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FORM 10-K INDEX
VERTEX PHARMACEUTICALS INCORPORATED Index to Consolidated Financial Statements

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission file number 000-19319

Vertex Pharmaceuticals Incorporated
(Exact name of registrant as specified in its charter)

(617) 444-6100

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:    None

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

Common Stock, $0.01 Par Value Per Share
(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.  [X]

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes [X]  No [    ]

        The aggregate market value of the registrant's common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) based on the last reported sale price of the Common Stock on The Nasdaq Stock Market on June 28, 2002, was $893,950,000.

        As of March 26, 2003, the registrant had 76,502,161 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be held on May 21, 2003 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" and "NanoWell" are registered trademarks of Vertex, and "E-VIPR", "Flying Reagent Dispenser" or "FRD", "GenomeScreen," "Screening Island" and "Topology-Compensating Plate Reader" or "tcPR" are trademarks of Vertex. "Agenerase" is a registered trademark of GlaxoSmithKline. "Prozei" is a trademark of Kissei Pharmaceutical Co., Ltd. "GeneBLAzer", "Vivid" and "PhosphoryLIGHT" are trademarks assigned by Vertex to Invitrogen Corporation. 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:

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our business strategy;



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our predicted development and commercial timelines;



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the selection, development and approval of our products;



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the establishment, development and maintenance of collaborative partnerships;

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our ability to identify new potential products;



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our ability to achieve commercial acceptance of our products;



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our ability to scale up our manufacturing capabilities and facilities;



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the potential for the acquisition of new and complementary technologies, resources and products;



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our projected capital expenditures; and



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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 also 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, neurological disorders and genetic diseases. Our research 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® (amprenavir). We have one product, 908 (GW433908 or VX-175), for which a New Drug Application (NDA) is pending with the U.S. FDA, and we have a total of 15 drug candidates in clinical or preclinical development. Vertex is currently developing approximately half of these drug candidates independently and half with pharmaceutical partners.

        We intend to concentrate our independent development and commercialization efforts on certain products for high-value markets where Vertex can effectively reach large patient populations with a sales force focused on specialists. At the same time, we are collaborating with partners to develop and market other Vertex-discovered products for selected major therapeutic areas. We believe this two-pronged approach will provide us with the opportunity to build long-term value for Vertex shareholders and create the greatest number of product development opportunities for Vertex. In 2003, we are focusing internal development efforts on five major programs for which we presently retain most or all of the downstream commercial rights. These development programs are: VX-148, our second generation IMPDH inhibitor for the treatment of psoriasis; VX-702, our second generation p38 MAP kinase inhibitor for the treatment of acute and chronic inflammatory diseases; VX-563, a small molecule modulator of gene expression with potential application in genetic disorders; VX-765, a second generation ICE inhibitor for chronic and acute inflammatory diseases; and VX-950, a small molecule inhibitor of hepatitis C virus protease. Based on clinical activities planned or underway for 2003, we expect to have clinical data in hand by the end of this year which will help us to select two drug candidates from this portfolio as priority candidates for clinical development and commercialization by Vertex in the U.S.

        Partnerships remain a key component of Vertex's corporate strategy. We have collaborations with Aventis, GlaxoSmithKline, Kissei, Novartis, Schering AG (Germany), Serono 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 through these partnerships, which we expect will generate significant downstream economic benefit to Vertex in the form of increased milestone payments, product revenues and royalty payments. We currently have drug candidates in clinical development under collaborations with GlaxoSmithKline and Aventis. In December, 2002, GSK submitted regulatory applications for market approval of 908 in the United States and Europe. With our partner Aventis we have demonstrated clinical proof of mechanism of pralnacasan (VX-740), a novel oral drug, in the treatment of rheumatoid arthritis, and have initiated a Phase II proof of concept clinical study of pralnacasan in osteoarthritis. We anticipate that Aventis will initiate a Phase IIb study of pralnacasan in rheumatoid arthritis during the first half of 2003.

        Collaborations also are fueling progress in our early-stage pipeline. In 2002, as part of our broad research and development collaboration with Novartis, signed May 2000, Vertex selected three novel small molecule kinase inhibitors for preclinical development. We also have drug candidates in preclinical development under our collaboration with Serono. We have additional research programs underway, and additional novel Vertex drug candidates targeting bacterial gyrase, specific kinases and proteases could enter preclinical studies within the next 12 months. These drug candidates may have application in the treatment of bacterial or viral infection, cancer, inflammation and neurological diseases.

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        Recent advances in biological understanding, including the complete sequencing of the human genome, have elucidated a wide array of biological targets and mechanisms that could be modulated by novel small molecule drugs for the treatment of disease. We have dedicated a substantial portion of our research organization to pursue what we believe is a highly efficient and proprietary approach to discovering novel drugs directed at the most relevant of these targets and mechanisms. Our approach organizes and prioritizes targets within gene families, which are groups of genes with similar sequences that code for structurally similar proteins. This approach essentially clusters targets according to how they interact with chemical inhibitors, and allows us to use high-throughput screening technologies, informatics and medicinal chemistry to rapidly identify drug-like classes of compounds in parallel for multiple targets. In concert with this approach, we use a variety of biological and chemical methodologies that interrogate the function of newly discovered proteins in order to focus our drug discovery and development efforts on the most promising targets within the most promising gene families. We believe that our systematic application of this drug discovery approach is increasing the speed and efficiency of drug design efforts directed at novel biological targets, and is securing valuable intellectual property for us in gene families of interest. Ultimately, we believe that our use of this approach will result in the development and market introduction of many major new drugs.

        We are presently applying our expertise in drug discovery to focus on the protein kinase, protease, caspase, and ion channel gene families, four areas in which we believe we can apply our drug design expertise to create product candidates that address a variety of sizable therapeutic indications. Our collaboration with Novartis 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 has enabled us to expand both our infrastructure and our drug discovery efforts in the protein kinase gene family. Technology and expertise acquired through our acquisition of Aurora Biosciences Corporation in July 2001 have led to a significant expansion of our drug discovery efforts directed at ion channels, a major class of membrane-bound drug targets, and other target classes. We now have a substantial drug discovery organization focused on these target-rich gene families operating at our San Diego, CA site. We are employing a number of proprietary technologies that enhance our drug discovery efforts in these gene families including our E-VIPR system, a high throughput electophysiology system for use in our ion channel drug discovery program, and Screening Island, which includes our Topology-Compensating Plate Reader (tcPR) and Flying Reagent Dispenser (FRD). We anticipate establishing new collaborations with major pharmaceutical companies in order to help provide the funding and resources needed to support these and other drug discovery efforts.

        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.

        The Company's internet address is www.vrtx.com. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available to you free of charge through the "Investors" section of our website as soon as reasonably practicable after those materials have been electronically filed with, or furnished to, the Securities and Exchange Commission.

Product Pipeline

        Vertex has a broad pipeline of novel, small molecule drug candidates targeted at areas of high unmet medical need. We have concentrated our independent development and commercialization efforts on certain products for high-value markets where Vertex can effectively reach large patient populations with a sales force focused on specialists. At the same time, we are collaborating with partners to develop and market other Vertex-discovered products for selected major therapeutic areas. We believe this two-pronged approach will provide us with the opportunity to build long-term value for

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Vertex shareholders and create the greatest number of product development opportunities for the Company.

VERTEX-DRIVEN PROGRAMS

PARTNER-DRIVEN PROGRAMS

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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.

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

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Commercial Product and Clinical Development Programs

        Our first product, Agenerase, received accelerated approval from the FDA in April 1999 and was launched in May 1999. We have one product, 908, for which an NDA is pending with the U.S. FDA, and an MAA is pending in the European Union. We have a total of 15 drug candidates in clinical and preclinical development to treat viral diseases, inflammation, cancer, autoimmune diseases, neurological disorders, and genetic disorders.

VERTEX-DRIVEN DEVELOPMENT PROGRAMS

Infectious Disease Programs

Hepatitis C Virus Infection

        Vertex is developing two drug candidates that target hepatitis C virus (HCV) 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 the human enzyme inosine 5'-monophosphate dehydrogenase (IMPDH). The second compound, VX-950, is in preclinical development. It targets the hepatitis C virus directly, by inhibiting the hepatitis C viral protease enzyme.

IMPDH Program: Infectious Diseases

        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 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.

        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, such as IMPDH, an attractive target for pharmacological intervention aimed at selectively inhibiting proliferation of such cells.

        Vertex is developing novel, orally administered inhibitors of IMPDH, targeting the treatment of both viral and autoimmune diseases. Our most advanced IMPDH-inhibiting 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-naïve patients with HCV infection in order to assess the safety, tolerability and clinical activity of this combination. 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 generated by Vertex demonstrates that merimepodib also has an additive antiviral effect in combination with pegylated interferon and ribavirin. In 2002, we initiated a triple combination Phase II study of merimepodib with pegylated interferon and ribavirin. The study was designed to establish the safety of the triple

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combination. It is a 6-month study, with an optional 6-month extension phase for patients who have responded to treatment. In addition, we will look for evidence of an additive antiviral effect for merimepodib when combined with pegylated interferon and ribavirin. The enrollment period for this study is complete. We expect to provide an update on the status of this development program in the second half of 2003.

        We have two additional IMPDH inhibitors, VX-148 and VX-944, in development, targeting autoimmune and oncology indications. More information on VX-148 and VX-944 is available in the section titled "Autoimmune Diseases," beginning on page 8.

        We retain all commercial rights to merimepodib and second generation compounds resulting from our IMPDH research and development program.

Hepatitis C Protease Program

        In 2001, Vertex and Eli Lilly selected VX-950, a potent, oral HCV protease inhibitor, for preclinical development. In the first quarter of 2003, Vertex announced that it had restructured its collaboration with Eli Lilly and now holds worldwide rights to VX-950. Based on preclinical work begun in 2002, we expect to begin Phase I clinical development of VX-950 in the second half of 2003. We believe that VX-950 is among the first reported drug development candidates of a new class of antiviral drugs being studied to inhibit hepatitis C NS3-4A protease, an enzyme considered essential for HCV 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. We have ongoing drug discovery efforts in the area of HCV protease inhibitors and we plan to select one additional drug candidate in the next 12 months. We hold worldwide rights to VX-950 and all other second-generation HCV protease inhibitors discovered in our collaboration with Eli Lilly.

Background: Hepatitis C

        Identified in 1989, hepatitis C virus (HCV) causes chronic inflammation in the liver. In a majority of patients, HCV establishes a chronic infection that can persist for decades and eventually lead to cirrhosis, liver failure and liver cancer. HCV infection represents a significant medical problem worldwide. 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 World Health Organization (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 viral infection 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.

Inflammation and Autoimmune Disease

Inflammatory Disease

Interleukin-1b Converting Enzyme Program

        Vertex is conducting research and development on inhibitors of interleukin-1b converting enzyme (ICE; caspase-1) for the treatment of acute and chronic inflammatory conditions. We are collaborating with Aventis S.A. in the development of the lead ICE inhibitor compound, pralnacasan (VX-740). Vertex has independently 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

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VX-765 reduces inflammation and cytokine levels in animal dermatitis and arthritis models. We expect to begin Phase I clinical studies of VX-765 in the second quarter of 2003. We hold worldwide rights to VX-765 and other compounds emerging from our second generation ICE inhibitor research program. For more information on ICE inhibitors, see the Interleukin-1b Converting Enzyme Program section of "Partner-Driven Programs" below.

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-1b. We have extensive pre-clinical and clinical experience with p38 MAP kinase inhibitors, which have the potential to be a powerful and broadly useful new class of oral anti-inflammatory drugs. The objective of our research collaboration with Kissei was 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. We 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 MAP kinase inhibitor development efforts with Kissei around a second generation compound, VX-702, which does not cross the blood brain barrier and represents a chemical class that is distinct from VX-745. We also have a third p38 MAP kinase inhibitor, VX-850, which is in preclinical development.

        In June 2002, we initiated a Phase I clinical study of VX-702. The double-blind, placebo-controlled, randomized clinical trial was designed to test the safety, tolerability, pharmacokinetics and pharmacodynamics of VX-702 in single and multiple doses in healthy volunteers.

        Vertex expects to begin Phase II development of VX-702 in the second quarter of 2003. As a novel p38 MAP kinase inhibitor, VX-702 would be expected to have benefit in a variety of diseases where inflammation plays an essential role. We intend to explore the potential of VX-702 in a variety of disease settings and have made a strategic decision to advance the clinical development of VX-702 in both acute and chronic disease indications. The initial focus of the Phase II program will be aimed at the use of VX-702 in acute coronary syndromes (ACS). ACS is a broad term that includes unstable angina and certain types of myocardial infarctions. We expect to provide further information on our development strategy for VX-702, including plans for a chronic indication, in the first half of 2003.

        We have collaborated with Kissei on the discovery and development of novel p38 MAP kinase inhibitors since 1997. The research portion of our collaboration with Kissei was completed in 2000. Under the agreement with Kissei, we hold development and commercial rights in the United States and Europe for our p38 MAP kinase inhibitors. Kissei holds development and commercial rights in Japan and certain Asian countries for VX-745 and VX-702, but not VX-850.

Background: p38 MAP Kinase 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.

        The central role of inflammation in many cardiovascular diseases has been well established in scientific literature. Specifically, inflammation is being increasingly recognized as a key component of the overall process in the development of coronary artery disease and particularly acute coronary syndromes. The p38 MAP kinase enzyme regulates the production of key proinflammatory cytokines

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implicated in the pathogenesis of ACS, including tumor necrosis factor-alpha (TNF-alpha), interleukin-1b (IL-1b) and interleukin-6 (IL-6). As a potential once-daily therapy addressing a novel target for ACS, VX-702 could provide a first-in-class approach to complement current therapies for this disease, which affects nearly 1.9 million individuals in the U.S. each year.

        We are aware of several other companies that are developing p38 MAP kinase inhibitors, and competition could also come from other drugs, in development or approved, that have different mechanisms of action for treating rheumatoid arthritis and other inflammatory diseases.

Autoimmune Diseases

IMPDH program

        We are independently developing novel, orally administered inhibitors of the enzyme inosine 5'-monophosphate dehydrogenase (IMPDH), targeting the treatment of both autoimmune diseases and cancer. In 2000, we designated two 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, discussed above under the heading "IMPDH Program: Infectious Diseases". VX-148 and VX-944 are in Phase II and Phase I development, respectively.

        In December 2002, we initiated a Phase II clinical trial with VX-148 for the treatment of moderate to severe psoriasis. The Phase II double blind, randomized, placebo-controlled study will evaluate two different doses of VX-148 in 75 psoriasis patients who will be treated twice daily (BID) for 12 weeks, with a 12-week follow-up period. The primary objective of the study is to evaluate the safety, tolerability and pharmacokinetics of VX-148. The secondary objective is to preliminarily evaluate the clinical activity of VX-148, as assessed by various accepted measures of clinical outcomes for psoriasis treatment evaluation.

        We also initiated a Phase I clinical trial of VX-944 in healthy volunteers in November 2002. The primary objective of this study will be to evaluate the safety, tolerability, and pharmacokinetics of VX-944 compared to placebo.

        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:

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Mycophenolate mofetil (MMF, or CellCept®), 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).



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Mizoribine (Bredinin®) 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 and cell growth, we believe that VX-148 and VX-944 have the potential to treat a wide variety of autoimmune diseases including such diseases as psoriasis, multiple sclerosis and rheumatoid arthritis, as well as many hematological and solid tumors.

Genetic Disorders

        In the first quarter of 2003, Vertex began a Phase I clinical trial of VX-563, an oral, small molecule modulator of gene expression that has potential application in sickle cell disease and other genetic disorders. The primary objective of the study is to evaluate the safety, tolerability and pharmacokinetics of VX-563 compared to placebo. VX-563 has been tested in vitro, and in vivo in animal models, for several disease indications including sickle cell disease and Huntington's disease.

        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

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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. Current treatments for sickle cell disease are ineffective and often 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 sickle cell disease. 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 sickle cell disease 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.

PARTNER-DRIVEN DEVELOPMENT PROGRAMS

Infectious Disease Programs

HIV/AIDS Program (GlaxoSmithKline)

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. Agenerase received regulatory approval in the U.S. in April 1999, and it is now marketed 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™. 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 receive royalties on sales of amprenavir by GlaxoSmithKline and Kissei. We also supply amprenavir bulk drug substance to Kissei. We believe that approximately 15,000 patients in 51 countries worldwide take Agenerase as part of combination therapy for the treatment of HIV. Agenerase's share of HIV protease inhibitor prescriptions in the U.S. was approximately 6.2% as of December 31, 2002.

        Agenerase has been approved for once-daily use based on data that demonstrates that the protease inhibitor ritonavir significantly boosts levels of Agenerase in the bloodstream in both once-daily and twice-daily dosing regimens. Co-administration of protease inhibitors 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 2002, 60% to 70% of Agenerase used in the United States was estimated to be in combination with ritonavir.

908 (VX-175)

        Our second HIV protease inhibitor, 908 (also known as VX-175) is being developed by our partner GlaxoSmithKline as part of our collaboration with them.

        908 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. In view of the large number of pills that HIV-infected patients typically require daily as part of combination drug regimens, the dosing benefit of 908 could provide a material increase in physician

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acceptance of and patient compliance with this product as compared to currently marketed protease inhibitors. VX-175 was synthesized at Vertex and then selected for development by GlaxoSmithKline.

        Our partner GlaxoSmithKline has conducted and substantially completed a state-of-the-art Phase III clinical program for 908. This pivotal program included trials in both treatment-naïve and treatment-experienced patients. The first study (NEAT) compared 908 to nelfinavir in treatment-naïve patients. The second study (SOLO) compared 908 in combination with ritonavir, administered once-daily, to nelfinavir in treatment-naïve patients. The third study (CONTEXT) evaluated both once-daily and twice-daily dosing of 908 in combination with ritonavir, compared to lopinavir/ritonavir, in treatment-experienced patients. In all of these studies, patients received reverse transcriptase inhibitors as part of the combination regimen. In 2002, Vertex and GlaxoSmithKline reported that the NEAT and SOLO studies met their endpoints at 48 weeks, and that the CONTEXT study met its endpoints at 24 weeks. Based on data collected from all three pivotal trials, 908 demonstrated good tolerability. On December 20, 2002, GlaxoSmithKline filed a New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA) and a Marketing Authorization Application (MAA) in the European Union (E.U.) for marketing approval of 908 in the U.S. and E.U. The submissions for registration included data from more than 1,100 treatment-naïve and treatment-experienced patients who participated in the Phase III trials. The FDA has informed GlaxoSmithKline that the NDA covering 908 has been accepted for filing and that 908 will receive a standard review. We have been informed by GlaxoSmithKline that its collection and submission of certain additional data requested by the FDA regarding 908 is proceeding as planned. We expect that 908 can be approved and launched in the U.S. in the fourth quarter of 2003.

        Data from the Phase III clinical program was presented at various medical conferences in 2002 and 2003. In the NEAT trial, 66% of 166 HIV positive patients achieved an undetectable viral load with 908, compared to 51% of 83 patients taking nelfinavir. In the SOLO study, 68% of 322 HIV-positive patients achieved undetectable viral load with 908/ritonavir compared to 65% of 327 patients taking nelfinavir. The preliminary 24-week data from the CONTEXT study has shown similar efficacy responses in both the 908/ritonavir regimens and the lopinavir/ritonavir regimen, meeting the primary endpoint of non-inferiority in the study at 24 weeks. Data from the three pivotal trials has shown that the incidence of adverse events was low in 908 treatment groups.

        908 will offer important new benefits as well as retaining many of the favorable properties associated with amprenavir including:

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a half-life which allows for convenient twice-daily dosing and provides high levels of the drug in the bloodstream;



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ability to be dosed once daily when co-administered with ritonavir;



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ability to be dosed effectively with or without food, providing convenience for patients;



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well tolerated;



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relatively low levels of cross-resistance to other protease inhibitors; and



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a favorable lipid profile.

        GlaxoSmithKline is developing 908 and has marketing rights in the United States, Europe and certain countries of the Far East. We currently hold the option to develop and commercialize 908 in Japan. We also have a co-promotion option in the United States and the European Union, and we will receive royalties on any sales of 908 by GlaxoSmithKline. We also retain rights to supply bulk drug substance to GlaxoSmithKline.

VX-385

        In 2001, GlaxoSmithKline advanced into preclinical development a third novel, orally available HIV protease inhibitor discovered by Vertex, VX-385 (GW640385). In November 2002, we announced

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that GlaxoSmithKline had begun Phase I evaluation of VX-385. We expect that GlaxoSmithKline will continue clinical development of this compound in 2003. 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, 908, and other currently marketed protease inhibitors.

Background: Treatment of HIV/AIDS

        Infection with HIV 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 are infected with HIV. The U.S. Centers for Disease Control estimates that there are 980,000 patients in the United States infected with HIV.

        Protease inhibitors (PIs) are used as part of combination regimens for the treatment of HIV. PIs block the cleavage of HIV polyproteins into active proteins, and result in the production of non-infectious viral particles. Currently, more than 174,000 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 estimated at more than $1.6 billion in 2002, and U.S. sales alone were estimated at more than $950 million in 2002.

        There are now four 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; the fusion inhibitor enfuvirtide; and PIs, including Agenerase.

Sepsis (Serono; Taisho)

        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. Under an agreement signed in 2000, Serono S.A. holds an option to 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 Program" on page 15. 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.

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Inflammation and Autoimmune Disease

Inflammatory Disease

Interleukin-1b Converting Enzyme Program (Aventis)

        We are conducting research and development on inhibitors of interleukin-1b converting enzyme (ICE; caspase-1) for the treatment of acute and chronic inflammatory conditions. We are collaborating with Aventis S.A. in the development of the lead ICE inhibitor compound, pralnacasan (VX-740), and Aventis is investing to develop pralnacasan in parallel for both rheumatoid arthritis and osteoarthritis. In January 2003, Aventis began a Phase II proof-of-concept study of pralnacasan in patients with osteoarthritis. The study will evaluate 400 patients treated with pralnacasan or placebo for 12 weeks. The study is intended to enable Vertex and Aventis to evaluate the safety and efficacy of pralnacasan in osteoarthritis patients. We expect that Aventis will begin a Phase IIb study of pralnacasan in patients with rheumatoid arthritis in the second quarter of 2003.

        In 2002, Aventis completed a 250 patient Phase IIa 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. Data from the Phase IIa clinical trial demonstrated that treatment with pralnacasan was well tolerated and led to positive anti-inflammatory effects in patients with rheumatoid arthritis. More specifically, the Phase IIa data demonstrated that:

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Patients receiving pralnacasan exhibited a dose-dependent trend towards improvement in signs and symptoms of disease as measured by ACR20 response rates after 12 weeks.



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Patients receiving 1200 mg/day of pralnacasan in the intention-to-treat population exhibited ACR20 response rates of 44% compared to a response rate of 32.7% in the group receiving placebo.



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In post-hoc subset analyses, both patients receiving stable concomitant methotrexate (MTX) treatment for >6 months and patients not receiving concomitant MTX treatment exhibited statistically significant, dose-dependent improvement in ACR20 response rates with pralnacasan treatment.



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Patients receiving the higher dose of pralnacasan (1200 mg/day) had statistically significant reductions in the inflammatory biomarkers C-reactive protein, erythrocyte sedimentation rate, and serum amyloid A.



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Treatment with pralnacasan enabled patients to reduce their concomitant corticosteroid therapy.



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Pralnacasan was well tolerated. The incidence of dose limiting adverse events (AEs) were similarly distributed among treatment groups overall. The most common AEs judged to be treatment-related were mild to moderate diarrhea and nausea, which were seen in <5% of the study population and were generally unrelated to dose.

        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 the production of interleukin-1b, a cytokine 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 certain other compounds discovered under our previous research collaboration with Aventis. We will receive milestone payments for successful development of pralnacasan in rheumatoid arthritis, as well as for each additional indication for which it is developed (including osteoarthritis). Additionally, we will receive royalties on any sales of pralnacasan and Aventis will partially fund a Vertex co-promotion effort in the U.S.

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Background: ICE Inhibitors for Inflammatory Disease

        ICE (caspase-1) is an enzyme that controls the release of active interleukin-1 beta (IL-1b) (one of two forms of IL-1) and IL-18 from white blood cells into the bloodstream and within tissues. IL-1b 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-1b 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-1b and IL-18 levels has been correlated with disease states in a number of acute and chronic inflammatory diseases.

        Rheumatoid arthritis (RA) is the lead indication for the pralnacasan development program. In patients with RA, increased activity of IL-1b and IL-18 is observed in joint tissues during disease flare-ups, and IL-1b and IL-18 are known to activate osteoclasts, a cell type important in bone erosion characteristic of rheumatoid arthritis.

        There are more than 6 million patients with RA worldwide, including approximately 2.1 million in the United States. The main drugs currently used to treat RA 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 liver toxicity. Even when tolerated well, over the long term many patients become unresponsive to methotrexate. Newer therapies including Enbrel® (etanercept) and Remicade® (infliximab) provide a strong rationale for a new kind of disease-modifying therapy that involves inhibition of the cytokine tumor necrosis factor (TNF) alpha. In 2001 Kineret® (anakinra) became the first therapy approved for RA targeting the cytokine IL-1b. However, these newer agents are injectable, and can be inconvenient and painful to administer. We believe that a well tolerated oral cytokine inhibitor such as pralnacasan may have significant commercial advantages.

        Osteoarthritis (OA) is the second indication for which pralnacasan is being developed. The inflammatory response plays a large role in the joint damage characteristic of OA, and increased cytokine activity has been observed in OA. Specifically, IL-1b is a key driver of pathology in OA, and animal models provide a strong rationale for pursuing IL-1b modulation for the treatment of OA.

        OA, a degenerative joint disease, is the most common form of arthritis, afflicting more than 240 million patients worldwide, including more than 21 million in the United States alone. Onset generally occurs after middle age, and as the disease progresses, it causes the loss of cartilage, damage to bone, formation of bone spurs, and inflammation of the soft tissues. OA may also occur in joints that have suffered previous injury, have been subjected to prolonged heavy use, or have been damaged by prior infection or inflammatory arthritis. Patients with OA experience pain, tenderness, swelling and progressive loss of mobility. OA is currently treated with over-the-counter drugs as well as palliative treatment such as NSAIDS and COX-2 inhibitors. These drugs do not address the underlying progressive joint destruction, while patients with more severe cases may become candidates for partial or total joint replacement surgery.

        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. We believe that pralnacasan is the only specific ICE inhibitor to be advanced into clinical trials and is the most advanced oral cytokine inhibitor in development.

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RESEARCH PROGRAMS

Vertex Drug Design Platform and Drug Discovery Strategy

        We believe that our integrated drug design approach 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 orally-available 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.

        Focused Drug Discovery in Target-Rich Gene Families.    Vertex has pioneered a novel approach to drug discovery in target-rich gene families. Our approach organizes and prioritizes targets within gene families, which are groups of genes with similar sequences that code for structurally similar proteins. This approach essentially clusters targets according to how they interact with chemical inhibitors, and allows us to use high-throughput screening technologies, informatics and medicinal chemistry to rapidly identify drug-like classes of compounds in parallel for multiple targets. In concert with this approach, we use a variety of biological and chemical methodologies that interrogate the function of newly discovered proteins in order to focus our drug discovery and development efforts on the most promising targets within the most promising gene families. We believe that our systematic application of this drug discovery approach is increasing the speed and efficiency of drug design efforts directed at novel biological targets, and is securing valuable intellectual property for us in gene families of interest. Ultimately, we believe that our use of this approach will result in the development and market introduction of many major new drugs.

Target-Rich Gene Family Drug Discovery Programs

        We have four major research programs in target-rich gene families. These research programs utilize our focused 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.

Kinase Program

        We have a broad-based drug discovery effort targeting the human protein kinase family, which consists of approximately 500 members. Protein 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. Kinase activity has been implicated in most major diseases, including cancer and autoimmune, inflammatory, cardiovascular, metabolic, and neurological diseases. Thus, kinases can be ideal targets for therapeutic intervention. The clinical success of the oncology drugs Gleevec (Novartis) and Iressa (Astra Zeneca) offer examples of how small molecule kinase inhibitors can be tailored to address specific diseases.

        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 protein kinases. The support provided by Novartis is enabling us to further expand both our infrastructure and parallel drug

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design efforts within this family. The collaboration addresses all human protein kinases excluding a small number of targets for which the two companies had substantial efforts underway prior to initiation of the agreement. For example, the p38 MAP kinase, excluded from our Novartis collaboration, is the molecular target for the Vertex drug candidates VX-702 and VX-850, which are in different stages of clinical development for inflammatory disease.

        In 2002, we selected three novel, small molecule kinase inhibitors from our program with Novartis for preclinical and clinical development. VX-528 is a small molecule inhibitor of Aurora kinases, which are three closely-related proteins required in rapidly dividing cells. Inhibition of Aurora kinase activity with a small molecule may provide a means of slowing or reversing the uncontrolled cell growth observed in cancer. VX-680 is a potent small molecule inhibitor of Aurora kinases and of FLT3 kinase. More than 30% of patients with acute myelogenous leukemia (AML) have activating mutations of FLT3. Thus VX-680 could provide therapeutic benefits for solid tumors and for hematological malignancies including AML. We also selected VX-608, a small molecule inhibitor of GSK3-b kinase. In June, 2001 we reported the 3-dimensional atomic structure of GSK3-b. Vertex researchers have developed proprietary information on the function of GSK3-b in the onset and progression of stroke, and have used that information to design and optimize VX-608. VX-608 has demonstrated broad activity in reducing tissue damage and improving outcomes in several preclinical models of stroke.

        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.

        The infrastructure created over the first 3 years of the Novartis/Vertex collaboration has enabled a parallel approach to drug discovery in the kinase gene family. This unique approach has Vertex poised for continued productivity. Over the next five years, we envision advancing a significant number of kinase inhibitors into clinical development targeting multiple therapeutic areas.

Caspase Program

        Caspases are a subfamily of proteases that 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 applying 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 small molecule caspase inhibitor drug candidate for clinical development in the coming years. VX-799 is currently in preclinical development.

        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 medicinal and computational chemistry tools, Vertex scientists made rapid progress in the design and

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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 (caspase-1). In November 1999, we began collaborating with Taisho Pharmaceutical Co., Ltd. to discover, develop, and commercialize other 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 the option to establish a joint venture with Serono.

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 proprietary technologies. 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, and lamotrigine and carbamezepine which are sodium channel inhibitors for the treatment of epilepsy, 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. 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. Within the next 18 months we expect to select novel small molecule drug candidates from this program for preclinical development.

Protease Program

        We also have a drug discovery effort targeting both human and viral proteases. The protease gene family consists of approximately 400 proteases that play a role in many different diseases. 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.

        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, including 908, which has a pending NDA filed with the U.S. FDA. 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 a broad Phase II development program. We also have two additional drug candidates targeting caspases in development. In 2003, Vertex expects to advance VX-950, an inhibitor of HCV protease (a serine protease), into Phase I 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.

Additional Gene Families

        We plan to utilize our 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 g-protein coupled receptors (GPCRs), nuclear receptors and phosphatases.

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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 worldwide sales of nearly $4 billion in 2001. 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 have discovered a class of molecules that also shows activity against the highly similar par E subunit of topoisomerase IV, another essential bacterial enzyme. These dual gyrB/parE inhibitors not only appear to be potent in preclinical testing, but may also be less susceptible to the development of drug resistance, a major and growing problem with marketed antibiotics. We are currently optimizing this dual inhibitor class and plan to select a clinical candidate in 2003.

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.

        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 neurorestorative agents for the treatment of a variety of neurological disorders. During 1999, we announced that orally administered neurophilin compounds discovered at Vertex, including compounds that do not interact with FKBP-12, significantly improve outcome in two different preclinical models of Parkinson's disease. We also reported for the first time that compounds that do not interact with FKBP-12 can improve outcomes in animal models of peripheral neuropathies. 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. Some compounds have been chosen for a more detailed investigation with the objective of selecting compounds for preclinical development in the future.

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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. Since our inception in 1989, we have advanced more than 15 drug candidates into development directed at biologically complex targets in areas of unmet medical need. Selected technologies include:

        Genomics and Bioinformatics.    To further our parallel drug design strategy, we place a great emphasis on collecting, annotating, and organizing scientific information from both public and private sources. This information can be from scientific sources (biological, genomic, chemical, or clinical) and from patents. We have developed proprietary software to help scientists access and learn from this information.

        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. We also use antisense, siRNA, dominant negative cell lines, and other biological approaches to better characterize the role played by specific targets in 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. Recent improvements in protein production and automated liquid handling have dramatically increased our ability to perform parallel crystallization trials. 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 the evaluation and selection of compounds for synthesis. During our virtual ("in silico") screening process, in excess of one billion compounds can be evaluated in one day to select several hundred or several thousand candidate compounds for synthesis and screening. These in silico tools enable us to analyze libraries of compounds for their potency, cell permeability, solubility, and other physical and biological properties relevant for drug design. Based on experimental results, new information is added to the process and the cycle is repeated. By using proprietary algorithms to sort and filter compounds for specific properties, our chemists can focus on synthesizing compounds that are more likely to lead to the rapid identification of development candidates.

        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 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.

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        Assay Development.    We have premier capabilities in assay development and screening that allow us to rapidly generate large numbers of high quality lead compounds and drug candidates across all major gene families. We conduct several hundred assays per year, and are utilizing our assay development to develop novel proprietary assays to establish the ADME/toxicology profiles for compounds in our screening library. We believe that our assay capabilities allow us to gain useful information about our compounds early in the discovery process, which furthers research productivity.

        Assay Technologies.    Our assay development and screening platform is built upon a number of capabilities and gene reporter technologies, such as green florescent protein (GFP) and beta lactamase, to which we acquired rights through our 2001 acquisition of Aurora Biosciences Corporation. A key technology for the assay development platform is beta lactamase, which enables fluorescence-activated cell sorting, and is readily adapted to a broad range of target classes. Vertex continues to find useful applications of beta-lactamase, such as GenomeScreen.

        High-Throughput Screening.    Vertex significantly enhanced its chemical management and screening capabilities with the acquisition of Aurora Biosciences Corporation. These capabilities include aspects of the proprietary ultra high-throughput screening (UHTSS) system which integrates compound management, plate replication with miniaturized screening, hit (potential lead) identification and follow-up. The ultra high-throughput capability is achieved through the use of our NanoWell® assay plate, which contains 3,456 wells in a standard microplate footprint. Assays for most enzyme and receptor targets are conducted in this format.

        Ion Channel Platform.    Our patented universal ion channel technology platform, includes the VIPR (Voltage/Ion Probe Reader) and VIPR II subsystems, proprietary voltage sensor probes and assay methods. 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. Vertex has developed advanced proprietary applications of these technologies which enable high-throughput, mechanistic studies of compound action on ion channels. These applications include the development of our E-VIPR platform which enables optical membrane potential assays for detecting activity of rapidly gating channels, such as certain voltage-gated channels.

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 a $15 million up-front 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 further amounts are based on the development of eight drug candidates. We are responsible for drug discovery and clinical proof-of-concept testing of all drug candidates. Under our agreement, Novartis has also created a $200 million loan facility to support our clinical studies, which we may draw down in amounts of up to $25 million for each drug candidate. The loans are interest free and Novartis will forgive the full amount of any advances with respect to a particular drug candidate if Novartis accepts the drug candidate for further development under our agreement. During 2002 we drew a $5 million advance against the loan facility to support our early development efforts related to a particular drug candidate. Novartis will have exclusive worldwide development, manufacturing and marketing rights to clinically and commercially

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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. Upon one year's written notice, Novartis may terminate this agreement without cause, effective no earlier than May, 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 certain other compounds discovered as part of the research collaboration between HMR and us 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 has paid us a $20 million up-front payment for prior research costs, and has agreed to pay us up to $62 million in milestone payments for successful development by Aventis of pralnacasan in rheumatoid arthritis, the first targeted indication. Milestone payments are also due for each additional indication. Aventis initiated a Phase IIa clinical study of pralnacasan in osteoarthritis in January 2003. The agreement also provides that Aventis will partially fund a Vertex co-promotion effort in the U.S. Aventis has the right to terminate this agreement without cause upon six months' written notice. Termination by Aventis will end any license we have granted Aventis under the agreement.

GlaxoSmithKline

        In December 1993, we entered into a collaboration with GlaxoSmithKline covering the research, development and commercialization of HIV protease inhibitors, including Agenerase (amprenavir), 908 (an amprenavir prodrug), 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 up-front 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. We have received the entire $42 million and in 1999 began receiving royalties on sales of Agenerase. GlaxoSmithKline is also obligated to pay us additional development and commercialization milestone payments for subsequent drug candidates, including 908 and VX-385. In the fourth quarter of 2002 we received a milestone payment of $1.5 million from GlaxoSmithKline in connection with the submission of an application for marketing approval for 908 in the U.S. and the European Union. 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 (now owned by Pharmacia/Pfizer) patent applications claiming HIV protease inhibitors, to permit Vertex and GlaxoSmithKline to develop, manufacture and market Agenerase and 908 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.

Serono S.A.

        In December 2000, we entered into a collaboration with Serono S.A. to discover, develop, and market caspase inhibitors. The Agreement covers caspase inhibitors other than certain ICE inhibitors

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and related compounds which are the subject of our agreement with Aventis described above. 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. We have received $5 million in up-front payments for prior research, and could also receive up to $20 million in research funding, some of which has been paid, over the five year agreement term. We could also receive up to $70 million in milestone payments for the successful development and commercialization of one or more drug candidates. The two companies will share development costs. We have the option to establish a joint venture with Serono for the commercialization of products in North America, where we will share marketing rights and profits from the sale of drug products. 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 supplies of drug substance. Serono has the right to terminate the agreement without cause upon 90 days' written notice, effective at July 1, 2004.

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's research program funding obligations ended in the third quarter of 2002, and its development options with respect to compounds generated in this program ended in February 2003. Taisho has paid the full amount required to be paid by it under the program but has not elected to bring any compounds into development in its territory.

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 have an equal role in management of neurophilin ligand research and product development. The agreement provided that Schering AG would pay us up to $88 million, comprised of a $6 million up-front payment made upon signing in September 1998, $22 million of product research funding over five years and up to $60 million of development and commercialization milestone payments. Research funding under this agreement concluded in the fourth quarter of 2002, and we received the full amount of research funding specified in the agreement. Schering AG has an option exercisable until February 24, 2004 to designate a compound or compounds for 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. 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 drug substance 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 upon signing the agreement. We have received the full amount of research funding specified under the agreement.

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        p38 MAP Kinase.    In September 1997, we entered into a collaboration with Kissei to identify and develop compounds that target p38 MAP kinase. We are collaborating with Kissei in the development and commercialization of VX-702, a novel, orally active p38 MAP kinase inhibitor for the treatment of ACS and inflammatory diseases. Kissei has exclusive rights to develop and commercialize VX-702 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 up-front 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 development 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. In December 2001, together with Eli Lilly, we selected VX-950 for development. In December 2002, we restructured our agreement with Eli Lilly ending the research collaboration approximately six months early and granting us worldwide rights to compounds identified during the collaboration. We will lead development and commercialization of VX-950. We will pay Eli Lilly a royalty on future product sales of VX-950 and other HCV protease inhibitor compounds.

Discovery Tools and Services

Overview

        We acquired Aurora Biosciences Corporation and its subsidiary PanVera Corporation (PanVera) in July 2001. At the time of the acquisition, Aurora was in the business of developing and commercializing core technologies to accelerate the discovery of new medicines, including a broad portfolio of proprietary fluorescence assay technologies and screening platforms designed to provide an integrated solution for drug discovery. Fluorescence assay technologies developed and commercialized by Aurora include GeneBLAzer™, GenomeScreen™, Vivid™ and PhosphoryLIGHT™ technologies, as well as a broad collection of fluorescent proteins. Aurora's screening platforms include its ultra high-throughput screening system, the UHTSS® 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™ subsystem. Aurora produced and sold proteins, and provided protein cloning, expression and purification services through PanVera. Aurora also provided target discovery, assay development, screening and other services to its customers.

        As of July 1, 2002, we began to commercialize Aurora instruments and services, together with PanVera's reagents and probes business, under the name PanVera LLC. PanVera LLC's core business includes commercialization of fluorescence assay technologies, assay development services, the manufacture and sale of proteins, reagents and probes and the development and sale of instrumentation systems. The former Aurora site in San Diego, now operating under the name Vertex Pharmaceuticals (San Diego) LLC (Vertex San Diego), focuses mainly on pharmaceutical drug discovery. Vertex San Diego has retained exclusive rights to certain proprietary research tools, including particularly the E-VIPR system and certain voltage sensor probes, for use solely in pharmaceutical research. We also retained freedom to operate and innovate under all technologies transferred to PanVera LLC for commercialization.

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        On February 4, 2003, Vertex and PanVera LLC entered into an Asset Purchase Agreement with Invitrogen Corporation, pursuant to which Invitrogen agreed to purchase certain assets of PanVera LLC, including certain biochemical and cellular assay capabilities and its commercial portfolio of proprietary reagents, probes and proteins, for approximately $95 million in cash plus the assumption of certain liabilities. The disposition did not include the instrumentation system assets. The sale was completed on March 28, 2003. In connection with the sale we have agreed with Invitrogen that we may use in our drug discovery activities, but will not engage for a term of five years in the business of providing, reagents, probes or assay development services. We will also purchase a minimum of $3 million of products annually from Invitrogen for three years after the completion of the sale.

        The instrumentation business formerly conducted by Aurora and PanVera LLC will now be conducted under the name Aurora Instruments LLC.

Instruments

        Our 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. Our second-generation voltage ion probe reader, 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 our 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. We are also developing other instruments that we believe will significantly impact the productivity of our drug discoveries effort. Our Flying Reagent Dispenser (FRD) performs automated, high-speed, accurate liquid dispensing for stand-alone, benchtop applications using high-density plate formats. The Topology-Compensating Plate Reader (tcPR) provides fast, multi-channel ratiometric fluorescence reading on high-density assay plates. Accuracy is enhanced by adapting the optics to the topology of each plate, compensating for small differences in topology ("warping") from one plate to the next. The multi-tip piezo dispenser delivers nanoliter to microliter volumes with very high accuracy for reformatting compound libraries and other liquid stocks. The automated liquid handler can handle any combination of plates from 96 to 3,456-wells per plate.

        We continue to develop instruments to enable the decentralization of screening and dose response work in cell-based and biological based assays. Screening Island I (SSI), the first stage of this deployment, enables the unattended screening of ›100,000 compounds in a 10 hour time period. It contains two FRDs, two incubators for mamalian cell culture or assay incubation, and a high speed dual channel fluorescent reader. The instrument package is integrated with commercially available scheduling software and a high precision laboratory scale robot. The SSI was first put into service in February 2002. Screening Island II is the next generation instrument that is designed to have an integrated, miniaturized chemical handling feature. As designed, the system will enable the preparation of dosed screening plates from a miniaturized library of chemical samples contained in nanoplates.

        E-VIPR is Vertex's proprietary ion channel screening technology which uses fluorescent probes and waves of electrical stimulation to study ion channels. E-VIPR provides an automated, high-throughput platform with which we can obtain data of comparable quality to patch clamping at speeds up to a thousand times faster. E-VIPR can be used to study both fast and slow channel activity and to study state dependence, a phenomenon in which compounds bind preferentially to certain conformations of channels. E-VIPR can be used to study mechanism of action as well as to determine the selectivity of compounds for specific ion channels. With respect to voltage-gated channels, electrical stimulation eliminates the need for the addition of liquids and pharmacological modifiers which often distort the native conformation and activity of ion channels.

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        Some of our instruments are available commercially through our wholly-owned subsidiary Aurora Instruments LLC.

Intellectual Property

        We vigorously pursue patents to protect our intellectual property. As of December 31, 2002, we owned, in whole or in part, 130 issued U.S. patents and 204 pending U.S. patent applications covering proprietary technologies and intellectual property within our discovery and development programs, as well as foreign counterparts in many other countries. We were also exclusively licensed to 19 additional issued U.S. patents and 14 pending U.S. applications, as well as foreign counterparts thereof. As of the same date, our subsidiary PanVera LLC owned or exclusively licensed an additional 33 issued U.S. patents and 25 pending U.S. applications as well as foreign counterparts thereof covering their technologies. Upon the sale of certain assets of PanVera LLC on March 28, 2003, we transferred to the buyer of those assets all of PanVera LLC's rights to the patents and patent applications related to those assets, and entered into non-exclusive licenses permitting us freedom to operate under the PanVera LLC patents and patent applications solely in the research field and to fulfill existing obligations.

        We actively seek, when appropriate, protection for our products and proprietary information by means of United States and foreign patents, trademarks and contractual arrangements. In addition, we rely upon trade secrets and contractual arrangements to protect certain of our proprietary information and products. In addition to patents and pending patent applications that relate to potential drug targets, compounds we are developing to modulate those targets, and methods of using 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:

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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 an issued patent in the United States and patents and pending applications in other countries claiming 908 and related compounds. We also have applications pending in the United States and other countries claiming VX-385 and related compounds.



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issued United States patents that cover classes of chemical compounds, pharmaceutical compositions containing such compounds, and methods of using those compounds to treat or

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prevent IMPDH-mediated diseases. The class of compounds covered by one of these patents includes merimepodib. We also have an issued patent in the United States and patents and pending applications in other countries claiming VX-148, VX-944, and related compounds.

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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.



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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.



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



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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.



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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 have an issued U.S. patent on a mutent caspase target discovered under our caspase inhibitors program.



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



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issued United States patents and filed applications worldwide claiming inhibitors of multiple kinases, as part of our kinase research programs.



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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.



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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.

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Manufacturing

        We rely on third party manufacturers and collaborative partners to produce our compounds for 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, 908. If we were to exercise that option, we would expect to need to rely upon one or more contract manufacturers to manufacture the bulk drug substance on our behalf.

        We have established a quality assurance program intended to ensure that third party manufacturers under contract produce our compounds in accordance with the FDA's current Good Manufacturing Practices, or cGMP, and other applicable regulations.

        We believe that all of our existing compounds can be produced using established manufacturing methods, primarily through standard techniques of pharmaceutical synthesis. We believe that we will be able to continue to negotiate third party manufacturing arrangements on commercially reasonable terms and that it will not be necessary for us to develop internal manufacturing capability in order to successfully commercialize our products. Our objective is to maintain flexibility in deciding whether to develop internal manufacturing capabilities for certain of our potential products. However, in the event that we are unable to obtain contract manufacturing, or obtain such manufacturing on commercially reasonable terms, we may not be able to commercialize our products as planned. We have limited experience in manufacturing pharmaceutical or other products or in conducting manufacturing testing programs required to obtain FDA and other regulatory approvals, and there can be no assurance that we will further develop such capabilities successfully.

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

        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 that manufacturer or require us to obtain a license from that manufacturer in order to have our products manufactured.

        Our subsidiary Aurora Instruments LLC manufactures and supports the UHTSS Platform, the AMCS Platform, the sample distribution system, and the 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, Abbott Laboratories, Inc., Bristol Myers Squibb, Hoffmann-La Roche, Merck & Co., Inc. and Pfizer Inc. have other HIV protease inhibitor drugs in development or on the market. Many of our

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competitors have substantially greater financial, technical and human resources than ours and are more experienced in the development of new drugs.

Government Regulation

        Our development, manufacture and potential sale of therapeutics are subject to extensive regulation by United States and foreign governmental authorities. In particular, pharmaceutical products are subject to rigorous preclinical and clinical testing and to other approval requirements by the FDA in the United States under the Food, Drug and Cosmetic Act, and by comparable agencies in most foreign countries.

        As an initial step in the FDA regulatory approval process, preclinical studies are typically conducted in animals to identify potential safety problems. For certain diseases, animal models exist that are believed to be predictive of human efficacy. For such diseases, a drug candidate is tested in an animal model. The results of the studies are submitted to the FDA as a part of the Investigational New Drug application (IND) which is filed to comply with FDA regulations prior to commencement of human clinical testing in the U.S. For diseases for which no appropriately predictive animal model exists, no such results can be filed. For several of our drug candidates, no appropriately predictive model exists. As a result, no in vivo evidence of efficacy will be available until such compounds progress to human clinical trials.

        Clinical trials typically are 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, money 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.

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        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 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.

        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, 2002, we had more than 980 employees, including approximately 678 in research and development, and 303 in general and administrative functions. Approximately 75 of these employees were located at our U.K. research and development facility, 118 of these employees were located at our PanVera LLC facility in Madison, Wisconsin, and 235 of these employees were located at our facility in San Diego. Upon the sale of certain assets of PanVera LLC on March 28, 2003, the PanVera LLC employees were hired by the buyer of those assets, and are no longer our employees. Our scientific staff members (300 of whom hold Ph.D. and/or M.D. degrees, including 21 at PanVera LLC) 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.

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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 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

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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. In December 2001 she was appointed Vice President, Corporate Development and Communications. 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 S.A. 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 September 2001. He came to Vertex from the law firm of Kirkpatrick & Lockhart LLP, 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 LLP 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, Vice President, West Area Sales—Cardiovascular and Metabolic Business Unit for U.S. Primary Care, and Vice President, Cardiovascular Global Marketing. 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.

        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., Neurogen Corporation and Microbia. Dr. Bloom will retire as a director of Vertex effective as of the 2003 Annual Meeting of Shareholders.

        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 from 1997-1999, and as Chairman of Oxford Asymmetry International plc from 1997 to 2000. From 1979 to 1990, he held various Vice

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Presidential posts in SmithKline & French Laboratories' research and development organization. He also serves as a director of several companies located in Europe, Singapore and Australia. He holds Ph.D. and D.Sc. degrees in Pharmacology from the University of Bristol, England.

        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 Health 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, Cephalon Corporation, Genentech, 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 Thermo Electron Corporation.

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

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technological matters. The members of the Scientific Advisory Board, which is chaired by Dr. Mark Murcko, our Chief Technology Officer, are:

        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.

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RISK FACTORS

WE DO NOT KNOW WHETHER AGENERASE SALES WILL CONTINUE AT CURRENT LEVELS OR IF 908 SALES WILL BE AT A LEVEL AT OR ABOVE SALES LEVELS FOR AGENERASE.

        Agenerase's share of the worldwide protease inhibitor market may decrease due to competitive forces and market dynamics, including the launch of 908, which we expect could take place in the fourth quarter of 2003. Similarly, 908 may face similar competitive pressures, if it receives marketing approval from U.S. and foreign regulatory authorities and is commercially launched. 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 or 908. 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 (and possibly 908) by co-administering other antiretroviral agents 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 the sales potential of Agenerase and 908. Further, although we co-promote Agenerase and will co-promote 908 in the U.S. and key markets in Europe, GlaxoSmithKline directs the majority 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, 2002, our collaborators and we were conducting clinical development of 8 product candidates resulting from our research and development programs, including additional clinical trials of 908, merimepodib, pralnacasan, VX-148 and VX-702, and preclinical testing of 7 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 us. 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.

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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. If we are able to file a new drug application, such application may not be reviewed and approved 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 can take many years 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 merimepodib, pralnacasan, VX-148 and VX-702. It may also delay or prevent the commercialization of our products, including 908, which 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. Although we have been informed by GlaxoSmithKline that its NDA covering 908 has been accepted by the FDA and that the collection and submission of additional data regarding 908 is proceeding as planned, a significant delay in marketing approval of 908 could adversely impact our revenues.

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 and Aventis, have rights to control the planning and execution of product development and clinical programs. Our collaborative 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 or Aventis 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 $470 million from Novartis. We expect to seek additional collaborative arrangements to provide research support and to develop and

34

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.

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 15 drugs in development for HIV, five drugs in development for the treatment of hepatitis C infection, and 25 drugs in development for the treatment of rheumatoid arthritis or psoriasis, by competitors in the pharmaceutical and biotechnology industries. In order to compete successfully in these areas, we must demonstrate improved safety, efficacy and 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.

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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 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 provide for termination 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, MA area has increased competition for the available pool of skilled employees, especially in technical fields, and the high cost of living in the Boston and San Diego areas 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.

        We expect that if our clinical candidates continue to progress in development, we continue to build our commercial organization and our drug discovery efforts continue to generate drug candidates, we will require significant additional 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.

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 and 908. 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.

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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, 2002, we had 204 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 four of our neurophilin 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 2003. We believe that operating losses will continue beyond 2003, even if we receive significant future payments under our existing and future collaborative agreements and royalties on Agenerase and 908 sales, because we are planning to make significant investments in research and development, and will incur significant selling, general, and administrative expenses for our potential products. We expect that losses will fluctuate from quarter to quarter and year to year, and that such fluctuations may be substantial. We may never achieve or sustain profitability.

WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.

        We expect to incur substantial research and development and related supporting expenses as we design and develop existing and future compounds and undertake clinical trials of potential drugs resulting from such compounds. We also expect to incur substantial administrative and commercialization expenditures in the future and substantial expenses related to the filing, prosecution, defense and enforcement of patent and other intellectual property claims. We anticipate that we will finance these substantial cash needs with:

•

cash received from our existing collaborative agreements;



•

cash received from new collaborative agreements;



•

Agenerase and 908 royalty revenue;



•

existing cash reserves, together with interest earned on those reserves;



•

facilities and equipment financing;



•

disposition of assets that are not essential to our core pharmaceutical business; and



•

future product sales to the extent that we market products directly.

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        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 CURRENTLY LIMITED.

        We 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. Based on clinical activities planned or underway for 2003, we expect to initially select two drug candidates from our portfolio by the end of the year, for further clinical development and commercial launch in the U.S. We may not be able to successfully develop our own sales and marketing force for these drug candidates and 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 908 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.

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.

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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, 2002, our common stock traded between $32.45 and $12.67. 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;



•

announcements of financial results and other operating performance measures, or capital structuring activities;



•

technological innovations or the introduction of new products by our competitors;



•

government regulatory action;



•

public concern as to the safety of products developed by others;



•

developments in patent or other intellectual property rights or announcements relating to these matters;



•

developments in domestic and international governmental policy or regulation, for example relating to intellectual property rights; and



•

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

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

        As of December 31, 2002, we had approximately $326 million in long-term debt, including $315 million of 5% Convertible Subordinated Notes due September 2007. The high level of our indebtedness will impact us by:

•

exposing us to a fixed rate of interest which may be in excess of prevailing market rates;



•

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.

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ITEM 2. PROPERTIES

        We lease an aggregate of approximately 624,000 square feet of laboratory and office space in eight facilities in Cambridge, Massachusetts. The leases have expiration dates ranging from 2003 to 2017. 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. The lease for our Kendall Square building will expire in 2017, with the option to extend the lease for two consecutive terms of 10 years each. The building is currently under construction and we are obligated to build out finished space to specifications approved by our landlord. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Commitments" at page 56 for further discussion of our Kendall Square building.

        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 21,200 square feet of laboratory, office and equipment manufacturing space under a sublease that will expire May 31, 2004.

        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.

        In addition, at December 31, 2002 we owned the building in Madison, Wisconsin housing PanVera LLC's operations. That building was transferred to the buyer in connection with our sale of certain assets of PanVera LLC on March 28, 2002.

        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 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 Reexamination Certificate has been issued with respect to two of the three Chiron patents involved and a Notice of Intent to Issue a Reexamination Certificate has been issued with respect to the third patent. 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 we 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, and associated damages. One of the five patents was recently removed from the suit on a motion by Vertex. The suit stems from assays run on Vertex compounds by Dr. Gold

40

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 suit vigorously.

        The Company is not a party to any litigation in any court with, and management is not aware of any contemplated proceeding by, any governmental authority against the Company.

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, 2002.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

        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:

Stockholders

        As of March 26, 2003, there were 328 holders of record of the common stock (approximately 23,000 beneficial holders).

Dividends

        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.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Unaudited)

        The following unaudited selected financial data for each of the five years in the period ended December 31, 2002 are derived from our audited consolidated financial statements. This data should be read in conjunction with our audited consolidated financial statements and related notes which are included elsewhere in this Annual Report on Form 10-K, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 below.

(1)

During 2001 we implemented a change in accounting principle relating to revenue recognition that was retroactive to January 1, 2001. For further information please refer to Note C: "Change in Accounting Principle—Revenue Recognition" in the notes to our consolidated financial statements and our Management's Discussion and Analysis of Financial Condition and Results of Operations.

(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.

(3)

During 2001, we recorded a cumulative effect of change in accounting principle related to the adoption of Derivative Implementation Group Issue No. A17 ("DIG A17") in connection with the valuation of derivative instruments. Please refer to Note H: "Investments" in the notes to our consolidated financial statements for further information.

(4)

On July 18, 2001, we completed a merger with Aurora Biosciences Corporation. The merger was accounted for as a pooling of interests. All prior period consolidated financial statements presented have been restated to include the consolidated results of operations, financial position and cash flows of Aurora Biosciences Corporation as though the merger had been in effect on the dates indicated. Please refer to Note D: "Business Combinations" in the notes to our consolidated financial statements for further information.

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

Overview

        We are a global biotechnology company with employees located in Cambridge, MA, San Diego, CA and Abingdon, UK. During 2002 we had two operating segments: Pharmaceuticals and Discovery Tools and Services. See Note T: "Segment Information" in the notes to our consolidated financial statements for financial information regarding our operating segments.

        Our Pharmaceuticals business seeks to discover, develop, and commercialize major pharmaceutical products independently and with collaborators. Our proprietary, systematic, genomics-based discovery 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.

        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 is marketed worldwide. In Japan the drug is sold under the trade name Prozei. We have one drug candidate, 908 (GW 433908 or VX-175), for which a New Drug Application (NDA) is pending with the U.S. FDA. We have a total of 15 drug candidates in clinical or pre-clinical development including drug candidates focused on infectious diseases, autoimmune and inflammatory diseases and cancer, as well as other drug candidates targeting neurological disorders and genetic disorders. We intend to independently develop and commercialize certain of our own products for high-value markets where we can effectively reach large patient populations with a sales force focused on specialists. At the same time, we are collaborating with partners to develop and market other Vertex-discovered products for selected major therapeutic areas. We have significant collaborations with major pharmaceutical companies including Novartis, Aventis, GlaxoSmithKline and Serono, to develop and commercialize drug candidates serving markets where we believe our partner can more effectively compete. In these collaborations, we have retained rights to downstream product revenue.

        Our collaborations and contracts in the pharmaceuticals business 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, both independently and with our partners, in the coming years, which we expect will generate increased milestone payments, royalty payments and product revenues.

        Our Discovery Tools and Services business, part of which we operated through our subsidiary PanVera LLC, specializes in assay development, screening services, the development, manufacture and sale of instruments, and the manufacture and sale of proteins and reagents. This business had contracts in place that required the delivery of products, licenses and services throughout 2002 and early 2003.

        On February 4, 2003, Vertex and PanVera LLC signed a definitive agreement under which Invitrogen Corporation agreed to purchase for approximately $95 million in cash certain PanVera LLC assets, including its biochemical and cellular assay capabilities and its commercial portfolio of proprietary reagents, probes and proteins. The buyer also assumed certain liabilities of PanVera LLC. The sale does not include the instrumentation assets of the Discovery Tools and Services Business. This sale of assets was completed on March 28, 2003. In connection with the PanVera LLC asset sale, we have agreed with Invitrogen that we may use in our drug discovery activities, but will not engage for a term of five years in the business of providing, reagents, probes, or assay development services. We will also purchase a minimum of $3 million of products annually from Invitrogen for three years after completion of the asset sale.

        On July 18, 2001, we completed a merger with Aurora Biosciences Corporation. The merger united Aurora's industry-leading cell biology capabilities with Vertex's integrated drug discovery expertise,

43

creating a comprehensive, scalable platform for systematically accelerating drug candidate output in target-rich gene families. 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. Aurora acquired all of PanVera Corporation'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 Corporation.

        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 consider our collaborations with Novartis, GlaxoSmithKline, Aventis and Serono to be material to our business. Novartis has agreed to pay us up to approximately $600 million in pre-commercial payments, comprised of a $15 million up-front payment made 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 payments and cost reimbursements. These amounts are based on the successful development of eight drug candidates. We have the responsibility for drug discovery and clinical proof-of-concept testing for all drug candidates. Under our agreement, Novartis has created a $200 million loan facility to support our clinical studies, which we may draw down in increments of up to $25 million for each drug candidate. The loans are interest free and Novartis will forgive the full amount of any advances if Novartis accepts the drug candidate for development under our agreement. During 2002 we drew down $5 million against the loan facility to support our early development efforts related to a particular drug candidate. Additionally, we will receive royalties on any products marketed as a part of the collaboration. Subject to certain conditions, we will have co-promotion rights in the U.S. and Europe. Upon one year's written notice, Novartis may terminate this agreement without cause, effective no earlier than May, 2004.

        We are engaged in a collaborative agreement with GlaxoSmithKline (GSK) to develop and commercialize HIV protease inhibitors, including Agenerase (amprenavir), its prodrug 908, and VX-385. Under our agreement, GSK agreed to pay the Company up to $42 million comprised of an up-front license payment, product research funding over five years, and development and commercialization milestone payments for an initial drug candidate. We have received the entire $42 million and in 1999 began receiving royalties on sales of Agenerase. GSK is also obligated to pay additional development and commercialization milestone payments for subsequent drug candidates, including 908. In the fourth quarter of 2002 we received a milestone payment of $1.5 million for the submission of a new drug application for market approval of 908 in the US and European Union. GSK is required to bear the costs of development in its territory of drug candidates under the collaboration and 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. We have retained certain bulk drug manufacturing rights and certain co-promotion rights in territories licensed to GSK. GSK has the right to terminate its arrangement without cause upon twelve months' notice. Termination of the agreement by GSK will relieve it of its obligation to make further commercialization and development milestone and royalty payments and will end any license granted to GSK by Vertex under the agreement.

        Aventis has paid us $20 million up-front for prior research costs associated with pralnacasan (VX-740) and has agreed to pay us up to $62 million in milestone payments for successful development by Aventis of pralnacasan in rheumatoid arthritis, the first targeted indication. Milestone payments are also due for each additional indication under development. Aventis initiated a Phase IIa study for an additional indication, osteoarthritis, in January 2003. We have granted Aventis an exclusive worldwide license to develop, manufacture and market pralnacasan, as well as an exclusive option for certain other compounds discovered as part of the research collaboration between Vertex and Aventis that

44

ended in 1997. We will receive royalties on product sales and reimbursement of certain co-promotion expenses. Aventis has the right to terminate this agreement without cause upon six months notice.

        Serono has agreed to pay us up to $95 million in pre-commercial payments in conjunction with the December 2000 agreement to collaborate on the discovery, development, and commercialization of caspase inhibitors. The $95 million in pre-commercial payments is comprised of $5 million in up-front payments for prior research, up to $20 million in product research funding over five years and up to $70 million in further license fees and milestone payments for the successful development and commercialization of one or more drug candidates. We will share development costs. We have the option to establish a joint venture for the commercialization of products in North America, where we will share marketing rights and profits from the sale of drug products. 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 supplies of drug substance. Serono has the right to terminate the agreement without cause upon 90 days' written notice, effective September 30, 2004.

2003 Financial Guidance

        On February 4, 2003 we provided financial guidance for 2003 which we believed reflected the stage of development of our business, research and development opportunities, our infrastructure needs and our capital structure and liquidity profile. The key financial metrics on which we provided guidance are as follows:

•

Pharmaceutical collaborative and royalty revenues are expected to be between $90 million and $105 million, including $65 million from existing collaborations, $10 million from royalty arrangements and between $15 million and $30 million from new collaborations.



•

Discovery Tools and Services revenues will be less than $10 million, reflecting the PanVera LLC asset sale closed on March 28, 2003.



•

As we advance the development of Vertex-driven drug candidates and continue to invest in drug discovery, we project that research and development costs will be between $215 million and $230 million for the full year. This compares to 2002 research and development expense of $203 million. This increase in expense is due to increased investment in the development of Vertex-driven drug candidates, while maintaining an investment in research consistent with 2002.



•

We expect sales, general and administrative expenses to be between $38 million and $43 million for the full year.



•

The full year 2003 net loss is expected to be between $140 million and $160 million, excluding gain from the close of the sale of certain net assets of PanVera LLC, which we expect to be in excess of $75 million. The 2003 net loss range is expected to be consistent with the 2002 net loss from the Pharmaceuticals segment of our business.



•

We expect cash, cash equivalents and available for sale securities to be in excess of $600 million at the end of 2003.

        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 drug candidates. We also expect that losses will fluctuate from year to year and that such fluctuations may be substantial. The results set forth above are subject to risks and uncertainties that could cause our actual results to vary materially, as referenced in the section below entitled "Forward-Looking Statements."

Critical Accounting Policies and Estimates

        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

45

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 the section of their periodic reports entitled "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 condition 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 on Form 10-K, we consider our revenue recognition and research and development policies critical and therefore we separately outline these policies below.

        Our revenue recognition policies are in accordance with the SEC's Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." Our Pharmaceuticals business generates revenue mainly from collaborative research and development agreements and royalty agreements, while our Discovery Tools and Services business generates revenue mainly from product sales, assay development and screening services. Following the sale of the PanVera assets we expect our near term revenue to be generated mainly from our Pharmaceuticals business.

        Our collaborative 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.

        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. If our estimate of the period of performance shortens or lengthens, the amount of revenue we recognize from non-refundable, up-front license fees and milestones, not specifically tied to a separate earnings process, could increase or decrease in the period the change in estimate becomes known; future related revenues would be adjusted accordingly. 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.

        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 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.

        Product sales include technology licensing, instrumentation system sales, and biotechnology product sales. Revenue from licenses involving continuing obligations on our part 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 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,

46

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. Changes in estimates of costs to complete will impact revenue recognition under the percentage of completion accounting model in the period the change becomes known and all future periods would be adjusted accordingly. Funding for the development of prototype instrumentation systems was recognized ratably over the term of the related development 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. Changes in the length of the service period could impact revenue in the period the change in the estimate of the service period becomes known and related future period revenues would be adjusted accordingly.

        Certain contracts of our Discovery Tools and Services business contain obligations 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.

        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.

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 research and development revenues from the Emerging Issues Task Force No. 91-6 (EITF 91-6) method to the Substantive Milestone Method, adopted retroactive to January 1, 2001. 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.

        Pursuant to the 2001 change, we recorded a one-time, non-cash charge of $25,901,000, representing a cumulative change in accounting principle for periods prior to 2001. The amount of revenue recognized in 2002 and 2001 which was included in the one-time, non-cash charge was $6,979,000 and $7,748,000.

        Additionally, $2,809,000, $2,580,000 and $5,785,000 will be recognized as revenue in 2003, 2004 and thereafter, respectively, which was included in the January 2001 charge to income.

        Prior to our change of revenue recognition to the Substantive Milestone Method, in the fourth quarter of 2000 we changed our method of accounting for revenue recognition for collaborative 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 retroactive 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

47

receipt and milestones were recorded as revenue upon achievement of the milestone by the collaborative partner.

        Pursuant to the adoption of SAB 101 and the EITF 91-6 method in 2000, we recorded a one-time, non-cash charge of $3,161,000, representing a cumulative effect of a change in accounting principle for periods prior to 2000.

Year Ended December 31, 2002 Compared with Year Ended December 31, 2001

        Our net loss for 2002 was $108,621,000 or $1.43 per basic and diluted common share, compared to a net loss for 2001 of $66,233,000 or $0.89 per basic and diluted common share. Our loss in 2001 includes the effect of changes in accounting principles related to revenue recognition, as discussed above, and the adoption of Derivative Implementation Group No. A17, of $8,152,000, merger related expenses of $23,654,000 and a gain of $10,340,000 on the retirement of $30,000,000 in principal of our convertible subordinated notes.

        Total revenues decreased to $161,085,000 in 2002 compared to $167,490,000 in 2001. In 2002, Pharmaceuticals revenue, totaling $87,344,000, was comprised of $10,209,000 in royalties and $77,135,000 in collaborative research and development revenue, as compared with $80,103,000, comprised of $11,119,000 in royalties and $68,984,000 in collaborative research and development revenue in 2001. In 2002, Discovery Tools and Services revenue, totaling $73,741,000, was comprised of $51,772,000 in product sales and royalties and $21,969,000 in service revenue, as compared with $87,387,000, comprised of $59,921,000 in product sales and royalties, and $27,466,000 in service revenue in 2001.

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

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

        Collaborative research and development revenue increased in 2002 by 12% or $8,151,000 as compared with 2001, due primarily to additional revenue earned under our Novartis collaboration. In 2002 we recognized $41,894,000 of revenue under the Novartis collaboration compared with $36,723,000 in 2001. We increased our effort related to the kinase research program under the Novartis collaboration in 2002. Revenue recognized under the HCV Protease program under the Eli Lilly (Lilly) contract was $12,054,000 for the year ended December 31, 2002 compared with $6,686,000 for the year ended December 31, 2001. In the fourth quarter of 2002, our research and development agreement with Lilly was restructured. The original contractual research term was to conclude in June 2003. In connection with the restructuring of the agreement and termination of the research term, described more fully in Note O in the notes to our consolidated financial statements included in this report, we recognized $1,637,324 in revenue that had been previously deferred. That revenue related to the milestone paid in December 2001 and the upfront payment received in June 1997 at the commencement of the research and development collaboration. Additionally, in the fourth quarter of 2002 we received and recognized a milestone payment of $1,500,000 from GlaxoSmithKline in connection with the submission of a new drug application for market approval of 908 in the US and the European Union. These increases in revenue were partially offset by a decrease in research funding of $875,000 related to the conclusion of our collaboration with Taisho in the third quarter of 2002 as well as decreases in development reimbursement revenue earned under our collaboration with Kissei. We expect that collaborative research and development revenues will continue to be a significant source of our revenue. Our research programs with Taisho, Schering and Eli Lilly concluded during 2002. Therefore, research funding which we expect to receive from existing collaborators will be lower in 2003 as compared with 2002.

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        Product sales and royalties include instrumentation sales, technology licensing and biotechnology product sales.

        Product sales and royalties decreased $8,149,000, or 14%, to $51,772,000 in 2002 from $59,921,000 in 2001. The decrease in product sales in 2002 from 2001 is due primarily to a decrease in instrumentation revenue and biotechnology product revenue from our Discovery Tools and Services business. Instrumentation revenue decreased as the result of the completion of certain significant projects in late 2001 as well as a large equipment sale in late 2001 that was not repeated in 2002. Additionally, during late 2001 and throughout 2002 the Discovery Tools and Services business continued to shift its strategic focus away from instrumentation sales and towards technology licensing, assay development and the manufacture and sale of proteins, reagents and probes. The strategic shift of certain resources and technologies from our Discovery Tools and Services business to our Pharmaceuticals business has also impacted Discovery Tools and Services revenue. However, this shift contributed to the establishment of a fully integrated drug discovery operation focused on molecular targets, including the ion channels gene family.

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

        Service revenue decreased to $21,969,000 in 2002 from $27,466,000 in 2001. The decrease is a result of the completion of several significant screening arrangements in late 2001 that were not replaced as a result of the shift in strategic focus of our business towards Pharmaceuticals.

        We expect Discovery Tools and Services revenue to decrease in 2003 as a result of the sale of certain PanVera LLC assets to Invitrogen in the first quarter of 2003. See Note R: "Subsequent Event" for further information regarding the sale.

        Pharmaceutical royalty costs of $3,434,000 and $3,786,000 in 2002 and 2001, respectively, consists of royalty payments on the sales of Agenerase.

        Cost of product sales and royalties decreased $13,405,0000 or 49% to $13,684,000 in 2002 from $27,089,000 in 2001. The decrease in product and royalty costs is the result of the completion of certain projects that were not replaced in the current year. Additionally, the focus in our Discovery Tools and Services business toward technology licensing and discovery tools, which have higher gross margins, and away from instrumentation sales, with lower gross margins, contributed to a larger decrease in product costs from 2002 to 2001, as compared with the relative decrease in product sales from 2002 to 2001.

        Cost of service revenue decreased from $12,544,000 in 2001 to $11,163,000 in 2002. The decrease is primarily due to decreased service revenue partially offset by higher overhead costs for the year ended December 31, 2002. The increased overhead is a result of a strategic shift in focus away from instrumentation in the Discovery Tools and Services business and a resulting reallocation of fixed overhead.

        As a result of the sale of certain PanVera LLC assets to Invitrogen in the first quarter of 2003, we expect the cost of revenues related to Discovery Tools and Services revenue to decrease in 2003.

        Research and development expenses increased to $203,018,000 in 2002 from $150,173,000 in 2001, primarily due to our continued investment in advancing our broad clinical pipeline and broadening our research efforts. Our clinical investment was focused primarily on the advancement of our second generation p38 MAP kinase, IMPDH, HCV protease and ICE inhibitors. We currently are concentrating on large market opportunities such as certain inflammatory, autoimmune and viral diseases. We continued to expand our multi-target gene family research programs, of which our kinases program is the most advanced, along with investments in target families such as ion channels and proteases. As a result of our continued expansion, personnel and facilities expenses also increased.

        We have 15 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 to conduct

49

certain research and development related to specified drug candidates. Our research and development expenses for 2002, 2001 and 2000 were as follows:

        To date we have incurred in excess of $833,000,000 in research and development costs associated with drug discovery and development. We anticipate that research and development expenses will continue to increase as we add personnel and capabilities to support the advancement of Vertex-driven drug candidates. We do not expect a significant increase in research expenses without significant new funding from collaborations.

        Sales, general and administrative expenses increased $7,343,000, or 17%, to 49,390,000 in 2002 from $42,047,000 in 2001. The increase is primarily attributable to increased personnel and professional expenses. Included in the increase in personnel and professional expenses is an increase in our legal and patent expenses in the period related to continued protection of our intellectual property and activities contesting a suit filed by Oregon Health Sciences University.

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

        Interest income decreased approximately $16,411,000 to $28,722,000 in 2002 from $45,133,000 in 2001. The decrease is a result of lower funds invested and lower portfolio yields due to a depressed interest rate environment.

        Interest expense decreased to approximately $17,684,000 in 2002 from $19,318,000 in 2001. The decrease is a result of the reduction in principal amount of our convertible notes. In October 2001, we repurchased $30,000,0000 in principal amount of our 5% convertible subordinated notes due September 2007 and recorded a gain of $10,340,000 on the retirement of the convertible subordinated notes in the fourth quarter of 2001.

        In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 145, "Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." FAS 145 recinds FAS 4 and FAS 64, which addressed the accounting for gains and losses from extinguishment of debt. Under FAS 145 the gain on retirement of convertible subordinated notes is considered an ordinary item. Previously, the gain on retirement of convertible subordinated notes was classified as an extraordinary item. The item has been reclassified. At December 31, 2002 and 2001, $315,000,000 of the convertible subordinated notes was outstanding.

        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. The loss is included in other expense on the Statement of 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. 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.

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Overview of Research and Development Investment

        We estimate that it takes 10 to 15 years (the 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.

        Set forth below is a description of our drug candidates currently in preclinical and clinical development:

VERTEX-DRIVEN PROGRAMS

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PARTNER-DRIVEN PROGRAMS

        In 2003, our clinical and commercial teams are focused on key development activities for five major Vertex-driven programs, where we currently retain most or all of the downstream commercial rights.

        VX-148 is in Phase II clinical development for the treatment of psoriasis, an autoimmune disease affecting an estimated 2.7 million individuals in the United States. A safe, oral therapy would provide an important new treatment option for patients with moderate to severe psoriasis.

        VX-702 is a p38 MAP kinase inhibitor targeting treatment of inflammatory diseases including acute coronary syndromes (ACS). P38 MAP kinase inhibition represents a novel approach directed at the underlying inflammatory response observed in acute cardiovascular events, which afflict nearly 1.9 million patients in the U.S. each year. We expect to begin a Phase II study in ACS in the second quarter of 2003. Additionally, we are planning to investigate the clinical potential of VX-702 in one or more chronic inflammatory diseases.

        VX-765 is an oral ICE inhibitor that we expect to enter Phase I clinical evaluation targeting inflammatory diseases in the second quarter of 2003. Our first ICE inhibitor, pralnacasan, has demonstrated excellent tolerability in clinical studies and has shown clinical benefit in patients with rheumatoid arthritis.

        VX-950 represents a new class of antiviral drugs that could directly inhibit hepatitis C viral replication. We are confident that direct antiviral therapies for hepatitis C viral infection have the potential to be an important new treatment option. We expect to begin Phase I clinical studies of VX-950 in the second half of year 2003.

        VX-563 is a small molecule modulator of gene expression currently in Phase I clinical evaluation. By increasing the expression of proteins absent or deficient in certain disorders, VX-563 may provide a novel approach for the treatment of sickle cell and other genetic diseases.

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        Based on clinical activities planned or underway for 2003, we expect to have clinical data in hand by the end of this year which will help us to select two drug candidates from our Vertex-driven portfolio as priority candidates for clinical development and commercialization by Vertex in the U.S.

        Partnerships have played an important role in the growth and advancement of our pipeline. Our first drug, the HIV protease inhibitor Agenerase, was developed and commercialized in collaboration with GlaxoSmithKline (GSK). Our most advanced drug candidate, currently named 908 or VX-175, is an HIV protease inhibitor that we will also co-promote with GSK, if the new drug application filed by GSK in December is approved by the FDA, which we believe could happen during the fourth quarter of 2003. We believe that 908's convenient dosing regimen, low pill count and good tolerability will make it competitive with market-leading HIV protease inhibitors.

        Vertex and Aventis are making clinical progress with pralnacasan, a first-in-class, oral anti-cytokine therapy which has shown anti-inflammatory effects in Phase II clinical studies of patients with rheumatoid arthritis (RA). In the first half of 2003, Aventis is planning to initiate a large Phase IIb study in patients with RA. Aventis has also initiated a Phase II, 400-patient proof-of-concept study of pralnacasan in osteoarthritis (OA), a debilitating disease that afflicts an estimated 240 million people worldwide.

        In our broad-based kinase research program, which we are conducting in collaboration with Novartis, we selected three novel kinase inhibitors during 2002, for preclinical development targeting cancer and stroke.

Year Ended December 31, 2001 Compared with Year Ended December 31, 2000

        Our net loss for 2001 was $66,233,000 or $0.89 per basic and diluted common share compared to a net loss of $34,740,000 or $0.51 per basic and diluted common share.

        The following discussions relating to revenue for the year ended December 31, 2000 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. The table below details actual revenue recorded for the year ended December 31, 2000 compared to proforma revenue as if we had followed the Substantive Milestone Method from our inception:

*

Substantive Milestone Method of revenue recognition applied.

        Total revenues increased to $167,490,000 in 2001 compared to $139,001,000 in 2000. In 2001, Pharmaceuticals revenue totaling $80,103,000 was comprised of: $11,119,000 in royalties and $68,984,000 in collaborative research and development revenue, as compared with $66,319,000 comprised of: $12,361,000 in royalties, $53,958,000 in collaborative research and development revenue in 2000. In 2001, Discovery Tools and Services revenue totaling $87,387,000 was comprised of: $59,921,000 in product sales and royalties and $27,466,000 in service revenue, as compared with

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$72,682,000 comprised of: $52,437,000 in product sales and royalties, and $20,245,000 in service revenue 2000.

        Collaborative research and development revenue increased in 2001 by 28% or $15,026,000 as compared with 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 agreement 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. 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.

        Pharmaceutical 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 sales and royalties 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 a strategic shift in focus towards technology licensing and discovery service activity. The increase in biotechnology revenue is attributed to a continued increase in demand for proteins, drug screening assays and other biotechnology products.

        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.

        Cost of product sales and royalties decreased $6,413,0000 or 19% to $27,089,000 in 2001 from $33,502,000 in 2000. The decrease in product and royalty costs is attributable to a strategic shift in focus 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 $9,294,000 in 2000 to $12,544,000 in 2001, primarily due to a related increase in service revenue.

        Research and development expenses increased to $150,173,000 in 2001 from $102,441,000 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.

        Sales, general and administrative expenses remained relatively consistent totaling $42,047,000 in 2001 compared with $41,354,000 in 2000.

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

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        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 expense on the Statement of 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.

Liquidity and Capital Resources

        We have financed our operations 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 and facilities 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. At December 31, 2002, we had cash and marketable securities of $634,984,000.

        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.

        In order to help finance our substantial cash needs in the future, we anticipate entering into additional strategic collaborations, specifically in our Pharmaceuticals business. We expect these collaborations to provide us with significant sources of cash and revenue in the near and long term. In 2002, we did not enter into any new strategic collaborations. Additionally, we will rely on cash receipts from research funding, development reimbursements and potential milestone payments from our existing collaborators, as we continue to advance our research and development programs in 2003. Our collaboration with Taisho, and our research programs with Schering and Eli Lilly reached conclusion during 2002. Funding to be received from existing collaborators therefore will be lower in 2003 as compared with 2002.

        In connection with the sale of certain assets of PanVera LLC to Invitrogen (described more fully in Note R to our consolidated financial statements included in this report), we will receive approximately $95 million in cash in the first quarter of 2003. We expect to record a gain, net of transaction costs, in excess of $75 million. At December 31, 2002, we had cash and marketable securities of $634,984,000, and with the addition of the cash from the closing of the PanVera LLC transaction we have a strong cash and marketable securities position entering 2003.

        We have $315 million of September Notes, which are repayable in September 2007. We will continue to focus on our capital structure and consider financing opportunities to strengthen our long term liquidity profile.

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        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 $108,218,000 to $634,984,000, including cash and cash equivalents of $108,098,000, at December 31, 2002 from $743,202,000, including cash and cash equivalents of $189,205,000, at December 31, 2001. Net cash used in operations was $79,539,000 for the year ended December 31, 2002, which resulted from the net loss of $108,621,000 and a decrease in deferred revenue of $16,213,000, offset by $28,215,000 of net non-cash charges and gains, and $17,080,000 of changes in operating assets and liabilities. Deferred revenue decreased due to contractual commitments being fulfilled in 2002 for which cash was received in 2001 or earlier. Net cash used in investing activities for 2002 was $15,962,000, which included property and equipment expenditures of $41,219,000 and net sales of marketable securities of $25,051,000. Cash provided by financing activities during 2002 was $13,842,000 including $13,327,000 from the issuance of common stock under employee stock option and benefit plans, offset by $4,485,000 in principal payments on capital leases and other obligations. Cash provided by financing activities also included a $5,000,000 draw down from a loan facility created by Novartis. Novartis created a $200,000,000 loan facility to support certain clinical studies, which we may draw down in amounts aggregating up to $25,000,000 for each drug candidate. The loans are interest free and Novartis will forgive the full amount of any advances with respect to a particular drug candidate if Novartis accepts that drug candidate for development under the agreement. We expect to continue to draw down on the loan facility to fund certain development activities for drug candidates in the kinase research program.

Commitments

        At December 31, 2002, 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 290,000 square feet of laboratory and office space presently under construction in Cambridge, Massachusetts. The lease term began in January 2003 and lease payments commence in May 2003. The space is currently in an unfinished state, and we have an obligation, staged over a number of years, to build it out into finished laboratory and office space. The lease will expire in 2017 with options to extend the lease for two consecutive terms of ten years each, ultimately expiring in 2037. The table below includes our rent obligations under this lease of $14,356,000 in 2003, $19,202,000 in each of the years 2004 through 2007 and an aggregate of $203,690,000 for all years thereafter. We are actively exploring alternatives to minimize our financial obligation under this lease. These alternatives include sharing, subleasing or even exiting the lease space. We expect to finalize plans for this lease in the second quarter of 2003. Actions taken to minimize our financial obligation under the lease may result in a charge to our statement of operations which is not determinable at this time. 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):

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        In connection with the asset sale to Invitrogen we agreed to purchase a minimum of $3 million of products from Invitrogen annually for three years after the completion of the sale.

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) research and development expenses will continue to increase, but research expenses will not increase without new funding from collaborations, (iv) the Chiron Corporation and Oregon Health Sciences University litigation will not have a material adverse effect on us, (v) our financial results for 2003 will be as set forth in the financial guidance provided on February 4, 2003, (vi) we will finalize plans to share, sublet or exit the Kendall Square facility lease during the second quarter of 2003, (vii) we and our partners will begin clinical trials on a number of our development stage drug candidates during 2003, (viii) we will select two priority drug candidates for clinical development and commercialization by year-end, and (ix) 908 will be approved and launched in the U.S. in the fourth quarter of 2003. 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 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, the possibility of delays in the commencement or completion of clinical trials, the risk that clinical activities planned for 2003 may not be completed or adequate to provide us the data required to allow us to select two priority Vertex-driven development candidates by year-end, 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, including 908, our dependence upon existing and new pharmaceutical and biotechnology collaborations, the levels and timing of payments under our collaborative agreements, uncertainties about our ability to obtain new corporate collaborations 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, the risk that there may be changing and new regulations in the U.S. and internationally and uncertainty about our ability to minimize our financial obligation under the Kendall Square facility lease. 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 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 Reexamination Certificate has been issued in two of the three Chiron patents involved and a Notice of Intent to Issue a Reexamination Certificate has been issued with respect to the third patent. 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 we intend to defend the lawsuit, if and when it resumes, vigorously.

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        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, and associated damages. One of the five patents has recently been removed from the suit on a motion by Vertex. 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 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 suit vigorously.

Recent Accounting Pronouncements

        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 adopted the provisions of SFAS 144 on January 1, 2002 as required; the adoption did not have a material effect on our financial position and results of operations.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002." This Statement rescinds FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement and FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" and SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have the same economic effect as a sale-leaseback transaction. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Adoption of certain provisions of this standard was required after May 15, 2002, while other provisions must be adopted within financial statements issued after May 15, 2002 or the year beginning after May 15, 2002. Under SFAS 145 the gain on retirement of convertible subordinated notes is considered an ordinary item. Previously, the gain on convertible subordinated notes was classified as an extraordinary item.

        In September 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which supersedes EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The standard affects the accounting for restructuring charges and related activities. The provisions of this statement are required to be adopted for exit or disposal activities that are initiated after December 31, 2002. We do not expect the adoption of SFAS No. 146 to have an impact on our financial position and results of operations.

        In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 elaborates on the disclosures the Company must make about obligations under certain guarantees that we have issued. It also requires the Company to recognize, at the inception of a guarantee, a liability for the fair value of the obligations we have undertaken in issuing the guarantee. The initial recognition and initial measurement provisions are to be applied only to guarantees issued or modified after December 31, 2002. We have adopted the disclosure provisions as required by FIN 45. We are still evaluating the potential impact of FIN 45 on our financial position and results of operations.

        In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires certain variable interest

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entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. We do not expect FIN 46 to have a material effect on our consolidated financial statements.

        In November 2002, the Emerging Issues Task Force reached a consensus on Issue No. 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables." EITF 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Although we do not expect the adoption of EITF 00-21 to have a material impact, we are still evaluating the potential impact of EITF 00-21 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-44 of this Report.

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

        Not applicable.

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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 2003 Annual Meeting of Stockholders, to be filed with the Commission on or about April 9, 2003 (the "2003 Proxy Statement"), under "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" 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 2003 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 2003 Proxy Statement, which shall not be deemed incorporated herein).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        The information required by this Item 12 is included in the 2003 Proxy Statement under "Security Ownership of Certain Beneficial Owners and Management" and "Executive Compensation—Equity Compensation Plan Information" and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this Item 13 is included in the 2003 Proxy Statement under "Employment Contracts and Change-in-Control Arrangements" and is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's disclosure control and procedures (as defined in Exchange Act Rules 13(a)—14(c)) as of a date within 90 days of the filing date of this Annual Report on Form 10-K, have concluded that, based on such evaluation, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared. In designing and evaluating the disclosure controls and procedures, the Company's management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Changes in Internal Controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. Accordingly, no corrective actions were required or undertaken.

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PART IV

ITEM 15. 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.

(a)(3) Exhibits.

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62

63

*

Compensatory plan or agreement applicable to management and employees.

(b)

Reports on Form 8-K. On November 14, 2002, we filed a report on Form 8-K-Item 9-Regulation FD Disclosure, reporting certifications required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.

         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.

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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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 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 D to the consolidated financial statements. We did not audit the financial statements of Aurora Biosciences Corporation for the year ended December 31, 2000, which statements reflect total revenues of 49 percent of the related consolidated totals for the year ended December 31, 2000. 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
March 31, 2003

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 statements of operations, stockholders' equity, and cash flows of Aurora Biosciences Corporation (formed as a result of the consolidation of Aurora Biosciences Corporation and PanVera Corporation) for the year ended December 31, 2000 (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 year ended September 30, 2000, which reflect revenues constituting approximately 15.1% of the related combined total for the year 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 results of its operations and its cash flows of Aurora Biosciences Corporation for the year ended December 31, 2000, 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

THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

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

*

The 1999 consolidated financial statements are not required to be presented in the 2002 annual report.

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