VERTEX PHARMACEUTICALS INC / MA
FORM 10-K
(Annual Report)
Filed 3/15/2004 For Period Ending 12/31/2003
Address
130 WAVERLY STREET
CAMBRIDGE, Massachusetts 02139-4242
Telephone
616-577-6000
CIK
Industry
Sector
0000875320
Biotechnology & Drugs
Healthcare
Fiscal Year
12/31
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(cid:1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
or
(cid:3)
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
(State of incorporation)
130 Waverly Street
Cambridge, Massachusetts
(Address of principal executive offices)
04-3039129
(I.R.S. Employer
Identification No.)
02139-4242
(Zip Code)
(617) 444-6100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.01 Par Value Per Share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant (without admitting that any person
whose shares are not included in such calculation is an affiliate) based on the last reported sale price of the Common Stock on The Nasdaq
Stock Market on June 30, 2003, was $826,746,640.
As of March 12, 2004, the registrant had 78,183,920 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be held on May 6, 2004 are incorporated by
reference into Part III.
FORM 10-K INDEX
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Business
Executive Officers and Directors
Scientific Advisory Board
Risk Factors
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Market for the Registrant's Common Equity and Related Stockholder Matters
Selected Consolidated Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Item 10.
Item 11.
Item 12.
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
PART III
Stockholder Matters
Item 13.
Item 14.
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
PART IV
Page
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The "Company," "Vertex," "we" and "us," as used in this Annual Report on Form 10-K, refer to Vertex Pharmaceuticals Incorporated, a
Massachusetts corporation, and its subsidiaries.
"Vertex" is a registered trademark of Vertex, and "E-VIPR" and "GenomeScreen," are trademarks of Vertex. "Agenerase" is a registered
trademark, and "Lexiva" and "Telzir" are trademarks, of GlaxoSmithKline. "Prozei" is a trademark of Kissei Pharmaceutical Co., Ltd. Other
brands, names and trademarks contained in this Annual Report are the property of their respective owners.
Forward-Looking Statements
Our disclosure in this Annual Report on Form 10-K contains some forward-looking statements. Forward-looking statements give our
current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or
current facts. Such statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other
words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these
statements include, among other things, statements relating to:
•
•
•
•
•
•
•
•
•
•
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our business strategy;
our predicted development and commercial timelines;
the selection, development and approval of our products;
the establishment, development and maintenance of collaborative partnerships;
our ability to identify and develop new potential products;
our ability to achieve commercial acceptance of our products;
our ability to scale up our manufacturing capabilities and facilities;
our estimates regarding liabilities associated with our Kendall Square lease;
the potential for the acquisition of new and complementary technologies, resources and products;
our projected capital expenditures; and
our liquidity.
Any or all of our forward-looking statements in this Annual Report may turn out to be wrong. They can be affected by inaccurate
assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this Annual Report
will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary
materially. A more detailed reference to our forward-looking statements can be found under "Forward-looking Statements" in Item 7 of this
Annual Report.
We also provide a cautionary discussion of risks and uncertainties under "Risk Factors" in Item 1 of this Annual Report. These are factors
that we think could cause our actual results to differ materially from expected results. Other factors besides those listed there could also
adversely affect us.
ITEM 1. BUSINESS
Overview
PART I
We are a biotechnology company in the business of discovering, developing and commercializing small molecule drugs for serious
diseases including HIV infection, chronic hepatitis C virus infection, inflammatory and autoimmune disorders and cancer, independently and
with collaborators. Our principal focus is on the development and commercialization of new treatments for viral and inflammatory diseases.
There are two Vertex-discovered products on the market now for the treatment of HIV and AIDS. Our pipeline of potential products includes
several drug candidates targeting chronic hepatitis C virus infection, drug candidates targeting inflammatory diseases such as rheumatoid
arthritis, osteoarthritis, acute coronary syndromes and psoriasis, and compounds directed at cancer therapy.
Our goal is to mature into a profitable pharmaceutical company with industry-leading capabilities in research, development and
commercialization of products. Our strategy is to continue building these capabilities as we advance our own product candidates to market. Our
two marketed products to date were developed and commercialized in collaboration with GlaxoSmithKline, who provided us with development
capacity, financial support, commercial capabilities, and other valuable resources. We plan to continue to collaborate with existing and new
partners to develop and market other Vertex-discovered products for selected major therapeutic areas. We also have begun developing certain
potential products independently, for markets in which we believe we can commercialize products effectively and reach large patient
populations, but expend comparatively fewer resources by using a sales force focused on specialists. We believe this dual approach will help us
diversify risk and create the greatest number of product development and commercialization opportunities for Vertex.
Partnerships are a key component of our corporate strategy. We have collaborations with Aventis, GlaxoSmithKline, Novartis, Serono and
other companies. These collaborations provide us with financial support and other valuable resources for our research programs, development
resources for our clinical drug candidates, and marketing and sales support for our products. We have had a long and fruitful collaboration with
GlaxoSmithKline, resulting in our two marketed drugs, Agenerase and Lexiva, and the advancement of a third HIV protease inhibitor, VX-385,
into clinical development. We expect that GlaxoSmithKline will commence a Phase II trial of VX-385 in 2004. We currently are collaborating
with Aventis in the development of pralnacasan, an ICE inhibitor for the treatment of rheumatoid arthritis, osteoarthritis and other
inflammatory diseases. Our collaboration with Eli Lilly, now ended, produced one of our HCV drug candidates, VX-950.
We plan to continue adding promising potential products to our development pipeline through the conduct of our state-of-the-art research
programs. Our drug design approach integrates biology, chemistry, biophysics, automation and information technologies to make the drug
discovery process more efficient and productive. We believe that our drug discovery expertise is a distinguishing feature of the Company. We
currently are conducting a productive research program in the area of ion channel modulation, and have been engaged in a broad scale kinase
inhibitor collaboration with Novartis since 2000. We expect that future development candidates from these programs will be focused on the
treatment of wide variety of diseases and conditions including cancer and neuropathic pain.
We also seek to opportunistically license and acquire technologies, resources and products that have the potential to strengthen our drug
discovery platform, product pipeline and commercial capabilities.
In two independent transactions closed in March and December 2003, we sold the assets of our Discovery Tools and Services business for
an aggregate of $101 million in cash and the assumption of certain liabilities. As a result of the disposition of these assets, we now operate in a
single operating segment: Pharmaceuticals.
1
The Company's internet address is www.vrtx.com. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports are available to you free of charge through the "Investors" section of our website as
soon as reasonably practicable after those materials have been electronically filed with, or furnished to, the Securities and Exchange
Commission.
We were incorporated in Massachusetts in 1989, and our principal executive offices are located at 130 Waverly Street, Cambridge,
Massachusetts, 02139.
Commercial Products and Clinical Development Programs
Our product pipeline is principally focused on viral diseases, inflammatory and autoimmune diseases, and cancer.
Therapeutic Area and Product
Candidate
Clinical Indications
Development Phase
Company With
Marketing Rights
(Region)
Antivirals
Agenerase™(amprenavir)
Lexiva™(fosamprenavir
calcium)**
VX-385
HIV infection
Mktd
HIV infection
Mktd/MAA filed
HIV infection
Merimepodib (VX-497)
VX-950
Chronic hepatitis C
Chronic hepatitis C
Phase I
Phase II
Preclin
GlaxoSmithKline
(Worldwide)*
GlaxoSmithKline
(Worldwide)*
GlaxoSmithKline
(Worldwide)*
Vertex (Worldwide)
Vertex (Worldwide)
Inflammation and
Autoimmune Disease
VX-765
Inflammatory/autoimmune
Phase I
Vertex (Worldwide)
diseases
VX-702
Acute coronary syndromes;
Phase II
Kissei (Japan); Vertex
inflammatory diseases
(R.O.W.)
Pralnacasan (VX-740)
Rheumatoid arthritis (RA);
osteoarthritis (OA); other
inflammatory/autoimmune
diseases
Phase II
Aventis (Worldwide)*
Cancer
VX-680
VX-944
Oncology
Oncology
Preclin
Phase I
Novartis (Worldwide)†
Vertex (Worldwide)
*
**
†
Vertex has co-promotion rights in the U.S. and the E.U. Kissei has marketing rights to amprenavir (Prozei™) in Japan.
GlaxoSmithKline is seeking marketing approval in the E.U. under the name "Telzir™".
Vertex may elect by June 30, 2004 to continue the development of VX-680 under the original terms of the Novartis agreement, in
which event Novartis will hold an option on worldwide commercial rights.
2
Antiviral Programs
HIV/AIDS
Background: Treatment of HIV/AIDS
Infection with human immunosufficiency virus (HIV) leads to AIDS, a severe, life-threatening impairment of the immune system. The
World Health Organization estimates that approximately 36.1 million individuals worldwide are infected with HIV. The U.S. Centers for
Disease Control and Prevention (CDC) estimates that there are 980,000 patients in the United States infected with HIV.
There are four classes of antiviral drugs approved for the treatment of HIV infection and AIDS: nucleoside reverse transcriptase inhibitors
(NRTIs), such as AZT and 3TC; non-nucleoside reverse transcriptase inhibitors (NNRTIs), such as efavirenz; the fusion inhibitor enfuvirtide;
and HIV protease inhibitors (PIs). PIs such as Agenerase and Lexiva are used as part of combination regimens for the treatment of HIV. PIs
block the cleavage of HIV polyproteins into active proteins, and result in the production of non-infectious viral particles. The PI ritonavir has
been shown to significantly boost the levels of certain other PIs in the bloodstream and therefore co-administration of PIs with ritonavir has
become progressively more frequent in clinical practice as a strategy for achieving maximum antiviral activity, reducing the likelihood of
treatment failure (viral breakthrough), and lowering the overall pill count for patients. We estimate that approximately 75% of Lexiva patients
are treated concomitantly with ritonavir.
Currently, approximately 175,000 of the HIV patients receiving drug treatment in the U.S. take at least one PI. The market for HIV PIs is
highly competitive, with seven different PIs vying for a share. Worldwide sales of HIV PIs were estimated at more than $1.8 billion in 2003,
and U.S. sales alone during the same period were estimated at more than $1 billion.
Vertex HIV/AIDS Products
Agenerase
Our first marketed product is the HIV protease inhibitor Agenerase (amprenavir), an orally administered drug for the treatment of HIV
infection and AIDS. Agenerase received regulatory approval in the U.S. in April 1999. We created and developed Agenerase in collaboration
with GlaxoSmithKline. GlaxoSmithKline markets, and we co-promote, Agenerase in the U.S. and Europe. We collaborated with Kissei
Pharmaceutical Co., Ltd. to develop amprenavir in Japan, where it is sold by Kissei under the trade name Prozei™.
Regulatory authorities have approved once-daily use of Agenerase on the basis of data demonstrating that ritonavir (a PI) significantly
boosts levels of Agenerase in the bloodstream in both once-daily and twice-daily dosing regimens.
We receive royalties on sales of amprenavir by GlaxoSmithKline and Kissei. We also supply bulk amprenavir drug substance to Kissei.
Lexiva
Our second HIV protease inhibitor, Lexiva (fosamprenavir calcium), was co-discovered by Vertex and GlaxoSmithKline and has been
developed by GlaxoSmithKline under our collaboration. GlaxoSmithKline has worldwide marketing rights for Lexiva, and we have the right to
co-promote Lexiva in the United States and the European Union. We also have the right to supply bulk drug substance to GlaxoSmithKline.
We receive royalties on GlaxoSmithKline's sales of Lexiva.
GlaxoSmithKline conducted an extensive Phase III clinical program for Lexiva, including trials in both treatment-naïve and treatment-
experienced patients. The first study (NEAT) compared Lexiva to nelfinavir in treatment-naïve patients. The second study (SOLO) compared
Lexiva in combination with ritonavir, administered once-daily, to nelfinavir in treatment-naïve patients. The third study
3
(CONTEXT) evaluated both once-daily and twice-daily dosing of Lexiva in combination with ritonavir, compared to lopinavir/ritonavir, in
treatment-experienced patients. In all of these studies, patients received reverse transcriptase inhibitors as part of the combination regimen.
Data from the Phase III clinical program was presented at various medical conferences in 2002 and 2003. In the NEAT trial, 66% of 166
HIV-positive patients achieved an undetectable viral load with Lexiva (<400 copies/ml vRNA), compared to 52% of 83 patients taking
nelfinavir. In the SOLO study, 69% of 322 HIV-positive patients achieved undetectable viral load with Lexiva/ritonavir compared to 68% of
327 patients taking nelfinavir. Forty-eight-week data from the CONTEXT study has shown similar efficacy responses in BID regimens of both
Lexiva/ritonavir and lopinavir/ritonavir. The incidence of adverse events was low in the Lexiva treatment groups.
In December 2002, GlaxoSmithKline filed a New Drug Application (NDA) with the U.S. Food and Drug Administration (FDA) and a
Marketing Authorization Application (MAA) in the European Union (E.U.) for marketing approval of Lexiva in the U.S. and E.U. The
submissions for registration included data from more than 1,100 treatment-naïve and treatment-experienced patients who participated in the
Phase III trials. The FDA approved Lexiva on October 20, 2003. GlaxoSmithKline and Vertex launched Lexiva in the United States shortly
thereafter. GlaxoSmithKline currently is seeking marketing approval for Lexiva (under the name Telzir) in the E.U. We anticipate that E.U.
marketing approval will be granted in 2004.
Lexiva is a prodrug of amprenavir. A prodrug is an inactive compound that is metabolized by the body to become the active drug.
Administration of a prodrug can result in a smaller pill burden for patients, due to the need to use fewer fillers, with a resulting higher ultimate
drug load per pill. HIV-infected patients typically require a large number of pills daily as part of combination drug regimens. We believe that
Lexiva will offer important new benefits to HIV patients, including a low pill count and the ability to be dosed once or twice a day. This dosing
benefit could lead to a material increase in physician acceptance of Lexiva, and patient compliance with Lexiva dosing regimens, as compared
to other Agenerase and certain other currently marketed PIs. We also believe that trends in HIV patient demographics and emerging themes in
HIV treatment strategy in Western countries may result in increased use of protease inhibitors generally, including Lexiva.
We believe that Lexiva retains many of the favorable properties associated with amprenavir, including:
a half-life which allows for convenient twice-daily dosing and provides high levels of the drug in the bloodstream;
ability to be dosed once daily when co-administered with ritonavir;
ability to be dosed effectively with or without food, providing convenience for patients;
well tolerated;
relatively low levels of cross-resistance to other protease inhibitors; and
a favorable lipid profile.
•
•
•
•
•
•
VX-385
We have a third novel, orally available HIV protease inhibitor in clinical development, VX-385 (GW640385), which was co-discovered
by Vertex and GlaxoSmithKline. VX-385 is chemically distinct from Agenerase, Lexiva, and other currently marketed protease inhibitors.
Preclinical results presented at medical meetings in 2003 demonstrate that VX-385 is a highly potent inhibitor and demonstrates anti-HIV
activity against HIV strains resistant to a number of currently marketed protease inhibitors. Clinical results to date indicate that VX-385 is well-
tolerated in single doses in healthy volunteers and achieves blood levels consistent with those believed to have an antiviral effect.
4
Our collaborator GlaxoSmithKline controls development of VX-385 and plans to initiate a Phase II clinical trial of the compound in the
second half of 2004.
HEPATITIS C VIRUS INFECTION
Background: Treatment of Hepatitis C
Hepatitis C virus (HCV) causes chronic inflammation in the liver. In a majority of patients, HCV infection can persist for decades and
eventually lead to cirrhosis, liver failure and liver cancer. HCV infection represents a significant medical problem worldwide. Sources at the
CDC have estimated that approximately 2.7 million Americans, or approximately 1% of the population, are chronically infected with HCV, and
the World Health Organization estimates that there are as many as 185 million chronic carriers of the virus worldwide.
Currently, there is no vaccine available to prevent hepatitis C infection. The current standard treatment for hepatitis C viral infection is a
combination of pegylated interferon and ribavirin. At present, however, approximately 50% of patients still fail to show long-term sustained
response to pegylated interferon/ribavirin combination therapy. As a result, new safe and effective treatment options for HCV infection are
needed.
Vertex HCV Drug Candidates
Vertex is developing two drug candidates targeting hepatitis C virus infection by different mechanisms. The most advanced compound is
merimepodib, which targets HCV indirectly and is currently in Phase II development. Vertex's second HCV drug candidate, VX-950, targets
the hepatitis C virus directly, by inhibiting hepatitis C NS3-4A protease, an enzyme necessary for HCV replication. We expect to begin Phase I
clinical trials of VX-950 in 2004. Vertex holds all marketing rights to both merimepodib and VX-950.
Merimepodib
Merimepodib is Vertex's most advanced orally available drug candidate for the treatment of HCV infection. Merimepodib targets HCV
infection indirectly through inhibition of the human enzyme inosine 5'-monophosphate dehydrogenase (IMPDH). Vertex has conducted in vitro
experiments that demonstrate that merimepodib has an additive antiviral effect, in vitro, in combination with pegylated interferon and ribavirin.
In 2003, we completed the treatment arms of a triple combination Phase II study of merimepodib with pegylated interferon and ribavirin,
to evaluate the safety of the triple combination, in 31 patients with genotype I HCV infection who did not respond to a previous course of alpha
interferon in combination with ribavirin. The study provided for six months of treatment, with an optional 6-month extension phase for patients
who responded to therapy. In 2003, we reported six-month results from this study, indicating that merimepodib was well-tolerated and, in
addition, that merimepodib treatment was associated with a statistically significant, dose-dependent increase in the percentage of patients who
had undetectable HCV viral RNA after six months of treatment.
Merimepodib was discovered through Vertex's program to discover and develop novel orally administered IMPDH inhibitors. IMPDH
inhibition selectively inhibits cell proliferation and/or the cycle of viral infection by interrupting the biosynthesis of guanine nucleotides and,
indirectly, the synthesis of RNA and DNA in the cell, through one of two pathways available to cells for guanine synthesis. Accordingly,
IMPDH is believed to be an attractive target for inhibition of rapid cell proliferation and/or viral replication. Some viruses, including HCV,
may be more sensitive to disruptions in the pathway catalyzed by IMPDH. In addition, IMPDH inhibitors appear to work additively or
synergistically with other treatments for HCV, including ribavirin. The specific mechanism by which merimepodib enhances ribavirin activity
is not known, but it has been proposed that merimepodib may increase the likelihood of ribavirin incorporation into viral RNA during
replication,
5
resulting either in decreased replication or in the production of immature or non-infective viral particles.
In preclinical and early clinical studies, merimepodib demonstrated potent biological activity and oral bioavailability. Data from a Phase I
trial in healthy volunteers showed that merimepodib was well-tolerated in single escalating doses and achieved blood levels well above those
we believe, to be necessary, based on in vitro studies, to achieve potent inhibition of IMPDH. Data from a Phase II clinical trial indicated that
merimepodib, when given for 28 days as monotherapy to HCV patients who were unresponsive to prior treatment with alpha interferon, was
well tolerated and appeared to reduce levels of serum alanine aminotransferase, a marker of liver inflammation.
We have also assessed the safety, tolerability and clinical activity of merimepodib combined with alpha interferon in another Phase II trial
involving treatment-naïve patients with HCV infection. The viral load data from this study showed a trend toward enhanced antiviral activity in
patients given one of two doses of merimepodib combined with interferon, as compared to patients receiving interferon alone. Patients
receiving a 100 mg dose of merimepodib three times daily showed a greater reduction in HCV-RNA after 28 days. Merimepodib treatment was
associated with statistically significant viral RNA decreases in this study when treatment-non-compliant patients were excluded from the
analysis. These results are consistent with an additive antiviral effect mediated by merimepodib, when given in combination with alpha
interferon.
We expect to initiate expanded clinical studies of merimepodib in 2004. If our clinical activities progress as planned, we believe we may
be able to file a new drug application (NDA) for merimepodib as early as 2007.
VX-950
In 2001, we selected VX-950, a potent orally-administered HCV protease inhibitor, for preclinical development. We believe that VX-950
is among the most advanced drug development candidates in a new class of antiviral drugs being studied to inhibit hepatitis C NS3-4A
protease, an enzyme thought to be necessary for HCV replication. We believe that therapeutics such as VX-950 which directly target viral
replication may significantly increase the number of patients that achieve a complete viral response, clearing HCV from the body permanently.
VX-950 has the potential to become one of the first compounds targeting HCV directly and could provide an important treatment advance for
individuals with chronic HCV infection. Promising preclinical results for VX-950 were presented in multiple medical and research forums in
2003. Based on progress in preclinical development in 2003, we expect to begin Phase I clinical development of VX-950 in 2004, and we may
initiate a first study in HCV patients in the second half of 2004. We hold worldwide marketing rights to VX-950 and all other second-
generation HCV protease inhibitors discovered by Vertex in collaboration with Eli Lilly, and would pay Lilly royalties on certain future
product sales.
Inflammatory and Autoimmune Disease
Background: ICE Inhibitors for Inflammatory Disease
Interleukin-1 b converting enzyme (ICE; caspase-1) is an enzyme that controls the release of active interleukin-1 b (IL-1 b , one of two
forms of IL-1) and interleukin-18 (IL-18) from white blood cells into the bloodstream and within tissues. IL-1 b and IL-18 are cytokines that
mediate a wide range of immune and inflammatory responses in many cell types. Early in the inflammatory process, IL-1 b is released from
white blood cells, initiating a complex cascade of events that results in inflammation and tissue damage. IL-18 is an important factor in the
activation of lymphocytes, a type of white blood cell. Elevated IL-1 b and IL-18 levels have been correlated with disease states in a number of
acute and chronic inflammatory diseases.
Rheumatoid arthritis (RA) is a potential indication for small molecule ICE inhibitors. In patients with RA, increased activity of IL-1 b and
IL-18 is observed in joint tissues during disease flare-ups, and
6
IL-1 b is known to activate osteoclasts, a cell type important in bone erosion characteristic of rheumatoid arthritis. IL-18 may have a similar
effect.
There are more than 6 million patients with RA worldwide, including approximately 2.1 million in the United States. The main drugs
currently used to treat RA are non-steroidal anti-inflammatory drugs (NSAIDs) such as Motrin (ibuprofen) and Celebrex (celecoxib). These
drugs are palliative—they relieve pain and swelling but do not reverse or prevent the progression of the disease. Methotrexate is a disease-
modifying drug that is widely used, but its use is associated with side effects that include liver toxicity. Even when they tolerate it well, many
patients become unresponsive to methotrexate over the long term. Newer therapies including Enbrel® (etanercept) and Remicade®
(infliximab) provide a strong rationale for a new kind of disease-modifying therapy that involves inhibition of the cytokine tumor necrosis
factor (TNF) alpha. In 2001 Kineret® (anakinra) became the first therapy approved for RA targeting the cytokine IL-1. All of these newer
agents are administered by injection, which can be inconvenient and painful for patients. We believe that a well tolerated oral ICE inhibitor
may have significant commercial advantages over currently available treatments. In addition, we believe that anakinra's activity is different
than that of Vertex's ICE inhibitors and is not predictive of the degree of efficacy our drug candidates could have.
Osteoarthritis (OA) is also a potential indication for treatment with small molecule ICE inhibitors. OA, a degenerative joint disease, is the
most common form of arthritis, afflicting more than 240 million patients worldwide, including more than 21 million in the United States alone.
Onset generally occurs after middle age, and as the disease progresses, it causes the loss of cartilage, damage to bone, formation of bone spurs,
and inflammation of the soft tissues. OA may also occur in joints that have suffered previous injury, have been subjected to repetitive stress, or
have been damaged by prior infection or inflammatory arthritis. Patients with OA experience pain, tenderness, swelling and progressive loss of
mobility. Patients with OA currently are treated with over-the-counter drugs as well as palliative treatments such as NSAIDS and COX-2
inhibitors. These drugs do not address the underlying progressive joint destruction. Patients with more severe cases may become candidates for
partial or total joint replacement surgery.
The inflammatory response plays a significant role in the joint damage characteristic of OA, and increased cytokine activity has been
observed in patients with OA. IL-1 b is a key driver of pathology in OA, and results of tests conducted in animal models provide a strong
rationale for pursuing IL-1 b modulation for the treatment of OA.
Vertex ICE Inhibitors for Inflammatory Disease
Vertex is developing ICE inhibitors for the treatment of acute and chronic inflammatory conditions. We have collaborated with Aventis
S.A. in the development of our most advanced ICE inhibitor, pralnacasan, and we are independently developing a second generation ICE
inhibitor, VX-765. We hold worldwide rights to VX-765.
Pralnacasan
We are collaborating with Aventis S.A. in the clinical development of pralnacasan (VX-740). Aventis has invested in parallel clinical
trials of pralnacasan in both RA and OA, in addition to ongoing nonclinical toxicology studies. In 2003, Aventis and Vertex voluntarily
suspended the clinical development of pralnacasan, including an ongoing Phase II RA study, so that Aventis and Vertex could analyze findings
that emerged from a 9-month nonclinical toxicology study. In the nonclinical study, high doses of pralnacasan were associated with the
development of fibrosis in circumscribed areas of the liver of one species of animal. Aventis and Vertex are committed to exploring the
toxicology issue with the goal of re-initiating clinical development as soon as prudently possible. The companies' best estimate is that, if the
toxicology issue is satisfactorily addressed, development of pralnacasan will be delayed at least 12-24 months from the original timeline. If the
toxicology findings cannot be satisfactorily addressed, development of pralnacasan may be discontinued.
7
In 2002, Aventis completed a 284 patient Phase IIa study in RA to evaluate clinical activity using standard measures of response to
treatment, including the American College of Rheumatology (ACR) response criteria, which measure improvement in patient-reported and
physician-assessed disease severity and activity. Data from the Phase IIa clinical trial demonstrated that treatment with pralnacasan was well
tolerated and led to positive anti-inflammatory effects in patients with RA. Aventis previously had completed a Phase IIa 28-day clinical trial of
pralnacasan in patients with RA to evaluate the safety and pharmacokinetics of multiple doses of pralnacasan. Results showed dose-dependent
suppression of the production of interleukin-1 b , a cytokine that plays a role in inflammation and tissue damage.
In 2003, prior to the adverse nonclinical toxicology finding, Aventis completed a Phase II study of pralnacasan in OA. The purpose of this
study was to enable Vertex and Aventis to evaluate the safety and efficacy of pralnacasan in OA patients. More than 500 patients were enrolled
in the OA study, and received one of three doses of pralnacasan or placebo for 12 weeks. Pralnacasan was well-tolerated across all three dosage
groups. There was improvement (29-35%) in all four treatment groups in the primary endpoint, total WOMAC scores, during the 12 weeks of
study. The WOMAC is the "Western Ontario and McMasters Universities" scale for measuring signs and symptoms in OA studies. However,
there were no statistically significant differences in the change in total WOMAC score between placebo treatment and any of the pralnacasan
treatment groups. However, statistically significant changes in some urine and serum markers of bone and cartilage turnover were observed.
Interpretation of these results in the context of modifying the progression of OA requires additional scientific understanding, which will require
further clinical validation.
Under our 1999 agreement, Aventis holds an exclusive worldwide license to develop, manufacture and market pralnacasan in any
indication, as well as an exclusive option for certain other compounds discovered under our previous research collaboration with Aventis. We
will receive milestone payments for successful development of pralnacasan in RA, as well as for each additional indication, if any, for which it
is developed. In addition, we will receive royalties on any sales of pralnacasan, and Aventis will partially fund a Vertex co-promotion effort in
the U.S.
VX-765
VX-765 is the first clinical candidate to be selected for clinical development from our second generation ICE inhibitor research program.
VX-765 is chemically distinct from pralnacasan. In 2003, we completed Phase I clinical studies of VX-765 in healthy volunteers. These studies
demonstrated a dose-dependent decrease in levels of the cytokine interleukin-18, the first time this has been demonstrated for any therapeutic
agent. Preclinical data show that VX-765 reduces inflammation and cytokine levels in animal dermatitis and arthritis models. We plan to
initiate additional clinical studies of VX-765 in an inflammatory or autoimmune disease in 2004. We hold worldwide development and
commercial rights to VX-765.
Background: p38 MAP Kinase Inhibitors for Acute Coronary Syndromes and other Inflammatory Diseases
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. The p38 MAP kinase is a human enzyme involved in the onset and progression of
inflammation and apoptosis (cell death). When activated, the p38 MAP kinase triggers production of the cytokines IL-1, tumor necrosis factor-
alpha (TNF-alpha), and interleukin-6 (IL-6). Excess levels of IL-1 and TNF-alpha are associated with a broad range of acute and chronic
inflammatory diseases.
We have extensive pre-clinical and clinical experience with p38 MAP kinase inhibitors, which have the potential to be a powerful and
broadly useful new class of oral anti-inflammatory drugs. The initial objective of our p38 program was to identify and extensively evaluate
compounds that target p38 MAP kinase to develop novel, orally active drugs for the treatment of inflammatory diseases, such as
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rheumatoid arthritis, asthma, Crohn's disease, certain hematologic disorders, congestive heart failure, and neurological diseases such as stroke.
The central role of inflammation in many cardiovascular diseases has been well established. Specifically, inflammation is increasingly
recognized as a key component of the overall process in the development of coronary artery disease and particularly acute coronary syndromes
(ACS). ACS is a broad term that includes unstable angina and certain types of myocardial infarctions. P38 MAP kinase regulates the
production of key proinflammatory cytokines implicated in the pathogenesis of ACS, including TNF-alpha, IL-l b and IL-6. As a potential
once-daily therapy addressing a novel target for ACS, a potent p38 MAP kinase inhibitor could provide an approach to complement current
therapies for this disease, which affects nearly 1.9 million individuals in the U.S. each year.
VX-702—Vertex's p38 MAP kinase inhibitor for inflammatory diseases
We have collaborated with Kissei on the discovery and development of novel p38 MAP kinase inhibitors since 1997. The research portion
of our collaboration with Kissei was completed in 2000. Kissei holds rights to our p38 MAP kinase inhibitor, VX-702, in Japan and certain
other Asian countries, and we hold all development and commercial rights elsewhere.
We initiated a Phase I clinical study of VX-702 in June 2002. The double-blind, placebo-controlled, randomized clinical trial was
designed to test the safety, tolerability, pharmacokinetics and pharmacodynamics of VX-702 in single and multiple doses in healthy volunteers.
Results from this Phase I study supported further clinical development of VX-702.
We began Phase II development of VX-702 in 2003. We intend to explore the potential of VX-702 in a variety of disease settings in which
inflammation plays an important role. We have decided to advance the clinical development of VX-702 initially in acute disease indications.
The initial focus of the Phase II program is aimed at the use of VX-702 as an ACS therapy. We expect our pilot Phase II clinical trial of VX-
702 in ACS to be completed in 2004. A third compound discovered by Vertex, VX-850, is in preclinical development and serves as a backup to
VX-702.
Other Clinical Development Candidates
VX-680
VX-680 is the first kinase inhibitor to be advanced by Vertex with potential for the treatment of cancer. VX-680 is a potent inhibitor of
Aurora kinases and of Flt-3 kinase. Aurora kinases are enzymes thought to play multiple roles in the development and progression of cancer,
acting as regulators of cell proliferation, transforming normal cells into cancer cells and downregulating p53, one of the body's natural tumor
suppressors. Flt-3 is a receptor tyrosine kinase that is known to be inappropriately activated in several different types of leukemia. Inhibitors of
Aurora kinases and Flt-3 have the potential to be useful as highly targeted treatments for a range of oncology indications.
Vertex researchers published the three-dimensional atomic structure of Aurora-A kinase in 2002, and published the structure of Flt-3
kinase in January 2004. We also presented preclinical data in a number of research and medical venues in 2003 that indicate the potential of
VX-680 to treat several different cancer types for which there are currently few or no available treatments. In a paper published in February
2004, researchers at Vertex reported demonstrating for the first time that a selective small molecule inhibitor of the Aurora kinase (VX-680)
profoundly inhibits tumor growth and induces tumor regression in in vivo cancer models.
Vertex has filed an IND for the clinical study of VX-680 in the United States, and we expect that Phase I clinical studies of VX-680 will
be initiated in 2004. We discovered VX-680 in collaboration with Novartis. Under our amended agreement with Novartis, we may elect either
to continue development of VX-680 under the terms of the original agreement with Novartis, using loan proceeds from the Novartis loan
facility, or to develop VX-680 independently or with a third party. If we choose to
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continue development under the original agreement, Novartis will have an option on worldwide commercial rights to VX-680.
VX-944
VX-944 is an oral IMPDH inhibitor with potential for the treatment of cancer. Results from certain preclinical studies of VX-944 have
suggested that VX-944 has potent anti-tumor activity. Phase I clinical studies of VX-944 in healthy volunteers demonstrated that VX-944 is
orally bioavailable and well-tolerated. Vertex is now evaluating the possibility of entering into a collaborative relationship for more advanced
clinical development of VX-944.
RESEARCH and EARLY DEVELOPMENT PROGRAMS
Vertex Drug Design Platform and Drug Discovery Strategy
We believe that our integrated drug design approach has significantly enhanced our ability to discover and develop small molecule drug
candidates directed at biologically complex targets, including novel targets identified in genomic research. We believe that our approach has
been validated through our collaborations and success in moving drug candidates into clinical trials.
Integrated Drug Design Approach. Our drug design platform integrates advanced biology, biophysics, chemistry, automation and
information technologies in a coordinated and simultaneous fashion throughout the discovery process. The goal of our integrated,
interdisciplinary approach is to increase the speed and predictability of drug discovery and development.
Focused Drug Discovery in Target-Rich Gene Families. Vertex has pioneered a novel approach to drug discovery in target-rich gene
families. Our approach organizes and prioritizes targets within gene families, which are groups of genes with similar sequences that code for
structurally similar proteins. This approach essentially clusters targets according to how they interact with chemical inhibitors, and allows us to
use high-throughput screening technologies, informatics and medicinal chemistry to rapidly identify drug-like classes of compounds in parallel
for multiple targets. In concert with this approach, we use a variety of biological and chemical methodologies that interrogate the function of
newly discovered proteins in order to focus our drug discovery and development efforts on the most promising targets within the most
promising gene families. We believe that our systematic application of this drug discovery approach is increasing the speed and efficiency of
drug design efforts directed at novel biological targets, and is securing valuable intellectual property for us in gene families of interest.
Technology Platform
Our integrated technology platform employs a variety of technologies and uses information from a number of different scientific
disciplines. The most significant of them are as follows.
Functional Genomics. We use functional genomics techniques, such as gene knock-out mice, to help guide target selection and
test the potential of chemical compounds in disease models. Our patented GenomeScreen™ technology allows us to identify and
validate targets by scanning the genome of living human cells and identifying those genes activated or repressed in various disease
states. We have used GenomeScreen to assist us in mapping gene activation and cell signaling pathways and in characterizing poorly
understood cellular processes. We also use antisense, siRNA, dominant negative cell lines, and other biological approaches to better
characterize the role played by specific targets in cellular processes.
Biophysics. We generate atomic structural information on molecular targets using X-ray crystallography and nuclear magnetic
resonance (NMR) spectroscopy to guide design and optimization of lead classes of drugs.
Computer-based Modeling. We apply advanced proprietary computational modeling tools to guide the evaluation and selection
of compounds for synthesis. During our virtual ("in silico")
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screening process, candidate compounds are selected for synthesis and screening. We use proprietary algorithms to sort and filter
compounds for specific properties in order to seek compounds that are more likely to become development candidates.
Pharmacology. We employ a number of approaches to obtain predictive information on the bioavailability and pharmacokinetic
profile of potential drug candidates. These approaches include in vitro metabolism and toxicological studies and in vivo assessment of
leads in predictive animal models.
Assay Development. We use assay development and screening techniques, built upon a number of gene reporter technologies
such as green fluorescent protein (GFP) and beta lactamase, to rapidly generate large numbers of lead compounds and drug candidates
across certain gene families. We are also utilizing our assay development capabilities to develop novel proprietary assays to establish
ADME/toxicology profiles for compounds in our screening library.
High-Throughput Screening. We conduct assays for most enzyme and receptor targets using the ultra high-throughput screening
(UHTSS) system, which integrates compound management, plate replication with miniaturized screening, hit (potential lead)
identification and follow-up. The ultra high-throughput capability is achieved through the use of a 3,456 well assay microplate.
Instrumentation. Some of our ion channel research is conducted using E-VIPR, our proprietary screening technology which uses
fluorescent probes and waves of electrical stimulation to study ion channels. E-VIPR provides an automated, high-throughput platform
which enables us to collect high quality data at speeds up to a thousand times faster than patch clamping. We can use E-VIPR to study
both fast and slow channel activity and state dependence, a phenomenon in which compounds bind preferentially to certain
conformations of channels. With respect to voltage-gated channels, electrical stimulation eliminates the need for the addition of liquids
and pharmacological modifiers which often distort the native conformation and activity of ion channels.
Current Research Programs
Our past drug discovery efforts have produced a variety of drug candidates for development by Vertex or its partners. We believe our
ongoing research programs, particularly those directed at the kinase and ion channel gene families, continue to create potential value for Vertex
by generating new product candidates in areas of significant unmet medical need.
Kinase Program
We have a broad-based drug discovery effort targeting the human protein kinase family, of which there are approximately 500 members.
Protein kinases are enzymes that play a key role in transmitting signals between and within cells. Kinases exert their effect by phosphorylating
other proteins, which then become activated and perform a specific function. Kinase activity has been implicated in most major diseases,
including cancer and autoimmune, inflammatory, cardiovascular, metabolic, and neurological diseases. As a result, kinases can be ideal targets
for therapeutic intervention. The clinical success of the oncology drugs Gleevec (Novartis) and Iressa (AstraZeneca) offer examples of how
small molecule kinase inhibitors can be tailored to address specific diseases.
In May 2000 we entered into an agreement with Novartis Pharma AG to collaborate on the discovery, development and commercialization
of small molecule drugs directed at protein kinases. We expect the research effort under this agreement, which was amended in early 2004, to
continue through April 2006. The support provided by Novartis is enabling us to conduct extensive parallel drug design efforts within the
kinase target family.
In 2003, we filed an Investigational New Drug Application (IND) with the FDA covering VX-680, a potent small molecule inhibitor of
Aurora kinases and Flt-3 kinase. Aurora kinases are three closely-related proteins required in rapidly dividing cells. Inhibition of Aurora kinase
activity with a small
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molecule may provide a means of slowing or reversing the uncontrolled cell growth observed in cancer. In addition it is thought that more than
30% of patients with acute myelogenous leukemia (AML) have activating mutations of Flt-3. Thus VX-680 could provide therapeutic benefits
for patients with solid tumors and hematological malignancies including AML. Under our restructured agreement with Novartis, we may either
continue development of VX-680 under the terms of our original agreement with Novartis, or elect to develop and commercialize VX-680
independent of Novartis.
Vertex has drug discovery efforts underway targeting several other kinases, including those that play a role in the development and
progression of cancer, inflammation and autoimmune disease.
The infrastructure created over the first three years of the Novartis/Vertex collaboration has enabled a parallel approach to drug discovery
in the kinase gene family. Our researchers have determined the atomic structure of more than 20 kinase drug targets and more than 300
kinase/inhibitor co-complexes, providing information to help accelerate drug design and further our understanding of the role kinases play in
disease. Most recently, Vertex researchers published structural interpretations of the process by which mutations in kinases like Flt-3 can lead
to uncontrolled cellular proliferation and cancer. Using proprietary in silico and in vitro methodologies, Vertex has designed a diverse library of
proprietary kinase inhibitors, leading to the filing of more than 90 patents covering many hundreds of distinct chemical scaffolds. Over the next
several years, we expect to advance a number of kinase inhibitors as development candidates targeting multiple therapeutic areas.
Ion Channel Program
We are conducting a broad-based drug discovery program targeting the ion channel family. Ion channels are a gene family of more than
500 proteins that act as cellular gatekeepers, controlling the flow of ions across cell membranes. The ion channel target family contains
numerous druggable targets representing potential therapeutic intervention points for indications including cystic fibrosis, neuropathic pain and
inflammatory, cardio-vascular, and metabolic diseases. Existing therapies such as amlodipine and nifedipine, which are calcium channel
blockers for the treatment of hypertension, and lamotrigine and carbamezepine, which are sodium channel inhibitors for the treatment of
epilepsy, provide a strong rationale for developing drugs targeting ion channels.
Our ion channel research extends across several ion channel subfamilies, including sodium channels and calcium channels, and is
principally focused on the design and development of small molecule drugs for the treatment of neuropathic pain and cystic fibrosis. Specific
sodium channels have been shown to increase in expression and function in peripheral nerve cells at the site of injury, making them novel and
attractive targets for the treatment of neuropathic pain. Ion channel modulators also could be important therapeutic agents for cystic fibrosis, a
chronic, progressive genetic disorder. We have an ongoing research collaboration with the Cystic Fibrosis Foundation targeting the cystic
fibrosis regulator protein (CFTR). The symptoms of cystic fibrosis, particularly the development of thick mucous that causes lung tissue
inflammation and damage, are caused by a defect in CFTR. A CFTR channel modulator potentially may slow or halt the progression of cystic
fibrosis.
We are utilizing our expertise in assay development and screening to advance discovery efforts within the ion channel family. Our
capabilities are augmented by the use of E-VIPR, our proprietary ion channel screening technology. E-VIPR uses fluorescent probes and waves
of electrical stimulation to study ion channels in an automated high-throughput platform enabling the collection of high quality data at speeds
up to a thousand times faster than patch-clamping.
Caspase Program
The human caspase family is a subfamily of proteases which presently include 11 structurally related enzymes that play specific roles in
inflammation and apoptosis (programmed cell death). We are conducting research focused on the design of small molecules which can
potentially exert a protective effect on cells in specific tissues by inhibiting caspase-mediated apoptotic and inflammatory processes.
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Through gene knockout studies, our scientists have gained important insight into the biological role of different caspases in the activation
of apoptosis in specific cells and tissues. Vertex research teams have solved the three-dimensional atomic structures of four caspases, including
one caspase from each of the three caspase subfamilies, and more than 50 enzyme/inhibitor complexes.
Potential indications for caspase inhibitor compounds include tissue damage related to acute conditions such as stroke, myocardial
ischemia and sepsis, and neurodegenerative disorders such as Alzheimer's disease and Parkinson's disease. We are collaborating in a portion of
our caspase program with Serono S.A. under an agreement signed in 2000, covering the development and commercialization of certain caspase
inhibitors in the U.S. and the European Union.
Bacterial Gyrase
We are engaged in the discovery of novel antibiotics that target DNA gyrase B, an essential enzyme found in many bacteria. DNA gyrase
is utilized during the bacterial replication process. DNA gyrase inhibitors already on the market have proven to be potent, broad-spectrum
antibiotics and are used to treat a variety of common gram-positive and gram-negative infections in various treatment settings. Existing gyrase
inhibitors work by interacting with the gyrase A subunit. In contrast, we are targeting the gyrase B subunit, and specifically the ATP-binding
site that is common to multiple species of bacteria. We have discovered a class of molecules that also shows activity against the highly similar
par E subunit of topoisomerase IV, another essential bacterial enzyme. These dual gyrB/parE inhibitors not only appear to be potent in
preclinical testing, but may also be less susceptible to the development of drug resistance, a major and growing problem with marketed
antibiotics. We are currently optimizing this dual inhibitor class and may select a clinical candidate in 2004.
Additional Discovery Efforts
We plan to utilize our proprietary gene family-based platform and experience in structure-based drug design to pursue targets in other
medically important gene families. We have exploratory efforts underway targeting g-protein coupled receptors (GPCRs) and nuclear
receptors, among other things, as well as a program directed toward second generation HCV inhibitors.
Corporate Collaborations
We have entered into corporate collaborations with pharmaceutical companies that provide financial and other resources, including
capabilities in research, development, manufacturing, and sales and marketing, to support our research and development programs. At present,
we have the following major corporate collaborations:
Novartis Pharma AG
In May 2000, we entered into an agreement with Novartis Pharma AG to collaborate on the discovery, development and
commercialization of small molecule drugs directed at protein kinases. We amended this collaboration agreement in February 2004. Under the
original agreement, we were responsible for drug discovery and clinical proof-of-concept testing of all drug candidates. Novartis agreed,
among other things, to pay us up to $200,000,000 in product research funding through April 2006, and to loan us up to $200,000,000 on a non-
interest-bearing basis to support our clinical studies. We continue to be responsible for drug discovery under the amended agreement, and
Novartis will continue to provide research funding through the end of the six-year research term. However, under the agreement as modified,
Novartis will be responsible for all clinical and nonclinical development of drug candidates which it accepts for development, and consequently
the loan facility has been eliminated. We may either continue development of VX-680 under the terms of the original agreement, using loan
proceeds we have received under the Novartis loan facility, or elect to develop and commercialize VX-680 independent of Novartis. If we elect
to develop and commercialize VX-680 independent of Novartis, loan amounts with respect to that drug candidate which are unspent and
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uncommitted at the time of our election will be repayable immediately. At December 31, 2003, approximately $14 million in development
loans previously advanced to us on account of VX-680 were unspent and uncommitted. The agreement also provides up to $35 million in
license fees and milestones for each preclinical drug candidate nominated by us and accepted by Novartis. Novartis will have exclusive
worldwide development, manufacturing and marketing rights to drug candidates that it accepts from us for development. We will receive
royalties on any products that are marketed as part of the collaboration.
GlaxoSmithKline
In December 1993, we entered into a collaboration with GlaxoSmithKline covering the research, development and commercialization of
HIV protease inhibitors, including Agenerase (amprenavir), Lexiva (fosamprenavir calcium) and VX-385. Under the original agreement,
GlaxoSmithKline had exclusive rights to develop and commercialize our HIV protease inhibitors in all parts of the world except the Far East.
In 2003, we amended the agreement to add the Far East to GlaxoSmithKline's territory for development and commercialization of Lexiva.
GlaxoSmithKline pays us a royalty on all sales of the HIV protease inhibitors covered by the agreement. We have retained certain bulk drug
manufacturing rights and certain co-promotion rights in the territories licensed to GlaxoSmithKline. Under the collaborative agreement,
GlaxoSmithKline agreed to pay us up to $42 million, comprised of a $15 million up-front license payment made in 1993, $14 million of
product research funding over five years and $13 million of development and commercialization milestone payments for an initial drug
candidate. We have received the entire $42 million. We began receiving royalties on sales of Agenerase in 1999 and on Lexiva in 2003.
GlaxoSmithKline is also obligated to pay us additional development and commercialization milestone payments for subsequent drug
candidates, including Lexiva and VX-385. In addition, GlaxoSmithKline is required to bear the costs of development in its territory under the
collaboration.
GlaxoSmithKline has the right to terminate its agreement with us without cause upon 12 months' notice. Termination of the agreement by
GlaxoSmithKline will relieve it of its obligation to make further commercialization and development milestone and royalty payments, and will
end any license granted by us to GlaxoSmithKline under the agreement.
In June 1996, we and GlaxoSmithKline obtained a worldwide, non-exclusive license under certain G.D. Searle & Co. (now owned by
Pharmacia/Pfizer) patents in the area of HIV protease inhibition. We pay Searle a royalty based on sales of Agenerase and Lexiva.
Aventis S.A.
In September 1999, we entered into an expanded agreement with Aventis S.A., formerly Hoechst Marion Roussel Deutschland GmbH
(HMR), covering the development of pralnacasan. Aventis has an exclusive worldwide license to develop, manufacture and market
pralnacasan, as well as an exclusive option for certain other compounds discovered as part of the research collaboration between HMR and us
that ended in 1997. Aventis will fund the development of pralnacasan. We may co-promote the product in the United States and Europe and
will receive royalties on global sales, if any. Under the agreement, Aventis has paid us a $20 million up-front payment for prior research costs,
and has agreed to pay us up to $62 million in milestone payments for successful development by Aventis of pralnacasan for rheumatoid
arthritis, the first targeted indication. Milestone payments are also due for each additional indication. The agreement also provides that Aventis
will partially fund a Vertex co-promotion effort in the U.S. under certain conditions. Aventis has the right to terminate this agreement without
cause upon six months' written notice. Termination by Aventis will end any license we have granted Aventis under the agreement.
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Serono S.A.
In December 2000, we entered into a collaboration with Serono S.A. to discover, develop, and market certain types of caspase inhibitors.
Under the terms of the agreement, we could receive up to $95 million of pre-commercial payments, based on the successful development and
commercialization of more than one drug candidate, to support and expand our drug discovery activities in the caspase protein family. That
amount would include milestone payments as drug candidates move through development. Of that total, we have received $5 million in up-
front payments for prior research, and could also receive up to $20 million in research funding, some of which has been paid, over the five year
agreement term. The two companies will share development costs. We have the option to establish a joint venture with Serono for the
commercialization of products in North America, where we will share marketing rights and profits from the sale of drug products, if any.
Serono will have exclusive rights to market caspase inhibitors in other territories, excluding Japan and certain other countries in the Far East,
and will pay us for supplies of drug substance. Serono has the right to terminate the agreement without cause effective at the end of 2004 upon
written notice delivered on or before the end of June 2004.
Other Collaborations
Schering AG (Germany). In August 1998, we entered into a collaboration with Schering AG covering the research, development and
commercialization of novel, orally active neurophilin ligand compounds to promote nerve regeneration for the treatment of a number of
neurological diseases. Vertex and Schering AG have an equal role in management of neurophilin ligand research and product development.
Research funding under this agreement has concluded. We have amended the original agreement to extend Schering's option to designate a
compound or compounds for development under the agreement until September 2004. In North America, we will have manufacturing rights to,
and we will share equally with Schering AG in the marketing expenses and profits from, any compounds which may be selected for
development and commercialization. Schering AG will have the right to manufacture and market any commercialized compounds in Europe,
the Middle East and Africa, and will pay us a royalty on any product sales. Schering AG has the right to terminate the agreement without cause
upon six months' written notice.
Kissei Pharmaceutical Co., Ltd. Kissei launched our HIV protease inhibitor amprenavir (Agenerase) in Japan under the name Prozei in
1999 and pays us a royalty on all sales of Prozei. In September 1997, we entered into a collaboration with Kissei to identify and develop
compounds that target p38 MAP kinase. We are collaborating with Kissei in the development and commercialization of VX-702, a novel,
orally active p38 MAP kinase inhibitor for the treatment of ACS and inflammatory diseases. Kissei has exclusive rights to develop and
commercialize VX-702 in Japan and certain Southeast Asian countries, and semi-exclusive rights in China, Taiwan and South Korea. We retain
exclusive marketing rights in the United States, Canada, Europe, and the rest of the world. In addition, we will have the right to supply bulk
drug material to Kissei for sale in its territory, and will receive royalties and drug supply payments on any product sales. The research program
ended on June 30, 2000, and we have received the full amount of research funding specified under the agreement. Kissei has the right to
terminate the agreement without cause upon six months' notice.
Eli Lilly & Company. In June 1997, we entered into a collaboration with Eli Lilly covering the development of novel small molecule
compounds to treat hepatitis C infection, including VX-950. In December 2001, together with Eli Lilly, we selected VX-950 for development.
In December 2002, we restructured our agreement with Eli Lilly, ending the research collaboration approximately six months early and
providing us with worldwide rights to compounds identified during the collaboration. We will pay Eli Lilly a royalty on any future sales of
drug products developed from VX-950 and other certain other HCV protease inhibitor compounds.
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Intellectual Property
We actively seek, when appropriate, protection for our products and proprietary information by means of United States and foreign
patents, trademarks and contractual arrangements. In addition, we rely upon trade secrets and contractual arrangements to protect certain of our
proprietary information and products. In addition to patents and pending patent applications that relate to potential drug targets, compounds we
are developing to modulate those targets, and methods of making or using those compounds, we have several patents and pending patent
applications directed to proprietary elements of our drug discovery platform. These include patent applications claiming our E-VIPR platform
which enables optical membrane potential assays for detecting activity of rapidly gating ion channels, and methods of using our E-VIPR
platform for high-throughput screening of voltage-gated ion channels.
Much of our technology and many of our processes depend upon the knowledge, experience and skills of key scientific and technical
personnel. To protect our rights to our proprietary know-how and technology, we require all employees, consultants and advisors to enter into
confidentiality agreements that prohibit the disclosure of Vertex confidential information to anyone outside Vertex. These agreements typically
require disclosure and assignment to Vertex of ideas, developments, discoveries and inventions made by employees, consultants and advisors.
Patents and Pending Applications
We have issued patents and pending applications in the United States, and in foreign countries we deem appropriate, covering intellectual
property developed as part of each of our most advanced research, development and commercial programs. These include:
•
•
•
•
issued United States patents that cover classes of chemical compounds, pharmaceutical formulations and/or uses of the same for
treating HIV infection and AIDS. The patents include specific coverage for amprenavir and its pharmaceutical formulations,
methods of manufacture and methods to treat HIV infection or AIDS-related central nervous system disorders. We have a non-
exclusive, worldwide license under certain Searle patent applications claiming HIV protease inhibitors. We have an issued
patent in the United States and patents and pending applications in other countries claiming fosamprenavir and related
compounds, as well as VX-385.
issued United States patents that cover classes of chemical compounds, pharmaceutical compositions containing such
compounds, and methods of using those compounds to treat or prevent IMPDH-mediated diseases, including HCV. These
patents claim merimepodib, its combination with certain other therapeutic agents and the use thereof for treating HCV.
issued United States patents covering pralnacasan, the active metabolite of pralnacasan, and several different classes of
compounds useful as inhibitors of ICE, as well as pharmaceutical compositions containing those compounds and methods of
using those compounds to treat ICE-related diseases. These patents and applications include a series of patents and applications
purchased from Sanofi S.A., in July 1997, including a United States patent that covers DNA sequences encoding ICE. We also
have applications pending in the United States and other countries claiming VX-765 and related compounds.
an issued United States patent that covers a class of chemical compounds that includes VX-702 and VX-850, as well as
compositions comprising those compounds and the use of those compounds to treat p38 MAP kinase related disorders.
•
issued United States patents and pending applications covering assays useful to evaluate potential inhibitors of hepatitis C
protease and covering the X-ray crystal structures of hepatitis C protease and hepatitis C helicase, including the use of those
structures to develop hepatitis C protease inhibitors and hepatitis C helicase inhibitors, respectively. Other United States and
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worldwide pending applications cover VX-950, additional hepatitis C protease inhibitors and hepatitis C helicase inhibitors.
•
•
issued United States patents and filed applications worldwide claiming inhibitors of multiple kinase proteins.
pending applications and an issued United States patent for methods of designing novel chemical inhibitors of protein kinases.
The method involves using mutagenesis techniques to create hybrid kinases that act as surrogate targets for drug design and
compound screening.
•
pending applications claiming modulators of sodium ion channels, and uses thereof.
Manufacturing
We rely on third party manufacturers and collaborative partners to produce our compounds for clinical purposes and may do so for
commercial production of any drug candidates that are approved for marketing. Commercial manufacturing of Agenerase and Lexiva is being
done by GlaxoSmithKline. We retain the option to manufacture a portion of GlaxoSmithKline's requirements for bulk drug substance for
Agenerase and Lexiva. If we were to exercise that option, we believe we would need to rely upon one or more contract manufacturers to
manufacture the bulk drug substance on our behalf.
We have established a quality assurance program intended to ensure that third party manufacturers under contract produce our compounds
in accordance with the FDA's current Good Manufacturing Practices, or cGMP, and other applicable regulations.
We believe that all of our clinical drug candidates can be produced using established manufacturing methods, primarily through standard
techniques of pharmaceutical synthesis. We believe that we will be able to continue to negotiate third party manufacturing arrangements on
commercially reasonable terms and that it will not be necessary for us to develop an internal manufacturing capability in order to successfully
commercialize our products. Our objective is to maintain flexibility in deciding whether to develop internal manufacturing capabilities for
certain of our potential products. However, if we are unable to obtain contract manufacturing, or obtain such manufacturing on commercially
reasonable terms, we may not be able to commercialize our products as planned. We have limited experience in manufacturing pharmaceutical
or other products or in conducting manufacturing testing programs required to obtain FDA and other regulatory approvals, and there can be no
assurance that we will further develop those capabilities successfully.
Since most of our potential products are at an early stage of development, we will need to improve or modify our existing manufacturing
processes and capabilities to produce commercial quantities of any drug product economically. We cannot quantify the time or expense that
may ultimately be required to improve or modify our existing process technologies, but it is possible that such time or expense could be
substantial.
The production of our drug candidates is based in part on technology that we believe to be proprietary. We may license this technology to
contract manufacturers to enable them to manufacture drug candidates for us. In addition, a contract manufacturer may develop process
technology related to the manufacture of our drug candidates that the manufacturer owns either independently or jointly with us. This would
increase our reliance on that manufacturer or require us to obtain a license from that manufacturer in order to have our products manufactured.
Competition
We are engaged in biopharmaceutical fields characterized by extensive research efforts, rapid technological progress and intense
competition. There are many public and private companies, including pharmaceutical companies, chemical companies and biotechnology
companies, engaged in developing products for the same human therapeutic applications as those we are targeting. In order for us to compete
successfully, we must demonstrate improved safety, efficacy, ease of manufacturing
17
and market acceptance of our products over those of our competitors who have received regulatory approval and currently are marketing their
drugs. In the field of HIV protease inhibition, Abbott Laboratories, Inc., Bristol Myers Squibb, Gilead, Hoffmann-La Roche, Merck & Co., Inc.
and Pfizer Inc., among others, have other HIV protease inhibitor drugs in development or on the market. Similarly, a variety of companies are
attempting to develop new treatments for hepatitis C virus infection. Many of our competitors have substantially greater financial, technical and
human resources than ours and are more experienced in the development of new drugs.
Government Regulation
Our development, manufacture and potential sale of therapeutics are subject to extensive regulation by United States and foreign
governmental authorities. In particular, pharmaceutical products are subject to rigorous preclinical and clinical testing and to other approval
requirements by the FDA in the United States under the Food, Drug and Cosmetic Act, and by comparable agencies in most foreign countries.
Approval Process.
As an initial step in the FDA regulatory approval process, preclinical studies typically are conducted in animals to identify potential safety
problems. For certain diseases, animal models exist that are believed to be predictive of human efficacy. For such diseases, a drug candidate is
tested in an animal model. The results of the studies are submitted to the FDA as a part of the Investigational New Drug application (IND)
which is filed to comply with FDA regulations prior to commencement of human clinical testing in the U.S. For diseases for which no
appropriately predictive animal model exists, no such results can be filed. For several of our drug candidates, no appropriately predictive model
exists. As a result, no in vivo evidence of efficacy will be available until those compounds progress to human clinical trials. A variety of
nonclinical trials in a number of animal species, and other nonclinical studies, are ordinarily conducted while human clinical trials are
underway, to provide supplemental toxicology and other information and to help provide a foundation for the design of broader and more
lengthy human clinical trials as human clinical studies progress through the approval process.
Clinical trials typically are conducted in three sequential phases, although the phases may overlap. In Phase I, which frequently begins
with the initial introduction of the drug into healthy human subjects prior to introduction into patients, the drug candidate is tested for safety,
dosage tolerance, absorption, bioavailability, biodistribution, metabolism, excretion, clinical pharmacology and, if possible, for early
information on effectiveness. Phase II typically involves studies in a small sample of the intended patient population to assess the efficacy and
duration of the drug for a specific indication, to determine dose tolerance and the optimal dose range and to gather additional information
relating to safety and potential adverse effects. Phase III trials are undertaken to further evaluate clinical safety and efficacy in an expanded
patient population at geographically dispersed study sites, to determine the overall risk-benefit ratio of the drug and to provide an adequate
basis for physician labeling. Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study,
the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the
IND. Further, each clinical study must be evaluated by an independent Institutional Review Board at the institution at which the study will be
conducted. The Institutional Review Board will consider, among other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Data from nonclinical testing and clinical trials are submitted to the FDA in a New Drug Application (NDA) for marketing approval. The
process of completing nonclinical and 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
18
trials. The FDA may deny an NDA if applicable regulatory criteria are not satisfied or may require additional testing or information. Among
the conditions for marketing approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures
conform to the FDA's cGMP regulations, which must be followed at all times. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance.
Manufacturing establishments, both foreign and domestic, also are subject to inspections by or under the authority of the FDA and by or under
the authority of other federal, state or local agencies.
Timing to Approval.
We estimate that it takes 10 to 15 years (the industry average is 12 years) to discover, develop and bring to market a new pharmaceutical
product in the U.S. as outlined below:
Phase:
Discovery
Pre-Clinical
Phase I
Phase II
Objective:
Estimated
Duration:
Lead identification and target validation
Initial toxicology for preliminary identification of risks for humans; gather early
pharmacokinetic data
2 to 4 years
1 to 2 years
Evaluate safety in humans; study how the drug works, metabolizes and interacts
1 to 2 years
with other drugs
Establish effectiveness of the drug and its optimal dosage; continue safety
2 to 4 years
Phase III
FDA approval
Confirm efficacy, dosage regime and safety profile of the drug
Approval by the FDA to sell and market the drug under approved labeling
2 to 4 years
6 months to 2 years
evaluation
Animal and other nonclinical studies are typically conducted during each phase of human clinical studies.
Post-approval Studies.
Even after initial FDA approval has been obtained, further studies, including post-approval 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-approval reporting to monitor the side effects of the drug. Results of post-approval
programs may limit or expand further marketing of the drug product. 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.
Other Regulations.
Under the Drug Price Competition and Patent Term Restoration Act of 1984, a sponsor may be granted marketing exclusivity for a period
of time following FDA approval of certain drug applications, if FDA approval is received before the expiration of the patent's original term.
This marketing exclusivity would prevent a third party from obtaining FDA approval for a similar or identical drug through an Abbreviated
New Drug Application, which is the application form typically used by manufacturers seeking approval of a generic drug. The statute also
allows a patent owner to extend the term of the patent for a period equal to one-half the period of time elapsed between the filing of an IND and
the filing of the corresponding NDA plus the period of time between the filing of the NDA and FDA approval. We intend to seek the benefits
of this statute, but there can be no assurance that we will be able to obtain any such benefits.
Whether or not FDA approval has been obtained, approval of a drug product by regulatory authorities in foreign countries must be
obtained prior to the commencement of commercial sales of
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the product in such countries. Historically, the requirements governing the conduct of clinical trials and product approvals, and the time
required for approval, have varied widely from country to country.
In addition to the statutes and regulations described above, we are also subject to regulation under the Occupational Safety and Health Act,
the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state and local regulations.
Employees
As of December 31, 2003, we had more than 720 employees (approximately 714 full time, 10 part time), including approximately 486 in
research and development and 238 in general and administrative functions. Approximately 80 of these employees were located at our U.K.
research and development facility and 157 were located at our facility in San Diego. Our scientific staff members (278 of whom hold Ph.D.
and/or M.D. degrees) have diversified experience and expertise in molecular and cell biology, biochemistry, animal pharmacology, synthetic
organic chemistry, protein X-ray crystallography, protein nuclear magnetic resonance spectroscopy, computational chemistry, biophysical
chemistry, medicinal chemistry, clinical pharmacology and clinical medicine. Our employees are not covered by a collective bargaining
agreement, and we consider our relations with our employees to be good.
20
EXECUTIVE OFFICERS AND DIRECTORS
The names, ages and positions held by our executive officers and directors are as follows:
Name
Age
Position
Joshua S. Boger, Ph.D.
Vicki L. Sato, Ph.D.
John J. Alam, M.D.
52 Chairman and Chief Executive Officer
55 President
42 Senior Vice President of Drug Evaluation and
Approval
Lynne H. Brum
Iain P. M. Buchanan
Kenneth S. Boger
N. Anthony Coles, M.D.
Peter Mueller, Ph.D
Ian F. Smith, CPA
40 Vice President, Corporate Communications and
Financial Planning
50 Vice President, European Operations; Managing
Director, Vertex Pharmaceuticals (Europe)
Limited
57 Senior Vice President and General Counsel
43 Senior Vice President, Commercial Operations
47 Chief Scientific Officer and Senior Vice
President, Drug Discovery and Innovation
38 Senior Vice President and Chief Financial
Eric K. Brandt
Roger W. Brimblecombe, Ph.D., D.Sc.
Stuart J. Collinson, Ph.D.
Bruce I. Sachs
Charles A. Sanders, M.D.
Elaine S. Ullian
Officer
41 Director
74 Director
44 Director
44 Director
72 Director
56 Director
All executive officers are elected by the Board of Directors to serve in their respective capacities until their successors are elected and
qualified or until their earlier resignation or removal.
Dr. Joshua Boger is a founder of Vertex. He has been Chief Executive Officer since 1992 and Chairman of the Board since 1997. He was
our President from our inception in 1989 until December 2000, and Chief Scientific Officer from 1989 until May 1992. Dr. Boger has been a
director since Vertex's inception. Prior to founding Vertex in 1989, Dr. Boger held the position of Senior Director of Basic Chemistry at Merck
Sharp & Dohme Research Laboratories in Rahway, New Jersey, where he headed both the Department of Medicinal Chemistry of
Immunology & Inflammation and the Department of Biophysical Chemistry. Dr. Boger holds a B.A. in chemistry and philosophy from
Wesleyan University and M.S. and Ph.D. degrees in chemistry from Harvard University. Dr. Boger is the brother of Mr. Kenneth Boger, the
Company's Senior Vice President and General Counsel.
Dr. Sato joined Vertex in September 1992 as Vice President of Research and Chief Scientific Officer. She was appointed Senior Vice
President of Research and Development in September 1994 and became President of Vertex in December 2000. She served as Chair of the
Scientific Advisory Board from 1992 until December 2000. Previously, she was Vice President, Research and a member of the Scientific Board
of Biogen, Inc. As research head at Biogen, she directed research programs in the fields of inflammation, immunology, AIDS therapy and
cardiovascular therapy from early research into advanced product development. Dr. Sato received an A.B. in biology from Radcliffe College
and A.M. and Ph.D. degrees in biology from Harvard University. Following postdoctoral work in chemistry and immunology at the University
of California at Berkeley and Stanford Medical School, she was appointed to the faculty of Harvard University in the Department of Biology.
Dr. Alam served as Vice President of Clinical Development of the Company from October 1997 until January 2001, when he was
appointed Senior Vice President of Drug Evaluation and Approval. Dr. Alam came to Vertex from Biogen, Inc., where he held a variety of
positions from 1991-1997, including Director of Medical Research and Program Executive for Avonex (beta interferon). Prior to
21
joining Biogen, Dr. Alam was a Research Fellow at the Dana Farber Cancer Institute and had completed an internal medicine residency at The
Brigham and Women's Hospital in Boston. Dr. Alam holds an M.D. from Northwestern University Medical School and a S.B. in Chemical
Engineering from the Massachusetts Institute of Technology.
Ms. Brum joined Vertex as Director, Corporate Communications in 1994 and was Vice President of Corporate Communications of the
Company from 1998 until January 2001, when she was appointed Vice President of Corporate Communications and Market Development. In
December 2001 she was appointed Vice President, Corporate Development and Communications and in November 2003 she was appointed
Vice President, Corporate Communications and Financial Planning. Ms. Brum came to Vertex from Feinstein Kean Healthcare, a
communications and business consulting practice, where she was a vice president. Previously, she held corporate communications and research
positions at Biogen, Inc. Ms. Brum holds an M.B.A. from the Simmons Graduate School of Management, and a B.A. in biological sciences
from Wellesley College.
Mr. Buchanan joined Vertex in April 1994 from Cilag AG, a subsidiary of Johnson & Johnson based in Zug, Switzerland, where he served
as its Regional Licensing Director beginning in 1987. He previously held the position of Marketing Director of Biogen S.A. in Switzerland.
Prior to Biogen, Mr. Buchanan served in Product Management at Merck Sharp & Dohme (UK) Limited. Mr. Buchanan holds a B.Sc. from the
University of St. Andrews, Scotland.
Mr. Kenneth Boger joined Vertex as Senior Vice President and General Counsel in September 2001. He came to Vertex from the law firm
of Kirkpatrick & Lockhart LLP, where he was a partner specializing in business and corporate law and was a member of the firm's
Management Committee. Prior to the merger of Kirkpatrick & Lockhart with the Boston law firm of Warner & Stackpole LLP in 1999,
Mr. Boger was a partner at Warner & Stackpole, where he served on the Executive Committee from 1988 to 1997. Mr. Boger holds an A.B. in
history from Duke University, an M.B.A. from the Graduate School of Business at the University of Chicago, and a J.D. from Boston College
Law School. Mr. Boger is the brother of Dr. Joshua Boger, the Company's Chairman and Chief Executive Officer.
Dr. Coles joined Vertex as Senior Vice President, Commercial Operations-Pharmaceutical Products in March 2002. He came to Vertex
from Bristol-Myers Squibb, where he served in a variety of positions beginning in 1996, including Senior Vice President of Strategy and
Policy, Senior Vice President, Marketing and Medical Affairs for the Neuroscience, Infectious Disease, and Dermatology Division, Vice
President, West Area Sales—Cardiovascular and Metabolic Business Unit for U.S. Primary Care, and Vice President, Cardiovascular Global
Marketing. Prior to joining BMS, Dr. Coles was Vice-President of the Hypertension and Heart Failure Business Group at Merck. Dr. Coles
holds an M.D. from Duke University, a Masters Degree in Public Health from Harvard University and a B.S. degree from Johns Hopkins
University.
Dr. Mueller joined Vertex as Chief Scientific Officer and Senior Vice President, Drug Discovery and Innovation in July 2003. Dr. Mueller
came to Vertex from Boehringer Ingelheim Pharmaceuticals, Inc., where he served as Senior Vice President, Research and Development, and
was responsible for the development of all drug candidates in the company's worldwide portfolio in North America, beginning in 1997. He led
research programs in the areas of immunology, inflammation, cardiovascular disease and gene therapy on a global basis. During his time with
Boehringer Ingelheim, Dr. Mueller oversaw the discovery of numerous development candidates and held several positions in basic research,
medicinal chemistry and management. Dr. Mueller received both an undergraduate degree and a Ph.D. in chemistry at the Albert Einstein
University of Ulm, Germany, where he also holds a Professorship in Theoretic Organic Chemistry. He completed fellowships in quantum
pharmacology at Oxford University and in biophysics at Rochester University.
Mr. Smith joined Vertex as Vice President and Chief Financial Officer in October 2001, and was promoted to Senior Vice President and
Chief Financial Officer in November 2003. Mr. Smith came to Vertex from Ernst & Young, LLP, an accounting firm, where he served as a
partner in their Life
22
Science and Technology Practice since 1999. He had various responsibilities in the accounting, auditing and mergers and acquisitions groups.
Mr. Smith initially joined Ernst & Young's U.K. firm in 1987, and then joined their Boston office in 1995. Mr. Smith holds a B.A. in
Accounting and Finance from Manchester Metropolitan University, U.K., is a member of the American Institute of Certified Public
Accountants and is a Chartered Accountant of England and Wales.
Mr. Brandt joined us as a member of the Board of Directors in May 2003. He has been the Executive Vice President, Finance, Strategy
and Business Development, and Chief Financial Officer of Allergan Inc. since 2003, and was Corporate Vice President and Chief Financial
Officer of Allergan from May 1999 until 2003. From January 2001 to January 2002, he also assumed the duties of President, Global Consumer
Eye Care Business, at Allergan. Prior to that, he held various positions with the Boston Consulting Group, most recently serving as Vice
President and Partner, and a senior member of the BCG Health Care practice. Mr. Brandt holds a B.S. in chemical engineering from the
Massachusetts Institute of Technology, and an M.B.A. from Harvard University.
Dr. Brimblecombe has served as our director since 1993. He served as Chairman of Vanguard Medica Ltd. from 1991 to 2000, as
Chairman of Core Group plc from 1997-1999, and as Chairman of Oxford Asymmetry International plc from 1997 to 2000. From 1979 to
1990, he held various Vice Presidential posts in SmithKline & French Laboratories' research and development organization. He also serves as a
director of several companies located in Europe, Singapore and Australia. He holds Ph.D. and D.Sc. degrees in pharmacology from the
University of Bristol, England.
Dr. Collinson joined us as a member of the Board of Directors in July 2001. He currently serves as a Partner at Forward Ventures. Prior to
our merger with Aurora in 2001, Dr. Collinson served as the President, Chief Executive Officer and Chairman of the Board of Aurora. Before
joining Aurora, Dr. Collinson served as a consultant to Aurora from December 1998 to May 1999 and as Chief Executive Officer of
Andaris, Ltd., a privately held biopharmaceutical company, from June 1998 to November 1998. Prior to Andaris, Dr. Collinson held senior
management positions with Glaxo Wellcome from December 1994 through June 1998, most recently serving as Co-Chairman, Hospital and
Critical Care Therapy Management Team and Director of Hospital and Critical Care. Dr. Collinson received his Ph.D. in physical chemistry
from the University of Oxford, England and his M.B.A. from Harvard University.
Mr. Sachs has served as our director since 1998. He currently serves as a General Partner at Charles River Ventures. From 1998 to 1999,
he served as Executive Vice President and General Manager of Ascend Communications, Inc. From 1997 until 1998, Mr. Sachs served as
President and CEO of Stratus Computer, Inc. From 1995 to 1997, he served as Executive Vice President and General Manager of the Internet
Telecom Business Group at Bay Networks, Inc. From 1993 to 1995, he served as President and Chief Executive Officer at Xylogics, Inc.
Dr. Sanders has served as our director since 1996. He retired in 1994 as Chief Executive Officer and in 1995 as Chairman of Glaxo Inc.
From 1990 to 1995, he served as a member of the board of Glaxo plc. From 1981 to 1989, Dr. Sanders held a number of positions at the Squibb
Corporation, including that of Vice Chairman. Dr. Sanders has served on the boards of Merrill Lynch, Reynolds Metals Co. and Morton
International Inc. He is currently a director of Biopure Corporation, Cephalon Corporation, Genentech, Inc., Trimeris Inc., and Fisher Scientific
International.
Ms. Ullian has served as our director since 1997. Since 1996, she has served as President and Chief Executive Officer of Boston Medical
Center. From 1994 to 1996, she served as President and Chief Executive Officer of Boston University Medical Center Hospital. From 1987 to
1994, Ms. Ullian served as President and Chief Executive Officer of Faulkner Hospital. She also serves as a director of Thermo Electron
Corporation.
23
SCIENTIFIC ADVISORY BOARD
Vertex's Scientific Advisory Board consists of individuals with demonstrated expertise in various fields who advise us concerning long-
term scientific planning, research and development. The Scientific Advisory Board also evaluates our research programs, recommends
personnel to us and advises us on technological matters. The members of the Scientific Advisory Board, which is chaired by Dr. Mark Murcko,
our Chief Technology Officer, are:
Mark Murcko, Ph.D.
Vice President and Chief Technology Officer, Vertex Pharmaceuticals
Incorporated
Vicki L. Sato, Ph.D.
Peter Mueller, Ph.D
President, Vertex Pharmaceuticals Incorporated
Chief Scientific Officer and Senior Vice President, Drug Discovery and
Paul S. Anderson, Ph.D
Steven J. Burakoff, M.D.
Stephen C. Harrison, Ph.D.
Innovation, Vertex Pharmaceuticals Incorporated
Vice President, Drug Discovery, Bristol-Myers Squibb Company
Laura and Isaac Perlmutter Professor, New York University School of
Medicine; Director, New York University Cancer Institute; Director,
Skirball Institute of Biomolecular Medicine, New York University
School of Medicine
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.
Amory Houghton Professor of Chemistry and Biochemistry, Harvard
University
Robert T. Schooley, M.D.
Tim Gill Professor of Medicine and Head of the Division of Infectious
Roger Tsien, Ph.D.
Diseases, University of Colorado Health Sciences Center
Investigator, Howard Hughes Medical Institute; Professor of
Pharmacology and Professor of Chemistry and Biochemistry,
University of California, San Diego
Other than Dr. Murcko, Dr. Mueller and Dr. Sato, none of the members of the Scientific Advisory Board is employed by Vertex, and
members may have other commitments to or consulting or advisory contracts with their employers or other entities that may conflict or
compete with their obligations to us. Accordingly, such persons are expected to devote only a small portion of their time to us. In addition to
our Scientific Advisory Board, we have established consulting relationships with a number of scientific and medical experts who advise us on a
project-specific basis.
24
RISK FACTORS
WE DO NOT KNOW WHETHER AGENERASE SALES WILL CONTINUE AT CURRENT LEVELS OR IF LEXIVA SALES
WILL BE AT A LEVEL AT OR ABOVE SALES LEVELS FOR AGENERASE.
Agenerase's share of the worldwide protease inhibitor market may decrease due to competitive forces and market dynamics, including the
launch of Lexiva, which took place in the fourth quarter of 2003. Similarly, Lexiva may face similar competitive pressures. Other HIV protease
inhibitors and a number of other products, including Gilead's Viread, DuPont's Sustiva and GlaxoSmithKline's Ziagen, are on the market for
the treatment of HIV infection and AIDS. Other drugs are still in development by our competitors, including Bristol Myers Squibb and
Boehringer Ingelheim, which may have better efficacy, fewer side effects, easier administration and/or lower costs than Agenerase or Lexiva.
Moreover, the growth in the worldwide market for HIV protease inhibitors has, to a certain extent, occurred as a result of early and aggressive
treatment of HIV infection with a protease inhibitor-based regimen. Changes in treatment strategy, in which treatment is initiated later in the
course of infection, or in which treatment is more often initiated with a regimen that does not include a protease inhibitor, may result in less use
of HIV protease inhibitors. In addition, the clinical benefit of strategies used by clinicians to boost drug levels of Agenerase (and possibly
Lexiva) by co-administering other antiretroviral agents may not prove to be effective, or may not result in increased revenues. As a result, the
total market for protease inhibitors, in the U.S. and Europe, may decline, decreasing the sales potential of Agenerase and Lexiva. Further,
although we co-promote Agenerase and Lexiva in the U.S. and key markets in Europe (if Lexiva is approved in Europe), GlaxoSmithKline
directs the majority of the marketing and sales efforts and we will have little control over the success of those efforts. GlaxoSmithKline has the
right to terminate its agreement with us without cause upon 12 months' notice.
WE MAY NOT SUCCESSFULLY DEVELOP OUR DRUG PIPELINE.
All of the products that we are pursuing independently and with partners will require extensive additional development, testing and
investment, as well as regulatory approvals, prior to commercialization. Our product research and development efforts may not be successful.
Our drug candidates may not enter preclinical, nonclinical or clinical studies as or when anticipated or receive the required regulatory
approvals. Moreover, our products, if introduced, may not be commercially successful. The results of preclinical and initial clinical trials of
products under development by us are not necessarily predictive of results that will be obtained from large-scale clinical testing. Clinical trials
of products under development may not demonstrate the safety and efficacy of such products or result in a marketable product. Findings in
nonclinical studies conducted concurrently with clinical studies could adversely impact the development of our products. In addition, the
administration, alone or in combination with other drugs, of any product developed by us may produce undesirable side effects in humans.
The failure to demonstrate adequately the safety and efficacy of a therapeutic drug under development could delay or prevent regulatory
approval of the product and could have a material adverse effect on us. In addition, the FDA or regulatory authorities in other jurisdictions may
require additional clinical or nonclinical studies, which could result in increased costs and significant development delays. While all or a
portion of these additional costs may be covered by payments under our collaborative agreements, we bear all of the costs for our development
candidates that are not partnered.
IF DELAYS IN PATIENT ENROLLMENT SLOW OUR DEVELOPMENT PROGRESS WE MAY LOSE OUR COMPETITIVE
ADVANTAGE OR BE UNABLE TO BRING OUR DRUGS TO MARKET.
The rate of completion of clinical trials of our products is dependent upon, among other factors, the rate of patient accrual. Patient accrual
is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the
trial, the level of compliance by the clinical sites to clinical trial protocols, and the availability of clinical trial material.
25
Delays in patient enrollment in clinical trials may result in increased costs, program delays or both, which could have a material adverse effect
on us. While all or a portion of these additional costs may be covered by payments under our collaborative agreements, we bear all of the costs
for our development candidates that are not partnered. If our clinical trials are not completed, we may not be able to submit a new drug
application. If we are able to file a new drug application, such application may not be reviewed and approved in a timely manner, if at all.
IF WE DO NOT OBTAIN REGULATORY APPROVAL FOR OUR PRODUCTS ON A TIMELY BASIS, OR AT ALL, OUR
REVENUES WILL BE NEGATIVELY IMPACTED.
The FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of therapeutic pharmaceutical
products through lengthy and detailed laboratory and clinical testing procedures, sampling activities and other costly and time-consuming
procedures. Satisfaction of these requirements typically can take many years and may vary substantially based upon the type, complexity and
novelty of the pharmaceutical product. Data obtained from preclinical, nonclinical and clinical activities are susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. In addition, delays or rejections may be encountered based on changes
in, or additions to, regulatory policies for drug approval during the period of product development and regulatory review. The effect of
government regulation may be to delay or prevent the commencement of planned clinical trials for our drug candidates in clinical development,
including merimepodib, VX-385, VX-950, VX-765 and VX-702. It may also delay or prevent the commercialization of our products, including
Lexiva (which is not yet approved in the European Union), which are developed and submitted for approval, for a considerable period of time,
impose costly procedures upon our activities and provide competitive advantages to companies more experienced in regulatory affairs that
compete with us. Moreover, even if approval is granted, such approval may entail limitations on the indicated uses for which a product may be
marketed.
IF WE ARE UNABLE TO ATTRACT AND RETAIN COLLABORATIVE PARTNERS FOR RESEARCH SUPPORT AND THE
DEVELOPMENT AND COMMERCIALIZATION OF OUR PRODUCTS, WE MAY NOT BE ABLE TO FUND OUR RESEARCH
AND DEVELOPMENT ACTIVITIES.
Our collaborative partners have agreed to fund portions of our research and development programs and/or to conduct certain research and
development relating to specified products. In exchange, we have given them technology, product and marketing rights relating to those
products. Some of our corporate partners, including Novartis, GlaxoSmithKline and Aventis, have rights to control the planning and execution
of product development and clinical programs. Our collaborative partners may exercise their control rights in ways that may negatively impact
the timing and success of those programs. Our collaborations are subject to termination rights by the collaborators. If any of Aventis, Novartis,
GlaxoSmithKline or Serono were to terminate its relationship with us, or fail to meet its contractual obligations, it could have a material
adverse effect on our ability to undertake research, to fund related and other programs and to develop, manufacture and market any products
that may have resulted from the collaboration. We expect to seek additional collaborative arrangements to provide research support and to
develop and commercialize our products in the future. For example, a significant portion of our overall research effort is conducted under our
collaboration with Novartis in the kinase field. That collaboration will end by its terms in April 2006. If we are unable to enter into
collaborative arrangements which would extend or replace the Novartis collaboration, or to find other means of financing the effort currently
devoted to the Novartis collaboration, our ability to conduct our research, development and commercial activities could be adversely affected to
a material degree. Even if we are able to establish acceptable collaborative arrangements in the future, they may not be successful. Under
certain of our collaborative agreements, our collaborators have agreed to provide funding for only a portion of our research and development
activities and we are committed to investing our own capital to fund the remainder of the agreed upon programs. However, we may not have
adequate financial resources to satisfy those requirements.
26
IF WE LOSE OUR TECHNOLOGICAL ADVANTAGES, WE MAY NOT BE ABLE TO COMPETE IN THE MARKETPLACE.
We believe that our integrated drug discovery capability gives us a technological advantage over our competitors. However, the
pharmaceutical research field is characterized by rapid technological progress and intense competition. As a result, we may not realize the
expected benefits from these technologies. For example, a large pharmaceutical company, with significantly more resources than we have,
could pursue a novel, systematic approach to discover drugs based on gene families using proprietary drug targets, compound libraries,
compound approaches, structural protein analysis and information technologies. Such a company might identify broadly applicable compound
classes faster and more effectively than we do, impeding our ability to develop and market drugs based on our approach. Further, we believe
that interest in the application of structure-based drug design, parallel drug design and related approaches has accelerated as the strategies have
become more widely understood. Businesses, academic institutions, governmental agencies and other public and private research organizations
are conducting research to develop technologies that may compete with those we use. It is possible that our competitors could acquire or
develop technologies that would render our technology obsolete or noncompetitive. For example, a competitor could develop information
technologies that accelerate the atomic-level analysis of potential compounds that bind to the active site of a drug target, and predict the
absorption, toxicity, and relative ease-of-synthesis of candidate compounds. If we were unable to access the same technologies at an acceptable
price, our business could be adversely affected.
IF OUR COMPETITORS BRING SUPERIOR PRODUCTS TO MARKET OR BRING THEIR PRODUCTS TO MARKET
BEFORE WE DO, WE MAY BE UNABLE TO FIND A MARKET FOR OUR PRODUCTS.
Our products in development may not be able to compete effectively with products which are currently on the market or new products that
may be developed by others. There are many other companies developing products for the same indications that we are pursuing in
development. For example, we know of at least 15 drugs in development for HIV, 15 drugs in development for the treatment of hepatitis C
infection, and 25 drugs in development for the treatment of rheumatoid arthritis or psoriasis, by competitors in the pharmaceutical and
biotechnology industries. In order to compete successfully in these areas, we must demonstrate improved safety, efficacy and ease of
manufacturing and gain market acceptance over competing products that have received regulatory approval and are currently marketed. Many
of our competitors, including major pharmaceutical companies such as GlaxoSmithKline, Novartis, Abbott and Merck, have substantially
greater financial, technical and human resources than we do. In addition, many of our competitors have significantly greater experience than we
do in conducting preclinical testing and human clinical trials of new pharmaceutical products, and in obtaining FDA and other regulatory
approvals of products. Accordingly, our competitors may succeed in obtaining regulatory approval for products more rapidly than we do. If we
obtain regulatory approval and launch commercial sales of our products, we will also compete with respect to manufacturing efficiency and
sales and marketing capabilities, areas in which we currently have limited experience.
THE LOSS OF THE SERVICES OF KEY EMPLOYEES OR THE FAILURE TO HIRE QUALIFIED EMPLOYEES WOULD
NEGATIVELY IMPACT OUR BUSINESS AND FUTURE GROWTH.
Because our products are highly technical in nature, we require the services of highly qualified and trained scientists who have the
necessary skills to develop our products. Our future success will depend in large part on the continued services of our key scientific and
management personnel, including Dr. Joshua Boger, our Chief Executive Officer, and Dr. Vicki L. Sato, our President. While we have entered
into employment agreements with Dr. Boger and Dr. Sato, they provide for termination by the employee upon six months' notice.
27
We face intense competition for our scientific personnel from our competitors, our collaborative partners and other companies throughout
our industry. Moreover, the growth of local biotechnology companies and the expansion of major pharmaceutical companies into the
Cambridge, MA area has increased competition for the available pool of skilled employees, especially in technical fields, and the high cost of
living in the Boston and San Diego areas makes it difficult to attract employees from other parts of the country. A failure to retain, as well as
hire, train and effectively integrate into our organization, a sufficient number of qualified scientists and professionals would negatively impact
our business and our ability to grow our business. In addition, the level of funding under certain of our collaborative agreements, in particular
the Novartis collaboration, depends on the number of our scientists performing research under those agreements. If we cannot hire and retain
the required personnel, funding received under the agreements may be reduced.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY SUFFER.
We expect that if our clinical candidates continue to progress in development, we continue to build our commercial organization and our
drug discovery efforts continue to generate drug candidates, we will require significant additional investment in personnel, management
systems and resources. Our ability to commercialize our products, achieve our research and development objectives, and satisfy our
commitments under our collaboration agreements depends on our ability to respond effectively to these demands and expand our internal
organization to accommodate additional anticipated growth. If we are unable to manage our growth effectively, there could be a material
adverse effect on our business.
WE DEPEND ON THIRD PARTY MANUFACTURERS, AND IF WE ARE UNABLE TO OBTAIN CONTRACT
MANUFACTURING ON REASONABLE TERMS, WE MAY NOT BE ABLE TO DEVELOP OR COMMERCIALIZE OUR
PRODUCTS.
Our ability to conduct clinical trials and our ability to commercialize our potential products will depend, in part, on our ability to
manufacture our products on a large scale, either directly or through third parties, at a competitive cost and in accordance with FDA and other
regulatory requirements. We have no experience in manufacturing pharmaceuticals or other products, and we may not be able to develop such
capabilities in the foreseeable future. In addition, some of our current corporate partners have manufacturing rights with respect to our products
under development. We are, therefore, dependent on third party manufacturers and our collaborative partners for the production of our drug
candidates for preclinical research, clinical trial purposes and commercial production. Accordingly, if we are not able to obtain contract
manufacturing from these third parties on commercially reasonable terms, we may not be able to conduct or complete clinical trials or
commercialize our products as planned. Further, commercial formulation and manufacturing processes have yet to be developed for our drug
candidates other than Agenerase and Lexiva. As a result, our collaborators or we may encounter difficulties developing commercial
formulations and manufacturing processes for our drug candidates that could result in delays in clinical trials, regulatory submissions,
regulatory approvals and commercialization of our products.
IF OUR PATENTS DO NOT PROTECT OUR PRODUCTS, OR OUR PRODUCTS INFRINGE THIRD-PARTY PATENTS, WE
COULD BE SUBJECT TO LITIGATION AND SUBSTANTIAL LIABILITIES.
We have numerous patent applications pending in the United States, as well as foreign counterparts in other countries. Our success will
depend, in significant part, on our ability to obtain and maintain United States and foreign patent protection for our products, their uses and our
processes to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. We do not know whether any
patents will issue from any of our patent applications or, even if patents issue or have issued, that the issued claims will provide us with any
significant protection against competitive products or otherwise be valuable commercially. Legal standards relating to the validity of patents
and the proper scope of their claims in the biopharmaceutical field are still evolving, and there is no consistent law or policy regarding the valid
breadth of claims in biopharmaceutical
28
patents or the effect of prior art on them. If we are not able to obtain adequate patent protection, our ability to prevent competitors from
making, using and selling competing products will be limited. Furthermore, our activities may infringe the claims of patents held by third
parties. Defense and prosecution of infringement or other intellectual property claims, as well as participation in other inter-party proceedings,
can be expensive and time-consuming, even in those instances in which the outcome is favorable to us. If the outcome of any such litigation or
proceeding were adverse, we could be subject to significant liabilities to third parties, could be required to obtain licenses from third parties or
could be required to cease sales of affected products, any of which outcomes could have a material adverse effect on our consolidated financial
position.
WE EXPECT TO INCUR FUTURE LOSSES AND WE MAY NEVER BECOME PROFITABLE.
We have incurred significant operating losses each year since our inception and expect to incur a significant operating loss in 2004. We
believe that operating losses will continue beyond 2004, even if we receive significant future payments under our existing and future
collaborative agreements, because we are planning to make significant investments in research and development, and will incur significant
selling, general, and administrative expenses for our potential products. We expect that losses will fluctuate from quarter to quarter and year to
year, and that such fluctuations may be substantial. We cannot predict when the Company will become profitable, if at all.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.
We expect to incur substantial research and development and related supporting expenses as we design and develop existing and future
compounds and undertake clinical trials of potential drugs resulting from such compounds. We also expect to incur substantial administrative
and commercialization expenditures in the future and substantial expenses related to the filing, prosecution, defense and enforcement of patent
and other intellectual property claims. We anticipate that we will finance these substantial cash needs with:
•
•
•
•
•
cash received from our existing collaborative agreements;
cash received from new collaborative agreements;
Agenerase and Lexiva royalty revenue;
existing cash reserves, together with interest earned on those reserves; and
future product sales to the extent that we market products directly.
We expect that funds from these sources will be sufficient to fund our planned activities for at least the next 18 months. If not, it will be
necessary to raise additional funds through public offerings or private placements of equity or debt securities or other methods of financing.
Any equity financings could result in dilution to our then-existing securityholders. Any debt financing, if available at all, may be on terms that,
among other things, restrict our ability to pay dividends and interest (although we do not intend to pay dividends for the foreseeable future).
The required interest payments associated with any significant additional debt financing could materially adversely impact our ability to service
our convertible subordinated notes and convertible senior subordinated notes. The terms of any additional debt financing may also, under
certain circumstances, restrict or prohibit us from making interest payments on our convertible subordinated notes and convertible senior
subordinated notes. If adequate funds are not available, we may be required to curtail significantly or discontinue one or more of our research,
drug discovery or development programs, including clinical trials, or attempt to obtain funds through arrangements with collaborative partners
or others that may require us to relinquish rights to certain of our technologies or products in research or development. Additional financing
may not be available on acceptable terms, if at all.
29
OUR SALES AND MARKETING EXPERIENCE IS LIMITED.
We have little experience in marketing and selling pharmaceutical products. We must either develop a marketing and sales force or enter
into arrangements with third parties to market and sell any of our product candidates which are approved by the FDA. We do not know whether
we will be able to enter into marketing and sales agreements with others on acceptable terms, if at all. We may not be able to successfully
develop our own sales and marketing force for drug candidates for which we have retained marketing or co-promotion rights. If we develop our
own marketing and sales capability, we may be competing with other companies that currently have experienced and well-funded marketing
and sales operations. We have granted exclusive marketing rights for Agenerase and Lexiva to GlaxoSmithKline worldwide (except for
amprenavir in Japan), and for pralnacasan to Aventis worldwide. Kissei has exclusive marketing rights to Prozei (amprenavir) and VX-702 in
Japan. Even though we retain some co-promotion rights, to the extent that our collaborative partners have commercial rights to our products,
any revenues we receive from those products will depend primarily on the sales and marketing efforts of others.
IF WE INCUR PRODUCT LIABILITY EXPENSES, OUR EARNINGS COULD BE NEGATIVELY IMPACTED.
Our business will expose us to potential product liability risks that arise from the testing, manufacturing and sales of our products. In
addition to direct expenditures for damages, settlement and defense costs, there is the possibility of adverse publicity as a result of product
liability claims. These risks will increase as our products receive regulatory approval and are commercialized. We currently carry $15 million
of product liability insurance. This level of insurance may not be sufficient. Moreover, we may not be able to maintain our existing levels of
insurance or be able to obtain or maintain additional insurance that we may need in the future on acceptable terms.
In addition, our research and development activities may from time to time involve the controlled use of hazardous materials, including
hazardous chemicals and radioactive materials. Accordingly, we are subject to federal, state and local laws governing the use, handling and
disposal of these materials. Although we believe that our safety procedures for handling and disposing of hazardous materials comply with
regulatory requirements, we cannot completely eliminate the risk that accidental contamination or injury from these materials could expose us
to significant liability.
WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT MAY FRUSTRATE ANY ATTEMPT TO REMOVE OR
REPLACE OUR CURRENT MANAGEMENT.
Our corporate charter and by-law provisions and stockholder rights plan may discourage certain types of transactions involving an actual
or potential change of control of Vertex which might be beneficial to the company or its securityholders. Our charter provides for staggered
terms for the members of the Board of Directors. Our by-laws grant the directors a right to adjourn annual meetings of stockholders, and certain
provisions of the by-laws may be amended only with an 80% stockholder vote. Pursuant to our stockholder rights plan, each share of common
stock has an associated preferred share purchase right. The rights will not trade separately from the common stock until, and are exercisable
only upon, the acquisition or the potential acquisition through tender offer by a person or group of 15% or more of the outstanding common
stock. We may issue shares of any class or series of preferred stock in the future without stockholder approval and upon such terms as our
Board of Directors may determine. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights
of the holders of any class or series of preferred stock that may be issued in the future. As a result, shareholders or other parties may find it
more difficult to remove or replace our current management.
OUR STOCK PRICE MAY FLUCTUATE BASED ON FACTORS BEYOND OUR CONTROL.
Market prices for securities of companies such as Vertex are highly volatile. Within the 12 months ended December 31, 2003, our
common stock traded between $7.83 and $18.75. The market for our
30
stock, like that of other companies in the biotechnology field, has from time to time experienced significant price and volume fluctuations that
are unrelated to our operating performance. The future market price of our securities could be significantly and adversely affected by factors
such as:
•
•
•
•
•
•
•
•
announcements of results of clinical or nonclinical trials;
announcements of financial results and other operating performance measures, or capital structuring activities;
technological innovations or the introduction of new products by our competitors;
government regulatory action;
public concern as to the safety of products developed by others;
developments in patent or other intellectual property rights or announcements relating to these matters;
developments in domestic and international governmental policy or regulation, for example relating to intellectual property
rights; and
developments and market conditions for pharmaceutical and biotechnology stocks, in general.
OUR OUTSTANDING INDEBTEDNESS MAY MAKE IT MORE DIFFICULT TO OBTAIN ADDITIONAL FINANCING OR
REDUCE OUR FLEXIBILITY TO ACT IN OUR BEST INTERESTS.
As of December 31, 2003, we had approximately $333.5 in long-term debt, including $315 million of 5% Convertible Subordinated Notes
due September 2007. In a transaction completed on February 13, 2004, we exchanged $153.1 million of these notes for $153.1 million of
5.75% Convertible Senior Subordinated Notes due September 2011. The high level of our indebtedness will impact us by:
•
•
•
•
exposing us to fixed rates of interest which may be in excess of prevailing market rates;
making it more difficult to obtain additional financing for working capital, capital expenditures, debt service requirements or
other purposes;
constraining our ability to react quickly in an unfavorable economic climate or to changes in our business, or the pharmaceutical
industry; and
requiring the dedication of a substantial portion of our expected cash flow to service of our indebtedness, thereby reducing the
amount of expected cash flow available for other purposes.
IF WE ARE NOT ABLE TO RESTRUCTURE OUR KENDALL SQUARE LEASE ON ACCEPTABLE TERMS, OR AT ALL, WE
COULD BE OBLIGATED TO PAY AS MUCH AS THE FULL AMOUNT DUE UNDER THE LEASE, AS AND WHEN DUE
UNDER THE LEASE AGREEMENT.
We have decided not to occupy the Kendall Square facility, which we lease under a 15-year agreement expiring in 2018. We have
estimated our liability to restructure the lease, using assumptions and estimates we consider appropriate, to be $69.5 million as of December 31,
2003. In estimating the liability, we considered several possible outcomes of the potential lease restructuring, including a sublease of the entire
space, a buy-out of our obligation, partial subleases by multiple parties, and other variations of these same outcomes. If we are unable to find a
tenant or tenants willing to sublease the facility on the terms we have incorporated into our estimate, including the rental rate, timing and term
of any such sublease(s), or if the market for specialized laboratory space in Cambridge, Massachusetts or other real estate fundamentals should
change before we are able to secure a sublease of the space, or if any of our other assumptions and estimates are inaccurate or circumstances
bearing upon the potential restructuring should change before we are able to restructure the lease, or if we are unable to reach agreement with
the landlord on the terms of any such restructuring, our estimated liability could increase to as much as the full amount due under the lease. Our
future obligations under the lease could be as much as $312,500,000, as set forth in "Off-Balance Sheet Commitments and Obligations at
December 31, 2003" on page 40 of this Annual Report on Form 10-K.
31
ITEM 2. PROPERTIES
We lease an aggregate of approximately 624,000 square feet of laboratory and office space in eight facilities in Cambridge, Massachusetts.
The leases have expiration dates ranging from 2005 to 2018. We have the option to extend the lease for our headquarters facility at 130
Waverly Street, Cambridge, for up to two additional terms, ending in 2015 with respect to one portion of the building, and in 2019 for the other
portion of the building. The lease for the laboratory and office building adjacent to our headquarters will expire in 2010 with the option to
extend the lease for up to two additional consecutive ten year terms. The lease for our Kendall Square building, which is currently unoccupied,
will expire in 2018, with the option to extend the lease for two consecutive terms of 10 years each. The building is currently under construction
and we are obligated to build out finished space to specifications approved by our landlord. We have decided not to occupy the Kendall Square
building and are actively trying to restructure the lease obligation. We are considering several possible outcomes for the potential restructuring,
including a sublease of the entire space, a buy-out of our obligation, partial subleases by multiple parties and other variations of these same
outcomes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and
Obligations" at page 39.
We also lease approximately 81,200 square feet of laboratory and office space in San Diego, California. The lease for this space will
expire on August 31, 2008, with an option to extend for up to two additional terms of five years each. We also sublease an additional 12,500
square feet of space for our administrative functions in a nearby facility. The sublease for this additional space will expire on March 31, 2004
and we are consolidating activities in our larger facility.
We lease approximately 22,000 square feet of laboratory and office space in Milton Park, Abingdon, England, under a lease expiring in
2013, with a right of early termination in 2008, for our U.K. business and research and development activities.
We believe our facilities are adequate for our current needs. We believe we can obtain additional space on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
We were involved in a lawsuit filed against us in December 2001 by Oregon Heath Sciences University in the District Court of Oregon.
The complaint in the suit sought to name Dr. Bruce Gold, an employee of Oregon Health Sciences University, as an inventor and Oregon
Health Sciences University as part owner of five of our neurophilin patents, and associated damages. The suit stemmed from assays run on
Vertex compounds by Dr. Gold under a sponsored research agreement in 1996. That lawsuit was settled on December 12, 2003 in connection
with the establishment of a collaboration between Vertex and OHSU, under which we will fund scientific research by OHSU scientists in areas
of mutual interest. We do not expect that the settlement terms will have a material impact on the Company's financial position.
On September 23, 2003, two purported shareholder class actions, Carlos Marcano v. Vertex Pharmaceuticals, et al. and City of Dearborn
Heights General Governmental Employees' Retirement System v. Vertex Pharmaceuticals, et al. , were filed in the United States District Court
for the District of Massachusetts, naming the Company and certain current and former officers and employees of the Company as defendants.
Those actions were followed by three additional lawsuits, Stephen Anish v. Vertex Pharmaceuticals, et al. , William Johns v. Vertex
Pharmaceuticals, et al. , and Ben Harrington v. Vertex Pharmaceuticals, et al. , also filed in the District of Massachusetts. All five cases
contain substantially identical allegations and have been consolidated by the District Court into one lawsuit. The plaintiffs claim that the
defendants made material misrepresentations and/or omissions of material fact regarding VX-745, an investigational agent with potential in the
treatment of inflammatory and neurological diseases, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10(b)(5).
The plaintiffs seek certification as a class action, compensatory damages in an unspecified amount, and
32
unspecified equitable or injunctive relief. We believe that the claims are without merit and intend to contest them vigorously.
We are not a party to any litigation in any court with any governmental authority, and management is not aware of any contemplated
proceeding by any governmental authority against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock trades on the Nasdaq Stock Market (Nasdaq) under the symbol "VRTX." The following table sets forth for the periods
indicated the high and low sale prices per share of the common stock as reported by Nasdaq:
Year Ended December 31, 2002:
High
Low
First quarter
Second quarter
Third quarter
Fourth quarter
Year Ended December 31, 2003:
First quarter
Second quarter
Third quarter
Fourth quarter
$
29.92 $
32.45
23.96
21.60
17.78
15.02
12.67
15.34
$
16.50 $
18.75
16.77
14.19
9.59
9.94
11.73
7.83
Stockholders
As of March 12, 2004, there were 1,116 holders of record of our common stock (approximately 18,500 beneficial holders).
Dividends
We have never declared or paid any cash dividends on our common stock, and we currently expect that future earnings, if any, will be
retained for use in our business.
33
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Unaudited)
The following unaudited selected financial data for each of the five years in the period ended December 31, 2003 are derived from our
audited consolidated financial statements. This data should be read in conjunction with our audited consolidated financial statements and
related notes which are included elsewhere in this Annual Report on Form 10-K, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Item 7 below.
Consolidated Statement of Operations Data:
Revenues:
Royalties
Collaborative and other research and development revenues
Total revenue
Costs and expenses:
Year Ended December 31,
2003
2002
2001(1)
2000(2)
1999
(In thousands, except per share amounts)
$
9,002
$
10,054
$
10,783
$
12,036
$
60,139
84,716
74,514
70,459
8,053
43,617
69,141
94,770
85,297
82,495
51,670
Royalty payments
Research and development
Sales, general and administrative
Restructuring and other expense
Merger related costs
Total costs and expenses
Loss from operations
Other income/(expense), net
Debt conversion expense
Gain on retirement of convertible subordinated notes
3,126
199,636
39,082
91,824
—
3,334
198,338
41,056
—
—
3,594
141,988
31,856
—
22,960
3,965
96,308
30,006
—
—
2,925
79,251
28,266
—
—
333,668
242,728
200,398
130,279
110,442
(264,527 )
(147,958 )
(115,101 )
(1,886 )
11,000
—
—
—
—
24,532
—
10,340
(47,784 )
20,239
(14,375 )
—
(58,772 )
10,487
—
—
Loss from continuing operations before cumulative effect of changes in
accounting principles
(266,413 )
(136,958 )
(80,229 )
(41,920 )
(48,285 )
Income from discontinued operations(4):
Gain on sales of assets
Income (loss) from discontinued operations
70,339
(693 )
—
28,337
—
22,148
—
10,341
Total income from discontinued operations
69,646
28,337
22,148
10,341
—
7,131
7,131
Loss before cumulative effect of changes in accounting principles
Cumulative effect of change in accounting principle—revenue recognition
Cumulative effect of change in accounting principle—derivatives(3)
Net loss
Basic and diluted net loss per common share
Basic and diluted weighted average number of common shares outstanding
Pro forma amounts assuming the 2001 accounting change relating to
revenue recognition is applied retroactively (1)
Net loss
Net loss per weighted common share—basic and diluted
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities
Other current assets
Property, plant and equipment
Restricted cash
Other non-current assets
$
$
$
$
$
$
(196,767 ) $
—
—
(108,621 ) $
—
—
(58,081 ) $
(25,901 )
17,749
(31,579 ) $
(3,161 )
—
(41,154 )
—
—
(196,767 ) $
(108,621 ) $
(66,233 ) $
(34,740 ) $
(41,154 )
(2.56 ) $
77,004
(1.43 ) $
75,749
(0.89 ) $
74,464
(0.51 ) $
67,682
(0.66 )
62,602
(196,767 ) $
(2.56 ) $
(108,621 ) $
(1.43 ) $
(40,332 ) $
(0.54 ) $
(45,860 ) $
(0.68 ) $
(38,234 )
(0.61 )
34
December 31,
2003
2002
2001
2000
1999
$
583,164
10,642
80,083
26,061
24,461
$
634,984
21,588
95,991
26,091
37,066
$
743,202
32,890
80,377
26,190
42,472
$
814,061
43,370
43,961
14,713
25,031
224,955
18,055
37,226
17,113
9,989
Total assets
724,411
815,720
925,131
941,136
307,338
Current liabilities, excluding restructuring and other expense
Accrued restructuring and other expense
Collaborator development loan, excluding current portion
Deferred revenue, excluding current portion
Convertible notes (due 2007)(5)
Other long-term obligations
Stockholder's equity
69,541
69,526
18,460
51,771
315,000
7,268
192,845
64,597
—
5,000
46,598
315,000
5,944
378,581
91,553
—
—
35,201
315,000
8,026
475,351
41,527
—
—
28,329
345,000
12,269
514,011
27,184
—
—
12,234
—
16,003
251,917
Total liabilities and stockholder's equity
$
724,411
$
815,720
$
925,131
$
941,136
$
307,338
On
(1)
July 18, 2001, we completed a merger with Aurora Biosciences Corporation. The merger was accounted for as a pooling of interests. All prior period consolidated financial
statements presented have been restated to include the consolidated results of operations, financial position and cash flows of Aurora Biosciences Corporation as though the merger
had been in effect on the dates indicated.
In the third quarter of 2001, in connection with our overall review of accounting policies concurrent with our merger with Aurora, we elected to change our revenue recognition
policy for collaborative research and development revenues from the Emerging Issues Task Force No. 91-6 (EITF 91-6) method to the Substantive Milestone Method, adopted
retroactive to January 1, 2001. We believe this method is preferable because it is reflective of the Company's on-going business operations and is more consistent with the industry
practices following the implementation of SAB 101 in 2000 throughout the biotechnology industry. For further information please refer to Note C: "Change in Accounting
Principle—Revenue Recognition" in the notes to our consolidated financial statements and our Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this Annual Report on Form 10-K.
(2)
(3)
(4)
(5)
In the fourth quarter of 2000, we changed our method of accounting for revenue recognition in conjunction with our adoption of the SEC's Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" which was retroactive to January 1, 2000.
During 2001, we recorded a cumulative effect of change in accounting principle related to the adoption of Derivative Implementation Group Issue No. A17 ("DIG A17") in
connection with the valuation of derivative instruments. Please refer to Note I: "Investments" in the notes to our consolidated financial statements included in this Annual Report on
Form 10-K for further information.
We sold certain assets and liabilities of our Discovery Tools and Services business in two independent transactions in March and December 2003. In October 2001 the FASB issued
FASB 144 "Accounting for the Impairment of Long-Lived Assets" ("SFAS 144"). Pursuant to SFAS 144 the Statement of Operations data shown above give effect to the
disposition of the assets sold, accounting for such assets as discontinued operations. Please refer to Note D: "Sale of Assets" in the notes to our consolidated financial statements
included in this Annual Report on Form 10-K for further information.
In February 2004, we exchanged approximately $153.1 million in aggregate principal amount of our 5% Convertible Subordinated Notes due 2007 for approximately $153.1
million in aggregate principal amount of newly issued 5.75% Convertible Senior Subordinated Notes due 2011.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a biotechnology company in the business of discovering, developing, and marketing small molecule drugs for serious diseases
including HIV infection, chronic hepatitis C virus infection, inflammatory and autoimmune disorders and cancer, independently and with
collaborators. To date, we have discovered and advanced two products that have reached the market, Agenerase (amprenavir) and Lexiva
(fosamprenavir calcium). Agenerase was approved and launched in the United States in early 1999, and Lexiva was approved and launched in
the United States in late 2003. We earn a royalty on the sales of Agenerase and Lexiva and co-promote these products in collaboration with
GlaxoSmithKline. Our drug candidate pipeline is principally focused on the development and commercialization of new treatments for viral
and inflammatory diseases. We have built a drug discovery capability that integrates advanced biology, chemistry, biophysics, automation and
information technologies, with a goal of making the drug discovery process more efficient and productive.
Drug Discovery and Development
Discovery and development of a single new pharmaceutical product is a lengthy and resource-intensive process which may take 10 to 15
years or more. During this process, potential drug candidates are subjected to rigorous evaluation, driven in part by stringent regulatory
considerations, designed to generate information concerning toxicity profiles, efficacy, proper dosage levels and a variety of other
characteristics which are important in determining whether a proposed drug candidate should be approved for marketing. Most chemical
compounds which are investigated as potential drug candidates never progress into formal development, and most drug candidates which do
advance into formal development never become commercial products.
We have a variety of drug candidates in clinical development and a broad-based drug discovery effort. Given the uncertainties of the
research and development process, it is not possible to predict with confidence which, if any, of these efforts will result in a marketable
pharmaceutical product. We constantly monitor the results of our discovery research and our nonclinical and clinical trials and regularly
evaluate and re-evaluate our portfolio investments with the objective of balancing risk and potential return in view of new data and scientific,
business and commercial insights. This process can result in relatively abrupt changes in focus and priority as new information comes to light
and we gain new insights into ongoing programs.
Business Strategy
We have elected to diversify our research and development activities across a relatively broad array of investment opportunities, due in
part to the high risks associated with the biotechnology and pharmaceutical business. We focus our efforts both on programs which we expect
to control throughout the development and commercialization process, and programs which we expect will be conducted in the development
and commercial phase principally by a collaborative partner. Since we have incurred losses from our inception and expect to incur losses for
the forseeable future, our business strategy is dependent in large part on our continued ability to raise significant funding to finance our
operations and meet our long term contractual commitments and obligations. In the past, we have secured funds principally through capital
market transactions, strategic collaborative agreements, proceeds from the disposition of assets, investment income and the issuance of stock
under our employee benefit programs. At December 31, 2003 we had $583 million of cash, cash equivalents and available for sale securities
and $315 million of 5% Convertible Subordinated Notes due 2007 (the "2007 Notes"). During 2003 and early 2004 we took a number of steps
to address our cash position and investment requirements in support of our existing business strategy.
36
Debt Exchange. On February 13, 2004, we exchanged approximately $153.1 million in aggregate principal amount of our 2007 Notes
for approximately $153.1 million in aggregate principal amount of newly issued 5.75% Convertible Senior Subordinated Notes due 2011 (the
"2011 Notes"). This transaction had an effect of significantly deferring the repayment date for almost half of our outstanding debt.
Sale of Business. In two independent transactions closed in March and December 2003, we sold the assets of our Discovery Tools and
Services business for an aggregate of $101 million of cash and the assumption of certain liabilities, to Invitrogen Corporation ("Invitrogen")
and to a company organized by Telegraph Hill Partners, respectively. As a result of the disposition of the Discovery Tools and Services
business, we now operate in a single operating segment: Pharmaceuticals.
Novartis Restructuring. In January 2004, we amended our existing collaboration agreement with Novartis. We will continue to receive
research funding through April 2006, consistent with the original agreement, and up to $35 million in pre-commercial payments for each
preclinical drug candidate which we propose and Novartis accepts for preclinical development. We will no longer be responsible for the early
development of drug candidates through proof-of-concept, as required under the original agreement, except that we may elect to develop VX-
680 under the terms of the original agreement. We believe the restructured agreement remains financially attractive for us, and we are now free
to devote our internal development resources to Vertex-controlled compounds in our areas of principal therapeutic interest.
Rebalancing of Research and Development
During 2003, we elected to focus our internal development and commercialization activity on two principal areas for the intermediate
term: viral and inflammatory diseases. Our most advanced drug candidates in these areas are merimepodib (HCV), VX-950 (HCV) and VX-
765 (inflammatory diseases). In preparation for advancing these and other Vertex-controlled drug candidates, we restructured our operations
during the second half of the year to rebalance our relative investment in research, development and commercialization. This restructuring
included a workforce reduction and a decision not to occupy our Kendall Square facility in Cambridge, Massachusetts. Of the terminated
employees, 59% were from research, 30% were from sales, general and administrative functions primarily supporting research, and 11% were
from development. Our investment in Company-sponsored research declined during 2003 approximately 22% from 2002 levels, while our
investment in Company-sponsored development during 2003 increased over 2002 levels by approximately 57%. Collaborator-sponsored
research increased approximately 14% while our Collaborator-sponsored development declined in 2003 by 44%. Overall we expect our total
research and development investment in 2004 to be comparable to 2003, with any increases, if any, resulting principally from activities funded
in whole or in part by new collaborators.
Collaborative Revenue
Collaborations have been and will continue to be an important component of our business strategy going forward.
We currently have significant collaborations with Novartis, Aventis, GlaxoSmithKline, and Serono. In these collaborations, we have
retained a share of downstream product revenue and may be entitled to significant pre-commercial milestone payments as drug candidates
progress in development. We currently receive research funding from Novartis and Serono, and we currently have drug candidates in clinical
development and commercialization under the collaborations with GlaxoSmithKline and Aventis and under a collaboration with Kissei. In
2003 we realized $69.1 million in royalties and collaborative revenue, all of which was earned under our pharmaceutical partnerships. This
represented a significant decline from the 2002 level of $94.8 million and reflected the conclusion of funding from our collaborations with
Lilly, Taisho and Schering AG and our lack of any new source of collaboration
37
revenue since 2000. Our collaborations with Novartis and GlaxoSmithKline accounted for 64% and 17%, respectively, of our total revenue in
2003.
A significant portion of our total research effort is being conducted under our collaboration with Novartis, which is scheduled to conclude,
along with our research funding from Novartis, in April 2006. Under the terms of our agreement with Novartis, we will retain all rights to the
intellectual property which we generate during that collaboration, except for rights licensed to Novartis in connection with the development and
commercialization of specific preclinical drug candidates that Novartis accepts for development. Our access to these retained rights may help
us initiate other collaborative opportunities in the kinase inhibitor field if our collaboration with Novartis is not extended beyond 2006. We will
need to seek those opportunities or other financing alternatives in order to maintain our discovery effort at its existing level. It is not possible to
predict at present whether any of those collaborations or other financing alternatives will be available in 2006 and beyond.
Based on the value that we believe we have built through research and development investments in certain of our drug discovery and
development programs and our perception of the level of interest in certain of our programs among some potential collaborators, we believe
that we could enter into additional collaborative agreements in 2004 which could be material to our business. Our business development
priorities include new collaborations to support development and commercialization, in Europe and Japan, of our HCV clinical candidates and
our oral cytokine inhibitor, VX-765. Our product development pipeline also includes drug candidates that are outside our core therapeutic areas
of viral and inflammatory diseases, such as VX-702 (acute coronary syndromes), VX-944 (oncology) and VX-680 (oncology). In 2004 and
future periods we expect to identify collaborative development and commercialization opportunities for these drug candidates in order to
continue their clinical advancement, as we maintain focus on our Company-sponsored opportunities. We are also seeking collaborators for our
ion channels and other discovery programs.
Lease Restructuring
For the twelve months ended December 31, 2003, we recorded restructuring and other related expenses of $91.8 million, of which $78.7
million relates to the potential restructuring of our Kendall Square lease. The restructuring accrual remaining at December 31, 2003 was $69.5
million. The liability at December 31, 2003 represents our best judgment of the assumptions and estimates most appropriate in measuring the
outcome of the potential lease restructuring. Although it is possible that this liability will be paid in full over the next 24 months, the actual
amount and timing of any payments will depend on the actual terms of any lease restructuring transaction(s). If we are successful in
restructuring the lease, we could potentially be relieved of a future lease obligation of approximately $16 to $18 million per year and a
contractual construction obligation which could be in excess of $30 million through 2006.
Financial Guidance
The key financial measures for which we have provided guidance in 2004 are as follows:
•
•
•
•
•
Our full year loss is expected to be between $140 and $150 million, before any gains or charges, including additional charges
relating to the potential lease restructuring and the convertible note debt exchange.
Total revenue is expected to be in the range of $90 to $100 million in 2004. This is expected to be comprised of $60 to
$65 million in committed funding and milestones from existing collaborative partners, and $15 to $18 million from HIV product
royalties. In addition, we are currently in discussions with pharmaceutical companies regarding strategic research and product
development agreements, and the successful conclusion of such discussions may result in additional revenue and cash flow in
2004.
38
As we prioritize our investment toward proprietary drug candidates and realize the benefits from the operational restructuring in
drug discovery during 2003, we anticipate that research and development expenses will be in the range of $190 to $205 million
for the full year of 2004.
We expect sales, general and administrative expenses to be between $38 and $43 million in 2004.
We expect cash, cash equivalents and available for sale securities to be in excess of $350 million at the end of 2004.
The financial measures set forth above are forward looking and are subject to risks and uncertainties that could cause our actual results to
vary materially, as referenced in the section below entitled "Forward-Looking Statements."
Contractual Commitments and Obligations
The first part of the following table sets forth commitments and obligations that have been recorded on our consolidated balance sheet as
of December 31, 2003. Certain other obligations and commitments, while not required under accounting principles generally accepted in the
United States ("GAAP") to be included in the consolidated balance sheets, may have a material impact on liquidity. We have presented these
items, all of which have been entered into in the ordinary course of business, in the table below in order to present a more complete picture of
our financial position and liquidity.
December 31, 2003
Less than 1
year
1 to 3 years
3 to 5 years
5 years or more
Total
(in thousands)
Commitments and Obligations Recorded
on the Balance Sheet at December 31,
2003:
Capital leases
Collaborator development loans
Convertible subordinated notes*
Off-Balance Sheet Commitments and
Obligations at December 31, 2003:
Operating leases
Purchase obligations
Research and development and other
commitments
$
113 $
14,000
—
— $
—
—
— $
18,460
315,000
— $
—
—
113
32,460
315,000
44,962
3,000
108,180
6,000
59,740
—
182,847
—
395,729
9,000
2,769
2,365
—
—
5,134
Total contractual obligations and
commitments
$
64,844 $
116,545 $
393,200 $
182,847 $
757,436
*
See description below of our Note exchange, which closed on February 13, 2004, pursuant to which we have deferred approximately
$153.1 million of principal repayment obligations from 2007 to 2011.
Commitments and Obligations Recorded on the Balance Sheet at December 31, 2003:
Capital leases relate to equipment leases that expire at various dates though June 2004.
The collaborator development loans in the table above represent indebtedness to Novartis in the amount of $32,460,000 that was advanced
under a loan facility established pursuant to the original collaboration agreement with Novartis. Loans under the facility were intended to fund
early clinical studies of kinase inhibitor compounds that we selected for early development. In February 2004, we amended the terms of the
Novartis collaboration agreement. We will continue to be responsible for drug discovery and Novartis will continue to provide research
funding through the balance of the research term ending in April 2006, as provided in the original agreement. However, Novartis will now
39
be responsible for all nonclinical and clinical development of drug candidates which it accepts for development, and consequently the loan
facility providing funding for development activities by Vertex has been terminated. We may either continue development of VX-680 under the
terms of the original agreement using loan proceeds we have received under the Novartis loan facility, or elect to develop and commercialize
VX-680 independent of Novartis. If we elect to develop and commercialize VX-680 independent of Novartis, loan amounts with respect to that
drug candidate which are unspent and uncommitted at the time of our election will be repayable immediately. Outstanding loans which funded
amounts either spent or committed to be spent on development activities relating to a particular compound will be forgiven if that compound is
selected by Novartis for development. If not, the related loan will be repayable without interest in May 2008. At December 31, 2003,
approximately $14 million in development loans previously advanced to us were unspent and uncommitted. Please refer to Note P to our
consolidated financial statements included in this Annual Report on Form 10-K.
At December 31, 2003 we had $315,000,000 in 2007 Notes. On February 13, 2004, we concluded an exchange of approximately
$153.1 million in aggregate principal amount of 2007 Notes for approximately $153.1 million in aggregate principal amount of newly issued
2011 Notes. As a result of this transaction, the Company has outstanding $161.9 million in aggregate principal amount of 2007 Notes and
$153.1 million in aggregate principal amount of 2011 Notes. Our annual interest payment obligation increased by $1.1 million to $16.9 million,
reflecting the slightly higher coupon rate on the 2011 Notes.
Off-Balance Sheet Commitments and Obligations at December 31, 2003:
At December 31, 2003, our future minimum commitments and contractual obligations included facilities operating leases, a purchase
obligation and contractual commitments related to our research and development programs. These items are not required to be recorded on our
consolidated balance sheets under GAAP. They are disclosed in the table presented above and described more fully in the following paragraphs
in order to provide a more complete picture of our financial position and liquidity at December 31, 2003.
Our Kendall Square lease term began January 1, 2003 and lease payments commenced in May 2003. We have an obligation, staged over a
number of years, to build out the space into finished laboratory and office space. The lease will expire in 2018 with options to extend the lease
for two consecutive terms of ten years each, ultimately expiring in 2038. In June 2003, we decided not to occupy the space under this lease and
to attempt to restructure the lease. See Note E to our consolidated financial statements included in this Annual Report on Form 10-K. The
Company's future minimum commitments under this lease including lease payments and a construction obligation are $29.2 million for less
than 1 year, $68.4 million for 1 to 3 years, $38.7 million for 3 to 5 years and $176.2 million for 5 years or more and are included in the table
above.
Commitments under research and development programs represent contractual commitments entered into for materials and services in the
normal course of business.
The purchase obligations referred to above include an agreement to purchase a minimum of $3 million of certain specified products from
Invitrogen annually for three years after the completion of the sale of certain assets of the Discovery Tools and Services business on March 28,
2003.
Liquidity and Capital Resources
We have incurred operating losses since our inception and have historically financed our operations principally through public stock
offerings, private placements of our equity and debt securities, strategic collaborative agreements, which include research and development
funding, milestones and royalties on the sales of products, proceeds from disposition of assets of our Discovery Tools and Services business,
investment income and proceeds from the issuance of stock under our employee benefit programs.
40
At December 31, 2003 we had cash, cash equivalents and marketable securities of $583,164,000, which is a decrease of $51,820,000 from
$634,984,000 at December 31, 2002. The decrease of $51,820,000 is primarily the result of cash used by operations of $167,623,000 offset by
the net cash consideration received from the sale of the assets of the Discovery Tools and Services business of approximately $96,561,000.
Additionally, expenditures for property and equipment were $17,351,000, cash receipts from the issuance of common stock under our
employee benefit programs were approximately $11,959,000 and we drew down $27,460,000 under the Novartis loan facility in 2003, bringing
the balance outstanding under the loan facility to $32,460,000 at December 31, 2003.
As part of our strategy to manage our long term operational cash needs, in early 2004 we exchanged approximately $153.1 million in
aggregate principal amount of our 2007 Notes for approximately $153.1 million in aggregate principal amount of newly issued 2011 Notes.
The 2011 Notes were issued through a private offering to qualified institutional buyers. The 2011 Notes are convertible, at the option of the
holder, into common stock at a price equal to $14.94, subject to adjustment under certain circumstances. The 2007 Notes are convertible, at the
option of the holder, into common stock at a price equal to $92.26.
The restructuring accrual remaining at December 31, 2003 of $69.5 million, relating to the potential Kendall Square lease restructuring,
could possibly be paid in full over the next 24 months. However, the actual amount and timing of such payments will be dependent upon the
ultimate terms of any lease restructuring. We review our estimates underlying the restructuring accrual on at least a quarterly basis, and the
accrual could change with any future change in our estimates.
We expect to continue to invest significantly in our pipeline, particularly in clinical trials of merimepodib, VX-950 and VX-765, and in
our ion channel and kinase discovery efforts. Consequently, we expect to incur losses on a quarterly and annual basis for the foreseeable future
as we continue to develop and commercialize existing and future drug candidates. We also expect to incur substantial administrative
expenditures in the future and expenses related to filing, prosecution, defense and enforcement of patent and other intellectual property rights.
We expect our capital expenditures to remain at levels consistent with 2003, and we expect to complete 2004 with cash, cash equivalents and
marketable securities in excess of $350 million.
Beyond 2004, the adequacy of our available funds to meet our future operating and capital requirements, including repayment of the 2007
Notes and the 2011 Notes, will depend on many factors, including the number, breadth and prospects of our discovery and development
programs and the costs and timing of obtaining regulatory approvals for any of our product candidates. Collaborations have been and will
continue to be an important component of our business strategy. We will continue to rely on cash receipts from our existing research and
development collaborations, including research funding, development reimbursements and potential milestone payments, and from new
collaborations we may enter, in order to help fund our research and development efforts.
From time to time during 2004, we may repurchase our existing 2007 Notes in privately negotiated transactions, or market purchases or
otherwise, depending on market conditions. Any such repurchases may be material.
To the extent that our current cash and marketable securities, in addition to the above-mentioned sources, are not sufficient to fund our
activities, it will be necessary to raise additional funds through public offerings or private placements of securities or other methods of
financing. We will continue to manage our capital structure and consider financing opportunities to strengthen our long term liquidity profile.
There can be no assurance that such financing will be available on acceptable terms, if at all.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements
prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial
statements requires us to make
41
certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of revenue and expense during the reported periods. These items are
constantly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur
in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past
experience or other assumptions do not turn out to be substantially accurate.
We believe that the application of the accounting policies for restructuring and other expenses, research and development expenses, and
revenue recognition, all of which are important to our financial position and results of operations, require significant judgments and estimates
on the part of management. Our accounting polices, including the ones discussed below, are more fully described in Note B to our consolidated
financial statements included in this Annual Report on Form 10-K.
Restructuring and Other Expense
We record liabilities associated with restructuring activities based on estimates of fair value in the period the liabilities are incurred, in
accordance with SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). These estimates are reviewed
and may be adjusted in subsequent periods. Adjustments are based, among other things, on management's assessment of changes in factors
underlying the estimates, the impact of which is measured using the credit-adjusted risk-free rate applied in the initial period.
On June 10, 2003, we announced a plan to restructure our operations in preparation for increased investment in the clinical development
and commercialization of our drug candidates. We designed the restructuring to rebalance our relative investment in research, development and
commercialization, to better support our long-term objective of becoming an integrated drug company. The restructuring included a workforce
reduction, write-offs of certain assets and a decision not to occupy the Kendall Square facility. We are actively trying to restructure the lease
obligation.
As a result of the Company's restructuring plan and in accordance with SFAS 146, we recorded an initial estimate of the fair value of the
estimated liability in the second quarter of 2003. We have reviewed our assumptions and estimates quarterly and updated the liability as
changes in circumstances have required. For the twelve months ended December 31, 2003, we recorded restructuring and other related
expenses of $91.8 million. The $91.8 million includes $78.7 million of potential lease restructuring expense (of which $34.9 million,
$42.4 million and $1.4 million was recorded in the second, third and fourth quarters of 2003, respectively). In addition to the $78.7 million,
other costs included in the $91.8 million charge include $6.0 million of lease operating expense incurred prior to the decision not to occupy the
Kendall Square facility, $2.6 million for severance and related employee transition benefits and $4.5 million for a write-off of leasehold
improvements and other assets.
The charge for the potential lease restructuring is the most significant component of the total restructuring charge and requires us to make
significant judgments and assumptions. We use probability weighted discounted cash flows in order to calculate the amount of the liability
associated with the potential lease restructuring. In accordance with SFAS 146, we used a credit-adjusted risk-free rate of approximately 10%
in discounting our estimated cash flows. The probability weighted cash flows are based on management's assumptions and estimates regarding
the possible outcomes of the potential lease restructuring. In estimating the liability we considered several possible outcomes of the potential
lease restructuring, including a sublease of the entire space, a buy-out of our obligation, partial subleases by multiple parties, and other
variations of these same outcomes. We also included in these potential outcomes the contractually required commitment for build-out of the
leased space. We validate our estimates and assumptions through consultations with independent third parties having relevant expertise. We
increased our estimated lease restructuring expense from the second quarter to the third quarter by $42.4 million, based on our judgment that a
significant decline in the real estate
42
market in Cambridge, Massachusetts had occurred. We believe an increase in available laboratory and office space in Cambridge,
Massachusetts and certain other factors led to a corresponding overall decline in real estate market fundamentals from the previous quarter.
Accordingly, we revised our expectations of attainable sublease terms, assuming lower sublease rental rates and a delay in occupancy by
potential subtenants.
It is possible that our estimates and assumptions will change in the future resulting in additional adjustments to the amount of the liability,
and the effect of such adjustments could be material. For example, if sublease rental rates differ from our assumption by approximately 10% in
either direction, our recorded liability will be negatively or positively adjusted by approximately $8 million. If the time to finalize the
restructuring is delayed by six months from our estimated completion date, the impact could be as high as approximately $10 million in
additional liability, or more if there is further delay. We will review our assumptions and judgments related to the potential lease restructuring
on at least a quarterly basis, until the outcome is finalized, and make whatever modifications we believe are necessary, based on our best
judgment, to reflect any changed circumstances.
Revenue Recognition
Our revenue recognition policies are in accordance with the SEC's Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements," as amended by SEC Staff Accounting Bulletin No. 104, "Revenue Recognition," and for revenue arrangements
entered into after June 30, 2003, Emerging Issues Task Force Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-
21").
Our collaborative and other research and development revenue is generated primarily through collaborative research and development
agreements with strategic partners. The terms of these agreements typically include non-refundable up-front license fees, funding of research
and development efforts, payments based upon achievement of certain milestones and royalties on product sales.
We recognize revenue from non-refundable, up-front license fees and milestones, not specifically tied to a separate earnings process,
ratably over the contracted or estimated period of performance. Changes in estimates could impact revenue in the period the estimate is
changed. If our estimate of the period of performance shortens or lengthens, the amount of revenue we recognize from non-refundable, up-front
license fees and milestones could increase or decrease in the period the change in estimate becomes known. Future related revenues would be
adjusted accordingly. To date, changes to our estimates have not had a material impact on our financial position or results of operations.
Research funding is recognized ratably over the period of effort, as earned. Milestones that are based on designated achievement points and that
are considered at risk and substantive at the inception of the collaborative contract, are recognized as earned when the corresponding payment
is considered reasonably assured. We evaluate whether milestones are at risk and substantive based on the contingent nature of the milestone,
specifically reviewing factors such as the technological and commercial risk that must be overcome and the level of investment required.
Under EITF 00-21, in multiple element arrangements, license payments are recognized together with any up-front payment and the
research and development funding as a single unit of accounting, unless the delivered technology has stand-alone value to the customer and we
have objective and reliable evidence of fair value of the undelivered elements in the arrangement. License payments received during the course
of a collaboration that do not meet the separation criteria above are recognized, when earned, in proportion to the period of time completed on
the contract relative to the total contracted or estimated period of performance on the underlying research and development collaboration, with
the remaining amount deferred and recognized ratably over the remaining period of performance. Payments received after performance
obligations are complete are recognized when earned. We did not receive any license payments in 2003.
Royalty revenue is recognized based upon actual and estimated net sales of licensed products in licensed territories, as provided by our
collaborative partner, and is recognized in the period the sales
43
occur. Differences between actual royalty revenues and estimated royalty revenues, which have not been historically significant, are reconciled
and adjusted for in the quarter they become known.
Research and Development Costs
All research and development costs, including amounts funded by research and development collaborations, are expensed as incurred.
Research and development expenses are comprised of costs incurred in performing research and development activities including salaries and
benefits, facilities costs, overhead costs, clinical trial costs, contract services and other outside costs. Clinical trial, contract services and other
outside costs require that we make estimates of the costs incurred in a given accounting period and record accruals at period end as the third
party service periods and billing terms do not always coincide with our period end. We base our estimates on our knowledge of the research
and development programs, services performed for the period, past history for related activities and the expected duration of the third party
service contract where applicable.
Results of Operations
The following discussion of revenues and expenses is based only on the results of our continuing operations. We sold the assets of the
Discovery Tools and Services business in two independent transactions in March and December 2003. In accordance with SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets" ("SFAS No. 144"), the results of operations associated with the assets sold have been
reclassified on the consolidated financial statements under the heading "discontinued operations" for all periods presented. The reclassification
of the amounts to discontinued operations have been prepared using estimates and assumptions we have deemed appropriate based upon the
information currently available. Prior to 2002, the Discovery Tools and Services business was not separately managed operationally or
financially and therefore, we have estimated certain operating expenses, based on certain assumptions, including relative costs of the business
being sold compared to historical site costs. Amounts reclassified to discontinued operations are not necessarily indicative of the results that
would have been achieved had the Discovery Tools and Services business operated on a stand-alone basis during the periods presented.
As a result of the disposition of these assets, we now operate in a single operating segment: Pharmaceuticals.
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Our net loss for 2003 was $196,767,000 or $2.56 per basic and diluted common share, compared to a net loss for 2002 of $108,621,000 or
$1.43 per basic and diluted common share. Our loss in 2003 includes restructuring and other expense of $91,824,000 and income from
discontinued operations of $69,646,000. Included in the income from discontinued operations is a gain from the sale of assets of $70,339,000.
Included in our net loss for 2002 was income from discontinued operations of $28,337,000.
In addition to restructuring and other expense, offset by income from discontinued operations, our net loss for 2003 as compared with our
net loss for 2002 increased primarily as a result of decreased revenue and interest income.
Total revenues decreased to $69,141,000 in 2003 compared to $94,770,000 in 2002. In 2003, revenue was comprised of $9,002,000 in
royalties and $60,139,000 in collaborative and other research and development revenue, as compared with $10,054,000 in royalties and
$84,716,000 in collaborative research and development revenue in 2002.
Royalties consist primarily of Agenerase royalty revenue. Agenerase royalty revenue is based on actual and estimated worldwide net sales
of Agenerase. We began earning royalties on sales of Lexiva in the United States in November 2003. We expect to receive marketing approval
for Lexiva in the European Union in 2004. We pay a royalty to a third party on sales of Agenerase and Lexiva.
44
Collaborative and other research and development revenue decreased $24,577,000 or 29% in 2003 as compared with 2002. The decrease
in collaborative and other research and development revenue is due to the conclusion of certain of our collaborative research and development
arrangements, mainly in late 2002, partially offset by additional revenue recognized under our Novartis collaboration and a milestone payment
received from GlaxoSmithKline in connection with FDA approval of Lexiva. The table presented below is a summary of significant revenue
arrangements for the year ended 2003 as compared with the year ended 2002.
Collaborative and other research and development revenue:
Summary of significant collaborative revenue arrangements:
Novartis
Serono
GlaxoSmithKline
Eli Lilly
Schering
Kissei
Taisho
Other
Year Ended December 31,
2003
2002
(In thousands)
$
44,502 $
5,280
2,500
—
—
267
—
7,590
41,894
5,280
1,500
12,054
5,000
4,574
4,187
10,227
Total collaborative and other research and development revenue
$
60,139 $
84,716
We have not entered into any significant collaborative research and development agreements since 2000. Additionally as shown in the
table above, research funding under our partnerships with Eli Lilly, Schering and Taisho concluded in 2002.
We expect that collaborative and other research and development revenues will continue to be a significant source of our total revenues
and we believe we could enter into additional collaborative agreements in 2004 which could be material to our business.
Research and development expenses remained relatively consistent at $199,636,000 in 2003 compared to $198,338,000 in 2002. Research
expenditures were $113,435,000 in 2003 compared with $120,406,000 in 2002. Development expenditures were $86,201,000 in 2003
compared with $77,932,000 in 2002. Our investment in research has decreased due to the operational restructuring in June 2003 while our
investment in development has increased as a result of our proprietary drug candidates entering and advancing through clinical development. In
2003 our clinical trials focused on multiple drug candidates. The results of these trials enabled us to focus our clinical pipeline on two core
therapeutic areas—viral and inflammatory diseases. Our lead drug candidates in these areas are merimepodib (HCV), VX-950 (HCV) and VX-
765 (inflammatory diseases). In 2003 our development investment also focused on drug candidates with potential therapeutic indications
outside our current core therapeutic areas, such as VX-702 (acute coronary syndromes), VX-148 (autoimmune diseases), VX-944 (oncology)
and VX-680 (oncology). In 2004 and future periods we will seek to identify licensing opportunities for these drug candidates in order to
continue their clinical development. We continue to focus our main drug discovery efforts on the protein kinase and ion channel gene families
as well as other targeted areas.
45
Our collaborative partners have agreed to fund portions of our research and development programs related to specified drug candidates.
Our research and development expenses for 2003, 2002 and 2001 were as follows:
2003
2002
2001
Research
Development
Total
Research
Development
Total
Research
Development
Total
Collaborator-Sponsored $
Company-Sponsored
62,162 $
51,273
19,935 $
66,266
82,097 $
117,539
54,509 $
65,897
35,675 $
42,257
90,184 $ 49,490 $
43,427
108,154
20,262 $ 69,752
28,809 72,236
Total
$ 113,435 $
86,201 $ 199,636 $ 120,406 $
77,932 $ 198,338 $ 92,917 $
49,071 $ 141,988
Our product pipeline is principally focused on viral diseases, inflammatory and autoimmune diseases, and cancer.
Therapeutic Area and Product
Candidate
Clinical Indications
Development Phase
Company With
Marketing Rights
(Region)
Antivirals
Agenerase™(amprenavir)
Lexiva™(fosamprenavir
calcium)**
VX-385
HIV infection
Mktd
HIV infection
Mktd/MAA filed
HIV infection
Merimepodib (VX-497)
VX-950
Chronic hepatitis C
Chronic hepatitis C
Phase I
Phase II
Preclin
GlaxoSmithKline
(Worldwide)*
GlaxoSmithKline
(Worldwide)*
GlaxoSmithKline
(Worldwide)*
Vertex (Worldwide)
Vertex (Worldwide)
Inflammation and
Autoimmune Disease
VX-765
Inflammatory/autoimmune
Phase I
Vertex (Worldwide)
diseases
VX-702
Acute coronary syndromes;
Phase II
Kissei (Japan); Vertex
Pralnacasan (VX-740)
inflammatory diseases
Rheumatoid arthritis (RA);
osteoarthritis (OA); other
inflammatory/autoimmune
diseases
Phase II
Aventis (Worldwide)*
(R.O.W.)
Cancer
VX-680
VX-944
Oncology
Oncology
Preclin
Phase I
Novartis (Worldwide)†
Vertex (Worldwide)
*
Vertex has co-promotion rights in the U.S. and the E.U. Kissei has marketing rights to amprenavir (Prozei™) in Japan.
**
GlaxoSmithKline is seeking marketing approval in the E.U. under the name "Telzir™".
†
Vertex may elect by June 30, 2004 to continue the development of VX-680 under the original terms of the Novartis agreement, in
which event Novartis will hold an option on worldwide commercial rights.
To date we have incurred in excess of $1 billion in research and development costs associated with drug discovery and development. We
expect research and development expenses in 2004 to remain comparable with 2003. However, our anticipated 2004 research and development
expenses could vary materially, depending on the occurrence and timing of clinical trials. We anticipate that research and development
expenses will increase in future periods as we add personnel and capabilities to support the advancement of our lead drug candidates. However,
we do not expect that our research expenses will increase significantly unless we obtain a significant amount of funding from new
collaborations.
46
We estimate that it takes 10 to 15 years (the industry average is 12 years) to discover, develop and bring to market a new pharmaceutical
product in the U.S. as outlined below:
Phase:
Objective:
Estimated
Duration:
Discovery
Pre-Clinical
Phase I
Phase II
Lead identification and target validation
Initial toxicology for preliminary identification of risks for humans; gather early
pharmacokinetic data
2 to 4 years
1 to 2 years
Evaluate safety in humans; study how the drug works, metabolizes and interacts
1 to 2 years
with other drugs
Establish effectiveness of the drug and its optimal dosage; continue safety
2 to 4 years
evaluation
Phase III
FDA approval
Confirm efficacy, dosage regime and safety profile of the drug
Approval by the FDA to sell and market the drug under approved labeling
2 to 4 years
6 months to 2 years
Animal and other nonclinical studies are typically conducted during each phase of human clinical studies.
The successful development of our products is highly uncertain and subject to a number of risk factors. The duration of clinical trials may
vary substantially according to the type, complexity and novelty of the pharmaceutical product. The FDA and comparable agencies in foreign
countries impose substantial requirements on the introduction of therapeutic pharmaceutical products through lengthy and detailed laboratory
and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Data obtained from preclinical,
nonclinical and clinical activities at any step in the testing process may be adverse and lead to discontinuation of development. Data obtained
from these activities also are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. The duration and
the cost related to discovery, preclinical, nonclinical and clinical trials may vary significantly over the life of a project and are difficult to
predict. Therefore, accurate and meaningful estimates of the ultimate costs to bring our drug candidates to market are not available. The most
significant costs associated with drug discovery and development are those costs associated with Phase II and Phase III clinical trials. Given the
uncertainties related to development, we are currently unable to reliably estimate when, if ever, our drug candidates will generate revenue and
cash flows. We do not expect to receive net cash inflows from any major discovery and development products until a drug candidate becomes a
profitable commercial product.
Sales, general and administrative expenses decreased $1,974,000, or 5%, to $39,082,000 in 2003 from $41,056,000 in 2002, due primarily
to a reduction in personnel resulting from our consolidation of certain general and administration functions to our corporate office location in
Cambridge, Massachusetts, and from our restructuring in the second quarter of 2003.
Restructuring and other expense for the twelve months ended December 31, 2003 was $91.8 million. The activity related to restructuring
and other expense for the twelve months ended December 31, 2003, is presented below (in thousands):
Charge for the
Twelve Months Ended
December 31, 2003
Cash Payments
in 2003
Non-cash
Write-off
in 2003
Accrual as of
December 31, 2003
Lease restructuring expense and other
operating lease expense
Employee severance, benefits and
related costs
Leasehold improvements and asset
impairments
$
84,726 $
15,200 $
— $
69,526
2,616
4,482
2,616
—
—
4,482
—
—
Total
$
91,824 $
17,816 $
4,482 $
69,526
47
In accordance with SFAS 146, we review on a quarterly basis the estimates and assumptions underlying our determination of the
anticipated liability associated with the potential lease restructuring and adjust the liability as changes in circumstances require. It is possible
that those estimates and assumptions could change in the future resulting in incremental expense or, alternatively, in reversal of expense, and
the effect of any such adjustments could be material.
Interest income decreased approximately $13,310,000 to $15,412,000 in 2003 from $28,722,000 in 2002. The decrease is mainly the result
of both a lower level of invested funds and lower portfolio yields due to a reduced interest rate environment.
Income from discontinued operations increased $69,646,000 in 2003 from $28,337,000 in 2002, due to our sale of the assets of our
Discovery Tools and Services business in 2003. Included in the income from discontinued operations in 2003 is a gain on the sale of those
assets of $70,339,000.
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Our net loss for 2002 was $108,621,000 or $1.43 per basic and diluted common share compared to a net loss of $66,233,000 or $0.89 per
basic and diluted common share for 2001. The net loss for 2002 includes income from discontinued operations of $28,337,000. The net loss for
2001 includes income from discontinued operations of $22,148,000, a charge of $25,901,000 representing a cumulative change in accounting
principle related to revenue recognition and a gain of $17,749,000 representing a cumulative change in accounting related to derivative
instruments.
Total revenues increased to $94,770,000 in 2002 compared to $85,297,000 in 2001. In 2002, revenue was comprised of $10,054,000 in
royalties and $84,716,000 in collaborative and other research and development revenue, as compared with $10,783,000 in royalties and
$74,514,000 in collaborative and other research and development revenue in 2001.
Collaborative and other research and development revenue increased $10,202,000 or 14% in 2002 as compared with 2001. The table
presented below is a summary of significant revenue arrangements for the year ended 2002 as compared with the year ended 2001. As
illustrated in the table below the overall increase in collaborative and other research and development revenue in 2002 is due to an increase in
revenue recorded in connection with certan collaborations, such as Novartis and Eli Lilly, offset by a decrease in revenue earned under our
arrangements with Kissei and Taisho. In 2002 we recognized an increased amount of revenue under our Novartis collaboration as a result of
increased effort allocated to our kinase research program. In the fourth quarter of 2002, our research and development agreement with Lilly
was restructured; the original contractual research term was to conclude in June 2003. In connection with the restructuring of the agreement and
termination of the research term, we recognized approximately $1,637,000 in revenue that had been previously deferred. This deferred revenue
related to the development milestone paid in December 2001 and the up-front payment received in June 1997 at the commencement of the
collaboration. Additionally, in the fourth quarter of 2002 we received and recognized a milestone payment of $1,500,000 from
GlaxoSmithKline in connection with the submission of a new drug application for market approval of Lexiva in the U.S.
48
We have not entered into any significant collaborative research and development agreements since 2000. Funding under our partnerships with
Lilly, Schering and Taisho concluded in 2002.
Collaborative and other research and development revenue:
Summary of significant collaborative revenue arrangements:
Novartis
Serono
GlaxoSmithKline
Eli Lilly
Schering
Kissei
Taisho
Other
Year Ended December 31,
2002
2001
(In thousands)
$
41,894 $
5,280
1,500
12,054
5,000
4,574
4,187
10,227
36,723
4,802
—
6,686
5,000
7,405
5,583
8,315
Total collaborative and other research and development revenue
$
84,716 $
74,514
Research and development expenses increased to $198,338,000 in 2002 from $141,988,000 in 2001, primarily due to investment in
advancing our clinical pipeline and broadening our research efforts. Our clinical investment was directed primarily toward advancing our
second generation p38 MAP kinase inhibitor (VX-702), our IMPDH inhibitors (VX-148 and merimepodib), our HCV protease inhibitor (VX-
950) and ICE inhibitor (VX-765). Development investment increased from $49,071,000 in 2001 to $77,932,000 in 2002. Investment in
research increased from $92,917,000 in 2001 to $120,406,000 in 2002, resulting principally from the expansion of our multi-target gene family
research programs, including our kinase program and ion channel program. As a result of our continued expansion, personnel and facilities
expenses also increased.
Sales, general and administrative expenses increased $9,200,000, or 29%, to $41,056,000 in 2002 from $31,856,000 in 2001. The increase
is primarily attributable to increased personnel and professional expenses. Included in the increase in personnel and professional expenses is an
increase in expenses relating to the addition of certain key executives, certain process consulting costs and legal and patent expenses related to
continued protection of our intellectual property, including expenses associated with contesting a suit filed by Oregon Health Sciences
University.
Merger related costs of $22,960,000 in 2001 consisted of investment banking, legal and accounting fees associated with the acquisition of
Aurora Biosciences Corporation completed on July 18, 2001.
Interest income decreased approximately $16,411,000 to $28,722,000 in 2002 from $45,133,000 in 2001. The decrease is a result of both a
lower level of invested funds, and lower portfolio yields due to a reduced interest rate environment.
Interest expense decreased to approximately $17,684,000 in 2002 from $19,318,000 in 2001. The decrease is a result of the reduction in
principal amount of the 2007 Notes. In October 2001, we repurchased $30,000,0000 in principal amount of our 2007 Notes and recorded a gain
of $10,340,000 on the retirement of the notes in the fourth quarter of 2001.
In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 145,
"Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." FAS 145 recinds FAS
4 and FAS 64, which addressed the accounting for gains and losses from extinguishment of debt. Under FAS 145 the gain on retirement of
convertible subordinated notes is considered an ordinary item. The gain on retirement of convertible subordinated notes was originally
classified in 2001 as an extraordinary item but has been reclassified as part of loss from continuing operations. At December 31, 2002 and
2001, $315,000,000 of the 2007 Notes was outstanding.
49
Using the equity method of accounting, we recorded $662,000 as our share of loss in Altus Biologics Inc. (Altus), for the year ended
December 31, 2001. The loss is included in other expense on the Statement of Operations. Effective September 28, 2001, coincident with a
financial restructuring of Altus, we changed our method of accounting for Altus from the equity method to the cost method. See Note I to our
consolidated financial statements included in this Annual Report on Form 10-K.
In the third quarter of 2001, in connection with our overall review of accounting policies concurrent with our merger with Aurora, we
elected to change our revenue recognition policy for collaborative and other research and development revenues from the Emerging Issues
Task Force No. 91-6 ("EITF 91-6") method to the Substantive Milestone Method, adopted retroactive to January 1, 2001. We believe this
method is preferable because it is reflective of the Company's on-going business operations and is more consistent with industry practices
following the implementation of SAB 101 throughout the biotechnology industry in 2000.
Pursuant to the 2001 change, we recorded a one-time, non-cash charge of $25,901,000, representing a cumulative change in accounting
principle for periods prior to 2001. The amount of revenue recognized in 2003, 2002 and 2001 which was included in the one-time, non-cash
charge was $2,809,000, $6,979,000 and $7,748,000, respectively. Additionally, $3,684,000, $3,628,000 and $1,053,000 will be recognized as
revenue in 2004, 2005 and thereafter, respectively, which amounts were included in the January 2001 charge to income.
Effective July 1, 2001, we adopted Derivative Implementation Group Issue No. A17, "Contracts that Provide for Net Share
Settlement" (DIG A17). Pursuant to the adoption of DIG A17, we recorded a $17,749,000 cumulative effect of a change in accounting principle
to reflect the value of warrants held in Altus. This amount is included in investments in the December 31, 2001 balance sheet. As of
September 30, 2001, the warrants no longer qualified as derivatives under DIG A17 due to changes in the terms of the warrants coincident with
a financial restructuring of Altus.
Forward-looking Statements
This reports contains forward-looking statements about our business, including our expectation that (i) we are positioned to commercialize
multiple products in the coming years that we expect will generate increased revenues; (ii) our losses will continue; (iii) research and
development expenses will continue to increase, but research expenses will not increase without new funding from collaborations; (iv) we will
enter into additional strategic collaborations for the development of our drug candidates which are outside our focus areas of viral and
inflammatory diseases; (v) our financial results for 2004 will be as set forth in this Annual Report on Form 10-K; (vi) we will continue to
collaborate with existing and new partners to develop and market Vertex-discovered products for selected major therapeutic areas; (vii) we and
our partners will begin clinical trials on a number of our development stage drug candidates during 2004; (viii) Lexiva will be approved and
launched in the E.U. in 2004; (ix) we will initiate expanded clinical trials of merimepodib in 2004, and believe we may be able to file an NDA
for merimepodib as early as 2007; (x) development of pralnacasan will be delayed by at least 12-24 months, if the adverse toxicology finding is
satisfactorily addressed; (xi) our Phase II clinical trial of VX-702 will be complete in 2004; (xii) our research programs will produce additional
development candidates, including numerous kinase inhibitors, in the next several years; and (xiii) our liability to restructure the Kendall
Square lease will be as we have estimated and we may pay the full amount in the next 24 months. While management makes its best efforts to
be accurate in making forward-looking statements, such statements are subject to risks and uncertainties that could cause our actual results to
vary materially. These risks and uncertainties include, among other things, our inability to further identify, develop and achieve commercial
success for new products and technologies, the possibility of delays in the research and development necessary to select drug development
candidates, the possibility of delays in the commencement or completion of clinical trials, the risk that clinical activities planned for 2004 may
not commence as scheduled, the risk that clinical trials may not result in marketable products, the risk that we may be unable to successfully
finance and secure regulatory approval of and market our drug candidates, including Lexiva, our dependence upon existing and new
pharmaceutical
50
and biotechnology collaborations, the levels and timing of payments under our collaborative agreements, uncertainties about our ability to
obtain new corporate collaborations on satisfactory terms, if at all, the development of competing systems, our ability to protect our proprietary
technologies, patent-infringement claims, risks of new, changing and competitive technologies, the risk that there may be changing and new
regulations in the U.S. and internationally and uncertainty about our ability to restructure our obligation under the Kendall Square facility lease.
Please see the "Risk Factors" appearing elsewhere in this report for more details regarding these and other risks. We disclaim any intention or
obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 150
("SFAS 150"), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes
standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption
of SFAS 150 in the third quarter of 2003 did not have a material impact on our results of operations or financial position.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 ("SFAS 149"), Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments
and for hedging activities under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133). The adoption of SFAS 149 in the third quarter of 2003 did not have a material impact on our results of operations or
financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosures the Company must make about
obligations under certain guarantees that the company has issued. It also requires the Company to recognize, at the inception of a guarantee, a
liability for the fair value of the obligations undertaken in issuing the guarantee. The initial recognition and initial measurement provisions are
to be applied only to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on our
results of operations or financial position. We have provided additional disclosure with respect to guarantees in Note U to the Consolidated
Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51" and in December 2003 issued a revised FIN 46 ("FIN 46R") which addresses the period of adoption of FIN 46 for entities
created before January 31, 2003. FIN 46 provides a new consolidation model which determines control and consolidation based on potential
variability in gains and losses. The provisions of FIN 46 are effective for enterpises with variable interest entities created after January 31,
2003. We must adopt the provisions of FIN 46 in the first quarter of 2004 and do not expect the adoption to have a material impact on our
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
As part of its investment portfolio, Vertex owns financial instruments that are sensitive to market risks. The investment portfolio is used to
preserve Vertex's capital until it is required to fund operations, including Vertex's research and development activities. None of these market
risk sensitive instruments are held for trading purposes. Vertex does not have derivative financial instruments in its investment portfolio.
51
Interest Rate Risk
Vertex invests its cash in a variety of financial instruments, principally securities issued by the U.S. government and its agencies,
investment grade corporate bonds and notes and money market instruments. These investments are denominnated in U.S. dollars. All of its
interest-bearing securities are subject to interest rate risk, and could decline in value if interest rates fluctuate. Substantially all of Vertex's
investment portfolio consists of marketable securities with active secondary or resale markets to help ensure portfolio liquidity, and Vertex has
implemented guidelines limiting the term to maturity of its investment instruments. Due to the conservative nature of these instruments, Vertex
does not believe that it has a material exposure to interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is contained on pages F-2 through F-37 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13(a) - 15(e) and 15d - 15
(e)) as of the end of the period covered by this Annual Report on Form 10-K, have concluded that, based on such evaluation, the Company's
disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company, including its
consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Annual Report
on Form 10-K was being prepared. In designing and evaluating the disclosure controls and procedures, the Company's management recognized
that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
(b) Changes in Internal Controls Over Financial Reporting. No change in the Company's internal controls over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the fourth quarter of our last fiscal year, that has materially affected,
or is reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
PART III
The information regarding directors required by this Item 10 is included in the definitive Proxy Statement for Vertex's 2004 Annual
Meeting of Stockholders (the "2004 Proxy Statement"), under "Information Regarding the Board of Directors and its Committees" and is
incorporated herein by reference. Other information required by this Item 10 is included in the 2004 Proxy Statement under "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Code of Conduct and Ethics" 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.
We have adopted a written Code of Conduct and Ethics that applies to our principal executive officer, principal financial officer, and
principal accounting officer or controller, or persons performing similar functions. Our Code of Conduct and Ethics also applies to our
directors and all of our officers and employees. Our Code of Conduct and Ethics is available upon request without charge. Requests
52
for our Code of Conduct and Ethics should be directed to us at 130 Waverly St., Cambridge, MA 02139, Attention: Investor Relations, or by
submitting an email request through the "Contact Us" tab in the "Investors" portion of our website, located at www.vrtx.com. Disclosure
regarding any amendments to, or waivers from, provisions of the Code of Conduct and Ethics that apply to our principal executive and
financial officers will be included in a Current Report on Form 8-K within five business days following the date of the amendment or waiver,
unless website posting of such amendments or waivers is then permitted by the rules of The Nasdaq Stock Market.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included in the 2004 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 2004 Proxy
Statement, which shall not be deemed incorporated herein).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this Item 12 is included in the 2004 Proxy Statement under "Security Ownership of Certain Beneficial
Owners and Management" and "Executive Compensation—Equity Compensation Plan Information" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included in the 2004 Proxy Statement under "Employment Contracts and Change-in-Control
Arrangements" and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 is included in the 2004 Proxy Statement under "Independent Accountants" and is incorporated
herein by reference.
53
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The Financial Statements required to be filed by Item 8 of this Annual Report on Form 10-K, and filed herewith,
are as follows:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and
2001
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the years
ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and
2001
Notes to Consolidated Financial Statements
Page Number in
this Form 10-K
F-2
F-3
F-4
F-5
F-6
F-7 to F-37
(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
Number
Exhibit Description
2.1 Agreement and Plan of Merger dated as of April 29, 2001, by and among Vertex, Aurora and
Ahab Acquisition Sub Inc. (filed as Exhibit 2 to Vertex's Current Report on Form 8-K dated
April 29, 2001 [File No. 000-19319] and incorporated herein by reference).
2.2 Asset Purchase Agreement among Vertex, PanVera LLC and Invitrogen Corporation dated
February 4, 2003 (filed as Exhibit 2.2 to Vertex's 2002 Annual Report on Form 10-K [file
No. 000-19319] and incorporated herein by reference).
3.1 Restated Articles of Organization filed with The Commonwealth of Massachusetts on July 31,
1991 (filed as Exhibit 3.1 to Vertex's 1997 Annual Report on Form 10-K [File No. 000-19319]
and incorporated herein by reference).
3.2 Articles of Amendment filed with The Commonwealth of Massachusetts on June 4, 1997 (filed as
Exhibit 3.2 to Vertex's 1997 Annual Report on Form 10-K [File No. 000-19319] and incorporated
herein by reference).
3.3 Certificate of Vote of Directors Establishing a Series of a Class of Stock, as filed with the
Secretary of The Commonwealth of Massachusetts on July 31, 1991 (filed as Exhibit 3.3 to
Vertex's 1997 Annual Report on Form 10-K [File No. 000-19319] and incorporated herein by
reference).
3.4 Articles of Amendment filed with The Commonwealth of Massachusetts on May 21, 2001 (filed
as Exhibit 3.4 to Vertex's registration statement on Form S-4 [Registration Number 333-61480]
and incorporated herein by reference.)
3.5 By-laws of Vertex as amended and restated as of March 12, 2001 (filed as Exhibit 3.4 to Vertex's
2000 Annual Report on Form 10-K [File No. 000-19319] and incorporated herein by reference).
4.1 Specimen stock certificate (filed as Exhibit 4.1 to Vertex's Registration Statement on Form S-1
[Registration No. 33-40966] or amendments thereto and incorporated herein by reference).
4.2 Stockholder Rights Plan (filed as Exhibit 4.2 to Vertex's Registration Statement on Form S-1
[Registration No. 33-40966] or amendments thereto and incorporated herein by reference).
54
4.3 First Amendment to Rights Agreement dated as of February 21, 1997 (filed as Exhibit 4.3 to
Vertex's 1996 Annual Report on Form 10-K [File No. 000-19319] and incorporated herein by
reference).
Indenture dated as of September 19, 2000 between Vertex and State Street Bank and Trust
Company (filed as Exhibit 4.1 to Vertex's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 [File No. 000-19319] and incorporated herein by reference).
4.4
4.5 Supplemental Indenture dated as of December 12, 2000 between Vertex and State Street Bank and
Trust Company (filed as Exhibit 4.2 to Pre-Effective Amendment No. 1 to the Form S-3 filed by
Vertex [Registration No. 333-49844] and incorporated herein by reference).
4.6 Second Amendment to Rights Agreement dated as of June 30, 2001 (filed as Exhibit 4.4 to
4.7
Vertex's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 [File No. 000-19319]
and incorporated herein by reference).
Indenture dated February 13, 2004 between Vertex and U.S. Bank National Association (filed as
Exhibit 4.1 to Vertex's Current Report on Form 8-K dated February 23, 2004 [File No. 000-19319]
and incorporated herein by reference).
10.1 1991 Stock Option Plan, as amended and restated as of September 14, 1999 (filed as Exhibit 10.1
to Vertex 1999 Annual Report on Form 10-K [File No. 000-19319] and incorporated herein by
reference).*
10.2 1994 Stock and Option Plan, as amended and restated as of September 14, 1999 (filed as
Exhibit 10.1 to Vertex 1999 Annual Report on Form 10-K [File No. 000-19319] and incorporated
herein by reference).*
10.3 1996 Stock and Option Plan, Amended and Restated as of July 17, 2002 (filed as Exhibit 10.3 to
Vertex's 2002 Annual Report on Form 10-K [file No. 000-19319] and incorporated herein by
reference).*
10.4 Non-Competition and Stock Repurchase Agreement between Vertex and Joshua Boger, dated
April 20, 1989 (filed as Exhibit 10.2 to Vertex's Registration Statement on Form S-1 [Registration
No. 33-40966] or amendments thereto and incorporated herein by reference).*
10.5 Form of Employee Stock Purchase Agreement (filed as Exhibit 10.3 to Vertex's Registration
Statement on Form S-1 [Registration No. 33-40966] or amendments thereto and incorporated
herein by reference).*
10.6 Form of Employee Non-Disclosure and Inventions Agreement (filed as Exhibit 10.4 to Vertex's
Registration Statement on Form S-1 [Registration No. 33-40966] or amendments thereto and
incorporated herein by reference).
10.7 Form of Executive Employment Agreement executed by Joshua S. Boger and Vicki L. Sato (filed
as Exhibit 10.6 to Vertex's 1994 Annual Report on Form 10-K [File No. 000-19319] and
incorporated herein by reference).*
10.8 Form of Amendment to Employment Agreement executed by Joshua S. Boger and Vicki L. Sato
(filed as Exhibit 10.1 to Vertex's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995 [File No. 000-19319] and incorporated herein by reference).*
10.9 Executive Employment Agreement between Vertex and Iain P.M. Buchanan (filed as Exhibit 10.9
to Vertex's 2001 Annual Report on Form 10-K [File No. 000-19319] and incorporated herein by
reference).*
10.10 Agreement dated December 21, 2000 between Vertex and Richard H. Aldrich (filed as
Exhibit 10.10 to Vertex's 2000 Annual Report on Form 10-K [File No. 000-19319] and
incorporated herein by reference).*
55
10.11 Lease dated March 3, 1995, between Fort Washington Realty Trust and Vertex, relating to the
premises at 130 Waverly Street, Cambridge, MA (filed as Exhibit 10.15 to Vertex's 1994 Annual
Report on Form 10-K [File No. 000-19319] and incorporated herein by reference).
10.12 First Amendment to Lease dated December 29, 1995 between Fort Washington Realty Trust and
Vertex (filed as Exhibit 10.15 to Vertex's 1995 Annual Report on Form 10-K [File No. 000-
19319] and incorporated herein by reference).
10.13 Second Amendment to Lease and Option Agreement dated June 12, 1997 between Fort
Washington Realty Trust and Vertex (filed as Exhibit 10.17 to Vertex 1999 Annual Report on
Form 10-K [File No. 000-19319] and incorporated herein by reference).
10.14 Third, Fourth and Fifth Amendments to Lease between Fort Washington Realty Trust and Vertex
(with certain confidential information deleted) (filed as Exhibit 10.14 to Vertex's 2001 Annual
Report on Form 10-K [File No. 000-19319] and incorporated herein by reference).
10.15 Lease by and between Trustees of Fort Washington Realty Trust, Landlord, and Vertex, executed
September 17, 1999 (filed, with certain confidential information deleted, as Exhibit 10.27 to
Vertex's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 [File No. 000-
19319], and incorporated herein by reference).
10.16 Lease by and between Kendall Square, LLC, Landlord, and Vertex, executed January 18, 2001
(filed, with certain confidential information deleted, as Exhibit 10.16 to Vertex's 2000 Annual
Report on Form 10-K [File No. 000-19319] and incorporated herein by reference).
10.17 Agreement for Lease of Premises at 88 Milton Park, Abingdon, Oxfordshire between Milton Park
Limited and Vertex Pharmaceuticals (Europe) Limited and Vertex Pharmaceuticals Incorporated
(filed as Exhibit 10.18 to Vertex 1999 Annual Report on Form 10-K [File No. 000-19319] and
incorporated herein by reference).
10.18 Research and Development Agreement dated April 13, 1993 between Vertex and Kissei
Pharmaceutical Co., Ltd. (filed, with certain confidential information deleted, as Exhibit 10.1 to
Vertex's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 [File No. 000-
19319] and incorporated herein by reference).
10.19 Research Agreement and License Agreement, both dated December 16, 1993, between Vertex and
Burroughs Wellcome Co. (filed, with certain confidential information deleted, as Exhibit 10.16 to
Vertex's 1993 Annual Report on Form 10-K [File No. 000-19319] and incorporated herein by
reference).
10.20 Research and Development Agreement between Vertex and Eli Lilly and Company effective
June 11, 1997 (filed, with certain confidential information deleted, as Exhibit 10.1 to Vertex's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 [File No. 000-19319] and
incorporated herein by reference).
10.21 Research and Development Agreement between Vertex and Kissei Pharmaceutical Co. Ltd.
effective September 10, 1997 (filed, with certain confidential information deleted, as Exhibit 10.1
to Vertex's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 [File
No. 000-19319] and incorporated herein by reference).
10.22 Research Agreement between Vertex and Schering AG dated as of August 24, 1998 (filed, with
certain confidential information deleted, as Exhibit 10.1 to Vertex's Quarterly Report on Form 10-
Q for the quarter ended September 30, 1998 [File No. 000-19319] and incorporated herein by
reference).
10.23 License, Development and Commercialization Agreement between Vertex and Hoechst Marion
Roussel Deutschland GmbH dated September 1, 1999 (filed, with certain confidential information
deleted, as Exhibit 10.27 to Vertex's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 [File No. 000-19319], and incorporated herein by reference).
56
10.24 Collaboration and Option Agreement between Vertex and Taisho Pharmaceutical Co., Ltd. dated
November 30, 1999 (filed, with certain confidential information deleted, as Exhibit 10.27 to
Vertex's 1999 Form 10-K [File No. 000-19319] and incorporated herein by reference).
10.25 Research and Early Development Agreement between Vertex and Novartis Pharma AG dated
May 8, 2000 (filed, with certain confidential information deleted, as Exhibit 10.1 to Vertex's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 [File No. 000-19319] and
incorporated herein by reference).
10.26 Research Agreement between Vertex and Laboratoires Serono S.A. dated December 11, 2000
(filed, with certain confidential information deleted, as Exhibit 10.26 to Vertex's 2000 Annual
Report on Form 10-K [File No. 000-19319] and incorporated herein by reference).
10.27 Letter Agreement between Aurora and Stuart J. Collinson (filed as Exhibit 10.26 to Vertex's
registration statement on Form S-4 [Registration No. 333-61480] and incorporated herein by
reference).*
10.28 Executive Employment Agreement between Vertex and Kenneth S. Boger (filed as Exhibit 10.28
to Vertex's 2001 Annual Report on Form 10-K [File No. 000-19319] and incorporated herein by
reference).*
10.29 Executive Employment Agreement between Vertex and Ian F. Smith (filed as Exhibit 10.29 to
Vertex's 2001 Annual Report on Form 10-K [File No. 000-19319] and incorporated herein by
reference).*
10.30 Letter Agreement between Vertex and N. Anthony Coles, M.D. (filed as Exhibit 10.30 to Vertex's
2001 Annual Report on Form 10-K [File No. 000-19319] and incorporated herein by reference).*
10.31 Form of Non-Competition Agreement between Vertex and Invitrogen Corporation dated
March 28, 2003 (filed as Exhibit 10.31 to Vertex's 2002 Annual Report on Form 10-K [File
No. 000-19319] and incorporated herein by reference).
10.32 Form of letter agreement with John J. Alam, Senior Vice President of Drug Evaluation and
Approval; Lynne H. Brum, Vice President of Corporate Communications and Financial Planning;
Pamela Fritz, Vice President, Human Resources; Peter Mueller, Chief Scientific Officer and
Senior Vice President, Drug Discovery and Innovation; Mark Murcko, Vice President and Chief
Technology Officer; Steven Schmidt, Vice President, Information Systems; John A. Thomson,
Vice President, Research; and Jeffrey D. Wilson, Vice President, Pharmaceutical Operations,
covering special rights upon a change of control transaction (filed as Exhibit 10.32 to Vertex's
2002 Annual Report on Form 10-K [File No. 000-19319] and incorporated herein by reference).*
10.33 Dealer Manager Agreement dated February 10, 2004 between Vertex and UBS Securities LLC,
(filed as Exhibit 10.1 to Vertex's Current Report on Form 8-K dated February 23, 2004 [File
No. 000-19319] and incorporated herein by reference.
10.34 Resale Registration Rights Agreement dated as of February 13, 2004 between Vertex and UBS
Securities LLC (filed as Exhibit 10.2 to Vertex's Current Report on Form 8-K dated February 23,
2004 [File No. 000-19319] and incorporated herein by reference).
10.35 First Revised and Restated Research and Early Development Agreement between Vertex and
Novartis Pharma AG dated February 3, 2004 (filed, with certain confidential information deleted,
herewith).
18.1 Letter from PricewaterhouseCoopers LLP dated November 14, 2001 re: Change in Accounting
Principle (filed as Exhibit 18.1 to Vertex's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 [File No. 000-19319] and incorporated herein by reference).
21 Subsidiaries of Vertex (filed herewith).
23.1 Consent of Independent Accountants, PricewaterhouseCoopers LLP (filed herewith).
57
31.1 Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
31.2 Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
32.1 Certification of the Chief Executive Officer and the Chief Financial Officer under Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
*
Compensatory plan or agreement applicable to management and employees.
(b) Reports on Form 8-K.
On November 10, 2003, we furnished a report on Form 8-K-Item 9-Regulation FD Disclosure Item 12-Disclosure of Results of Operations
and Financial Condition, reporting that the Company had issued two press releases, one regarding the development status of certain of its drug
candidates and the second reporting that the Company had issued a press release to report the Company's financial results for the quarter ended
September 30, 2003.
On December 5, 2003, we filed a report on Form 8-K-Item 5-Other Events, reporting that Joshua S. Boger, the Company's Chairman and
CEO, entered into a plan with Goldman, Sachs & Co., pursuant to which Goldman will undertake to sell, subject to a limit order, an aggregate
of 370,000 shares of the Company's stock issuable upon exercise of options held by Dr. Boger.
On December 5, 2003, we furnished a report on Form 8-K-Item 9-Regulation FD Disclosure, reporting that the Company had issued a
press release on December 4, 2003 to announce the sale of certain instrumentation assets of Vertex's subsidiary Aurora Instruments LLC to
Aurora Discovery, Inc., and updating our 2003 full-year financial guidance.
On December 16, 2003, we filed a report on Form 8-K-Item 5-Other Events, reporting that on November 17, 2003, Iain P.M. Buchanan,
the Company's Vice President of European Operations, entered into a plan with Lehman Brothers Inc., pursuant to which Lehman will
undertake to sell, subject to a limit order, an aggregate of 50,000 shares of the Company's stock issuable upon exercise of options held by
Mr. Buchanan.
On December 19, 2003, we filed a report on Form 8-K-Item 5-Other Events, reporting that Vicki L. Sato, the Company's President,
entered into a plan with Goldman, Sachs & Co., pursuant to which Goldman will undertake to sell, subject to a limit order, an aggregate of
344,509 shares of the Company's stock issuable upon exercise of options held by Dr. Sato.
58
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.
March 15, 2004
By:
/s/ JOSHUA S. BOGER
VERTEX PHARMACEUTICALS INCORPORATED
Joshua S. Boger
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
Joshua S. Boger
/s/ IAN F. SMITH
Ian F. Smith
/s/ JOHANNA MESSINA POWER
Johanna Messina Power
/s/ ERIC K. BRANDT
Eric K. Brandt
/s/ ROGER W. BRIMBLECOMBE
Roger W. Brimblecombe
/s/ STUART J. COLLINSON
Stuart J. Collinson
/s/ BRUCE I. SACHS
Bruce I. Sachs
/s/ CHARLES A. SANDERS
Charles A. Sanders
/s/ ELAINE S. ULLIAN
Elaine S. Ullian
Director, Chairman and Chief Executive Officer
(Principal Executive Officer)
March 15, 2004
Chief Financial Officer (Principal Financial Officer)
March 15, 2004
Controller (Principal Accounting Officer)
March 15, 2004
Director
Director
Director
Director
Director
Director
59
March 15, 2004
March 15, 2004
March 15, 2004
March 15, 2004
March 15, 2004
March 15, 2004
VERTEX PHARMACEUTICALS INCORPORATED
Index to Consolidated Financial Statements
Page Number
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the years ended
December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and
2001
F-2
F-3
F-4
F-5
F-6
Notes to Consolidated Financial Statements
F-7 to F-37
F-1
Report of Independent Auditors
To the Board of Directors and Stockholders of
Vertex Pharmaceuticals Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders'
equity and comprehensive loss and of cash flows present fairly, in all material respects, the financial position of Vertex Pharmaceuticals
Incorporated and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note C to the consolidated financial statements, during the year ended December 31, 2001 the Company changed its
method of accounting for revenue recognition. As discussed in Note I to the consolidated financial statements, during the year ended
December 31, 2001 the Company changed its method of accounting for certain derivatives.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 10, 2004
F-2
VERTEX PHARMACEUTICALS INCORPORATED
Consolidated Balance Sheets
December 31,
2003
2002
(In thousands, except share and per
share amounts)
Current assets:
Cash and cash equivalents
Assets
$
98,159 $
108,098
Marketable securities, available for sale
Accounts receivable
Prepaid expenses and other current assets
Total current assets
Restricted cash
Property and equipment, net
Investments
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Accrued interest
Obligations under capital leases
Collaborator development loan
Deferred revenue
Accrued restructuring and other expense
Other obligations
Total current liabilities
Obligations under capital leases, excluding current portion
Collaborator development loan, excluding current portion
Other obligations, excluding current portion
Deferred revenue, excluding current portion
Convertible subordinated notes (due September 2007)
Total liabilities
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued
and outstanding at December 31, 2003 and 2002, respectively
Common stock, $0.01 par value; 200,000,000 shares authorized;
78,025,002 and 76,357,412 shares issued and outstanding at December 31,
2003 and 2002, respectively
Additional paid-in capital
Deferred compensation, net
Accumulated other comprehensive income
Accumulated deficit
Total stockholders' equity
485,005
7,324
3,318
593,806
26,061
80,083
18,863
5,598
526,886
13,200
8,388
656,572
26,091
95,991
26,433
10,633
$
724,411 $
815,720
$
12,306 $
26,374
4,455
113
14,000
7,746
69,526
4,547
16,745
29,306
4,463
1,965
—
11,888
—
230
139,067
64,597
—
18,460
7,268
51,771
315,000
99
5,000
5,845
46,598
315,000
531,566
437,139
—
—
780
810,407
(1,112 )
2,690
(619,920 )
764
794,206
—
6,764
(423,153 )
192,845
378,581
Total liabilities and stockholders' equity
$
724,411 $
815,720
The accompanying notes are an integral part of the consolidated financial statements.
F-3
VERTEX PHARMACEUTICALS INCORPORATED
Consolidated Statements of Operations
Years Ended December 31,
2003
2002
2001
(In thousands, except per share data)
Revenues:
Royalties
Collaborative and other research and development revenues
$
9,002 $
60,139
10,054 $
84,716
10,783
74,514
Total revenues
Costs and expenses:
Royalty payments
Research and development
Sales, general and administrative
Restructuring and other expense
Merger related costs
Total costs and expenses
Loss from operations
Interest income
Interest expense
Gain on retirement of convertible subordinated notes
Other expense
69,141
94,770
85,297
3,126
199,636
39,082
91,824
—
3,334
198,338
41,056
—
—
3,594
141,988
31,856
—
22,960
333,668
242,728
200,398
(264,527 )
15,412
(17,298 )
—
—
(147,958 )
28,722
(17,684 )
—
(38 )
(115,101 )
45,133
(19,318 )
10,340
(1,283 )
Loss from continuing operations before cumulative effect of changes in
accounting principles
Income from discontinued operations:
Gain on sales of assets
Income (loss) from discontinued operations
$
(266,413 ) $
(136,958 ) $
(80,229 )
70,339
(693 )
—
28,337
—
22,148
Total income from discontinued operations
69,646
28,337
22,148
Loss before cumulative effect of changes in accounting principles
Cumulative effect of change in accounting principle—revenue recognition
Cumulative effect of change in accounting principle—derivatives
$
(196,767 ) $
(108,621 ) $
—
—
—
—
(58,081 )
(25,901 )
17,749
Net loss
$
(196,767 ) $
(108,621 ) $
(66,233 )
Basic and diluted net loss per common share from continuing operations
before cumulative effect of changes in accounting principles
Discontinued operations
Cumulative effect of changes in accounting principle-revenue recognition
Cumulative effect of change in accounting principle-derivatives
$
(3.46 ) $
0.90
—
—
(1.81 ) $
0.38
—
—
Basic and diluted net loss per common share
$
(2.56 ) $
(1.43 ) $
(1.08 )
0.30
(0.35 )
0.24
(0.89 )
Basic and diluted weighted average number of common shares outstanding
Unaudited pro forma amounts assuming the 2001 accounting change
relating to revenue recognition is applied retroactively (Note C):
Net loss
Basic and diluted net loss per common share
$
$
77,004
75,749
74,464
(196,767 ) $
(2.56 ) $
(108,621 ) $
(1.43 ) $
(40,332 )
(0.54 )
The accompanying notes are an integral part of the consolidated financial statements.
F-4
VERTEX PHARMACEUTICALS INCORPORATED
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Deferred
Compensation
Accumulated
Other
Comprehensive
Income (Loss)
(in thousands)
Accumulated
Deficit
Total
Stockholders'
Equity
Comprehensive
Income (Loss)
Balance, December 31,
2000
Net change in unrealized
holding gains/(losses) on
marketable securities
Translation adjustments
Net loss
Comprehensive loss
Issuances of common stock:
Benefit plans
Equity compensation for
services rendered
Tax benefit of disqualifying
position
Amortization of deferred
compensation
Balance, December 31,
2001
Net change in unrealized
holding gains/(losses) on
marketable securities
Translation adjustments
Net loss
Comprehensive loss
Issuances of common stock:
Benefit plans
Equity compensation for
services rendered
Amortization of deferred
compensation
Balance, December 31,
2002
Net change in unrealized
holding gains/(losses) on
marketable securities
Translation adjustments
Net loss
Comprehensive loss
Issuances of common stock:
Benefit plans
Equity compensation for
services rendered
Amortization of deferred
compensation
Balance, December 31,
2003
73,474
735
757,522
(174 )
4,227
(248,299 )
514,011
1,581
16
19,637
320
539
75,055
751
778,018
1,302
13
15,896
292
76,357
764
794,206
154
(20 )
20
—
7,218
(311 )
(66,233 )
7,218
(311 )
(66,233 )
(59,326 )
7,218 $
(311 )
(66,233 )
$
19,653
320
539
154
11,134
(314,532 )
475,351
(4,922 )
552
(108,621 )
(4,922 ) $
552
(108,621 )
(4,922 )
552
(108,621 )
$
(112,991 )
15,909
292
20
6,764
(423,153 )
378,581
(4,705 )
631
(196,767 )
(4,705 ) $
631
(196,767 )
(4,705 )
631
(196,767 )
$
(200,841 )
1,668
16
16,039
(1,128 )
162
16
14,927
162
16
78,025
780
810,407
(1,112 )
2,690
(619,920 )
192,845
The accompanying notes are an integral part of the consolidated financial statements.
F-5
VERTEX PHARMACEUTICALS INCORPORATED
Consolidated Statements of Cash Flows
Years Ended December 31,
Cash flows from operating activities:
Net loss
Net income from discontinued operations
Loss from continuing operations
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization
Non-cash based compensation expense
Non-cash restructuring and other expense
Write-down of marketable securities and investments
Other non-cash items, net
Loss on disposal of property and equipment
Realized (gains)/losses on marketable securities
Equity in losses of unconsolidated subsidiary
Gain on retirement of convertible subordinated notes
Cumulative effects of changes in accounting principles
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses
Other current assets
Accounts payable
Accrued expenses and other current liabilities
Accrued restructuring and other expense
Accrued interest
Deferred revenue
Effect of discontinued operations on operating activities
2003
2002
2001
(In thousands)
$
(196,767 ) $
(69,646 )
(108,621 ) $
(28,337 )
(66,233 )
(22,148 )
(266,413 )
(136,658 )
(88,381 )
23,438
3,146
4,395
—
—
116
(1,249 )
—
—
—
1,574
596
(2 )
(2,151 )
(4,050 )
69,526
4,683
(1,232 )
24,905
2,894
—
666
1,220
51
(2,048 )
—
—
—
3,064
2,479
2,283
4,770
1,483
—
4
2,012
13,636
17,802
1,501
—
2,100
31
1,107
(3,081 )
662
(10,340 )
8,152
5,515
(3,213 )
8,359
3,732
10,945
—
(424 )
13,452
25,034
Net cash used in operating activities
(167,623 )
(79,539 )
(7,047 )
Cash flows from investing activities:
Purchases of marketable securities
Sales and maturities of marketable securities
Expenditures for property and equipment
Proceeds from the sale of equipment
Restricted cash
Investments and other assets
Effect of discontinued operations on investing activities
(555,842 )
593,998
(17,351 )
—
30
1,603
97,147
(702,986 )
727,582
(38,881 )
6
(4 )
101
(1,780 )
(1,252,781 )
1,176,143
(49,391 )
—
(15,966 )
(3,116 )
24
Net cash (used in) provided by investing activities
119,585
(15,962 )
(145,087 )
Cash flows from financing activities:
Issuances of common stock, net
Repurchase of convertible debentures
Proceeds from notes payable, capital lease and loan obligations
Principal payments on capital leases and other obligations
Effect of discontinued operations on financing activities
11,959
—
27,460
(1,951 )
—
13,327
—
5,000
(3,986 )
(499 )
18,626
(18,900 )
—
(4,417 )
(318 )
Net cash (used in) provided by financing activities
37,468
13,842
(5,009 )
Effect of changes in exchange rates on cash
631
552
(311 )
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents—beginning of period
(9,939 )
108,098
(81,107 )
189,205
(157,454 )
346,659
Cash and cash equivalents—end of period
$
98,159 $
108,098 $
189,205
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for taxes
$
$
15,896 $
— $
16,078 $
118 $
18,244
156
The accompanying notes are an integral part of the consolidated financial statements.
F-6
VERTEX PHARMACEUTICALS INCORPORATED
Notes to Consolidated Financial Statements
A. The Company
Vertex Pharmaceuticals Incorporated ("Vertex" or the "Company") is a biotechnology company in the business of discovering,
developing, and commercializing small molecule drugs for serious diseases including HIV infection, chronic hepatitis C virus infection,
inflammatory and autoimmune disorders and cancer, independently and with collaborators. At December 31, 2003 the Company had three
facilities worldwide with more than 720 employees. The Company's facilities are located in Cambridge, MA, San Diego, CA and Abingdon,
UK.
The Company's principal focus is on the development and commercialization of new treatments for viral and inflammatory diseases. There
are two Vertex discovered products, Agenerase (amprenavir) and Lexiva (fosamprenavir calcium), on the market now for the treatment of HIV
and AIDs. Agenerase was approved and launched in the United States in April 1999. Lexiva was granted marketing approval by the FDA in
October 2003, and was launched by Vertex and GlaxoSmithKline shortly thereafter. Vertex earns a royalty on the sales of Agenerase and
Lexiva and co-promotes these products in partnership with GlaxoSmithKline. Vertex's pipeline of potential products includes drug candidates
targeting chronic hepatitis C infection, drug candidates targeting inflammatory diseases such as rheumatoid arthritis, osteoarthritis, acute
coronary syndromes and psoriasis, and drug candidates directed at cancer therapy. Additionally, Vertex has built a drug discovery capability
that integrates biology, chemistry, biophysics, automation and information technologies, to make the drug discovery process more efficient and
productive.
Partnerships are a key component of Vertex's corporate strategy. Currently, Vertex has significant collaborations with Aventis,
GlaxoSmithKline, Novartis, and Serono. These collaborations provide Vertex with financial support and other valuable resources for its
research programs, development of its clinical drug candidates, and marketing and sales of its products. Vertex currently has drug candidates in
clinical development under collaborations with GlaxoSmithKline, Aventis and Kissei.
The Company has begun developing certain potential products independently, for markets where Vertex believes it can commercialize
products effectively and reach large patient populations, but expend comparatively fewer resources by using a sales force focused on
specialists. At the same time, Vertex is collaborating with partners to discover, develop and market other Vertex-discovered products for
selected major therapeutic areas.
In July 2001, Vertex completed a merger with Aurora BioSciences Corporation ("Aurora"). Aurora specialized in industry-leading assay
development, screening and cell biology capabilities. The Company acquired all of Aurora's outstanding common stock in a tax-free, stock for
stock transaction, for approximately 14.1 million shares of Vertex common stock. Prior to its acquisition by Vertex, Aurora completed a
merger with PanVera Corporation. PanVera Corporation was a biotechnology company engaged in the development, manufacture and
worldwide supply of proteins for evaluation as targets and drug screening assays for high-throughput screening. Both mergers were accounted
for under the pooling of interests method of accounting.
In July 2002, Vertex began to commercialize the Aurora instruments and services, along with PanVera Corporation's reagents and probes
business, under the name PanVera LLC. PanVera LLC's core business included commercialization of fluorescence assay technologies, assay
development services, the manufacture and sale of proteins, reagents and probes, and the development and sale of instrumentation systems.
Upon completion of this reorganization, PanVera LLC comprised the Company's Discovery Tools and Services business and Aurora's
remaining business continued to operate at the former Aurora's San Diego site, as Vertex Pharmaceuticals (San Diego) LLC, dedicated to the
Company's pharmaceuticals business.
F-7
In March and December 2003, in two independent transactions, Vertex sold the assets of the Discovery Tools and Services business. In
connection with those sales the buyers paid approximately $101 million in cash and assumed certain liabilities. As a result of the sales, the
Company now operates in one operating segment: Pharmaceuticals. Please refer to Note D "Sale of Assets" for further information.
Vertex 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, uncertain protection of proprietary technology, clinical trial uncertainty, dependence on
collaborative partners, share price volatility, the need to obtain additional funding, uncertainties relating to pharmaceutical pricing and
reimbursement, limited experience in manufacturing, sales and marketing, potential product liability and the need to comply with government
regulations. The Company expects to incur operating losses for the foreseeable future, as a result of expenditures for its research and
development programs.
B. Accounting Policies
Basis of Presentation
The consolidated financial statements reflect the operations of the Company and its wholly owned subsidiaries. The mergers with Aurora
and PanVera have been accounted for as a pooling of interests under Accounting Principles Board Opinion No. 16, "Business
Combinations" ("APB 16"), and accordingly, the results of operations, financial position and cash flows for Aurora and PanVera have been
included in the consolidated financial statements of the Company for all periods presented.
The sale of the assets of the Company's Discovery Tools and Services business in March 2003 and December 2003 represent a component
of Vertex's business that, beginning in 2002, had separately identifiable cash flows. As such, pursuant to SFAS No. 144, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS No. 144"), the consolidated statements of operations and of cash flows have been restated to show
the results of operations and cash flows of the assets sold as discontinued operations for all periods presented. The results of discontinued
operations prior to 2002 have been prepared using estimates and assumptions the Company has deemed appropriate based upon the information
currently available and does not necessarily reflect the results that would have been achieved had the business operated on a stand-alone basis
for the periods presented. Prior to 2002, the Discovery Tools and Services business was not separately managed operationally or financially
and therefore, Vertex has estimated certain operating expenses based on certain assumptions, including relative costs of the business being sold
compared to historical site costs. Please refer to Note D "Sale of Assets" for further information.
All significant intercompany balances and transactions have been eliminated.
The Company operates in one segment, Pharmaceuticals, and all revenues are from U.S. operations.
Reclassification in the Preparation of Financial Statements
Certain amounts in prior years' financial statements have been reclassified to conform to the current presentation. These reclassifications
had no effect on the reported net loss.
F-8
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of
America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reported periods. Significant estimates in these consolidated financial statements include costs associated with a potential
lease restructuring, the carrying value of the Company's investments in privately held companies and whether any decline in fair value is
considered other than temporary and useful lives for depreciation and amortization. Changes in estimates are recorded in the period in which
they become known. The Company bases its estimates on historical experience and various other assumptions that management believes to be
reasonable under the circumstances. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents, which are money market funds and debt securities, are valued at cost plus accrued interest. The Company considers all
highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Changes in cash and
cash equivalents may be affected by shifts in investment portfolio maturities as well as by actual cash receipts and disbursements.
Marketable Securities
Marketable securities consist of investments in high-grade corporate bonds, asset-backed securities and U.S. government agency securities
that are classified as available for sale. Since these securities are available to fund current operations, they are classified as current assets on the
balance sheet. Marketable securities are stated at fair value with their unrealized gains and losses included as a component of accumulated other
comprehensive income (loss), which is a separate component of stockholders' equity, until such gains and losses are realized. The fair value of
these securities is based on quoted market prices. If a decline in the fair value is considered other-than-temporary, based on available evidence,
the unrealized loss is transferred from other comprehensive income (loss) to the consolidated statement of operations. For the years ended
December 31, 2002 and 2001, the Company recorded $666,000 and $600,000, respectively, in charges to write down certain marketable
securities because the decline in value was considered other-than-temporary. There were no charges to write-down marketable securities in
2003. Realized gains and losses are determined on the specific identification method and are included in interest income.
Investments
Investments at December 31, 2003 and 2002 include long term investments recorded under the cost method of accounting. When the
Company holds an ownership interest of less than 20%, and does not have the ability to exercise significant influence over the investment
entity's operating activities, the Company accounts for its investment using the cost method. If any adjustment to the fair value of an investment
reflects a decline in the value of that investment below its cost, the Company considers the evidence available to it, including the duration and
extent to which the market value of the investment has been less than cost, to evaluate the extent to which the decline is other-than-temporary.
If the decline is considered other-than-temporary, the cost basis of the investment is written down to fair value as a new cost basis and the
amount of the write-down is included in the Company's consolidated
F-9
statement of operations. For the year ended December 31, 2001, the Company recorded $1,500,000 in charges related to the write-down of an
investment because the decline in the value of the investment was considered other-than-temporary. There were no charges to write-down
investments in 2002 or 2003.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of money market funds and
marketable securities. The Company places these investments in highly rated financial institutions, and, by policy, limits the amounts of credit
exposure to any one financial institution. These amounts at times may exceed federally insured limits. The Company has not experienced any
credit losses in these accounts and does not believe it is exposed to any significant credit risk on these funds. The Company has no foreign
exchange contracts, option contracts or other foreign exchange hedging arrangements.
To date, the Company's revenue has been generated from a limited number of customers in the biotechnology and pharmaceuticals
industries in the U.S., Europe and Japan. In 2003 the Company had significant revenue transactions with Novartis and GlaxoSmithKline, which
accounted for 64% and 17%, respectively, of the Company's total revenue. In 2002 and 2001, the Company had significant revenue
transactions with Novartis, which accounted for 26% and 22%, respectively, of the Company's total revenue.
GlaxoSmithKline and Novartis represented approximately 41% and 29%, respectively, of the Company's accounts receivable balance at
December 31, 2003. Kissei Pharmaceuticals and GlaxoSmithKline represented approximately 27% and 19%, respectively, of the Company's
accounts receivable balance at December 31, 2002. Management believes that credit risks associated with these collaborative partners are not
significant.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the lesser of
the lease terms or the estimated useful lives of the related assets, generally four to seven years for furniture and equipment and three to five
years for computers and software. Leasehold improvements are amortized over the lesser of the useful life of the improvements or the
remaining life of the lease. Major additions and betterments are capitalized; maintenance and repairs, which do not improve or extend the life
of the respective assets, are charged to operations. When assets are retired or otherwise disposed of, the assets and related allowances for
depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in the Company's consolidated
statement of operations.
Assets Held for Sale
The Company classifies long-lived assets as held for sale so long as such assets are available for immediate sale in their present condition,
the Company has the intent and ability to transfer the assets to a buyer within one year and the sale of such assets is considered probable at the
balance sheet date. The Company considers a sale probable when a definitive purchase and sale agreement has been signed. Assets held for sale
are measured at the lower of book value or fair value less cost to sell. No assets were classified as held for sale at December 31, 2003 or 2002.
F-10
Long-Lived Assets
The Company accounts for the impairment and disposition of long-lived assets in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In accordance with SFAS No. 144,
management assesses the potential impairments of its long-lived assets whenever events or changes in circumstances indicate that an asset's
carrying value may not be recoverable. If the carrying value exceeds the undiscounted future cash flows estimated to result from the use and
eventual disposition of the asset the Company writes down the asset to its estimated fair value.
Retirement of Convertible Subordinated Notes
In October 2001, the Company repurchased and retired $30,000,000 in principal amount of its 5% Convertible Subordinated Notes due
September 2007 ("2007 Notes"), which resulted in a gain of $10,340,000. In April 2002, the FASB issued SFAS 145, "Recission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 recinds SFAS 4 and SFAS 64,
which addressed the accounting for gains and losses from extinguishment of debt. Under SFAS 145 the gain on retirement of convertible
subordinated notes is considered an ordinary item. The gain on retirement of convertible subordinated notes originally was classified as an
extraordinary item in 2001, but has since been reclassified to loss from continuing operations.
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure" ("SFAS 148"). SFAS 148 amends SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation.
In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company
has adopted the quarterly and annual disclosure requirements of SFAS 148 as required.
In accordance with SFAS 148, the Company has adopted the disclosure-only provisions of SFAS 123 and applies Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for all stock awards
granted to employees. Under APB 25, provided other criteria are met, when the exercise price of options granted to employees under these
plans equals the market price of the common stock on the date of grant, no compensation cost is required. When the exercise price of options
granted to employees under these plans is less than the market price of the common stock on the date of grant, compensation costs are expensed
over the vesting period. Subsequent changes to option terms can also give rise to compensation costs.
At December 31, 2003 the Company had three stock-based employee compensation plans, which are described more fully in Note O
"Common and Preferred Stock." For the year ended December 31, 2003, the Company recorded $16,000 in compensation expense related to
restricted shares issued to employees in 2003. No stock-based employee compensation cost related to stock options is reflected in the net loss,
as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. For
stock options granted to nonemployees, the Company recognizes compensation costs in accordance with the requirements of SFAS 123.
SFAS 123
F-11
requires that companies recognize compensation expense for grants of stock, stock options and other equity instruments based on fair value.
The following table illustrates the effect on net loss and net loss per share if the fair value recognition of SFAS 123 had been applied to
the Company's stock-based employee compensation.
Year Ended December 31,
2003
2002
2001
(In thousands, except per share data)
Net loss attributable to common shareholders, as reported
Add: Employee stock-based compensation expense included in net loss
Deduct: Total stock-based employee compensation expense determined
under the fair value based method for all awards
$
(196,767 ) $
(108,621 ) $
16
—
(66,233 )
—
(51,180 )
(54,686 )
(55,295 )
Pro forma net loss
Basic and diluted net loss per common share, as reported
$
$
(247,931 ) $
(2.56 ) $
(163,307 ) $
(1.43 ) $
(121,528 )
(0.89 )
Basic and diluted net loss per common share, pro forma
$
(3.22 ) $
(2.16 ) $
(1.63 )
Restructuring and Other Expense
In June 2002, the FASB issued SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF 94-3 "Liability Recognition
for Certain Employee Termination Benefits and other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
principal differences between SFAS 146 and EITF 94-3 relate to the timing of recording a liability and the value of the liability recorded;
SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and that the
liability be recorded at fair value. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002.
The Company adopted SFAS 146 as required and accordingly records costs and liabilities associated with exit and disposal activities, as
defined in SFAS 146, at fair value in the period the liability is incurred. In periods subsequent to initial measurement, changes to the liability
are measured using the credit-adjusted risk-free rate applied in the initial period. In 2003, the Company recorded costs and liabilities for exit
and disposal activities related to a restructuring plan, including a decision not to occupy a leased facility, in accordance with SFAS 146. The
liability is evaluated and adjusted as appropriate on at least a quarterly basis for changes in circumstances. Please refer to Note E "Restructuring
and Other Expense" for further information.
Revenue Recognition
The Company's revenue recognition policies are in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), as amended by SEC Staff Accounting Bulletin No. 104,
"Revenue Recognition." In third quarter of 2003, the Company adopted Emerging Issues Task Force Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables" ("EITF 00-21"). EITF 00-21 addresses certain aspects of the accounting for arrangements that involve the delivery
or performance of multiple products, services and/or rights to use assets. The provisions of EITF 00-21 apply to revenue
F-12
arrangements entered into after June 30, 2003. The Company generates revenues through collaborative research and development agreements
and royalties on commercialized products.
Collaborative and Other Research and Development Revenue
The Company's collaborative and other research and development revenue is generated primarily through collaborative research and
development agreements with strategic partners for the discovery, development and commercialization of major pharmaceutical products. The
terms of the agreements typically include non-refundable up-front license fees, funding of research and development efforts, payments based
upon achievement of certain milestones and royalties on product sales.
In the third quarter of 2001, in connection with an overall review of accounting policies concurrent with the merger with Aurora, Vertex
elected to change its revenue recognition policy for collaborative and other research and development revenues from the Emerging Issues Task
Force No. 91-6 ("EITF 91-6") Method to the Substantive Milestone Method, adopted retroactively to January 1, 2001. Under the Substantive
Milestone Method, the Company recognizes revenue from non-refundable, up-front license fees and milestones, not specifically tied to a
separate earnings process, ratably over the contracted or estimated period of performance. Research funding is recognized as earned, ratably
over the period of effort. Milestones, based on designated achievement points that are considered at risk and substantive at the inception of the
collaborative agreement, are recognized as earned, when the earnings process is complete and the corresponding payment is reasonably
assured. The Company evaluates whether milestones are at risk and substantive based on the contingent nature of the milestone, specifically
reviewing factors such as the technological and commercial risk that needs to be overcome and the level of investment required. Because
Vertex's adoption of the Substantive Milestone Method in the third quarter of 2001 was retroactive to January 1, 2001, the results of the first
two quarters of 2001 have been restated in accordance with the new revenue policy. Pursuant to the 2001 change, Vertex recorded a one-time
non-cash charge of $25,901,000, representing a cumulative change in accounting principle for periods prior to 2001.
Under EITF 00-21, in multiple element arrangements, license payments are recognized together with any up-front payment and the
research and development funding as a single unit of accounting, unless the delivered technology has stand alone value to the customer and
there is objective and reliable evidence of fair value of the undelivered elements in the arrangement. The Company did not receive any license
payments during 2003. License payments received during the course of a collaboration that do not meet the separation criteria above are
recognized, when earned, in proportion to the period of time completed on the contract relative to the total contracted or estimated period of
performance on the underlying research and development collaboration, with the remaining amount deferred and recognized ratably over the
remaining period of performance. Payments received after performance obligations are complete are recognized when earned.
Royalty Revenue
Royalty revenue is recognized based upon actual and estimated net sales of licensed products in licensed territories as provided by the
collaborative partner and is recognized in the period the sales occur. Differences between actual royalty revenues and estimated royalty
revenues, which have not been historically significant, are reconciled and adjusted for in the quarter they become known.
F-13
Research and Development
All research and development costs, including amounts funded in research collaborations, are expensed as incurred. Research and
development expenses are comprised of costs incurred in performing research and development activities including salaries and benefits,
facilities costs, overhead costs, clinical trial costs, contract services and other outside costs.
Advertising
All advertising costs are expensed as incurred. During the years ended December 31, 2002 and 2001, advertising expenses totaled
$431,000 and $444,000, respectively. There were no advertising costs in 2003.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial
statement carrying amounts and the income tax bases of assets and liabilities. A valuation allowance is applied against any net deferred tax
asset if, based on the weighted available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Debt Issuance Costs
Debt issuance costs related to expenses incurred to complete Vertex's convertible subordinated note offerings are deferred and included in
other assets on the consolidated balance sheet. The costs are amortized based on the effective interest method over the term of the related debt
issuance. The amortization expense is included in interest expense on the consolidated statements of operations.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss), which includes foreign currency
translation adjustments and unrealized gains and losses on certain marketable securities. For purposes of comprehensive income (loss)
disclosures, the Company does not record tax provisions or benefits for the net changes in foreign currency translation adjustment, as the
Company intends to permanently reinvest undistributed earnings in its foreign subsidiaries.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the local currency. Assets and liabilities of the foreign subsidiary are
remeasured into U.S. dollars at rates of exchange in effect at the end of the year. Revenue and expense amounts are remeasured using the
average exchange rates for the period. Net unrealized gains and losses resulting from foreign currency remeasurement are included in other
comprehensive income (loss), which is a separate component of stockholders' equity.
Basic and Diluted Net Loss per Common Share
Basic net loss per share is based upon the weighted average number of common shares outstanding during the period. Diluted net loss 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 exercise of
outstanding stock options, the proceeds of which are then assumed to have
F-14
been used to repurchase outstanding stock using the treasury stock method, the assumed conversion of convertible notes and unvested restricted
shares of common stock. Common equivalent shares have not been included in the net loss per share calculations as their effect would be anti-
dilutive. Total potential gross common equivalent shares, before applying the treasury stock method, at December 31, 2003, 2002 and 2001
consisted of 16,802,000, 17,065,000 and 16,810,000 stock options outstanding, respectively, with a weighted average exercise price of $23.42,
$25.73 and $27.37, respectively. At December 31, 2003, 2002 and 2001 there were notes convertible into 3,414,264 shares of common stock at
a conversion price of $92.26 per share. At December 31, 2003 there were 124,481 unvested restricted shares of common stock. Please refer to
Note M "Convertible Subordinated Notes" for further information about Vertex's recent exchange of convertible notes.
New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes
standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The adoption
of SFAS 150 in the third quarter of 2003 did not have a material impact on the Company's results of operation or financial position.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting for derivative
instruments and for hedging activities under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and
Hedging Activities . The adoption of SFAS 149 in the third quarter of 2003 did not have a material impact on the Company's results of
operation or financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosures the Company must make about
obligations under certain guarantees that the company has issued. It also requires the Company to recognize, at the inception of a guarantee, a
liability for the fair value of the obligations undertaken in issuing the guarantee. The initial recognition and initial measurement provisions are
to be applied only to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the
Company's results of operations or financial position. The Company has provided additional disclosure with respect to guarantees in Note U
"Guarantees."
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation
of ARB No. 51" and in December 2003 issued a revised FIN 46 ("FIN 46R") which addresses the period of adoption of FIN 46 for entities
created before January 31, 2003. FIN 46 provides a new consolidation model which determines control and consolidation based on potential
variability in gains and losses. The provisions of FIN 46 are effective for enterprises with variable interest entities created after January 31,
2003. The Company must adopt the provisions of FIN 46 in the first quarter of fiscal 2004 and does not expect the adoption to have a material
impact on the consolidated financial statements.
F-15
C. Change in Accounting Principle—Revenue Recognition
In the third quarter of 2001, in connection with an overall review of accounting policies concurrent with the merger with Aurora, Vertex
elected to change its revenue recognition policy for collaborative and other research and development revenues from the EITF 91-6 Method to
the Substantive Milestone Method adopted retroactively to January 1, 2001. Vertex believes this method is preferable because it is more
reflective of the Company's on-going business operations and is more consistent with industry practices following the implementation of SAB
101 throughout the biotechnology industry in 2000. Under the Substantive Milestone Method, the Company recognizes revenue from non-
refundable up-front license fees and milestones, not specifically tied to a separate earnings process, ratably over the contracted or estimated
period of performance. Research funding is recognized as earned, ratably over the period of effort. Milestones, based on designated
achievement points that are considered at risk and substantive at inception of the contract, are recognized as earned, and a separate earnings
process is complete, when the corresponding payment is reasonably assured. The Company evaluates whether milestones are at risk and
substantive based on the contingent nature of the milestone, specifically reviewing factors such as the technological and commercial risk that
needs to be overcome and the level of investment required.
Pursuant to the 2001 change in accounting principle to the Substantive Milestone Method, Vertex recorded a one-time non-cash charge of
$25,901,000, representing a cumulative effect of a change in accounting principle for periods prior to 2001. The impact of the adoption of this
new accounting policy for revenue recognition for collaborative and other research and development revenues was to defer revenue recognition
for certain portions of revenue previously recognized under Vertex's collaborative agreements into future accounting periods. Since Vertex's
adoption of the Substantive Milestone Method in the third quarter of 2001 was retroactive to January 1, 2001, the results of the first two
quarters of 2001 have been restated in accordance with this revenue recognition policy. Included in collaborative and other research and
development revenue is $2,809,000 and $6,979,000 of revenue recognized in 2003 and 2002, respectively, that was included in the one-time
non-cash charge of $25,901,000. The amount of revenue to be recognized in future years that was included in the one-time non-cash charge of
$25,901,000 is $3,684,000, $3,628,000 and $1,053,000 in 2004, 2005 and thereafter, respectively.
D. Sale of Assets
In March and December 2003, in two independent transactions, Vertex sold the assets of its Discovery Tools and Services business. The
Discovery Tools and Services business specialized in assay development, screening services, instrumentation development and sales and the
manufacture and sale of proteins, reagents and probes. As a result of these sales, the Company now operates in one operating segment:
Pharmaceuticals.
On March 28, 2003, Vertex completed the sale of certain assets of the Discovery Tools and Services business, including certain
proprietary reagents, probes and proteins and certain biochemical and cellular assay capabilities, to Invitrogen Corporation ("PanVera Asset
Sale"). Substantially all of the assets sold were owned by Vertex's wholly-owned subsidiary, PanVera. In connection with the sale, Mirus
Corporation ("Mirus") exercised a right of first refusal with respect to shares of Mirus owned by PanVera. Additionally, on the same date,
Mirus acquired certain of PanVera's assets. The aggregate gross consideration received by PanVera for the assets conveyed to Invitrogen and
Mirus was approximately $97 million in cash and assumption of certain liabilities.
In connection with the sale, Vertex obtained a license from Invitrogen to make and use the reagents and probes sold to Invitrogen solely
for its drug discovery activities, independently and with
F-16
partners, but has agreed that it will not engage in the business of providing reagents, probes or assay development services to third parties for a
term of five years. Vertex also agreed to purchase a minimum of $3 million of specified products annually from Invitrogen for three years after
the completion of the sale. The prices of the products within the purchase commitment approximate fair value. The sale did not include the
instrumentation assets of the Discovery Tools and Services business, which were historically managed both financially and operationally
together with the assets sold on March 28, 2003.
The Company recorded a gain on the PanVera Asset Sale of approximately $69 million. The gain was recorded net of transaction costs
and certain accruals and receivables established for transaction bonuses payable by Vertex to former employees meeting certain employment
requirements, an obligation in connection with certain annual contractual license fees under a customer agreement, estimated losses on the
three year purchase commitment for required payments in excess of the fair value of products expected to be purchased and an adjustment
based upon the net book value of the assets sold on the closing date. Vertex has not recorded any income tax liability associated with the gain
on the sale. It is anticipated that operating losses will be used to offset the taxable income generated from the sale. Accruals recorded in
connection with the sale are included in other obligations, current and non-current, on the condensed consolidated balance sheets.
On December 3, 2003, Vertex sold the remaining instrumentation assets of its Discovery Tools and Services business to Aurora
Discovery, Inc., a new company formed by Telegraph Hill Partners, LP and certain former employees of Vertex, for approximately
$4.3 million and the assumption of certain liabilities. The assets sold were used to develop and commercialize liquid and cell-dispensing
instruments that are used in high throughput drug discovery screening and large-scale, automated molecular biology. Vertex has retained non-
exclusive licenses to use the instrumentation technologies sold in its drug discovery research. The Company recorded a $1.0 million gain on the
sale. The gain was recorded net of transaction costs. The Company did not record any income tax liability associated with the sale in
December 2003. It is anticipated that operating losses will be used to offset the taxable income generated from the sale.
The combination of the Discovery Tools and Services assets sold in March 2003 and in December 2003 represents a component of the
Company's business that, beginning in 2002, was managed separately both financially and operationally.
In accordance with SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets" ("SFAS No. 144"), the results of operations
and cash flows of the assets sold have been reclassified in the consolidated financial statements under the heading "discontinued operations" for
all periods presented. The reclassification of the amounts to discontinued operations have been prepared using certain estimates and
assumptions deemed appropriate based upon information available. Amounts reclassified to discontinued operations are not necessarily
indicative of what revenues, expenses or income would have been had the business operated on a stand-alone basis. Prior to 2002, the
Discovery Tools and Services business was not separately managed operationally or financially and therefore, certain operating expenses were
estimated based on certain assumptions, including relative costs of the business sold compared to historical site costs.
F-17
Income from discontinued operations is comprised of the following revenue and expenses:
Year Ended December 31,
2003
2002
2001
(In thousands)
Revenues from discontinued operations
Expenses from discontinued operations
Gain from sale of discontinued operations
$
11,574 $
12,267
70,339
66,315 $
37,978
—
82,193
60,045
—
Income from discontinued operations
$
69,646 $
28,337 $
22,148
E. Restructuring and Other Expense
On June 10, 2003, Vertex adopted a plan to restructure its operations in preparation for investments in advancing major products through
clinical development to commercialization. The restructuring was designed to rebalance the Company's relative investment in research,
development and commercialization, to better enable the Company to pursue its long-term objective of becoming a profitable pharmaceutical
company with industry-leading capabilities in research, development and commercialization of products. The restructuring plan included a
workforce reduction, write-offs of certain assets and a decision not to occupy the Kendall Square facility. The facility is approximately 290,000
square feet of specialized laboratory and office space in Cambridge, Massachusetts ("Kendall Square Lease"). The lease commenced in
January 2003 and has a 15-year term. The Company is actively trying to restructure the lease obligation. The Company recorded restructuring
and other related expenses of $91.8 million for the twelve months ended December 31, 2003. The $91.8 million includes $78.7 million of
potential lease restructuring expense, $6.0 million of lease operating expense incurred prior to the decision not to occupy the Kendall Square
facility, $2.6 million for severance and related employee transition benefits and $4.5 million for a write-off of leasehold improvements and
other assets.
The activity related to restructuring and other expense for the twelve months ended December 31, 2003, is presented below (in thousands):
Charge for
the Twelve
Months Ended
December 31,
2003
Cash Payments
in 2003
Non-cash
Write-off in
2003
Accrual as of
December 31,
2003
Lease restructuring expense and other operating
lease expense
Employee severance, benefits and related costs
Leasehold improvements and asset impairments
$
84,726 $
2,616
4,482
15,200 $
2,616
—
— $
—
4,482
Total
$
91,824 $
17,816 $
4,482 $
69,526
—
—
69,526
As a result of the Company's restructuring plan and in accordance with SFAS 146, "Accounting for Costs Associated with Exit or
Disposal Activities," the Company recorded an initial estimate, at fair value, in the second quarter of 2003. The Company reviews its
assumptions and estimates quarterly and updates the liability as changes in circumstances require. Of the $78.7 million of the potential lease
restructuring expense for the year ended December 31, 2003, $34.9 million, $42.4 million and $1.4 million was recorded in the second, third
and fourth quarters of 2003, respectively. As prescribed
F-18
by SFAS 146, the liability recorded with respect to the potential lease restructuring was calculated using probability weighted discounted cash
flows based on the Company's assumptions and estimates regarding the possible outcomes of the potential lease restructuring, including
contractual rental and build-out commitments, lease buy-out, time to sublease the space and sublease rental rates. The Company validates its
estimates and assumptions through consultations with independent third parties having relevant expertise. The Company used a credit-adjusted
risk-free rate of approximately 10% to discount the estimated cash flows. The incremental $42.4 million charge recorded in the third quarter of
2003 resulted from revised expectations of the Company's potential liability due to an increase in available laboratory and office space in
Cambridge, Massachusetts and certain other factors which led to a corresponding overall decline in real estate market fundamentals.
Accordingly, the Company revised its expectations of attainable sublease terms, assuming lower sublease rental rates and a delay in occupancy
by a subtenant.
The expense and liability related to the potential lease restructuring requires the Company to make significant estimates and assumptions.
The Company will review the estimates and assumptions on at least a quarterly basis, until the outcome is finalized, and make whatever
modifications management believes to be necessary, based on the Company's best judgment, to reflect any changed circumstances. It is
possible that such estimates could change in the future resulting in additional adjustments, and the effect of any such adjustments could be
material. Because the Company's estimate of the liability related to the potential lease restructuring includes the application of a discount rate to
reflect the time value of money, the estimate of the liability will change as a result of time passing. Any such changes to the Company's
estimate of the liability are recorded as additional restructuring and other expense.
The severance, benefits and other related costs also were recorded in accordance with SFAS 146. The Company specifically identified all
employees whose employment was to be terminated and notified them prior to the end of the quarter in which the related charge was recorded.
This restructuring plan resulted in a reduction of 111 employees, or 13% of the Company's workforce, of which 66 were from the Cambridge
site and 45 were from the San Diego site. Of the terminated employees, 59% were from research, 30% were from sales, general and
administrative, who primarily supported research, and 11% were from development.
The payment of the remaining accrued liability of approximately $69.5 million related to the potential lease restructuring and other
expense is dependent upon the ultimate terms of any restructuring of the lease.
F-19
F. Marketable Securities
A summary of cash equivalents and available-for-sale securities is shown below (in thousands):
December 31, 2003
Cash and cash equivalents
Cash and money market funds
Municipal bonds
Corporate debt securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
87,132
6,406
4,621
$
87,132
6,406
4,621
Total cash and cash equivalents
$
98,159
$
98,159
Marketable securities
Municipal bond securities
Due within 1 year
US government securities
Due within 1 year
Due within 1 to 5 years
Total US government securities
Corporate debt securities
Due within 1 year
Due within 1 to 5 years
Total corporate debt securities
$
2,016 $
— $
17 $
1,999
11,250
70,706
81,956
176,034
222,717
11,427
71,199
728
58
82,626
176,593
223,787
398,751
1,900
271
400,380
Total marketable securities
$
482,723 $
2,628 $
346 $
485,005
Total cash, cash equivalents and marketable securities
$
580,882 $
2,628 $
346 $
583,164
December 31, 2002
Cash and cash equivalents
Cash and money market funds
Corporate debt securities
Total cash and cash equivalents
Marketable securities
Total equity securities
US government securities
Due within 1 year
Due within 1 to 5 years
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
102,598
5,500
$
108,098
$
102,598
5,500
$
108,098
$
265 $
75
$
340
44,770
75,969
45,056
77,720
122,776
259,619
144,151
Total US government securities
120,739
2,037
Corporate debt securities
Due within 1 year
Due within 1 to 5 years
257,347
141,548
Total corporate debt securities
398,895
4,881
6
403,770
Total marketable securities
$
519,899 $
6,993 $
6 $
526,886
Total cash, cash equivalents and marketable securities
$
627,997 $
6,993 $
6 $
634,984
F-20
Gross realized gains for 2003 were $1,249,000. There were no gross realized losses for 2003. Gross realized gains and losses for 2002
were $2,281,000 and $233,000, respectively. Gross realized gains and losses for 2001 were $3,134,000 and $53,000, respectively. Maturities
stated are effective maturities.
G. Restricted Cash
At December 31, 2003 and 2002, the Company held $26,061,000 and $26,091,000 in restricted cash, respectively. At December 31, 2003
and 2002 the balance was held in deposit with certain banks predominantly to collateralize conditional stand-by letters of credit in the names of
the Company's landlords pursuant to certain operating lease agreements.
On January 5, 2004, the Company issued a stand-by letter of credit in the amount of $11,500,000 pursuant to certain operating lease
requirements.
H. Property and Equipment
Property and equipment consist of the following at December 31 (in thousands):
Furniture and equipment
Leasehold improvements
Computers
Software
Building
Construction in process
Total property and equipment, gross
Less accumulated depreciation and amortization
$
2003
2002
92,497 $
62,412
16,289
15,336
—
—
92,330
56,177
14,271
11,564
6,133
1,519
186,534
106,451
181,994
86,003
Total property and equipment, net
$
80,083 $
95,991
Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was $27,988,000, $24,003,000 and $16,385,000,
respectively.
The sale of certain assets of the Discovery Tools and Services business in March 2003 included the laboratory, production and office
facility owned by the Company in Madison, Wisconsin. This asset appears in the table above with a book value of $6,133,000 for the year
ended December 31, 2002.
In 2003 and 2002, the Company wrote off certain assets that were fully depreciated and no longer utilized. There was no effect on the
Company's net property and equipment. Additionally, the Company wrote off certain assets that were not fully depreciated. The total expense
for those assets was $148,000.
I. Investments
In February 1999, Vertex restructured its investment in Altus Biologics Inc. ("Altus"), which was a majority owned subsidiary, so that
Altus would operate independently from Vertex. 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. Vertex accounted for its investment in Altus
under the equity method of accounting.
F-21
In September and November of 2001, Altus underwent financial restructurings, which reduced Vertex's relative ownership in Altus to
approximately 14% and 11% on the respective dates. Accordingly, effective September 28, 2001, Vertex began accounting for its investment in
Altus using the cost method. For the period from January 1, 2001 through September 28, 2001, Vertex recorded $662,000 as its share of Altus'
losses under the equity method of accounting. The loss is included in other expense on the statement of operations.
In the third quarter of 2001, Vertex adopted Derivative Implementation Group Issue No. A17, "Contracts that Provide for Net Share
Settlement" ("DIG A17"). Subsequent to the issuance of SFAS No. 133, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," the FASB established the Derivatives Implementation Group to address and interpret practice issues relating to that standard. On
April 10, 2001, the FASB published DIG A17 relating to contracts that provide for net share settlement, including warrants of a privately held
company. Pursuant to the adoption of DIG A17 on July 1, 2001, Vertex recorded a $17,749,000 cumulative effect of a change in accounting
principle to reflect the value of warrants held in Altus as income with a corresponding increase to Investments. The valuation of the warrants
was determined based on an independent appraisal that used the Black-Scholes option pricing model. Significant assumptions used in the
Black-Scholes model included the fair value of Altus' common stock, which was based on a valuation of Altus using projected discounted cash
flows and comparable market values using multiples of revenue, volatility of 70%, risk-free interest rates between 4.9% to 5.6% and warrant
terms per the agreements ranging from 3.5 to 11.6 years. As of September 30, 2001, the warrants no longer qualified as derivatives under DIG
A17 due to changes in the terms of the warrants coincident with the financial restructuring of Altus. The Company's cost basis carrying value in
its outstanding equity and warrants of Altus was $18,813,000 at December 31, 2003 and 2002, respectively. At December 31, 2003 the
Company did not have any additional investments in privately held companies. The Company held investments in other privately held
companies at December 31, 2002, which investments were disposed of in the sale of certain assets of the Discovery Tools and Services
business in March 2003.
In accordance with the Company's policy, as outlined in Note B, the Company has assessed its investment in Altus and determined that
there had not been any adjustments to the respective fair values indicating a decrease in the fair value of the investment below the carrying
value that would require the Company to write-down the investment basis of the investment at December 31, 2003.
J. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at December 31 (in thousands):
Research and development contract costs
Payroll and benefits
Professional fees
Other
F-22
2003
2002
$
11,098 $
8,399
5,940
937
11,435
11,100
3,324
3,447
$
26,374 $
29,306
K. Capital Leases
At December 31, 2003, the Company had obligations under capital leases for the short-term only; there are no obligations under long-term
capital leases. At December 31, 2003 the Company had capital lease obligations due of $113,000, of which $2,000 represents interest
payments.
L. Commitments
The Company leases its facilities and certain equipment under non-cancelable operating leases. The Company's leases have terms through
the year 2018. The term of the Kendall Square Lease began January 1, 2003 and lease payments commenced in May 2003. The Company has
an obligation, staged over a number of years, to build out the space into finished laboratory and office space. The lease will expire in 2018 with
options to extend the lease for two consecutive terms of ten years each, ultimately expiring in 2038. In June 2003, the Company decided not to
occupy the space under this lease and is actively seeking to restructure the lease and to secure subtenancies acceptable to the landlord. See
Note E for further information.
At December 31, 2003, future minimum commitments under facility operating leases with non-cancelable terms of more than one year
(including the Kendall Square Lease) are as follows (in thousands):
Kendall Square
Other Operating
Total Operating
Year
2004
2005
2006
2007
2008
Thereafter
Lease
Leases
Leases
$
29,188 $
27,415
22,476
18,541
19,296
195,537
15,774 $
15,685
12,401
11,663
11,663
16,090
44,962
43,100
34,877
30,204
30,959
211,627
Total minimum lease payments
$
312,453 $
83,276 $
395,729
Rental expense, primarily related to facilities, was $15,449,000, $15,847,000, and $15,447,000 for the years ended December 31, 2003,
2002 and 2001, respectively.
The Company has future contractual commitments in connection with its research and development programs. For 2004 and 2005 the
amounts committed under these contracts are $2,769,000 and $2,365,000, respectively.
In connection with the PanVera Asset Sale (see Note D), Vertex agreed to purchase a minimum of $3 million of certain specified products
from Invitrogen annually for three years. The estimated losses on the three year purchase commitment for anticipated payments in excess of the
fair value of products expected to be purchased have been booked against the gain on the sale and recorded as a liability on the consolidated
balance sheets.
M. Convertible Subordinated Notes
On September 19, 2000, the Company issued $345,000,000 of 5% Convertible Subordinated Notes due September 2007 ("2007 Notes").
In October 2001, the Company repurchased $30,000,000 in principal amount of the 2007 Notes for cash consideration of $18,900,000. As a
result of this transaction, the Company recorded a gain on the early extinguishment of debt of $10,340,000, net of $760,000 of deferred debt
costs, in the fourth quarter of 2001. At December 31, 2003, the 2007 Notes
F-23
had an outstanding balance of $315,000,000 and a fair value of $282,860,000 as obtained from a quoted market source.
The 2007 Notes are convertible, at the option of the holder, into common stock at a price equal to $92.26 per share, subject to adjustment
under certain circumstances. The 2007 Notes bear interest at the rate of 5% per annum, and the Company is required to make semi-annual
interest payments on the outstanding principal balance of the notes on March 19 and September 19 of each year. The 2007 Notes are
redeemable by the Company at any time on or after September 19, 2003 at specific redemption prices if the closing price of the Company's
common stock exceeds 120% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days.
The deferred financing costs associated with the sale of the convertible notes, which are classified as long-term other assets, were $9,297,000
of which $1,401,000, $1,401,000 and $1,498,000 and were amortized to interest expense in 2003, 2002 and 2001, respectively.
On February 13, 2004, Vertex exchanged approximately $153.1 million in aggregate principal amount of the 2007 Notes for
approximately $153.1 million in aggregate principal amount of newly issued 5.75% Convertible Senior Subordinated Notes due 2011
("2011 Notes"). The 2011 Notes were issued through a private offering to qualified institutional buyers. The 2011 Notes are convertible, at the
option of the holder, into common stock at a price equal to $14.94 per share, subject to adjustment under certain circumstances. The 2011
Notes bear interest at the rate of 5.75% per annum, and the Company is required to make semi-annual interest payments on the outstanding
principal balance on February 15 and August 15 of each year. On or after February 15, 2007, the Company may redeem the notes at a
redemption price equal to the principal amount plus accrued and unpaid interest, if any. The 2011 Notes are senior in right of payment to the
2007 Notes. Upon completion of the exchange, the Company had approximately $161.9 million in aggregate principal amount of 2007 Notes
and approximately $153.1 million in aggregate principal amount of 2011 Notes.
N. Income Taxes
For the year ended December 31, 2003, there is no provision for income taxes included in the Consolidated Statement of Operations. For
the years ended December 31, 2002 and December 31, 2001, the Company provided approximately $276,000 and $630,000, respectively, for
income taxes which was recorded in other expense on the Consolidated Statement of Operations. The provision principally relates to certain
foreign obligations. The Company's federal statutory income tax rate for 2003, 2002 and 2001 was 34%. The Company has incurred losses
from operations but has not recorded an income tax benefit for 2003, 2002 and 2001 as the Company has recorded a valuation allowance
against its net operating losses and other net deferred tax assets due to uncertainties related to the realizability of these tax assets.
F-24
Deferred tax liabilities and assets are determined based on the difference between financial statement and tax bases using enacted tax rates
in effect for the year in which the differences are expected to reverse. The components of deferred taxes at December 31 were as follows (in
thousands):
Deferred Tax Assets:
Net operating loss
Tax credits carryforward
Property, plant and equipment
Deferred revenue
Capitalized research and development
Other
Gross deferred tax asset
Valuation allowance
Deferred Tax Liabilities:
Gain on Investment
Net deferred tax asset
2003
2002
$
210,928 $
24,944
10,484
—
53,154
31,754
207,691
23,471
6,400
1,690
43,193
2,688
331,264
285,133
(320,206 )
(274,075 )
(11,058 )
(11,058 )
$
— $
—
Of the $320,206,000 gross deferred tax asset at December 31, 2003, $102,919,000 relates to deductions for nonqualified stock options,
which will be credited to additional paid-in capital, if realized.
For federal income tax purposes, as of December 31, 2003, the Company had net operating loss carryforwards of approximately
$542,726,000 and tax credits of $15,686,000 which may be used to offset future income. The operating loss carryforwards will expire as
follows: $1,329,000 in 2005, $4,462,000 in 2006 and $536,935,000 thereafter. The tax credit carryforwards begin to expire in 2004. A
valuation allowance has been established for the full amount of the 2003 deferred tax asset since it is more likely than not that the deferred tax
asset will not be realized. The Company also has foreign net operating loss carryforwards of $1,400,000, which have no expiration date.
Ownership changes, as defined by Internal Revenue Code, may have limited the amount of net operating losses and research and
experimentation credit carryforwards that can be utilized annually to offset future taxable income and taxes payable.
O. Common and Preferred Stock
Common Stock
Stock and Option Plans
The Company has a 1991 Stock Option Plan (the "1991 Plan"), a 1994 Stock and Option Plan (the "1994 Plan") and a 1996 Stock and
Option Plan (the "1996 Plan"). Stock options may be granted under the Plans either as options intended to qualify as "incentive stock
options" ("ISOs") under the Internal Revenue Code or as non-qualified stock options ("NQSOs"). Under the 1991 Plan, stock options may be
granted to employees (including officers and directors who are employees) and to consultants of the Company (NQSOs only). Under the 1994
Plan and the 1996 Plan, stock rights, which may be (i) ISOs when Internal Revenue Code requirements are met, (ii) NQSOs, or (iii) shares of
common stock or the opportunity to make a direct purchase of shares of common stock ("Stock
F-25
Awards"), may be granted to employees (including officers and directors who are employees) and consultants, advisors and non-employee
directors (NQSOs and stock awards only). Under the 1991 and 1994 Plans, ISOs may be granted at a price not less than the fair market value of
the common stock on the date of the grant, and NQSOs may be granted at an exercise price established by the Management Development and
Compensation Committee of the Board of Directors, which may be less than, equal to or greater than the fair value of the common stock on the
date of the grant. Stock options granted under the 1996 Plan may not be granted at a price less than the fair market value of the common stock
on the date of grant. Vesting is ratable over specified periods for all plans, is generally four or five years, and is determined by the Management
Development and Compensation Committee. ISOs granted under the Plans must expire not more than ten years from the date of grant.
In July 2001, in connection with the acquisition of Aurora, the Company assumed the obligations under the Aurora 1996 Stock Plan (the
"Aurora Stock Plan"), the 1993 Stock Plan of PanVera Corporation (the "PanVera Plan") and certain non-plan stock option agreements ("Non-
Plan Stock Option Agreements") under which 1,039,596, 3,328 and 2,697 shares of Vertex's common stock, respectively, were reserved for
issuance at December 31, 2003.
The Company has reserved 8,000,000 shares under the 1991 Plan and 1994 Plan. The Company reserved 22,000,000 shares for issuance
under the 1996 Plan, of which 5,500,000 were reserved during 2001 and 6,000,000 were reserved in 2002. At December 31, 2003, the
Company had a total of 5,026,815 shares of common stock available for future grant under its 1991, 1994 and 1996 stock option plans. No
shares remain available for grant under the Aurora Stock Plan, the PanVera Plan or Non-Plan Stock Option Agreements.
Consolidated stock option activity for the years ended December 31, 2003, 2002 and 2001 is as follows (shares in thousands):
2003
2002
2001
Weighted
Average
Exercise Price
Shares
Weighted
Average
Exercise Price
Shares
Weighted
Average
Exercise Price
Outstanding at beginning of year
Granted
Exercised
Canceled
Shares
17,065 $
3,465
(914 )
(2,814 )
25.73
14.59
9.15
31.00
16,810 $
2,952
(944 )
(1,753 )
27.37
17.49
10.43
36.44
14,615 $
4,451
(1,401 )
(855 )
Outstanding at end of year
16,802 $
23.42
17,065 $
25.73
16,810 $
Options exercisable at year-end
Weighted average fair value of options
granted during the year
10,205 $
23.08
9,566 $
22.85
7,476 $
$
9.46
$
11.60
$
25.97
28.98
11.65
38.58
27.37
19.04
14.97
The fair value of each option granted under the 1991, 1994 and 1996 plans during 2003, 2002 and 2001 was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average assumptions:
Expected life (years)
Expected volatility
Risk-free interest rate
Dividend yield
F-26
2003
2002
2001
5.50
75.00 %
3.27 %
—
5.50
75.00 %
4.18 %
—
5.50
58.00 %
4.86 %
—
The fair value of each option granted under the Aurora Stock Plan, PanVera Plan and Non-plan Stock Option Agreements during 2001
was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
Expected life (years)
Expected volatility
Risk-free interest rate
Dividend yield
2001
5.50
93.00 %
4.35 %
—
The following table summarizes information about stock options outstanding and exercisable at December 31, 2003 (shares in thousands):
Options Outstanding
Options Exercisable
Range of
Exercise Prices
Number
Outstanding
Weighted
Average
Remaining
Contractual Life
Weighted
Average
Exercise
Price
Number
Exercisable
Weighted
Average
Exercise
Price
$1.22-$10.19
10.28-13.11
13.15-13.67
13.69-15.56
2,396
1,846
1,740
1,192
3.16 $
6.03 $
4.50 $
4.11 $
8.78
12.78
13.63
15.25
1,966 $
1,404 $
1,693 $
1,070 $
8.72
12.79
13.64
15.30
15.60-15.60
15.66-16.53
16.59-20.91
20.97-24.66
24.69-58.88
59.37-135.49
$1.22-$135.49
1,938
1,873
799
1,962
1,146
1,910
9.05 $
8.45 $
6.89 $
7.89 $
7.24 $
6.89 $
15.60
15.95
18.78
24.47
38.62
73.06
307 $
503 $
501 $
823 $
751 $
1,187 $
15.60
15.95
18.79
24.47
41.21
73.81
16,802
6.38 $
23.42
10,205 $
23.08
In December 2003, the Company issued 124,481 shares of restricted Common Stock to employees and all of the shares were outstanding
and unvested at December 31, 2003. The restricted shares vest over four years in four equal annual installments. The fair value of the
Company's Common Stock on the date of grant was $9.07 and the price per share was $0.01 per share, which is the par value of the Company's
Common Stock. The Company recorded deferred compensation of approximately $1,128,000 related to the issuance of the restricted shares.
Stock Based Compensation
The Company records and amortizes over the related vesting periods deferred compensation representing the difference between the
exercise price of stock options granted or the price per share of restricted stock issued, and the fair value of the Company's Common Stock at
the date of grant or issuance. Amortization of deferred compensation expense of $16,000, $20,000, and $154,000 was recognized during 2003,
2002 and 2001, respectively.
Compensation cost, calculated using a Black-Scholes option pricing model, recognized in connection with the issuance of stock options to
nonemployees was $161,826, $292,000 and $320,000 in 2003, 2002 and 2001, respectively.
F-27
Employee Stock Purchase Plans
On July 1, 1992, Vertex adopted the Vertex Pharmaceuticals Incorporated Employee Stock Purchase Plan (the "Vertex Purchase Plan").
On May 17, 2002, at the Company's annual meeting, the shareholders approved certain amendments to the Vertex Purchase Plan. One of the
amendments reserved an additional 600,000 shares for issuance under the Vertex Purchase Plan. The Vertex Purchase Plan permits eligible
employees to enroll in a twelve month offering period comprising two six month purchase periods to purchase shares of the Company's
common stock, through payroll deductions, at a price equal to 85% of the fair market value of the common stock on the first day of the
applicable twelve month offering period or the last day of the applicable six month purchase period, whichever is lower. In September 2002,
the Vertex Purchase Plan was further amended by the Company's Board of Directors to make certain changes to the administration of the
Vertex Purchase Plan.
In connection with the acquisition of Aurora in July 2001, the Company assumed the obligations under the Aurora Employee Stock
Purchase Plan (the "Aurora Purchase Plan"). The Aurora Purchase Plan provided for all eligible employees to purchase the Company's common
stock, through payroll withholdings, at a price of 85% of the lesser of fair market value on the start date of each overlapping two-year offering
period or on the date on which each semi-annual purchase period ends. The Aurora Purchase Plan was terminated in the second quarter of 2002
following a semi-annual purchase.
During 2003, 2002, and 2001 the following shares were issued to employees under the Vertex Purchase Plan (shares in thousands):
Number of shares
Average price paid
2003
2002
2001
379
9.49 $
220
15.85 $
155
20.54
$
Had the Company adopted SFAS 123, the weighted average fair value of each purchase right granted during 2003, 2002 and 2001 would
have been $5.86, $6.04, and $7.45 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:
Expected life (years)
Expected volatility
Risk-free interest rate
Dividend yield
2003
2002
2001
1.0
75.00 %
1.17 %
—
.50
75.00 %
1.53 %
—
.50
58.00 %
2.97 %
—
Rights
Each holder of a share of outstanding Common Stock also holds one share purchase right (a "Right") for each share of Common Stock.
Each Right entitles the holder to purchase from the Company one half of one-hundredth of a share of Series A junior participating preferred
stock, $0.01 par value (the "Junior Preferred Shares"), of the Company at a price of $135 per one half of one-hundredth of a Junior Preferred
Share (the "Purchase Price"). The Rights are not exercisable until the earlier of acquisition by a person or group of 15% or more of the
outstanding Common Stock (an "Acquiring Person") or the announcement of an intention to make or commencement of a tender offer or
exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding
Common Stock. In the event that any person or group becomes an Acquiring Person, each holder of a Right other than the Acquiring Person
will thereafter have the right to receive upon exercise that number of shares of Common Stock having a market value
F-28
of two times the Purchase Price and, in the event that the Company is acquired in a business combination transaction or 50% or more of its
assets are sold, each holder of a Right will thereafter have the right to receive upon exercise that number of shares of Common Stock of the
acquiring company which at the time of the transaction will have a market value of two times the Purchase Price. Under certain specified
circumstances, the Board of Directors of the Company may cause the Rights (other than Rights owned by such person or group) to be
exchanged, in whole or in part, for Common Stock or Junior Preferred Shares, at an exchange rate of one share of Common Stock per Right or
one half of one-hundredth of a Junior Preferred Share per Right. At any time prior to the acquisition by a person or group of beneficial
ownership of 15% or more of the outstanding Common Stock, the Board of Directors of the Company may redeem the Rights in whole at a
price of $0.01 per Right.
Common Stock Reserved for Future Issuance
At December 31, 2003, the Company has reserved shares of common stock for future issuance under all equity compensation plans as
follows (shares in thousands):
Common stock under stock and option plans
Common stock under the Vertex Purchase Plan
Common stock under the Vertex 401(k) Plan
Total
21,829
249
125
22,203
P. Significant Revenue Arrangements
The Company has formed strategic collaborations with major pharmaceutical companies in the areas of drug discovery, development, and
commercialization. Research and development agreements provide the Company with financial support and other valuable resources for
research programs and development of clinical drug candidates, product development and marketing and sales of products.
Collaborative Research and Development Agreements
In the Company's collaborative research, development and commercialization programs the Company seeks to discover, develop and
commercialize major pharmaceutical products in conjunction with and supported by the Company's collaborators. Collaborative research and
development arrangements provide research funding over an initial contract period with renewal and termination options that vary by
agreement. The agreements also include milestone payments based on the achievement or the occurrence of a designated event. The
agreements may also contain development reimbursement provisions, royalty rights or profit sharing rights and manufacturing options. The
terms of each agreement vary. The Company has entered into significant research and development collaborations with large pharmaceutical
companies.
F-29
P. Significant Revenue Arrangements
Novartis
In May 2000, the Company and Novartis Pharma AG ("Novartis") entered into an agreement to collaborate on the discovery, development
and commercialization of small molecule drugs directed at targets in the kinase protein family. Under the agreement, Novartis agreed to pay the
Company an up-front payment of $15,000,000 made upon signing of the agreement, up to $200,000,000 in product research funding over six
years and further license fees, milestone payments and cost reimbursements based in part on the progress of drug candidates through
development. The Company was responsible for drug discovery and clinical proof-of-concept testing of all drug candidates. Under the
agreement, Novartis created a $200,000,000 loan facility to support the Company's early clinical development activities under the agreement.
The agreement provided that the loans would be interest free and Novartis would forgive the full amount of any advances with respect to a
particular drug candidate accepted by Novartis for development under the agreement. At December 31, 2003 and 2002 $32,455,000 and
$5,000,000, respectively, were outstanding under this loan facility. Novartis has exclusive worldwide development, manufacturing and
marketing rights to clinically and commercially relevant drug candidates that it accepts from the Company for development. Vertex will receive
royalties on any products that are marketed as part of the collaboration. Novartis had the right to terminate this agreement without cause upon
one year's written notice effective no earlier than May 2004. In 2003, 2002 and 2001 the Company recognized approximately $44,502,000,
$41,894,000 and $36,723,000, respectively, in revenue under this agreement.
In February 2004 the Company amended the Novartis collaboration. Vertex will continue to be responsible for drug discovery under the
amended agreement, and Novartis will continue to provide research funding through the end of the research term in April 2006. However,
under the agreement as modified, Novartis will be responsible for all clinical and nonclinical development of drug candidates which it accepts
for development, and consequently the loan facility has been eliminated. The Company may either continue development of its drug candidate
VX-680 under the terms of the original agreement, using loan proceeds from the Novartis loan facility, or elect to develop and commercialize
VX-680 independent of Novartis. Upon selection of a pre-clinical drug candidate under the restructured agreement, Novartis will pay Vertex a
$10 million selection milestone, and Vertex may receive up to $25 million per drug candidate in pre-commercial milestones. Vertex will
continue to receive royalties on sales of products that are commercialized as part of the collaboration. Outstanding loans which funded amounts
either spent or committed to be spent on development activities relating to a particular compound will be forgiven if that compound is selected
by Novartis for development. If not, the related loan will be repayable without interest in May 2008. If the Company elects to develop and
commercialize VX-680 independent of Novartis, loan amounts with respect to that drug candidate which are unspent and uncommitted at the
time of the Company's election will be repayable immediately. At December 31, 2003, approximately $14 million in development loans
previously advanced to Vertex on account of VX-680 were unspent and uncommitted. Novartis no longer has the right to terminate this
agreement without cause.
GlaxoSmithKline
In December 1993, the Company and GlaxoSmithKline ("GSK") entered into a collaborative agreement to research, develop and
commercialize HIV protease inhibitors, including Agenerase (amprenavir), Lexiva (fosamprenavir calcium) and VX-385. Under the
collaborative agreement, GSK agreed to pay the Company up to $42,000,000 comprised of an up-front $15,000,000 license payment made in
1993, $14,000,000 of product research funding over five years and $13,000,000 of development and commercialization milestone payments for
an initial drug candidate. Research funding under this
F-30
agreement ended on December 31, 1998 and Vertex has received the entire $42 million referenced above. Vertex is also entitled to royalties on
sales of its protease inhibitors by GSK. The Company began earning a royalty from GSK in 1999 on sales of Agenerase, and in the fourth
quarter of 2003 on sales of Lexiva. GSK is also obligated to pay additional development and commercialization milestone payments for
subsequent drug candidates, including Lexiva and VX-385. In the fourth quarter of 2003, GSK paid the Company a milestone payment of
$2,500,000 for the FDA approval of Lexiva in the United States. In the fourth quarter of 2002, GSK paid the Company a milestone payment of
$1,500,000 for the submission of a new drug application for market approval of Lexiva in the United States and the European Union. GSK is
required to bear the costs of development in its territory of drug candidates under the collaboration. Under the original agreement, GSK had
exclusive rights to develop and commercialize Vertex's HIV protease inhibitors in all parts of the world except the Far East. In 2003, the
Company amended the agreement to add the Far East to GSK's territory for development and commercialization of Lexiva. The Company has
retained certain bulk drug manufacturing rights and certain co-promotion rights in territories licensed to GSK. GSK has the right to terminate
its arrangement with the Company without cause upon twelve months' notice. Termination of the agreement by GSK will relieve it of its
obligation to make further commercialization and development milestone and royalty payments and will end any license granted to GSK by
Vertex under the agreement. Revenues and royalties earned from GSK were $11,502,000, $11,554,000, and $10,783,000 in 2003, 2002 and
2001, respectively.
In June 1996, the Company and GSK obtained a worldwide, non-exclusive license under certain G.D. Searle & Co. ("Searle") patents in
the area of HIV protease inhibition. The Company pays Searle a royalty based on sales of Agenerase and Lexiva.
Aventis S.A.
In September 1999, the Company and Aventis S.A. ("Aventis"), formerly Hoechst Marion Roussel Deutschland GmbH, entered into an
expanded agreement covering the development of pralnacasan, an orally active inhibitor of interleukin-1 b converting enzyme. Under the
agreement, Aventis agreed to make a $20,000,000 up-front payment to the Company for prior research costs, and up to $62,000,000 in
milestone payments for successful development by Aventis of pralnacasan in the treatment of rheumatoid arthritis, the first targeted indication.
Milestone payments are also due for each additional indication. The research collaboration under this agreement ended in 1997. Aventis has an
exclusive worldwide license to develop, manufacture and market pralnacasan. Aventis will fund the development of pralnacasan. Vertex may
co-promote pralnacasan in the U.S. and Europe. Vertex will receive royalties on global sales, if any. The agreement also provides that Aventis
will partially fund a Vertex co-promotion effort in the United States under certain conditions. Aventis may terminate this agreement without
cause upon six months' written notice. Termination by Aventis will end any license granted to Aventis by Vertex under the agreement. The
Company did not earn any revenue in connection with the Aventis collaboration in 2003, 2002 or 2001.
Serono S.A.
In December 2000, the Company and Serono S.A. ("Serono") entered into an agreement to collaborate on the discovery, development, and
commercialization of certain types of caspase inhibitors. Under the agreement, the Company could receive up to $95,000,000 in pre-
commercial payments, comprised of $5,000,000 in up-front payments for prior research, up to $20,000,000 in product research funding over
five years and up to $70,000,000 in further license fees and milestone payments. These amounts are based on the development of more than
one drug candidate. The two companies will
F-31
share development costs. Vertex has the option to establish a joint venture with Serono for the commercialization of products in North
America, where the two companies will share marketing rights and profits from the sale of drug products, if any. Serono will have exclusive
rights to market caspase inhibitors in other territories, excluding Japan and certain other countries in the Far East, and will pay Vertex for the
supply of drug substance. Serono has the right to terminate the agreement without cause effective at the end of 2004, upon written notice
delivered on or before the end of June 2004.
In 2003, 2002 and 2001, the Company recognized approximately $5,280,000, $5,280,000 and $4,802,000 as revenue, respectively, from
Serono.
The Company in 2003, 2002 and 2001 recognized an aggregate of $267,000, $25,815,000 and $24,674,000, respectively, in revenue from
collaborations with Kissei Pharmaceuticals Co. Ltd., Eli Lilly & Company, Taisho Pharmaceuticals Co., LTD and Schering AG.
Q. Employee Benefits
The Company has a 401(k) retirement plan (the "Vertex 401(k) Plan") in which substantially all of its permanent employees are eligible to
participate. Participants may contribute up to 60% of their annual compensation to the plan, subject to statutory limitations. The Company may
declare discretionary matching contributions to the Vertex 401(k) Plan which are payable in the form of Company shares. The match is paid in
fully vested Company shares and employees have the ability to transfer funds from Company stock as they choose. The Company declared
matching contributions to the Vertex 401(k) Plan as follows (in thousands, except share data):
Discretionary matching contributions for the year ended
December 31,
Shares issued for the year ended December 31,
Shares issuable as of the year ended December 31,
$
2,237 $
2,558 $
185,040
60,781
104,344
64,931
1,399
15,215
32,284
2003
2002
2001
In connection with the acquisition of Aurora in July 2001, the Company assumed the Aurora 401(k) Retirement Savings Plan and 401(k)
Profit Sharing Plan Trust (collectively, the "Aurora Plan") covering substantially all employees of Aurora and its wholly-owned subsidiaries
who have completed certain service requirements. Effective April 1, 2002, the Aurora Plan was merged into the Vertex 401(k) Plan, and all
employees eligible to participate in the Aurora Plan were offered eligibility to participate in the Vertex 401(k) Plan. Participants in the Aurora
Plan contributed a portion of their compensation to the Aurora Plan through payroll deductions. Company-paid Aurora Plan matching
contributions, if any, were determined by the Company at its sole discretion and payable in the form of cash. The Company's cash contributions
under the Aurora Plan totaled $77,000 and $453,000 in 2002 and 2001 respectively.
R. Related Party Transactions
As of December 31, 2003, the Company had a loan outstanding to an officer in the amount of $170,000. The loan is interest free and will
be forgiven prorated over a four-year term ending in the second quarter of 2006.
The brother of the Company's Chairman and Chief Executive Officer was a partner in a law firm representing the Company to which
$200,000 in legal fees were paid in 2001. As of September 24, 2001,
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he was no longer a partner with that firm and was hired as Senior Vice President and General Counsel of Vertex.
In January 2002, the Company forgave an interest free loan outstanding to a director in the amount of $132,000 in accordance with the
terms of a retention and non-compete agreement executed by the Company in April 2001.
In 2001, the Company entered into a four year consulting agreement with a director of the Company for the provision of part-time
consulting services over a period of four years at $80,000 per year, commencing in January 2002.
In April 2001, Aurora entered into an agreement with a customer, which included assay development services, product sales and licenses
combined with the purchase of stock in the customer. At the time of the transaction, the Chief Executive Officer of the customer was a director
of Aurora. As of July 18, 2001, upon the acquisition of Aurora by Vertex, the Chief Executive Officer of the customer was no longer a director
of Aurora. The total investment in the customer was approximately $4,120,000 at December 31, 2002 and represented approximately 10% of
the outstanding equity interest in the customer. The stock in the customer was transferred to Invitrogen Corporation in connection with the sale
of certain of assets of PanVera LLC on March 28, 2003. The Company believes that the amounts charged by the Company for services,
products and licenses are comparable to what the Company would have charged had it not purchased the stock in the customer and had the
former director of Aurora not been affiliated with the customer. The investment was accounted for using the cost method and was included in
Investments on the balance sheet at December 31, 2002. Total revenue recognized from this agreement was $3,035,000 and $3,348,000 in 2002
and 2001, respectively. No revenue was recognized in 2003 from this agreement. Revenue recognized from this agreement is included in
discontinued operations on the consolidated financial statements for all periods presented.
S. Contingencies
The Company has certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues contingent
liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
On September 23, 2003, two purported shareholder class actions, Carlos Marcano v. Vertex Pharmaceuticals, et al. and City of Dearborn
Heights General Governmental Employees' Retirement System v. Vertex Pharmaceuticals, et al. , were filed in the United States District Court
for the District of Massachusetts, naming the Company and certain current and former officers and employees of the Company as defendants.
Those actions were followed by three additional lawsuits, Stephen Anish v. Vertex Pharmaceuticals, et al. , William Johns v. Vertex
Pharmaceuticals, et al. , and Ben Harrington v. Vertex Pharmaceuticals, et al. , also filed in the District of Massachusetts. All five cases
contain substantially identical allegations and have been consolidated by the District Court into one lawsuit. The plaintiffs claim that the
defendants made material misrepresentations and/or omissions of material fact regarding VX-745, an investigational agent with potential in the
treatment of inflammatory and neurological diseases, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10(b)(5).
The plaintiffs seek certification as a class action, compensatory damages in an unspecified amount, and unspecified equitable or injunctive
relief. The Company believes that the claims are without merit and intends to contest them vigorously.
On December 17, 2003, a purported class action, Marguerite Sacchetti v. James C. Blair et al., was filed in the Superior Court of the State
of California, County of San Diego, naming as defendants all
F-33
of the directors of Aurora who approved the merger of Aurora and Vertex, which closed in July 2001. Goldman, Sachs & Co. LLP, a financial
advisor to Aurora in the merger transaction, was initially named as a defendant but the lawsuit has now been dismissed as to Goldman, Sachs.
The plaintiffs claim that Aurora's directors breached their fiduciary duty to Aurora by, among other things, negligently conducting due
diligence of Vertex by failing to discover alleged problems with VX-745, a Vertex drug candidate that was the subject of a development
program which was terminated by Vertex in September 2001. The plaintiff seeks certification as a class action, compensatory damages in an
unspecified amount and unspecified equitable or injunctive relief. Vertex has certain indemnity obligations to Aurora's directors under the
terms of the merger agreement between Vertex and Aurora, which could result in liability to Vertex for attorney's fees and costs in connection
with this action, as well as for any ultimate judgement which might be awarded. There is an outstanding directors' and officers' liability policy
which may cover a significant portion of any such liability. The defendants are vigorously defending this suit.
T. Guarantees
As permitted under Massachusetts law, Vertex's Articles of Organization and Bylaws provide that the Company will indemnify certain of
its officers and directors for certain claims asserted against them in connection with their service as an officer or director. The maximum
potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited.
However, the Company has purchased certain directors' and officers' liability insurance policies that reduce its monetary exposure and enable it
to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification arrangements is
minimal.
Vertex customarily agrees in the ordinary course of its business to indemnification provisions in agreements with clinical trials
investigators in its drug development programs, in sponsored research agreements with academic and not-for-profit institutions, in various
comparable agreements involving parties performing services for the Company in the ordinary course of business, and in its real estate leases.
The Company also customarily agrees to certain indemnification provisions in its drug discovery and development collaboration agreements.
With respect to the Company's clinical trials and sponsored research agreements, these indemnification provisions typically apply to any claim
asserted against the investigator or the investigator's institution relating to personal injury or property damage, violations of law or certain
breaches of the Company's contractual obligations arising out of the research or clinical testing of the Company's compounds or drug
candidates. With respect to lease agreements, the indemnification provisions typically apply to claims asserted against the landlord relating to
personal injury or property damage caused by the Company, to violations of law by the Company or to certain breaches of the Company's
contractual obligations. The indemnification provisions appearing in the Company's collaboration agreements are similar, but in addition
provide some limited indemnification for its collaborator in the event of third party claims alleging infringement of intellectual property rights.
In each of the cases above, the term of these indemnification provisions generally survives the termination of the agreement, although the
provision has the most relevance during the contract term and for a short period of time thereafter. The maximum potential amount of future
payments that the Company could be required to make under these provisions is generally unlimited. Vertex has purchased insurance policies
covering personal injury, property damage and general liability that reduce our exposure for indemnification and would enable us in many
cases to recover a portion of any future amounts paid. The Company has never paid any material amounts to defend lawsuits or settle claims
related to these indemnification provisions. Accordingly, the Company believes the estimated fair value of these indemnification arrangements
is minimal.
F-34
Effective on March 28, 2003 the Company sold certain assets of PanVera LLC to Invitrogen Corporation for approximately $97 million.
The agreement with Invitrogen requires the Company to indemnify Invitrogen against any loss it may suffer by reason of Vertex's breach of
certain representations and warranties, or failure to perform certain covenants, contained in the agreement. The representations, warranties and
covenants are of a type customary in agreements of this sort. The Company's aggregate obligations under the indemnity are, with a few
exceptions which the Company believes are not material, capped at one-half of the purchase price, and apply to claims under representations
and warranties made within fifteen months after closing, although there is no corresponding time limit for claims made based on breaches of
covenants. The Company believes the estimated fair value of these indemnification arrangements is minimal.
Effective on December 3, 2003, the Company sold certain instrumentation assets to Aurora Discovery, Inc. for approximately
$4.3 million. The agreement with Aurora Discovery, Inc. requires the Company to indemnify Aurora Discovery, Inc. against any loss it may
suffer by reason of the Company's breach of certain representations and warranties, or failure to perform certain covenants, contained in the
agreement. The representations, warranties and covenants are of a type customary in agreements of this sort. The Company's aggregate
obligations under the indemnity are capped at one-half of the purchase price, and apply to claims under representations and warranties made
within fifteen months after closing, although there is no corresponding time limit for claims made based on breaches of covenants. The
Company believes the estimated fair value of these indemnification arrangements is minimal.
On February 10, 2004, Vertex entered into a Dealer Manager Agreement with UBS Securities LLC in connection with the exchange of
approximately $153.1 million of 2007 Notes for approximately $153.1 million of 2011 Notes. The Dealer Manager Agreement requires the
Company to indemnify UBS Securities LLC against any loss it may suffer by reason of the Company's breach of certain representations and
warranties, its failure to perform certain covenants, the inclusion of any untrue statement of material fact in the materials provided to potential
investors in the 2011 Notes, the omission of any material fact needed to make those materials not misleading, and any actions taken by the
Company or its representatives in connection with the exchange of convertible notes. The representations, warranties and covenants in the
Dealer Manager Agreement are of a type customary in agreements of this sort. The Company believes the estimated fair value of these
indemnification obligations is minimal.
F-35
U. Quarterly Financial Data (unaudited)
(in thousands, except per share data)
Three Months Ended
March 31,
2003
June 30,
2003
Sept. 30,
2003
Dec. 31,
2003
Revenues:
Royalties
Collaborative and other research and development revenues
$
1,921 $
2,020 $
14,068
13,932
2,003 $
13,820
3,058
18,319
Total revenues
15,989
15,952
15,823
21,377
Costs and expenses:
Royalty payments
Research and development
Sales, general and administrative
Restructuring and other expense
Total costs and expenses
Loss from operations
Interest income
Interest expense
652
51,629
9,485
3,899
65,665
(49,676 )
5,768
(4,363 )
668
50,080
9,687
44,131
104,566
(88,614 )
3,421
(4,342 )
797
49,627
9,436
42,394
102,254
(86,431 )
3,164
(4,334 )
1,009
48,300
10,474
1,400
61,183
(39,806 )
3,059
(4,259 )
Loss from continuing operations
(48,271 )
(89,535 )
(87,601 )
(41,006 )
Income (loss) from discontinued operations:
Gain on sales of assets
Income (loss) from discontinued operations
Total income (loss) from discontinued operations
Net income (loss)
Basic and diluted net income (loss) per common share
Basic weighted average number of common shares outstanding
Diluted weighted average number of common shares outstanding
$
$
F-36
69,232
(350 )
68,882
—
(393 )
(393 )
451
729
1,180
656
(679 )
(23 )
20,611 $
(89,928 ) $
(86,421 ) $
(41,029 )
0.27 $
(1.17 ) $
(1.12 ) $
76,411
77,362
76,764
76,764
77,067
77,067
(0.53 )
77,758
77,758
(in thousands, except per share data)
Revenues:
Royalties
Collaborative and other research and development revenues
$
2,319 $
19,502
2,384 $
21,158
2,610 $
20,662
2,741
23,394
Three Months Ended
March 31,
2002
June 30,
2002
Sept. 30,
2002
Dec. 31,
2002
Total revenues
Costs and expenses:
Royalty payments
Research and development
Sales, general and administrative
Total costs and expenses
Loss from operations
Interest income
Interest expense
Other expense
Loss from continuing operations
Income from discontinued operations
21,821
23,542
23,272
26,135
773
45,999
8,544
55,316
(33,495 )
8,458
(4,450 )
(6 )
(29,493 )
7,426
772
45,816
11,437
58,025
(34,483 )
7,468
(4,433 )
(25 )
(31,473 )
10,454
880
49,345
11,227
61,452
(38,180 )
6,812
(4,411 )
(1 )
(35,780 )
2,328
909
57,178
9,848
67,935
(41,800 )
5,984
(4,390 )
(6 )
(40,212 )
8,129
Net loss
$
(22,067 ) $
(21,019 ) $
(33,452 ) $
(32,083 )
Basic and diluted net loss per common share
Basic and diluted weighted average number of common shares
outstanding
$
(0.29 ) $
(0.28 ) $
(0.44 ) $
(0.42 )
75,161
75,660
75,979
76,287
F-37
QuickLinks
FORM 10-K INDEX
PART I
ITEM 1. BUSINESS
EXECUTIVE OFFICERS AND DIRECTORS
SCIENTIFIC ADVISORY BOARD
RISK FACTORS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Unaudited)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
VERTEX PHARMACEUTICALS INCORPORATED Index to Consolidated Financial Statements
Report of Independent Auditors
VERTEX PHARMACEUTICALS INCORPORATED Consolidated Balance Sheets
VERTEX PHARMACEUTICALS INCORPORATED Consolidated Statements of Operations
VERTEX PHARMACEUTICALS INCORPORATED Consolidated Statements of Stockholders' Equity and Comprehensive Loss
VERTEX PHARMACEUTICALS INCORPORATED Consolidated Statements of Cash Flows
VERTEX PHARMACEUTICALS INCORPORATED Notes to Consolidated Financial Statements
EXHIBIT 10.35
(WITH CERTAIN CONFIDENTIAL INFORMATION DELETED AND MARKED WITH BRACKETED
ASTERIKS]
FIRST REVISED AND RESTATED
RESEARCH AND EARLY DEVELOPMENT AGREEMENT
BETWEEN
VERTEX PHARMACEUTICALS INCORPORATED
AND
NOVARTIS PHARMA AG
Research and Early Development Agreement
TABLE OF CONTENTS
Page Number
INTRODUCTION...................................................................................................1
ARTICLE I - DEFINITIONS.....................................................................................2
ARTICLE II -- RESEARCH PROGRAM..............................................................................7
2.1. Commencement.........................................................................................7
2.2. Term.................................................................................................7
2.3. Research Diligence...................................................................................8
2.4. Research Plan........................................................................................8
2.5. Joint Research Committee.............................................................................8
2.6. Joint Steering Committee............................................................................10
2.7. Exchange of Information.............................................................................10
2.8. [This section has been intentionally left blank.]...................................................11
2.9. Exclusivity.........................................................................................11
ARTICLE III -- PAYMENTS.......................................................................................12
3.1. Signature Payment by NOVARTIS.......................................................................12
3.2. Staffing and Research Support Payments..............................................................12
3.3. Development Loan Facility...........................................................................13
3.4. Records.............................................................................................13
ARTICLE IV -- LICENSE, DEVELOPMENT AND COMMERCIALIZATION RIGHTS..............................................14
4.1. Development Election................................................................................14
4.2. [This section has been intentionally left blank.]...................................................16
4.3. Extension of Exercise Period........................................................................16
4.4. Refused Candidate...................................................................................16
4.5. Back-up Compounds...................................................................................17
4.6. [This section has been intentionally left blank.]...................................................19
4.7. Clinical Trial Material.............................................................................19
4.8. Special Provisions Regarding VX-680, VX-528 and VX-608..............................................19
ARTICLE V -- CONFIDENTIALITY................................................................................21
5.1. Undertaking.........................................................................................21
5.2. Exceptions..........................................................................................22
5.3. Publicity...........................................................................................23
5.4. Survival............................................................................................23
ARTICLE VI -- PUBLICATION....................................................................................23
ARTICLE VII -- INDEMNIFICATION................................................................................24
7.1. Indemnification by VERTEX...........................................................................24
7.2. Indemnification by NOVARTIS.........................................................................25
7.3. Claims Procedures...................................................................................25
7.4. Compliance..........................................................................................26
ARTICLE VIII -- PATENTABLE INVENTIONS........................................................................27
8.1. Ownership...........................................................................................27
8.2. Preparation.........................................................................................27
8.3. Costs...............................................................................................27
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page i
Research and Early Development Agreement
TABLE OF CONTENTS
Page Number
ARTICLE IX -- TERM AND TERMINATION...........................................................................28
9.1. Term................................................................................................28
9.2. Termination of the Research Program by NOVARTIS for Cause...........................................28
9.3. Termination of the Research Program by VERTEX for Cause.............................................29
9.4. [This section has been intentionally left blank.]...................................................29
9.5. Termination for Scientific Cause....................................................................29
9.6. Effect of Termination...............................................................................29
ARTICLE X -- REPRESENTATIONS AND WARRANTIES.................................................................30
10.1. Representations and Warranties of VERTEX............................................................30
10.2. Representations and Warranties of NOVARTIS..........................................................31
ARTICLE XI -- DISPUTE RESOLUTION.............................................................................31
11.1. Governing Law, and Jurisdiction.....................................................................31
11.2. Dispute Resolution Process..........................................................................32
ARTICLE XII -- MISCELLANEOUS PROVISIONS.......................................................................33
12.1. Official Language...................................................................................33
12.2. Waiver..............................................................................................33
12.3. Force Majeure.......................................................................................33
12.4. Severability........................................................................................33
12.5. Government Acts.....................................................................................33
12.6. Government Approvals................................................................................34
12.7. Export Controls.....................................................................................34
12.8. Assignment..........................................................................................34
12.9. Affiliates..........................................................................................34
12.10. Counterparts........................................................................................35
12.11. No Agency...........................................................................................35
12.12. Notice..............................................................................................35
12.13. Headings............................................................................................36
12.14. Authority...........................................................................................36
12.15. Entire Agreement....................................................................................36
12.16. Standstill..........................................................................................36
12.17. Notice of Pharmaceutical Side-Effects...............................................................37
12.18. Inflation Adjustment................................................................................37
12.19. Invoice Requirement.................................................................................38
12.20. Hardship............................................................................................38
Exhibit A Form of License, Development and Commercialization Agreement
Exhibit B Form of Invoice
Schedule 1.13 Excluded Compounds and Excluded Kinases
Schedule 2.4.3 Development Candidate Criteria
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page ii
FIRST REVISED AND RESTATED
RESEARCH AND EARLY DEVELOPMENT AGREEMENT
First Revised and Restated Agreement made this 3rd day of February, 2004, (as so revised and restated, the "Research Agreement"), revising
and restating that certain Research And Early Development Agreement dated May 8, 2000 (the "Original Agreement"), between VERTEX
PHARMACEUTICALS INCORPORATED ("VERTEX"), a Massachusetts corporation with principal offices at 130 Waverly Street,
Cambridge, MA 02139-4242, and NOVARTIS PHARMA AG ("NOVARTIS"), a Swiss corporation with principal offices at Lichtstrasse 35,
CH-4056 Basel, Switzerland.
This Research Agreement is intended by the parties to replace and supercede the rights and obligations of the parties under the Original
Agreement with respect to the subject matter thereof, except that the terms of the Original Agreement shall be deemed to govern the rights and
obligations of the parties with respect to the Compounds known as VX-680 and VX-528, subject to the provisions of Section 4.8(b) of this
Research Agreement.
INTRODUCTION
WHEREAS, VERTEX has undertaken a broad drug discovery program with the objective of designing novel, small-molecule compounds
targeting the kinase protein super-family;
WHEREAS, NOVARTIS is also interested in developing and commercializing drugs targeting kinase proteins and has particular expertise in
developing, registering, manufacturing, marketing and selling pharmaceuticals worldwide;
WHEREAS, both parties desire to revise and restate the Original Agreement to reflect agreed modifications to the original collaboration, which
involve among other things a redirection of VERTEX's efforts from the delivery of compounds which have progressed through early clinical
testing, to the delivery of Development Candidates, at an earlier stage in the development process, which target selected Kinases and meet
certain pre-agreed Development Candidate Criteria; and
WHEREAS, NOVARTIS may elect to develop, market and sell any or all of those Compounds as drugs upon the terms set forth herein and in a
License, Development and Commercialization Agreement identical in substance to EXHIBIT A hereto;
NOW THEREFORE, in consideration of the mutual covenants set forth in this Research Agreement, and other good and valuable
consideration, the parties agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the terms defined in this Article 1 shall have the following meanings whether used in their singular or plural
forms. Use of the singular shall include the plural and vice versa, unless the context requires otherwise:
First Revised and Restated Research and Early Development Agreement - Confidential - Page 1
1.1. "AFFILIATE" shall mean, with respect to any Person, any other Person which directly or indirectly, by itself or through one or more
intermediaries, controls, or is controlled by, or is under direct or indirect common control with, such Person. The term "control" means the
possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise. Control will be presumed if one Person owns, either of record or beneficially, more
than 50% of the voting stock of any other Person. For the avoidance of any doubt, the Novartis Institute for Functional Genomics, Inc. and The
Friedrich Miescher Institute, as currently operated, are not Affiliates of NOVARTIS for the purposes of this Research Agreement.
1.1.1. "BACK-UP COMPOUND" shall mean, [***].
1.2. "BULK DRUG SUBSTANCE" shall mean a Drug Product Candidate in bulk crystal, powder or other form suitable for incorporation in a
Drug Product.
1.3. "COMPOUND" shall mean any chemical compound, including salts thereof, which affects a Kinase and which was or is synthesized
and/or tested (including by screening) by or under the direction of VERTEX or its Affiliates during the term of the Research Program
conducted under this Research Agreement, or was synthesized or tested by VERTEX or its Affiliates prior to the Effective Date in a program
targeted toward Kinase modulation.
1.4. "CONTROLLED" shall mean the legal authority or right of a party hereto to grant a license or sublicense of intellectual property rights to
another party hereto, or to otherwise disclose proprietary or trade secret information to such other party, without breaching the terms of any
agreement with a Third Party, infringing upon the intellectual property rights of a Third Party, or misappropriating the proprietary or trade
secret information of a Third Party.
1.5. (a) "DEVELOPMENT CANDIDATE" shall mean a Compound that meets the Development Candidate Criteria and which is either
proposed by VERTEX, during the term of the Research Program [***], for formal pre-clinical development, or is selected by NOVARTIS on
or before the Final Termination Date for formal pre-clinical development pursuant to the provisions of Section 4.1 hereof.
1.5. (b) "DEVELOPMENT CANDIDATE INFORMATION" will mean all material information known to VERTEX about a Development
Candidate, including analytical results and raw data, which NOVARTIS reasonably needs in order to decide whether to exercise the
Development Election with respect to the Development Candidate. The Development Candidate Information shall include any previously
undisclosed information with respect to VERTEX Kinase Technology which is important to a scientific and commercial evaluation of the
Development Candidate. Development Candidate Information will also include comparable information known to VERTEX concerning all
Compounds which are Back-up Compounds, as defined herein, to the specific Development Candidate which is the subject of the Development
Candidate Information. [***]
1.5.(c) "DEVELOPMENT CANDIDATE CRITERIA" shall mean (a) the criteria set forth on Schedule 2.4.3 hereof and (b) such further, more
specific criteria to be determined by the JRC as soon as possible after the start of each research project with respect to each particular Kinase
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 2
target, each therapeutic application, special delivery forms, and the like, as set forth in Section 2.5.3 hereof.
1.6. "DEVELOPMENT ELECTION" shall have the meaning set forth in
Section 4.1 hereof.
1.7. "DEVELOPMENT PROGRAM" shall mean activities associated with development of a Drug Product Candidate as specified in the
License Agreement.
1.8. [This section has been intentionally left blank.]
1.9. "DRUG PRODUCT" shall mean a finished dosage form which is prepared from Bulk Drug Substance and is ready for administration to
the ultimate consumer as a pharmaceutical.
1.10. (a) "DRUG PRODUCT CANDIDATE" shall mean a Development Candidate which has been selected by NOVARTIS for development
and commercialization under the License Agreement, pursuant to exercise of its Development Election under
Section 4.1 hereof.
1.10. (b) "DRUG PRODUCT CANDIDATE BACKUP CANDIDATE" shall mean any Back-up Compound for which NOVARTIS has
exercised its Development Election under
Section 4.5 hereof.
1.11. [This section has been intentionally left blank.]
1.12. "EFFECTIVE DATE" shall mean the effective date of the Original Agreement as set forth on the first page hereof.
1.13. "EXCLUDED COMPOUNDS" shall mean any chemical compounds the therapeutic effect of which in humans is thought to be
principally derived from an effect on one or more Excluded Kinases. "Excluded Compounds" shall also include the Compound known as [***].
An "analog" shall mean any compounds (or salts thereof) which are claimed in [***] which NOVARTIS can demonstrate by written record
were synthesized by NOVARTIS before the Effective Date. "Excluded Compounds" shall also include any Compounds directed toward
modulation of a Kinase which has been added to the list of Excluded Kinases by the operation of
Section 4.4 hereof; provided that in no event shall an Excluded Compound include a Drug Product Candidate.
1.14. "EXCLUDED KINASES" shall mean the human kinases specifically identified in Schedule 1.13 hereto. "Excluded Kinases" shall also
include any Kinase hereafter added to the list of Excluded Kinases pursuant to the provisions of Section 4.4 hereof.
1.15. [This section has been intentionally left blank.]
1.16. "FIELD" shall mean the treatment or prevention of conditions or diseases in humans, principally by affecting a Kinase other than an
Excluded Kinase.
1.17. "FINAL NOTICE PERIOD" shall have the meaning set forth in Section 4.1(d) hereof.
1.17.1. "FINAL REPORT" shall have the meaning set forth in Section 4.1(d) hereof.
1.17.2. "FINAL REPORT PERIOD" shall have the meaning set forth in Section 4.1(d) hereof.
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1.17.3. "FINAL TERMINATION DATE" shall have the meaning set forth in
Section 4.1(d) hereof.
1.18. "FTE" shall mean the equivalent of the work of one VERTEX scientist or other project managerial professional, full time for one year,
which equates to a total of forty-seven (47) weeks or one thousand eight hundred eighty (1880) hours per year of work, on or directly related to
the Research Program. Work in the Research Program can include, but is not limited to, experimental laboratory work, project and research
management, activities directed toward evaluation of the commercial potential of a possible Drug Candidate, recording and writing up results,
reviewing literature and references, holding scientific discussions, attending appropriate seminars and symposia, and carrying out Joint
Research Committee duties. FTE's shall include equivalent scientific work in the Research Program delegated to and carried out by contractors,
under the general direction of VERTEX scientists; provided, that the nature and quantity (as a percentage of total program FTE's) of the
delegated work shall not be such that the most substantial parts of the overall Research Program, in terms of projected value creation, have
been delegated to Third Parties. FTE's which result from work delegated to and carried out by contractors will be separately identified by
VERTEX on its invoices provided to NOVARTIS under Section 12.19 hereof.
1.19. [This section has been intentionally left blank.]
1.20. [This section has been intentionally left blank.]
1.21. "JOINT RESEARCH COMMITTEE" OR "JRC" shall have the meaning ascribed to it in Section 2.5 of this Research Agreement.
1.22. "JOINT STEERING COMMITTEE" OR "JSC" shall have the meaning ascribed to it in Section 2.6 of this Research Agreement.
1.23. "KINASE" shall mean a human enzyme that catalyzes the transfer of a phosphate group from a nucleoside triphosphate to a protein.
1.24. "KINASE TECHNOLOGY" shall mean all data, technical information, know-how, experience, inventions (whether or not patented) trade
secrets, processes and methods discovered, developed or applied (with the consent of its owner) and Controlled by either party or its Affiliates,
in connection with performance by either party under the Research Program, or in connection with the conduct of a Development Program
under the License Agreement prior to termination of the Research Program, that relate to the research, development, utilization, manufacture or
use of Compounds, Development Candidates, Drug Product Candidates or Drug Products (other than any such technology which is exclusive to
Excluded Kinases); provided, however, that the term Kinase Technology shall not apply to VERTEX's general drug design technology whether
in hardware or software form, tangible or intangible.
1.25. "KNOW-HOW" means all Kinase Technology other than inventions which are the subject of Patents; and "LEAD PERIOD" shall have
the meaning set forth in Section 4.5(a) hereof.
1.26. "LICENSE AGREEMENT" shall mean the License, Development and Commercialization Agreement, identical in substance to EXHIBIT
A to this Research Agreement, to be executed by VERTEX and NOVARTIS with respect to each Drug Product Candidate; and "NOTICE
PERIOD" shall have the meaning set forth in
Section 4.1(b) hereof.
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1.27. "NOVARTIS KNOW-HOW" shall mean all Know-How of NOVARTIS.
1.28. "NOVARTIS PATENTS" shall mean any Patents controlled by NOVARTIS or its Affiliates claiming Kinase Technology.
1.29. "NOVARTIS KINASE TECHNOLOGY" shall mean all NOVARTIS Patents and NOVARTIS Know-How.
1.30. "PATENTS" means all existing patents and patent applications and all patent applications hereafter filed, including any continuation,
continuation-in-part, division, provisional or any substitute applications, any patent issued with respect to any such patent applications, any
reissue, reexamination, renewal or extension (including any supplementary protection certificate) of any such patent, and any confirmation
patent or registration patent or patent of addition based on any such patent, and all foreign counterparts of any of the foregoing.
1.31. "PERSON" means any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization or
government or political subdivision thereof.
1.32. [This section has been intentionally left blank.]
1.33. [This section has been intentionally left blank.]
1.34. "REFUSED CANDIDATE" shall have the meaning set forth in Section 4.4 hereof.
1.35. "REPLACEMENT CANDIDATE" shall have the meaning set forth in
Section 4.5(b) hereof.
1.36. "RESEARCH PLAN" shall have the meaning set forth in Section 2.4.1 hereto.
1.37. (a) "RESEARCH PROGRAM" shall mean all research activities undertaken under this Research Agreement associated with the
identification and design of Compounds and Development Candidates as provided herein; including but not limited to identification and initial
testing of Compounds; the conduct of activities referenced in the Development Candidate Criteria with respect to Compounds; and selection of
Development Candidates from Compounds.
1.37. (b) "RESEARCH TERMINATION DATE" shall mean the earlier of April 30, 2006 or the date upon which the Research Program is
terminated under Sections 9.2, 9.3 or 9.5 hereof.
1.38. "RESEARCH YEAR" means a twelve-month period during the term of the Research Program commencing on May 1, and ending on
April 30 of each year. The first Research Year hereunder shall be deemed to have commenced on May 1, 2000.
1.39. [This space has been intentionally left blank.]
1.40. "TECHNOLOGY" shall mean NOVARTIS Kinase Technology and VERTEX Kinase Technology.
1.41. "THIRD PARTY" shall mean any person or entity which is not a party or an Affiliate of any party to this Research Agreement.
1.42. "THIRD PARTY REFERRAL" shall mean the procedure for resolution of certain disputes hereunder which is set forth in Section 11.2(b)
hereof.
1.43. "VERTEX KNOW-HOW" shall mean all Know-How of VERTEX.
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1.44. "VERTEX PATENTS" shall mean any Patents Controlled by VERTEX or its Affiliates claiming Kinase Technology.
1.45. "VERTEX KINASE TECHNOLOGY" shall mean all VERTEX Patents and VERTEX Know-How.
Capitalized terms used but not otherwise defined herein which are defined in the License Agreement shall have the meaning ascribed to them
therein.
ARTICLE II
RESEARCH PROGRAM
2.1. COMMENCEMENT. The Research Program originally commenced on May 1, 2000. VERTEX has principal responsibility for the
conduct of the Research Program and NOVARTIS provides consultation, advice and such research effort as may be deemed appropriate by the
JRC and accepted by NOVARTIS. The JRC shall review and coordinate all of the parties' efforts with respect to the Research Program.
2.2. TERM. The Research Program will conclude on May 1, 2006, unless earlier terminated in accordance with the provisions hereof. At the
request of either party made during the fourth Research Year, the parties will discuss whether, and upon what basis, the Research Program
might be extended on comparable terms beyond its initial 6 year term.
2.3. RESEARCH DILIGENCE. The common objective of the parties is to identify Development Candidates as soon as practicable for selection
by NOVARTIS as Drug Product Candidates and for worldwide development and marketing under the terms of the License Agreement.
VERTEX will work diligently and use all reasonable efforts, consistent with prudent business judgment, to identify Development Candidates
for acceptance by NOVARTIS as Drug Product Candidates. VERTEX intends to dedicate to the Research Program at least that level of staffing
referenced in
Section 3.2 hereof, and expects to employ an optimal combination of experience and training in the Field. As a matter of corporate strategy,
VERTEX has chosen to dedicate a significant amount of its overall research efforts to work in the Field, and will not change that overall
strategy during the term of the Research Program without prior notice to and approval by NOVARTIS.
2.4. RESEARCH PLAN; EARLY DEVELOPMENT PLAN.
2.4.1. General. VERTEX originally prepared an overall research plan for the Research Program which it submitted to the JRC for its review
and comment at the first meeting of the JRC after the Effective Date. The research plan has been and will be revised, updated and submitted to
the JRC at least annually for its review and comment (as so revised, updated and submitted, the "Research Plan").
2.4.2. [This section has been intentionally left blank.]
2.4.3. Plan Review. In developing the Research Plan, VERTEX will take into account the intention of the parties to produce Compounds which
meet the Development
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Candidate Criteria. VERTEX shall not perform any work under this Research Agreement with respect to Excluded Compounds or Excluded
Kinases. The Research Plan will be reviewed as necessary at each meeting of the JRC, and at any other time upon the request of either party,
and shall be modified as appropriate to reflect material scientific or commercial developments. Any disagreements among the parties with
respect to these matters may be referred by either party to the Joint Steering Committee for resolution. Notwithstanding the foregoing,
VERTEX shall have the final say with respect to the Research Plan.
2.5. JOINT RESEARCH COMMITTEE.
2.5.1. Composition and Purposes. VERTEX and NOVARTIS have established and will continue to participate in a Joint Research Committee
("JRC") consisting of at least eight (8) representatives (as may be increased or decreased by the JRC), half of whom shall be designated from
time to time by each party. If the JRC chooses to designate a Committee Chair, the Chair will be appointed from among the members of the
Committee designated by VERTEX. The JRC shall meet formally at least quarterly, or with such other frequency, and at such time and
location, as may be established by the Committee, for the following purposes:
(i) To receive and review reports by VERTEX and its project teams, which shall be prepared and submitted to the JRC on a quarterly basis
within fifteen (15) days after the end of each calendar quarter, such reports summarizing progress during the preceding quarter under the
Research Plan; and to review information with respect to the Compounds under investigation (which VERTEX shall provide in form and
content at least as extensive as customarily provided to the JRC under the Original Agreement);
(ii) To review a proposal by either party that specified Excluded Compounds or Excluded Kinases be included in the Research Program, or that
a Kinase be added to the list of Excluded Kinases; provided that the JRC shall have no authority to include or exclude any Compound or
Kinase from the Research Program, and that any such action must be the subject of a formally adopted amendment to this Research Agreement;
(iii) To define as soon as possible the further, more specific Development Criteria (x) for ongoing projects, after the signature of this Research
Agreement, or (y) for new projects, after the start of such new research project;
(iv) To review Development Candidates proposed by VERTEX and to assess whether a given Development Candidate proposed by VERTEX
meets the Development Criteria;
(v) To review the Research Plan and any proposed revisions thereto;
(vi) [This subsection has been intentionally left blank.]; and
(vii) To discuss matters relating to Patents, as may be presented to the JRC by VERTEX or NOVARTIS.
The party hosting a particular JRC meeting shall prepare and deliver to the members of the JRC, within thirty (30) days after the date of each
meeting, minutes of such
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meeting setting forth, INTER ALIA, all decisions of the JRC, and including a report on the progress of work performed. In case the JRC meets
by means of telephone or video conferences, this responsibility shall lie with VERTEX.
2.5.2. Decision-Making.
(i) Each of VERTEX and NOVARTIS shall have one vote on the JRC. The objective of the JRC shall be to reach agreement by consensus on
all matters within the scope of the Research Plan. However, in the event of a deadlock with respect to any action (which shall be deemed to
have occurred if either party shall request a vote of the JRC on a matter and that vote shall either not be taken within thirty (30) days of the
request or if taken shall result in a tie vote) and subject to the procedure set forth in subsection (ii) below as to certain matters, the vote of
VERTEX, rendered after reasonable and open discussion among the members of the JRC, shall be final and controlling.
(ii) Notwithstanding the foregoing, with respect to JRC decisions (x) as to the nature and extent of any additional Development Candidate
Criteria referenced in Section 2.5.3 hereof, any disagreement between the parties that cannot be resolved within forty-five (45) days by the JRC
(as that period may be extended under (iii) below) shall be referred to the JSC for resolution and if not resolved within seven (7) business days
after referral, shall be referred for final resolution in good faith by the Chief Executive Officer of VERTEX and the Chief Executive Officer of
NOVARTIS, and failing final resolution, there will be no change to the Development Candidate Criteria; or
(y) as to whether or not Development Candidate Information provided by VERTEX, pursuant to subsection (iii) below, is complete or as to
whether or not a given Compound proposed by VERTEX as a Development Candidate meets the Development Criteria, the matter shall be
referred as provided in subsection (x) above to the JRC and the JSC and, failing agreement, the matter shall be referred for final resolution
under the provisions of Section 11.2(b) of this Research Agreement.
(iii) In the event that NOVARTIS's representatives on the JRC reasonably believe that the Development Candidate Information with respect to
a particular Development Candidate proposed by VERTEX to the JRC is incomplete, NOVARTIS shall provide written notice thereof to
VERTEX within fifteen (15) business days after receipt of the Development Candidate Information, and VERTEX shall undertake reasonable
efforts to furnish the requested additional Development Candidate Information within fifteen (15) business days after receipt of NOVARTIS's
notice hereunder. The 45-day period provided for action by the JRC under subsection (ii) above shall be extended by the amount of time
required for VERTEX to provide the requested information, but in any event not in excess of thirty (30) days.
(iv) Notwithstanding any of the foregoing, if VERTEX and NOVARTIS deadlock on any other matters being considered by the JRC which
might have a significant impact on the time or likely success of the Research Program, the matter shall be referred to the JSC for resolution in
accordance with
Section 2.6 hereof.
(v) Each party shall retain the rights, powers, and discretion granted to it under this Research Agreement, and the JRC shall not be delegated or
vested with any such rights, powers or discretion except as expressly provided in this Research Agreement.
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The JRC shall not have the power to amend or modify this Research Agreement, which may only be amended or modified as provided in
Section 12.15.
2.5.3. ADDITIONAL DEVELOPMENT CANDIDATE CRITERIA. The parties acknowledge that it may be necessary or appropriate to adopt
additional Development Candidate Criteria which more specifically define the pre-development characteristics of Compounds which the parties
believe may be suitable for development and commercialization under the License Agreement, based upon the Kinase targeted by a specific
project under the Research Program and the particular disease indication or indications thought to be addressed by Compounds modulating the
Kinase which is the subject of that project. [***] Any disagreements with respect to the selection of additional Development Candidate Criteria
hereunder will be addressed as provided in Section 2.5.2(ii).
2.6. JOINT STEERING COMMITTEE.
2.6.1. Composition and Purposes. VERTEX and NOVARTIS have established and will continue to participate in a Joint Steering Committee
("JSC") which shall consist of an equal number of senior executives as may be designated by each party from time to time. The JSC shall
initially have four
(4) members. If the JSC chooses to designate a Committee Chair, the Chair will be appointed from among the members of the JSC designated
by NOVARTIS. The JSC shall meet annually, or with such other frequency, and at such time and location, as may be established by the
Committee, for the following purposes:
(i) General oversight of the entire collaboration between VERTEX and NOVARTIS, including the Research Program and any development and
commercialization of a Drug Product Candidate under the License Agreement;
(ii) Periodically review the overall goals and strategy of the Research Program;
(iii) Discuss and attempt to resolve any deadlocked issues submitted to it by the JRC, although the vote of VERTEX's representatives shall
prevail if the JSC is unable to reach a consensus on any matter other than matters submitted to the JSC under Section 2.5.2(ii).
2.7. EXCHANGE OF INFORMATION.
2.7.1. VERTEX, and at its sole discretion NOVARTIS, will share information with the JRC, as soon as it is available, necessary to facilitate
mutual understanding of the status of the Research Program and decision-making in connection therewith.
2.7.2. Neither VERTEX nor NOVARTIS shall use Kinase Technology disclosed by the other party (excluding information which is no longer
subject to confidentiality restrictions under Article V by reason of the exceptions set forth in Section 5.2) for any purpose, including the filing
of patent applications containing such information, without the other party's consent, other than for carrying out the Research Program or
discharging its responsibilities under the License Agreement, or as otherwise permitted under the Research Agreement or the License
Agreement.
2.7.3. [This section has been intentionally left blank.]
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2.7.4. [***]
2.8. [This section has been intentionally left blank.]
2.9. FREEDOM-OF-ACTION AND EXCLUSIVITY
2.9.1. [***]
2.9.2. [***]
2.9.3. [This section has been intentionally left blank.]
2.9.4. [This section has been intentionally left blank.]
2.9.5. [This section has been intentionally left blank.]
2.9.6. [This section has been intentionally left blank.]
ARTICLE III
PAYMENTS
3.1. SIGNATURE PAYMENT BY NOVARTIS. Upon the Effective Date of this Research Agreement NOVARTIS made an initial non-
refundable payment of $15,000,000 to VERTEX.
3.2. STAFFING AND RESEARCH SUPPORT PAYMENTS. NOVARTIS has made or will make the payments specified below to VERTEX
during each Research Year in support of the Research Program under this Research Agreement. The required payments are based upon the
following assumptions: (a) the average number of FTE's which VERTEX will have employed in the Research Program during a Research Year
will be approximately equal to the FTE Level listed in the third column below; and (b) the annual rate per FTE is approximately [***]. If the
average FTE level for any Research Year is less than the level specified below for that year (the difference being referred to in this section as
an "FTE Shortfall"), then the amount of funding specified below for that Research Year shall be reduced by an amount (the "FTE Shortfall
Amount") which bears the same relation to the total funding specified below for that Research Year as the FTE Shortfall bears to the projected
FTE Level for that Year. The FTE Shortfall Amount shall be carried over from year to year and applied to compensate VERTEX for FTE
Levels in subsequent Research Years which exceed the level for those Years as specified below. In any such subsequent Research Year,
VERTEX shall be entitled to receive out of any remaining FTE Shortfall Amount a payment equal to the value (computed with reference to the
inflation-adjusted FTE rate specified above) of any FTE's actually employed during that Research Year in excess of the FTE Level specified
for that year ("Excess FTE's"). Notwithstanding the foregoing, the FTE Shortfall Amount will not be applied to compensate VERTEX on
account of more than 20 Excess FTE's in any one Research Year.
RESEARCH YEAR FUNDING FTE LEVEL
1 [***] [***]
2 [***] [***]
3 [***] [***]
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RESEARCH YEAR FUNDING FTE LEVEL
4 [***] [***]
5 [***] [***]
6 [***] [***]
Research Year 1 will be deemed to have commenced on May 1, 2000. Payments due for each Research Year shall be made quarterly in
advance on or before May 1, August 1, November 1 and February 1 of each Research Year except that the quarterly payment due May 1, 2000
was made within thirty business days after the Effective Date of this Research Agreement. All payments shall be made without deduction for
withholding or other similar taxes, in United States dollars to the credit of such bank account as may be designated by VERTEX in writing to
NOVARTIS. Any payments which fall due on a date which is a legal holiday in the Commonwealth of Massachusetts may be made on the next
following day which is not a legal holiday in the Commonwealth.
3.3. DEVELOPMENT LOAN FACILITY. The existing development loan facility is hereby terminated. All currently outstanding loans made
under the facility will be repaid by VERTEX on or before the earlier of: May 7, 2008, as specified in Section 3.3.3 of the Original Agreement;
or the first anniversary of the effective date of any termination of this Research Agreement by NOVARTIS for cause under Section 9.2 hereof.
Notwithstanding the foregoing, the provisions of Section 4.8 of this Research Agreement will apply as specified therein to repayment of
development loans advanced on account of the Compounds known as VX-680 and VX-528.
3.4. RECORDS. VERTEX shall keep accurate records and books of accounts containing all data reasonably required for the calculation and
verification of FTE's employed by VERTEX in the Research Program.
At NOVARTIS's request, VERTEX shall make those records available, no more than once a year, during reasonable working hours, for review
by a recognized independent accounting firm acceptable to both parties, at NOVARTIS's expense, for the sole purpose of verifying the
accuracy of those records in the calculation of Research Program FTE's. VERTEX shall not, however, be required to retain or make available
to NOVARTIS or its accountants, any such records or books of account for any Research Year, beyond thirty-six (36) months from the
conclusion of that Research Year. NOVARTIS shall cause the accounting firm to retain all such information in confidence.
In the event of a negative difference between the average number of FTE's stated to be involved in the Research Program and the number of
FTE's actually employed, the amount previously advanced to VERTEX and attributable to any such negative difference shall be due and
payable to NOVARTIS without delay. If the negative difference is more than [***] in any Research Year, then VERTEX shall also pay the
reasonable costs of the independent accountant employed by NOVARTIS in the review. Interest at the rate of [***], assessed from the end of
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 11
the Research Year to which the negative difference relates, shall be due from VERTEX upon prior written notice.
ARTICLE IV
LICENSE, DEVELOPMENT AND COMMERCIALIZATION RIGHTS
4.1. DEVELOPMENT ELECTION.
(a) NOVARTIS shall have the exclusive right (the "Development Election") to develop and commercialize, under the terms and conditions set
forth in the License Agreement and for any and all Indications, (i) each Drug Product Candidate proposed to it by VERTEX as set forth below,
and related Back-up Compounds as provided in Section 4.5 hereof and selected by NOVARTIS, and (ii) any Compound or Compounds
selected by NOVARTIS, as provided in Section 4.1(d) hereof, from Compounds which have met the Development Candidate Criteria, whether
or not any such Compound or Compounds have been proposed as Development Candidates by VERTEX. While the Development Election is
in effect, VERTEX will not grant to any Third Party rights to VERTEX Kinase Technology which are inconsistent with the grant of the
Development Election to NOVARTIS hereunder. NOVARTIS's right to exercise Development Elections will expire and NOVARTIS shall no
longer have the right to select Drug Candidates hereunder upon the first to occur of:
(1) The Final Termination Date as defined below;
(2) Termination of the Research Program by VERTEX under
Section 9.3 hereof;
(3) Termination of the Research Program by either party hereto for Scientific Cause under Section 9.5 hereof.
If NOVARTIS validly terminates the Research Program for cause under Section 9.2 hereof, the Development Election may nonetheless be
exercised for the one-year period after the effective date of the termination for cause, but only with respect to Compounds which have met the
Development Candidate Criteria prior to the effective termination date.
(b) VERTEX shall notify NOVARTIS and the JRC each time VERTEX has identified a Compound that, in the reasonable exercise of its
scientific and business judgment, is a suitable Development Candidate and meets the Development Candidate Criteria. The corresponding
notice shall be accompanied by the Development Candidate Information relating to the Development Candidate and its Back-up Compounds,
provided that information concerning Compound structures shall be handled as specified in Section 5.1 hereof. NOVARTIS may, at its sole
discretion, exercise its Development Election and accept the Development Candidate as a Drug Product Candidate by delivery of written notice
to VERTEX
[***]. The total period of time from receipt of notice from VERTEX through [***] shall be referred to as the "Notice Period". Notwithstanding
any other provisions of this Research Agreement, the Development Election with respect to any Development Candidate will not expire until
the end of the Notice Period with respect to that Development Candidate.
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 12
(c) [This subsection has been intentionally left blank.]
(d) VERTEX will submit a final report (the "Final Report") to NOVARTIS covering the period beginning on the Research Termination Date
[***] (the "Final Report Period"). The Final Report will contain Development Candidate Information for any Compound that VERTEX
believes, in the reasonable exercise of its scientific and business judgment, meets the Development Candidate Criteria
[***], along with information with respect to relevant Back-up Compounds. The procedure whereby NOVARTIS may exercise its
Development Election and accept any Development Candidate identified in the Final Report, for further development as a Drug Product
Candidate, will be the same as that described in subsection (b) above, and the time period from receipt of the Final Report from VERTEX
through the end of the 90-day period referenced in that subsection (b) shall be called the "Final Notice Period".
In addition, [***] If NOVARTIS, based on this information, concludes that a given Compound does meet the Development Candidate Criteria,
a formal Development Election procedure pursuant to Section 4.1(b) will be initiated for such Compound. If VERTEX disagrees with
NOVARTIS's judgment that a given Compound meets the Development Candidate Criteria, the dispute resolution provisions in Section 2.5.2
(ii) shall apply.
The date upon which the Final Report Period, as and if extended by the parties as provided for in Section 4.3 hereof, expires shall be called the
"Final Termination Date."
(e) [***]
(f) Promptly following exercise by NOVARTIS of its Development Election, the parties will execute a License Agreement substantially
identical to the license agreement attached hereto as Exhibit A. NOVARTIS will develop and commercialize the Drug Product Candidate under
the provisions of the License Agreement. If the Development Election has previously been exercised with respect to another Drug Product
Candidate and a License Agreement is in effect, then the License Agreement will be amended to reflect the addition of another Drug Product
Candidate. Development of each Drug Product Candidate shall proceed immediately after the Development Election is exercised, in
accordance with the terms of the License Agreement.
4.2. [This section has been intentionally left blank.]
4.3. EXTENSION OF NOTICE PERIOD AND FINAL NOTICE PERIOD.
NOVARTIS may propose to VERTEX by written notice delivered during
[***] the Notice Period with respect to a particular Development Candidate, or the Final Notice Period, with specific reference to one or more
Compounds included in the Final Report and meeting the Development Candidate Criteria, that the Notice Period or the Final Notice Period, as
the case may be, for a specific Development Candidate or Compound be extended for good reason for a specified time to permit NOVARTIS,
at its expense and under its direction, to conduct such additional studies of that Development Candidate or Compound as may be specified in
the notice. VERTEX shall discuss this request with NOVARTIS and the parties shall attempt in
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 13
good faith to reach mutual agreement with respect to the requested extension period and the conduct of additional studies, but failing agreement
the applicable Notice Period or Final Notice Period shall expire as specified herein.
4.4. REFUSED CANDIDATE.
4.4.1. If NOVARTIS does not exercise its Development Election within the Notice Period or the Final Notice Period, as applicable, specified in
Section 4.1, with respect to a particular Development Candidate proposed by VERTEX, then the Development Election will expire with respect
to that Development Candidate (a "Refused Candidate"), and (a) NOVARTIS will relinquish all rights under this Research Agreement and the
License Agreement [***] (b) VERTEX may thereafter develop and commercialize the Refused Candidate and any such Excluded Compounds
at its expense free of any further obligation to NOVARTIS with respect thereto; and [***], shall be considered Excluded Compounds under the
provisions of this Section 4.4.1.
4.4.2. [This section has been intentionally left blank.]
4.5. BACK-UP COMPOUNDS. The following provisions will apply with respect to Back-up Compounds to any Drug Product Candidate.
(a) VERTEX RESTRICTIONS ON NOMINATION AND DEVELOPMENT. So long as NOVARTIS is using commercially reasonable efforts
with respect to the development of a particular Drug Product Candidate or the commercialization of a particular Drug Product, VERTEX will
not (i) propose a Compound for development under the License Agreement which is a Back-up Compound with respect to that Drug Product
Candidate or Drug Product, or (ii) until after the period starting on the date on which NOVARTIS has exercised its Development Election for a
particular Drug Product Candidate and ending [***] (the "Lead Period"), commence development of that Back-up Compound either directly or
together with or through an Affiliate or a Third Party.
(b) TERMINATION OF DEVELOPMENT OR COMMERCIALIZATION. If, prior to the end of the Lead Period with respect to a particular
Drug Product or Drug Product Candidate, NOVARTIS ceases to use commercially reasonable efforts to develop or commercialize that Drug
Product Candidate or Drug Product, then the restrictions on nomination and development referenced in subsection (a) above will no longer
apply with respect to Back-up Compounds for that Drug Product Candidate or Drug Product unless NOVARTIS, without delay, commences
another Development Program under the License Agreement with another Compound (a "Replacement Candidate") targeting the same Kinase,
which Replacement Candidate is a Back-up Compound associated with the discontinued Drug Product Candidate or Drug Product, and
NOVARTIS shall have the right to select for this purpose any such Back-up Compound by providing VERTEX with notice of its Development
Election in this regard. Any such Back-up Compound for which NOVARTIS has exercised its Development Election under this subsection (b)
shall hereafter be a Drug Product Candidate subject to the terms and conditions of the License Agreement.
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 14
(c) TERMINATION OF RIGHTS TO BACK-UP COMPOUNDS. A Back-up Compound will no longer be subject to NOVARTIS's
Development Election under the Research Agreement after the end of the Lead Period applicable to that Back-up Compound, except for Back-
up Compounds which (i) subject to subsection (a) above, VERTEX has proposed for development on or before the Final Termination Date, and
as to which NOVARTIS has exercised its Development Election hereunder; or (ii) have been or will be selected by NOVARTIS for
development before the end of the applicable Lead Period under the provisions of subsection (b) above, or
(iii) for which NOVARTIS has exercised or will exercise its Development Election before the end of the applicable Lead Period under the
provisions of subsection
(d) below.
(d) NOVARTIS RIGHTS TO LICENSE BACK-UP COMPOUNDS. Anytime prior to the expiry of the Lead Period with respect a particular
Drug Product Candidate, NOVARTIS may also, by paying in each case the Back-up Election Fee provided under Section 6.1 of the License
Agreement, exercise its Development Election with respect to any one or more Back-up Compounds associated with that Drug Product
Candidate, provided that Drug Product Candidate, or a Back-up Compound selected pursuant to the provisions of subsection (b) above, is still
in active development. Any such Back-up Compound for which NOVARTIS has exercised its Development Election under this subsection (d)
shall become a "Drug Product Candidate Back-up Candidate" subject to the terms and conditions of the License Agreement.
(e) NOVARTIS OBLIGATIONS WITH RESPECT TO DRUG PRODUCT CANDIDATE BACK-UP CANDIDATES. So long as
NOVARTIS is using commercially reasonable efforts, pursuant to the provisions of Sections 3.6 and 5.6 of the License Agreement, with
respect to the development of a particular Drug Product Candidate or the commercialization of a particular Drug Product, NOVARTIS shall
have no obligation to develop any of the Drug Product Candidate Back-up Candidates associated with that Drug Product Candidate or Drug
Product. As soon as NOVARTIS ceases the development of a particular Drug Product Candidate, NOVARTIS's obligations to use diligent,
commercially reasonable efforts will immediately shift from the discontinued Drug Product Candidate to an associated Drug Product Candidate
Back-up Compound. If NOVARTIS ceases the development of a particular Drug Product Candidate and does not commence development of a
Drug Product Candidate Back-up Compound pursuant to the foregoing, the license to the Drug Product Candidate and its Back-up Compounds
under the License Agreement will expire and the license rights will revert to VERTEX.
4.6. [This section has been intentionally left blank.]
4.7. DRUG SUBSTANCE.
As soon as practicable after the exercise of its Development Election with respect to a Drug Product Candidate, VERTEX will deliver to
NOVARTIS, if so requested by NOVARTIS, all drug substance for that Candidate in VERTEX's possession, if any, to the extent it is usable in
connection with development of that Candidate. NOVARTIS will reimburse VERTEX for the Manufacturing Cost (as such term is defined in
the License Agreement) of that material within thirty (30) days of receipt of VERTEX's invoice therefor.
4.8. SPECIAL PROVISIONS REGARDING VX-680, VX-528 AND VX-608.
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 15
The parties acknowledge that VERTEX is currently pursuing three Development Candidates which have been designated as VX-608, VX-680
and VX-528.
(a) VX-608. VX-608 will be governed by this Research Agreement and will be subject to the Development Election. The Notice Period with
respect to VX-608 shall be deemed to have commenced on the later of (i) the date on which this Research Agreement is entered into, or (ii) the
date by which NOVARTIS is in possession of the Development Candidate Information. If NOVARTIS exercises its Development Election
with respect to VX-608 during the Notice Period, that Compound will become a Drug Product Candidate hereunder, and NOVARTIS will
undertake all future development of VX-608 under the terms of the License Agreement. The Development Election Payment will be made to
VERTEX and
[***]. If NOVARTIS fails to exercise its Development Election with respect to VX-608 during the Notice Period, then VX-608 will become a
Refused Candidate hereunder and the provisions of Section 4.4 will be applicable thereafter. Any outstanding development loan will be repaid
in accordance with Section 3.3 hereof.
(b) VX-680 AND VX-528. The Compounds designated by VERTEX as VX-680 and VX-528 are in early development under the provisions of
the Original Agreement, and the terms of the Original Agreement shall continue to govern the rights and obligations of VERTEX and
NOVARTIS with respect to VX-680 and VX-528 only, with the following modifications: [***]
At its sole discretion exercisable by notice in writing from VERTEX to NOVARTIS delivered on or before [***], VERTEX may elect to
consider VX-680 and VX-528 as Development Candidates which have become Refused Candidates under the Research Agreement, and the
terms and conditions of the Research Agreement as they apply to any Refused Candidate shall thereafter apply in the case of VX-680 and VX-
528. Contemporaneously with the aforementioned notice, VERTEX shall repay to NOVARTIS that portion of the total amount of any
development loan previously advanced by NOVARTIS to VERTEX on account of either Compound, which is unspent and uncommitted as of
the notice date. The balance of any development loan shall be repaid as provided in Section 3.3 hereof.
ARTICLE V
CONFIDENTIALITY
5.1. UNDERTAKING. During the term of this Research Agreement, each party shall keep confidential, and other than as provided herein shall
not use or disclose, directly or indirectly, any trade secrets, confidential or proprietary information, or any other knowledge, information,
documents or materials, owned, developed or possessed by the other party, whether in tangible or intangible form, the confidentiality of which
such other party takes reasonable measures to protect, including but not limited to VERTEX Kinase Technology and NOVARTIS Kinase
Technology.
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 16
(a) Each party shall take any and all lawful measures to prevent the unauthorized use and disclosure of such information, and to prevent
unauthorized persons or entities from obtaining or using such information.
(b) Each party further agrees to refrain from directly or indirectly taking any action which would constitute or facilitate the unauthorized use or
disclosure of such information. Each party may disclose such information to its officers, employees and agents, to authorized licensees and
sublicensees, and to subcontractors in connection with the development or manufacture of Drug Candidates, Drug Product Candidates or Drug
Products, to the extent necessary to enable such parties to perform their obligations hereunder or under the applicable license, sublicense or
subcontract, as the case may be; provided, that such officers, employees, agents, licensees, sublicensees and subcontractors have entered into
appropriate confidentiality agreements for secrecy and non-use of such information which by their terms shall be enforceable by injunctive
relief at the instance of the disclosing party.
(c) Each party shall be liable for any unauthorized use and disclosure of such information by its officers, employees and agents and any such
sublicensees and subcontractors.
(d) NOVARTIS will ensure that information with respect to the chemical structure of any Development Candidate which is delivered to
NOVARTIS under Section 4.1(b) hereof as part of the Development Candidate Information with respect to that Development Candidate and its
associated Back-up Compounds will be distributed or otherwise made known only to [***] The foregoing limitation on distribution of
information will cease being applicable at such time as NOVARTIS exercises its Development Election with respect to that Development
Candidate.
5.2. EXCEPTIONS. Notwithstanding the foregoing, the provisions of Section 5.1 hereof shall not apply to knowledge, information, documents
or materials which the receiving party can conclusively establish:
(a) have entered the public domain without such party's breach of any obligation owed to the disclosing party;
(b) are permitted to be disclosed by the prior written consent of the disclosing party;
(c) have become known to the receiving party from a source other than the disclosing party, other than by breach of an obligation of
confidentiality owed to the disclosing party;
(d) are disclosed by the disclosing party to a Third Party without restrictions on its disclosure;
(e) are independently developed by the receiving party without breach of this Research Agreement; or
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 17
(f) are required to be disclosed by the receiving party to comply with applicable laws or regulations, to defend or prosecute litigation or to
comply with governmental regulations, provided that the receiving party provides prior written notice of such disclosure to the disclosing party
and takes reasonable and lawful actions to avoid or minimize the degree of such disclosure.
Either VERTEX or NOVARTIS may at any time, by notice in writing to the other party, waive any or all of the confidentiality obligations to
which the other party is subject hereunder, for any length of time or with respect to any specific information.
5.3. PUBLICITY. The parties will agree upon the timing and content of any initial press release or other public communications relating to this
First Revised and Restated Agreement and the transactions contemplated herein.
(a) Except to the extent already disclosed in that initial press release or other public communication, no public announcement concerning the
existence or the terms of this Research Agreement or concerning the transactions described herein shall be made, either directly or indirectly,
by VERTEX or NOVARTIS, except as may be legally required by applicable laws, regulations, or judicial order, without first obtaining the
approval of the other party and agreement upon the nature, text, and timing of such announcement, which approval and agreement shall not be
unreasonably withheld.
(b) The party desiring to make any such public announcement shall provide the other party with a written copy of the proposed announcement
in sufficient time prior to public release to allow such other party to comment upon such announcement, prior to public release.
5.4. SURVIVAL. The provisions of this Article V shall survive the termination of this Research Agreement and shall extend for a period of
five (5) years thereafter.
ARTICLE VI
PUBLICATION
Each of NOVARTIS and VERTEX reserves the right to publish or publicly present the results (the "Results") of the Research Program, subject
to the following terms and conditions. The party proposing to publish or publicly present the Results (the "publishing party") will submit a draft
of any proposed manuscript or speech to the other party (the "non-publishing party") for comments at least thirty (30) days prior to submission
for publication or oral presentation. The non-publishing party shall notify the publishing party in writing within fifteen (15) days of receipt of
such draft whether such draft contains (i) information of the non-publishing party which it considers to be confidential under the provisions of
Article V hereof, (ii) information that if published would have an adverse effect on a patent application covering the subject matter of this
Research Agreement which the non-publishing party intends to file, or (iii) information which the non-publishing party reasonably believes
would be likely to have a material adverse impact on the development or commercialization of a Drug Product Candidate. In any such
notification, the non-publishing party shall indicate with specificity its suggestions
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 18
regarding the manner and degree to which the publishing party may disclose such information. In the case of item (ii) above, the non-
publishing party may request a delay and the publishing party shall delay such publication, for a period not exceeding ninety (90) days, to
permit the timely preparation and filing of a patent application or an application for a certificate of invention on the information involved. In
the case of item (i) above, no party may publish confidential information of the other party without its consent in violation of Article V of this
Research Agreement. In the case of item (iii) above, if the publishing party shall disagree with the non-publishing party's assessment of the
impact of the publication, then the issue shall be referred to the JSC for resolution. If the JSC is unable to reach agreement on the matter within
thirty
(30) days after such referral, the matter shall be referred by the JSC to the Chief Executive Officer of NOVARTIS and the Chief Executive
Officer of VERTEX who shall attempt in good faith to reach a fair and equitable resolution of this disagreement. If the disagreement is not
resolved in this manner within two (2) weeks of referral by the JSC as aforesaid, then the decision of the publishing party as to publication of
any information generated by it, subject always to the confidentiality provisions of Article V hereof, shall be final, provided that such decision
shall be exercised with reasonable regard for the interests of the non-publishing party. The parties agree that authorship of any publication will
be determined based on the customary standards then being applied in the relevant scientific journal. The parties will use their best efforts to
gain the right to review proposed publications relating to the subject matter of the Research Program by consultants or contractors.
This Article VI shall terminate with the termination of this Research Agreement, but the provisions of Article V hereof shall continue to govern
the disclosure by one party, whether by publication or otherwise, of Confidential Information of the other, during the period set forth in Section
5.4.
ARTICLE VII
INDEMNIFICATION
7.1. INDEMNIFICATION BY VERTEX. VERTEX will indemnify and hold NOVARTIS and its Affiliates, and their employees, officers and
directors harmless against any loss, damages, action, suit, claim, demand, liability, expense, bodily injury, death or property damage (a "Loss"),
that may be brought, instituted or arise against or be incurred by such persons to the extent such Loss is based on or arises out of:
(a) the development, manufacture, use, sale, storage or handling of a Compound, a Development Candidate, a Drug Product Candidate or a
Drug Product by VERTEX or its Affiliates or their representatives, agents, authorized sublicensees or subcontractors under this Research
Agreement, or any actual or alleged violation of law resulting therefrom (with the exception of Losses based on infringement or
misappropriation of intellectual property rights); or
(b) the breach by VERTEX of any of its covenants, representations or warranties set forth in this Research Agreement; and
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 19
(c) provided however, that the foregoing indemnification shall not apply to any Loss to the extent such Loss is caused by the negligent or
willful misconduct of NOVARTIS or its Affiliates.
7.2. INDEMNIFICATION BY NOVARTIS. NOVARTIS will indemnify and hold VERTEX, and its Affiliates, and their employees, officers
and directors harmless against any Loss that may be brought, instituted or arise against or be incurred by such persons to the extent such Loss is
based on or arises out of:
(a) the development, manufacture, use, sale, storage or handling of a Compound, a Development Candidate, a Drug Product Candidate or a
Drug Product by NOVARTIS or its Affiliates or their representatives, agents, authorized sublicensees or subcontractors under this Research
Agreement, or any actual or alleged violation of law resulting therefrom (with the exception of Losses based on infringement or
misappropriation of intellectual property rights); or
(b) the breach by NOVARTIS of any of its covenants, representations or warranties set forth in this Research Agreement; and
(c) provided that the foregoing indemnification shall not apply to any Loss to the extent such Loss is caused by the negligent or willful
misconduct of VERTEX or its Affiliates.
7.3. CLAIMS PROCEDURES. Each Party entitled to be indemnified by the other Party (an "Indemnified Party") pursuant to Section 7.1 or 7.2
hereof shall give notice to the other Party (an "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any
threatened or asserted claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom; provided:
(a) That counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be withheld) and the Indemnified Party may participate in such
defense at such party's expense (unless (i) the employment of counsel by such Indemnified Party has been authorized by the Indemnifying
Party; or (ii) the Indemnified Party shall have reasonably concluded that there may be a conflict of interest between the Indemnifying Party and
the Indemnified Party in the defense of such action, in each of which cases the Indemnifying Party shall pay the reasonable fees and expenses
of one law firm serving as counsel for the Indemnified Party, which law firm shall be subject to approval, not to be unreasonably withheld, by
the Indemnifying Party); and
(b) The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this
Research Agreement to the extent that the failure to give notice did not result in harm to the Indemnifying Party.
(c) No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the approval of each Indemnified Party which
approval shall not be unreasonably withheld, consent to entry of any judgment or enter into any settlement which (i)
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 20
would result in injunctive or other relief being imposed against the Indemnified Party; or (ii) does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation.
(d) Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably
request in writing and shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom.
7.4. COMPLIANCE. The parties shall comply fully with all applicable laws and regulations in connection with their respective activities under
this Research Agreement.
ARTICLE VIII
PATENTABLE INVENTIONS
8.1. OWNERSHIP. All inventions made and all Know-How generated exclusively by either party or its Affiliates (directly or through others
acting on its behalf) prior to and during the term of this Research Agreement shall be owned by the party making the invention or generating
the Know-How claimed, or if such invention is made jointly (a "Joint Invention"), shall be owned jointly, all as determined in accordance with
United States laws of inventorship.
8.2. PREPARATION. VERTEX shall take responsibility for the preparation, filing, prosecution and maintenance of all VERTEX Patents, and
any patents and patent applications claiming Joint Inventions, and NOVARTIS shall take responsibility for the preparation, filing, prosecution
and maintenance of all NOVARTIS Patents. VERTEX shall provide the JRC with periodic reports listing, by name, Patents filed by VERTEX
in the United States and other jurisdictions, along with a general summary of the claims made and the jurisdictions of filing. In good time,
before the deadline for foreign filing of any patent application filed in the United States, VERTEX will notify NOVARTIS whether it intends
to foreign file such patent application, and if it intends to do so, in what countries it proposes to foreign file. Upon timely written notice from
NOVARTIS, VERTEX will file in such additional countries -- all being countries in which NOVARTIS would customarily file its own cases
dealing with similar subject matter -- as NOVARTIS shall request.
8.3. COSTS.
(a) During the Research Program. NOVARTIS shall reimburse VERTEX for
[***]. If the full amount of any reimbursement commitment is not applied in any Research Year, the unused balance may be carried over from
year to year during the Research Program.
(b) After the Research Program. Upon expiration of the Research Program, the parties shall determine which Patents covering Drug Product
Candidates and Drug Products, and Development Candidates and Back-up Compounds as to which the Development Election is still applicable
(until it expires), are included in the Kinase Technology, and thereafter [***]. Either party may at any time thereafter elect, by written notice to
the other party, to discontinue support for one or more such Patents (a "Discontinued Patent") and shall not be responsible for any costs
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 21
relating to a Discontinued Patent which are incurred more than sixty (60) days after receipt of that notice by the other party. In such case, the
other party may elect at its sole discretion to continue preparation, filing, prosecution or maintenance of the Discontinued Patent at its sole
expense. The party so continuing shall own any such Patent, and if the party electing to discontinue support is the owner of the Discontinued
Patent, it shall execute such documents of transfer or assignment and perform such acts as may be reasonably necessary to transfer ownership
of the Discontinued Patent to the other party and enable that party to file or to continue prosecution or maintenance, if the other party elects to
do so. Discontinuance may be on a country-by-country basis or for a Patent series in total.
ARTICLE IX
TERM AND TERMINATION
9.1. TERM.
9.1.1. This Research Agreement shall have retroactive effect to the Effective Date, replacing and superceding the rights and obligations of the
parties under the Original Agreement, except that the terms of the Original Agreement shall be deemed to govern the rights and obligations of
the parties with respect to the Compounds known as VX-680 and VX-528, pursuant to the provisions of Section 4.8 of this Research
Agreement. This Research Agreement will extend until the Final Termination Date as defined herein, unless earlier terminated by either party
hereto in accordance with this Research Agreement, or unless extended by mutual agreement of the parties; provided that the Agreement will
be deemed to continue in effect with respect to any Drug Product Candidate during the Lead Period with respect to that Candidate, but only
insofar as necessary to enable NOVARTIS to exercise its Development Election under Section 4.5 hereof with respect to any Back-up
Compounds for that Drug Product Candidate.
9.2. TERMINATION OF THE RESEARCH PROGRAM BY NOVARTIS FOR CAUSE. Upon written notice to VERTEX, NOVARTIS may
at its sole discretion unilaterally terminate the Research Program and this Research Agreement upon the occurrence of any of the following
events:
(a) VERTEX shall materially breach any of its material obligations, such as its obligations under Section 3.2 hereof, under this Research
Agreement or the License Agreement, and such material breach shall not have been remedied or steps initiated to remedy the same to
NOVARTIS's reasonable satisfaction, within sixty (60) days after NOVARTIS sends written notice of breach to VERTEX; or
(b) VERTEX shall cease to function as a going concern by suspending or discontinuing its business for any reason except for interruptions
caused by Force Majeure, strike, labor dispute or any other events over which it has no control.
In the event of any valid termination under this Section 9.2, NOVARTIS shall not be required to make any payments under Section 3.2 hereof
which are not due and payable prior to receipt by VERTEX of the notice of breach referenced under Section 9.2(a) or receipt by VERTEX of
the notice of termination pursuant to Section 9.2(b), as the case may be. Notwithstanding the foregoing, any License Agreement then in effect
shall continue in effect unless it is expressly terminated in accordance with its terms.
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 22
9.3. TERMINATION OF THE RESEARCH PROGRAM BY VERTEX FOR CAUSE. VERTEX may at its sole discretion terminate this
Research Agreement upon written notice to NOVARTIS upon the occurrence of any of the following events:
(a) NOVARTIS shall materially breach any of its material obligations under this Research Agreement or the License Agreement and such
material breach shall not have been remedied or steps initiated to remedy the same to VERTEX's reasonable satisfaction, within sixty (60) days
after VERTEX sends written notice of breach to NOVARTIS; or
(b) NOVARTIS shall cease to function as a going concern by suspending or discontinuing its business for any reason except for interruptions
caused by Force Majeure, strike, labor dispute or any other events over which it has no control.
Notwithstanding the foregoing, any License Agreement then in effect shall continue in effect unless it is expressly terminated in accordance
with its terms.
9.4. [This section has been intentionally left blank.]
9.5. TERMINATION FOR SCIENTIFIC CAUSE.
Either party may terminate this Research Agreement upon six months' prior written notice to the other party, if the terminating party can
demonstrate to the reasonable satisfaction of the other party that, by reason of scientific developments unknown on the Effective Date, the
Research Program is unlikely to produce any Compounds that can achieve a commercially viable therapeutic effect through an effect on a
Kinase target.
9.6. EFFECT OF TERMINATION.
(a) Except where explicitly provided elsewhere herein, termination of this Research Agreement for any reason, or expiration of this Research
Agreement, will not affect: (i) obligations which have accrued as of the date of termination or expiration, and (ii) obligations and rights which,
expressly or from the context thereof, are intended to survive termination or expiration of this Research Agreement, including obligations of
confidentiality under Article V hereof, the indemnification provisions of Article VII hereof and the rights and obligations of the parties during
the Lead Period under Sections 4.1 and 4.5 with respect to a particular Drug Product Candidate and related Back-up Compounds.
(b) Upon termination or expiration of this Research Agreement, NOVARTIS and VERTEX will retain exclusive rights to their respective
Kinase Technology (including intellectual property), except NOVARTIS shall hold those rights to VERTEX Technology provided in any
License Agreement in effect on the Final Termination Date covering Drug Product Candidates selected by NOVARTIS, and shall hold those
rights to Back-up Compounds and Drug Product Candidate Back-up Compounds provided in Sections 4.1(e) and 4.5.
ARTICLE X
REPRESENTATIONS AND WARRANTIES
10.1. REPRESENTATIONS AND WARRANTIES OF VERTEX. VERTEX represents and warrants to NOVARTIS as follows:
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 23
(a) Authorization. This Research Agreement has been duly executed and delivered by VERTEX and constitutes the valid and binding
obligation of VERTEX, enforceable against VERTEX in accordance with its terms except as enforceability may be limited by bankruptcy,
fraudulent conveyance, insolvency, bankruptcy, reorganization, moratorium and other laws relating to or affecting creditors' rights generally
and by general equitable principles. The execution, delivery and performance of this Research Agreement have been duly authorized by all
necessary action on the part of VERTEX, its officers and directors.
(b) No Third Party Rights. VERTEX owns or possesses adequate licenses or other rights to use all VERTEX Kinase Technology relating to the
Field and to grant the licenses herein. The granting of the Development Election to NOVARTIS hereunder does not violate any right known to
VERTEX of any Third Party.
(c) Third Party Patents. Except as disclosed in writing between the parties to this Research Agreement or their respective agents, VERTEX is
not aware of any issued patents or pending patent applications that, if issued, would be infringed by the development, manufacture, use or sale
of any Compound, Development Candidate or Drug Product Candidate pursuant to this Research Agreement.
10.2. REPRESENTATIONS AND WARRANTIES OF NOVARTIS. NOVARTIS represents and warrants to VERTEX as follows:
(a) Authorization. This Research Agreement has been duly executed and delivered by NOVARTIS and constitutes the valid and binding
obligation of NOVARTIS, enforceable against NOVARTIS in accordance with its terms except as enforceability may be limited by
bankruptcy, fraudulent conveyance, insolvency, bankruptcy, reorganization, moratorium and other laws relating to or affecting creditors' rights
generally and by general equitable principles. The execution, delivery and performance of this Research Agreement have been duly authorized
by all necessary action on the part of NOVARTIS, its officers and directors.
(b) Third Party Rights. NOVARTIS owns or possesses adequate licenses or other rights to use all NOVARTIS Kinase Technology relating to
the Field in accordance with the provisions of this Research Agreement.
(c) Third Party Patents. Except as disclosed in writing between the parties to this Research Agreement or their respective agents, NOVARTIS
is not aware of any issued patents or pending patent applications that, if issued, would be infringed by the development, manufacture, use or
sale of any Compound, Development Candidate or Drug Product Candidate pursuant to this Research Agreement.
ARTICLE XI
DISPUTE RESOLUTION
11.1. GOVERNING LAW, AND JURISDICTION. This Research Agreement shall be governed and construed in accordance with the internal
laws of the State of New York.
11.2. DISPUTE RESOLUTION PROCESS.
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 24
(a) General. Except as set forth in (b) below or as otherwise explicitly provided herein, in the event of any controversy or claim arising out of or
relating to any provision of this Research Agreement, or the collaborative effort contemplated hereby, the parties shall, and either party may,
initially refer such dispute to the JSC, and failing resolution of the controversy or claim within thirty (30) days after such referral, the matter
shall be referred to the Chief Executive Officer of VERTEX and the Chief Executive Officer of NOVARTIS who shall, as soon as practicable,
attempt in good faith to resolve the controversy or claim. If such controversy or claim is not resolved within sixty
(60) days of the date of initial referral of the matter to the JSC, either party shall be free to initiate proceedings in any court having requisite
jurisdiction.
(b) Third Party Referral. Any dispute or claim relating to the "Referral Matters" as defined below which the parties are unable to resolve
pursuant to the other dispute resolution mechanisms provided in this Research Agreement (other than litigation) shall, upon the written request
of one party delivered to the other party, be submitted to and settled by a panel of Third Parties (a "Third Party Panel") appointed by VERTEX
and NOVARTIS as provided below. The "Referral Matter" shall consist solely of disagreements concerning whether a particular Compound
has satisfied all of the applicable Development Candidate Criteria. Within thirty (30) days after delivery of the above-referenced written
request, each party will appoint one person who is not an Affiliate of the party appointing that person, and who is knowledgeable in the areas of
pharmaceutical science, business and commercial aspects of drug development and sale, or the clinical development of pharmaceuticals, to hear
and determine the dispute. The two persons so chosen will select another impartial Third Party and their majority decision will be final and
conclusive upon the parties hereto. If either party fails to designate its appointee within the thirty (30) day period referenced above, then the
appointee who has been designated by the other party will serve as the sole member of the Third Party Panel and will be deemed to be the
single, mutually approved party to resolve the dispute. Each party will bear its own costs in the Third Party Referral process, and the parties
will split equally the costs of the Third Party Panel members. The Third Party Panel will, upon the request of either party, issue its final
determination in writing.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1. OFFICIAL LANGUAGE. English shall be the official language of this Research Agreement and the License Agreement, and all
communications between the parties hereto shall be conducted in that language.
12.2. WAIVER. No provision of this Research Agreement may be waived except in writing by both parties hereto. No failure or delay by either
party hereto in exercising any right or remedy hereunder or under applicable law will operate as a waiver thereof, or a waiver of any right or
remedy on any subsequent occasion.
12.3. FORCE MAJEURE.
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 25
Neither party will be in breach hereof by reason of its delay in the performance of or failure to perform any of its obligations hereunder, if that
delay or failure is caused by strikes, acts of God or the public enemy, riots, incendiaries, interference by civil or military authorities,
compliance with governmental priorities for materials, or any fault beyond its control or without its fault or negligence.
12.4. SEVERABILITY. Should one or more provisions of this Research Agreement be or become invalid, then the parties hereto shall attempt
to agree upon valid provisions in substitution for the invalid provisions, which in their economic effect come so close to the invalid provisions
that it can be reasonably assumed that the parties would have accepted this Research Agreement with those new provisions. If the parties are
unable to agree on such valid provisions, the invalidity of such one or more provisions of this Research Agreement shall nevertheless not affect
the validity of the Agreement as a whole, unless the invalid provisions are of such essential importance for this Research Agreement that it may
be reasonably presumed that the parties would not have entered into this Research Agreement without the invalid provisions.
12.5. GOVERNMENT ACTS. In the event that any act, regulation, directive, or law of a country or its government, including its departments,
agencies or courts, should make impossible or prohibit, restrain, modify or limit any material act or obligation of NOVARTIS or VERTEX
under this Research Agreement, the party, if any, not so affected, shall have the right, at its option, to suspend or terminate this Research
Agreement as to such country, if good faith negotiations between the parties to make such modifications therein as may be necessary to fairly
address the impact thereof, are not successful after a reasonable period of time in producing mutually acceptable modifications to this Research
Agreement.
12.6. GOVERNMENT APPROVALS. Each party will obtain any government approval required in its country of domicile to enable this
Research Agreement to become effective, or to enable any payment hereunder to be made, or any other obligation hereunder to be observed or
performed. Each party will keep the other informed of progress in obtaining any such government approval, and will cooperate with the other
party in any such efforts.
12.7. EXPORT CONTROLS. This Research Agreement is made subject to any restrictions concerning the export of materials and Technology
from the United States which may be imposed upon or related to either party to this Research Agreement from time to time by the Government
of the United States. Furthermore, NOVARTIS will not export, directly or indirectly, any VERTEX Kinase Technology or any Bulk Drug
Substance, Drug Product Candidates or Drug Products utilizing such Technology to any countries for which the United States Government or
any agency thereof at the time of export requires an export license or other governmental approval, without first obtaining the written consent
to do so from the Department of Commerce or other agency of the United States Government when required by applicable statute or regulation.
12.8. ASSIGNMENT.
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 26
This Research Agreement may not be assigned or otherwise transferred by either party without the prior written consent of the other party;
provided, however, that either party may assign this Research Agreement, without the consent of the other party, (i) to any of its Affiliates, if
the assigning party guarantees the full performance of its Affiliates' obligations hereunder, or
(ii) in connection with the transfer or sale of all or substantially all of its assets or business or in the event of its merger or consolidation with
another company. Any purported assignment in contravention of this Section 12.8 shall, at the option of the non-assigning party, be null and
void and of no effect. No assignment shall release either party from responsibility for the performance of any accrued obligation of such party
hereunder. This Research Agreement shall be binding upon and enforceable against the successor to or any permitted assignees from either of
the parties hereto.
12.9. AFFILIATES. Each party may perform its obligations hereunder personally or through one or more Affiliates, although each party shall
nonetheless be solely responsible for the performance of its Affiliates. Neither party shall permit any of its Affiliates to commit any act
(including any act or omission) which such party is prohibited hereunder from committing directly. The use of subcontractors by either party
shall not increase the financial obligations of the other party hereunder in any respect.
12.10. COUNTERPARTS. This Research Agreement may be executed in duplicate, each of which shall be deemed to be original and both of
which shall constitute one and the same Agreement.
12.11. NO AGENCY. Nothing herein contained shall be deemed to create an agency, joint venture, amalgamation, partnership or similar
relationship between NOVARTIS and VERTEX. Notwithstanding any of the provisions of this Research Agreement, neither party to this
Research Agreement shall at any time enter into, incur, or hold itself out to third parties as having authority to enter into or incur, on behalf of
the other party, any commitment, expense, or liability whatsoever, and all contracts, expenses and liabilities in connection with or relating to
the obligations of each party under this Research Agreement shall be made, paid, and undertaken exclusively by such party on its own behalf
and not as an agent or representative of the other.
12.12. NOTICE. All communications between the parties with respect to any of the provisions of this Research Agreement will be sent to the
addresses set out below, or to such other addresses as may be designated by one party to the other by notice pursuant hereto, by prepaid,
certified air mail (which shall be deemed received by the other party on the seventh business day following deposit in the mails), or by
facsimile transmission, or other electronic means of communication (which shall be deemed received when transmitted), with confirmation by
first class letter, postage pre-paid, given by the close of business on or before the next following business day:
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 27
if to NOVARTIS, at:
NOVARTIS PHARMA AG
Business Development and Licensing
P.O. Box
CH-4002
Basel, Switzerland
Attention: Victor A. Hartmann, Vice President
with a copy to: Legal Services, at the address referenced above
if to VERTEX, at:
Attention: President
Vertex Pharmaceuticals Incorporated
130 Waverly Street
Cambridge, MA U.S.A. 02139-4211
with a copy to: Legal Department Attention: General Counsel
12.13. HEADINGS. The paragraph headings are for convenience only and will not be deemed to affect in any way the language of the
provisions to which they refer.
12.14. AUTHORITY. The undersigned represent that they are authorized to sign this Research Agreement on behalf of the parties hereto. The
parties each represent that no provision of this Research Agreement will violate any other agreement that such party may have with any other
person or company. Each party has relied on that representation in entering into this Research Agreement.
12.15. ENTIRE AGREEMENT. This Research Agreement, together with the Original Agreement insofar as it remains applicable, as set forth
in the Recitals, in Section 4.8 and elsewhere herein, with respect to VX-680 and VX-528 only, and the respective License Agreements thereto,
contains the entire understanding of the parties relating to the matters referred to herein, and may only be amended by a written document, duly
executed on behalf of the respective parties.
12.16. STANDSTILL.
[***]
12.17. NOTICE OF PHARMACEUTICAL SIDE-EFFECTS. During the term of this Research Agreement, the parties shall keep each other
promptly and fully informed and will promptly notify appropriate authorities in accordance with applicable law, after receipt of information
with respect to any serious adverse event (as defined by the ICH Harmonized Tripartite Guideline on Clinical Safety Data Management),
directly or indirectly attributable to the use or application of Compounds, a Development Candidate, Bulk Drug Substance, a Drug Product
Candidate or a Drug Product.
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 28
12.18. INFLATION ADJUSTMENT. All payments required to be made to VERTEX hereunder (except any royalty payments required to be
made under the provisions of Section 6.3 of the License Agreement) shall be adjusted at the beginning of each Research Year (commencing at
the beginning of Research Year 2) to reflect the impact of inflation since the Effective Date of the Agreement, as measured by the biotech
worker inflation rate defined and reported in the Radford Survey (Radford/AON Consulting Inc., San Francisco, CA), or other mutually
acceptable index. Notwithstanding the foregoing, no adjustment shall be required in any Research Year in which the appropriate inflation
adjustment, if applied, would result in a change of less than [***] in the relevant payment amount.
12.19. INVOICE REQUIREMENT. Any amounts payable to VERTEX hereunder (except any royalty payments required to be made under the
provisions of Section 6.3 of the License Agreement) shall be made within thirty days after receipt by NOVARTIS, or its nominee designated
for that purpose in advance by NOVARTIS in writing to VERTEX, of an invoice covering such payment, which invoice shall conform to the
extent reasonably practicable to the form of invoice contained in Exhibit B to this Research Agreement.
12.20. HARDSHIP. If as a result of unforeseen events or developments relating to the subject matter of this Research Agreement, the
performance of this Research Agreement shall cause inequitable economic hardship for one party which runs counter to the objectives of this
Research Agreement and which the other party cannot reasonably and in good faith expect the first party to bear unrelieved, the parties will
meet and seek in good faith to find equitable means of amending this Research Agreement to reestablish a fair and reasonable economic
balance under this Research Agreement between the parties hereto.
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 29
VERTEX PHARMACEUTICALS INCORPORATED
By: /s/ Kenneth S. Boger
---------------------------------------------
Kenneth S. Boger
Title: Senior Vice President and General Counsel
NOVARTIS PHARMA AG
By: /s/ Stephanie Lassarat
----------------------------------------------
Title: Senior Legal Counsel
-------------------------------------------
By: /s/ W. Steiger
----------------------------------------------
Title: Head of Administration, NIBR Basil
-------------------------------------------
First Revised and Restated Research and Early Development Agreement -- Confidential -- Page 30
SCHEDULE 1.13
EXCLUDED COMPOUNDS AND EXCLUDED KINASES
Excluded Kinases
SWISSPROT Designation
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
[***] [***]
Excluded Compounds
[***]
First Revised and Restated Research and Early Develoment Agreement - Confidential Schedule 1.13
SCHEDULE 2.4.3
DEVELOPMENT CANDIDATE CRITERIA
[***]
First Revised and Restated Research and Early Develoment Agreement - Confidential Schedule 2.4.3 - Page 1
FORM OF LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENT
EXHIBIT A
Research and Early Develoment Agreement - Confidential Exhibit A
First Revised and Restated
EXHIBIT B
FORM OF INVOICE
[COMPANY Letterhead]
[Date]
Novartis Pharma AG
Zentraler Faktureneingang
Attn: Ms. R. Aschwanden
Lichtstrasse 35
CH - 4002 Basel
Switzerland
Dear Ms. Aschwanden
Re: [COMPANY] License Agreement for [PRODUCT]
This is an invoice requesting payment in connection the above-captioned Agreement between [COMPANY] and Novartis Pharma AG.
Novartis Contract Code N DEG.: [will be assigned within Novartis following
execution]
Novartis Cost Centre: 630926 / 393120
SPECIFICATION: [PLEASE SPECIFY THE EVENT FOR WHICH THE
INVOICE IS DUE, AND ADD ANY COPIES OF
INVOICES FROM THIRD PARTIES IN CASE
REIMBURSEMENT FOR THIRD PARTY WORK IS
AGREED TO]
Amount and Currency: [self-explanatory]
Bank address and Account N DEG.: [insert the name and address of the bank to
which the payment should be sent and the
account number to which it should be
credited]
Sincerely yours,
[COMPANY]
First Revised and Restated Research and Early Develoment Agreement - Confidential Exhibit B
EXHIBIT A
LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENT
BETWEEN
VERTEX PHARMACEUTICALS INCORPORATED
AND
NOVARTIS PHARMA AG
ARTICLE I -- DEFINITIONS..........................................................................................2
ARTICLE II -- LICENSE...........................................................................................10
2.1 Grant to NOVARTIS.....................................................................................10
2.2 Grant to VERTEX.......................................................................................11
2.3 Information Transfer..................................................................................11
ARTICLE III -- DEVELOPMENT.......................................................................................12
3.1 Commencement of Development Program...................................................................12
3.2 International Project Team............................................................................13
3.3 Development Responsibility and Costs..................................................................14
3.4 Regulatory Approvals..................................................................................15
3.5 Assistance Rights.....................................................................................16
3.6 Reasonable Efforts in Development.....................................................................17
ARTICLE IV -- MANUFACTURING AND SUPPLY..........................................................................17
4.1 Supply of Bulk Drug Substance and Drug Product........................................................17
4.2 [This section has been intentionally left blank.].....................................................17
4.3 Formulation and Packaging.............................................................................18
ARTICLE V -- COMMERCIALIZATION.................................................................................18
5.1 Marketing and Promotion...............................................................................18
5.2 Global Brand Team.....................................................................................18
5.3 [This section has been intentionally left blank.].....................................................19
5.4 [This section has been intentionally left blank.].....................................................19
5.5 Co-labeling...........................................................................................20
5.6 Due Diligence.........................................................................................20
ARTICLE VI -- PAYMENTS..........................................................................................21
6.1 Development Election Payment..........................................................................21
6.2 Development Milestone Payments by NOVARTIS............................................................21
6.3 Royalties.............................................................................................23
6.4 [This section has been intentionally left blank.].....................................................24
6.5 Sales Reports.........................................................................................24
6.6 Withholding Tax.......................................................................................26
ARTICLE VII -- BACK-UP COMPOUNDS.................................................................................26
ARTICLE VIII -- INTELLECTUAL PROPERTY............................................................................27
8.1 Patentable Inventions and Know-How....................................................................27
8.2 Infringement Claims by Third Parties..................................................................28
8.3 Infringement Claims Against Third Parties.............................................................30
8.4 Notice of Certification...............................................................................31
8.5 Patent Term Extensions................................................................................31
ARTICLE IX -- REPRESENTATIONS AND WARRANTIES....................................................................32
9.1 Representations and Warranties of VERTEX..............................................................32
9.2 Representations and Warranties of NOVARTIS............................................................33
ARTICLE X -- CONFIDENTIALITY...................................................................................34
10.1 Undertaking...........................................................................................34
License, Development and Commercialization Agreement -- Confidential
10.2 Exceptions............................................................................................35
10.3 Publicity.............................................................................................36
10.4 Survival..............................................................................................36
ARTICLE XI -- PUBLICATIONS......................................................................................36
ARTICLE XII -- DISPUTE RESOLUTION................................................................................38
12.1 Governing Law, and Jurisdiction.......................................................................38
12.2 Dispute Resolution Process............................................................................38
ARTICLE XIII -- TERM AND TERMINATION.............................................................................38
13.1 Term..................................................................................................38
13.2 Termination For Cause.................................................................................39
13.3 Termination for Bankruptcy............................................................................39
13.4 Termination by NOVARTIS...............................................................................39
13.5 Effect of Termination.................................................................................40
ARTICLE XIV -- INDEMNIFICATION...................................................................................40
14.1 Indemnification by VERTEX.............................................................................40
14.2 Indemnification by NOVARTIS...........................................................................41
14.3 Claims Procedures.....................................................................................41
14.4 Compliance............................................................................................43
14.5 Insurance.............................................................................................43
ARTICLE XV -- MISCELLANEOUS PROVISIONS..........................................................................43
15.1 Notice of Pharmaceutical Side-Effects.................................................................43
15.2 Waiver................................................................................................43
15.3 Force Majeure.........................................................................................43
15.4 Registration of License...............................................................................44
15.5 Severability..........................................................................................44
15.6 Government Acts.......................................................................................44
15.7 Government Approvals..................................................................................44
15.8 Assignment............................................................................................45
15.9 Affiliates............................................................................................45
15.10 Counterparts..........................................................................................45
15.11 No Agency.............................................................................................45
15.12 Notice................................................................................................46
15.13 Headings..............................................................................................46
15.14 Authority.............................................................................................47
15.15 Entire Agreement......................................................................................47
15.16 Inflation Adjustment..................................................................................47
15.17 Invoice Requirement...................................................................................47
15.18 Hardship..............................................................................................47
SCHEDULES
Schedule 1.12 -- List of Drug Product Candidates
Schedule 1.25 -- List of Major Markets
Schedule 1.29 -- NOVARTIS Patents
Schedule 1.44 -- VERTEX Patents
License, Development and Commercialization Agreement -- Confidential
LICENSE, DEVELOPMENT AND COMMERCIALIZATION AGREEMENT
This Agreement is made and entered into as of ________, _____ ( the "Effective Date") between Vertex Pharmaceuticals Incorporated
(hereinafter "VERTEX"), a Massachusetts corporation with principal offices at 130 Waverly Street, Cambridge, MA 02139-4242, and
NOVARTIS PHARMA AG (hereinafter "NOVARTIS"), a Swiss corporation with principal offices at Lichtstrasse 35, CH-4056 Basel,
Switzerland.
INTRODUCTION
WHEREAS, VERTEX and NOVARTIS are parties to a certain First Revised and Restated Research Agreement dated January __, 2004 (the
"Research Agreement") which revised and restated a certain Research and Early Development Agreement dated May 8, 2000 (the "Original
Agreement"), under which VERTEX is attempting to design novel, small-molecule compounds targeting the Kinase protein superfamily; and
WHEREAS, NOVARTIS may elect to develop and commercialize compounds proposed by VERTEX under the Research Agreement; and
WHEREAS, in accordance with the Research Agreement NOVARTIS has elected to develop and commercialize the Drug Product Candidates
designated on SCHEDULE 1.12 hereto, and the parties therefore wish to execute this License, Development and Commercialization
Agreement, which is identical in substance to the agreement attached as Exhibit A to the Research Agreement, to memorialize the provisions
specific to development and commercialization of Drug Product Candidates;
WHEREAS, the parties have special rights and obligations with respect to Back-up Compounds to the Drug Product Candidates (as defined in
the Research Agreement); and
NOW THEREFORE, in consideration of the foregoing premises, the parties agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the terms defined in this Article 1 shall have the following meanings whether used in their singular or plural
forms. Use of the singular shall include the plural and vice versa, unless the context requires otherwise:
1.1. "AFFILIATE" shall mean, with respect to any Person, any other Person which directly or indirectly, by itself or through one or more
intermediaries, controls, or is controlled
License, Development and Commercialization Agreement -- Confidential -- Page 1
by, or is under direct or indirect common control with, such Person. The term "control" means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or
otherwise. Control will be presumed if one Person owns, either of record or beneficially, more than 50% of the voting stock of any other
Person. For the avoidance of any doubt, the Novartis Institute for Functional Genomics, Inc. and The Friedrich Miescher Institute, as currently
operated, are not Affiliates of NOVARTIS for the purposes of this Agreement.
1.1.1. "CHANGE OF CONTROL" shall mean (a) a transaction which results in the voting securities of VERTEX immediately prior to such
transaction ceasing to represent more than fifty percent (50%) of the combined voting power of the surviving entity immediately after such
transaction; (b) any Third Party (other than any trustee or other fiduciary holding securities under an employee benefit plan, or any corporation
or other entity owned directly or indirectly by the stockholders of such party in substantially the same portion as their ownership of stock of
such party) becoming the beneficial owner of more than fifty percent (50%) of the combined voting power of the outstanding securities of
VERTEX; or (c) a sale to a Third Party of all or substantially all of the business of VERTEX necessary for VERTEX's performance under this
Agreement.
1.2. "GLOBAL BRAND TEAM" OR "GBT" shall have the meaning set forth in
Section 5.2 hereof; and "Back-up Compound" shall have the meaning set forth in
Section 1.1.1 of the Research Agreement.
1.3. [This section has been intentionally left blank.]
1.4. "BULK DRUG SUBSTANCE" shall mean a Drug Product Candidate in bulk crystal, powder or other form suitable for incorporation in a
Drug Product.
1.5. "CONTROLLED" shall mean the legal authority or right of a party hereto to grant a license or sublicense of intellectual property rights to
another party hereto, or to otherwise disclose proprietary or trade secret information to such other party, without breaching the terms of any
agreement with a Third Party, infringing upon the intellectual property rights of a Third Party, or misappropriating the proprietary or trade
secret information of a Third Party.
1.6. [This section has been intentionally left blank.]
1.7. (a) "DEVELOPMENT CANDIDATE" shall have the meaning ascribed to it in the Research Agreement.
(b) "DEVELOPMENT ELECTION FEE" and "BACK-UP ELECTION FEE" shall each have the meaning ascribed to it in Section 6.1 hereof.
1.8. "DEVELOPMENT PLAN" shall have the meaning ascribed to it in
Section 3.2.2 hereof.
1.9. "DEVELOPMENT PROGRAM" shall mean activities associated with development of a Drug Product Candidate which are conducted by
or at the direction of NOVARTIS after the Development Election has been exercised with respect to that Drug Product Candidate, including
but not limited to (a) manufacture and formulation of Drug Product Candidates for use in pre-clinical, non-clinical and clinical studies; (b) pre-
clinical and non-clinical animal studies
License, Development and Commercialization Agreement -- Confidential -- Page 2
performed in accordance with GLP (or the applicable equivalent); (c)planning, implementation, evaluation and administration of human
clinical trials; (d) manufacturing process development, scale-up and commercial manufacture of Drug Product; (e) preparation and submission
of applications for Regulatory Approval; and (f) post-market surveillance of approved drug indications, as required or agreed as part of a
marketing approval by any governmental regulatory authority.
1.10. [This Section has been intentionally left blank.]
1.11. "Drug Product" shall mean a finished dosage form which is prepared from Bulk Drug Substance and is ready for administration to the
ultimate consumer as a pharmaceutical.
1.12. "DRUG PRODUCT CANDIDATE" shall mean any Development Candidate or Drug Product Candidate Back-up Candidate listed from
time to time on Schedule 1.12 hereof, as to which NOVARTIS has exercised the Development Election under the Research Agreement and
which has become a subject of this License Agreement in accordance with the provisions thereof; and "Drug Product Candidate Back-up
Candidate" shall have the meaning set forth in Section 7.4 of this Agreement.
1.13. "EFFECTIVE DATE" shall mean the effective date of this Agreement as set forth on the first page hereof.
1.14. [This section has been intentionally left blank.]
1.15. "FIELD" shall mean the treatment or prevention of conditions or diseases in humans, principally by affecting a Kinase other than an
Excluded Kinase.
1.16. "FIRST COMMERCIAL SALE" shall mean the first sale of a Drug Product by NOVARTIS or an Affiliate or sublicensee of NOVARTIS
in a country in the Territory following Regulatory Approval of the Drug Product in that country or, if no such Regulatory Approval or similar
marketing approval is required, the date upon which the Drug Product is first commercially launched in such country.
1.17. "FILING OUTSIDE THE U.S." shall mean any application or regulatory filing to be made hereunder with a regulatory authority outside
the United States, for approval to manufacture and sell Drug Product(s) outside the U.S., and any correspondence, approvals or governmental
licenses relating thereto.
1.18. [This section has been intentionally left blank.]
1.19. "GMP" shall mean the current Good Manufacturing Practice regulations promulgated by the FDA, published at 21 CFR Part 210 et seq.,
as such regulations may from time to time be amended, and such equivalent regulations or standards of countries outside the United States as
may be applicable to activities conducted hereunder; and "GLP" shall mean the current Good Laboratory Practices regulations promulgated by
the FDA, published at 21 CFR Part 58, as such regulations may be from time to time amended, and such equivalent regulations or standards of
countries outside the United States as may be applicable to activities conducted hereunder.
License, Development and Commercialization Agreement -- Confidential -- Page 3
1.20. "INDICATION" shall mean a recognized disease or condition, an important manifestation of a disease or condition, or symptom
associated with a disease or syndrome for which use of a Drug Product is indicated, as would be identified in the Drug Product's label under
applicable FDA regulations or the foreign equivalent thereof.
1.21. "IND" shall mean the investigational new drug application relating to a Drug Product Candidate filed with the FDA pursuant to 21 CFR
Part 312, including any amendments thereto. References herein to IND shall include, to the extent applicable, any comparable Filing(s) Outside
the U.S. (such as a CTX in the European Union).
1.22. "INTERNATIONAL PROJECT TEAM" or "IPT" shall have the meaning set forth in Section 3.2.1 hereof.
1.23. "JOINT STEERING COMMITTEE" or "JSC" shall have the meaning set forth in Section 2.6 of the Research Agreement.
1.24. "KNOW-HOW" means all proprietary material and information including data, technical information, know-how, experience, inventions,
discoveries, trade secrets, compositions of matter and methods, whether currently existing or developed or obtained during the course of this
Agreement and whether or not patentable or confidential, that are now Controlled by a Party or its Affiliates and that relate to the development,
utilization, manufacture or use of any Drug Product Candidate or Drug Product, including but not limited to processes, techniques, methods,
products, materials and compositions; provided however, that for the purposes of the definition of VERTEX Know-How only, the term "Know-
How" shall not include VERTEX's general drug design technology, whether in software or hardware, tangible or intangible, form; and "Lead
Period" shall mean the period starting on date this Agreement is effective with respect to a particular Drug Product Candidate and ending on the
second anniversary thereafter.
1.25. "MAJOR MARKETS" shall mean those countries listed on Schedule 1.25 hereto.
1.26. "MANUFACTURING COST" shall mean [***].
1.27. "NET SALES" with respect to any Drug Product shall mean the gross amount invoiced by NOVARTIS and any NOVARTIS Affiliate,
licensee or sublicensee for that Drug Product sold to Third Parties in bona fide, arms-length transactions, less [***]; all as determined in
accordance with NOVARTIS' usual and customary accounting methods, which are in accordance with generally accepted accounting principles
(GAAP).
1.27.1. In the case of any sale or other disposal of a Drug Product between or among NOVARTIS and its Affiliates, licensees and sublicensees,
for resale, Net Sales shall be calculated as above only on the value charged or invoiced on the first arm's-length sale thereafter to a Third Party;
1.27.2. In the case of any sale which is not invoiced or is delivered before invoice, Net Sales shall be calculated at the time of shipment or when
the Drug Product is paid for, if paid for before shipment or invoice;
1.27.3. In the case of any sale or other disposal for value, such as barter or counter-trade, of any Drug Product, or part thereof, other than in an
arm's length transaction
License, Development and Commercialization Agreement -- Confidential -- Page 4
exclusively for money, Net Sales shall be calculated as above on the value of the consideration received or the fair market price (if higher) of
the Drug Product in the country of sale or disposal;
1.27.4. In the event the Drug Product is sold in a finished dosage form containing the Drug Product in combination with one or more other
active ingredients (a "Combination Product"), the Net Sales of the Drug Product, for the purposes of determining royalty payments, shall be
determined by [***].
1.28. "NOVARTIS KNOW-HOW" shall mean all Know-How of NOVARTIS.
1.29. "NOVARTIS PATENTS" shall mean any Patents Controlled by NOVARTIS or any of its Affiliates claiming Bulk Drug Substance, a
Drug Product Candidate or a Drug Product, or a formulation or prodrug thereof, discovered or identified by NOVARTIS or its Affiliates during
the course of the Research Program or a Development Program, or a method of making or using Bulk Drug Substance, a Drug Product
Candidate or a Drug Product, or a prodrug thereof, or an improvement to the subject matter of a Patent covering any of the foregoing. A list of
NOVARTIS Patents is appended hereto as Schedule 1.29 and will be updated periodically to reflect additions thereto during the term of this
Agreement. NOVARTIS shall keep VERTEX periodically informed in writing of all NOVARTIS Patents.
1.30. "NOVARTIS TECHNOLOGY" shall mean all NOVARTIS Patents and all NOVARTIS Know-How which is applied by NOVARTIS to
the development, manufacture or use of Bulk Drug Substance, a Drug Product Candidate or a Drug Product.
1.31. "PATENTS" means all existing patents and patent applications and all patent applications hereafter filed, including any continuation,
continuation-in-part, division, provisional or any substitute applications, any patent issued with respect to any such patent applications, any
reissue, reexamination, renewal or extension (including any supplementary protection certificate) of any such patent, and any confirmation
patent or registration patent or patent of addition based on any such patent, and all foreign counterparts of any of the foregoing.
1.32. "PERSON" shall mean any individual, corporation, partnership, association. joint-stock company, trust, unincorporated organization or
government or political subdivision thereof.
1.33. "PIVOTAL REGISTRATION STUDY" shall mean a human clinical trial conducted for inclusion in (i) that portion of the FDA
submission and approval process which provides for the continued trials of a Drug Candidate on sufficient numbers of patients to generate
safety and efficacy data to support Regulatory Approval in the proposed therapeutic indication, as more fully defined in 21 CFR. Section
312.21(c), and (ii) equivalent submissions with similar requirements in other countries.
1.34. "REGULATORY APPROVAL" shall mean, with respect to any country, all authorizations by the appropriate governmental entity or
entities necessary for commercial sale of a Drug Product in that country including, without limitation and where applicable, approval of
labeling, price, reimbursement and manufacturing. "Regulatory Approval" in the United States shall mean final approval of a new drug
application pursuant to 21 CFR Section 314, permitting marketing of the applicable Drug Product in interstate commerce in the United States.
"Regulatory Approval" in the European Union shall mean final approval of a Marketing
License, Development and Commercialization Agreement -- Confidential -- Page 5
Authorization Application pursuant to Council Directive 75/319/EEC, as amended, or Council Regulation 2309/93/EEC, as amended.
1.35. "RESEARCH AGREEMENT" shall mean that certain First Revised and Restated Research and Early Development Agreement between
VERTEX and NOVARTIS dated February 3, 2004.
1.36. [This section has been intentionally left blank.]
1.37. [This section has been intentionally left blank.] =
1.38. "Technology" shall mean VERTEX Technology and NOVARTIS Technology.
1.39. "Territory" shall mean all the countries in the world.
1.40. "Third Party" shall mean any person or entity which is not a party or an Affiliate of any party to this Agreement.
1.41. [This section has been intentionally left blank.]
1.42. "VALID PATENT CLAIM" shall mean either (a) a claim of an issued and unexpired Patent which has not been revoked or held
permanently unenforceable or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or
unappealed within the time allowed for appeal, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer or
otherwise, or (b) a claim of a pending patent application which claim was filed in good faith and has not been abandoned or finally disallowed
without the possibility of appeal or refiling of said application.
1.43. "VERTEX KNOW-HOW" shall mean all Know-How of VERTEX.
1.44. "VERTEX PATENTS" shall mean any Patents Controlled by VERTEX or any of its Affiliates claiming Bulk Drug Substance, a Drug
Product Candidate or a Drug Product, or a formulation or prodrug thereof, discovered or identified by VERTEX or its Affiliates during the
course of the Research Program and the Development Program, or a method of making or using Bulk Drug Substance, a Drug Product
Candidate or a Drug Product, or a prodrug thereof, or an improvement to the subject matter of a Patent covering any of the foregoing. A list of
VERTEX Patents is appended hereto as Schedule 1.44 and will be updated periodically to reflect additions thereto during the term of this
Agreement.
1.45. "VERTEX TECHNOLOGY" shall mean all VERTEX Patents and all VERTEX Know-How.
1.46. The term "European Union" shall mean those countries which are now or later become members of the European Union.
Capitalized terms used but not otherwise defined herein which are defined in the Research Agreement shall have the meaning ascribed to them
therein.
ARTICLE II
LICENSE
2.1. GRANT TO NOVARTIS.
License, Development and Commercialization Agreement -- Confidential -- Page 6
(a) Subject to the other provisions of this Agreement, VERTEX hereby grants to NOVARTIS an exclusive worldwide license under VERTEX
Technology to the extent useful to permit NOVARTIS to carry out its rights and obligations set forth in this Agreement and to develop,
manufacture, have manufactured, market, use, sell and import for sale, as provided herein, Bulk Drug Substance, Drug Product Candidates and
Drug Products worldwide. NOVARTIS shall have the right to sublicense under this Agreement. Subject to the provisions of this Agreement,
VERTEX shall have the right to use VERTEX Technology to discharge its obligations and exercise its rights under this Agreement. VERTEX
retains all rights to VERTEX Technology except to the extent explicitly granted to NOVARTIS hereunder.
(b) NOVARTIS may subcontract its rights to manufacture Bulk Drug Substance, Drug Product Candidates, and Drug Product and may contract
with reputable organizations to conduct or assist in the conduct of human clinical trials and the evaluation of trials data, after prior notice to, but
without the consent of, VERTEX. NOVARTIS shall be responsible to VERTEX for the performance of any of its sublicensees or
subcontractors under any provisions of this Agreement for which NOVARTIS is responsible. NOVARTIS shall not permit any subcontractors
or sublicensees to use VERTEX Technology without provisions safeguarding confidentiality at least equivalent to those provided in this
Agreement. Any such provisions will allow VERTEX the right to directly enforce the obligations of confidentiality with respect to VERTEX
Technology in possession of the Third Party.
(c) [***]
2.2. GRANT TO VERTEX. Subject to the other provisions of this Agreement, NOVARTIS hereby grants to VERTEX a non-exclusive,
worldwide license or (as appropriate) sublicense under NOVARTIS Technology, only to the extent necessary to permit VERTEX to carry out
the activities which it is permitted to undertake in this Agreement. VERTEX shall not sublicense such license to the NOVARTIS Technology
without the consent of NOVARTIS (which shall not be unreasonably withheld). Any permitted sublicense will contain provisions safeguarding
confidentiality at least equivalent to those provided in this Agreement, which will allow NOVARTIS the right to directly enforce the
obligations of confidentiality with respect to NOVARTIS Technology in possession of the Third Party. NOVARTIS retains all rights to
NOVARTIS Technology except to the extent explicitly granted to VERTEX hereunder.
2.3. Information Transfer.
(a) [***]
(b) [***]
(c) [***]
License, Development and Commercialization Agreement -- Confidential -- Page 7
ARTICLE III
DEVELOPMENT
3.1. COMMENCEMENT OF DEVELOPMENT PROGRAM. NOVARTIS shall promptly and diligently commence and pursue a
Development Program with respect to each Drug Product Candidate as soon as practicable after exercise by NOVARTIS of its Development
Election with respect to that Drug Product Candidate.
3.2. INTERNATIONAL PROJECT TEAM.
3.2.1. FORMATION AND RESPONSIBILITIES. As soon as practicable after the exercise by NOVARTIS of its Development Election with
respect to a Drug Product Candidate, NOVARTIS will establish an International Project Team ("IPT") which shall include one representative
designated by VERTEX from time to time; provided, however, an IPT shall no longer include a representative designated by VERTEX in case
of a Change of Control of VERTEX. Additional IPT's, which shall also include one VERTEX representative, may be established from time to
time in connection with the development of additional Drug Product Candidates. The IPT (or its successor organization, as designated by
NOVARTIS) will be the principal organization through which the development of a Drug Product Candidate is planned, administered,
evaluated and completed, subject to appropriate review and approval at senior management levels as required by NOVARTIS from time to
time. In addition to the VERTEX member, the IPT will typically have members from the various functional groups (e.g., research, preclinical
safety, clinical, regulatory, marketing) which are or will be expected to be involved in development and launch of the Drug Product Candidate
and Drug Product. NOVARTIS will appoint the IPT Chair. The IPT will typically meet every four to six weeks, depending on the level of
current development activity, and will be responsible for preparation and implementation of the Development Plan described in Section 3.2.2
below with respect to each Drug Product Candidate.
3.2.2. DEVELOPMENT PLAN. The IPT shall prepare and oversee the implementation of the overall Development Plan for each Drug Product
Candidate. The Development Plan shall, among other things, detail, schedule and fully describe the proposed toxicology studies, clinical trials,
regulatory plans, clinical trial and commercial material requirements, and process development and manufacturing plans for each Drug Product
Candidate, along with relevant budget information for the described items, and will outline the key elements involved in obtaining Regulatory
Approval in each country where the Drug Product is to be marketed. The parties expect that development tasks will be advanced in parallel
rather than serially where practicable and appropriate, if doing so would be likely to advance the ultimate date of Regulatory Approval and
launch and is otherwise commercially reasonable.
License, Development and Commercialization Agreement -- Confidential -- Page 8
3.2.3. MEETING MATERIALS. The IPT will consider all information that is material to an assessment of the status, direction and progress of
the Development Program, including all clinical trials protocols, data and reports. The IPT Leader will ensure that full and complete minutes
are prepared and distributed to each member of the IPT promptly after each meeting. Those minutes shall contain a full report on the activities
of the IPT during its meeting. VERTEX's representative on the IPT will receive all documents and information distributed or communicated to
members of the IPT generally, and may review copies of all other information relative to the development of a Drug Product Candidate unless
the IPT Leader denies access to that information for good reason.
3.2.4. [This section has been intentionally left blank.]
3.3. DEVELOPMENT RESPONSIBILITY AND COSTS. Except as provided in
Section 3.5 below, NOVARTIS will have sole responsibility for, and bear the cost of conducting, the Development Program with respect to
each Drug Product Candidate.
3.4. REGULATORY APPROVALS. NOVARTIS shall be solely responsible for preparing and submitting registration dossiers for Regulatory
Approval of Drug Product Candidates in the Territory.
3.4.1. NOVARTIS OWNERSHIP. All Regulatory Approvals shall be held by and in the name of NOVARTIS, and NOVARTIS shall own all
submissions in connection therewith, provided that VERTEX shall have a right of reference to all or any part of the submissions if the
"Assistance Rights" become effective under Section 3.5 hereof.
3.4.2. PRINCIPAL INTERFACE. All formulary or marketing approvals shall also be obtained by and in the name of NOVARTIS, and
NOVARTIS will be the principal interface with and will otherwise handle all interactions with regulatory agencies concerning any Drug
Product including, to the extent legally possible, being the sole contact with such agencies, subject to the rights of VERTEX under Section
3.4.3.
3.4.3. REGULATORY MEETINGS. To the extent not prohibited by law or regulation, VERTEX shall have the right, after consultation with
NOVARTIS and unless VERTEX's presence would impede the regulatory approval process, to have one representative participate in all
material meetings between representatives of NOVARTIS and any of the FDA, the EMEA and Koseisho (MHW Japan).
(a) NOVARTIS will undertake to provide VERTEX with information reasonably in advance of the meeting sufficient to ensure that the
VERTEX representative is adequately informed about the issues to be presented at any such meeting.
(b) VERTEX may request NOVARTIS to provide VERTEX with a copy of any correspondence between the FDA, the EMEA and Koseisho
that relates to any material issues involving Regulatory Approval of a Drug Product Candidate, and NOVARTIS shall provide that information
upon request, unless NOVARTIS has good reason to withhold any such correspondence, in which case it will notify VERTEX of that reason
promptly.
License, Development and Commercialization Agreement -- Confidential -- Page 9
(c) Notwithstanding the foregoing, NOVARTIS will have sole discretion as to the regulatory strategy and decision-making for any Drug
Product Candidate or Drug Product.
3.5. Assistance Rights. [***]
3.5.1. [***]
3.5.2. If VERTEX pursues its Assistance Rights:
(a) REGULATORY ACTIONS. NOVARTIS will continue to make any necessary and appropriate regulatory filings with respect to the
Development Work and will, if required for VERTEX to exercise its Assistance Rights effectively, transfer to VERTEX at VERTEX's expense
any IND material (or equivalents thereof) relevant to such Development Work.
(b) MANUFACTURE OF CLINICAL SUPPLY OF DRUG PRODUCT CANDIDATE. NOVARTIS will supply VERTEX (for up to two
years) with the necessary clinical supply of Drug Product Candidate required to perform such Development Work in accordance with
NOVARTIS' then current scale of manufacturing at NOVARTIS' Manufacturing Cost and upon such other reasonable and customary terms as
to shipment, delivery and similar matters as may be agreed.
(c) MILESTONES. If NOVARTIS elects to resume the Development Program for a Drug Product Candidate, it will provide VERTEX with
ninety (90) days prior notice thereof, and will reimburse VERTEX for the actual direct cost of the Development Work of good quality, if such
work conforms with the requirements of the relevant Development Plan. NOVARTIS will pay VERTEX interest on the reimbursable costs
incurred by VERTEX in the conduct of the Development Work, at a rate compounded quarterly equal to the thirty-day London InterBank
Offered Rate ("LIBOR") for the local currency in which payment is made, as quoted in THE FINANCIAL TIMES as determined on the date
the Development Work is first undertaken by VERTEX and on the last Business Day of each calendar quarter thereafter.
3.6. REASONABLE EFFORTS IN DEVELOPMENT. NOVARTIS will use diligent, commercially reasonable efforts consistent with those
used by NOVARTIS for its own compounds of similar commercial potential to develop Drug Product Candidates into Drug Products.
NOVARTIS will promptly notify VERTEX in writing if it should determine that development of any Drug Product Candidate or Drug Product
is not technically feasible or commercially justifiable, specifying in reasonable detail the reasons for that determination.
ARTICLE IV
MANUFACTURING AND SUPPLY
4.1. Supply of Bulk Drug Substance and Drug Product. NOVARTIS will be responsible for manufacturing and supply of all Bulk Drug
Substance, Drug Product Candidates and Drug Product as necessary for the conduct of the Development Plan and for all commercial purposes
in the Territory. Pursuant to the provisions of Section 4.7 of the Research Agreement, the parties will agree on reasonable and appropriate
measures by which manufacturing previously being undertaken by VERTEX shall be transitioned to NOVARTIS following the exercise of its
Development Election with respect to a particular Drug Product Candidate. The objective of both parties will be to accomplish a smooth and
timely transition. Any Bulk Drug
License, Development and Commercialization Agreement -- Confidential -- Page 10
Substance provided to NOVARTIS during the transition period will be supplied at VERTEX's reasonable Manufacturing Cost.
4.2. [This section has been intentionally left blank.]
4.3. FORMULATION AND PACKAGING. In all events, NOVARTIS will be responsible for formulation and packaging of Drug Products.
ARTICLE V
COMMERCIALIZATION
5.1. MARKETING AND PROMOTION. NOVARTIS shall have exclusive rights to market, sell and distribute all Drug Products in the
Territory. NOVARTIS will book all sales of Drug Products and will report those sales to VERTEX as specified in Section 6.5 of this
Agreement.
5.2. GLOBAL BRAND TEAM. Not later than six months prior to the commencement of Phase III Clinical Trials for any Drug Product
Candidate, NOVARTIS will form a Global Brand Team ("GBT"), which will include one representative designated by VERTEX; provided,
however, [***]. Additional GBT's, which shall also include one VERTEX representative, may be established from time to time in connection
with the marketing of additional Drug Product Candidates. The GBT (or its successor organization, as designated by NOVARTIS) will be the
principal organization through which the marketing of a Drug Product is planned, administered, evaluated and effected, subject to appropriate
review at senior management levels as required by NOVARTIS. NOVARTIS will appoint the chair of the GBT, who will normally be the
Brand Director. The GBT will periodically meet as necessary, depending on the level of marketing activity at the time.
5.2.1. MARKETING PLANS. The Global Brand Team will prepare and oversee the implementation of a detailed marketing plan (a "Marketing
Plan") for the launch of each Drug Product, addressing the overall branding and branding elements as well as the key promotional product
claims. The GBT will select an external agency or agencies which will be charged with the execution of some components of the Marketing
Plan. The Marketing Plan will contain among other things budgets, schedules, product positioning, pricing, market research plans and results
and other customary planning and marketing material with respect to marketing and launch of the Drug Product. The Marketing Plan will be
periodically updated to reflect changes in market information, sales performance and forecasts, sales force deployment, communication plans
and information concerning competition and competitors.
5.2.2. LOCAL PRODUCT TEAMS. Local Product Teams will be established in each country to prepare and execute the product launch for a
Drug Product within the framework of the Marketing Plan. .
5.2.3. CAMPAIGNS AND PROMOTIONAL MATERIALS. The GBT will review all general product campaigns (including target audience
and principal messages) and may from time to time review the principal promotional material to be used in connection with the marketing and
sale of a Drug Product.
License, Development and Commercialization Agreement -- Confidential -- Page 11
5.2.4. [This section has been intentionally left blank.]
5.3. [This section has been intentionally left blank.]
5.4. [This section has been intentionally left blank.]
5.5. CO-LABELING. To the extent not prohibited by law or regulation and subject to any required Regulatory Approval, Drug Products
(including labels, packaging and inserts) and all promotional materials for the same, sold in North America, the countries of the European
Union and Japan will bear both NOVARTIS' and VERTEX's company names and logos with equal prominence (including equal sized type
face), or if equal prominence is prohibited by law, with such prominence as may otherwise be permitted by law. To the extent not prohibited by
law or regulation and subject to any required Regulatory Approval, Drug Products (including labels, packaging and inserts) and all promotional
materials for the same, sold in the rest of the world will include VERTEX's company name (in the English alphabet) and logo with the
designation: "under license from"; provided, however, that this provision shall no longer apply in case of a Change of Control of VERTEX.
Any trademark for a Drug Product will be selected by, and will be the property of, NOVARTIS.
5.5.1. REVIEW OF REGULATORY FILINGS. NOVARTIS will permit VERTEX to review all material regulatory filings which relate to
product labeling, and all proposed labels, packaging, package inserts, and promotional materials required under the Agreement to bear
VERTEX's name, if permitted by law, prior to the filing of any such materials with any regulatory authority; provided, however, that this
provision shall no longer apply in case of a Change of Control of VERTEX.
5.5.2. REGULATORY COMMUNICATIONS.
(a) NOVARTIS will permit VERTEX to participate with NOVARTIS in material communications with regulatory officials which concern the
matters referenced in this Section 5.5; provided, however, [***].
(b) NOVARTIS will immediately inform VERTEX of any material regulatory communications received by NOVARTIS which might operate
to restrict VERTEX's rights under this Section 5.5.2, and will cooperate with any reasonable request of VERTEX aimed at facilitating approval
by a regulatory authority for co-labeling consistent with this provision.
5.6. DUE DILIGENCE. NOVARTIS shall use diligent and commercially reasonable efforts consistent with the requirements of the
Development Program and sound and reasonable business practices and judgment to effect introduction of Drug Products into Major Markets
as soon as reasonably practicable, devoting the same degree of attention and diligence to such efforts that it devotes to such activities for other
of its products of comparable market potential. Following the First Commercial Sale of a Drug Product and until the expiration of this
Agreement, NOVARTIS shall endeavor to keep Drug Products reasonably available to the public in each of the Major Markets. NOVARTIS
shall promptly notify VERTEX if it shall determine that the marketing and sale of a Drug Product in any country is not commercially
reasonable or economically profitable or if for other unforeseen reasons further commercial support of the Drug Product in certain territories is
no longer prudent or practical. In determining whether NOVARTIS is in compliance with the foregoing provisions, there shall be taken into
account the
License, Development and Commercialization Agreement -- Confidential -- Page 12
normal course of assertive drug development programs in the pharmaceutical industry conducted with sound and reasonable business practices
and judgment.
ARTICLE VI
PAYMENTS
6.1. DEVELOPMENT ELECTION PAYMENT. NOVARTIS will pay to VERTEX a milestone payment in the amount of [***] (a
"Development Election Fee") each time NOVARTIS exercises its Development Election with respect to a Development Candidate. Each time
NOVARTIS exercises its Development Election under Section 4.1 of the Research Agreement with respect to a Compound which is a Back-up
Compound to a Drug Product Candidate, NOVARTIS will pay to VERTEX a milestone payment in the amount of [***] (the "Back-up
Election Fee"); [***]
6.2. Development Milestone Payments by NOVARTIS.
6.2.1. NOVARTIS will make the following payments to VERTEX upon the achievement of any of the following milestones with respect to a
Drug Product Candidate:
[***] [***]
---------------------------------------------
[***] [***]
---------------------------------------------
[***] [***]
---------------------------------------------
[***] [***]
---------------------------------------------
[***] [***]
---------------------------------------------
[***] [***]
---------------------------------------------
6.2.2. [This section has been intentionally left blank.]
6.2.3. All payments shall be made by wire transfer in United States dollars ("Dollars") to the credit of such bank account as may be designated
by VERTEX in writing to NOVARTIS. Any payment which falls due on a date which is a Saturday, Sunday or a legal holiday in the
Commonwealth of Massachusetts may be made on the next succeeding day which is not a Saturday, Sunday or a legal holiday in the
Commonwealth.
6.2.4. If a Drug Product Candidate is abandoned during the term of this Agreement for any scientific or medical reasons after any one or more
of the foregoing milestone payments are made, and if a Back-up Compound to that Drug Product Candidate is developed to replace the
abandoned Drug Product Candidate for the same Indications, then no milestone
License, Development and Commercialization Agreement -- Confidential -- Page 13
payment shall be required with respect to the Back-up Compound to the extent that that milestone payment has already been made with respect
to the abandoned Drug Product Candidate.
6.3. ROYALTIES. NOVARTIS shall pay to VERTEX the following annual royalties on Net Sales of each Drug Product in the Territory.
[***]
6.3.1. Third Party Royalties: If NOVARTIS is required to pay royalties to any Third Party in order to exercise its rights to sell a Drug Product
in a country, then
[***]payable to such Third Party in any calendar quarter for such Drug Product in such country shall be deductible from the royalties payable
to VERTEX under this Agreement in respect of sales of that Drug Product in such country for the same calendar quarter, provided that in no
event shall the net royalty rate payable fall below [***], as a result of the application of this Sections 6.3.1 and 6.3.2.
6.3.2. Unlicensed Competition: If in any country a Third Party sells a pharmaceutical product which is a "generic version" of a Drug Product
being sold in that country (a "Third Party Product") -- where "generic version" means a pharmaceutical product (other than a product originally
sold as a Drug Product) that includes the same active ingredient as that used in a Drug Product -- then for the period in which the sales of such
Third Party Product in such country are at least [***], the royalties payable to VERTEX by NOVARTIS on sales of such Product in such
country for such period shall be [***] in Section 6.3 , but in no event shall the royalties owed for such Drug Product in such country, when
combined with any royalty reduction provided under Section 6.3.1 hereof, reduce the royalties payable on Net Sales of such Drug Product in
that country by more than [***]
6.4. [This section has been intentionally left blank.]
6.5. SALES REPORTS.
(a) During the term of this Agreement and after the First Commercial Sale of a Drug Product, NOVARTIS shall furnish or cause to be
furnished to VERTEX on a quarterly basis a written report or reports covering each calendar quarter (each such calendar quarter being
sometimes referred to herein as a "reporting period") showing (i) the Net Sales of each Drug Product in each country in the world during the
reporting period by NOVARTIS and each Affiliate and sublicensee; (ii) the royalties, payable in Dollars, which shall have accrued under
Section 6.3 hereof in respect of such sales and the basis of calculating those royalties; (iii) withholding taxes, if any, required by law to be
deducted in respect of any such sales; (iv) the exchange rates used in converting into Dollars, from the currencies in which sales were made,
any payments due which are based on Net Sales; and (v) dispositions of Drug Products other than pursuant to sale for cash. With respect to
sales of Drug Products invoiced in Dollars, the Net Sales amounts and the amounts due to VERTEX hereunder shall be expressed in Dollars.
With respect to sales of Drug Products invoiced in a currency other than Dollars, the Net Sales
License, Development and Commercialization Agreement -- Confidential -- Page 14
and amounts due to VERTEX hereunder shall be expressed in the domestic currency of the party making the sale, together with the Dollar
equivalent of the amount payable to VERTEX, calculated using NOVARTIS' then-current standard exchange rate methodology for the
translation of foreign currency sales into U.S. dollars. In each report the methodology will be disclosed, will be identical to that employed by
NOVARTIS, generally, in its external financial reporting, as reviewed and approved by its independent auditors and will be in conformity with
NOVARTIS' usual and customary general accounting principles consistently applied. If any sublicensee makes any sales invoiced in a currency
other than its domestic currency, the Net Sales shall be converted to its domestic currency in accordance with the sublicensee's normal
accounting principles. NOVARTIS shall furnish to VERTEX appropriate evidence of payment of any tax or other amount required by
applicable laws or regulations to be deducted from any royalty payment, including any tax or withholding levied by a foreign taxing authority
in respect of the payment or accrual of any royalty. Reports shall be due on the thirtieth (30th) day following the close of each reporting period,
although NOVARTIS shall also provide VERTEX with a "flash" report of Net Sales, only, within ten (10) business days after the end of each
month. NOVARTIS shall keep accurate records in sufficient detail to enable the amounts due hereunder to be determined and to be verified by
VERTEX.
(b) Amounts shown to have accrued by each sales report provided for under subsection 6.5(a), above, shall be due and payable on the date such
sales report is due.
(c) All payments shall be made in Dollars. If at any time legal restrictions prevent the prompt remittance of any payments with respect to any
country of the Territory where Drug Products are sold, NOVARTIS or its sublicensees shall have the right and option to make such payments
by depositing the amount thereof in local currency to VERTEX's account in a bank or depository in such country.
(d) Upon the written request of VERTEX, at VERTEX's expense and not more than once in or in respect of any calendar year, NOVARTIS
shall permit an independent accountant of national prominence selected by VERTEX, to have access during normal business hours to those
records of NOVARTIS as may be reasonably necessary to verify the accuracy of the sales reports furnished by NOVARTIS pursuant to this
Section 6.5, in respect of any calendar year ending not more than thirty-six (36) months prior to the date of such notice. NOVARTIS shall
include in each sublicense entered into by it pursuant to this Agreement a provision requiring the sublicensee to keep and maintain adequate
records of sales made pursuant to such sublicense and to grant access to such records by the aforementioned independent accountant for the
reasons specified in this
Section 6.5. Upon the expiration of thirty-six (36) months following the end of any calendar year, the calculation of amounts payable with
respect to such fiscal year shall be binding and conclusive upon VERTEX, and NOVARTIS and its sublicensees shall be released from any
liability or accountability with respect to payments for such year. The report prepared by such independent accountant, a copy of which shall be
sent or otherwise provided to NOVARTIS by such independent accountant at the same time it is sent or otherwise provided to VERTEX, shall
contain the conclusions of such independent accountant regarding the audit and will specify that the amounts paid to VERTEX pursuant thereto
were correct or, if incorrect, the amount of any underpayment or overpayment. If such independent accountant's report shows any
underpayment, NOVARTIS shall remit or shall cause its sublicensees to remit to VERTEX within thirty (30) days after NOVARTIS' receipt of
such report, (i) the amount of such underpayment and (ii) if such underpayment exceeds [***] owed for the calendar year then being
License, Development and Commercialization Agreement -- Confidential -- Page 15
audited, the reasonable and necessary fees and expenses of such independent accountant performing the audit, subject to reasonable
substantiation thereof. Any overpayments shall be fully creditable against amounts payable in subsequent payment periods. VERTEX agrees
that all information subject to review under this
Section 6.5 or under any sublicense agreement is confidential and that VERTEX shall retain and cause its accountant to retain all such
information in confidence.
(e) In case of any delay in payment by NOVARTIS to VERTEX not occasioned by Force Majeure, interest at the rate of [***], assessed from
the thirty-first day after the due date of the payment, shall be due from NOVARTIS upon prior written notice.
6.6. WITHHOLDING TAX. If during the term of this Agreement, withholding tax should be required by law to be deducted from any
payments required to be made by NOVARTIS to VERTEX hereunder, the parties will agree upon an equitable division of liability for any sum
which is withheld and for which VERTEX is not compensated or reimbursed by way of usable tax credits or otherwise. In that connection
VERTEX at NOVARTIS' request shall sign a usual and customary exemption application and in addition shall apply for a tax refund at the
request of NOVARTIS from any tax authority to which NOVARTIS has paid withholding tax on account of any payments made by
NOVARTIS to VERTEX hereunder.
ARTICLE VII
BACK-UP COMPOUNDS
Notwithstanding the provisions under the Research Agreement with respect to Back-up Compounds and for the sake of clarity, it is reminded
that the parties agreed the following with respect to Back-up Compounds in
Section 4.5 of the Research Agreement.
7.1 VERTEX RESTRICTIONS ON NOMINATION AND DEVELOPMENT. So long as NOVARTIS is using commercially reasonable
efforts with respect to the development of a particular Drug Product Candidate or the commercialization of a particular Drug Product, pursuant
to Sections 3.6 and 5.6 hereof, VERTEX will not (i) propose a Compound for development under the License Agreement which is a Back-up
Compound with respect to that Drug Product Candidate or Drug Product, or (ii) until after the period starting on the date on which NOVARTIS
has exercised its Development Election for a particular Drug Product Candidate and ending [***] (the "Lead Period"), commence development
of that Back-up Compound either directly or together with or through an Affiliate or a Third Party.
7.2 TERMINATION OF DEVELOPMENT OR COMMERCIALIZATION. If, prior to the end of the Lead Period with respect to a particular
Drug Product or Drug Product Candidate, pursuant to Sections 3.6 and 5.6 hereof, NOVARTIS ceases to use commercially reasonable efforts
to develop or commercialize that Drug Product Candidate or Drug Product, then the restrictions on nomination and development referenced in
Section 7.1 above will no longer apply with respect to Back-up Compounds for that Drug Product Candidate or Drug Product unless
NOVARTIS, without delay, commences another Development Program under the License Agreement with another Compound (a
"Replacement Candidate") targeting the same Kinase, which Replacement Candidate is a Back-up Compound
License, Development and Commercialization Agreement -- Confidential -- Page 16
associated with the discontinued Drug Product Candidate or Drug Product, and NOVARTIS shall have the right to select for this purpose any
such Back-up Compound by providing VERTEX with notice of its Development Election in this regard. Any such Back-up Compound for
which NOVARTIS has exercised its Development Election under this Section 7.2 shall hereafter be a Drug Product Candidate subject to the
terms and conditions of this Agreement.
7.3. TERMINATION OF RIGHTS TO BACK-UP COMPOUNDS. A Back-up Compound will no longer be subject to NOVARTIS'
Development Election under the Research Agreement after the end of the Lead Period applicable to that Back-up Compound, except for Back-
up Compounds which (i) subject to Section 7.1 above, VERTEX has proposed for development on or before the Final Termination Date, and as
to which NOVARTIS has exercised its Development Election hereunder; or (ii) have been or will be selected by NOVARTIS for development
before the end of the applicable Lead Period under the provisions of Section 7.2 above, or (iii) for which NOVARTIS has exercised or will
exercise its Development Election before the end of the applicable Lead Period under the provisions of Section 7.4 below.
7.4 NOVARTIS RIGHTS TO LICENSE BACK-UP COMPOUNDS. Anytime prior to the expiry of the Lead Period with respect a particular
Drug Product Candidate, NOVARTIS may also, by paying in each case the Back-up Election Fee provided under Section 6.1 of the this
Agreement, exercise its Development Election with respect to any one or more Back-up Compounds associated with that Drug Product
Candidate, provided that Drug Product Candidate, or a Back-up Compound selected pursuant to the provisions of Section 7.2 above, is still in
active development. Any such Back-up Compound for which NOVARTIS has exercised its Development Election under Section 7.4 shall
become a "Drug Product Candidate Back-up Candidate" subject to the terms and conditions of this Agreement.
7.5 NOVARTIS OBLIGATIONS WITH RESPECT TO DRUG PRODUCT CANDIDATE BACK-UP CANDIDATES. So long as
NOVARTIS is using commercially reasonable efforts, pursuant to the provisions of Sections 3.6 and 5.6 of this Agreement, with respect to the
development of a particular Drug Product Candidate or the commercialization of a particular Drug Product, NOVARTIS shall have no
obligation to develop any of the Drug Product Candidate Back-up Candidates associated with that Drug Product Candidate or Drug Product. As
soon as NOVARTIS ceases the development of a particular Drug Product Candidate, NOVARTIS' obligations to use diligent, commercially
reasonable efforts will immediately shift from the discontinued Drug Product Candidate to an associated Drug Product Candidate Back-up
Compound. If NOVARTIS ceases the development of a particular Drug Product Candidate and does not commence development of a Drug
Product Candidate Back-up Compound pursuant to the foregoing, the license to the Drug Product Candidate and its Back-up Compounds under
this Agreement will expire and the license rights will revert to VERTEX.
License, Development and Commercialization Agreement -- Confidential -- Page 17
8.1. PATENTABLE INVENTIONS AND KNOW-HOW.
ARTICLE VIII
INTELLECTUAL PROPERTY
8.1.1. Ownership. Any inventions made and all Know-How generated by either party or its Affiliates during the term of this Agreement, and
Controlled by such party, relating to the manufacture or use of Bulk Drug Substance, a Drug Product Candidate or a Drug Product, or a prodrug
thereof, will be disclosed to the other party promptly after the disclosing party recognizes the significance thereof. All patents and technology
shall be owned by the party making the invention claimed or contained therein or, if such invention is made jointly, shall be owned jointly, all
as determined in accordance with U.S. laws of inventorship.
8.1.2. Patent Prosecution. VERTEX shall be responsible for the preparation, filing, prosecution and maintenance of all patents and patent
applications included in VERTEX Patents and all patents and patent applications included in Patents claiming inventions jointly owned with
NOVARTIS. NOVARTIS shall be responsible for the preparation, filing, prosecution and maintenance of all patents and patent applications
included in NOVARTIS Patents. In each case the responsible party shall consult from time to time with the other party with respect thereto.
VERTEX shall provide NOVARTIS with periodic reports listing the jurisdictions in which the VERTEX Patents licensed hereunder have been
filed. Subject to the next succeeding sentences, VERTEX will file patent applications with respect to those VERTEX Patents in such other
countries as NOVARTIS shall request in writing, all such other countries being countries in which NOVARTIS would customarily file its own
cases dealing with similar subject matters. The party initially responsible for preparation, filing, prosecution and maintenance of a particular
Patent (the "Initial Responsible Party") shall give thirty (30) days advance notice (the "Discontinuance Election") to the other party of any
decision to cease preparation, filing, prosecution and maintenance of that Patent in any jurisdiction (a "Discontinued Patent"). In such case, the
other party may elect at its sole discretion to continue preparation, filing and prosecution or maintenance of the Discontinued Patent at its sole
expense. The party so continuing shall own any such Patent; and the Initial Responsible Party shall execute such documents and perform such
acts as may be reasonably necessary for the other party to file or to continue prosecution or maintenance, including assigning ownership of
such Patent to such electing party. Discontinuance may be on a country-by-country basis or for a patent application or patent series in total.
Each party will consult the other party with respect to its choice of patent counsel and will keep that party continuously informed of all matters
relating to the preparation, filing, prosecution and maintenance of Patents covered by this Agreement. Each party shall endeavor
License, Development and Commercialization Agreement -- Confidential -- Page 18
in good faith to coordinate its efforts with those of the other party to minimize or avoid interference with the prosecution of the other party's
patent applications.
8.1.3. Costs. Costs incurred in the preparation, prosecution and maintenance of Patents shall be borne by each party as set forth in Section 8.3
of the Research Agreement.
8.2. Infringement Claims by Third Parties.
8.2.1. Notice. If the manufacture, use or sale of Bulk Drug Substance and/or Drug Product results in a claim against a party hereto for patent
infringement or for inducing or contributing to patent infringement ("Infringement Claim"), the party first having notice of an Infringement
Claim shall promptly notify the other in writing. The notice shall set forth the facts of the Infringement Claim in reasonable detail.
8.2.2. Third Party Licenses. In the event that practicing the Technology in connection with the manufacture, use or sale of a Drug Product in
any country would infringe a Third Party's patent, then VERTEX will use reasonable efforts to obtain a license under the Third Party's patents
with a right to sublicense to NOVARTIS, under terms reasonably acceptable to both VERTEX and NOVARTIS,
[***]
8.2.3. Discontinued Sales, License or Defense of Suit. If the required license is either unavailable or its terms are unacceptable both to
VERTEX and to NOVARTIS, then NOVARTIS may elect in its sole discretion to discontinue sales of the Drug Product in such country or to
undertake the defense of a patent infringement action or the prosecution of a declaratory judgment action with respect to the Third Party
patents. [***] Provided that NOVARTIS is conducting the defense of the Infringement Claim or the prosecution of such declaratory judgment
actions, [***]. The costs and expenses of all suits brought by a party under this Section 8.2.3 shall be reimbursed to such party and then to the
other party, if it participates in such suit, PRO RATA, out of any damages or other monetary awards recovered therein in favor of VERTEX or
NOVARTIS. [***] No settlement or consent judgment or other voluntary final disposition of a suit under this Section 8.2 may be entered into
without the joint consent of VERTEX and NOVARTIS (which consent shall not be unreasonably withheld).
8.3. Infringement Claims Against Third Parties.
8.3.1. VERTEX and NOVARTIS each agree to take reasonable actions to protect their respective patents and technology from infringement
and from unauthorized possession or use.
8.3.2. If any VERTEX Patents or NOVARTIS Patents are infringed or VERTEX Know-How or NOVARTIS Know-How is misappropriated,
as the case may be, by a Third Party, the party to this Agreement first having knowledge of such infringement or misappropriation, or
knowledge of a reasonable probability of such infringement or misappropriation, shall promptly notify the other in writing. The notice shall set
forth the facts of such infringement or misappropriation in reasonable detail. The owner of the patent or technology, or VERTEX, in the case of
joint ownership between the parties hereto, shall have the primary right, but not the obligation, to institute, prosecute, and control with its own
counsel any action or proceeding with respect to infringement or misappropriation of such patent or technology and the other party shall have
the right, at its own expense, to be represented in such action by its own counsel. If the
License, Development and Commercialization Agreement -- Confidential -- Page 19
party having the primary right or responsibility to institute, prosecute, and control such action or prosecution fails to do so within a period of
one hundred twenty (120) days after receiving notice of the infringement, the other party shall have the right to bring and control any such
action by counsel of its own choice, and the other shall have the right, at its own expense, to be represented in any such action by counsel of its
own choice. If one party brings any such action or proceeding, the second party may be joined as a party plaintiff and, in case of joining, the
second party agrees to give the first party reasonable assistance and authority to file and to prosecute such suit. The costs and expenses of all
suits brought by a party under this Section 8.3.2 shall be reimbursed to such party and to the other party, if it participates in such suit, PRO
RATA, out of any damages or other monetary awards recovered therein in favor of VERTEX or NOVARTIS. [***] No settlement or consent
judgment or other voluntary final disposition of a suit under this Section 8.3 may be entered into without the joint consent of VERTEX and
NOVARTIS (which consent shall not be unreasonably withheld).
8.4. NOTICE OF CERTIFICATION. VERTEX and NOVARTIS each shall immediately give notice to the other of any certification filed
under the U.S. "Drug Price Competition and Patent Term Restoration Act of 1984" claiming that a VERTEX Patent or a NOVARTIS Patent is
invalid or that any infringement will not arise from the manufacture, use or sale of any product by a third party. If VERTEX decides not to
bring infringement proceedings against the entity making such a certification, VERTEX shall give notice to NOVARTIS of its decision not to
bring suit within twenty-one (21) days after receipt of notice of such certification. NOVARTIS may then, but is not required to, bring suit
against the party that filed the certification. Any suit by NOVARTIS or VERTEX shall either be in the name of NOVARTIS or in the name of
VERTEX, or jointly by NOVARTIS and VERTEX, as may be required by law. For this purpose, the party not bringing suit shall execute such
legal papers necessary for the prosecution of such suit as may be reasonably requested by the party bringing suit.
8.5. PATENT TERM EXTENSIONS. The parties shall cooperate in good faith with each other in gaining patent term extension wherever
applicable to VERTEX Patents and NOVARTIS Patents covering Drug Product Candidates or Drug Products. NOVARTIS and VERTEX shall
mutually determine which patents shall be extended. All filings for such extension shall be made by the party who owns the patent, provided,
however, that in the event that the party who owns the patent elects not to file for an extension, such party shall (i) inform the other party of its
intention not to file and (ii) grant the other party the right to file for such extension.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
9.1. REPRESENTATIONS AND WARRANTIES OF VERTEX. VERTEX represents and warrants to NOVARTIS as follows:
9.1.1. AUTHORIZATION. This Agreement has been duly executed and delivered by VERTEX and constitutes the valid and binding
obligation of VERTEX, enforceable against VERTEX in accordance with its terms except as enforceability may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general
equitable principles.
License, Development and Commercialization Agreement -- Confidential -- Page 20
The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part of VERTEX, its
officers and directors.
9.1.2. NO THIRD PARTY RIGHTS. Except as previously disclosed in writing to NOVARTIS on or before the date set forth on the first page
hereof, (a) VERTEX owns or possesses adequate licenses or other rights to use all VERTEX Technology, and to grant the licenses herein; and
(b) the granting of the licenses to NOVARTIS hereunder does not violate any right known to VERTEX of any Third Party.
9.1.3. NO THIRD PARTY PATENTS. Except as disclosed in writing by VERTEX to NOVARTIS or its agents, to VERTEX's knowledge and
based on its current understanding of the Drug Product Candidate(s) and its use, the development, manufacture, use or sale of any Bulk Drug
Substance, Drug Product Candidates or Drug Products pursuant to this Agreement will not infringe or conflict with any Third Party right or
patent, and VERTEX is not aware of any issued patent or pending patent application that, if issued, would be infringed by the development,
manufacture, use or sale of any Bulk Drug Substance, Drug Product Candidates or Drug Products pursuant to this Agreement.
9.1.4. MAINTENANCE OF PATENTS AND LICENSES. Subject to the provisions of Section 8.1.2 with respect to Discontinued Patents,
VERTEX will take all reasonable steps to obtain any consent required for and to maintain in effect, including by means of extension, any
license, sublicense, patent or patent application applicable to the Field for which it has granted rights to NOVARTIS hereunder.
9.2. REPRESENTATIONS AND WARRANTIES OF NOVARTIS. NOVARTIS represents and warrants to VERTEX as follows:
9.2.1. AUTHORIZATION. This Agreement has been duly executed and delivered by NOVARTIS and constitutes the valid and binding
obligation of NOVARTIS, enforceable against NOVARTIS in accordance with its terms, except as enforceability may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to creditors' rights generally and by general
equitable principles. The execution, delivery and performance of this Agreement have been duly authorized by all necessary action on the part
of NOVARTIS, its officers and directors.
9.2.2. NO THIRD PARTY RIGHTS. Except as previously disclosed in writing to VERTEX on or before the date set forth on the first page
hereof, (a) NOVARTIS owns or possesses adequate licenses or other rights to use all NOVARTIS Technology, and to grant the licenses herein;
and (b) the granting of the licenses to VERTEX hereunder does not violate any right known to NOVARTIS of any Third Party.
License, Development and Commercialization Agreement -- Confidential -- Page 21
9.2.3. NO THIRD PARTY PATENTS. Except as disclosed in writing by NOVARTIS to VERTEX or its agents, to NOVARTIS' knowledge
and based on its current understanding of the Drug Product Candidate(s) and its use, the manufacture, use or sale of any Bulk Drug Substance,
Drug Product Candidates or Drug Products pursuant to this Agreement will not infringe or conflict with any Third Party right or patent, and
NOVARTIS is not aware of any issued patent or pending patent application that, if issued, would be infringed by the development,
manufacture, use or sale of any Bulk Drug Substance, Drug Product Candidates or Drug Products pursuant to this Agreement.
9.2.4. MAINTENANCE OF PATENTS AND LICENSES. Subject to the provisions of Section 8.1.2 with respect to Discontinued Patents,
NOVARTIS will take all reasonable steps to obtain any consent required for and to maintain in effect, including by means of extension, any
license, sublicense, patent or patent application applicable to the Field for which it has granted rights to VERTEX hereunder.
ARTICLE X
CONFIDENTIALITY
10.1. UNDERTAKING. During the term of this Agreement, each party shall keep confidential, and other than as provided herein shall not use
or disclose, directly or indirectly, any trade secrets, confidential or proprietary information, or any other knowledge, information, documents or
materials, owned, developed or possessed by the other party, whether in tangible or intangible form, the confidentiality of which such other
party takes reasonable measures to protect, including but not limited to VERTEX Technology and NOVARTIS Technology.
10.1.1. Each party shall take any and all lawful measures to prevent the unauthorized use and disclosure of such information, and to prevent
unauthorized persons or entities from obtaining or using such information.
10.1.2. Each party further agrees to refrain from directly or indirectly taking any action which would constitute or facilitate the unauthorized
use or disclosure of such information. Each party may disclose such information to its officers, employees and agents, to authorized licensees
and sublicensees, and to subcontractors in connection with the development or manufacture of Bulk Drug Substance, Drug Product Candidates
or Drug Products, to the extent necessary to enable such parties to perform their obligations hereunder or under the applicable license,
sublicense or subcontract, as the case may be; provided, that such officers, employees, agents, licensees, sublicensees and subcontractors have
entered into appropriate confidentiality agreements for secrecy and non-use of such information which by their terms shall be enforceable by
injunctive relief at the instance of the disclosing party.
License, Development and Commercialization Agreement -- Confidential -- Page 22
10.1.3. Each party shall be liable for any unauthorized use and disclosure of such information by its officers, employees and agents and any
such sublicensees and subcontractors.
10.2. EXCEPTIONS. Notwithstanding the foregoing, the provisions of Section 10.1 hereof shall not apply to knowledge, information,
documents or materials which the receiving party can conclusively establish:
10.2.1. have entered the public domain without such party's breach of any obligation owed to the disclosing party;
10.2.2. are permitted to be disclosed by the prior written consent of the disclosing party;
10.2.3. have become known to the receiving party from a source other than the disclosing party, other than by breach of an obligation of
confidentiality owed to the disclosing party;
10.2.4. are disclosed by the disclosing party to a Third Party without restrictions on its disclosure;
10.2.5. are independently developed by the receiving party without breach of this Agreement; or
10.2.6. are required to be disclosed by the receiving party to comply with applicable laws or regulations, to defend or prosecute litigation or to
comply with governmental regulations, provided that the receiving party provides prior written notice of such disclosure to the disclosing party
and takes reasonable and lawful actions to avoid or minimize the degree of such disclosure.
10.3. PUBLICITY. The parties will agree upon the timing and content of any initial press release or other public communications relating to
this Agreement and the transactions contemplated herein.
10.3.1. Except to the extent already disclosed in that initial press release or other public communication, no public announcement concerning
the existence or the terms of this Agreement or concerning the transactions described herein shall be made, either directly or indirectly, by
VERTEX or NOVARTIS, except as may be legally required by applicable laws, regulations, or judicial order, without first obtaining the
approval of the other party and agreement upon the nature, text, and timing of such announcement, which approval and agreement shall not be
unreasonably withheld.
10.3.2. The party desiring to make any such public announcement shall provide the other party with a written copy of the proposed
announcement in sufficient time prior to public release to allow such other party to comment upon such announcement, prior to public release.
10.4. SURVIVAL. The provisions of this Article X shall survive the termination of this Agreement and shall extend for a period of five (5)
years thereafter.
License, Development and Commercialization Agreement -- Confidential -- Page 23
ARTICLE XI
PUBLICATION
NOVARTIS reserves the sole right to publish or publicly present the results of the Development Program and information concerning Drug
Product Candidates and Back-up Compounds (collectively, the "Results"), subject to the following terms and conditions. NOVARTIS will
submit a draft of any proposed manuscript or speech to VERTEX for comments at least thirty (30) days prior to submission for publication or
oral presentation. VERTEX shall notify NOVARTIS in writing within fifteen (15) days of receipt of such draft whether such draft contains (i)
information of VERTEX which it considers to be confidential under the provisions of Article IX hereof, or (ii) information that if published
would have an adverse effect on a patent application covering the subject matter of this Agreement which VERTEX intends to file,. In any such
notification, VERTEX shall indicate with specificity its suggestions regarding the manner and degree to which NOVARTIS may disclose such
information. In the case of item (ii) above, VERTEX may request a delay and NOVARTIS shall delay such publication, for a period not
exceeding ninety (90) days, to permit the timely preparation and filing of a patent application or an application for a certificate of invention on
the information involved. In the case of item (i) above, NOVARTIS may not publish confidential information of VERTEX without its consent
in violation of Article IX of this Agreement. The parties agree that authorship of any publication will be determined based on the customary
standards then being applied in the relevant scientific journal.
This Article XI shall terminate with the termination of this Agreement, but the provisions of Article X hereof shall continue to govern the
disclosure by one party, whether by publication or otherwise, of Confidential Information of the other, during the period set forth in Section
10.4.
ARTICLE XII
DISPUTE RESOLUTION
12.1. GOVERNING LAW, AND JURISDICTION. This Agreement shall be governed and construed in accordance with the internal laws of
the State of New York.
12.2. DISPUTE RESOLUTION PROCESS. Except as otherwise explicitly provided herein, in the event of any controversy or claim arising out
of or relating to any provision of this Agreement, or the collaborative effort contemplated hereby, the parties shall, and either party may,
initially refer such dispute to the Joint Steering Committee, and failing resolution of the controversy or claim within thirty (30) days after such
referral, the matter shall be referred to the Chief Executive Officer of VERTEX and the Chief Executive Officer of NOVARTIS who shall, as
soon as practicable, attempt in good faith to resolve the controversy or claim. If such controversy or claim is not resolved within sixty (60) days
of the date of initial referral of the matter to the JSC, either party shall be free to initiate proceedings in any court having requisite jurisdiction.
License, Development and Commercialization Agreement -- Confidential -- Page 24
ARTICLE XIII
TERM AND TERMINATION
13.1. TERM. The term of this Agreement shall extend with respect to a Drug Product in a particular country until the later of: (a) the last to
expire of any VERTEX Patents containing a Valid Patent Claim covering the Drug Product or its use or manufacture in that country; or (b) if
there is no such Valid Patent Claim under a VERTEX Patent in a particular country, ten (10) years from the earlier of the date Regulatory
Approval is received in that country for sale of the Drug Product, or the date of First Commercial Sale of the Drug Product in that country.
13.2. TERMINATION FOR CAUSE. In addition to rights of termination which may be granted to either party under other provisions of this
Agreement, either party may terminate this Agreement upon sixty (60) days prior written notice to the other party upon the material breach by
such other party of any of its obligations under this Agreement, provided that such termination shall become effective only if the breaching
party shall fail to remedy or cure the breach within such sixty (60) day period.
13.3. TERMINATION FOR BANKRUPTCY. If at any time during the term of this Agreement, an Event of Bankruptcy (as defined below)
relating to either party (the "Bankrupt Party") occurs, the other party (the "Other Party") shall have, in addition to all other legal and equitable
rights and remedies available hereunder, the option to terminate this Agreement upon 30 days' written notice to the Bankrupt Party. It is agreed
and understood that if the Other Party does not elect to terminate this Agreement upon the occurrence of an Event of Bankruptcy, except as
may otherwise be agreed with the trustee or receiver appointed to manage the affairs of the Bankrupt Party, the Other Party shall continue to
make all payments required of it under this Agreement as if the Event of Bankruptcy had not occurred, and the Bankrupt Party shall not have
the right to terminate any license granted herein. As used above, the term "Event of Bankruptcy" shall mean (a) dissolution, termination of
existence, liquidation or business failure of either party; (b) the appointment of a custodian or receiver for either party who has not been
terminated or dismissed within 90 days; (c) the institution by either party of any proceeding under national, federal or state bankruptcy,
reorganization, receivership or other similar laws affecting the rights of creditors generally or the making by either party of a composition or
any assignment or trust mortgage for the benefit of creditors or under any national, federal or state bankruptcy, reorganization, receivership or
other similar law affecting the rights of creditors generally, which proceeding is not dismissed within 90 days of filing.
13.4. TERMINATION BY NOVARTIS. [***]
13.5. EFFECT OF TERMINATION.
(a) Termination of this Agreement for any reason, or expiration of this Agreement, will not affect: (i) obligations, including the payment of any
royalties and any supply price payments, which have accrued as of the date of termination or expiration, and (ii) rights and obligations which,
from the context thereof, are intended to survive termination or expiration of this Agreement.
(b) For each country, at the end of the Agreement term as provided in Section 13.1 hereof in respect of a Drug Product, NOVARTIS shall have
a perpetual, nonexclusive, transferable, paid-up, royalty-free license under VERTEX Technology, in each case which is in
License, Development and Commercialization Agreement -- Confidential -- Page 25
existence at the end of such Agreement term, to use, make, have made and sell that Drug Product in that country and to make or have made
Drug Product for use and sale in that country.
ARTICLE XIV
INDEMNIFICATION
14.1. INDEMNIFICATION BY VERTEX. VERTEX will indemnify and hold NOVARTIS and its Affiliates, and their employees, officers and
directors harmless against any loss, damages, action, suit, claim, demand, liability, expense, bodily injury, death or property damage (a "Loss"),
that may be brought, instituted or arise against or be incurred by such persons to the extent such Loss is based on or arises out of:
14.1.1. the development, manufacture, use, storage or handling of a Drug Product Candidate or a Drug Product by VERTEX or its Affiliates or
their representatives, agents or subcontractors under this Agreement, or any actual or alleged violation of law resulting therefrom (with the
exception of Losses based on infringement or misappropriation of intellectual property rights); or
14.1.2. the breach by VERTEX of any of its covenants, representations or warranties set forth in this Agreement; and
14.1.3. provided however, that the foregoing indemnification shall not apply to any Loss to the extent such Loss is caused by the negligent or
willful misconduct of NOVARTIS or its Affiliates.
14.2. INDEMNIFICATION BY NOVARTIS. NOVARTIS will indemnify and hold VERTEX, and its Affiliates, and their employees, officers
and directors harmless against any Loss that may be brought, instituted or arise against or be incurred by such persons to the extent such Loss is
based on or arises out of:
14.2.1. the development, manufacture, use, sale, storage or handling of a Drug Product Candidate or a Drug Product by NOVARTIS or its
Affiliates or their representatives, agents or subcontractors under this Agreement, or any actual or alleged violation of law resulting therefrom
(with the exception of Losses based on infringement or misappropriation of intellectual property rights); or
14.2.2. the breach by NOVARTIS of any of its covenants, representations or warranties set forth in this Agreement; and
14.2.3. provided that the foregoing indemnification shall not apply to any Loss to the extent such Loss is caused by the negligent or willful
misconduct of VERTEX or its Affiliates.
14.3. CLAIMS PROCEDURES. Each Party entitled to be indemnified by the other Party (an "Indemnified Party") pursuant to Section 14.1 or
14.2 hereof shall give notice to the other Party (an "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any
threatened or asserted claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom;
License, Development and Commercialization Agreement -- Confidential -- Page 26
provided: That counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be withheld) and the Indemnified Party may participate in such
defense at such party's expense (unless (i) the employment of counsel by such Indemnified Party has been authorized by the Indemnifying
Party; or (ii) the Indemnified Party shall have reasonably concluded that there may be a conflict of interest between the Indemnifying Party and
the Indemnified Party in the defense of such action, in each of which cases the Indemnifying Party shall pay the reasonable fees and expenses
of one law firm serving as counsel for the Indemnified Party, which law firm shall be subject to approval, not to be unreasonably withheld, by
the Indemnifying Party); and
14.3.1. The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under
this Agreement to the extent that the failure to give notice did not result in harm to the Indemnifying Party.
14.3.2. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the approval of each Indemnified Party which
approval shall not be unreasonably withheld, consent to entry of any judgment or enter into any settlement which (i) would result in injunctive
or other relief being imposed against the Indemnified Party; or (ii) does not include as an unconditional term thereof the giving by the claimant
or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation.
14.3.3. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom.
14.4. COMPLIANCE. The parties shall comply fully with all applicable laws and regulations in connection with their respective activities
under this Agreement.
14.5. INSURANCE. Each party shall use all commercially reasonable efforts to maintain insurance, including product liability insurance, with
respect to its activities hereunder.
14.5.1. Such insurance shall be in such amounts and subject to such deductibles as the parties may agree based upon standards prevailing in the
industry at the time.
14.5.2. Either party may satisfy its obligations under this
Section through self-insurance to the same extent.
14.5.3. At such time as a Drug Product is being manufactured by a party for commercial sale, that party shall name the other party as an
additional insured on any such policies.
License, Development and Commercialization Agreement -- Confidential -- Page 27
ARTICLE XV
MISCELLANEOUS PROVISIONS
15.1. NOTICE OF PHARMACEUTICAL SIDE-EFFECTS. During the term of this Agreement, each of the parties will notify appropriate
authorities in accordance with applicable law, and the other party, promptly after receipt of information with respect to any serious adverse
event (as defined by the ICH Harmonized Tripartite Guideline on Clinical Safety Data Management), directly or indirectly attributable to the
use or application of a Development Candidate, Bulk Drug Substance, a Drug Product Candidate or a Drug Product.
15.2. WAIVER. No provision of the Agreement may be waived except in writing by both parties hereto. No failure or delay by either party
hereto in exercising any right or remedy hereunder or under applicable law will operate as a waiver thereof, or a waiver of a particular right or
waiver of any right or remedy on any subsequent occasion.
15.3. FORCE MAJEURE. Neither party shall be held liable or responsible to the other party nor be deemed to have defaulted under or
breached this Agreement for failure or delay in fulfilling or performing any term of this Agreement, other than an obligation to make a
payment, when such failure or delay is caused by or results from fire, floods, embargoes, government regulations, prohibitions or interventions,
war, acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts, acts of God, or any other cause
beyond the reasonable control of the affected party.
15.4. REGISTRATION OF LICENSE. NOVARTIS may, at its expense, register the license granted under this Agreement in any country
where the use, sale or manufacture of a Drug Product in such country would be covered by a Valid Patent Claim. Upon request by
NOVARTIS, VERTEX agrees promptly to execute any "short form" licenses submitted to it by NOVARTIS in order to effect the foregoing
registration in such country, but such licenses shall in no way alter or affect the obligations of the parties hereunder.
15.5. SEVERABILITY. It is the intention of the parties to comply with all applicable laws domestic or foreign in connection with the
performance of its obligations hereunder. In the event that any provision of this Agreement, or any part hereof, is found invalid or
unenforceable, the remainder of this Agreement will be binding on the parties hereto, and will be construed as if the invalid or unenforceable
provision or part thereof had been deleted, and the Agreement shall be deemed modified to the extent necessary to render the surviving
provisions enforceable to the fullest extent permitted by law.
15.6. GOVERNMENT ACTS. In the event that any act, regulation, directive, or law of a government, including its departments, agencies or
courts, should make impossible or prohibit, restrain, modify or limit any material act or obligation of NOVARTIS or VERTEX under this
Agreement, the party, if any, not so affected shall have the right, at its option, to suspend or terminate this Agreement as to such country, if
good faith negotiations between the parties to make such modifications to this Agreement as may be necessary to fairly address the impact
thereof, are not successful after a reasonable period of time in producing mutually acceptable modifications to this Agreement.
License, Development and Commercialization Agreement -- Confidential -- Page 28
15.7. GOVERNMENT APPROVALS. NOVARTIS will use reasonable efforts to obtain any government approval required to enable this
Agreement to become effective, or to enable any payment hereunder to be made, or any other obligation hereunder to be observed or
performed. Each party will keep the other informed of progress in obtaining any such approvals.
15.8. ASSIGNMENT. This Agreement may not be assigned or otherwise transferred by either party without the prior written consent of the
other party; provided, however, that either party may assign this Agreement, without the consent of the other party, (i) to any of its Affiliates, if
the assigning party guarantees the full performance of its Affiliates' obligations hereunder, or (ii) in connection with the transfer or sale of all or
substantially all of its assets or business or in the event of its merger or consolidation with another company. Any purported assignment in
contravention of this Section 15.8 shall, at the option of the non-assigning party, be null and void and of no effect. No assignment shall release
either party from responsibility for the performance of any accrued obligation of such party hereunder. This Agreement shall be binding upon
and enforceable against the successor to or any permitted assignee from either of the parties hereto.
15.9. AFFILIATES. Each party may perform its obligations hereunder personally or through one or more Affiliates, although each party shall
nonetheless be solely responsible for the performance of its Affiliates. Neither party shall permit any of its Affiliates to commit any act
(including any act of omission) which such party is prohibited hereunder from committing directly. The use of subcontractors by either party
shall not increase the financial obligations of the other party hereunder in any respect.
15.10. COUNTERPARTS. This Agreement may be executed in duplicate both of which shall be deemed to be originals, and both of which
shall constitute one and the same Agreement.
15.11. NO AGENCY. Nothing herein contained shall be deemed to create an agency, joint venture, amalgamation, partnership or similar
relationship between NOVARTIS and VERTEX. Notwithstanding any of the provisions of this Agreement, neither party shall at any time enter
into, incur, or hold itself out to third parties as having authority to enter into or incur, on behalf of the other party, any commitment, expense, or
liability whatsoever, and all contracts, expenses and liabilities undertaken or incurred by one party in connection with or relating to the
development, manufacture or sale of Bulk Drug Substance, Drug Product Candidates or Drug Products shall be undertaken, incurred or paid
exclusively by that party, and not as an agent or representative of the other party.
15.12. NOTICE. All communications between the parties with respect to any of the provisions of this Agreement will be sent to the addresses
set out below, or to other addresses as designated by one party to the other by notice pursuant hereto, by prepaid certified, air mail (which shall
be deemed received by the other party on the seventh business day following deposit in the mails), or by cable, telex, facsimile transmission, or
other electronic means of communication (which shall be deemed received when transmitted), with confirmation by letter given by the close of
business on or before the next following business day:
License, Development and Commercialization Agreement -- Confidential -- Page 29
If to NOVARTIS, at:
NOVARTIS PHARMA AG
Business Development and Licensing
P.O. Box
CH-4002
Basel, Switzerland
Attention: Victor A. Hartmann, Vice President
with a copy to: Legal Services, at the address referenced above and
if to VERTEX, at:
with a copy to:
Vertex Pharmaceutical Incorporated
130 Waverly Street
Cambridge, MA U.S.A. 02139-4211
Attention: President
Legal Department
Attention: General Counsel
15.13. HEADINGS. The paragraph headings are for convenience only and will not be deemed to affect in any way the language of the
provisions to which they refer.
15.14. AUTHORITY. The undersigned represent that they are authorized to sign this Agreement on behalf of the parties hereto. The parties
each represent that no provision of this Agreement will violate any other agreement that such party may have with any other person or
company. Each party has relied on that representation in entering into this Agreement.
15.15. ENTIRE AGREEMENT. This Agreement, including the Schedules appended hereto, contains the entire understanding of the parties
relating to the matters referred to herein, except as matters referenced herein are also addressed in the Research Agreement, and may only be
amended by a written document, duly executed on behalf of the respective parties.
15.16. INFLATION ADJUSTMENT. All payments required to be made to VERTEX hereunder (except any royalty payments required to be
made under the provisions of Section 6.3 hereof) shall be adjusted at the beginning of each calendar year to reflect the impact of inflation since
the date of execution of the Revised and Restated Research Agreement, as measured by the biotech worker inflation rate defined and reported
in the Radford Survey (Radford/AON Consulting Inc., San Francisco, CA), or other mutually acceptable index. Notwithstanding the foregoing,
no adjustment shall be required in any calendar year in which the appropriate inflation adjustment, if applied, would result in a change of less
than [***].
15.17. INVOICE REQUIREMENT. Any amounts payable to VERTEX hereunder (except any royalty payments required to be made under the
provisions of Section 6.3 hereof) shall be made within thirty days after receipt by NOVARTIS, or its nominee designated for that purpose in
advance by NOVARTIS in writing to VERTEX, of an invoice covering such payment, which
License, Development and Commercialization Agreement -- Confidential -- Page 30
invoice shall conform to the extent reasonably practicable to the form of invoice contained in Exhibit B to the Research Agreement.
15.18. HARDSHIP. If as a result of unforeseen events or developments relating to the subject matter of this Agreement, the performance of this
Agreement shall cause inequitable economic hardship for one party which runs counter to the objectives of this Agreement and which the other
party cannot reasonably and in good faith expect the first party to bear unrelieved, the parties will meet and seek in good faith to find equitable
means of amending this Agreement to reestablish a fair and reasonable economic balance under this Agreement between the parties hereto.
License, Development and Commercialization Agreement -- Confidential -- Page 31
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day
and year first above written.
VERTEX PHARMACEUTICALS INCORPORATED
By:
Kenneth S. Boger Title: Senior Vice President and General Counsel
NOVARTIS PHARMA AG
By:
Title:
By:
Title:
License, Development and Commercialization Agreement -- Confidential -- Page 32
SCHEDULE 1.12
LIST OF DRUG PRODUCT CANDIDATES
To be supplied
License, Development and Commercialization Agreement -- Confidential
SCHEDULE 1.25
LIST OF MAJOR MARKETS
[***]
License, Development and Commercialization Agreement -- Confidential
SCHEDULE 1.29
NOVARTIS PATENTS
License, Development and Commercialization Agreement -- Confidential
SCHEDULE 1.44
VERTEX PATENTS
License, Development and Commercialization Agreement -- Confidential
SUBSIDIARIES OF VERTEX PHARMACEUTICALS INCORPORATED
Vertex Pharmaceuticals (San Diego) LLC, a Delaware limited liability company
EXHIBIT 21
* VSD Sub I LLC, a Delaware limited liability company
*** VSD Sub II LLC, a Delaware limited liability company
Vertex Holdings, Inc., a Delaware corporation
** Vertex Pharmaceuticals (Europe) Ltd., a U.K. limited liability company
** Vertex Securities Trust, a Massachusetts Business Trust
* a subsidiary of Vertex Pharmaceuticals (San Diego) LLC
** indirect subsidiaries of Vertex Pharmaceuticals Incorporated
*** a subsidiary of VSD Sub I LLC
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-48030, 33-48348, 33-65472, 33-
93224, 333-12325, 333-27011, 333-56179, 333-79549, 333-65664, 333-65666 and 333-104362) and on Form S-3 (File Nos. 333-37794 and
333-49844) of Vertex Pharmaceuticals Incorporated of our report dated March 10, 2004, relating to the consolidated financial statements,
which appears in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 15, 2004
Exhibit 31.1
SECTION 302 CEO CERTIFICATION
I, Joshua S. Boger, certify that:
1. I have reviewed this annual report of Vertex Pharmaceuticals Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 15, 2004
/s/ JOSHUA S. BOGER
--------------------------------------
Joshua S. Boger
Chairman and Chief Executive Officer
Exhibit 31.2
SECTION 302 CFO CERTIFICATION
I, Ian F. Smith, certify that:
1. I have reviewed this annual report of Vertex Pharmaceuticals Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 15, 2004
/s/ IAN F. SMITH
--------------------------------------
Ian F. Smith
Senior Vice President and
Chief Financial Officer
SECTION 906 CEO/CFO CERTIFICATION
Exhibit 32.1
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code) each of the undersigned officers of Vertex Pharmaceuticals Incorporated, a
Massachusetts corporation (the "Company"), does hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the year ended December 31, 2003 (the "Form 10-K") of the Company fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents,
in all material respects, the financial condition and results of operations of the Company.
DATED: MARCH 15, 2004 /s/ JOSHUA S. BOGER
------ -------------- -------------------
Joshua S. Boger
Chairman and Chief Executive Officer
DATED: MARCH 15, 2004 /s/ IAN F. SMITH
------ -------------- --------------------
Ian F. Smith
Senior Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company
and furnished to the Securities and Exchange Commission or its staff upon request.
End of Filing
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