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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file number 000-19319
VERTEX PHARMACEUTICALS INCORPORATED
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3039129
(State of incorporation) (I.R.S. Employer Identification No.)
130 WAVERLY STREET
CAMBRIDGE, MASSACHUSETTS 02139-4242
(Address of principal executive offices) (Zip Code)
(617) 577-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __________
As of March 22, 1999 there were outstanding 25,400,241 shares of Common Stock,
$.01 par value per share. The aggregate market value of shares of Common Stock
held by non-affiliates of the registrant, based upon the last sales price for
such stock on that date as reported by The Nasdaq National Stock Market, was
approximately $637,750,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held on May 19, 1999 are incorporated by reference into Part
III.
Page 1
The "Company" and "Vertex," as used in this Annual Report on Form 10-K,
refer to Vertex Pharmaceuticals Incorporated, a Massachusetts corporation.
This Annual Report on Form 10-K contains forward-looking statements based
on current management expectations. When used in this Report, the words
"expects," "anticipates," "estimates," "plans," "believes," and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties. Factors that could cause
actual results to differ from these expectations include, but are not limited
to, those discussed in the section of Item 1 entitled "Risk Factors." These
forward-looking statements speak only as of the date of this Report. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in the events, conditions or circumstances on which any such statement is
based.
Vertex is a registered trademark of Vertex Pharmaceuticals Incorporated,
and Incel is a trademark of Vertex Pharmaceuticals Incorporated. Agenerase is a
trademark of the Glaxo Wellcome Group of companies.
PART I
ITEM 1. BUSINESS
Vertex is engaged in the discovery, development and commercialization of
novel, small molecule pharmaceuticals for the treatment of diseases for which
there are currently limited or no effective treatments. The Company is a
leader in the use of structure-based drug design, an approach to drug
discovery that integrates advanced biology, biophysics, chemistry, and
information technologies in a coordinated and simultaneous fashion. The
Company believes that this integrated approach is applicable to therapeutic
targets in a broad range of diseases. Vertex's goal is to create a portfolio
of highly specific, proprietary, small molecule drugs based on its knowledge
of the atomic structure of proteins involved in the control of disease
processes.
Agenerase-TM- for the treatment of HIV infection and AIDS is the Company's
first product to have a New Drug Application filed with the U.S. FDA for
marketing approval. The Company's drug candidates currently in clinical trials
include:
- - Two compounds, Incel-TM- in Phase II, and VX-853, in Phase I/II clinical
studies for treatment of cancer multidrug resistance;
- - VX-497, an inhibitor of the enzyme IMPDH, currently in Phase II studies for
the treatment of psoriasis and hepatitis C virus infection;
- - Timcodar dimesylate, a neurophilin ligand compound in a Phase II study for
the treatment of diabetic neuropathy;
- - VX-740, an inhibitor of the enzyme ICE, that recently completed a Phase I
clinical trial and may be useful in the treatment of inflammatory diseases;
and
- - VX-745, an inhibitor of the enzyme p38 MAP kinase, currently in a Phase I
clinical trial, that may be useful in the treatment of inflammatory and
neurological diseases.
In addition, the Company has research programs aimed at developing orally
available small molecule compounds targeting neurodegenerative disorders and
hepatitis C virus infection.
Page 2
STRUCTURE-BASED DRUG DESIGN
Drugs are natural or synthetic compounds that interact with a target
molecule, typically a protein, either to induce or to inhibit that molecule's
function within the human body. Traditionally, pharmaceutical products have
been discovered through screening thousands of compounds in predictive assays
for a chosen disease target. Vertex uses an information-driven drug design
approach that integrates multiple advanced technologies.
Vertex's discovery programs have yielded clinical drug candidates in an
average of 39 months from project initiation, two times faster than the
industry average. Also, Vertex has at least one product candidate in
clinical development from each of its first five research programs. In
contrast, across the pharmaceutical industry an average of just 25% of all
research projects result in a drug entering clinical trials.
The drug discovery process is complex and involves multiple steps and
disciplines. The key steps in the discovery and development of a compound for
human testing (a drug candidate) typically include:
- identification of a drug target;
- development of a relevant biological assay;
- selection of compounds for screening;
- identification of a lead molecule;
- optimization of the lead molecule; and
- preclinical development.
The Company's approach to structure-based design is an integrated approach
combining efforts in biology, biophysics and chemistry in a coordinated and
simultaneous fashion throughout the discovery process. This enables the Company
to capture and apply information generated in one scientific discipline across
an entire project. In addition, Vertex leverages the information base from its
programs to capitalize on emerging therapeutic opportunities as they are
discovered.
Vertex integrates a number of core technologies as part of the Company's
drug discovery platform. These include:
- - FUNCTIONAL GENOMICS. Vertex uses a number of functional genomics
techniques, such as gene knock-out mice, to help guide target selection and
test the potential of its compounds in disease models.
- - BIOPHYSICS. Vertex's crystallography group has solved more than a dozen
structures and more than 200 target/inhibitor complexes in the past eight
years. Vertex scientists have also pioneered innovative nuclear magnetic
resonance (NMR) techniques, including the use of NMR for screening and a
proprietary technology called NMR-SHAPES that can rapidly identify classes
of compounds with appropriate binding properties.
- - CHEMISTRY. Vertex applies combinatorial chemistry techniques together with
a strategy of parallel synthesis to explore the suitability and activity of
a wide range of compounds.
- - COMPUTER-BASED MODELING. Vertex applies advanced, proprietary
computational modeling tools to guide combinatorial and medicinal chemistry
efforts in identifying and optimizing leads.
- - PHARMACOLOGY. At Vertex, pharmacological testing and pharmacokinetic and
pharmacodynamic modeling are used early in the drug discovery process to
improve the likelihood that compounds will possess desirable
characteristics.
Page 3
The Company believes that its integrated structure-based approach to drug
discovery and the applicability of this approach to a broad range of protein
targets provides the Company with significant competitive advantages in the
discovery and development of novel therapeutics for a variety of diseases.
CORPORATE STRATEGY
Vertex is concentrating on the discovery and development of drugs for the
treatment of viral diseases, multidrug resistance in cancer, autoimmune
diseases, inflammatory diseases and neurological diseases. The Company's
research and development strategy is to identify therapeutic areas in which
there is (i) an unmet clinical need, (ii) evidence that interaction with known
protein targets will produce a therapeutic effect, and (iii) evidence that the
protein targets will be appropriate for structural analysis using Vertex's
scientific approach.
The Company's business strategy is to develop some products independently
and to form collaborations with pharmaceutical companies in other programs for
which they can provide resources and access to competencies complementary to
Vertex's in-house capabilities. Corporate collaborations with other
pharmaceutical companies allow Vertex to share the inherent risks of drug
development and allocate the Company's internal resources more effectively. The
financial support, as well as the resources in development, marketing and sales,
provided by corporate collaborators has allowed Vertex to focus on expanding its
clinical and discovery pipeline. As Vertex increases its capabilities in
manufacturing, marketing and sales, collaborative agreements will still remain
an important part of the Company's business strategy, allowing the Company to
select from its broad pipeline those products best suited to commercialization
by the Company, while retaining a substantial interest in the commercial success
of partnered projects. In its collaborative agreements, Vertex seeks to
participate, through manufacturing, co-promotion and marketing rights, in
generating significant downstream revenue for each of its products.
PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS
The following are the Company's most advanced research and development
programs.
CLINICAL DEVELOPMENT PROGRAMS
AGENERASE-TM-
OVERVIEW
Agenerase-TM- (Glaxo Wellcome's brand name for the compound amprenavir) is
the Company's most advanced product. Agenerase, a second generation HIV
protease inhibitor, is an orally deliverable drug for the treatment of HIV
infection and AIDS. It was developed by Vertex in collaboration with Glaxo
Wellcome plc. and Kissei Pharmaceutical Co., Ltd. Glaxo Wellcome has filed a
New Drug Application for Agenerase with the U.S. Food and Drug Administration in
the United States and has made equivalent filings in Europe, Canada and other
countries. The U.S. FDA has designated Agenerase as a fast-track product, and
FDA review is expected to be completed by mid-April 1999. Upon approval by
regulatory authorities, Glaxo Wellcome will market Agenerase in the United
States and other countries, with co-promotion assistance by the Company. Kissei
is the Company's partner for the development and commercialization of amprenavir
in the Far East.
BACKGROUND
World sales of antiviral drugs for the treatment of AIDS and HIV infection
were an
Page 4
estimated $4 billion in 1998. Nevertheless, there remains a significant need
for new therapeutic options for the management of HIV infection. In the United
States and elsewhere, the majority of HIV-infected patients are undiagnosed or
untreated with any antiviral drug. The antiviral drugs currently on the market
have significant limitations, creating a significant market opportunity for
Agenerase. Suboptimal treatment strategies and poor adherence to complex drug
regimens result in the development of drug-resistant virus and need for
subsequent changes in treatment regimens for many patients. Switching antiviral
medications is therefore done on a routine basis, also resulting in the need for
new agents.
HIV protease is a key enzyme involved in the viral replication of HIV.
Agenerase is an HIV protease inhibitor designed by Vertex to effectively block
the replication of HIV and to possess key competitive characteristics. Four
other companies are marketing protease inhibitors approved by the FDA. However,
clinician and patient acceptance of these products may be limited by complex
dosing regimens, which can result in poor patient compliance, and by
dose-limiting side effects.
The Company believes that Agenerase compares favorably with the protease
inhibitors currently on the market in terms of potency, tolerability, dosing
regimen and resistance profile. Agenerase is taken twice daily, without
restrictions regarding dosing with or without food or water. In addition,
clinical studies have shown that Agenerase penetrates the tissues of the central
nervous system, which may be important in preventing the development of
resistance. Agenerase has a unique IN VITRO resistance profile, and preliminary
clinical data have shown that patients previously treated with Agenerase can be
successfully treated with a subsequent protease inhibitor. To date, HIV has been
shown to develop resistance to antiviral drugs, including currently marketed HIV
protease inhibitors. Preliminary data also suggest that Agenerase is less
associated with blood lipid abnormalities than other HIV protease inhibitors.
However, there can be no assurance that disease resistance or other factors will
not limit the efficacy of Agenerase.
In addition to protease inhibitors, there are two other classes of
antiviral drugs currently approved for the treatment of HIV/AIDS. Nucleoside
reverse transcriptase inhibitors, or NRTIs, include AZT, d4T, ddI, ddC, 3TC and
abacavir. Non-nucleoside reverse transcriptase inhibitors, or NNRTIs, include
efavirenz, nevirapine and delavirdine. Both classes of drugs act by inhibiting
reverse transcriptase, a viral enzyme required for replication. The clinical
utility of each of these drugs is limited by significant side effects and by the
development of viral resistance. Clinical studies have demonstrated that
therapies for HIV infection which comprise a combination of three or more drugs
including at least two drug classes ("drug cocktails") are superior in potency
and durability of response to those which do not. Such combinations are
currently accepted as the standard of care for HIV infection.
PROGRAM STATUS
Glaxo Wellcome, the Company's HIV research and development partner, has
filed for U.S. regulatory approval for marketing Agenerase and has made
equivalent regulatory filings in Europe, Canada and other countries. Glaxo
Wellcome is the global leader in sales of HIV therapeutics. To support
Agenerase in the marketplace, Vertex has established a small clinical liaison
force to build relationships with physicians and patient treatment advocates.
The Company will receive a royalty based on Glaxo Wellcome's sales of Agenerase.
Agenerase has already been made available to more than 2,000 patients through an
early access program.
Glaxo Wellcome filed the New Drug Application for Agenerase on October 15,
1998, and the FDA has designated Agenerase for review under the its guidelines
for accelerated approval. Vertex and Glaxo Wellcome are continuing development
activities with respect to Agenerase, including on-going Phase III studies to
support the full approval of the drug, and on-going and planned Phase IV studies
designed to further characterize and expand the utilization of the product.
Page 5
There can be no assurance, however, that the New Drug Application will be
approved within the expected time-frame or at all, that full approval will be
granted on the basis of ongoing Phase III studies, or that the Phase IV studies
will commence as planned or will be successful.
In 1995, Kissei completed single dose and multi-dose, placebo-controlled,
Phase I clinical trials. Vertex expects that in 1999 Kissei will initiate a
Phase II/III efficacy trial in HIV-positive patients in Japan. The results of
such trials, together with clinical data from the Glaxo Wellcome trials, could
form the basis for a filing for marketing approval of amprenavir in Japan. There
can be no assurance, however, that these clinical trials will commence or
proceed as currently anticipated.
In collaboration with Glaxo Wellcome, Vertex is also engaged in research to
develop new formulations of amprenavir. In addition, Vertex and Glaxo Wellcome
are continuing to evaluate new lead classes of third generation HIV protease
inhibitors discovered under their HIV research collaboration.
PATENTS
The Company has patents and pending patent applications in the United
States and in certain foreign countries covering intellectual property developed
as part of the Company's HIV research and development program. These include
issued United States patents that cover classes of chemical compounds,
pharmaceutical formulations and/or uses of the same for treating HIV infection
and AIDS. The patents include specific coverage for amprenavir, the Company's
lead drug candidate for treating HIV infection and AIDS, 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. The
Company also has a non-exclusive, worldwide license under certain G.D. Searle &
Company patent applications claiming HIV protease inhibitors.
CANCER MULTIDRUG RESISTANCE (MDR) PROGRAM
OVERVIEW
Vertex is developing novel compounds to treat and prevent the occurrence of
drug resistance associated with the failure of cancer chemotherapy. Vertex is
developing Incel-TM- (also referred to as biricodar dicitrate or VX-710), a
compound that blocks major multidrug resistance mechanisms, including
P-glycoprotein, or P-gp, and multidrug resistance associated protein, or MRP.
Incel, an intravenous compound, is intended to be administered in combination
with cancer chemotherapy agents, such as doxorubicin, paclitaxel, vincristine,
etoposide and mitoxantrone. Vertex is conducting Phase II clinical trials of
Incel in five different types of cancer. In addition, Vertex is conducting a
Phase I/II clinical trial of the compound VX-853, an oral MDR inhibitor, in
patients with solid tumors. The Company retains all commercial rights to Incel
worldwide, except for Canada, where BioChem Pharma Inc. has rights under a
collaboration agreement with Vertex.
BACKGROUND
The American Cancer Society estimates that during 1998 more than 1.2
million people in the United States were diagnosed with invasive cancer and more
than 560,000 people in the U.S. died from such cancers. The Company believes
that a significant number of these patients fail to respond or relapse following
chemotherapy because of multidrug resistance, or MDR.
Multidrug resistance is frequently associated with the failure of
chemotherapy. A major contributing factor to MDR is the presence of molecular
pumps, including P-gP and MRP, that function to expel chemotherapeutic agents
from cancer cells, preventing the sustained delivery of
Page 6
potent levels of the chemotherapeutic agents required for therapeutic benefit.
As a consequence, such resistant tumor cells cannot be killed efficiently by
anticancer drugs such as doxorubicin, vincristine, etoposide and paclitaxel.
P-gp has been associated with MDR in a variety of cancers including liver
cancer, breast cancer, soft tissue sarcoma, prostate cancer, colon cancer,
pancreatic cancer, acute myelogenous leukemia, multiple myeloma and certain lung
cancers. MRP was recently identified as another drug efflux pump and is also
associated with resistance observed.
No drug has been approved by the FDA specifically for the treatment of MDR,
but several compounds are in advanced clinical studies. Certain agents, such as
dex-verapamil and cyclosporin A, have been shown in preliminary human studies to
have some promise for overcoming clinical resistance to certain commonly used
chemotherapeutic agents. The Company believes these drugs affect only a subset
of the MDR pumps and may have side effects that could limit broad use. Second
generation multidrug reversing agents, such as valspodar, a cyclosporin analog,
are also currently being evaluated by other companies.
PROGRAM STATUS
Vertex's lead compound, Incel, has displayed potent activity IN VITRO as an
inhibitor of MDR for a number of chemotherapeutic agents in a variety of tumor
types. Vertex has completed two Phase I/II studies with Incel in combination
with doxorubicin and with paclitaxel. Vertex also completed a Phase II study of
Incel in combination with doxorubicin in patients with liver cancer. Vertex does
not intend to pursue this indication further at the present time. The Company
is currently conducting five Phase II clinical studies of Incel. Preliminary
results from the Phase II studies indicate that sustained blood levels of Incel
in excess of those necessary to reverse MDR IN VITRO can be achieved.
Pharmacokinetic data of Incel in combination with paclitaxel indicated that the
compound has a dose sparing effect, suggesting that approximately one-half the
dose of paclitaxel can be used when that drug is administered with Incel.
Phase II clinical trials of Incel are currently being conducted in the
following indications:
- - BREAST CANCER. In 1997, the Company initiated a Phase II multi-center trial
to assess the safety and efficacy of the co-administration of Incel and
paclitaxel in patients with metastatic breast cancer. Interim data reported
at the 21st Annual Breast Cancer Symposium in 1998 suggest that Incel may
play a role in restoring the activity of paclitaxel in some patients with
advanced breast cancer whose tumors have previously been resistant to
paclitaxel therapy.
- - SOFT TISSUE SARCOMA. The Company began a Phase II trial in 1997 to study
Incel in combination with doxorubicin in patients with soft tissue sarcoma.
Preliminary results from 11 patients, announced at the 4th Connective Tissue
Oncology Society Meeting in 1998 indicated that treatment with Incel and
doxorubicin was well-tolerated, showed no marked drug interactions, and
indicated that Incel could also play a role in restoring the activity of
doxorubicin in this patient population.
- - OVARIAN CANCER. A study of Incel in combination with paclitaxel in patients
with ovarian cancer began in 1997. This open-label Phase II clinical trial
will evaluate the tolerability, safety, pharmacokinetics and efficacy of the
compound with paclitaxel.
- - PROSTATE CANCER. In 1998, Vertex began a Phase II clinical trial evaluating
the pharmacokinetics and efficacy of Incel in combination with mitoxantrone
and prednisone in patients with advanced hormone-refractory prostate cancer.
This study is the first to examine Incel's activity in an exclusively
chemotherapy-naive patient population.
- - SMALL CELL LUNG CANCER. Also begun in 1998, this is an open-label,
multi-center trial to evaluate the tolerability, pharmacokinetics and
anti-tumor activity of Incel in combination with doxorubicin and vincristine
in patients with progressive disease, who responded to initial
Page 7
therapy and subsequently relapsed. This study will try to correlate the
multidrug resistance profile of each patient with any therapeutic response to
Incel.
Preliminary results from some of these studies are expected in 1999. The
results will help to determine the most appropriate regimens and indications for
Phase III clinical development of Incel. However, there can be no assurance that
additional clinical trials will commence or trials currently under way will
proceed as currently anticipated. The clinical efficacy of the suppression of
mechanisms of action of MDR in chemotherapy in the treatment of cancer is
unproven, and, therefore, there can be no assurance that the Company's MDR
compounds in development will improve the efficacy of chemotherapy.
PATENTS
The Company has patents and pending patent applications in the United
States and in certain foreign countries covering intellectual property developed
as part of the Company's MDR research and development program. These include
issued United States patents claiming Incel and structurally related compounds,
VX-853 and structurally related compounds, and other compounds for treating
multidrug resistance.
IMPDH PROGRAM
OVERVIEW
IMPDH is an enzyme that controls the synthesis of certain nucleotides which
are required for RNA and DNA synthesis. Most cell types can use an alternative
pathway if IMPDH is inhibited, but a few cell types, such as lymphocytes and
virus-infected cells, are completely dependent on this enzyme. IMPDH inhibitors
thus selectively block the proliferation of lymphocytes and the replication of
certain viruses, and Vertex believes that IMPDH inhibitors may be useful both in
immunosuppression and as antiviral agents. VX-497 is a novel, orally
administered IMPDH inhibitor designed by Vertex. Vertex is conducting Phase II
clinical trials of VX-497 for the treatment of severe chronic plaque-type
psoriasis and for the treatment of hepatitis C virus ("HCV") infection. The
Company retains all commercial rights to compounds resulting from this program.
BACKGROUND
IMPDH catalyzes a key step in nucleotide biosynthesis. IMPDH inhibition
appears to selectively suppress immune system cells while leaving other cells
unaffected and may play an important role in down regulating inappropriate
immune responses common to a range of human diseases, including multiple
sclerosis, inflammatory bowel disease, psoriasis, rheumatoid arthritis and
systemic lupus erythematosus. IMPDH inhibitors can be used to prevent the
rejection of transplanted organs and may also have anti-viral effects.
The Company is aware of only two IMPDH inhibitors currently on the market
in the United States. Hoffmann-La Roche's mycophenolate mofetil is approved for
use in combination with cyclosporine to prevent acute rejection in kidney and
heart transplantation. Schering-Plough's ribavirin was approved in 1998 for
treatment, in combination with alpha interferon, of Hepatitis C infection. The
Company believes that compound-specific side effects of mycophenolate mofetil
and ribavirin may limit their use for chronic autoimmune disorders.
Psoriasis was selected as the first chronic autoimmune indication for
VX-497 development. There is a sigificant medical need for new therapies for
moderate to severe psoriasis patients. A chemically unrelated IMPDH inhibitor,
mycophenolic acid, was investigated in psoriasis in the 1970's. Despite
clear-cut efficacy, its development was terminated due to toxicity and
tolerability
Page 8
problems. It did however, establish proof of the principle of IMPDH inhibition
as a therapeutic approach for psoriasis. In addition to topical and
intralesional medications, moderate to severely afflicted patients are treated
with phototherapy (UVB and PUVA), and systemic drugs such as methotrexate,
retinoids, and cyclosporine. However, these treatments require extensive medical
supervision, and/or have serious toxic side effects.
As an immunosuppressive, VX-497 may block the growth of certain lymphocyte
populations that contribute to the inflammation of the liver in HCV patients.
VX-497 may also have a direct antiviral effect on HCV and other viruses.
Although it has not been possible to test potential drugs against hepatitis C IN
VITRO because an HCV replication model has not been available, studies of VX-497
against related viruses have demonstrated that VX-497 may be a powerful
inhibitor of viral replication.
According to the U.S. Center for Disease Control (CDC) estimates,
approximately 4 million people in the United States are infected with HCV, and
there are estimated to be approximately 170 million chronic carriers of the
virus worldwide. Current treatment options are limited. Various forms of
interferon alpha are the most common treatment used, but provide lasting benefit
in less than 20% of patients. Recent research results indicate that combination
therapy of interferon plus ribavirin may increase the long-term rate of
sustained response to treatment. Still, more than 50% of patients fail
combination ribavirin-interferon therapy, and additional safe and effective
treatments for HCV infection are needed.
PROGRAM STATUS
A Phase I clinical trial investigating the pharmacokinetics and
tolerability of VX-497 in escalating single doses in healthy subjects was
completed in the United Kingdom in early 1998. Data from that study show that
VX-497 is well tolerated and achieves blood levels well above the threshhold
necessary to inhibit IMPDH IN VITRO.
Vertex is now conducting a Phase II clinical trial of VX-497 to determine
the tolerability and pharmacokinetic profile of VX-497 in psoriasis patients.
This is a randomized, blinded dose range-finding study. Preliminary safety and
efficacy of VX-497 are being assessed in the 12-week trial. Vertex is also
conducting a Phase II study of VX-497 for the treatment of HCV infection.
Preliminary safety and efficacy are being assessed in this four-week dose
range-finding monotherapy trial.
Future clinical development of VX-497 in HCV may involve assessment of the
compound in combination with other agents such as interferon alpha. The Company
may also expand clinical development of VX-497 into additional autoimmune,
transplant and antiviral indications in the future. There can be no assurance,
however, that additional clinical trials will commence or that studies currently
under way will proceed as anticipated.
PATENTS
The Company has patents and pending patent applications in the United
States and in certain foreign countries covering intellectual property developed
as part of the Company's IMPDH research and development program. These include
an issued United States patent which covers a class of chemical compounds,
pharmaceutical compositions containing such compounds, and methods of using
those compounds to treat or prevent IMPDH-mediated diseases. The class of
compounds covered by this patent includes VX-497.
Page 9
ICE PROGRAM
OVERVIEW
Vertex is conducting research and development on inhibitors of
interleukin-1 beta converting enzyme (ICE) for the treatment of acute and
chronic inflammatory conditions, including rheumatoid arthritis (RA). The
Company is collaborating with Hoechst Marion Roussel (HMR) in the development
of the ICE inhibitor compound VX-740. A Phase I clinical trial of VX-740 in
healthy volunteers was recently completed. Inhibitors of ICE may have
application to a wide range of chronic and acute inflammatory diseases, such
as rheumatoid arthritis, osteoarthritis, inflammatory bowel disease, sepsis,
and pancreatitis.
BACKGROUND
Elevation of interleukin-1 beta (IL-1 beta) levels has been correlated to
a number of acute and chronic inflammatory diseases. There are approximately 2.1
million patients with rheumatoid arthritis in the United States alone. Numerous
companies are seeking to develop drugs to treat these conditions through various
mechanisms. However, although several companies are pursuing ICE as a drug
target, Vertex is not aware of any company with an ICE-inhibiting compound in
clinical development, and there currently are no IL-1 beta inhibitors approved
for marketing.
Inside specialized immune system cells, ICE activates the inflammatory
cytokine protein IL-1 beta and the protein gamma interferon, a key
immunoregulator that modulates antigen presentation, T-cell activation, and cell
adhesion. This triggers a cascade of events that produces inflammation. Vertex
and HMR scientists have designed several classes of small molecule ICE
inhibitors, including VX-740, the development candidate in the collaboration.
Currently, non-steroidal anti-inflammatory drugs and other
anti-inflammatory approaches which provide some symptomatic relief without
altering disease progression, are used extensively in the treatment of RA. A
few disease-modifying anti-rheumatic drugs such as methotrexate have been
available or have been investigated for a number of years, but have toxicities
that limit their long-term use. New biologics such as etanercept (Enbrel) and
infliximab (Remicade) seek to attenuate the anti-inflammatory process by
targeting TNF-alpha. In addition, studies with soluble IL-1 receptor and IL-1
receptor antagonist have shown reduced joint destruction in RA patients.
However, current anticytokine therapies for RA and inflammatory bowel disease
are protein-based and must be injected. The Company believes that an oral
therapy which can alter the course of disease with few side effects would be a
major addition to the RA therapeutic arsenal.
PROGRAM STATUS
The first clinical trial of VX-740 was a study involving 18 healthy
volunteers begun in 1998. This study was designed to test the pharmacokinetics
and tolerability of the compound in a range of single doses. Preliminary
results of this study indicate that the drug was well tolerated. VX-740 has
been shown to be orally active in several animal models of human inflammatory
disease, including models for acute and chronic arthritis. Vertex expects that
a Phase II study of VX-740 for the treatment of rheumatoid arthritis will be the
next step in the development program. However, there can be no assurance that
clinical trials will commence or proceed as currently anticipated.
PATENTS
The Company has patents and pending patent applications in the United
States and in certain foreign countries covering intellectual property developed
as part of the Company's ICE research and development program. These include
issued United States patents covering several
Page 10
different classes of compounds useful as inhibitors of ICE, pharmaceutical
compositions containing those compounds and methods of using those compounds to
treat ICE-related diseases. These patents and applications include a series of
patents and applications purchased from Sanofi S.A., in July 1997. The Company
also has a United States patent obtained from Sanofi S.A. that covers DNA
sequences encoding ICE.
NEUROPHILIN LIGAND PROGRAM
OVERVIEW
The goal of the Neurophilin Ligand Program is to discover and develop drugs
useful in the treatment of neurological disorders such as peripheral
neuropathies, including diabetic neuropathy, Parkinson's disease, trauma, and
amyotrophic lateral sclerosis, or ALS. Vertex has used information-driven drug
design to synthesize a library of orally available small molecule compounds that
have the potential to promote recovery of nerve function and nerve growth.
Vertex is engaged in worldwide strategic partnership with Schering AG, Germany
for research, development and commercialization of neurophilin ligands for the
treatment of a variety of neurological disorders. In November 1998, Vertex
started a Phase II clinical trial of timcodar dimesylate (also referred to as
VX-853) in diabetic neuropathy patients. Schering AG has an option to
co-develop timcodar dimesylate with Vertex under the collaboration agreement.
BACKGROUND
Neurodegenerative disorders are among the diseases with the fewest
available effective treatments. Central nervous system disorders such as
Alzheimer's disease, Parkinson's disease and multiple sclerosis affect millions
of patients worldwide, and for some of these there are no approved therapies
that alter the course of disease progression. Peripheral neuropathies encompass
a wide spectrum of clinical syndromes for which treatments of only limited
efficacy are available. Diabetic neuropathy, the indication for Vertex's
ongoing Phase II study of timcodar dimesylate, is the most common identifiable
cause of neuropathy. There are approximately 1.3 million patients with moderate
to severe diabetic neuropathy in the United States.
Effective treatment of both central and peripheral neurological disorders
has long been hampered by the inability to slow, arrest, or reverse nerve damage
or progression. Other companies are developing various neurotrophic factors
(proteins) for these indications, but the Company believes their clinical
utility is likely to be limited. Based on Vertex's extensive research in the
field of immunosuppressive drugs, the Company has been able to generate a large
number of compounds, known as neurophilin ligands, that trigger nerve growth
activity. Extensive IN VITRO and IN VIVO studies conducted with a reference
compound designed by Vertex support the broad potential of Vertex's neurophilin
ligands in the treatment of degenerative central nervous system and peripheral
nervous system diseases. Vertex's clinical neurophilin ligand candidate,
timcodar, has demonstrated potent activity in promoting neurite outgrowth and
functional recovery of nerves in preclinical studies. Vertex researchers are
still seeking to determine the mechanism of action of neurophilin ligands.
PROGRAM STATUS
In October 1998, Vertex started a Phase II clinical trial with timcodar
dimesylate. Approximately 70 patients will be enrolled in the trial, which is
expected to be conducted at eight centers in the United States. This is a
double-blind, placebo controlled trial. Primary objectives will be to evaluate
the safety and tolerability of six different dose regimens of timcodar
administered orally over a 28-day period. Nerve function will also be
monitored. A single-dose Phase I study of four different doses of timcodar in
healthy volunteers was completed in 1998, providing support for Phase II
clinical development in the indication of diabetic neuropathy. IN
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VITRO results have shown timcodar's ability to promote neurite outgrowth, and IN
VIVO results have shown that timcodar can prevent neural dysfunction in a model
of diabetic polyneuropathy.
PATENTS
The Company has patents and pending patent applications in the United
States and in certain foreign countries covering intellectual property developed
as part of the Company's Neurophilin research and development program. These
include issued United States patents covering the use of various classes of
chemical compounds to treat a wide variety of neurological disorders. One of
these patents specifically covers the use of timcodar to treat neurological
disorders.
P38 MAP KINASE PROGRAM
OVERVIEW
Vertex is collaborating with Kissei on the design, development and
commercialization of inhibitors of p38 MAP kinase. The p38 MAP kinase is a human
enzyme involved with the onset and progression of inflammation and programmed
cell death. The objective of Vertex's research collaboration with Kissei is to
identify and extensively evaluate compounds that target p38 MAP kinase to
develop novel, orally active drugs for the treatment of inflammatory diseases,
such as rheumatoid arthritis, asthma, and Crohn's disease, and neurological
diseases such as stroke. In March 1999, the Company initiated a Phase I
clinical trial with VX-745, a novel orally administered investigational drug
targeting p38 MAP kinase.
BACKGROUND
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 interleukin-1 (IL-1), interleukin-6
(IL-6) and tumor necrosis factor TNF-alpha. Excess levels of IL-1 and TNF-alpha
are associated with a broad range of acute and chronic inflammatory diseases.
They also play an important role in programmed cell death associated with
ischemia and stroke, and in neurodegenerative diseases such as Alzheimer's and
Parkinson's disease. Vertex is aware of several other companies that are
developing p38 MAP kinase inhibitors.
PROGRAM STATUS
During 1998, Vertex and Kissei selected VX-745 as a lead drug development
candidate targeting p38 MAP kinase. The Company began a Phase I clinical trial
of the compound in healthy volunteers in early 1999. The study, which is being
conducted in Europe, will assess the compound's safety and help to determine the
dose range for subsequent studies. The Phase I randomized, blinded clinical
trial is designed to test the pharmacokinetics and tolerability of
VX-745 in escalating single doses in healthy volunteers. The trial will assess
the ability of different doses of VX-745 to inhibit experimentally induced
TNF-alpha production using specific biochemical assays. Following completion of
the study, Vertex may conduct additional single or multidose trials of VX-745.
VX-745 has been shown to slow disease progression in animal models of
immune-mediated arthritis. However, there can be no assurance that clinical
trials will commence or proceed as currently anticipated.
Page 12
PATENTS
The Company has pending patent applications in the United States and in
certain foreign countries covering intellectual property developed as part of
the Company's p38 MAP Kinase research and development program. Certain of the
applications cover a class of chemical compounds that includes VX-745, as well
as VX-745 specifically, compositions comprising those compounds and the use of
those compounds to treat p38-related disorder.
RESEARCH PROGRAMS
HEPATITIS C VIRUS PROGRAMS
The Company is conducting two discovery research programs to develop
compounds to treat hepatitis C. Identified in 1989, the hepatitis C virus (HCV)
causes chronic inflammation in the liver. In a majority of patients, HCV
establishes a chronic infection that can persist for decades and eventually lead
to cirrhosis, liver failure and liver cancer. HCV infection represents a
significant medical problem worldwide for which there is inadequate or no
therapy for a majority of patients. Sources at the CDC have estimated that
approximately 4 million Americans, or more than 1% of the population, may be
infected with HCV, and there are estimated to be more than 100 million chronic
carriers of the virus worldwide. Currently, there is no vaccine available to
prevent hepatitis C infection. The only drugs approved for the treatment of
hepatitis C are interferon alpha and ribavarin. Combination therapy with
interferon alpha and ribavarin is the most successful treatment currently
available, but over 50% of patients still failed to show long-term sustained
response to that combination, and safe and effective treatments for HCV
infection are needed.
HEPATITIS C PROTEASE
The hepatitis C NS3-4A serine protease is a virally encoded enzyme
generally believed to be essential for replication of HCV. Under an agreement
signed during 1997, Vertex and Eli Lilly and Company are collaborating on the
research, development and commercialization of novel, orally active HCV protease
inhibitors for the treatment of hepatitis C infection. This research derives
heavily from detailed structural information about the protease, discovered and
developed by Vertex researchers.
The Company has pending patent applications in the United States and in
certain foreign countries covering intellectual property developed as part of
the Company's Hepatitis C Protease research and development program. Vertex has
an issued United States patent covering an assay useful to evaluate potential
inhibitors of Hepatitis C protease.
HEPATITIS C HELICASE
Vertex is also conducting discovery research to design orally deliverable
drugs to inhibit the hepatitis C virus helicase. The NS3 helicase enzyme is
believed to play an essential role in the infectious cycle of the hepatitis C
virus by aligning viral DNA in its proper configuration for replication.
Therefore, the HCV helicase represents an attractive target for drug discovery.
Researchers from Vertex solved the three-dimensional atomic structure of
the hepatitis C virus NS3 helicase. Vertex is using the structural information
to identify and optimize inhibitors of the enzyme, employing structure-based
techniques, including cluster-based screening, and
Page 13
computational, combinatorial, and medicinal chemistry, to design novel small
molecule inhibitors of the HCV helicase for clinical development as new
antiviral drugs to treat HCV infection.
The Company has pending patent applications in the United States covering
intellectual property developed as part of the Company's Hepatitis C Helicase
research and development program. These applications cover Hepatitis C helicase
inhibitors and the X-ray crystal structure of Hepatitis C helicase.
CASPASE INHIBITORS PROGRAM
Vertex is conducting a major multidisciplinary research effort to design of
novel, small molecule inhibitors of apoptosis (programmed cell death) for the
treatment of a variety of pathological conditions including major
neurodegenerative and cardiovascular diseases. In this separate caspase
inhibitor program, Vertex scientists are capitalizing on expertise gained
through the Company's successful design and optimization of inhibitors of ICE
(Caspase-1). Recent highlights include the solution of the caspase-3 structure
by X-ray crystallography and the first description of the caspase-9 gene
knockout mouse, establishing that this enzyme is of particular importance in
neurobiology. With respect to drug discovery, Vertex's caspase research has
resulted in the identification of novel compounds with activity in enzyme
assays, cellular assays, and animal models. The goal of Vertex's caspase
inhibitors program is to discover and develop novel drugs useful for treating
neurodegenerative disorders such as Alzheimer's and Parkinson's disease and for
decreasing the tissue damage in myocardial infarction and stroke.
JNK3 MAP KINASE INHIBITORS PROGRAM
Vertex is currently engaged in a research effort to identify JNK3 MAP
kinase inhibitors. Vertex's studies have been accelerated by the experience
gained in Vertex's p38 MAP kinase program with Kissei. Jun N-terminal kinase
(JNK) is a member of the same group of structurally-related enzymes as p38 MAP
kinase. Recent findings suggest that JNK3 plays an important role in central
nervous system disorders such as epilepsy, stroke and Alzheimer's Disease. JNK3
also has been implicated in Parkinson's disease. Vertex has solved and in 1998
reported in the journal STRUCTURE the X-ray crystal structure of JNK3 complexed
to an analog of the co-factor molecule ATP. Using proprietary structural
information of the JNK3 and other MAP kinase enzymes, Vertex scientists selected
initial compounds for investigation as potential inhibitors. Vertex has
identified several novel classes of JNK3 MAP kinase inhibitors and is currently
using advanced drug discovery technology to move lead compounds toward clinical
candidate status.
CORPORATE COLLABORATIONS
Vertex has 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 the
Company's research and development programs. At present, the Company has the
following major corporate collaborations.
GLAXO WELLCOME PLC.
Vertex and Glaxo Wellcome are collaborating on the development and
commercialization of Agenerase (amprenavir). Under the collaborative agreement
for research and development of HIV protease inhibitors, which began in December
1993, Glaxo Wellcome agreed to pay Vertex up to $42 million, comprised of a $15
million initial license payment paid in December 1993, $14 million of product
research funding over five years and $13 million of development and
commercialization milestone payments for an initial drug candidate. From the
inception of the agreement in December 1993 through December 31, 1998, Vertex
has recognized as revenue $34 million. The Company has received the full amount
of research funding specified under the agreement. Glaxo Wellcome is
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also obligated to pay to Vertex additional development and commercialization
milestone payments for subsequent drug candidates. In addition, Glaxo Wellcome
is required to bear the costs of development in its territory under the
collaboration. Glaxo Wellcome has exclusive rights to develop and commercialize
Vertex HIV protease inhibitors in all parts of the world except the Far East and
will pay Vertex a royalty on sales. Vertex has retained certain bulk drug
manufacturing rights and certain co-promotion rights in the territories licensed
to Glaxo Wellcome.
Glaxo Wellcome has the right to terminate its agreement with the Company
without cause upon twelve months' notice. Termination by Glaxo Wellcome of the
agreement will relieve Glaxo Wellcome of its obligation to make further
commercialization and development milestone and royalty payments, and will end
any license granted to Glaxo Wellcome by Vertex thereunder, and could have a
material adverse effect on the Company's business and result of operations.
Vertex and Glaxo Wellcome have a non-exclusive, worldwide license under
certain Searle patent applications claiming HIV protease inhibitors to permit
Vertex and Glaxo Wellcome to develop, manufacture and market Agenerase free of
the risk of intellectual property claims by Searle. The terms of the license
require Vertex to pay Searle a royalty on net sales.
KISSEI PHARMACEUTICAL CO., LTD.
AMPRENAVIR
Vertex and Kissei are collaborating on the development of amprenavir,
Vertex's HIV protease inhibitor. Under the collaborative agreement, which began
in April 1993, Kissei agreed to pay to Vertex up to $20 million, comprised of
$9.8 million of product research funding over three years, $7 million of
development and commercialization milestone payments and a $3.2 million equity
investment. From the inception of the agreement in April 1993 through December
31, 1998, $14.6 million has been recognized as revenue. During 1997, the
Company also received $4 million related to reimbursements of certain
development costs. The Company has received the full amount of research funding
specified under the agreement. Kissei has exclusive rights to develop and
commercialize amprenavir in Japan, the People's Republic of China and several
other countries in the Far East and will pay Vertex a royalty on sales. Vertex
is responsible for the manufacture of bulk product for Kissei.
P38 MAP KINASE
In September 1997, the Company and Kissei entered into a collaborative
agreement for the p38 MAP kinase program for the development and
commercialization of novel, orally active drugs for the treatment of
inflammatory and neurological diseases. Under the terms of the agreement,
Kissei agreed to pay the Company up to $22 million, composed of a $4 million
license payment paid in September 1997, $11 million of product research funding
over three years and $7 million of development and commercialization milestone
payments. From the inception of the agreement in September 1997 through
December 31, 1998, $11 million has been recognized as revenue. The Company and
Kissei will collaborate to identify and extensively evaluate compounds that
target p38 MAP kinase. Kissei will have the right to develop and commercialize
these compounds in its licensed territories. Kissei has exclusive rights to p38
MAP kinase compounds in Japan and certain Southeast Asian countries and
semi-exclusive rights in China, Taiwan and South Korea. The Company retains
exclusive marketing rights in the United States, Canada, Europe, and the rest of
the world. In addition, the Company will have the right to supply bulk drug
material to Kissei for sale in its territory, and will receive royalties and
drug supply payments on any product sales. Kissei has the right to terminate
the agreement without cause upon six months' notice.
Page 15
BIOCHEM PHARMA INC.
The Company and BioChem are collaborating on the development and
commercialization of Incel, the Company's lead compound in its cancer
multidrug resistance program. Under the collaborative agreement, which began
in May 1996, BioChem agreed to pay the Company up to $4 million comprised of
an initial license payment of $500,000 and development and commercialization
milestone payments. From the inception of the agreement in May 1996 through
December 31, 1998, $0.8 million has been recognized as revenue. BioChem also
agreed to bear certain costs of development of Incel in Canada. BioChem has
exclusive rights to develop and commercialize Incel in Canada. The Company
will supply BioChem's requirements of bulk and finished forms of Incel.
BioChem will make payments to the Company for those materials based on sales
of products by BioChem, which will cover Vertex's cost of supplying materials
and will provide a profit to Vertex. BioChem has the right to terminate the
agreement without cause upon six months' notice. Termination will relieve
BioChem of any further payment obligations and will end any license granted
to BioChem by Vertex under the agreement.
HOECHST MARION ROUSSEL
Vertex and HMR are collaborating on the development of ICE inhibitors as
anti-inflammatory agents. Under the collaborative agreement, which commenced in
September 1993, HMR is obligated to pay to Vertex up to $30.5 million, comprised
of $18.5 million of product research funding over five years and $12 million of
development and commercialization milestone payments. From the inception of the
agreement in September 1993 through December 31, 1998, $21.5 million has been
recognized as revenue. The Company received additional revenue related to
reimbursements for clinical development in 1997. The Company has received the
full amount of research funding specified under the agreement. HMR has exclusive
rights to develop and market drugs resulting from the collaborative effort in
Europe, Africa and the Middle East, and Vertex has exclusive development and
marketing rights in the rest of the world, except the Far East, where Vertex
shares those rights with HMR. HMR is obligated to pay a royalty to Vertex on any
sales made in Europe, and Vertex is obligated to pay a royalty to HMR on any
sales made in the United States or the rest of the Americas. Each party will
have the option to co-promote products in the other party's exclusive territory.
Vertex and HMR will each have rights to develop and market the drugs in Far
Eastern countries including Japan.
ELI LILLY & COMPANY
In June 1997, Vertex and Lilly entered into a collaborative agreement for
the research, development and commercialization of novel, small molecule
compounds to treat hepatitis C infection. Under the terms of the agreement,
Lilly will pay the Company up to $51 million composed of a $3 million up front
payment paid in June 1997, $33 million of product research funding over six
years and $15 million of development and commercialization milestone payments.
From the inception of the agreement in June 1997 through December 31, 1998,
$10.8 million has been recognized as revenue. The Company and Lilly will
jointly manage the research, development, manufacturing and marketing of drug
candidates emerging from the collaboration. The Company will have primary
responsibility for drug design, process development and pre-commercial drug
substance manufacturing, and Lilly will have primary responsibility for
formulation, preclinical and clinical development and global marketing. The
Company has the option to supply 100% of Lilly's commercial drug substance
supply needs. The Company will receive royalties on future product sales, if
any. If the Company exercises its commercial supply option, the Company will
receive drug supply payments in addition to royalties on future product sales,
if any. Lilly has the right to terminate the agreement without cause upon six
months' notice after June 1999.
Page 16
SCHERING AG
The Company and Schering AG, Germany are collaborating on the research,
development and commercialization of novel, orally active neurophilin ligand
compounds to promote nerve regeneration for the treatment of a number of
neurological diseases. Under the terms of the agreement, Schering AG will pay
the Company up to $88 million composed of a $6 million upfront license payment
paid in September 1998, $22 million of product research funding over five years
and $60 million of development and commercialization milestone payments. From
the inception of the agreement in August 1998 through December 31, 1998, $10
million has been recognized as revenue. Under terms of the agreement, Vertex
and Schering AG will have an equal role in management of neurophilin ligand
research and product development. In North America, Vertex will have
manufacturing rights, and Vertex and Schering AG will share equally in the
marketing expenses and profits from commercialized compounds. In addition to
having manufacturing rights in North America, the Company retains the option to
manufacture bulk drug substance for sales and marketing in territories outside
Europe, the Middle East and Africa. Schering AG will have the right to
manufacture and market any commercialized compounds in Europe, the Middle East
and Africa, and pay Vertex a royalty on product sales. After December 2000,
Schering AG has the right to terminate without cause upon a six months' written
notice.
ALTUS BIOLOGICS INC.
Altus Biologics Inc. develops, manufactures and markets products based
on a novel and proprietary technology for stabilizing proteins. At December
31, 1998, Vertex owned approximately 70% of the capital stock of Altus. In
February 1999, Vertex restructured its investment in Altus. As part of the
transaction, Vertex provided Altus $3 million of cash and surrendered its
shares of Altus preferred stock in exchange for two new classes of preferred
stock and warrants. The new preferred stock provides Vertex with a minority
ownership position in Altus, and the warrants, which become exercisable upon
certain events, will provide Vertex with significant additional ownership
potential. As a result of the transaction, Altus now operates independently
from Vertex. In addition, Vertex has retained a non-exclusive royalty-free
right to use Altus' technology for discovering, developing and manufacturing
small molecule drugs.
PATENTS AND PROPRIETARY INFORMATION
The Company has rights in certain patents and pending patent applications
that relate to compounds it is developing and methods of using such compounds,
as discussed above. In addition, the Company actively seeks, when appropriate,
protection for its products and proprietary information by means of United
States and foreign patents, trademarks and contractual arrangements. Vertex has
pending applications in the United States, and foreign counterpart applications
in countries it deems appropriate, for all of its most advanced research and
development programs. In addition, the Company relies upon trade secrets and
contractual arrangements to protect certain of its proprietary information and
products.
There can be no assurance that any patents will issue from any of the
Company's patent applications or, even if patents issue or have issued, that the
claims thereof will provide the Company with any significant protection against
competitive products or otherwise be valuable commercially. Legal standards
relating to the validity of patents and the proper scope of their claims in the
biopharmaceutical field are still evolving, and there is no consistent policy
regarding the breadth of claims allowed in biopharmaceutical patents. No
assurance can be given as to the Company's ability to avoid infringing, and thus
having to negotiate a license under, any patents issued to others, or that a
license to such patents would be available on commercially acceptable terms, if
at all. See Item 3, "Legal Proceedings."
Page 17
Further, there can be no assurance that any patents issued to or licensed
by the Company will not be infringed by the products of others, which may
require the Company to engage in patent infringement litigation. In addition to
being a party to patent infringement litigation, the Company could be required
to participate in interference proceedings declared by the United States Patent
and Trademark Office. Defense or prosecution of patent infringement litigation,
as well as participation in interference proceedings, can be expensive and time
consuming, even in those instances in which the outcome is favorable to the
Company. If the outcome of any such litigation or proceeding were adverse, the
Company could be subject to significant liabilities to third parties, could be
required to obtain licenses from third parties or could be required to cease
sales of the affected products, any of which could have a material adverse
effect on the Company.
Much of the Company's technology and many of its processes are dependent
upon the knowledge, experience and skills of key scientific and technical
personnel. To protect its rights to its proprietary know-how and technology, the
Company requires all employees, consultants, advisors and collaborators to enter
into confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside the Company. These agreements require disclosure
and assignment to the Company of ideas, developments, discoveries and inventions
made by employees, consultants, advisors and collaborators. However, there can
be no assurance that these agreements will effectively prevent disclosure of the
Company's confidential information or will provide meaningful protection for the
Company's confidential information if there is unauthorized use or disclosure.
MANUFACTURING
The Company relies on third party manufacturers and collaborative partners
to produce its compounds for preclinical and clinical purposes and may do so for
commercial production of any compounds that are approved for marketing.
Commercial manufacturing of Agenerase will be done, at least initially, by Glaxo
Wellcome. Vertex retains the option to manufacture a portion of Glaxo
Wellcome's requirements for bulk drug substance. If Vertex were to exercise
that option, it would rely upon one or more contract manufacturers to
manufacture the Agenerase bulk drug substance on its behalf.
The Company has established a quality assurance program, including a set of
standard operating procedures, intended to ensure that third party manufacturers
under contract produce the Company's compounds in accordance with the FDA's
current Good Manufacturing Practices, or cGMP, and other applicable regulations.
The Company believes that all of its existing compounds can be produced
using established manufacturing methods, primarily through standard techniques
of pharmaceutical synthesis. The Company believes that it will be able to
continue to negotiate third party manufacturing arrangements on commercially
reasonable terms and that it will not be necessary for it to develop internal
manufacturing capability in order to successfully commercialize its products.
The Company's objective is to maintain flexibility in deciding whether to
develop internal manufacturing capabilities for certain of its potential
products. However, in the event that the Company is unable to obtain contract
manufacturing, or obtain such manufacturing on commercially reasonable terms, it
may not be able to commercialize its products as planned. The Company has
limited experience in manufacturing pharmaceutical or other products or in
conducting manufacturing testing programs required to obtain FDA and other
regulatory approvals, and there can be no assurance that the Company will
further develop such capabilities successfully.
Since most of the Company's potential products are at an early stage of
development, the Company will need to improve or modify its existing
manufacturing processes and capabilities to produce commercial quantities of
any drug product economically. The Company cannot quantify the time or
expense that may ultimately be required to improve or modify its existing
process technologies, but
Page 18
it is possible that such time or expense could be substantial.
The production of Vertex's compounds is based in part on technology that
the Company believes to be proprietary. Vertex may license this technology to
contract manufacturers to enable them to manufacture compounds for the Company.
In addition, a contract manufacturer may develop process technology related to
the manufacture of Vertex's compounds that the manufacturer owns either
independently or jointly with the Company. This would increase the Company's
reliance on such manufacturer or require the Company to obtain a license from
such manufacturer in order to have its products manufactured.
Some of the Company's current corporate partners have certain manufacturing
rights with respect to the Company's products under development, and there can
be no assurance that such corporate partners' rights will not impede the
Company's ability to conduct the development programs and commercialize any
resulting products in accordance with the schedules and in the manner currently
contemplated by the Company.
COMPETITION
The Company is engaged in pharmaceutical fields characterized by extensive
research efforts, rapid technological progress and intense competition. There
are many public and private companies, including pharmaceutical companies,
chemical companies and biotechnology companies, engaged in developing products
for the same human therapeutic applications as those targeted by Vertex. In
order for the Company to compete successfully, it must demonstrate improved
safety, efficacy, ease of manufacturing and market acceptance of its products
over those of its competitors who have received regulatory approval and are
currently marketing their drugs. In the field of HIV protease inhibition, Merck
& Co., Inc., Abbott Laboratories, Inc., Hoffmann-La Roche, and Agouron
Pharmaceuticals, Inc. have HIV protease inhibitor drugs that are already on the
market. Many of the Company's competitors have substantially greater financial,
technical and human resources than those of the Company and more experience in
the development of new drugs. See "Risk Factors--Vertex Faces Substantial
Competition."
GOVERNMENT REGULATION
The Company's development, manufacture and potential sale of therapeutics
are subject to extensive regulation by United States and foreign governmental
authorities. In particular, pharmaceutical products are subject to rigorous
preclinical and clinical testing and to other approval requirements by the FDA
in the United States under the Food, Drug and Cosmetic Act and by comparable
agencies in most foreign countries.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animals to identify potential safety
problems. For certain diseases, animal models exist that are believed to be
predictive of human efficacy. For such diseases, a drug candidate is tested in
an animal model. The results of the studies are submitted to the FDA as a part
of the Investigational New Drug application (IND) which is filed to comply with
FDA regulations prior to commencement of human clinical testing. For other
diseases for which no appropriately predictive animal model exists, no such
results can be filed. For several of the Company's drug candidates, no
appropriately predictive model exists. As a result, no IN VIVO evidence of
efficacy would be available until such compounds progress to human clinical
trials.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, which frequently begins with the
initial introduction of the drug into healthy human subjects prior to
introduction into patients, the compound will be tested for safety, dosage
tolerance, absorption, bioavailability, biodistribution, metabolism, excretion,
clinical pharmacology and, if possible, for early information on effectiveness.
Phase II typically involves
Page 19
studies in a small sample of the intended patient population to assess the
efficacy of the drug for a specific indication, to determine dose tolerance and
the optimal dose range and to gather additional information relating to safety
and potential adverse effects. Phase III trials are undertaken to further
evaluate clinical safety and efficacy in an expanded patient population at
geographically dispersed study sites, to determine the overall risk-benefit
ratio of the drug and to provide an adequate basis for physician labeling. Each
trial is conducted in accordance with certain standards under protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Further, each clinical study must be evaluated by an
independent Institutional Review Board at the institution at which the study
will be conducted. The Institutional Review Board will consider, among other
things, ethical factors, the safety of human subjects and the possible liability
of the institution.
Data from preclinical testing and clinical trials are submitted to the FDA
in a New Drug Application (NDA) for marketing approval. The process of
completing clinical testing and obtaining FDA approval for a new drug is likely
to take a number of years and require the expenditure of substantial resources.
Preparing an NDA involves considerable data collection, verification, analysis
and expense, and there can be no assurance that approval will be granted on a
timely basis, if at all. The approval process is affected by a number of
factors, including the severity of the disease, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials. The FDA
may deny an NDA if applicable regulatory criteria are not satisfied or may
require additional testing or information. Among the conditions for marketing
approval is the requirement that the prospective manufacturer's quality control
and manufacturing procedures conform to the FDA's cGMP regulations, which must
be followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, monies and effort in
the area of production and quality control to ensure full technical compliance.
Manufacturing establishments, both foreign and domestic, also are subject to
inspections by or under the authority of the FDA and by or under the authority
of other federal, state or local agencies.
Even after initial FDA approval has been obtained, further studies,
including post-marketing studies, may be required to provide additional data on
safety and will be required to gain approval for the use of a product as a
treatment for clinical indications other than those for which the product was
initially tested. Also, the FDA will require post-marketing reporting to monitor
the side effects of the drug. Results of post-marketing programs may limit or
expand further marketing of the products. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process, labeling or manufacturing facilities, an NDA supplement may be required
to be submitted to the FDA.
The Orphan Drug Act provides incentives to drug manufacturers to develop
and manufacture drugs for the treatment of diseases or conditions that affect
fewer than 200,000 individuals in the United States. Orphan drug status can also
be sought for diseases or conditions that affect more than 200,000 individuals
in the United States if the sponsor does not realistically anticipate its
product becoming profitable from sales in the United States. Under the Orphan
Drug Act, a manufacturer of a designated orphan product can seek tax benefits,
and the holder of the first FDA approval of a designated orphan product will be
granted a seven-year period of marketing exclusivity for that product for the
orphan indication. While the marketing exclusivity of an orphan drug would
prevent other sponsors from obtaining approval of the same compound for the same
indication, it would not prevent other types of drugs from being approved for
the same use. The Company may apply for orphan drug status for certain
indications of MDR in cancer.
Under the Drug Price Competition and Patent Term Restoration Act of 1984, a
sponsor may be granted marketing exclusivity for a period of time following FDA
approval of certain drug applications if FDA approval is received before the
expiration of the patent's original term. This
Page 20
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. The Company intends to seek the
benefits of this statute, but there can be no assurance that the Company will be
able to obtain any such benefits.
Whether or not FDA approval has been obtained, approval of a drug product
by regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. Historically,
the requirements governing the conduct of clinical trials and product approvals,
and the time required for approval, have varied widely from country to country.
In addition to the statutes and regulations described above, the Company is
also subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other present and potential future federal,
state and local regulations.
HUMAN RESOURCES
As of December 31, 1998, Vertex had 304 full-time employees, including 219
in research and development, 38 in support services and 47 in general and
administrative functions, and one part-time employee. Fourteen of these
employees were located at Vertex's new U.K. research and development facility,
opened in 1998. The Company's scientific staff members (103 of whom hold Ph.D.
and/or M.D. degrees) have diversified experience and expertise in molecular and
cell biology, biochemistry, animal pharmacology, synthetic organic chemistry,
protein x-ray crystallography, protein nuclear magnetic resonance spectroscopy,
computational chemistry, biophysical chemistry, medicinal chemistry, clinical
pharmacology and clinical medicine. In addition, the Company's Altus subsidiary
had 30 full-time employees as of December 31, 1998. The Company's employees are
not covered by a collective bargaining agreement, and the Company considers its
relations with its employees to be good.
EXECUTIVE OFFICERS
The names, ages and positions held by the executive officers of the Company are
as follows:
Name Age Position
- ---- --- --------
Joshua S. Boger, Ph.D. . . . . . . . .47 Chairman, President and Chief
Executive Officer
Richard H. Aldrich . . . . . . . . . .44 Senior Vice President and Chief
Business Officer
Vicki L. Sato, Ph.D. . . . . . . . . .50 Senior Vice President of Research
and Development and Chief
Scientific Officer; Chair of the
Scientific Advisory Board
Iain P. M. Buchanan. . . . . . . . . .45 Vice President of European
Operations; Managing Director of
Vertex Pharmaceuticals (Europe)
Limited
Thomas G. Auchincloss, Jr. . . . . . .37 Vice President of Finance and
Treasurer
Page 21
All executive officers are elected by the Board of Directors to serve in
their respective capacities until their successors are elected and qualified or
until their earlier resignation or removal.
Dr. Boger is a founder of the Company and was its President and Chief
Scientific Officer from its inception in 1989 until May 1992, when he became
President and Chief Executive Officer. In 1997, Dr. Boger became Chairman,
President and Chief Executive Officer. Dr. Boger has been a director since the
Company's inception. Prior to founding the Company in 1989, Dr. Boger held the
position of Senior Director of Basic Chemistry at Merck Sharp & Dohme Research
Laboratories in Rahway, New Jersey, where he headed both the Department of
Medicinal Chemistry of Immunology & Inflammation and the Department of
Biophysical Chemistry. Dr. Boger is also a Director of Millennium
Pharmaceuticals, Inc. Dr. Boger holds a B.A. in chemistry and philosophy from
Wesleyan University and M.S. and Ph.D. degrees in chemistry from Harvard
University.
Mr. Aldrich served as Vice President of Business Development of the Company
from June 1989 to May 1992, when he became Vice President and Chief Business
Officer. In December 1993, Mr. Aldrich was promoted to Senior Vice President and
Chief Business Officer. He joined Vertex from Integrated Genetics, where he
headed that company's business development group. Previously, he served as
Program Executive at Biogen, Inc., where he coordinated worldwide commercial
development of several biopharmaceuticals, and as Licensing Manager at Biogen
S.A. in Geneva, Switzerland, where he managed European and Far Eastern
licensing. Mr. Aldrich previously worked at the Boston Consulting Group, an
international management consulting firm. Mr. Aldrich received a B.S. degree
from Boston College and an M.B.A. from the Amos Tuck School of Business,
Dartmouth College.
Dr. Sato joined Vertex in September 1992 as Vice President of Research and
was appointed Senior Vice President of Research and Development in September
1994. Previously, she was Vice President, Research and a member of the
Scientific Board of Biogen, Inc. As research head at Biogen, she directed
research programs in the fields of inflammation, immunology, AIDS therapy and
cardiovascular therapy from early research into advanced product development.
Dr. Sato received an A.B. in biology from Radcliffe College and A.M. and Ph.D.
degrees from Harvard University. Following postdoctoral work in chemistry and
immunology at the University of California at Berkeley and Stanford Medical
School, she was appointed to the faculty of Harvard University in the Department
of Biology. Dr. Sato is also a Director of Mitotix, Inc.
Mr. Buchanan joined the Company in April 1994 from Cilag AG, a subsidiary
of Johnson & Johnson based in Zug, Switzerland, where he served as its Regional
Licensing Director since 1987. He previously held the position of Marketing
Director of Biogen, Inc. in Switzerland. Prior to Biogen, Mr. Buchanan served in
Product Management at Merck Sharp & Dohme (UK) Limited. Mr. Buchanan holds a
B.Sc. from the University of St. Andrews, Scotland.
Mr. Auchincloss joined the Company in October 1994 after serving as an
investment banker at Bear, Stearns & Co. Inc. since 1988, most recently as
Associate Director of the Corporate Finance Department. Prior to Bear Stearns,
Mr. Auchincloss was a financial analyst for PaineWebber, Inc. Mr. Auchincloss
holds a B.S. from Babson College and an M.B.A. from The Wharton School,
University of Pennsylvania.
Page 22
SCIENTIFIC ADVISORY BOARD
The Company's Scientific Advisory Board consists of individuals with
demonstrated expertise in various fields who advise the Company concerning
long-term scientific planning, research and development. The Scientific Advisory
Board also evaluates the Company's research programs, recommends personnel to
the Company and advises the Company on technological matters. The members of the
Scientific Advisory Board, which is chaired by Dr. Vicki L. Sato, are:
Vicki L. Sato, Ph.D. . . . . . Senior Vice President of Research and
Development and Chief Scientific Officer,
Vertex Pharmaceuticals Incorporated.
Steven J. Burakoff, M.D. . . . Chair, Department of Pediatric Oncology,
Dana-Farber Cancer Institute; Professor
of Pediatrics, Harvard Medical School.
Eugene H. Cordes, Ph.D.. . . . Professor of Pharmacy and Chemistry,
University of Michigan at Ann Arbor.
Jerome E. Groopman, M.D. . . . Chief, Division of Experimental Medicine,
Beth Israel Deaconess Medical Center;
Recanati Chair of Medicine and
Professor of Medicine, Harvard Medical
School.
Stephen C. Harrison, Ph.D. . . Higgins Professor of Biochemistry,
Harvard University; Investigator, Howard
Hughes Medical Institute; Professor of
Biological Chemistry and Molecular
Pharmacology and Professor of Pediatrics,
Harvard Medical School.
Jeremy R. Knowles, D. Phil.. . Dean of the Faculty of Arts and Sciences
and Amory Houghten Professor of Chemistry
and Biochemistry, Harvard University.
Robert T. Schooley, M.D. . . . Tim Gill Professor of Medicine and
Head of Infectious Disease, University of
Colorado Health Sciences Center.
Other than Dr. Sato, none of the members of the Scientific Advisory Board is
employed by the Company, and members may have other commitments to or consulting
or advisory contracts with their employers or other entities that may conflict
or compete with their obligations to the Company. Accordingly, such persons are
expected to devote only a small portion of their time to the Company. In
addition to its Scientific Advisory Board, Vertex has established consulting
relationships with a number of scientific and medical experts who advise the
Company on a project-specific basis.
Page 23
RISK FACTORS
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements in this Report or
presented elsewhere by Vertex.
Market Acceptance of Agenerase Cannot Yet Be Determined
Agenerase is currently awaiting marketing approval by regulatory
authorities, and it is too early to predict whether the product will be
successful in the market. Four other HIV protease inhibitors are on the market,
as well as a number of other products for the treatment of HIV infection and
AIDS. In addition, numerous other drugs are still in development by the
Company's competitors, which may have more efficacy, fewer side effects, easier
administration and/or lower costs. To date, HIV has been shown to develop
resistance to antiviral drugs, including currently marketed HIV protease
inhibitors. There can be no assurance that such disease resistance or other
factors will not limit the efficacy of Agenerase. Although Vertex will
co-promote Agenerase, most of the marketing effort and all of the sales effort
will be made by Glaxo Wellcome, and Vertex will have little control over the
success of those efforts.
SUCCESSFUL DEVELOPMENT OF PIPELINE CANNOT BE PREDICTED
The products that the Company is pursuing will require extensive additional
development, testing and investment, as well as regulatory approvals, prior to
commercialization. No assurance can be given that the Company's product
development efforts will be successful, that required regulatory approvals will
be obtained or that any products, if introduced, will be commercially
successful. The results of preclinical and initial clinical trials of products
under development by the Company are not necessarily predictive of results that
will be obtained from large-scale clinical testing, and there can be no
assurance that clinical trials of products under development will demonstrate
the safety and efficacy of such products or will result in a marketable product.
The administration alone or in combination with other drugs of any product
developed by the Company 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 the Company. In addition, the FDA may
require additional clinical trials, which could result in increased costs and
significant development delays. Commercial formulation and manufacturing
processes have yet to be developed for the Company's drug candidates other than
Agenerase. The Company or its collaborators may encounter difficulties in their
manufacturing process development and formulation activities that could result
in delays in clinical trials, regulatory submissions and commercialization of
its products, or cause negative financial and competitive consequences.
CLINICAL TRIAL TIMING MAY BE SUBJECT TO DELAYS
The rate of completion of clinical trials of the Company's products is
dependent upon, among other factors, the rate of patient accrual. Patient
accrual is a function of many factors, including the size of the patient
population, the proximity of patients to clinical sites, the eligibility
criteria for the trial and the availability of clinical trial material. Delays
in planned patient enrollment in clinical trials may result in increased costs,
program delays or both, which could have a material adverse effect on the
Company. There can be no assurance that if clinical trials are completed the
Company will be able to submit an NDA or that any such application will be
reviewed and approved by the FDA in a timely manner, if at all.
Page 24
VERTEX IS DEPENDENT ON COLLABORATIVE PARTNERS
The Company is engaged in research and development collaborations, pursuant
to which its partners have agreed to fund portions of the Company's research and
development programs and/or to conduct certain research and development relating
to specified products, in exchange for certain technology, product and marketing
rights relating to those products. Some of the Company's current corporate
partners have certain rights to control the planning and execution of product
development and clinical programs, and there can be no assurance that such
corporate partners' rights to control aspects of such programs will not impede
the Company's ability to conduct such programs in accordance with the schedules
and in the manner currently contemplated by the Company for such programs. If
any of the Company's corporate collaborators were to terminate its relationship
with Vertex, it could have a material adverse effect on the Company's ability to
fund related and other programs and to develop, manufacture and market any
products that may have resulted from such collaboration. The Company expects to
seek additional collaborative arrangements to develop and commercialize its
products in the future. There can be no assurance that the Company will be able
to establish acceptable collaborative arrangements in the future or that such
collaborative arrangements will be successful.
THE TECHNOLOGIES USED BY VERTEX ARE RAPIDLY CHANGING
The Company is engaged in pharmaceutical fields characterized by extensive
research efforts, rapid technological progress and intense competition. Further,
the Company believes that interest in the application of structure-based drug
design and related technologies may continue and may accelerate as the
technologies become more widely understood. Businesses, academic institutions,
governmental agencies and other public and private research organizations are
conducting research to develop technologies that may compete with those used by
the Company. It is possible that the Company's competitors could acquire or
develop technologies that would render the Company's technology obsolete or
noncompetitive.
VERTEX FACES SUBSTANTIAL COMPETITION
There are many public and private companies, including pharmaceutical
companies, chemical companies and biotechnology companies, engaged in developing
products for the human therapeutic applications targeted by Vertex. The Company
is aware of efforts by others to develop products in each of the areas in which
the Company has products in development. In addition, there can be no assurance
that the Company's products in development will be able to compete effectively
with products which are currently on the market. In order for the Company to
compete successfully in these areas, it must demonstrate improved safety,
efficacy, ease of manufacturing and market acceptance over its competitors, who
have received regulatory approval and are currently marketing. Many of the
Company's competitors have substantially greater financial, technical and human
resources than those of the Company. In addition, many of the Company's
competitors have significantly greater experience than the Company in conducting
preclinical testing and human clinical trials of new pharmaceutical products,
and in obtaining FDA and other regulatory approvals of products. Accordingly,
certain of the Company's competitors may succeed in obtaining regulatory
approval for products more rapidly than the Company. If the Company obtains
regulatory approval and commences commercial sales of its products, it will also
compete with respect to manufacturing efficiency and sales and marketing
capabilities, areas in which it currently has no experience.
VERTEX RELIES ON THIRD PARTY MANUFACTURERS
The Company's ability to conduct clinical trials and its ability to
commercialize its potential products will depend, in part, on its ability to
manufacture its products on a large scale, either directly or through third
parties, at a competitive cost and in accordance with FDA and other
Page 25
regulatory requirements. The Company currently does not have the capacity to
manufacture drugs in large-scale quanties and is dependent on third party
manufacturers or collaborative partners for the production of its compounds for
preclinical research, clinical trial purposes and commercial production. In the
event that the Company is unable to obtain contract manufacturing, or obtain
such manufacturing on commercially reasonable terms, it may not be able to
conduct or complete clinical trials or commercialize its products as planned.
The Company has no experience in manufacturing pharmaceutical or other products,
and there can be no assurance that the Company will successfully develop such
capabilities. Some of the Company's current corporate partners have certain
manufacturing rights with respect to the Company's products under development,
and there can be no assurance that such corporate partners' manufacturing rights
will not impede the Company's ability to conduct the development programs and
commercialize any resulting products in accordance with the schedules and in the
manner currently contemplated by the Company.
THE REGULATORY APPROVAL PROCESS IS SUBJECT TO UNCERTAINTIES
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of therapeutic pharmaceutical products through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time-consuming procedures. Satisfaction of these
requirements typically takes several years or longer and may vary substantially
based upon the type, complexity and novelty of the pharmaceutical product. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. In
addition, delays or rejections may be encountered based on changes in, or
additions to, regulatory policies for drug approval during the period of product
development and regulatory review. The effect of government regulation may be
to delay or prevent the commencement of clinical trials or marketing of Company
products, if any are developed and submitted for approval, for a considerable
period of time, to impose costly procedures upon the Company's activities and to
provide a competitive advantage to larger companies or companies more
experienced in regulatory affairs that compete with the Company. Moreover, even
if approval is granted, such approval may entail limitations on the indicated
uses for which a compound may be marketed.
THE SCOPE OF PATENT PROTECTION IS UNCERTAIN
The Company's success will depend, in part, on its ability to obtain United
States and foreign patent protection for its products and their uses, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. There can be no assurance that patents will issue from
any of the Company's pending or future patent applications. 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 the Company is unable to obtain adequate patent
protection, its ability to prevent competitors from making, using and selling
competing products will be limited. Furthermore, the Company's activities may
infringe the claims of the patents held by third parties. Defense and
prosecution of patent claims, as well as participation in interference
proceedings, can be expensive and time-consuming, even in those instances in
which the outcome is favorable to the Company. If the outcome of any such
litigation or proceeding were adverse, the Company could be subject to
significant liabilities to third parties, could be required to obtain licenses
from third parties or could be required to cease sales of the affected products,
any of which could have a material adverse effect on the Company.
Page 26
VERTEX WILL CONTINUE TO HAVE SIGNIFICANT FUTURE CAPITAL NEEDS; AVAILABILITY OF
ADDITIONAL FUNDING IS UNCERTAIN
The Company expects to incur substantial research and development and
related supporting expenses as it designs and develops existing and future
compounds and undertakes clinical trials of potential drugs resulting from such
compounds. The Company also expects to incur substantial administrative and
commercialization expenditures in the future and substantial expenses related to
the filing, prosecution, defense and enforcement of patent and other
intellectual property claims. The Company anticipates that it will finance
these substantial cash needs with Agenerase royalty revenue, its existing cash
reserves, together with interest earned thereon, future payments under its
collaborative agreements, facilities and equipment financing and additional
collaborative agreements. To the extent that funds from these sources are not
sufficient to fund the Company's activities, it will be necessary to raise
additional funds through public offerings or private placements of debt or
equity securities or other methods of financing. Any equity financings could
result in dilution to the Company's then existing stockholders. Any debt
financing, if available at all, may be on terms which, among other things,
restrict the Company's ability to pay dividends (although the Company does not
intend to pay dividends for the foreseeable future). If adequate funds are not
available, the Company may be required to curtail significantly or discontinue
one or more of its research, drug discovery or development programs, including
clinical trials, or attempt to obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies or products in research or development. No
assurance can be given that additional financing will be available on acceptable
terms, if at all.
THIRD PARTY PHARMACEUTICAL REIMBURSEMENT POLICIES MAY AFFECT PRODUCT PRICING
The success of the Company's products in the United States and other
significant markets will depend, in part, upon the extent to which a consumer
will be able to obtain reimbursement for the cost of such products from
government health administration authorities, third-party payors and other
organizations. Significant uncertainty exists as to the reimbursement status of
newly approved therapeutic products. Even if a product is approved for
marketing, there can be no assurance that adequate reimbursement will be
available. The Company is unable to predict what additional legislation or
regulation relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future or what effect the legislation or
regulation would have on the Company's business. Failure to obtain reimbursement
could have a material adverse effect on the Company.
THE COMPANY LACKS SALES AND MARKETING EXPERIENCE
The Company currently has little experience in marketing and no experience
selling pharmaceutical products. The Company must either develop a marketing and
sales force or enter into arrangements with third parties to market and sell any
of its product candidates which are approved by the FDA. In the territories
where the Company retains marketing and co-promotion rights, there can be no
assurance that the Company will successfully develop its own sales and marketing
experience or that it will be able to enter into marketing and sales agreements
with others on acceptable terms, if at all. If the Company develops its own
marketing and sales capability, it will compete with other companies that
currently have experienced and well-funded marketing and sales operations. To
the extent that the Company has or enters into co-promotion or other sales and
marketing arrangements with other companies, any revenues to be received by the
Company will be dependent on the efforts of others, and there can be no
assurance that such efforts will be successful.
Page 27
THERE IS A RISK OF PRODUCT LIABILITY
The Company's business will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of pharmaceutical
products. The use of the Company's products in clinical trials also exposes the
Company to the possibility of product liability claims and possible adverse
publicity. These risks will increase to the extent the Company's products
receive regulatory approval and are commercialized. There can be no assurance
that the Company will be able to maintain its existing levels of product
liability insurance or be able to obtain or maintain such additional insurance
as it may need in the future on acceptable terms. Nor can there be any assurance
that the Company's existing insurance or any such additional insurance will
provide adequate coverage against potential liabilities.
SHARE PRICE MAY FLUCTUATE BASED ON FACTORS BEYOND VERTEX'S CONTROL
Market prices for securities of companies such as Vertex are highly
volatile, and the market for the securities of such companies, including the
Common Stock of the Company, has from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of these
particular companies. Factors such as announcements of results of clinical
trials, technological innovations or new products by Vertex or its competitors,
government regulatory action, public concern as to the safety of products
developed by the Company or others, patent or proprietary rights developments
and market conditions for pharmaceutical and biotechnology stocks, in general,
could have a significant adverse effect on the future market price of the
Company's common stock.
VERTEX HAS ANTI-TAKEOVER PROVISIONS THAT MAY DISCOURAGE CHANGE IN CONTROL
The Company's charter and By-law provisions and the Company's Stockholder
Rights Plan may discourage certain types of transactions involving an actual or
potential change in control of the Company which might be beneficial to the
Company or its stockholders. The Company's charter provides for staggered terms
for the members of the Board of Directors. The Company's By-laws grant the
Directors a right to adjourn annual meetings of stockholders, and certain
provisions of the By-laws may be amended only with an 80% stockholder vote.
Pursuant to the Company's Stockholder Rights Plan, each share of Common Stock
has an associated preferred share purchase right (a "Right"). The Rights will
not trade separately from the Common Stock until, and are exercisable only upon,
the acquisition or the potential acquisition through tender offer by a person or
group of 15% or more of the outstanding Common Stock. Shares of any class or
series of preferred stock may be issued by the Company in the future without
stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any class or series of
preferred stock that may be issued in the future.
ITEM 2. PROPERTIES
The Company leases an aggregate of approximately 134,000 square feet of
laboratory and office space in seven facilities at in Cambridge, Massachusetts.
The leases have expiration dates ranging from December 2000 to 2009. The
Company has the option to extend the lease for the Company's headquarters
facility at 130 Waverly Street, Cambridge, for up to two additional terms,
ending in 2015.
During 1998, Vertex opened a research and development facility in the U.K.
of approximately 7,000 square feet of laboratory and office space located in
Swindon under a lease expiring in August 2000. The Company has the right to
terminate this lease at any time after June 1999. The Company has also leased
approximately 24,000 square feet of laboratory and office
Page 28
space in Milton Park under a lease expiring in 2013, with a right of early
termination in 2008. Upon completion of construction of the Milton Park
facility, expected by the third quarter of 1999, the Company will consolidate
its U.K. business and research and development activities from Ascot and Swindon
to Milton Park.
The Company believes its facilities are adequate for its current needs. The
Company believes it can obtain additional space on commercially reasonable
terms.
ITEM 3. LEGAL PROCEEDINGS
Chiron Corporation ("Chiron") filed suit on July 30, 1998 against the
Company and Eli Lilly and Company in the United States District Court for the
Northern District of California, alleging infringement by the defendants of
various 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 and development. Chiron has requested damages in an unspecified
amount, as well as an order permanently enjoining the defendants from unlicensed
use of Chiron inventions. While the final outcome of these actions cannot be
determined, the Company believes that the plaintiff's claims are without merit
and intends to defend the actions vigorously.
ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market ("Nasdaq")
under the symbol "VRTX." The following table sets forth the high, low and last
sale prices of each quarter for the Common Stock as reported by Nasdaq for the
periods indicated.
1997 High Low Close
- ------------------------------------------------------------------------
First Quarter $52 3/4 $37 3/4 $40 1/2
Second Quarter 49 3/4 27 5/8 38 1/4
Third Quarter 41 5/8 29 3/8 37 3/4
Fourth Quarter 38 3/8 25 1/4 33
1998 High Low Close
- ------------------------------------------------------------------------
First Quarter $40 3/8 $31 1/4 $31 15/16
Second Quarter 33 7/8 21 1/2 22 1/2
Third Quarter 27 7/8 14 1/2 23
Fourth Quarter 30 20 29 3/4
Page 29
The last sale price of the Common Stock on March 12, 1999, as reported by
Nasdaq, was $26.75 per share. As of March 12, 1999, there were 254 holders of
record of the Common Stock (approximately 7,200 beneficial holders).
The Company has never declared or paid any cash dividends on its Common
Stock and currently expects that future earnings, if any, will be retained for
use in its business.
RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the period ended December 31, 1998 are derived from the Company's
Consolidated Financial Statements. This data should be read in conjunction with
the Company's audited financial statements and related notes, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Consolidated Statement of Operations Data:
Revenues:
Collaborative and other research and
development revenues. . . . . . . . . . . $ 29,055 $ 29,926 $ 13,341 $ 22,081 $ 19,571
Investment income. . . . . . . . . . . . . . 15,343 13,873 5,257 5,453 3,574
-------- -------- -------- -------- --------
Total revenues. . . . . . . . . . . . . . 44,398 43,799 18,598 27,534 23,145
-------- -------- -------- -------- --------
Costs and expenses:
Research and development . . . . . . . . . 58,668 51,624 35,212 41,512 34,761
General and administrative . . . . . . . . 18,135 11,430 7,929 7,069 5,540
License Payment. . . . . . . . . . . . . . . -- -- 15,000 -- --
Interest . . . . . . . . . . . . . . . . . 681 576 462 481 439
-------- -------- -------- -------- --------
Total costs and expenses. . . . . . . . . 77,484 63,630 58,603 49,062 40,740
-------- -------- -------- -------- --------
Net loss . . . . . . . . . . . . . . . . . . $(33,086) $(19,831) $(40,005) $(21,528) $(17,595)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic and diluted net loss per common
share. . . . . . . . . . . . . . . . . . . . . $ (1.31) $ (0.82) $ (2.13) $ (1.25) $ (1.11)
Basic and diluted weighted average
number of common shares outstanding. . . . . . 25,299 24,264 18,798 17,231 15,818
DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments . . . $245,652 $279,671 $130,359 $86,978 $106,470
Total assets . . . . . . . . . . . . . . . . 266,346 295,604 143,499 98,981 116,175
Obligations under capital leases and debt,
excluding current portion. . . . . . . . . . 7,032 5,905 5,617 4,912 4,729
Accumulated deficit. . . . . . . . . . . . . (149,861) (116,775) (96,944) (56,939) (35,411)
Total stockholders' equity . . . . . . . . . 246,212 276,001 130,826 85,272 105,478
Page 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT CAN CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE DESCRIBED. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE BUT ARE NOT
LIMITED TO THOSE DESCRIBED IN THE SECTION ENTITLED "RISK FACTORS." READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS WHICH
SPEAK ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF.
The Company is engaged in the discovery, development and commercialization
of novel, small molecule pharmaceuticals for the treatment of major diseases for
which there are currently limited or no effective treatments. The Company is a
leader in the use of structure-based drug design, an approach to drug discovery
that integrates advanced biology, biophysics, chemistry and information
technologies. The Company is conducting research and development programs to
develop pharmaceuticals for the treatment of viral diseases, multidrug
resistance in cancer, autoimmune and inflammatory diseases and neurodegenerative
disorders.
To date, the Company has not received any material revenues from the sale
of pharmaceutical products. A New Drug Application ("NDA") was submitted in
October 1998 for the Company's lead product, Agenerase-TM- (amprenavir) for the
treatment of HIV infection. Glaxo Wellcome plc ("Glaxo Wellcome"), Vertex's
partner, has also submitted applications for market approval to Canadian and
European regulatory agencies. Assuming the NDA is approved, the Company will
receive a royalty on sales of Agenerase from Glaxo Wellcome. The Company has
incurred operating losses since its inception and expects to incur a loss in
1999. The Company believes that operating losses may continue beyond 1999, even
if significant royalties are realized on Agenerase-TM- sales, because the
Company is planning to make significant investments in research and development
for its other potential products. The Company expects that losses will
fluctuate from quarter to quarter and that such fluctuations may be substantial.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997.
The Company's total revenues were $44,398,000 in 1998 as compared to
$43,799,000 in 1997. In 1998, revenues consisted of $27,939,000 under the
Company's collaborative agreements, $15,343,000 in investment income and
$1,116,000 in government grants and other income. Collaborative revenue in 1998
included a $6,000,000 payment from Schering AG, Germany ("Schering AG")
associated with the signing of a collaborative agreement for the Company's
neurophilin ligand program and $4,000,000 of research funding under that
agreement, a $2,000,000 milestone payment from Kissei Pharmaceutical Co., Ltd.
("Kissei") for the acceptance of VX-745 as the lead development candidate for
the Company's p38 MAP kinase program, and a $3,000,000 milestone payment from
Glaxo Wellcome for the NDA filing for Agenerase. Other collaborative revenue in
1998 included $3,738,000 from Kissei, $3,457,000 from Glaxo Wellcome, $5,193,000
from Eli Lilly and Company ("Lilly") and $551,000 from others. Research funding
requirements under the Glaxo Wellcome agreement ended on December 31, 1998,
although Glaxo Wellcome continues to have certain development funding
obligations. In 1997, revenues consisted of $27,703,000 under the Company's
collaborative agreements, $13,873,000 in investment income, and $2,223,000 in
government grants and other income. Revenue from collaborative agreements in
1997 consisted of $3,275,000 from Glaxo Wellcome, $8,660,000 from Hoechst Marion
Roussel ("HMR"), $9,810,000 from Kissei, $5,694,000 from
Page 31
Lilly and $264,000 from others.
Total costs and expenses increased to $77,484,000 in 1998 from $63,630,000
in 1997. Research and development expenses increased to $58,668,000 in 1998
from $51,624,000 in 1997. The Company increased research staffing, including
opening a research site in the U.K., to fully staff a higher number of discovery
programs. In addition, the Company expanded its development infrastructure.
General and administrative expenses increased in 1998 to $18,135,000 from
$11,430,000 in 1997 primarily as a result of headcount growth to handle the
administrative requirements of the Company's growing research and development
operation, legal expenses associated with expansion of the Company's
intellectual property position and marketing expenses associated with the
anticipated launch of Agenerase and the Company's co-promotion preparations.
Interest expense increased in 1998 to $681,000 from $576,000 in 1997 due to
higher levels of equipment financing during 1998.
The Company recorded a net loss of $33,086,000 or $1.31 per share in 1998
compared to a net loss of $19,831,000 or $0.82 per share in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996.
The Company's total revenues increased to $43,799,000 in 1997 from
$18,598,000 in 1996. In 1997, revenues consisted of $27,703,000 under the
Company's collaborative agreements, $13,873,000 in investment income, and
$2,223,000 in government grants and other income. The principal reasons for the
increase in revenue in 1997 were the commencement of new collaborations with
Lilly on the Company's hepatitis C protease program and with Kissei on the
Company's p38 MAP kinase program, in addition to greater investment income from
higher levels of cash and investments. The 1997 collaborations with Lilly and
Kissei included payments of $3,000,000 and $4,000,000, respectively, and
research funding of $2,694,000 and $1,500,000, respectively. Other collaborative
revenue in 1997 included $4,310,000 from Kissei, $8,660,000 from HMR, which
included a $3,000,000 milestone payment, $3,275,000 from Glaxo Wellcome, and
$264,000 from others. Research funding requirements under the HMR agreement
ended on December 31, 1997, although HMR continues to have certain development
funding obligations. In 1996, revenues consisted of $12,013,000 under the
Company's collaborative agreements, $5,257,000 in investment income and
$1,328,000 in government grants and other income. Revenue from collaborative
agreements consisted of $6,289,000 from Glaxo Wellcome, $4,196,000 from HMR,
$692,000 from Kissei and $836,000 from others.
The Company's total costs and expenses increased to $63,630,000 in 1997
from $58,603,000 in 1996. In 1996, the Company paid $15,000,000 to obtain a
non-exclusive, world-wide license under certain G.D. Searle & Co. ("Searle")
patent applications claiming HIV protease inhibitors. Research and development
expenses increased to $51,624,000 in 1997 from $35,212,000 in 1996 principally
due to the commencement of preclinical development activities for drug
candidates in the ICE and IMPDH programs as well as the continued expansion of
the Company's core scientific staff. In addition, general and administrative
expenses increased to $11,430,000 in 1997 from $7,929,000 in 1996. The increase
in general and administrative expense principally reflects the impact of
personnel additions, an increase in legal expenses related to patent activity
and an increase in marketing activities. Interest expense increased to $576,000
in 1997 from $462,000 in 1996 due to higher levels of equipment lease
financing during the year.
The Company recorded a net loss of $19,831,000 or $0.82 per share in 1997
compared to a net loss of $40,005,000 or $2.13 per share in 1996. The lower
loss per share reflects not only a lower aggregate loss but also an increase in
average common shares outstanding from 18,798,000 in 1996 to 24,264,000 in 1997
due to two Common Stock offerings in August 1996 and March 1997.
Page 32
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have been funded principally through strategic
collaborative agreements, public offerings and private placements of the
Company's equity securities, equipment financing, government grants and
investment income. Assuming Agenerase is approved by the FDA, the Company will
begin receiving product royalty revenue in 1999. The Company has been expanding
its operations in order to increase and advance the number of potential products
in its research and development pipeline. Consequently, the Company expects to
incur increased research and development and related supporting expenses and is
likely to continue experiencing losses on a quarterly and annual basis. The
Company also expects to incur substantial administrative and commercialization
expenditures in the future and additional expenses related to the filing,
prosecution, defense and enforcement of patent and other intellectual property
rights.
The Company expects to finance these substantial cash needs with expected
royalty revenue from Agenerase, its existing cash and investments of
approximately $246,000,000 at December 31, 1998, together with investment income
earned thereon, future payments under its existing collaborative agreements, and
facilities and equipment financing. To the extent that funds from these sources
are not sufficient to fund the Company's activities, it will be necessary to
raise additional funds through public offerings or private placements of
securities, or new research collaborations for new or existing projects or other
methods of financing. There can be no assurance that such financing will be
available on acceptable terms, if at all.
The Company's aggregate cash and investments decreased by $34,019,000
during 1998 to $245,652,000 at December 31, 1998. Cash used by operations,
principally to fund research and development activities, was $31,055,000 during
the same period. The Company also expended $7,901,000 during this period to
acquire property and equipment, principally for research equipment and
facilities. During 1998, the Company entered into equipment financing
arrangements in the aggregate amount of $4,085,000 and repaid $2,716,000 of its
lease obligations.
In addition to the expansion of the research and development activities in
the U.S., the Company expanded its U.K. operations to include a research site
during 1998. The Company expects that, in general, research and development as
well as general and administrative expenses will continue to increase as the
Company starts new research projects, advances current clinical and preclinical
candidates, and expands its marketing and business development activities.
During 1998, the Company and Schering AG entered into a collaborative
agreement to research, develop and commercialize novel, orally active
neurophilin ligand compounds to promote nerve regeneration for the treatment of
a number of neurological diseases. Under the terms of the agreement, Schering
AG will pay the Company up to $88,000,000 composed of a $6,000,000 license
payment paid in September 1998, $22,000,000 of product research funding over
five years and potentially $60,000,000 of development and commercialization
milestone payments.
At December 31, 1998, the Company leased approximately 134,000 square feet
of office and research space in the U.S. and 31,000 square feet in the U.K.
These leases have terms ranging from 3 to 10 years. In addition, the Company's
liability for capitalized equipment lease obligations and other equipment
financing totaled approximately $10 million at December 31, 1998.
YEAR 2000
The Company has completed its evaluation of its business critical
information technology systems ("IT Systems") and has determined the actions
necessary in order to ensure that such IT Systems will be able to function
without disruption with respect to the application of dating systems in the Year
2000. The Company has begun to upgrade, replace and test certain of its IT
Page 33
Systems based on the results of that evaluation. Evaluation of embedded systems
in the Company's non-computer equipment ("Non-IT Systems") for Year 2000
compliance is under way but has not been completed.
In addition to risks associated with the Company's own computer systems and
equipment, the Company has relationships with, and is to varying degrees
dependent upon, a number of third parties that provide goods, services and
information to the Company. These include contract manufacturers, suppliers,
licensees and licensors, vendors, research partners and financial institutions,
whose systems and equipment are outside the control of the Company. If certain
of these third parties experience failures in their computer systems or
equipment due to Year 2000 non-compliance, it could affect the Company's ability
to engage in normal business activities. The Company intends to contact its
significant vendors and partners to ascertain their Year 2000 compliance and to
determine the extent to which the Company is vulnerable to their non-compliance,
if any.
The Company expects to complete its internal evaluation and remediation
efforts and its assessment of third party compliance and contingency plans by
mid-1999. However, there can be no assurance that these evaluations and any
required remedial actions will be able to be completed on a timely basis. The
Company believes that its IT Systems and Non-IT Systems are either already Year
2000 compliant or will be so prior to the Year 2000. The Company estimates the
cost of making its IT systems and Non-IT systems Year 2000 complaint will be
approximately $200,000. There can be no assurance, however, that the Company
will not experience unexpected costs in achieving full Year 2000 compliance,
which could result in a material adverse effect on the Company's future results
of operations. The Company believes that it will be able to locate alternate
sources for any critical goods or services provided by non-compliant third
parties, if any. However, the Company may not be able to timely develop or
implement contingency plans to address those business critical systems and third
party relationships which may not be Year 2000 compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company owns financial instruments that are sensitive to market risks
as part of its investment portfolio. The investment portfolio is used to
preserve the Company's capital until it is required to fund operations,
including the Company's research and development activities. None of these
market-risk sensitive instruments are held for trading purposes. The Company
does not own derivative financial instruments in its investment portfolio.
INTEREST RATE RISK
The Company invests its cash in a variety of financial instruments,
principally securities issued by the U.S. Government and its agencies,
investment grade corporate and money market instruments. These investments are
denominated in U.S. dollars. These bonds are subject to interest rate risk, and
could decline in value if interest rates fluctuate. The Company's investment
portfolio includes only marketable securities with active secondary or resale
markets to help ensure portfolio liquidity and the Company has implemented
guidelines limiting the duration of investments. Due to the conservative nature
of these instruments, the Company does not believe that it has a material
exposure to interest rate risk.
Page 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is contained on pages F-1 through F-18
of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors required by this Item is included in
the definitive Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders, to be filed with the Commission on or about April 12, 1999 (the
"1999 Proxy Statement"), under "Election of Directors" and is incorporated
herein by reference. The information regarding executive officers required by
this Item is included in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the 1999 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 1999 Proxy Statement, which shall not be deemed
incorporated herein).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the 1999 Proxy
Statement under "Security Ownership of Certain Beneficial Owners and Management"
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
Page 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. The Financial Statements required to be filed by
Item 8 of this Annual Report on Form 10-K, and filed herewith, are as
follows:
Page Number in
This Form 10-k
--------------
Report of Independent Accountants . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997. . . . F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . F-7 to F-18
(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.
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Articles of Organization filed with the Commonwealth of
Massachusetts on July 31, 1991 (filed as Exhibit 3.1 to the Company's
1997 Annual Report on Form 10-K (File No. 0-19319) and incorporated
herein by reference).
3.2 Articles of Amendment filed with the Commonwealth of Massachusetts on
June 4, 1997 (filed as Exhibit 3.2 to the Company's 1997 Annual Report
on Form 10-K (File No. 0-19319) and incorporated herein by reference).
3.3 Certificate of Vote of Directors Establishing a Series of a Class of
Stock, as filed with the Secretary of the Commonwealth of
Massachusetts on July 31, 1991 (filed as Exhibit 3.3 to the Company's
1997 Annual Report on Form 10-K (File No. 0-19319) and incorporated
herein by reference).
3.4 By-laws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-43874) and
incorporated herein by reference).
Page 36
4.1 Specimen stock certificate (filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-40966) or
amendments thereto and incorporated herein by reference).
4.2 Stockholder Rights Plan (filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-1 (Registration No. 33-40966) or
amendments thereto and incorporated herein by reference).
4.3 First Amendment to Rights Agreement dated as of February 21, 1997
(filed as Exhibit 4.3 to the Company's 1996 Annual Report on Form 10-K
(File No. 0-19319) and incorporated herein by reference).
10.1 1991 Stock Option Plan, as amended and restated as of May 13, 1993
(filed as Exhibit 28.1 to the Company's Registration Statement on Form
S-8 (No. 33-65742) and incorporated herein by reference).*
10.2 1994 Stock and Option Plan (filed as Exhibit 10.2 to the Company's
1994 Annual Report on Form 10-K (File No. 0-19319) and incorporated
herein by reference).*
10.3 1996 Stock and Option Plan (filed as Exhibit 10.3 to the Company's
1996 Annual Report on Form 10-K (File No. 0-19319) and incorporated
herein by reference).*
10.4 Amendment to 1996 Stock and Option Plan adopted December 12, 1997
(filed as Exhibit 10.4 to the Company's 1997 Annual Report on Form
10-K (File No. 0-19319) and incorporated herein by reference).*
10.5 Non-Competition and Stock Repurchase Agreement between the Company and
Joshua Boger, dated April 20, 1989 (filed as Exhibit 10.2 to the
Company's Registration Statement on Form S-1 (Registration No.
33-40966) or amendments thereto and incorporated herein by
reference).*
10.6 Form of Employee Stock Purchase Agreement (filed as Exhibit 10.3 to
the Company's Registration Statement on Form S-1 (Registration No.
33-40966) or amendments thereto and incorporated herein by
reference).*
10.7 Form of Employee Non-Disclosure and Inventions Agreement (filed as
Exhibit 10.4 to the Company's Registration Statement on Form S-1
(Registration No. 33-40966) or amendments thereto and incorporated
herein by reference).
10.8 Form of Executive Employment Agreement executed by Richard H. Aldrich,
Joshua S. Boger, and Vicki L. Sato (filed as Exhibit 10.6 to the
Company's 1994 Annual Report on Form 10-K (File No. 0-19319) and
incorporated herein by reference).*
10.9 Form of Amendment to Employment Agreement executed by Richard H.
Aldrich, Joshua S. Boger and Vicki L. Sato (filed as Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995 (File No. 0-19319) and incorporated herein by reference).
10.10 Series C Convertible Preferred Stock Purchase Agreement between the
Company and the party named therein, dated September 21, 1990 (filed
as Exhibit 10.8 to the Company's Registration Statement on Form S-1
(Registration No. 33-40966) or amendments thereto and incorporated
herein by reference).
Page 37
10.11 Stock Purchase Agreement dated November 10, 1994 between the Company
and Biotech Target S.A. (filed as Exhibit 10.12 to the Company's 1994
Annual Report on Form 10-K (File No. 0-19319) and incorporated herein
by reference).
10.12 Lease dated October 1, 1992 between C. Vincent Vappi and the Company
relating to the premises at 40 Allston Street, 618 Putnam Street, 228
Sidney Street, and 240 Sidney Street (filed as Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 0-19319) and incorporated herein by reference).
10.13 First Amendment as of March 1, 1995 to the lease between C. Vincent
Vappi and the Company (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995
(File No. 0-19319) and incorporated herein by reference).
10.14 Second Amendment as of February 12, 1997 to Lease between C. Vincent
Vappi and the Company (filed as Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996 (File No.
0-19319) and incorporated herein by reference ).
10.15 Lease dated March 1, 1993, between Fort Washington Realty Trust and
the Company, relating to the premises at 625 Putnam Avenue, Cambridge,
MA (filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 (File No. 0-19319) and
incorporated herein by reference).
10.16 First Amendment, dated 1 December 1996, to Lease between Fort
Washington Realty Trust and the Company dated 1 March 1993 (filed as
Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-19319) and incorporated herein by
reference).
10.17 Second Amendment, dated 1 February 1998, to Lease between Fort
Washington Realty Trust and the Company dated 1 March 1993 (filed as
Exhibit 10.17 to the Company's 1997 Annual Report on Form 10-K (File
No. 0-19319) and incorporated herein by reference).
10.18 Lease dated March 3, 1995, between Fort Washington Realty Trust and
the Company, relating to the premises at 130 Waverly Street,
Cambridge, MA (filed as Exhibit 10.15 to the Company's 1994 Annual
Report on Form 10-K (File No. 0-19319) and incorporated herein by
reference).
10.19 First Amendment to Lease dated March 3, 1995 between Fort Washington
Realty Trust and the Company (filed as Exhibit 10.15 to the Company's
1995 Annual Report on Form 10-K (File No. 0-19319) and incorporated
herein by reference).
10.20 Second Amendment to Lease and Option Agreement dated June 12, 1997
between Fort Washington Realty Trust and the Company (filed herewith).
10.21 Agreement for Lease of Premises at 88 Milton Park, Abingdon,
Oxfordshire between Milton Park Limited and Vertex Pharmaceuticals
(Europe) Limited and Vertex Pharmaceuticals Incorporated (filed
herewith)
Page 38
10.22 Research and Development Agreement dated April 13, 1993 between the
Company and Kissei Pharmaceutical Co., Ltd. (with certain confidential
information deleted) (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993 (File No.
0-19319) and incorporated herein by reference).
10.23 Research, Development, and License Agreement dated September 8, 1993
between the Company and Roussel Uclaf (with certain confidential
information deleted) (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993 (File No.
0-19319) and incorporated herein by reference).
10.24 Research Agreement and License Agreement, both dated December 16,
1993, between the Company and Burroughs Wellcome Co. (with certain
confidential information deleted) (filed as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 0-19319) and incorporated herein by reference).
10.25 License Agreement and Supply Agreement, both dated May 9, 1996,
between the Company and BioChem Pharma (International) Inc. (with
certain confidential information deleted) (filed as Exhibit 10.1 to
the Company's Quarterly Report on 10-Q for the quarter ended March 31,
1996 (File No. 0-19319) and incorporated herein by reference).
10.26 Research and Development Agreement between the Company and Eli Lilly
and Company effective June 11, 1997 (filed with certain confidential
information deleted as Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, and incorporated
herein by reference).
10.27 Research and Development Agreement between the Company and Kissei
Pharmaceutical Co. Ltd. effective September 10, 1997 (filed, with
certain confidential information deleted, as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, and incorporated herein by reference).
10.28 Research Agreement between the Company and Schering AG dated as of
August 24, 1998 (filed, with certain confidential information deleted,
as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, and incorporated herein by
reference).
21 Subsidiaries of the Company (filed as Exhibit 21 to the Company's
1997 Annual Report on Form 10-K (File No. 0-19319) and incorporated
herein by reference).
23 Consent of Independent Accountants (filed herewith).
27 Financial Data Schedule (submitted as an exhibit only in the
electronic format of this Annual Report on Form 10-K submitted to the
Securities and Exchange Commission).
- ------------------
* Compensatory plan or agreement applicable to management and employees.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended December 31, 1998.
Page 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VERTEX PHARMACEUTICALS INCORPORATED
March 29, 1999 By: /s/ Joshua S. Boger
-----------------------------------------
Joshua S. Boger
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
- ---- ----- ----
/s/ Joshua S. Boger Director, Chairman, President March 29, 1999
- ------------------------------- and Chief Executive Officer
Joshua S. Boger (Principal Executive Officer)
/s/ Thomas G. Auchincloss, Jr. Vice President of Finance March 29, 1999
- ------------------------------- and Treasurer
Thomas G. Auchincloss, Jr. (Principal Financial Officer)
/s/ Hans D. Van Houte Controller March 29, 1999
- -------------------------------
Hans D. van Houte
/s/ Barry M. Bloom Director March 24, 1999
- -------------------------------
Barry M. Bloom
/s/ Donald R. Conklin Director March 29, 1999
- -------------------------------
Donald R. Conklin
/s/ Roger W. Brimblecombe Director March 26, 1999
- -------------------------------
Roger W. Brimblecombe
/s/ William W. Helman IV Director March 29, 1999
- -------------------------------
William W. Helman IV
/s/ Bruce I. Sachs Director March 29, 1999
- -------------------------------
Bruce I. Sachs
/s/ Charles A. Sanders Director March 29, 1999
- -------------------------------
Charles A. Sanders
/s/ Elaine S. Ullian Director March 24, 1999
- -------------------------------
Elaine S. Ullian
Page 40
EXHIBIT INDEX
10.20 Second Amendment to Lease and Option Agreement dated June 12, 1997
between Fort Washington Realty Trust and the Company (filed herewith).
10.21 Agreement for Lease of Premises at 88 Milton Park, Abingdon,
Oxfordshire between Milton Park Limited and Vertex Pharmaceuticals
(Europe) Limited and Vertex Pharmaceuticals Incorporated (filed
herewith)
23 Consent of Independent Accountants (filed herewith).
27 Financial Data Schedule (submitted as an exhibit only in the
electronic format of this Annual Report on Form 10-K submitted to the
Securities and Exchange Commission).
VERTEX PHARMACEUTICALS INCORPORATED
Index to Consolidated Financial Statements
Page Number
-----------
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7 to F-18
Page F-1
Report of Independent Accountants
To the Board of Directors and Shareholders of Vertex Pharmaceuticals
Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Vertex
Pharmaceuticals Incorporated and its subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 25, 1999
Page F-2
CONSOLIDATED BALANCE SHEETS
VERTEX PHARMACEUTICALS INCORPORATED
December 31,
----------------------
(DOLLARS IN THOUSANDS) 1998 1997
------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $24,169 $71,454
Investments 221,483 208,217
Prepaid expenses and other current assets 3,056 1,952
- -------------------------------------------------------------------------------------------------------------------
Total current assets 248,708 281,623
Restricted cash 2,316 2,316
Property and equipment, net 14,476 11,095
Other assets 846 570
- -------------------------------------------------------------------------------------------------------------------
Total assets $266,346 $295,604
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Obligations under capital lease and debt $2,752 $2,510
Accounts payable 2,808 4,247
Accrued expenses 7,542 6,385
Deferred revenue -- 556
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 13,102 13,698
Obligations under capital lease and debt,
excluding current portion 7,032 5,905
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 20,134 19,603
Commitments (Note G)
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued
Common stock, $.01 par value; 100,000,000 shares authorized;
25,358,559 and 25,215,617 shares issued and outstanding
in 1998 and 1997, respectively 254 252
Additional paid-in capital 395,165 392,372
Accumulated other comprehensive income (loss) 654 152
Accumulated deficit (149,861) (116,775)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 246,212 276,001
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $266,346 $295,604
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
VERTEX PHARMACEUTICALS INCORPORATED
Year Ended December 31,
-----------------------
(In thousands, except per share data) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Revenues:
Collaborative and other research and development $29,055 $29,926 $ 13,341
Investment income 15,343 13,873 5,257
------ ------ -----
Total revenues 44,398 43,799 18,598
- -------------------------------------------------------------------------------------------------------------------
Costs and expenses:
Research and development 58,668 51,624 35,212
General and administrative 18,135 11,430 7,929
License payment -- -- 15,000
Interest 681 576 462
---- ---- ----
Total costs and expenses 77,484 63,630 58,603
- -------------------------------------------------------------------------------------------------------------------
Net loss $(33,086) $(19,831) $(40,005)
- -------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share $(1.31) $(0.82) $(2.13)
Basic and diluted weighted average number of
common shares outstanding 25,299 24,264 18,798
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
VERTEX PHARMACEUTICALS INCORPORATED
Accumulated
Common Stock Additional Other Total
------------------- Paid-in Accumulated Comprehensive Comprehensive Stockholders'
(In thousands) Shares Amount Capital Deficit income (loss) income (loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 17,299 $173 $142,038 $(56,939) $85,272
Net change in unrealized holding gains/
losses on investments $35 $ 35 35
Translation adjustments 14 14 14
Net loss (40,005) (40,005) (40,005)
--------
Comprehensive loss (39,956)
--------
Issuances of common stock:
Public offering of common stock 3,450 34 77,481 77,515
Private placement of common stock 152 2 4,998 5,000
Benefit plans 196 2 2,993 2,995
- ------------------------------------------------------------------------------------------------ -----------
Balance, December 31, 1996 21,097 211 227,510 (96,944) 49 130,826
Net change in unrealized holding gains/
losses on investments 115 115 115
Translation adjustments (12) (12) (12)
Net loss (19,831) (19,831) (19,831)
--------
Comprehensive loss (19,728)
--------
Issuances of common stock:
Public offering of common stock 3,450 34 148,776 148,810
Private placement of common stock 264 3 9,997 10,000
Benefit plans 405 4 6,089 6,093
- ------------------------------------------------------------------------------------------------ -----------
Balance, December 31, 1997 25,216 252 392,372 (116,775) 152 276,001
Net change in unrealized holding gains/
losses on investments 502 502 502
Translation adjustments -- -- --
Net loss (33,086) (33,086) (33,086)
--------
Comprehensive loss $(32,584)
--------
Issuances of common stock:
Benefit plans 143 2 2,793 2,795
- ------------------------------------------------------------------------------------------------ -----------
Balance, December 31, 1998 25,359 $254 $395,165 $(149,861) $ 654 $246,212
- ------------------------------------------------------------------------------------------------ -----------
- ------------------------------------------------------------------------------------------------ -----------
The accompanying notes are an integral part of the consolidated financial
statements.
Page F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
VERTEX PHARMACEUTICALS INCORPORATED
Year Ended December 31,
-----------------------
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (33,086) $ (19,831) $(40,005)
Adjustment to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 4,520 3,588 3,160
Realized gains/losses on available for sale securities (547) -- --
Changes in assets and liabilities:
Prepaid expenses and other current assets (1,104) (161) (832)
Accounts payable (1,439) 2,856 (1,631)
Accrued expenses 1,157 3,630 (748)
Deferred revenue (556) 556 (197)
--------- --------- --------
Net cash provided (used) by operating activities (31,055) (9,362) (40,253)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (507,540) (303,599) (73,035)
Sales and maturities of investments 495,323 191,005 36,150
Expenditures for property and equipment (7,901) (6,020) (3,983)
Other assets (276) (200) 518
--------- --------- --------
Net cash provided (used) by investing activities (20,394) (118,814) (40,350)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of capital lease obligations and debt (2,716) (3,104) (2,187)
Proceeds from equipment sale/leaseback -- 1,179 3,727
Proceeds from debt 4,085 1,813 --
Proceeds from public offerings of common stock -- 148,810 77,515
Proceeds from private placement of common stock -- 10,000 5,000
Proceeds from other issuances of capital stock 2,795 6,093 2,995
--------- --------- --------
Net cash provided (used) by financing activities 4,164 164,791 87,050
- -----------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash -- (12) 14
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (47,285) 36,603 6,461
Cash and cash equivalents at beginning of year 71,454 34,851 28,390
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 24,169 $ 71,454 $ 34,851
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page F-6
VERTEX PHARMACEUTICALS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY
Vertex Pharmaceuticals Incorporated ("Vertex" or the "Company") uses a range of
drug discovery technologies to identify, design and develop novel, orally
deliverable compounds that have the potential to treat major human diseases. As
of December 31, 1998, the Company has not received any material revenues from
the sale of pharmaceutical products. The Company's revenues during 1998, 1997
and 1996 principally resulted from research support payments from corporate
partners and investment income. The Company expects to incur an operating loss
in 1999 and potentially beyond 1999, as a result of expenditures for its
research and development programs.
The consolidated financial statements include the accounts of the Company and
the following subsidiaries: Altus Biologics Inc. ("Altus"), Vertex Securities
Corp. and Vertex Pharmaceuticals (Europe) Limited. All material intercompany
transactions are eliminated. Minority interests are carried at cost.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, rapid technological change and
competition, dependence on key personnel, uncertainty of protection of
proprietary technology, clinical trial uncertainty, dependence on collaborative
partners, share price volatility, the possible need to obtain additional
funding, uncertainties relating to pharmaceutical pricing and reimbursement,
limited experience in manufacturing and sales and marketing, potential product
liability and the need for compliance with government regulations.
B. ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents, which are money market funds and debt securities, are valued
at cost plus accrued interest. The Company considers all highly liquid
investments with original maturities of three months or less at the date of
purchase to be cash equivalents. Changes in cash and cash equivalents may be
affected by shifts in investment portfolio maturities as well as by actual cash
receipts and disbursements. Financial instruments which potentially subject the
Company to concentration of credit risk consist principally of money market
funds and marketable securities. The Company places these investments in highly
rated financial institutions, and, by policy, limits the amounts of credit
exposure to any one financial institution. These amounts at times may exceed
federally insured limits. The Company has not experienced any losses in such
accounts and does not believe it is exposed to any significant credit risk on
these funds.
INVESTMENTS
Investments consist of marketable securities which are classified as available
for sale. Investments are stated at fair value with unrealized gains and losses
included as a component of accumulated
Page F-7
other comprehensive income (loss) until realized. The fair value of these
securities is based on quoted market prices. Realized gains and losses are
determined on the specific identification method and are included in investment
income.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization are
provided using the straight-line method over the lesser of the lease terms or
the estimated useful lives of the related assets, generally four or five years
for equipment and furniture and three years for purchased software. Leasehold
improvements are amortized over the life of leases. When assets are retired or
otherwise disposed of, the assets and related allowances for depreciation and
amortization are eliminated from the accounts and any resulting gain or loss is
reflected in income (loss).
REVENUE RECOGNITION
Revenue under research and development arrangements is recognized as earned
under the terms of the respective agreements. License payments are recorded as
revenue when contractual obligations have been met. Product research funding is
recorded as revenue, generally on a quarterly basis, as research effort is
incurred. Deferred revenue arises from payments received which have not yet been
earned under research and development arrangements. The Company recognizes
milestone payments when the milestones are achieved.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences, using current tax rates, of temporary differences between the
financial statement carrying amounts and the income tax bases of assets and
liabilities. A valuation allowance is applied against any net deferred tax asset
if, based on the weighted available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized.
BASIC AND DILUTED LOSS PER COMMON SHARE
Basic earnings per share is based upon the weighted average number of common
shares outstanding during the period. Diluted earnings per share is based upon
the weighted average number of common shares outstanding during the period plus
additional weighted average common equivalent shares outstanding during the
period when the effect is not anti-dilutive. Common equivalent shares result
from the assumed exercise of outstanding stock options, the proceeds of which
are then assumed to have been used to repurchase outstanding stock using the
treasury stock method. Common equivalent shares have not been included in the
per-share calculations as the effect would be anti-dilutive. Potential common
equivalent shares consist of 5,837,000 stock options outstanding with a weighted
average exercise price of $22.62 as of December 31, 1998.
SEGMENT INFORMATION
The Company is in one business segment, the business of discovery, development
and commercialization of novel, small molecule pharmaceuticals. The Company
follows the requirements of FAS 131 "Disclosures about Segments of an Enterprise
and Related Information."
Page F-8
C. INVESTMENTS
Investments consist of the following at December 31 (in thousands):
1998 1997
-------------- ----------------
Cost Fair Value Cost Fair Value
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
Cash and money market funds $20,888 $20,888 $43,072 $43,072
Corporate debt securities 3,281 3,281 28,382 28,382
------ ------ ------- -------
Total cash and cash equivalents $24,169 $24,169 $71,454 $71,454
-------- -------- --------- ---------
-------- -------- --------- ---------
Investments
US Government securities
Due within 1 year $18,383 $18,363 $4,719 $4,713
Due within 1 to 5 years 28,734 28,834 40,167 40,200
Due over 5 years 3,048 3,037 --- ---
Corporate debt securities
Due within 1 year 21,684 21,638 71,136 71,165
Due within 1 to 5 years 133,039 133,665 69,771 69,851
Due over 5 years 15,945 15,946 22,276 22,288
-------- -------- --------- ---------
Total Investments $220,833 $221,483 $208,069 $208,217
-------- -------- --------- ---------
-------- -------- --------- ---------
Gross unrealized holding gains and losses at December 31, 1998 were $911,000 and
$261,000, respectively, and at December 31, 1997 were $184,000 and $36,000,
respectively. Gross realized gains and losses for 1998 were $852,000 and
$305,000, respectively. The effect of gross realized gains and losses on the
financial statements for the years 1997 and 1996 was immaterial. Maturities
stated are final maturities, the effective maturities for certain securities may
be shorter in duration.
D. RESTRICTED CASH
In accordance with an operating lease agreement, the Company holds in deposit
approximately $2,316,000 with its bank to collateralize a conditional, stand-by
letter of credit in the name of the landlord. The letter of credit is redeemable
only if the Company defaults on the lease under specific criteria. These funds
are restricted from the Company's use during the lease period, although the
Company is entitled to all interest earned on the funds.
E. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31 (in thousands):
1998 1997
- -------------------------------------------------------------------------------------------------------------------
Leasehold improvements $7,804 $6,983
Furniture and equipment 11,070 4,511
Software 3,276 2,823
Equipment under capital lease 20,471 20,403
- -------------------------------------------------------------------------------------------------------------------
42,621 34,720
Less accumulated depreciation and amortization 28,145 23,625
- -------------------------------------------------------------------------------------------------------------------
$14,476 $11,095
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
The net book value of equipment under capital lease was $3,687,000 and
$5,811,000 at December 31, 1998 and 1997, respectively.
Page F-9
F. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31 (in thousands):
1998 1997
- -------------------------------------------------------------------------------------------------------------------
Professional fees $2,134 $1,192
Development contract costs 2,391 2,663
Payroll and benefits 1,239 1,145
Other 1,778 1,385
- -------------------------------------------------------------------------------------------------------------------
$7,542 $6,385
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
G. COMMITMENTS, CAPITAL LEASES AND DEBT OBLIGATIONS
CAPITAL LEASES AND DEBT OBLIGATIONS
At December 31, 1998, long-term capital lease and debt obligations were due as
follows (in thousands):
Year ended December 31, Capital leases Debt Total
- -------------------------------------------------------------------------------------------------------------------
1999 $ 2,065 $ 947 $ 3,012
2000 1,478 1,027 2,505
2001 1,315 1,114 2,429
2002 89 1,351 1,440
2003 -- 873 873
- -------------------------------------------------------------------------------------------------------------------
Total 4,947 5,312 10,259
Less amount representing interest payments 475 -- 475
- -------------------------------------------------------------------------------------------------------------------
Present value of minimum lease and debt payments 4,472 5,312 9,784
Less current portion 1,805 947 2,752
- -------------------------------------------------------------------------------------------------------------------
$ 2,667 $ 4,365 $ 7,032
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
During 1997 and 1996, the Company financed under capital lease arrangements an
aggregate of $1,179,000 and $3,727,000, respectively, of asset cost under its
master lease agreements. At the end of the lease term, the Company has the right
to either return the equipment to the lessor or purchase the equipment for fair
market value at that time. These agreements have a term of five years and
require that the Company maintain a certain level of cash and investments.
During 1998, the Company financed under a master debt agreement, assets with a
cost of $1,574,000, $1,506,000 and $1,005,000 with interest rates of 7.89%,
8.06% and 8.08%, respectively. During 1997, the Company financed under a master
debt agreement, assets with a cost of $676,000 and $1,137,000 with interest
rates of 8.59% and 8.38%, respectively. The Company has certain equipment with a
net book value of $4,945,000, designated as collateral under these agreements.
These agreements have a term of five years, and require that the Company
maintain a certain level of cash and investments. The carrying value of these
debt obligations approximates fair value.
Interest paid under capital leases and debt was $681,000, $576,000 and $462,000
in 1998, 1997 and 1996, respectively.
COMMITMENTS
The Company leases its facilities and certain equipment under operating leases.
The Company's leases have terms through the year 2009. Noncancelable future
minimum payments are as follows:
Page F-10
$5,507,000 in 1999, $5,612,000 in 2000, $4,744,000 in 2001, $4,408,000 in 2002,
$4,408,000 in 2003 and $15,813,000 thereafter. Rental expense was $4,358,000,
$3,363,000 and $3,063,000 in 1998, 1997 and 1996, respectively.
The Company has certain license and maintenance contracts that contain future,
committed payments for the support and upgrade of specific software programs
currently used in research. For the years 1999, 2000 and 2001 the amounts
committed under these contracts are $314,000, $343,000 and $376,000,
respectively.
H. INCOME TAXES
The Company's federal statutory income tax rate for 1998, 1997 and 1996 was 34%.
The Company recorded no income tax benefit for 1998, 1997 and 1996 and recorded
a full valuation allowance against net operating losses due to uncertainties
related to realizability of these tax assets.
Deferred tax liabilities and assets are determined based on the difference
between financial statement and tax bases using enacted tax rates in effect for
the year in which the differences are expected to reverse. The components of the
deferred taxes at December 31, were as follows (in thousands):
1998 1997
-------------------------
Net operating loss $ 57,295 $ 38,434
Tax credits carryforward 10,958 5,829
Property, plant and equipment 1,345 1,211
Other 572 468
--------- --------
Gross deferred tax asset 70,170 45,942
Valuation allowance (70,170) (45,942)
--------- --------
Net deferred tax balance $ -- $ --
--------- --------
--------- --------
For federal income tax purposes, as of December 31, 1998, the Company has net
operating loss carryforwards of approximately $143,238,000 and $7,624,000 of tax
credits, which may be used to offset future income. These net operating loss
carryforwards expire beginning in 2005, and the tax credit carryforwards begin
to expire in 2004. Approximately $22,935,000 of the net operating loss
carryforwards and $245,000 of the tax credit carryforwards belong to Altus and
can only be used to offset future income of Altus. A valuation allowance has
been established for the full amount of the deferred tax asset since it is more
likely than not that the deferred tax asset will not be realized.
The amount of tax credits and net operating loss carryforwards that the Company
may utilize in any one year is limited in accordance with Internal Revenue Code
ss.382. This limitation arises whenever a cumulative change in ownership in
excess of 50% occurs. A change of ownership has occurred which will limit the
amount of net operating loss and tax credits available prior to the change.
There may also be further changes of ownership subsequent to 1998 which may also
limit the amount of net operating loss and tax credit utilization in a
subsequent year.
I. COMMON AND PREFERRED STOCK
Page F-11
COMMON STOCK
In June 1997, Eli Lilly and Company ("Lilly") purchased 263,922 shares of the
Company's common stock for $10,000,000. In March 1997, the Company completed a
public offering of 3,450,000 shares of its common stock at a price of $45.50 per
share with net proceeds to the Company of approximately $148,810,000. In August
1996, the Company completed a public offering of 3,450,000 shares of its Common
Stock at a price of $24 per share with net proceeds to the Company of
approximately $77,515,000. In June 1996, Glaxo Wellcome purchased 151,792 shares
of the Company's Common Stock for approximately $5,000,000.
During 1997, the Company increased the authorized number of shares of Common
Stock by 50,000,000 shares to 100,000,000 shares. At December 31, 1998,
7,862,000 shares of the Company's Common Stock were reserved for exercise of
Common Stock options granted or to be granted under its 1991 Stock Option Plan,
1994 Stock and Option Plan, and 1996 Stock and Option Plan, 48,000 shares were
reserved for exercise of certain other options granted in 1991, 88,000 shares of
Common Stock were reserved for issuance under the Company's 401(k) Plan, and
76,000 shares of Common Stock were reserved for issuance under the Company's
Employee Stock Purchase Plan.
STOCK OPTION PLANS
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock-based compensation plans. However, pro forma disclosures as if the
Company adopted the cost recognition requirements under FASB Statement No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") in 1998, 1997 and 1996
are presented below. Compensation expense of $91,000 and $66,000 was recognized
during 1998 and 1997, respectively. No compensation expense was recognized for
these plans in 1996.
The Company has the 1991 Stock Option Plan (the "1991 Plan") and 1994 Stock and
Option Plan (the "1994 Plan") and 1996 Stock and Option Plan (the "1996 Plan").
Under the 1994 Plan and the 1996 Plan, stock rights, which are either (i)
incentive stock options when Internal Revenue Code requirements are met, (ii)
non-qualified stock options ("NQSOs"), or (iii) award shares of Common Stock or
the opportunity to make a direct purchase of shares of Common Stock ("Stock
Awards"), may be granted to employees (including officers and directors who are
employees), consultants, advisors and non-employee directors (NQSOs and stock
awards only). Incentive stock options granted under the Plans may not be granted
at a price less than the fair market value of the Common Stock on the date of
grant. Non-qualified stock options may be granted at an exercise price
established by the Compensation Committee of the Board of Directors, which may
be less than, equal to or greater than the fair value of the Common Stock on the
date of grant. Vesting periods, generally four or five years, are determined by
the Compensation Committee. Incentive stock options granted under the Plans must
expire not more than ten years from the date of grant. At December 31, 1998, the
Company had 2,074,000 shares of common stock available for future grant under
its stock option plans.
Page F-12
Stock option activity for the years ended December 31, 1998, 1997 and 1996 is as
follows (shares in thousands):
1998 1997 1996
---------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 4,702 $22.03 4,033 $18.98 3,196 $14.63
Granted 1,341 $24.57 1,257 $29.78 1,056 $31.11
Exercised (78) $14.89 (375) $13.97 (139) $12.96
Canceled (128) $25.90 (213) $23.99 (80) $16.11
----- ----- ----
Outstanding at end
of year 5,837 $22.62 4,702 $22.03 4,033 $18.98
----- ----- -----
Options exercisable
at year-end 2,758 $18.76 1,944 $16.50 1,625 $13.92
----- ----- -----
Weighted average fair
value of options granted
during the year $11.68 $13.94 $15.04
------ ------ ------
------ ------ ------
The fair value of each option granted during 1998, 1997 and 1996 was estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: (1) expected life of 5.11 years for the
1998 grants, 5.18 years for the 1997 grants and 5.41 years for the 1996 grants
(2) expected volatility of 46.5% for the 1998 grants, 44.7% for the 1997 grants
and 42% for the 1996 grants (3) risk-free interest rate of 4.86% for the 1998
grants, 5.5% for the 1997 grants and 6.30% for the 1996 grants and (4) no
dividend yield.
The following table summarizes information about stock options outstanding and
exercisable at December 31, 1998 (shares in thousands):
Options Outstanding Options Exercisable
---------------------------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ----------- ---------------- ----- ----------- -----
$6.48 - $15.00 1,152 4.94 $11.88 1,021 $11.82
$15.13 - $19.00 1,273 6.08 $17.43 984 $17.03
$19.87 - $27.25 1,219 9.68 $24.03 63 $22.54
$27.34 - $30.50 982 8.92 $27.48 231 $27.62
$33.19 - $49.13 1,211 8.17 $32.94 459 $32.97
----- ------
$ 6.48 - $49.13 5,837 7.52 $22.62 2,758 $18.76
----- ------
----- ------
Page F-13
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Stock Purchase Plan, substantially all permanent
employees may, through payroll withholdings, purchase shares of the Company's
Common Stock at a price of 85% of the lesser of fair market value at the
beginning or end of each six-month withholding period. During 1998, 38,170
shares of Common Stock at a price of $22.66 per share were issued to employees
under the plan. During 1997, 26,213 shares were issued at an average price of
$28.00 per share. During 1996, 32,296 shares of Common Stock at an average price
of $19.21 per share were issued to employees under the plan. Had the Company
adopted SFAS 123, the weighted average fair value of each purchase right granted
during 1998, 1997 and 1996 would have been $7.65, $9.16 and $5.76, respectively.
The fair value was estimated at the beginning of the withholding period using
the Black-Scholes option-pricing model with the following weighted average
assumptions: (1) expected life of one half year for all years (2) expected
volatility of 52%, 51% and 41% for 1998, 1997 and 1996, respectively (3)
risk-free interest rate of 4.70% for 1998, 5.43% for 1997 and 5.50% for 1996 and
(4) no dividend yield.
PRO FORMA DISCLOSURES
Had compensation cost for the Company's 1998, 1997 and 1996 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net loss and net loss per share for 1998, 1997 and 1996 would
approximate the pro forma amounts below (in thousands except per share data):
1998 1997 1996
---- ---- ----
Net loss As reported $(33,086) $(19,831) $(40,005)
Pro forma $(41,542) $(25,154) $(42,025)
Basic and diluted loss per share As reported $ (1.31) $(0.82) $(2.13)
Pro forma $ (1.64) $(1.04) $(2.24)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts since SFAS 123 does not apply to awards prior to 1995 and
additional awards in future years are anticipated.
RIGHTS
Each holder of a share of outstanding Common Stock also holds one share purchase
right (a "Right") for each share of Common Stock. Each Right entitles the holder
to purchase from the Company one one-hundredth of a share of Series A junior
participating preferred stock, $.01 par value (the "Junior Preferred Shares"),
of the Company at a price of $270 per one one-hundredth of a Junior Preferred
Share (the "Purchase Price"). The Rights are not exercisable until the earlier
of acquisition by a person or group of 15% or more of the outstanding Common
Stock (an "Acquiring Person") or the announcement of an intention to make or
commencement of a tender offer or exchange offer the consummation of which would
result in the beneficial ownership by a person or group of 15% or more of the
outstanding Common Stock. In the event that any person or group becomes an
Acquiring Person, each holder of a Right other than the Acquiring Person will
thereafter have the right to receive upon exercise that number of shares of
Common Stock having a market value of two times the Purchase Price and, in the
event that the Company is acquired in a business combination transaction or 50%
or more of its assets are sold, each holder of a Right will thereafter have the
right to receive upon exercise that number of shares of Common Stock of the
acquiring company which at the time of the transaction will have a market value
of two times the Purchase Price. Under certain specified circumstances, the
Board of Directors of the
Page F-14
Company may cause the Rights (other than Rights owned by such person or group)
to be exchanged, in whole or in part, for Common Stock or Junior Preferred
Shares, at an exchange rate of one share of Common Stock per Right or one
one-hundredth of a Junior Preferred Share per Right. At any time prior to the
acquisition by a person or group of beneficial ownership of 15% or more of the
outstanding Common Stock, the Board of Directors of the Company may redeem the
Rights in whole at a price of $.01 per Right.
J. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
The Company and Schering AG, Germany ("Schering AG") are collaborating on the
research, development and commercialization of novel, orally active neurophilin
ligand compounds to promote nerve regeneration for the treatment of a number of
neurological diseases. Under the terms of the agreement, Schering AG agreed to
pay the Company up to $88,000,000 composed of a $6,000,000 license payment paid
in September 1998, $22,000,000 of product research funding over five years and
$60,000,000 of development and commercialization milestone payments. From the
inception of the agreement in August 1998 through December 31, 1998, $10,000,000
has been recognized as revenue. Under terms of the agreement, Vertex and
Schering AG will have an equal role in management of neurophilin ligand research
and product development. In North America, Vertex will have manufacturing
rights, and Vertex and Schering AG will share equally in the marketing expenses
and profits from commercialized compounds. In addition to having manufacturing
rights in North America, the Company retains the option to manufacture bulk drug
substance for sales and marketing in territories outside Europe, the Middle East
and Africa. Schering AG will have the right to manufacture and market any
commercialized compounds in Europe, the Middle East and Africa, and pay Vertex a
royalty on product sales, if any. After December 2000, Schering AG has the right
to terminate without cause upon a six months' written notice. Revenues earned
from Schering AG under the neurophilin ligand agreement were $10,000,000 in
1998.
The Company and Kissei Pharmaceutical Co., Ltd. ("Kissei") are collaborating to
design inhibitors of p38 MAP kinase and to develop them as novel, orally active
drugs for the treatment of inflammatory and neurological diseases. Under the
terms of the agreement, Kissei agreed to pay the Company up to $22,000,000
composed of a $4,000,000 license payment, $11,000,000 of product research
funding over three years and $7,000,000 of development and commercialization
milestone payments. From the inception of the agreement in September 1997
through December 31, 1998, $11,000,000 has been recognized as revenue. Kissei
will have the right to develop and commercialize these compounds in its licensed
territories. Kissei has exclusive rights to p38 MAP kinase compounds in Japan
and certain Southeast Asian countries and semi-exclusive rights in China, Taiwan
and South Korea. The Company retains exclusive marketing rights in the United
States, Canada, Europe and the rest of the world. In addition, the Company will
have the right to supply bulk drug material to Kissei for sale in its territory
and will receive royalties and drug supply payments on future product sales, if
any. Kissei has the right to terminate the agreement without cause upon six
months' notice. Revenues earned from Kissei under the p38 MAP kinase agreement
were $5,521,000 and $5,500,000 in 1998 and 1997, respectively.
The Company and Lilly are collaborating on designing inhibitors of the hepatitis
C protease enzyme and developing them as novel drugs to treat hepatitis C
infection. Under the terms of the agreement, Lilly agreed to pay the Company up
to $51,000,000 composed of a $3,000,000 payment paid in June 1997, $33,000,000
of product research funding over six years and $15,000,000 of development and
commercialization milestone payments. From the inception of the agreement in
June 1997 through December 31, 1998, $10,829,000 has been recognized as revenue.
The Company has the option to supply 100 percent of Lilly's commercial drug
substance supply needs. The Company will receive royalties on future product
sales, if any. If the Company exercises its commercial supply option, the
Company will receive drug supply payments in addition to royalties on future
product sales, if any. Lilly has the right to terminate the agreement
Page F-15
without cause upon six months' notice after June 1999. In connection with this
collaboration, Lilly purchased 263,922 shares of the Company's common stock for
$10,000,000. Revenues earned from Lilly were $5,193,000 and $5,694,000 in 1998
and 1997, respectively.
The Company and BioChem Pharma ("BioChem") are collaborating on the development
and commercialization in Canada of Incel-TM- (VX-710), Vertex's lead multidrug
resistance reversal agent. Under the development agreement, BioChem agreed to
pay Vertex up to $4,000,000 comprised of an initial licensing fee of $500,000
and development and commercialization milestones payments. From the inception of
the agreement in May 1996 through the year ended December 31, 1998, $750,000 has
been recognized as license and research revenue. BioChem has agreed to fund
certain development activities for Incel in Canada, including Phase II clinical
trials in two different cancer indications which are currently underway. Vertex
has agreed to supply BioChem's clinical and commercial drug supply needs.
BioChem has agreed to pay Vertex a portion of its net sales, which will cover
Vertex's cost of supplying material and will provide a profit to Vertex. BioChem
has the right to terminate the agreement without cause upon six months' notice.
Termination will relieve BioChem of any further payment obligations and will end
any license granted to BioChem by Vertex under the agreement. Revenues earned
from BioChem were $56,000, $251,000 and $577,000 in 1998, 1997 and 1996,
respectively.
The Company and Glaxo Wellcome are collaborating on the development and
commercialization of compounds in connection with the Company's HIV Program.
Under the collaborative agreement, Glaxo Wellcome agreed to pay the Company up
to $42,000,000 comprised of a $15,000,000 initial license payment paid in 1993,
$14,000,000 of product research funding over five years and $13,000,000 of
development and commercialization milestone payments. From the inception of the
agreement in December 1993 through the year ended December 31, 1998, $34,000,000
has been recognized as revenue. Research funding under this agreement ended on
December 31, 1998. Glaxo Wellcome is also obligated to pay to the Company
additional development and commercialization milestone payments for subsequent
drug candidates. In addition, Glaxo Wellcome agreed to bear all costs of
development in its territory of drug candidates under the collaboration. Under
the agreement, Glaxo Wellcome is also required to pay Vertex a royalty on sales,
if any. Glaxo Wellcome has the right to terminate the license arrangements
without cause upon twelve months' notice given at any time. Termination by Glaxo
Wellcome of the license arrangements under the agreement will relieve it of its
obligation to make further commercialization and development milestone and
royalty payments and will end any license granted to Glaxo Wellcome by Vertex
thereunder. Revenues earned from Glaxo Wellcome were $6,457,000, $3,275,000 and
$6,289,000 for 1998, 1997 and 1996, respectively.
In June 1996, the Company and Glaxo Wellcome obtained a worldwide, non-exclusive
license under certain G.D. Searle & Co. ("Searle") patent applications in the
area of HIV protease inhibition. Vertex paid $15,000,000 and Glaxo Wellcome paid
$10,000,000 to Searle for the license. The Company also agreed to pay Searle a
royalty on sales of Agenerase (amprenavir), if any.
The Company and Hoechst Marion Roussel ("HMR") are collaborating on the
development of interleukin-1 beta converting enzyme inhibitor. Under the
collaborative agreement, HMR agreed to pay the Company up to $30,500,000,
comprised of $18,500,000 of product research funding over five years and
$12,000,000 of development and commercialization milestone payments. From the
inception of the agreement in September 1993 through the year ended December 31,
1998, $21,500,000 has been recognized as revenue. Revenues earned under the HMR
agreement were $460,000, $8,660,000 and $4,196,000 in 1998, 1997 and 1996,
respectively. Research funding under this agreement ended on December 31, 1997.
The Company and Kissei are collaborating on the development and
commercialization of amprenavir, the drug candidate from the Company's HIV
Program. Under the collaborative
Page F-16
agreement, Kissei agreed to pay the Company up to $20,000,000, comprised of
$9,800,000 of product research funding through 1995, $7,000,000 of development
milestone and territory option payments and a $3,200,000 equity investment. From
the inception of the agreement in April 1993 through the year ended December 31,
1998, $14,642,000 has been recognized as revenue. During 1997, the Company also
received $4,000,000 related to reimbursements of certain development costs.
Under the collaboration, Kissei is also required to pay Vertex a royalty on
sales, if any. Revenues earned under this Kissei agreement were $217,000,
$4,310,000 and $692,000 in 1998, 1997 and 1996, respectively. Research funding
under this agreement ended on December 31, 1995.
K. EMPLOYEE BENEFITS
The Company has a 401(k) retirement plan in which substantially all of its
permanent employees are eligible to participate. Participants may contribute up
to 15% of their annual compensation to the plan, subject to statutory
limitations. For 1998, the Company declared discretionary matching contributions
to the plan in the aggregate amount of $672,000, payable in the form of shares
of the Company's Common Stock. Of these shares, 19,419 were issued as of
December 31, 1998 with the remaining 7,195 issuable in 1999. For 1997, the
Company declared discretionary matching contributions to the plan in the
aggregate amount of $482,000, payable in the form of shares of the Company's
Common Stock. Of these shares, 6,458 were issued as of December 31, 1997 with
the remaining 7,113 issued in 1998. For 1996, the Company declared discretionary
matching contributions to the plan in the aggregate amount of $426,000, payable
in the form of shares of the Company's Common Stock. Of these shares, 7,013 were
issued as of December 31, 1996 with the remaining 5,278 issued in 1997.
L. RELATED PARTY
A sibling of the Company's President is a partner in the law firm representing
the Company to which $333,000, $394,000 and $472,000 in legal fees were paid in
1998, 1997 and 1996, respectively.
M. LEGAL PROCEEDINGS
Chiron Corporation ("Chiron") filed suit on July 30, 1998 against the Company
and Lilly in the United States District Court for the Northern District of
California, alleging infringement by the defendants of various 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 and development.
Chiron has requested damages in an unspecified amount, as well as an order
permanently enjoining the defendants from unlicensed use of Chiron inventions.
While the final outcome of these actions cannot be determined, the Company
believes that the plaintiff's claims are without merit and intends to defend the
actions vigorously.
N. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which
requires that all components of comprehensive income and total comprehensive
income be reported and that changes be shown in a financial statement displayed
with the same prominence as other financial statements. The Company has
disclosed this information in its statement of stockholders' equity and consists
of the following (in thousands):
Page F-17
Accumulated
Cumulative Unrealized Other
Translation gain/(loss) on comprehensive
Adjustment investments income (loss)
Balance as of December 31, 1996 $ 16 $ 33 $ 49
Foreign currency translation adjustment (12) -- (12)
Unrealized holding gains arising during
the period -- 115 115
------ -------- ---------
Balance as of December 31, 1997 4 148 152
Foreign currency translation adjustment -- -- --
Unrealized gains/(losses) on securities:
Unrealized holding gains arising during
the period -- 1,049 1,049
Less: reclassification adjustment for gains
Included in net loss (547) (547)
------ -------- ---------
Balance as of December 31, 1998 $ 4 $ 650 $ 654
------ -------- ---------
O. SUBSEQUENT EVENTS
ALTUS BIOLOGICS, INC.
Altus develops, manufactures and markets products based on a novel and
proprietary technology for stabilizing proteins. At December 31, 1998, Vertex
owned approximately 70% of the capital stock of Altus. On February 5, 1999,
Vertex restructured its investment in Altus. As part of the transaction, Vertex
provided Altus $3,000,000 of cash and surrendered its shares of Altus preferred
stock in exchange for two new classes of preferred stock and warrants. The new
preferred stock provides Vertex with a minority equity ownership position in
Altus, and the warrants become exercisable upon certain events. As a result of
the transaction, Altus operates independently from Vertex as a minority-owned
subsidiary. In addition, Vertex has retained a non-exclusive royalty-free right
to use Altus' technology for discovering, developing and manufacturing small
molecule drugs.
P. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE)
First Second Third Fourth Total
----- ------ ----- ------ -----
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
1998
Total revenues $ 7,169 $ 7,152 $ 18,417 $ 11,660 $ 44,398
Total expenses 15,583 16,954 20,690 24,257 77,484
Net loss (8,414) (9,802) (2,273) (12,597) (33,086)
Basic and diluted earnings per share
(0.33) (0.39) (0.09) (0.50) (1.31)
1997
Total revenues $ 6,918 $ 12,155 $ 13,547 $ 11,179 $ 43,799
Total expenses 12,684 13,567 19,403 17,976 63,630
Net loss (5,766) (1,412) (5,856) (6,797) (19,831)
Basic and diluted earnings per share (0.26) (0.06) (0.23) (0.27) (0.82)
Page F-18