2000. The increase is due to interest expense associated with the
September Notes.

Using the equity method of accounting we recorded $662,000 as our share of
loss in Altus Biologics Inc. (Altus), for the year ended December 31, 2001,
compared with $550,000 as our share of loss for the year ended December 31,
2000. The loss is included in other, net on the Statement of

47

Operations. Effective September 28, 2001, coincident with a financial
restructuring of Altus, we changed our method of accounting for Altus from the
equity method to the cost method. Please see Note H to our consolidated
financial statements included in this report.

Effective July 1, 2001, we adopted Derivative Implementation Group Issue
No. A17, "Contracts that Provide for Net Share Settlement" (DIG A17). Pursuant
to the adoption of DIG A17 we recorded a $17,749,000 cumulative effect of a
change in accounting principle to reflect the value of warrants held in Altus.
This amount is included in investments in the December 31, 2001 balance sheet.
As of September 30, 2001, the warrants no longer qualified as derivatives under
DIG A17 due to changes in the terms of the warrants coincident with a financial
restructuring of Altus.

In October 2001, we re-purchased $30,000,000 in principal amount of our
September Notes for cash consideration of $18,900,000. As a result of this
transaction we recorded an extraordinary gain on the early extinguishment of
debt of $10,340,000, net of $760,000 of deferred debt costs in the fourth
quarter of 2001.

YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999

Our net loss for 2000 was $45,860,000, or $0.68 per basic and diluted share,
compared to a net loss of $38,234,000 or $0.61 per basic and diluted share in
1999.

Total revenues increased to $139,001,000 in 2000 from $111,807,000 in 1999.
In 2000 revenue was comprised of $12,361,000 in royalty revenue, $52,437,000 in
product sales, $20,245,000 in service revenues, and $53,958,000 in collaborative
and other research and development revenue, compared with $8,398,000 in royalty
revenue, $44,208,000 in product sales, $12,911,000 in service revenues and
$46,290,000 in collaborative and other research and development revenue in 1999.

Product sales increased $8,229,000, or 19%, from $44,208,000 in 1999 to
$52,437,000 in 2000. The increase in product sales is due primarily to increases
in licensing revenue and biotechnology product revenue. The increase in
licensing revenue is attributable to several significant license agreements
executed in mid to late 2000. The increase in biotechnology product revenue can
be attributed to increased demand for protein drug targets and drug screening
assays.

Service revenue increased significantly during the year 2000, from
$12,911,000 in 1999 to $20,245,000 in 2000. The increase in service revenue is
attributable to several significant service agreements entered into in late 1999
and early 2000.

In 2000 we recognized $53,958,000 in collaborative and other research and
development revenue. Approximately $14,823,000 of our collaborative and other
research and development revenue earned in 2000 was earned under the Novartis
collaboration. Additionally we received and recognized as revenue a $10,000,000
license payment from Aventis under our collaborative agreement and a $3,000,000
substantive milestone payment for the approval of Agenerase in the E.U. The
balance of our collaborative and other research and development revenue in 2000
was earned under other collaborations consisting of research support payments,
development reimbursements and amortization of previously received up-front or
license payments. Comparatively, in 1999 we recognized $46,290,000 in
collaborative and other research and development revenue. This included a
$10,000,000 initial license payment and a $5,000,000 substantive milestone
payment in connection with the signing of the Aventis agreement as well as a
$5,000,000 substantive milestone payment for the U.S. FDA approval of Agenerase.
The balance of collaborative and other research and development revenue
recognized during 1999 was earned under other collaborations.

Product costs increased $3,890,000 or 14% to $31,127,000 in 2000 from
$27,237,000 in 1999. The increase in product costs resulted from increased
purchases of materials and technology development expenses associated with
instrumentation revenue and increased expenses associated with biotechnology
product revenue. Instrumentation expenses increased at a rate significantly
greater than the corresponding revenue due to unanticipated additional resources
required to complete certain projects.

48

Cost of service revenue increased from $4,236,000 in 1999 to $8,357,000 in
2000. This was consistent with the increase in service revenue for the same
period.

Royalty costs of $4,134,000 and $3,108,000 in 2000 and 1999, respectively,
primarily consisted of royalty payments on the sales of Agenerase.

Research and development expenses increased to $101,093,000 in 2000 from
$85,029,000 in 1999. The increase in research and development expenses was
principally due to the continued expansion of our research and development
operations and an increase in the number of drug development candidates over the
prior year. 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 development candidates.

Sales, general and administrative expenses increased $5,096,000 during the
year 2000, from $40,918,000 in 1999 to $46,014,000 in 2000. The increase was
primarily a result of increased personnel and professional expenses associated
with our growth. Additionally, during 2000 marketing expenses associated with
Agenerase increased.

Interest income increased from $12,954,000 in 1999 to $33,312,000 in 2000.
The increase is due to a higher level of cash and marketable securities
throughout 2000 primarily as a result of the proceeds received from the issuance
of $520,0000,000 in principal amount of the March Notes and the September Notes.
Partially offsetting the increase in interest income was a $1,400,000 net write
down of a marketable security due to management's assessment that the decline in
value was other-than-temporary.

Interest expense increased significantly from $1,704,000 in 1999 to
$11,653,000 in 2000. The increase is due to interest expense associated with the
March Notes and the September Notes.

In the third quarter of 2000 we recognized debt conversion expense of
$14,375,000, representing the "make-whole" payment resulting from our call for
redemption on September 15, 2000 of our March Notes. As a result of 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 the notes, which was paid in cash on
October 5, 2000.

Using the equity method of accounting we recorded $550,000 as our share of
loss in Altus in 2000, compared with $724,000 as our share of loss in 1999. The
loss is included in other, net on the Statement of Operations. Please see
Note H to our consolidated financial statements included in this report.

LIQUIDITY AND CAPITAL RESOURCES

Our operations have been funded principally through strategic collaborative
agreements, strategic technology alliances, revenues from assay development and
screening services, product sales, royalties, 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. In 2000, we completed private
placements of the March Notes and the September Notes.

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, strategic technology
alliances, royalties from the sales of Agenerase, revenues from assay
development and screening services, product sales, royalties, existing cash and

49

marketable securities of $743,202,000 at December 31, 2001, 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 marketable securities decreased $70,859,000 to
$743,202,000, including cash and cash equivalents of $189,205,000, at
December 31, 2001 from $814,061,000, including cash and cash equivalents of
$346,659,000, at December 31, 2000. Net cash used in operations was $8,074,000
for the year ended December 31, 2001, which resulted from the net loss of
$66,233,000, offset by $17,069,000 of net non-cash charges and gains, an
increase in deferred revenue of $20,469,000 and $20,621,000 of changes in
operating assets and liabilities. Deferred revenue increased due to cash
received for research funding and receipt of a milestone payment, the majority
of which was not recognized as revenue in 2001. Net cash used in investing
activities for 2001 was $145,087,000, which included property and equipment
expenditures of $53,899,000 and net purchases of marketable securities of
$76,595,000. Cash used in financing activities during 2001 was $3,982,000
including approximately $18,900,000 for the retirement of $30,000,000 of
principal on our September Notes as well as $4,735,000 used for the repayment of
capital lease and loan obligations. The issuance of common stock under employee
stock option and benefit plans for the year ended December 31, 2001 provided
$19,653,000.

COMMITMENTS

At December 31, 2001, our future minimum commitments included facilities and
certain equipment under non-cancelable operating leases, as well as contractual
commitments related to our research and development programs. In January 2001 we
entered into an agreement to lease approximately 275,000 square feet of
laboratory and office space presently under construction. We will begin paying
rent in March 2003. The lease will expire in 2017 with the option to extend the
lease for two consecutive terms of ten years each ultimately expiring in 2037.
Our commitments under this lease, as well as additional non-cancelable operating
leases and contractual, research and development program commitments, are
included in the table below (in thousands):

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements about our business,
including our expectation that (i) we are positioned to commercialize multiple
products in the coming years that we expect will generate increased revenues
(ii) our losses will continue, (iii) our research and development expenses, our
administrative and commercialization expenses and our expenses related to
filing, prosecuting and defending our patents and intellectual property rights
will increase, and sales, general and administrative expenses will remain
consistent with current levels, and (iv) the Chiron Corporation and Oregon
Health Sciences University litigation will not have a material adverse effect on
us. While management makes its best efforts to be accurate in making
forward-looking statements, such statements are subject to risks and
uncertainties that could cause our actual results to vary materially. These
risks and uncertainties include, among other things, our inability to
successfully integrate Aurora

50

into our existing business, our inability to further identify, develop and
achieve commercial success for new products and technologies, the possibility of
delays in the research and development necessary to select drug development
candidates and delays in clinical trials, the risk that clinical trials may not
result in marketable products, the risk that we may be unable to successfully
finance and secure regulatory approval of and market our drug candidates, our
dependence upon pharmaceutical and biotechnology collaborations, the levels and
timing of payments under our collaborative agreements, uncertainties about our
ability to obtain new corporate collaborations and acquire new technologies on
satisfactory terms, if at all, the development of competing systems, our ability
to protect our proprietary technologies, patent-infringement claims, risks of
new, changing and competitive technologies and regulations in the U.S. and
internationally. Please see the "Risk Factors" appearing elsewhere in this
report for more details regarding these and other risks. We disclaim any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.

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 Vertex and Eli Lilly 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 Eli Lilly, was granted a
stay in the infringement lawsuit, pending the outcome of the patent
reexamination. That reexamination proceeding is still on going and the stay is
still in effect. However, a Notice of Intent to Issue a Reexamination
Certificate has been issued in two of the three Chiron patents in suit. While
the length of the stay and the final outcome of the lawsuit cannot be
determined, we maintain that Chiron's claims are without merit and intend to
defend the lawsuit, if and when it resumes, vigorously.

On December 7, 2001 Oregon Health Sciences University filed suit against
Vertex in the District Court of Oregon. The complaint in the suit seeks to name
Bruce Gold, an employee of Oregon Health Sciences University, as an inventor and
Oregon Health Sciences University as part of owner, of five of Vertex's
neurophilin patents. The suit stems from assays run on Vertex compounds by
Dr. Gold under a sponsored research agreement in 1996. We have investigated the
inventorship on these patents and have concluded that Bruce Gold is not an
inventor, Oregon Health Sciences University has no ownership interest in any of
these patents, and that the claims made in this complaint are without merit. We
intend to contest this claim vigorously.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations." SFAS No. 141 requires that all business combinations be accounted
for under the purchase method only and that certain acquired intangible assets
in a business combination be recognized as assets apart from goodwill. SFAS
No. 141 is effective for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which requires that ratable amortization of goodwill be replaced with
periodic tests of the goodwill's impairment and that intangible assets other
than goodwill be amortized over their useful lives. The provisions of SFAS
No. 142 will be effective for fiscal years beginning after December 15, 2001,
and will thus be adopted by the Company, as required, on January 1, 2002. We do
not expect SFAS No. 142 will have a material effect on our financial position
and results of operations.

51

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and provides a single accounting model for long-lived assets to
be disposed of. The provisions of SFAS No. 144 will be effective for fiscal
years beginning after December 15, 2001. We do not expect SFAS No. 144 will have
on our financial position and results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As part of its investment portfolio, Vertex owns financial instruments that
are sensitive to market risks. 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 have derivative
financial instruments in its investment portfolio.

INTEREST RATE RISK

Vertex invests its cash in a variety of financial instruments, principally
securities issued by the U.S. government and its agencies, investment grade
corporate bonds and notes and money market instruments. These investments are
denominated in U.S. dollars. All of its interest-bearing securities are subject
to interest rate risk, and could decline in value if interest rates fluctuate.
Substantially all of Vertex's investment portfolio consists of marketable
securities with active secondary or resale markets to help ensure portfolio
liquidity, and Vertex has implemented guidelines limiting the term to maturity
of its investment instruments. 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 this Item 8 is contained on pages F-1 through
F-38 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

52

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information regarding directors required by this Item 10 is included in
the definitive Proxy Statement for Vertex's 2002 Annual Meeting of Stockholders,
to be filed with the Commission on or about April 9, 2002 (the "2002 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 11 is included in the 2002 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 2002 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 12 is included in the 2002 Proxy
Statement under "Security Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item 13 is included in the 2002 Proxy
Statement under "Employment Contracts and Change in Control Arrangements" and is
incorporated herein by reference.

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:

(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.

53

(a)(3) EXHIBITS.

- ------------------------

* Compensatory plan or agreement applicable to management and employees.

(b) Reports on Form 8-K. No reports on Form 8-K were filed by Vertex during the
quarter ended December 31, 2001.

57

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 29, 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.

58

VERTEX PHARMACEUTICALS INCORPORATED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Vertex Pharmaceuticals Incorporated:

In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, of stockholders' equity and comprehensive loss and of cash flows
present fairly, in all material respects, the financial position of Vertex
Pharmaceuticals Incorporated and its subsidiaries at December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001 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. The consolidated financial statements give retroactive effect to the
merger of Aurora Biosciences Corporation (formed on March 1, 2001 as a result of
the consolidation of Aurora Biosciences Corporation and PanVera Corporation) on
July 18, 2001 in a transaction accounted for as a pooling of interests, as
described in Note B to the consolidated financial statements. We did not audit
the financial statements of Aurora Biosciences Corporation at December 31, 2000
and for each of the years ended December 31, 2000 and 1999, which statements
reflect total assets of 18 percent of the related consolidated totals as of
December 31, 2000 and total revenues of 49 percent and 54 percent of the related
consolidated totals for the years ended December 31, 2000 and 1999,
respectively. Those statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion expressed herein, insofar as
it relates to the amounts included for Aurora Biosciences Corporation, is based
solely on the report of the other auditors. 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 and the report of other auditors provide a reasonable basis for our
opinion.

As discussed in Note C to the consolidated financial statements, during each
of the years ended December 31, 2001 and 2000 the Company changed its method of
accounting for revenue recognition. As discussed in Note H to the consolidated
financial statements, during the year ended December 31, 2001 the Company
changed its method of accounting for certain derivatives.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
February 5, 2002

F-2

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
Aurora Biosciences Corporation:

We have audited the accompanying consolidated balance sheet of Aurora
Biosciences Corporation (formed as a result of the consolidation of Aurora
Biosciences Corporation and PanVera Corporation) as of December 31, 2000 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 2000 and 1999 (not included separately
herein). The consolidated financial statements give retroactive effect to the
merger of Aurora Biosciences Corporation and PanVera Corporation on March 1,
2001, which has been accounted for using the pooling of interests method as
described in the notes to the consolidated financial statements; such notes also
describe the process of consolidation, given that PanVera Corporation's fiscal
years were September 30. These consolidated financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the statement of operations of PanVera Corporation for the years ended
September 30, 2000 and 1999, which reflect revenues constituting approximately
14.4% of the related combined total for the two-year period ended December 31,
2000. Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to data included for
PanVera Corporation for the periods described above is based solely on the
report of the other auditors.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Aurora Biosciences Corporation at
December 31, 2000, and the consolidated results of its operations and its cash
flows for the years ended December 31, 2000 and 1999, after giving retroactive
effect to the merger of PanVera Corporation, as described in the notes to the
consolidated financial statements, in conformity with accounting principles
generally accepted in the United States.

/s/ ERNST & YOUNG LLP

San Diego, California
April 27, 2001

F-3

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of
PanVera Corporation:

We have audited the accompanying balance sheets of PanVera Corporation (a
Wisconsin corporation) as of September 30, 2000 and 1999, and the related
statements of income, stockholders' equity, and cash flows for the years then
ended (not included separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PanVera Corporation as of
September 30, 2000 and 1999, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP

Milwaukee, Wisconsin
October 20, 2000

F-4

VERTEX PHARMACEUTICALS INCORPORATED

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial
statements.

F-5

VERTEX PHARMACEUTICALS INCORPORATED

CONSOLIDATED STATEMENT OF OPERATIONS

The accompanying notes are an integral part of the consolidated financial
statements.

F-6

VERTEX PHARMACEUTICALS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

The accompanying notes are an integral part of the consolidated financial
statements.

F-7

VERTEX PHARMACEUTICALS

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of the consolidated financial
statements.

F-8

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. THE COMPANY

Vertex Pharmaceuticals Incorporated ("Vertex" or the "Company") is a global
biotechnology company that seeks to discover, develop, and commercialize major
pharmaceutical products independently and with collaborators. The Company has
four facilities worldwide with over 1000 employees. The facilities are located
in Cambridge, MA, Madison, WI, San Diego, CA and Abingdon, UK. 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. This
approach, which targets gene families, has formed the basis for successful drug
discovery and for the advancement of drug candidates by Vertex and its
collaborators. We are developing several drug candidates in commercial
collaborations that retain rights to downstream product revenue for the Company.
Vertex has more than twelve drug candidates in development to treat viral
diseases, cancer, autoimmune and inflammatory diseases and neurological
disorders. The Company's first approved product is
Agenerase-Registered Trademark- (amprenavir), an HIV protease inhibitor, which
Vertex co-promotes with GlaxoSmithKline. The Company earns a royalty on sales of
Agenerase. Agenerase has received approval in 34 countries worldwide, including
the United States, the 15 member states of the European Union, and Japan, where
the drug is sold under the trade name Prozei-TM-. The Company expects to incur
operating losses for the foreseeable future, as a result of expenditures for its
research and development programs.

On July 18, 2001, the Company completed a merger with Aurora Biosciences
Corporation ("Aurora"). Aurora specializes in industry-leading assay
development, screening and cell biology capabilities. Aurora generates revenue
primarily from product sales and services related to assay development and
specialized screening services and systems. The Company acquired all of Aurora's
outstanding common stock in a tax-free, stock for stock transaction, for
approximately 14.1 million shares of Vertex common stock. The merger was
accounted for as a pooling of interests.

On March 1, 2001, Aurora completed a merger with PanVera Corporation
("PanVera"). PanVera is a biotechnology company engaged in the development,
manufacture and worldwide supply of proteins for evaluation as targets and drug
screening assays for high-throughput screening. Aurora acquired all of PanVera's
outstanding common stock in a tax-free, stock for stock transaction. The merger
has been accounted for as a pooling of interests. All references to "Aurora"
refer to the combined company of Aurora and PanVera.

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. The mergers with Aurora and PanVera have been
accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16, "Business Combinations" ("APB 16"). Accordingly, all prior
period consolidated financial statements presented have been restated to include
the combined results of operations, financial position and cash flows of Aurora
and PanVera as though the mergers had been in effect since the inception of
Aurora and PanVera. All significant intercompany balances and transactions have
been eliminated.

F-9

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. ACCOUNTING POLICIES (CONTINUED)
Prior to the merger, PanVera's fiscal year end was September 30. In
recording the business combination, PanVera's results of operations for the
fiscal years ended September 30, 2000 and 1999 have been combined with the
Company's results of operations for the fiscal years ended December 31, 2000 and
1999. In accordance with APB 16, PanVera's results of operations and cash flows
for the three month period ended December 31, 2000 have been added directly to
the Company's accumulated deficit and cash flows at December 31, 2000, and are
excluded from reported fiscal 2000 consolidated results of operations. PanVera's
revenue and net loss for the three months ended December 31, 2000 was $3,005,000
and $396,000, respectively. Included in PanVera's results of operations for the
three months ended December 31, 2000 were merger related costs of approximately
$467,000. The combined balance sheet at December 31, 2000 includes PanVera's
balance sheet at December 31, 2000.

RECLASSIFICATION IN THE PREPARATION OF FINANCIAL STATEMENTS

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.

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, warranty reserves, collectibility of accounts receivable,
estimated fair value of equity instruments and whether any decline in such fair
value is other-than-temporary and estimates of cost to completion under
long-term production contracts applying 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 may be
affected by shifts in investment portfolio maturities as well as by actual cash
receipts and disbursements.

MARKETABLE SECURITIES

Marketable securities consist of investments in high grade corporate bonds,
asset-backed securities and U.S. government agency securities and are classified
as available for sale. Since these securities are available to fund current
operations, they are classified as current assets on the balance sheet.
Marketable securities 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 stockholders' equity, until realized. The fair value
of these securities is based on quoted market prices. If a decline in the fair
value is considered other-than-temporary, based on available evidence, the
unrealized loss is re-classed from other comprehensive income (loss) to the
consolidated statement of operations. For the years ended December 31, 2001 and
2000, the Company recorded $600,000 and $1,369,000, respectively, in charges to
write down certain marketable securities because the decline in value was
considered

F-10

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. ACCOUNTING POLICIES (CONTINUED)
other-than-temporary. There were no write-downs in 1999. Realized gains and
losses are determined on the specific identification method and are included in
interest income.

INVESTMENTS

Investments include long term investments recorded under both the cost and
equity methods of accounting. The Company uses the equity method of accounting
for investments when it has an ownership interest of 20% to 50%. When the
Company holds an ownership interest of less than 20%, and does not have the
ability to exercise significant influence over the investment entity's operating
activities, the Company accounts for its investment using the cost method. If
any adjustment to fair value reflects a decline in the value of the investment
below cost, the Company considers available evidence, including the duration and
extent to which the market value has been less than cost, to evaluate the extent
to which the decline is other-than-temporary. If the decline is considered
other-than-temporary, the cost basis of the investment is written down to fair
value as a new cost basis and the amount of the write down is included in the
Company's consolidated statement of operations. For the year ended December 31,
2001, the Company recorded $1,500,000 in charges related to the write-down of an
investment because the decline in the value of the investment was considered
other-than-temporary.

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 credit losses in such
accounts and does not believe it is exposed to any significant credit risk on
these funds. The Company has no foreign exchange contracts, option contracts or
other foreign hedging arrangements.

To date, the Company's revenue has been generated from a limited number of
customers in the biotechnology and pharmaceuticals industries in the US, Europe
and Japan. In 2001, the Company's revenue included transactions with each of the
following customers: Novartis Pharma AG (22%) and Pfizer, Inc (17%), including
Warner-Lambert, which Pfizer acquired in 2000. In 2000 the Company's revenue
included significant transactions with these same two customers, Novartis (18%)
and Pfizer (17%). In 1999 the Company had significant revenue transactions with
Aventis S.A. (14%). The loss of such customers could have a material adverse
impact on the Company.

GlaxoSmithKline, Kissei Pharmaceuticals, Co, Ltd. and Novartis Pharma AG
represented approximately 20%, 15%, and 10%, respectively, of the Company's
accounts receivable balance at December 31, 2001. At December 31, 2000, Pfizer
represented 33% and GlaxoSmithKline represented 11% of the Company's accounts
receivable balance. 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 to seven
years for furniture and equipment, three to five years for computers and
software and forty years for buildings. Leasehold improvements are amortized
over the lesser of the useful life of the improvements or the remaining life of
the lease. Major additions and betterments are

F-11

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. ACCOUNTING POLICIES (CONTINUED)
capitalized; maintenance and repairs, which do not improve or extend the life of
the respective assets, are charged to operations. 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 the Company's consolidated statement of operations.

WARRANTY RESERVE

Estimated expenses for warranty obligations in connection with
instrumentation system sales are accrued as revenue is recognized. Reserve
estimates are adjusted periodically to reflect actual experience.

STOCK-BASED COMPENSATION

In accounting for its stock-based compensation plans, the Company applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations for all awards granted to
employees. Under APB 25, provided other criteria are met, 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. Subsequent changes to option terms
can also give rise to compensation. For stock options granted to nonemployees,
the Company recognizes compensation costs in accordance with the requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires that companies recognize
compensation expense for grants of stock, stock options and other equity
instruments based on fair value.

REVENUE RECOGNITION

The Company's revenue recognition policies are in accordance with the
Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). The Company generates
revenues through collaborative research and development agreements, assay
development and screening services, product sales and royalty agreements.

COLLABORATIVE AND OTHER RESEARCH AND DEVELOPMENT REVENUE

The Company's collaborative and other research and development revenue is
primarily generated through collaborative research and development agreements
with strategic partners for the development of small molecule drugs that address
major unmet medical needs. The terms of the agreements typically include
non-refundable up-front license fees, funding of research and development
efforts, payments based upon achievement of certain at-risk and substantive
milestones and royalties on product sales.

In the third quarter of 2001, in connection with an overall review of
accounting policies concurrent with the merger with Aurora, Vertex elected to
change its revenue recognition policy for collaborative and other research and
development revenues from the Emerging Issues Task Force No. 91-6 ("EITF 91-6")
method to the Substantive Milestone Method. Under the Substantive Milestone
Method, adopted retroactively to January 1, 2001, the Company recognizes revenue
from non-refundable, up-front license fees and milestones, not specifically tied
to a separate earnings process, ratably over the contracted or estimated period
of performance. Research funding is recognized as earned, ratably

F-12

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. ACCOUNTING POLICIES (CONTINUED)
over the period of effort. Milestones, based on designated achievement points
that are considered at risk and substantive at the inception of the
collaborative contract, are recognized as earned, when the corresponding payment
is reasonably assured. The Company evaluates whether milestones are at risk and
substantive based on the contingent nature of the milestone, specifically
reviewing factors such as the technological and commercial risk that needs to be
overcome and the level of investment required.

In the fourth quarter of 2000, Vertex had changed its method of accounting
for revenue recognition to the EITF 91-6 method in conjunction with the adoption
of SAB 101. Under the EITF 91-6 method, adopted retroactively to January 1,
2000, the Company recognized revenue from research and development arrangements,
including non-refundable upfront license fees, milestones and research and
development funding, over the period of continuing involvement using the lesser
of the non-refundable cash received or the result achieved using percentage of
completion accounting. Where the Company had no continuing involvement,
non-refundable license fees were recorded as revenue upon receipt and milestones
were recorded as revenue upon achievement of the milestone by the collaborative
partner.

The cumulative effect of the change in accounting principle related to
revenue recognition recorded in the third quarter of 2001, retroactive to
January 1, 2001, resulted in a non-cash charge to income of $25,901,000. Prior
2001 quarterly financial results have been restated for the retroactive adoption
of the Company's new revenue recognition policy to January 1, 2001.

The cumulative effect of the change in accounting principle relating to the
adoption of SAB 101 in the fourth quarter of 2000, retroactive to January 1,
2000, resulted in a non-cash charge to income of $3,161,000. Prior 2000
quarterly financial results have been restated for the retroactive adoption of
SAB 101 to January 1, 2000.

PRODUCT SALES

Product sales include instrumentation system sales, technology licensing and
biotechnology product sales as well as commercial drug substance sales. Revenue
from licenses where Vertex has continuing obligations is recognized over the
period of the license. Revenue from perpetual licenses is recognized when the
license is issued, provided that there are no significant continuing obligations
and the payment is non-refundable and non-creditable.

Revenue from sales of commercial drug substance, biotechnology products and
certain instrumentation system sales, is recognized upon shipment, when the
title to the product and associated risk of loss has passed to the customer,
collectibility is reasonably assured and, if applicable, upon acceptance when
acceptance criteria are specified or upon expiration of the acceptance period.
Sales under long-term production contracts are recognized using percentage of
completion accounting, based on actual costs incurred to date compared to total
estimated costs to complete. Funding for prototype instrumentation systems was
recognized ratably over the terms of the agreements, which approximated costs
incurred. Milestones related to delivery of the components of the prototype
systems were recognized when earned, as evidenced by written acknowledgement of
acceptance from the customer.

SERVICE REVENUES

Service revenues include assay development, screening services, and
contracted product development. Service revenue is recognized as the services
are performed or ratably over the service period if the Company believes such
method will approximate the expense being incurred. Revenue from up-front fees
is deferred and recognized over the service period.

F-13

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. ACCOUNTING POLICIES (CONTINUED)
Aurora has certain contracts under which it agrees to sell instrumentation
systems and technology licenses, in addition to providing assay development and
screening services. Each of these separable elements may be individually
delivered and is not considered essential to the functionality of the others.
The Company allocates revenue under such contracts to each of the separable
elements based on the relative fair value of each element, which under most of
our agreements approximates the stated price in the contract.

ROYALTY REVENUE

Royalty revenue is recognized based upon actual and estimated net sales of
licensed products in licensed territories as provided by the collaborative
partner and is generally recognized in the period the sales occur. Differences
between actual royalty revenues and estimated royalty revenues, which have not
been historically significant, are reconciled and adjusted for in the quarter
they become known.

Accounts receivable includes unbilled amounts on long-term production
contracts totaling $3,441,000 and $11,666,000 at December 31, 2001 and 2000,
respectively. Unbilled receivables represent amounts due from customers that
will be billed at future dates in accordance with contract terms. The unbilled
receivables at December 31, 2001 are expected to be billed and collected within
one year.

RESEARCH AND DEVELOPMENT

All research and development costs, including amounts funded in research
collaborations, are expensed as incurred. Research and development expenses are
comprised of costs incurred in performing research and development activities
including salaries and benefits, facilities costs, overhead costs, clinical
trial costs, contract services and other outside costs. Customer-sponsored
research and development expenses totaled approximately $69,752,000, $52,010,000
and $38,507,000 in 2001, 2000 and 1999, respectively. Revenue from
customer-sponsored research and development totaled approximately $68,984,000,
$68,239,000 and $43,370,000 in 2001, 2000 and 1999, respectively. Company-
sponsored research and development expenses totaled approximately $78,921,000,
$49,083,000 and $46,522,000 in 2001, 2000 and 1999, respectively.

ADVERTISING

All advertising costs are expensed as incurred. During the years ended
December 31, 2001, 2000 and 1999, advertising expenses totaled $444,000,
$1,794,000 and $2,538,000 respectively.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the financial statement
carrying amounts and the income tax bases of assets and liabilities. A valuation
allowance is applied against any net deferred tax asset if, based on the
weighted available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.

DEBT ISSUANCE COSTS

Debt issuance costs related 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
statements of operations.

F-14

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME (LOSS)

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 marketable securities.
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 earnings per common share is based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per common 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 subordinated
convertible notes. Common equivalent shares have not been included in the net
loss per common share calculations as their effect would be anti-dilutive.

Potential common equivalent shares consist of the following at December 31,
(shares in thousands):

SEGMENT INFORMATION

The Company's business operations have been segregated into two reportable
segments: (i) Vertex and (ii) Aurora. Vertex seeks to discover, develop, and
commercialize major pharmaceutical products independently and with partners.
Aurora specializes in industry-leading assay development, screening and cell
biology capabilities.

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141, "Business Combinations"
("SFAS No. 141"). SFAS No. 141 requires that all business combinations be
accounted for under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as assets distinct
from goodwill. SFAS No. 141 is effective for all business combinations initiated
after June 30, 2001 and for all business

F-15

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B. ACCOUNTING POLICIES (CONTINUED)
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), which requires that ratable amortization of goodwill
be replaced with periodic tests of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. The provisions
of SFAS No. 142 are effective for fiscal years beginning after December 15,
2001, and was adopted by the Company, as required, on January 1, 2002. The
Company does not expect SFAS No. 142 will have a material effect on its
financial position and results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and provides a single accounting model for long-lived
assets to be disposed of. The provisions of SFAS No. 144 will be effective for
fiscal years beginning after December 15, 2001. The Company does not expect SFAS
No. 144 will have a material effect on its financial position and results of
operations.

C. CHANGE IN ACCOUNTING PRINCIPLE--REVENUE RECOGNITION

In the third quarter of 2001, in connection with an overall review of
accounting policies concurrent with the merger with Aurora, Vertex elected to
change its revenue recognition policy for collaborative and other research and
development revenues from the EITF 91-6 method to the Substantive Milestone
Method. Vertex believes this method is preferable because it is more reflective
of the Company's on-going business operations and is more consistent with
industry practices following the prior year implementation of SAB 101 throughout
the biotechnology industry. Under the Substantive Milestone Method, adopted
retroactively to January 1, 2001, the Company recognizes revenue from
non-refundable up-front, license fees and milestones, not specifically tied to a
separate earnings process, ratably over the contracted or estimated period of
performance. Research funding is recognized as earned, ratably over the period
of effort. Milestones, based on designated achievement points that are
considered at risk and substantive at inception of the contract, are recognized
as earned, when the corresponding payment is reasonably assured. The Company
evaluates whether milestones are at risk and substantive based on the contingent
nature of the milestone, specifically reviewing factors such as the
technological and commercial risk that needs to be overcome and the level of
investment required.

During 2000, the Company had recognized revenue from collaborative research
and development arrangements in a manner consistent to that prescribed by EITF
91-6. Under that model, revenue was recognized for non-refundable license fees,
milestones, and collaborative research and development funding using the lesser
of the non-refundable cash received or the result achieved using percentage of
completion accounting. Where the Company had no continuing involvement,
non-refundable license fees were recorded as revenue upon receipt and milestones
were recorded as revenue upon achievement of the milestone by the collaborative
partner.

Pursuant to the 2001 change in accounting principle to the Substantive
Milestone Method, Vertex recorded a one-time non-cash charge of $25,901,000. The
impact of the adoption of this new accounting policy for revenue recognition for
collaborative and other research and development revenues was to defer revenue
recognition for certain portions of revenue previously recognized under our
collaborative agreements into future accounting periods. The results of the
first two quarters of 2001 have been restated in accordance with the new revenue
recognition policy. The pro forma amounts for net loss and net loss per basic
and diluted common share, presented in the consolidated

F-16

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

C. CHANGE IN ACCOUNTING PRINCIPLE--REVENUE RECOGNITION (CONTINUED)
statements of operations were calculated assuming the accounting change was made
retroactively to all prior periods. Included in the 2001 collaborative and other
research and development revenue is $7,748,000 of revenue that was included in
the cumulative effect of the change in accounting principle. The amount of
revenue to be recognized in future years that was included in the cumulative
effect of the change in accounting principle is $6,979,000, $2,809,000,
$2,580,000 and $5,785,000 in 2002, 2003, 2004 and thereafter, respectively.

In connection with the adoption of SAB 101 in the fourth quarter of 2000,
Vertex changed its accounting for revenue recognition to the EITF 91-6 model. In
1999, prior to the 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. Under the EITF 91-6 model,
adopted retroactively to January 1, 2000, the Company recognized revenue from
research and development arrangements, including non-refundable license fees,
milestones and research and development funding, over the period of continuing
involvement using the lesser of the non-refundable cash received or the result
achieved using percentage of completion accounting. Where the Company had no
continuing involvement, non-refundable license fees were recorded as revenue
upon receipt and milestones were recorded as revenue upon achievement of the
milestone by the collaborative partner. Pursuant to the adoption of SAB 101 in
2000, the Company recorded a one-time non-cash charge of $3,161,000,
representing a cumulative effect of a change in accounting principle.

D. BUSINESS COMBINATIONS

On July 18, 2001, the Company completed a merger with Aurora in a tax-free,
stock for stock transaction, which has been accounted for as a pooling of
interests. Each share of Aurora common stock converted into shares of newly
issued Vertex common stock at a fixed ratio of 0.62 shares of Vertex common
stock for each share of Aurora common stock. A total of approximately
14.1 million shares of Vertex common stock were exchanged for all of Aurora's
outstanding common stock, and Aurora's outstanding stock options were converted
into approximately 2.6 million options to purchase Vertex common stock, based
upon the same fixed ratio.

On March 1, 2001, Aurora completed a merger with PanVera. The merger
qualified as a tax-free exchange and was accounted for as a pooling of
interests. A total of approximately 1.6 million shares of Aurora common stock,
which converted into approximately 1.0 million shares of Vertex common stock,
were exchanged for all of PanVera's outstanding stock. PanVera's outstanding
stock options were converted into options to purchase approximately 260,000
shares of Aurora common stock which converted into approximately 161,000 shares
of Vertex common stock.

The Company's consolidated financial statements have been restated for all
periods prior to the business combinations to include the combined financial
results of Vertex, Aurora and PanVera.

F-17

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

D. BUSINESS COMBINATIONS (CONTINUED)
Revenue and net income (loss) for the individual companies reported prior to the
mergers were as follows (in thousands):

* Revenue and net loss for the six months ended June 30, 2001 for Vertex has
been restated to reflect the adoption of the Substantive Milestone Method
of revenue recognition, retroactive to January 1, 2001 (Note C).

The conforming of accounting policies of Vertex, Aurora and PanVera did not
result in adjustments to net income or stockholders' equity. There were no
significant intercompany transactions between the three entities for the years
ended December 31, 2000 and 1999.

F-18

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. MARKETABLE SECURITIES

A summary of cash equivalents and available-for-sale securities is shown
below (in thousands):

F-19

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E. MARKETABLE SECURITIES (CONTINUED)

Gross realized gains and losses for 2001 were $3,134,000 and $53,000,
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. Maturities stated are effective maturities.

F. RESTRICTED CASH

At December 31, 2001 and 2000, the Company held $26,190,000 and $14,713,000
in restricted cash, respectively. At December 31, 2001 the balance was comprised
of $26,087,000 held in deposit with certain banks predominantly to collateralize
conditional, standby letters of credit in the names of the respective landlords
in accordance with certain operating lease agreements, and $103,000 in
connection with a Variable Rate Demand Industrial Revenue Bond held by the
Company. At December 31, 2000 the balance was comprised of $10,121,000
restricted in connection with certain operating lease agreements for facilities
and $4,592,000 in connection with a Variable Rate Demand Industrial Revenue
Bond.

F-20

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

G. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31 (in
thousands):

Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $16,385,000, $11,798,000 and $9,576,000, respectively. The accumulated
depreciation and amortization of equipment under capital leases was $25,025,000
and $26,957,000 at December 31, 2001 and 2000, respectively. Assets under
capital leases collateralize the related lease obligations.

H. INVESTMENTS

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% equity investment in Altus
with a balance sheet value of approximately $1,726,000 at December 31, 2000. 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 under the
equity method of accounting. Vertex does not have any revenue related or other
significant operational contracts with Altus.

In September and November of 2001, Altus underwent financial restructurings,
which reduced Vertex's relative ownership in Altus to approximately 14% and 11%
on the respective dates. Accordingly, effective September 28, 2001, Vertex
accounts for its investment in Altus using the cost method. For the period from
January 1, 2001 through September 28, 2001, Vertex recorded $662,000 as its
share of Altus' losses under the equity method of accounting.

In the third quarter of 2001, Vertex adopted Derivative Implementation Group
Issue No. A17, "Contracts that Provide for Net Share Settlement" ("DIG A17").
Subsequent to the issuance of SFAS No. 133, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," the FASB established the
Derivatives Implementation Group to address and interpret practice issues
relating to that standard. On April 10, 2001, the FASB published DIG A17
relating to contracts that provide for net share settlement, including warrants
of a privately held company. Pursuant to the adoption of DIG A17 on July 1,
2001, Vertex recorded a $17,749,000 cumulative effect of a change in accounting
principle to reflect the value of warrants held in Altus as income with a
corresponding increase to Investments. The valuation of the warrants was
determined based on an independent appraisal that used the Black-Scholes option
pricing model to value the warrants. Significant assumptions used in the
Black-Scholes model included the fair value of Altus' common stock which was
based on a valuation of

F-21

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

H. INVESTMENTS (CONTINUED)
Altus using projected discounted cash flows and comparable market values using
multiples of revenue, volatility of 70%, risk free interest rates between 4.9%
to 5.6% and warrant terms per the agreements ranging from 3.5 to 11.6 years. As
of September 30, 2001, the warrants no longer qualified as derivatives under DIG
A17 due to changes in the terms of the warrants coincident with the financial
restructuring of Altus. The Company's cost basis carrying value in its
outstanding equity and warrants of Altus was $18,813,000 at December 31, 2001.
The Company also held investments at cost in other privately held companies at
December 31, 2001 and 2000.

I. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following at
December 31 (in thousands):

J. CAPITAL LEASES AND OTHER OBLIGATIONS

At December 31, 2001, long-term capital lease, loan and other obligations
were due as follows (in thousands):

CAPITAL LEASE OBLIGATIONS

The Company leases certain equipment and improvements under capital leases,
which expire at various dates through June 2004.

F-22

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

J. CAPITAL LEASES AND OTHER OBLIGATIONS (CONTINUED)
OTHER OBLIGATIONS:

LOAN AGREEMENTS

During 1998, the Company financed assets under a master loan agreement 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 assets under a
master loan agreement with a cost of $676,000 and $1,137,000, with interest
rates of 8.59% and 8.38%, respectively. The Company has certain equipment with a
net book value of $1,407,000 designated as collateral under these agreements at
December 31, 2001. 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 loan obligations at December 31, 2001 and 2000 approximates fair value.

PROMISSORY NOTE

In July 1997 the Company re-purchased shares of its common stock from a
common stockholder by making a cash payment and issuing a promissory note.
Interest is imputed at 4.91%. The balance of the note is $274,000 at
December 31, 2001. Payments of principal and interest are due in quarterly
installments through July 1, 2002.

VARIABLE RATE DEMAND BONDS

In October 1998, the City of Madison, Wisconsin ("City") issued $6,300,000
of Variable Rate Demand Industrial Revenue Bonds, Series 1998 and then loaned
the proceeds to the Company. The Company utilized the proceeds to finance the
construction of a new laboratory, production and office facility in Madison,
Wisconsin, which the Company began occupying in June 2001. Terms of the loan
agreement are subject to the terms of the bonds. The loan bears interest payable
monthly at a rate that is the lesser of a variable rate based upon the
prevailing market conditions required to resell the bonds at par value, or 12%.
Variable rate adjustments are made at specified periodic determination dates.
The interest rate on the bonds may be converted to a fixed rate at the option of
the Company. At December 31, 2001, the variable rate of interest was 1.85%.
Interest incurred in 2001, 2000 and 1999 was $285,000, $386,000 and $281,000,
respectively. Interest capitalized, during construction in 2001 and 2000, was
$106,000 and $9,375, respectively. No interest was capitalized during 1999.
Principal payments are due in annual installments beginning in October 2002
through October 2018.

As a condition of the sale of the aforementioned Variable Rate Demand
Industrial Revenue Bonds, the Company entered into an irrevocable letter of
credit with a bank. As security for the bonds, a replacement letter was obtained
in June 2000 for an initial five year term with annual extensions thereafter
through October 15, 2001. The letter of credit is secured by a General Business
Security Agreement, subject to certain financial covenants.

LINE OF CREDIT AGREEMENTS

At December 31, 2001, the Company had available on demand a $1 million line
of credit with a bank. The interest rate on outstanding borrowings is 1.9% over
the thirty day LIBOR rate. Borrowings are limited to specified percentages of
eligible accounts receivable and inventory. There were no borrowings outstanding
on this line of credit during 2001.

At December 31, 2001, the Company also had available a $1 million
transaction note subject to the same terms and conditions as the line of credit.
There were no borrowings outstanding on this note during 2001.

F-23

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

J. CAPITAL LEASES AND OTHER OBLIGATIONS (CONTINUED)
Both the line of credit and transaction note are cross-collateralized with a
letter of credit.

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. No amounts were drawn down against the line of credit
and it expired unused in 2001.

K. 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 costs
associated with issuance of the March Notes were $5,340,000, of which $423,000
was amortized to interest expense in 2000.

On September 15, 2000, the Company announced the call for redemption of its
March Notes. By 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 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 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, which are classified as long-term other assets,
were $10,698,000 of which $1,498,000 and $428,000 was amortized to interest
expense in 2001 and 2000, respectively.

In October 2001, the Company re-purchased $30,000,000 in principal amount of
its September Notes for cash consideration of $18,900,000. As a result of this
transaction the Company recorded an extraordinary gain on the early
extinguishment of debt of $10,340,000, net of $760,000 of deferred debt costs in
the fourth quarter of 2001. At December 31, 2001, the September Notes had an
outstanding balance of $315,000,000 and a fair value of $212,121,000, as
obtained from a quoted market source.

L. COMMITMENTS

The Company leases its facilities and certain equipment under non-cancelable
operating leases. The Company's leases have terms through the year 2017. In
January of 2001, the Company entered into a lease agreement to lease
approximately 275,000 square feet of laboratory and office space

F-24

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

L. COMMITMENTS (CONTINUED)
presently under construction. The Company will begin paying rent on this new
facility in March 2003. The lease will expire in 2017 with the option to extend
the lease for two consecutive terms of ten years each, ultimately expiring in
2037. The Company's future minimum commitments under this lease are included in
the table below.

At December 31, 2001, future minimum commitments under facility operating
leases with non-cancelable terms of more than one year are as follows (in
thousands):

Rental expense was $15,447,000, $8,892,000 and $8,139,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.

The Company has future contractual commitments in connection with its
research and development programs. For the years 2002, 2003, 2004 and 2005 the
amounts committed under these contracts are $6,859,000, $3,924,000, $2,209,000
and $865,000, respectively.

M. INCOME TAXES

For the year ended December 31, 2001, the Company provided approximately
$630,000 for income taxes which was recorded in Other, net on the Consolidated
Statement of Operations. The provision principally relates to certain foreign
and state tax obligations, in addition to recording a valuation allowance for
certain deferred tax assets acquired in the merger with Aurora. The Company's
federal statutory income tax rate for 2001, 2000 and 1999 was 34%. The Company
has incurred losses from operations but has not recorded an income tax benefit
for 2001, 2000 and 1999 as the Company has recorded a valuation allowance
against its net operating losses and other net deferred tax assets due to
uncertainties related to the 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
deferred taxes at December 31 were as follows (in thousands):

F-25

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

M. INCOME TAXES (CONTINUED)
Of the $224,263,000 valuation allowance at December 31, 2001, $95,027,000
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, 2001, the Company has
net operating loss carryforwards of approximately $384,338,000 and $17,597,000
of tax credits, which may be used to offset future income. These operating loss
carryforwards expire beginning in 2005, and the tax credit carryforwards begin
to expire in 2004. A valuation allowance has been established for the full
amount of the 2001 deferred tax asset since it is more likely than not that the
deferred tax asset will not be realized.

N. COMMON AND PREFERRED STOCK

COMMON STOCK

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.

In July 2001, in connection with the acquisition of Aurora, the Company
assumed the obligations under the Aurora 1996 Stock Plan (the "Aurora Stock
Plan"), the 1993 Stock Plan of PanVera Corporation (the "PanVera Plan") and
certain non-plan stock option agreements ("Non-Plan Stock Option Agreements")
under which 2,393,000, 109,000, 3,000 shares of Vertex's common stock,
respectively, were reserved for issuance at December 31, 2001.

The Aurora Stock Plan provides for the granting of ISOs and stock
appreciation rights to employees and NQSOs and stock purchase rights to
employees, directors and consultants. The exercise price of ISOs must be equal
to the fair market value of the Company's common stock on the date of grant, and
the exercise price of NQSOs may be no less than 85% of the fair market value of
the Company's common stock on the date of grant. The PanVera Plan provides for
the granting of ISOs to employees of PanVera and the exercise price must be
equal to the fair market value of the Company's

F-26

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

N. COMMON AND PREFERRED STOCK (CONTINUED)
common stock on the date of grant. Vesting periods for the Aurora Stock Plan and
Pan Vera Plan are generally four years and options 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 16,000,000 shares, of which 5,500,000 were
reserved during 2001. At December 31, 2001, the Company had a total of 3,108,000
shares of common stock available for future grant under its 1991, 1994 and 1996
stock option plans. No shares remain available for grant under the Aurora Stock
Plan, the PanVera Plan or Non-Plan Stock Option Agreements.

Consolidated stock option activity for the years ended December 31, 2001,
2000 and 1999 is as follows (shares in thousands):

The fair value of each option granted under the 1991, 1994 and 1996 plans
during 2001, 2000 and 1999 was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:

The fair value of each option granted under the Aurora Stock Plan, PanVera
Plan and Non-plan Stock Option Agreements during 2001, 2000 and 1999 was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:

F-27

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

N. COMMON AND PREFERRED STOCK (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2001 (shares in thousands):

STOCK BASED COMPENSATION

The Company records and amortizes over the related vesting periods deferred
compensation representing the difference between the exercise price of stock
options granted or the price per share of restricted stock issued and the fair
value of the Company's common stock at the date of grant or issuance.
Amortization of deferred compensation expense of $154,000, $637,000 and $887,000
was recognized during 2001, 2000 and 1999, respectively.

Compensation cost, calculated using a Black-Scholes option pricing model,
recognized in connection with the issuance of stock options to nonemployees was
$320,000, $372,000 and $120,000 in 2001, 2000 and 1999, respectively.

EMPLOYEE STOCK PURCHASE PLANS

Under the Vertex Employee Stock Purchase Plan (the "Vertex 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 at the end of each six-month withholding
period.

In connection with the acquisition of Aurora in July 2001, the Company
assumed the obligations under the Aurora Employee Stock Purchase Plan (the
"Aurora Purchase Plan"). The Aurora Purchase Plan provides for all eligible
employees to purchase the Company's common stock, through payroll withholdings,
at a price of 85% of the lesser of fair market value on the start date of each
overlapping two-year offering period or on the date on which each semi-annual
purchase period ends. The Company does not anticipate issuing any additional
shares under the Aurora Purchase Plan.

F-28

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

N. COMMON AND PREFERRED STOCK (CONTINUED)

During 2001, 2000, and 1999 the following shares were issued to employees
under the plans (shares in thousands):

Had the Company adopted SFAS 123, the weighted average fair value of each
purchase right granted during 2001, 2000 and 1999 would have been $7.45, $5.93
and $6.20, 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:

PRO FORMA DISCLOSURES

Had compensation expense for 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):

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. Under
certain specified circumstances, the Board of Directors of the Company may cause
the Rights

F-29

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

N. COMMON AND PREFERRED STOCK (CONTINUED)
(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.

COMMON STOCK RESERVED FOR FUTURE ISSUANCE

At December 31, 2001, the Company has reserved shares of common stock for
future issuance as follows (shares in thousands):

Common stock under stock option plans....................... 19,918
Common stock under the Vertex Purchase Plan................. 247
Common stock under the Vertex 401(k) Plan................... 181
------
Total....................................................... 20,346
======

O. SIGNIFICANT REVENUE ARRANGEMENTS

The Company has formed strategic collaborations with major pharmaceutical
companies in the areas of drug discovery and development, assay development,
screening services and instrumentation products. These collaborations include
partnered research and development arrangements and system, service and
licensing arrangements focused on assay development. Research and development
agreements provide the Company with financial support and other valuable
resources for research programs and development of clinical drug candidates,
product development and marketing and sales of products. Assay development,
screening services and instrumentation contracts provide contracted revenue to
the Aurora business.

COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS

In the Company's collaborative research and development programs the Company
seeks to discover and develop novel drug candidates in conjunction with and
supported by our collaborators. Collaborative research and development
arrangements provide research funding over an initial contract period with
renewal and termination options that vary by agreement. The agreements also
include milestone payments based on the achievement or the occurrence of a
designated event. The agreements may also contain development reimbursement
provisions, royalty rights or profit sharing rights and manufacturing options.
The terms of each agreement vary. We have entered into research and development
collaborations with large pharmaceutical companies.

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 $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

F-30

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

O. SIGNIFICANT REVENUE ARRANGEMENTS (CONTINUED)
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. In 2001 and 2000, the Company recognized approximately $36,723,000 and
$27,910,000, respectively, in revenue under the kinase program.

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 will
have an option to obtain marketing rights in Japan and certain Far East markets
for any compounds arising from the collaboration. Taisho agreed to pay the
Company up to $43,000,000 in pre-commercial payments, comprised of research
funding and 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.

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 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.

In 2001, 2000 and 1999, the Company recognized approximately $10,385,000,
$6,974,000 and $3,900,000 as revenue, respectively, under the caspase program.

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 pralnacasan,, 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
pralnacasan 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 pralnacasan, 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

F-31

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

O. SIGNIFICANT REVENUE ARRANGEMENTS (CONTINUED)
funding. Aventis will fund the development of pralnacasan. 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 agreement were $10,000,000 and $15,000,000, in 2000 and 1999,
respectively. The Company did not earn any revenue in connection with the
Aventis collaboration in 2001.

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 six months' written notice. The Company recognized $5,000,000,
$6,027,000 and $4,000,000 as revenue under the Schering agreement in 2001, 2000
and 1999, respectively.

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 was $6,686,000, $5,948,000, $5,452,000
in 2001, 2000, 1999, respectively.

KISSEI PHARMACEUTICAL CO. LTD.

P38 MAP KINASE. The Company and Kissei Pharmaceutical Co., Ltd.
("Kissei") entered into an agreement to collaborate on the identification of
inhibitors of p38 MAP kinase and the development of those compounds 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 certain compounds in Japan and various Southeast Asian
countries and semi-exclusive rights in China, Taiwan

F-32

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

O. SIGNIFICANT REVENUE ARRANGEMENTS (CONTINUED)
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. Additionally, Kissei agreed to pay certain development costs. Kissei has
the right to terminate the agreement without cause upon six months' notice. In
2001, 2000 and 1999, approximately $6,248,000, $5,615,000, and $6,286,000 was
recognized as revenue under the p38 MAP kinase research and development program,
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. Revenue earned
under the Kissei agreement in 2001, 2000 and 1999 were $1,157,000, $7,000, and
$1,000,000, respectively.

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 of the agreement by Glaxo 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 under the agreement. In 1999,
the Company began earning a royalty from Glaxo from sales of Agenerase. Revenues
and royalties earned from Glaxo were $11,211,000, $15,646,000, and $13,927,000
in 2001, 2000 and 1999, 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.

ASSAY DEVELOPMENT, SCREENING SERVICES AND INSTRUMENTATION AGREEMENTS

Aurora has certain contracts under which it agrees to sell instrumentation
systems and technology licenses, in addition to providing assay development and
screening services. Each of these separable elements may be individually
delivered and are not considered essential to the functionality of one another.
The Company allocates revenue under such contracts to each of the separable
elements based

F-33

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

O. SIGNIFICANT REVENUE ARRANGEMENTS (CONTINUED)
on its relative fair value which under most of our agreements approximates the
stated price in the contract.

PFIZER AND WARNER-LAMBERT (ACQUIRED BY PFIZER IN 2000)

Prior to the acquisition of Warner-Lambert by Pfizer in 2000 the Company had
separate contracts with each company. Following the acquisition, the Company
continued to deliver on the individual contracts until the contracts were
amended and consolidated in 2001. The revenues recognized from such contracts
for 1999, 2000 and 2001 are as follows:

Following the amendment and consolidation of the contracts the Company has a
continuing obligation to deliver instrumentation and technology licenses. If
such commitments are delivered and accepted the Company will record as much as
$12,000,000 in revenue.

P. EMPLOYEE BENEFITS

The Company has a 401(k) retirement plan (the "Vertex 401(k) 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. The Company may declare discretionary matching
contributions to the Vertex 401(k) Plan which are payable in the form of Company
shares. The match is paid in fully vested Company shares and employees have the
ability to transfer funds from Company stock as they choose. The Company
declared matching contributions to the Vertex 401(k) plan as follows (in
thousands except per share data):

In connection with the acquisition of Aurora in July 2001, the Company
assumed the Aurora 401(k) Retirement Savings Plan and 401(k) Profit Sharing Plan
Trust (collectively, the "Aurora Plan") covering substantially all employees of
Aurora and its wholly-owned subsidiaries who have completed certain service
requirements. Participants may contribute a portion of their compensation to the
Aurora Plan through payroll deductions. Company-paid Aurora Plan matching
contributions, if any, are determined by the Company at its sole discretion and
payable in the form of cash. The Company's cash contributions under the Aurora
Plan totaled $453,000, $338,000 and $225,000 in 2001, 2000 and 1999,
respectively.

F-34

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Q. RELATED PARTY

A sibling of the Company's Chairman and Chief Executive Officer was a
partner in a law firm representing the Company to which $200,000, $736,000 and
$480,000 in legal fees were paid in 2001, 2000 and 1999, respectively. As of
September 24, 2001 he is no longer a partner with that firm and was hired as
Senior Vice President and General Counsel of Vertex.

In April 2001, Aurora entered into an agreement with a customer, which
included assay development services, product sales and licenses combined with
the purchase of stock in the customer. At the time of the transaction, the Chief
Executive Officer of the customer was a director of Aurora. As of July 18, 2001,
following the acquisition of Aurora by Vertex, the Chief Executive Officer of
the customer is no longer a director of Aurora. The total investment in the
customer is approximately $4,120,000 at December 31, 2001 and represents
approximately 6% of the outstanding equity interest of the customer. The Company
believes that the amounts charged by the Company for services, products and
licenses are comparable to what the Company would have charged had it not
purchased the stock in the customer and had the former director of Aurora not
been affiliated with the customer. The investment is accounted for using the
cost method and is included in Investments on the balance sheet. Total revenue
recognized from this agreement in 2001 was $3,348,000.

As of December 31, 2001, the Company had a loan outstanding to a director in
the amount of $132,000. The loan was interest free and was forgiven in
January 2002 as a result of a retention and non-compete agreement executed by
the Company in April 2001.

In 2001, the Company entered into a consulting agreement with a director of
the Company for the provision of part-time consulting services over a period of
four years at $80,000 per year, commencing in January 2002.

R. 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 Eli Lilly, was granted a
stay in the infringement lawsuit, pending the outcome of the patent
re-examination. That reexamination proceeding is still on-going and the stay is
still in effect. However, a Notice of Intent to Issue a Reexamination
Certificate has been issued in two of the three Chiron patents in suit. While
the length of the stay and the final outcome of the lawsuit cannot be
determined, Vertex maintains that Chiron's claims are without merit and intends
to defend the lawsuit, if and when it resumes, vigorously.

On December 7, 2001 Oregon Health Sciences University filed suit against
Vertex in the District Court of Oregon. The complaint in the suit seeks to name
Dr. Bruce Gold, an employee of Oregon Health Sciences University, as an inventor
and Oregon Health Sciences University as part owner of five of Vertex's
neurophilin patents. The suit stems from assays run on Vertex compounds by
Dr. Gold under a sponsored research agreement in 1996. Vertex has investigated
the inventorship on these patents and believes that Dr. Gold is not an inventor,
Oregon Health Sciences has no ownership interest in any of these patents, and
that the claims made in this complaint are without merit. Vertex intends to
contest this claim vigorously.

F-35

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

S. SEGMENT INFORMATION

The accounting policies of the segments are described in the summary of
significant accounting policies (Note B). The Company evaluates segment
performance based on loss before merger related charges, debt conversion costs,
the cumulative effects related to changes in accounting principles and
extraordinary items. The Company does not evaluate segment performance based on
the segment's total assets and therefore the Company's assets are not reported
by segment. The following tables contain information about results for the years
ended December 31, 2001, 2000 and 1999.

F-36

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

T. QUARTERLY FINANCIAL DATA (UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE DATA)

- ------------------------

* Prior 2001 quarterly financial results have been restated for the
retroactive adoption of the Substantive Milestone Method of revenue
recognition to January 1, 2001. Please refer to "Note C: Change in
Accounting Principle--Revenue Recognition" in the notes to the consolidated
financial statements for further information.

F-37

VERTEX PHARMACEUTICALS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

T. QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)

F-38