SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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



FORM 10-K

(Mark One)



/X/   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934





For the fiscal year ended December 31, 1997



OR



/ /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934



For the transition period from _________ to ________



Commission file number 0-19319



VERTEX PHARMACEUTICALS INCORPORATED

(Exact name of registrant as specified in its charter)



MASSACHUSETTS                                        04-3039129

(State of incorporation)                    (I.R.S. Employer Identification No.)



130 WAVERLY STREET

CAMBRIDGE, MASSACHUSETTS                              02139-4242

(Address of principal executive offices)                   (Zip Code)



(617) 577-6000

(Registrant's telephone number, including area code)



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



Common Stock, $0.01 par value

(Title of class)



Indicate by check mark whether the registrant: (1) has filed all reports

required to be filed by Section 13 of 15(d) of the Securities Exchange Act of

1934 during the preceding 12 months (or for such shorter period that the

registrant was required to file such reports), and (2) has been subject to such

filing requirements for the past 90 days. Yes /X/  No / /



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405

of Regulation S-K is not contained herein, and will not be contained, to the

best of the registrant's knowledge, in definitive proxy or information

statements incorporated by reference in Part III of this Form 10-K or any

amendment to this Form 10-K. /X/



As of March 16, 1998 there were outstanding 25,267,905 shares of Common Stock,

$.01 par value per share. The aggregate market value of shares of Common Stock

held by non-affiliates of the registrant, based upon the last sales price for

such stock on that date as reported by The Nasdaq Stock Market, was

approximately $868,075,000.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the definitive Proxy Statement for the 1998 Annual Meeting of

Stockholders to be held on May 27, 1998 are incorporated by reference into Part

III.



Page 1

The "Company" and "Vertex," as used in this Annual Report on Form 10-K,

refer to Vertex Pharmaceuticals Incorporated.



This Annual Report on Form 10-K contains forward-looking statements

based on current management expectations. When used in this Report, the words

"expects" "anticipates," "estimates," "plans," "believes," and similar

expressions are intended to identify forward-looking statements. Such statements

are subject to risks and uncertainties. Factors that could cause actual results

to differ from these expectations include, but are not limited to, those

discussed in the section of Item 1 entitled "Risk Factors." These

forward-looking statements speak only as of the date of this Report. The Company

expressly disclaims any obligation or undertaking to release publicly any

updates or revisions to any forward-looking statements contained herein to

reflect any change in the Company's expectations with regard thereto or any

change in the events, conditions or circumstances on which any such statement is

based.



Vertex is a registered trademark of Vertex Pharmaceuticals

Incorporated, and Incel is a trademark of Vertex Pharmaceuticals Incorporated.

CLEC is a registered trademark of the Company's subsidiary, Altus Biologics Inc.



PART I



ITEM 1.       BUSINESS



Vertex is engaged in the discovery, development and commercialization

of novel, small molecule pharmaceuticals for the treatment of diseases for which

there are currently limited or no effective treatments. The Company is a leader

in the use of structure-based drug design, an approach to drug discovery that

integrates advanced biology, biophysics and chemistry in a coordinated and

simultaneous fashion. The Company believes that this integrated approach is

applicable to therapeutic targets in a broad range of diseases. Vertex's goal is

to create a portfolio of highly specific, proprietary, small molecule drugs

based on its knowledge of the atomic structure of proteins involved in the

control of disease processes. The Company's drug candidates currently in

clinical trials include amprenavir for the treatment of human immunodeficiency

virus ("HIV") infection and acquired immune deficiency syndrome ("AIDS"), two

compounds for treatment of cancer multidrug resistance ("MDR") and an inosine

monophosphate dehydrogenase ("IMPDH") inhibitor for the treatment of autoimmune

diseases. In addition, the Company has preclinical and research programs aimed

at developing orally available small molecule compounds to treat inflammatory

diseases, neurodegenerative diseases and hepatitis C infection.



Structure-Based Drug Design



Drugs are natural or synthetic compounds that interact with a target

molecule, typically a protein, either to induce or to inhibit that molecule's

function within the human body. Traditionally, pharmaceutical products have been

discovered through the screening of thousands of compounds, either from existing

chemical libraries or from fermentation broths, against a predictive assay for a

particular disease target. The Company believes that traditional pharmaceutical

discovery is an essentially random process which is costly and inefficient.

Advances in biotechnology have led to another method of developing drugs based

on the isolation and production of human recombinant proteins. The Company

believes that this approach also has limitations because the resulting

pharmaceuticals are large molecules that cannot be administered orally, are

difficult to manufacture and have applications which are limited to the disease

state in which the protein is involved.



Vertex is developing pharmaceutical products using a structure-based

drug design approach, which is distinct from the traditional pharmaceutical and

biotechnological approaches. By determining and modeling the three dimensional

atomic structure of a target protein, the





Page 2

Company intends to rationally design or alter chemical compounds to specifically

interact with the targeted protein. The Company believes that structure-based

drug design increases the chances for the discovery of multiple lead compounds

for selected protein targets, including targets for which traditional drug

discovery has met with limited success. Moreover, the Company believes that the

structure-based drug design process may accelerate optimization of lead

compounds, since modification of a lead compound may be undertaken with

knowledge of the relationship between the compound's structure and its desired

therapeutic effect, rather than through experimentation with randomly generated

modifications to that compound.



The Company's approach to structure-based design is an integrated

approach combining efforts in biology, biophysics and chemistry in a coordinated

and simultaneous fashion. To acquire structural information, Vertex applies

advanced biophysical and computational tools, including x-ray crystallography,

nuclear magnetic resonance spectroscopy and high resolution computer modeling.

As structural information is gathered, the Company uses combinatorial,

computational and medicinal chemistry to design and produce novel, highly

specific small molecule compounds that possess the characteristics required for

therapeutic benefit. To arrive at initial lead compounds, the Company may use

traditional approaches, such as screening chemical libraries, natural products

or combinatorial libraries in addition to using known chemical compounds or may

apply direct computational methods (de novo design). Throughout the process, the

Company develops biological assays and proprietary animal models, some of which

employ the latest advances in genomics techniques, in order to analyze the

function of target proteins. Using these tools, the Company optimizes compounds

for potency and pharmaceutical properties, including tolerability and

pharmacokinetics, and manufacturability. The Company selects clinical candidates

from among optimized compounds based on the results of in vitro and in vivo

tests designed to predict the compounds' safety and efficacy.



Vertex expects to employ all of its core technologies from the initial

phases of a program through the entire discovery process. Information generated

through the application of one scientific technique becomes part of the

information base from which further advances may be made by Vertex scientists

using other development techniques. Using its approach to structure-based drug

design, Vertex has demonstrated that it is able to solve atomic structures of

target proteins, generate lead compounds that bind to the target in vitro and

optimize those compounds to produce drug candidates with desirable

pharmaceutical attributes. The Company believes that its integrated

structure-based approach to drug discovery and the applicability of this

approach to a broad range of protein targets provides the Company with

significant competitive advantages in the discovery and development of novel

therapeutics for a variety of diseases.



Corporate Strategy



Vertex is concentrating on the discovery and development of drugs for

the treatment of viral diseases, multidrug resistance in cancer, autoimmune

diseases, inflammatory diseases and neurodegenerative diseases. The Company's

research and development strategy is to identify therapeutic areas in which

there is (i) an unmet clinical need, (ii) evidence that interaction with known

protein targets will produce a therapeutic effect and (iii) evidence that the

protein targets will be appropriate for structural analysis using Vertex's

scientific approach. The Company's business strategy is to form collaborations

with pharmaceutical companies in programs for which they can provide resources

and access to competencies complementary to Vertex's in-house capabilities.



Product Development and Research Programs



The following are the Company's most advanced product development and

research programs.







Page 3

Clinical Development Programs



HIV Program



Overview



Vertex is developing orally deliverable antiviral drugs to treat HIV

infection and AIDS. Vertex's HIV Program is focused on the HIV protease, a key

enzyme involved in viral replication. The Company is collaborating with Glaxo

Wellcome plc. ("Glaxo Wellcome") and Kissei Pharmaceutical Co., Ltd. ("Kissei")

in the development of its most advanced HIV protease inhibitor, amprenavir

(VX-478 or 141W94). Glaxo Wellcome has been conducting pivotal Phase III

clinical trials of amprenavir since early 1997. These Phase III clinical trials

are intended to support the submission of a New Drug Application ("NDA") for

market approval in the United States and equivalent submissions in Europe and

other territories. However, there can be no assurance that these clinical trials

will result in the submission or approval of an NDA for amprenavir.



Background



Recent World Health Organization ("WHO") estimates place the number of

people infected with HIV at 860,000 in the United States in 1997. The U.S.

Centers for Disease Control ("CDC") estimates that 240,000 HIV-infected

individuals in the United States have progressed to and are living with AIDS.

The WHO recently revised upward estimates of worldwide HIV prevalence to 30.6

million, with 5.8 million new infections and 2.3 million deaths in 1997.



With the advent of combination therapy strategies and the introduction

of several new drugs, world sales of antiviral drugs for the treatment of HIV

have increased fivefold over a period of two years, reaching approximately $2.5

billion in 1997. Despite this dramatic market increase and the success of new

agents, there remains a signficant need for new therapeutic options for the

management of HIV infection. In the United States and elsewhere, the majority of

HIV-infected patients are undiagnosed and untreated with any antiviral drug.



Three classes of antiviral drugs - nucleoside reverse transcriptase

inhibitors ("NRTIs"), non-nucleoside reverse transcriptase inhibitors

("NNRTIs"), and protease inhibitors - are currently approved for the treatment

of HIV/AIDS. NRTIs (which include AZT, ddI, ddC and 3TC) and NNRTIs (which

include nevirapine and delavirdine) both act by inhibiting reverse

transcriptase, a viral enzyme required for replication. The clinical utility of

each of these drugs is limited by significant side effects and by the

development of viral resistance. HIV protease inhibitors work by an alternative

mechanism, blocking another viral enzyme involved in HIV replication. Indinavir,

saquinavir, ritonavir, and nelfinavir are protease inhibitors that have received

U.S. Food and Drug Administration ("FDA") marketing approval. However, clinician

and patient acceptance of these products may be limited by complex dosing

regimens, which can result in poor patient compliance, and by dose-limiting side

effects. Amprenavir is being studied using twice daily dosing, without

restrictions regarding dosing with or without food, in contrast with certain of

the currently available protease inhibitors which are approved for dosage three

times daily with food restrictions. The Company believes that amprenavir will

compare favorably with the protease inhibitors currently on the market in terms

of potency, tolerability, dosing regimen and resistance profile, even if

twice-daily dosing regimens now being studied for some of the other protease

inhibitors receive FDA approval. See "Risk Factors--Early Stage of Development;

Technological Uncertainty" and "--Rapid Technological Change and Competition."



Clinical Status



Amprenavir is a second generation HIV protease inhibitor designed by

Vertex to effectively





Page 4

block the replication of HIV and to possess key competitive characteristics.

Through a series of advanced clinical studies, underway or planned by Glaxo

Wellcome, amprenavir is being assessed in a wide array of clinical trials for

the treatment of HIV and AIDS. Glaxo Wellcome is conducting three Phase III

pivotal clinical trials in the US, Canada and Europe to assess the

tolerability and antiviral activity of amprenavir in combination therapy in

HIV-positive adults and children. Two Phase III clinical trials, including

one trial comparing amprenavir with indinavir, are fully enrolled. Three

different formulations of amprenavir are being tested in clinical trials: a

150 mg capsule, a 50 mg capsule, and an oral solution. Amprenavir is being

studied in Phase III pediatric trials utilizing the 50 mg capsule or the oral

solution. Data generated from 16 weeks of treatment in the Phase III studies

is intended to support filing for market approval of amprenavir. Glaxo

Wellcome is expected to file an NDA in the United States later in 1998 and to

seek regulatory approval for amprenavir in Europe and other countries shortly

thereafter. However, there can be no assurance that clinical trials will

result in the submission or approval of an NDA for amprenavir or that trials

that have not yet begun will commence. See "Risk Factors -- Uncertainties

Related to Clinical Trials."



In addition to the Phase III trials discussed above, Phase II trials

are being conducted evaluating amprenavir in combination with available and/or

experimental protease inhibitors, NRTIs, and NNRTIs. One study compares the

combinations of amprenavir and nelfinavir, amprenavir and indinavir, amprenavir

and saquinavir (soft gel caps), and amprenavir and the nucleoside analogues 3TC

and AZT over 16 weeks of treatment. Preliminary results presented in February

1998 at the 5th Conference on Retroviruses and Opportunistic Infections in

Chicago indicate that combining amprenavir with any one of three currently

available protease inhibitors may result in highly potent antiviral regimens

that appear to be generally well tolerated by patients.



Data from other studies presented at the same meeting suggested that

amprenavir in combination with Glaxo Wellcome's investigational NRTI abacavir

(1592) results in highly potent antiviral activity. In one study, 11 of 11

patients evaluated at 24 weeks achieved 99.9% reduction in viral load. This

result was consistent with another trial that compared amprenavir/abacavir

therapy with other protease inhibitor/abacavir combinations.



Data from these trials are preliminary and incomplete. Many trials are

ongoing. There can be no assurance that these results are predictive of results

that will be obtained in any future clinical trials. See "Risk Factors --

Uncertainties Related to Clinical Trials."



In 1995, Kissei completed single dose and multi-dose,

placebo-controlled, Phase I clinical trials. Vertex expects that in 1998 Kissei

will initiate Phase II/III efficacy trials in HIV-positive patients in Japan and

that the results of such trials, together with clinical data from the Glaxo

Wellcome trials, could form the basis for a filing for marketing approval of

amprenavir in Japan. There can be no assurance, however, that these clinical

trials will commence or proceed as currently anticipated. See "Risk Factors --

Uncertainties Related to Clinical Trials" and "-- Dependence on Collaborative

Partners."



In collaboration with Glaxo Wellcome, Vertex is also engaged in

research to develop new formulations of amprenavir. In addition, Vertex and

Glaxo Wellcome are continuing efforts to develop new lead classes of HIV

protease inhibitors.



The Company has four issued United States patents, 13 United States

patent applications pending (including two which are under a Notice of

Allowance), and foreign counterparts to some of those applications, that claim

classes of chemical compounds, pharmaceutical formulations and/or uses of the

same for treating HIV infection and AIDS. Two of the issued patents and five of

the 13 United States patent applications (including both applications under a

Notice of Allowance), have claims that include amprenavir, the Company's lead

drug candidate for treating HIV infection and AIDS, pharmaceutical formulations

containing amprenavir or the use of amprenavir to treat HIV infection or

AIDS-related central nervous system disorders within their





Page 5

literal scope. In addition, the Company has one issued United States patent that

claims processes for preparing synthetic intermediates useful in the synthesis

of a class of compounds that includes amprenavir. The Company also has a

non-exclusive, worldwide license under certain G.D. Searle & Company ("Searle")

patent applications claiming HIV protease inhibitors.



Cancer Multidrug Resistance Program



Overview



Vertex is developing novel compounds to treat and prevent the

occurrence of drug resistance associated with the failure of cancer chemotherapy

by inhibiting cellular mechanisms believed to be responsible for MDR. Vertex is

developing two compounds, Incel(TM) (biricodar dicitrate; VX-710) and VX-853,

that block two major multidrug resistance mechanisms, P-glycoprotein ("MDR1")

and multidrug resistance associated protein, ("MRP"). Incel, an intravenous

compound, and VX-853, an oral compound, are intended to be administered in

combination with cancer chemotherapy agents, such as doxorubicin and paclitaxel.

Vertex is conducting Phase II clinical trials of Incel in liver and breast

cancer. In addition, BioChem Therapeutic, Inc. ("BioChem"), a subsidiary of

Biochem Pharma (International) Inc., Vertex's partner for the development and

marketing of Incel in Canada, is conducting Phase II clinical trials of Incel in

soft tissue sarcoma and ovarian cancer. Vertex is conducting a Phase I/II

clinical trial of VX-853, initiated in 1996, in patients with solid tumors.



Background



The American Cancer Society estimates that during 1998 more than 1.2

million people in the United States will be diagnosed with invasive cancer and

more than 560,000 people in the U.S. will die from such cancers. The Company

believes that a significant number of these patients may not be effectively

treated by chemotherapy because of MDR.



Multidrug resistance is frequently associated with the failure of

chemotherapy. A major contributing factor to MDR is the presence of molecular

pumps, including MDR1 and MRP, that function to expel chemotherapeutic agents

from cancer cells, preventing the sustained delivery of potent levels of the

chemotherapeutic agents required for therapeutic benefit. As a consequence, such

resistant tumor cells cannot be killed efficiently by anticancer drugs such as

doxorubicin, vincristine, etoposide and paclitaxel. MDR1 has been implicated in

MDR in a variety of cancers including liver cancer, breast cancer, soft tissue

sarcoma, prostate cancer, colon cancer, pancreatic cancer, acute myelogenous

leukemia, multiple myeloma and certain lung cancers. MRP was recently identified

as another drug efflux pump and is believed responsible for resistance observed

in additional tumor types.



No drug has been approved by the FDA specifically for the treatment of

MDR, but several compounds are in advanced clinical studies. Certain agents,

such as dex-verapamil and an analog of cyclosporin A, have been shown in

preliminary human studies to have some effectiveness in overcoming clinical

resistance to certain commonly used chemotherapeutic agents. The Company

believes these drugs may have side effects that could limit broad use.



Clinical Status



Vertex's lead compound, Incel, has displayed potent activity in vitro

as an inhibitor of MDR for a number of chemotherapeutic agents in a variety of

tumor types. Vertex has completed two Phase I/II studies with Incel in

combination with doxorubicin and with paclitaxel. Vertex initiated a Phase II

multi-center clinical trial in June 1996 to assess the safety and efficacy of

the co-administration of Incel and doxorubicin in patients with liver cancer in

comparison with doxorubicin alone. In 1997, the Company initiated a Phase II

multi-center trial to assess the safety





Page 6

and efficacy of the co-administration of Incel and paclitaxel in patients with

breast cancer. In addition, in 1997 BioChem initiated Phase II clinical trials

of Incel in combination with paclitaxel in patients with ovarian cancer and in

combination with doxorubicin in patients with soft tissue sarcoma. The Company

intends to expand its Incel clinical development program to explore a variety of

alternative indications for the drug. However, there can be no assurance that

clinical trials will commence or proceed as currently anticipated. See "Risk

Factors -- Uncertainties Related to Clinical Trials," "-- Manufacturing

Uncertainties; Reliance on Third Party Manufacturers" and "-- Dependence on

Collaborative Partners."



A Phase I/II dose-escalating clinical trial of VX-853 in combination

with doxorubicin in patients with solid tumors is being conducted, based on

Vertex research that showed that VX-853 potently blocks MDR mediated by both

MDR1 and MRP. The current clinical trial is expected to provide data regarding

the safety of VX-853 at various dose levels, alone and in combination with

escalating doses of doxorubicin.



The Company has five issued United States patents, two United States

patent applications pending (one of which is under a Notice of Allowance) and

several foreign counterpart applications claiming Incel and other compounds for

treating multidrug resistance. One of the issued United States patents claims

Incel and structurally related compounds. One of the issued United States

patents claims VX-853 and structurally related compounds. The Company may seek

orphan drug status for certain indications of its MDR compounds. See "Risk

Factors - Extensive Government Regulation; Uncertainty of Product Clearance and

Approval."





IMPDH Program



Overview



Vertex is developing novel, orally deliverable immunosuppressive drugs

that it believes could selectively halt the growth of lymphocytes by blocking

IMPDH, an enzyme which controls DNA synthesis in lymphocytes. In 1997, Vertex

initiated a Phase I clinical trial with VX-497, a novel, orally administered

IMPDH inhibitor designed by Vertex.



Background



IMPDH is an enzyme involved in the immune response that enables

lymphocyte proliferation and recruitment by catalyzing a key step in one of

two DNA nucleotide biosynthesis pathways. IMPDH inhibition appears to

selectively suppress immune system cells while leaving other cells

unaffected, and may play an important role in down regulating inappropriate

immune responses common to a range of human diseases, including asthma,

psoriasis, rheumatoid arthritis and systemic lupus, as well as with

transplant rejection. Vertex believes that blocking the enzyme IMPDH with an

oral compound designed to specifically bind to IMPDH may provide a novel way

to inhibit the progress of autoimmune diseases. IMPDH inhibition may also

have an anti-inflammatory effect that may be useful in certain indications.



The Company is aware of only one specific inhibitor of IMPDH currently

on the market in the United States, Hoffmann-La Roche's mycophenolate mofetil,

which is approved for acute kidney transplant and heart transplant rejection.

The Company believes that compound-specific side effects of mycophenolate

mofetil may limit its use for chronic autoimmune disorders. See, however, "Risk

Factors--Early Stage of Development; Technological Uncertainty" and "--Rapid

Technological Change and Competition."





Page 7

Clinical Status



Vertex research, using cluster-based screening to sort families of

compounds as potential inhibitors, led to the selection of VX-497 as a lead

candidate in 1996. VX-497 has displayed potent immunosuppressive activity in

animal models of rheumatoid arthritis and organ transplant rejection. A Phase

I clinical trial is currently under way to test the pharmacokinetics and

tolerability of VX-497 in escalating single doses in healthy subjects in the

United Kingdom. The Company plans to follow the current Phase I clinical

trial with multidose safety studies. Data from Phase I studies will be used

by Vertex to design dose-ranging trials to assess the safety and efficacy of

VX-497 in one or more indications. Phase II clinical trials in one or more

indications are planned for 1998. There can be no assurance, however, that

clinical trials will commence or proceed as currently anticipated. See "Risk

Factors -- Early Stages of Development; Technological Uncertainty," "--

Manufacturing Uncertainties; Reliance on Third Party Manufacturers" and " --

Uncertainties Related to Clinical Trials."



The Company has five United States patent applications pending,

claiming inhibitors of IMPDH, including VX-497 and related compounds. The

Company has two United States patent applications pending that claim the crystal

structure of IMPDH and the use of that structure to design inhibitors.



Preclinical Development Programs



ICE Program



Overview



Vertex is developing novel drugs to treat acute and chronic

inflammatory conditions, including rheumatoid arthritis and osteoarthritis. The

Company is collaborating with Hoechst Marion Roussel ("HMR") in the development

of VX-740 to block interleukin-1 beta converting enzyme ("ICE"), which mediates

the production and release of the inflammatory cytokine IL-1 beta, as well as

the production of gamma interferon. Inside specialized immune system cells, ICE

activates the proteins interleukin-1 beta (IL-1 beta) and gamma interferon, and

triggers a cascade of events that produces inflammation. Vertex and HMR

scientists have designed several classes of small molecule ICE inhibitors,

including VX-740, the development candidate in the collaboration. Inhibitors of

ICE may have application to a wide range of chronic and acute inflammatory

diseases, such as rheumatoid arthritis, osteoarthritis, inflammatory bowel

disease, sepsis, and pancreatitis.



Background



Elevation of IL-1 beta levels has been correlated to a number of acute

and chronic inflammatory diseases. There are approximately 2,100,000 patients

with rheumatoid arthritis in the United States alone. Numerous companies are

seeking to develop drugs to treat these conditions through various mechanisms.

However, although several companies are pursuing ICE as a drug target, Vertex is

not aware of any company with an ICE-inhibiting compound in clinical

development, and there currently are no IL-1 beta inhibitors approved for

marketing.



Preclinical Status



VX-740 has been designed by Vertex and HMR as a potential small

molecule inhibitor of ICE that could be used for the treatment of both acute and

chronic inflammatory disorders. VX-740 has been shown to be orally active in

several animal models of human inflammatory disease, including models for acute

and chronic arthritis. In December 1997, Vertex announced that it had earned the

first of a series of milestone payments to be made by HMR to Vertex as VX-740





Page 8

advances through preclinical development, clinical development and

commercialization. The $3.0 million milestone payment related to progress

made in the preclinical development of VX-740 in 1997. Phase I clinical

trials are planned to start in 1998 for VX-740. However, there can be no

assurance that clinical trials will commence or proceed as currently

anticipated. See "Risk Factors--Uncertainties Related to Clinical Trials,"

"--Manufacturing Uncertainties; Reliance on Third Party Manufacturers" and

"--Dependence on Collaborative Partners." Based on Vertex's discovery of the

ICE's role in the production of gamma interferon, a key immunoregulator that

modulates antigen presentation, T-cell activation, and cell adhesion, Vertex

also plans to investigate ICE inhibitors for additional therapeutic uses such

as in metastatic cancer, and diabetes.



The Company has 10 issued United States patents, 28 United States

patent applications pending and several foreign counterpart patent applications

claiming inhibitors of ICE, including a series of patents and applications

purchased from Sanofi S.A., in July 1997. The Company has two patent

applications pending in the United States and several foreign counterpart

applications claiming the crystal structure of ICE and derivatives thereof and

various uses of those structures. The company also has one United States patent

that claims DNA sequences encoding ICE. That patent, which was purchased from

Sanofi S.A., is currently involved in an interference in the United States

Patent and Trademark Office.



Research Programs



Neurophilin Program



Vertex has designed orally administerable small molecule compounds that

promote nerve growth in central and peripheral nerve injury. Data supporting the

nerve regeneration in spinal cord and peripheral nerve injury models were

presented at the Society for Neuroscience 27th Annual Meeting in October 1997.

Vertex is testing neurophilin compounds in additional animal models of nerve

injury with the goal of selecting a compound for development to treat

neurodegenerative diseases, such as Alzheimer's and Parkinson's diseases,

peripheral neuropathies, which result from degeneration of sensory and motor

nerves, as well as to treat nerve injury resulting from trauma or stroke. The

Company expects to select a compound in 1998 as a clinical development

candidate.



The Company has five United States patent applications (one of which is

under a Notice of Allowance) claiming the use of certain of its

immunosuppressive compounds and certain of its multidrug resistance compounds

for nerve growth applications. The Company also has nine issued United States

patents and three United States patent applications pending (one of which is

under a Notice of Allowance) that claim compounds that are useful in nerve

growth applications.



MAP Kinase Program



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. Vertex is designing and

developing compounds that inhibit cytokine translation by blocking MAP kinases.



Vertex's first MAP kinase research program focuses on the p38 MAP

kinase, a human enzyme involved with the onset and progression of inflammation

and programmed cell death. When activated, the p38 MAP kinase triggers

production of interleukin-1 ("IL-1") and tumor necrosis factor TNF-alpha,

cytokines that play a central role in the body's inflammatory response. Excess

levels of IL-1 and TNF-alpha are associated with a broad range of acute and

chronic inflammatory diseases, as well as playing an important role in

programmed cell death associated with ischemia and stroke, and in

neurodegenerative diseases such as Alzheimer's and Parkinson's disease. In 1997

Vertex and Kissei signed an agreement to collaborate on the design, development

and commercialization of inhibitors of p38 MAP kinase. The objective of the

research collaboration is to identify and extensively evaluate compounds that

target p38 MAP kinase to develop novel, orally active drugs for the treatment of

inflammatory and neurological diseases. Vertex and Kissei



Page 9

researchers are currently evaluating compounds in animal models and initial

preclinical toxicology tests to determine a potential clinical candidate.

Vertex expects to advance a compound from this program to preclinical testing

in 1998. However, there can be no assurance that studies will commence or

proceed as currently anticipated.



Vertex has two United States patent application pending claiming

inhibitors of p38 MAP kinase. Vertex also has one United States patent

application pending claiming methods of designing inhibitors of MAP kinases.



Hepatitis C Virus Programs



The Company is conducting two discovery research programs to develop

compounds to treat hepatitis C. Identified in 1989, the hepatitis C virus

("HCV") causes chronic inflammation in the liver. In a majority of patients, HCV

establishes a chronic infection that can persist for decades and eventually lead

to cirrhosis, liver failure and liver cancer. HCV infection represents a

significant medical problem worldwide for which there is inadequate or no

therapy for a majority of patients. Sources at the U.S. Centers for Disease

Control and Prevention have estimated that approximately 3.9 million Americans,

or more than one percent of the population, may be infected with HCV. Currently,

there is no vaccine available to prevent hepatitis C infection. In addition, the

only drug approved for the treatment of hepatitis C, interferon alpha, provides

long-term therapeutic benefit to less than 25 percent of patients treated.



Hepatitis C Protease



Hepatitis C protease is an enzyme generally believed to be essential

for replication of HCV. Under an agreement signed during 1997, Vertex and Eli

Lilly and Company ("Lilly") are collaborating on the research, development and

commercialization of novel, orally active protease inhibitors for the treatment

of chronic infection caused by HCV, using structural information developed by

Vertex researchers.



Vertex has one international patent application pending (which

designates the United States among other countries) claiming inhibitors of HCV

protease. Vertex also has one United States patent application pending claiming

the crystal structure of HCV protease and the use of that structure to design

inhibitors. Vertex has an additional United States patent application claiming

methods of identifying HCV protease inhibitors.





Hepatitis C Helicase



Vertex is also conducting discovery research to design orally

deliverable drugs to inhibit hepatitis C helicase. The NS3 helicase enzyme is

believed to play an essential role in the infectious cycle of the hepatitis C

virus by aligning viral DNA in its proper configuration for replication.

Therefore, helicase represents an attractive target for drug discovery.



Researchers from Vertex have solved the three-dimensional atomic

structure of the hepatitis C virus NS3 helicase. This achievement was described

in a paper published on January 15, 1998 in the journal Structure. Vertex is

using the structural information to identify and optimize inhibitors of the

enzyme, employing structure-based techniques, including cluster-based screening,

and computational, combinatorial, and medicinal chemistry, to design novel small

molecule inhibitors of HCV helicase for clinical development as new antiviral

drugs to treat HCV infection.



Vertex has one United States patent application pending disclosing the

crystal structure of HCV helicase.







Page 10

Caspase Program



Vertex is conducting research to design novel drugs for apoptosis

(programmed cell death) for neurodegenerative diseases and other

neurodegenerative conditions. This drug discovery effort is based on the

Company's knowledge of ICE and its homologues, the caspases. Vertex has gained a

detailed understanding of apoptotic pathways using biological, genomic, and

structural data from ICE homologues. Vertex has solved the X-ray structure of

CPP32, a caspase believed to be important in neuronal apoptosis, and is using

structural information to design small molecule lead compounds that selectively

block CPP32 and other caspases. The goal of Vertex's caspases program is to

discover and develop drugs useful for treating neurodegenerative disorders such

as Alzheimer's disease and Parkinson's disease as well as for the prevention of

tissue damage resulting from myocardial and cerebral ischemia.



The Company has one United States patent application claiming a protein

involved in apoptosis.



Corporate Collaborations



Vertex has entered into corporate collaborations with pharmaceutical

companies that provide financial and other resources, including capabilities in

research, development and sales and marketing, to support the Company's research

and development programs. At present, the Company has the following major

corporate collaborations.



Glaxo Wellcome plc.



Vertex and Glaxo Wellcome are collaborating on the development of

Vertex's HIV protease inhibitors. Under the collaborative agreement, which

commenced in December 1993, Glaxo Wellcome is obligated to pay Vertex up to

$42.0 million, comprised of a $15.0 million initial license payment paid in

December 1993, $14.0 million of product research funding over five years and

$13.0 million of development and commercialization milestone payments for an

initial drug candidate. From the inception of the agreement in December 1993

through December 31, 1997, Vertex has recognized as revenue $28 million. Glaxo

Wellcome is also obligated to pay to Vertex additional development and

commercialization milestone payments for subsequent drug candidates. In

addition, Glaxo Wellcome is required to bear the costs of development in its

territory under the collaboration. Glaxo Wellcome has exclusive rights to

develop and commercialize Vertex HIV protease inhibitors in all parts of the

world except the Far East and will pay Vertex a royalty on sales. Vertex has

retained certain bulk drug manufacturing rights and certain co-promotion rights

in the territories licensed to Glaxo Wellcome. See "-- HIV Program."



Glaxo Wellcome has the right to terminate the research collaboration

under its agreement with the Company without cause upon twelve months' notice

given at any time and has the right to terminate the license arrangements under

its agreement with the Company without cause upon twelve months' notice,

provided such notice is not given before the research collaboration has been

terminated. Termination by Glaxo Wellcome of the research collaboration under

its agreement with the Company will relieve Glaxo Wellcome of its obligation to

make further research support payments under the agreement. Termination by Glaxo

Wellcome of the license arrangements under the agreement will relieve Glaxo

Wellcome of its obligation to make further commercialization and development

milestone and royalty payments, and will end any license granted to Glaxo

Wellcome by Vertex thereunder, and could have a material adverse effect on the

Company's business and result of operations. See "Risk Factors -Dependence on

Collaborative Partners."



Vertex and Glaxo Wellcome have a non-exclusive, worldwide license under

certain Searle patent applications claiming HIV protease inhibitors to permit

Vertex and Glaxo Wellcome to develop, manufacture and market amprenavir free of

the risk of intellectual property claims by



Page 11

Searle. The terms of the license require Vertex to pay Searle a royalty on

sales. In connection with this transaction, Glaxo Wellcome purchased shares of

the Company's Common Stock for approximately $5.0 million in June 1996.



Kissei Pharmaceutical Co., Ltd.



Amprenavir



Vertex and Kissei are collaborating on the development of

amprenavir, Vertex's HIV protease inhibitor. Under the collaborative

agreement, which commenced in April 1993, Kissei is obligated to pay to

Vertex up to $20.0 million, comprised of $9.8 million of product research

funding over three years, $7.0 million of development and commercialization

milestone payments and a $3.2 million equity investment. From the inception

of the agreement in April 1993 through December 31, 1997, $14.6 million has

been recognized as revenue. During 1997, the Company also received $4.0

million related to reimbursements of certain development costs. The Company

has received the full amount of research funding specified under the

agreement. Kissei has exclusive rights to develop and commercialize

amprenavir in Japan, the People's Republic of China and several other

countries in the Far East and will pay Vertex a royalty on sales. Vertex is

responsible for the manufacture of bulk product for Kissei. See "-- HIV

Program."



p38 MAP Kinase



In September 1997, the Company and Kissei entered into a collaborative

agreement for the p38 MAP kinase program for the development and

commercialization of novel, orally active drugs for the treatment of

inflammatory and neurological diseases. Under the terms of the agreement, Kissei

will pay the Company up to $22 million composed of a $4 million license payment

paid in September 1997, $11 million of product research funding over three years

and $7 million of development and commercialization milestone payments. From the

inception of the agreement in September 1997 through December 31, 1997, $5.5

million has been recognized as revenue. The Company and Kissei will collaborate

to identify and extensively evaluate compounds that target p38 MAP kinase.

Kissei will have the right to develop and commercialize these compounds in its

licensed territories. Kissei has exclusive rights to p38 MAP kinase compounds in

Japan and certain Southeast Asian countries and semi-exclusive rights in China,

Taiwan and South Korea. The Company retains exclusive marketing rights in the

United States, Canada, Europe, and the rest of the world. In addition, the

Company will have the right to supply bulk drug material to Kissei for sale in

its territory, and will receive royalties and drug supply payments on any

product sales. Kissei has the right to terminate the agreement without cause

upon six months' notice after June 1998.

See "--MAP Kinase Program."



BioChem Therapeutic, Inc.



The Company and BioChem are collaborating on the development and

commercialization of Incel, the Company's lead compound in its cancer multidrug

resistance program. Under the collaborative agreement, which commenced in May

1996, BioChem is obligated to pay the Company up to $4.0 million comprised of an

initial license payment of $500,000 and development and commercialization

milestone payments. From the inception of the agreement in May 1996 through

December 31, 1997, $0.8 million has been recognized as revenue. BioChem also is

obligated to bear the costs of development of Incel in Canada. BioChem has

exclusive rights to develop and commercialize Incel in Canada. The Company will

supply BioChem's requirements of bulk and finished forms of Incel. BioChem will

make payments to the Company for those materials based on sales of products by

BioChem, which will cover Vertex's cost of supplying materials and will provide

a profit to Vertex.



BioChem has the right to terminate the agreement without cause upon six

months' notice.



Page 12

Termination will relieve BioChem of any further payment obligations and will end

any license granted to BioChem by Vertex under the agreement. See "-- Cancer

Multidrug Resistance Program."



Hoechst Marion Roussel



Vertex and HMR are collaborating on the development of ICE inhibitors

as anti-inflammatory agents. Under the collaborative agreement, which commenced

in September 1993, HMR is obligated to pay to Vertex up to $30.5 million,

comprised of $18.5 million of product research funding over five years and $12.0

million of development and commercialization milestone payments. From the

inception of the agreement in September 1993 through December 31, 1997, $21.5

million has been recognized as revenue. The Company received additional revenue

related to reimbursements for clinical development in 1997. The Company has

received the full amount of research funding specified under the agreement. HMR

has exclusive rights to develop and market drugs resulting from the

collaborative effort in Europe, Africa and the Middle East, and Vertex has

exclusive development and marketing rights in the rest of the world, except the

Far East, where Vertex shares those rights with HMR. HMR is obligated to pay a

royalty to Vertex on any sales made in Europe, and Vertex is obligated to pay a

royalty to HMR on any sales made in the United States or the rest of the

Americas. Each party will have the option to co-promote products in the other

party's exclusive territory. Vertex and HMR will each have rights to develop and

market the drugs in Far Eastern countries including Japan.



HMR has the right to terminate the agreement at any time without cause

upon twelve months' notice. For a period of one year after any such termination,

HMR retains the right to select one or more compounds for development and to

license such compound or compounds from Vertex, provided HMR resumes research

funding and commercialization milestone payments and makes all such payments

that would otherwise have been due but for such termination. See "-- ICE

Program."



Eli Lilly & Company



In June 1997, Vertex and Lilly entered into a collaborative agreement

for the research, development and commercialization of novel, small molecule

compounds to treat hepatitis C infection. Under the terms of the agreement,

Lilly will pay the Company up to $51 million composed of a $3 million up front

payment paid in June 1997, $33 million of product research funding over six

years and $15 million of development and commercialization milestone payments.

From the inception of the agreement in June 1997 through December 31, 1997, $5.7

million has been recognized as revenue. The Company and Lilly will jointly

manage the research, development, manufacturing and marketing of drug candidates

emerging from the collaboration. The Company will have primary responsibility

for drug design, process development and pre-commercial drug substance

manufacturing, and Lilly will have primary responsibility for formulation,

preclinical and clinical development and global marketing. The Company has the

option to supply 100 percent of Lilly's commercial drug substance supply needs.

The Company will receive royalties on future product sales, if any. If the

Company exercises its commercial supply option, the Company will receive drug

supply payments in addition to royalties on future product sales, if any. Lilly

has the right to terminate the agreement without cause upon six months' notice

after June 1999. See "--Hepatitis C Protease."



Altus Biologics Inc.



Altus Biologics Inc. ("Altus") is a subsidiary of Vertex that develops,

manufactures and markets a unique class of products based on a novel and

proprietary technology for stabilizing proteins. This technology is used to

create cross-linked protein crystals ("CLPCs"), facilitating the use of proteins

in a broad array of applications, ranging from pharmaceutical to industrial

uses. CLPCs are high-performance products designed to solve critical process

chemistry and protein



Page 13

stability issues in the development, manufacture and administration of

pharmaceutical substances. Altus has concentrated its early development efforts

on the application of the CLPC technology to enzymes, producing cross-linked

enzyme crystals. In addition, responding to expressions of interest for other

CLPCs to meet needs in a variety of areas, Altus intends to pursue with

collaborators the development of its technology for other high value

applications, such as consumer care products and catalysts for the destruction

of chemical warfare agents. Since 1994, Altus has introduced 10 CLEC(R) products

derived from five enzymes which are being used by pharmaceutical companies in

trial and scale-up stages of pharmaceutical development and manufacturing. Over

300 organizations in 29 countries have purchased trial stage quantities of

Altus' CLEC products, including over 70 companies which have purchased larger

scale-up quantities.



As of March 17, 1998, Altus owned seven pending United States patent

applications, and had been granted an exclusive, worldwide, royalty-free license

to one issued United States patent, six pending United States patent

applications and international and foreign counterparts thereof pursuant to an

exclusive, worldwide, royalty-free license from Vertex. Altus has also filed

international and foreign counterparts based on its United States patent

applications. Altus is also a co-owner with Vertex of an additional United

States patent application and an international counterpart thereof.



Patents and Proprietary Information



The Company has rights in certain patents and pending patent

applications that relate to compounds it is developing and methods of using such

compounds. The Company actively seeks, when appropriate, protection for its

products and proprietary information by means of United States and foreign

patents, trademarks and contractual arrangements. In addition, the Company

relies upon trade secrets and contractual arrangements to protect certain of its

proprietary information and products.



As of March 13, 1997, the Company had a total of 27 United States

patents and 75 United States pending patent applications. The Company also has

an exclusive license under four United States patents, one of which is subject

to a reissue application that has been allowed. Three of the licensed patents

and the allowed reissue application claim the use of certain compounds for

treating hemoglobin disorders, including sickle cell disease and beta

thalassemia. The Company has a non-exclusive, worldwide license under certain

Searle patent applications claiming HIV protease inhibitors. The Company's

non-exclusive, worldwide license permits Vertex to develop, manufacture and

market amprenavir free of intellectual property claims by Searle. The Company

has four issued United States patents and 13 United States patent applications

claiming antiviral compounds, pharmaceutical formulations thereof and/or their

uses, for treating HIV infection and AIDS. Two of those 13 United States patent

applications are under a Notice of Allowance. Two of the issued patents and five

of the 13 applications (including the two under a Notice of Allowance) have

claims that include amprenavir, the Company's lead drug candidate, within their

literal scope. Another one of the three issued patents contains claims covering

the use of amprenavir to treat AIDS-related central nervous system disorders.

The Company also has a United States patent that claims processes for preparing

synthetic intermediates useful in the synthesis of a class of compounds that

includes amprenavir.



The Company has five issued United States patents and two United States

patent applications claiming Incel and other compounds for treating multidrug

resistance. One of those issued patents contains claims covering Incel and

structurally related compounds. Another of the issued patents claims VX-853 and

structurally related compounds. The Company has five United States patent

applications pending, claiming inhibitors of IMPDH, including VX-497 and related

compounds. The Company has two United States patent applications pending that

claim the crystal structure of IMPDH and the use of that structure to design

inhibitors. The Company has ten issued



Page 14

United States patents and 28 United States patent applications pending claiming

inhibitors of ICE. The Company has two patent applications pending in the United

States claiming the crystal structure of ICE and derivatives thereof and various

uses of those structures. The company also has one United States patent that

claims DNA sequences encoding ICE. That patent, which was purchased from Sanofi

S.A., is currently involved in an interference in the United States Patent and

Trademark Office with an application filed by Merck & Co. The Company has five

United States patent applications pending claiming the use of certain of its

immunosuppressive compounds and certain of its multidrug resistance compounds

for nerve growth applications. Vertex recently received a Notice of Allowance in

one of those applications. The Company also has nine issued United States

patents and three patent applications pending that claim compounds that are

useful in nerve growth application. The Company has one United States patent

application claiming a protein involved in apoptosis. The Company has two United

States patent application pending claiming inhibitors of p38 MAP kinase. The

Company also has one United States patent application pending that claims

methods of designing inhibitors of MAP kinase. The Company also has one

international patent application pending (designating the United States and

other countries) claiming inhibitors of HCV protease. The Company has one United

States patent application pending claiming the crystal structure of HCV protease

and the use of that structure to design inhibitors. The Company has one United

States patent application pending claiming an assay for HCV protease activity.

The Company has one United States patent application pending disclosing the

crystal structure of HCV helicase. The Company has one United States patent

application pending claiming methods of assaying and designing inhibitors of

enzymes using proprietary technology. The Company has one United States patent

application pending claiming processes useful in NMR technology. The Company has

one United States patent claiming a novel device useful in pharmaceutical

research. The Company also has filed international and foreign counterparts

based on several of its United States patents and patent applications.



There can be no assurance that any patents will issue from any of the

Company's patent applications or, even if patents issue or have issued, that the

claims thereof will provide the Company with any significant protection against

competitive products or otherwise be valuable commercially. Legal standards

relating to the validity of patents and the proper scope of their claims in the

biopharmaceutical field are still evolving, and there is no consistent policy

regarding the breadth of claims allowed in biopharmaceutical patents. No

assurance can be given as to the Company's ability to avoid infringing, and thus

having to negotiate a license under, any patents issued to others, or that a

license to such patents would be available on commercially acceptable terms, if

at all. Further, there can be no assurance that any patents issued to or

licensed by the Company will not be infringed by the products of others, which

may require the Company to engage in patent infringement litigation. In addition

to being a party to patent infringement litigation, the Company could be

required to participate in interference proceedings declared by the United

States Patent and Trademark Office. Defense or prosecution of patent

infringement litigation, as well as participation in interference proceedings,

can be expensive and time consuming, even in those instances in which the

outcome is favorable to the Company. If the outcome of any such litigation or

proceeding were adverse, the Company could be subject to significant liabilities

to third parties, could be required to obtain licenses from third parties or

could be required to cease sales of the affected products, any of which could

have a material adverse effect on the Company. See "Risk Factors -- Uncertainty

Related to Patents and Proprietary Information."



The Company has licensed on an exclusive basis four United States

patents from Children's Hospital. One of those patents was subject to a reissue

application for which the Company recently received a Notice of Allowance. The

patents and the allowed reissue application claim the use of certain compounds

in the treatment of hemoglobin disorders, including sickle cell disease and beta

thalassemia. Because Children's Hospital did not foreign file the application

corresponding to the reissue application within one year of filing its

corresponding United States application, the Company's foreign patent rights may

be limited. In addition, there can be no





Page 15

assurance that others will not develop independently substantially equivalent

technology, obtain access to the Company's know-how or be issued patents which

may prevent the sale of Company products or require licensing and the payment of

significant fees or royalties by the Company in order for it to carry on its

business. Furthermore, there can be no assurance that any such license will be

available.



Much of the Company's technology and many of its processes are

dependent upon the knowledge, experience and skills of key scientific and

technical personnel. To protect its rights to its proprietary know-how and

technology, the Company requires all employees, consultants, advisors and

collaborators to enter into confidentiality agreements that prohibit the

disclosure of confidential information to anyone outside the Company. These

agreements require disclosure and assignment to the Company of ideas,

developments, discoveries and inventions made by employees, consultants,

advisors and collaborators. There can be no assurance that these agreements will

effectively prevent disclosure of the Company's confidential information or will

provide meaningful protection for the Company's confidential information if

there is unauthorized use or disclosure. Furthermore, in the absence of patent

protection, the Company's business may be adversely affected by competitors who

independently develop substantially equivalent technology. See "-- Corporate

Collaborations," and "Risk Factors -- Dependence on Collaborative Partners" and

"-- Uncertainty Relating to Patents and Proprietary Information."



Manufacturing



The Company relies on third party manufacturers to produce its

compounds for preclinical and clinical purposes and may do so for commercial

production of any compounds that are approved for marketing. The Company expects

that commercial manufacturing of amprenavir will be done, at least initially, by

Glaxo Wellcome. The Company has established a quality assurance program,

including a set of standard operating procedures, intended to ensure that third

party manufacturers under contract produce the Company's compounds in accordance

with the FDA's current Good Manufacturing Practices ("cGMP") and other

applicable regulations. See "-- Government Regulation."



The Company believes that all of its existing compounds can be produced

using established manufacturing methods, primarily through standard techniques

of pharmaceutical synthesis. The Company currently does not have the capacity to

manufacture its potential products, is dependent on third party manufacturers or

collaborative partners for the production of its compounds for preclinical

research and clinical trial purposes and expects to be dependent on such

manufacturers or collaborative partners for some or all commercial production of

any of its compounds that are approved for marketing. The Company believes that

it will be able to continue to negotiate such arrangements on commercially

reasonable terms and that it will not be necessary for it to develop internal

manufacturing capability in order to successfully commercialize its products. In

the event that the Company is unable to obtain contract manufacturing, or obtain

such manufacturing on commercially reasonable terms, it may not be able to

commercialize its products as planned. The Company's objective is to maintain

flexibility in deciding whether to develop internal manufacturing capabilities

for certain of its potential products. The Company has limited experience in

manufacturing pharmaceutical or other products or in conducting manufacturing

testing programs required to obtain FDA and other regulatory approvals, and

there can be no assurance that the Company will further develop such

capabilities successfully.



Since the Company's potential products are at an early stage of

development, the Company will need to improve or modify its existing

manufacturing processes and capabilities to produce commercial quantities of any

drug product economically. The Company cannot quantify the time or expense that

may ultimately be required to improve or modify its existing process

technologies, but it is possible that such time or expense could be substantial.





Page 16

The production of Vertex's compounds is based in part on technology

that the Company believes to be proprietary. Vertex may license this technology

to contract manufacturers to enable them to manufacture compounds for the

Company. There can be no assurance that such manufacturers will abide by any

limitations or confidentiality restrictions in licenses with Vertex. In

addition, any such manufacturer may develop process technology related to the

manufacture of Vertex's compounds that such manufacturer owns either

independently or jointly with the Company. This would increase the Company's

reliance on such manufacturer or require the Company to obtain a license from

such manufacturer in order to have its products manufactured. There can be no

assurance that any such license would be available on terms acceptable to the

Company, if at all.



Some of the Company's current corporate partners have certain

manufacturing rights with respect to the Company's products under

development, and there can be no assurance that such corporate partners'

rights will not impede the Company's ability to conduct the development

programs and commercialize any resulting products in accordance with the

schedules and in the manner currently contemplated by the Company. See "Risk

Factors -- Manufacturing Uncertainties; Reliance on Third Party

Manufacturers."



Competition



The Company is engaged in pharmaceutical fields characterized by extensive

research efforts, rapid technological progress and intense competition. There

are many public and private companies, including pharmaceutical companies,

chemical companies and biotechnology companies, engaged in developing

products for the human therapeutic applications targeted by Vertex. Further,

the Company believes that interest in the application of structure-based drug

design and related technologies may continue and may accelerate as the

technologies become more widely understood. The Company is aware of efforts

by others to develop products in each of the areas in which the Company has

products in development. In the field of HIV protease inhibition, Merck &

Co., Inc., Abbott Laboratories, Inc., Hoffmann-La Roche, and Agouron

Pharmaceuticals, Inc. have HIV protease inhibitor drugs that are already on

the market. The Company is also aware of other companies that have HIV

protease inhibitors in development. There also are a number of competitors

that have products under development for the treatment of MDR in cancer. In

order for the Company to compete successfully in these areas, it must

demonstrate improved safety, efficacy, ease of manufacturing and market

acceptance over its competitors, who have received regulatory approval and

are currently marketing. Furthermore, academic institutions, governmental

agencies and other public and private research organizations are conducting

research to develop technologies and products that may compete with those

under development by the Company. In addition, other technologies are, or may

in the future become, the basis for competing products. There can be no

assurance that the Company's competitors will not succeed in developing

technologies and products that are more effective than any being developed by

the Company or that would render the Company's technology and products

obsolete or noncompetitive. In addition, there can be no assurance that the

Company's products in development will be able to compete effectively with

products which are currently on the market.



Many of the Company's competitors have substantially greater financial,

technical and human resources than those of the Company. In addition, many of

the Company's competitors have significantly greater experience than the

Company in conducting preclinical testing and human clinical trials of new

pharmaceutical products, and in obtaining FDA and other regulatory approvals

of products. Accordingly, certain of the Company's competitors may succeed in

obtaining regulatory approval for products more rapidly than the Company. If

the Company obtains regulatory approval and commences commercial sales of its

products, it will also compete with respect to manufacturing efficiency and

sales and marketing capabilities, areas in which it currently has no

experience. See "Risk Factors -- Rapid Technological Change and Competition."





Page 17

Pharmaceutical Pricing and Reimbursement



The Company's ability to commercialize its products successfully

will depend in part on the extent to which appropriate reimbursement levels

for the cost of such products and related treatment are obtained from

government authorities, private health insurers and other organizations, such

as health maintenance organizations ("HMOs"). Third party payors and

government authorities are continuing efforts to contain or reduce the cost

of health care. For example, in certain foreign markets, pricing and/or

profitability of prescription pharmaceuticals are subject to government

control. There can be no assurance that similar controls will not be

implemented in the United States. Also, the trend toward managed health care

in the United States and the concurrent growth of organizations such as HMOs,

which could control or significantly influence the purchase of health care

services and products, may result in lower prices for the Company's products.

The cost containment measures that health care providers and third party

payors are instituting and any proposed or future health care reform

measures, including any reductions in Government reimbursement programs such

as Medicaid and Medicare, could affect the Company's ability to sell its

products and may have a material adverse effect on the Company.



The success of the Company's products in the United States and other

significant markets will depend, in part, upon the extent to which a consumer

will be able to obtain reimbursement for the cost of such products from

government health administration authorities, third-party payors and other

organizations. Significant uncertainty exists as to the reimbursement status

of newly approved therapeutic products. Even if a product is approved for

marketing, there can be no assurance that adequate reimbursement will be

available. The Company is unable to predict what additional legislation or

regulation relating to the health care industry or third-party coverage and

reimbursement may be enacted in the future or what effect the legislation or

regulation would have on the Company's business. Failure to obtain

reimbursement could have a material adverse effect on the Company.



Government Regulation



The Company's development, manufacture and potential sale of

therapeutics are subject to extensive regulation by United States and foreign

governmental authorities. In particular, pharmaceutical products are subject

to rigorous preclinical and clinical testing and to other approval

requirements by the FDA in the United States under the Food, Drug and

Cosmetic Act and by comparable agencies in most foreign countries.



As an initial step in the FDA regulatory approval process,

preclinical studies are typically conducted in animals to identify potential

safety problems. For certain diseases, animal models exist that are believed

to be predictive of human efficacy. For such diseases, a drug candidate is

tested in an animal model. The results of the studies are submitted to the

FDA as a part of the Investigational New Drug application ("IND"), which is

filed to comply with FDA regulations prior to commencement of human clinical

testing. For other diseases for which no appropriately predictive animal

model exists, no such results can be filed. For several of the Company's drug

candidates, no appropriately predictive model exists. As a result, no in vivo

evidence of efficacy would be available until such compounds progress to

human clinical trials.



Clinical trials are typically conducted in three sequential phases,

although the phases may overlap. In Phase I, which frequently begins with the

initial introduction of the drug into healthy human subjects prior to

introduction into patients, the compound will be tested for safety, dosage

tolerance, absorption, bioavailability, biodistribution, metabolism,

excretion, clinical pharmacology and, if possible, for early information on

effectiveness. Phase II typically involves studies in a small sample of the

intended patient population to assess the efficacy of the drug for a specific

indication, to determine dose tolerance and the optimal dose range and to

gather additional information relating to safety and potential adverse

effects. Phase III trials are undertaken to further





Page 18

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 ("IRB") at the

institution at which the study will be conducted. The IRB will consider,

among other things, ethical factors, the safety of human subjects and the

possible liability of the institution.



Data from preclinical testing and clinical trials are submitted to

the FDA in a New Drug Application ("NDA") for marketing approval. The process

of completing clinical testing and obtaining FDA approval for a new drug is

likely to take a number of years and require the expenditure of substantial

resources. Preparing an NDA involves considerable data collection,

verification, analysis and expense, and there can be no assurance that

approval will be granted on a timely basis, if at all. The approval process

is affected by a number of factors, including the severity of the disease,

the availability of alternative treatments and the risks and benefits

demonstrated in clinical trials. The FDA may deny an NDA if applicable

regulatory criteria are not satisfied or may require additional testing or

information. Among the conditions for marketing approval is the requirement

that the prospective manufacturer's quality control and manufacturing

procedures conform to the FDA's cGMP regulations, which must be followed at

all times. In complying with standards set forth in these regulations,

manufacturers must continue to expend time, monies and effort in the area of

production and quality control to ensure full technical compliance.

Manufacturing establishments, both foreign and domestic, also are subject to

inspections by or under the authority of the FDA and by or under the

authority of other federal, state or local agencies.



Even after initial FDA approval has been obtained, further studies,

including post-marketing studies, may be required to provide additional data

on safety and will be required to gain approval for the use of a product as a

treatment for clinical indications other than those for which the product was

initially tested. Also, the FDA will require post-marketing reporting to

monitor the side effects of the drug. Results of post-marketing programs may

limit or expand further marketing of the products. Further, if there are any

modifications to the drug, including changes in indication, manufacturing

process, labeling or manufacturing facilities, an NDA supplement may be

required to be submitted to the FDA.



The Orphan Drug Act provides incentives to drug manufacturers to

develop and manufacture drugs for the treatment of diseases or conditions

that affect fewer than 200,000 individuals in the United States. Orphan drug

status can also be sought for diseases or conditions that affect more than

200,000 individuals in the United States if the sponsor does not

realistically anticipate its product becoming profitable from sales in the

United States. Under the Orphan Drug Act, a manufacturer of a designated

orphan product can seek tax benefits, and the holder of the first FDA

approval of a designated orphan product will be granted a seven-year period

of marketing exclusivity for that product for the orphan indication. While

the marketing exclusivity of an orphan drug would prevent other sponsors from

obtaining approval of the same compound for the same indication, it would not

prevent other types of drugs from being approved for the same use. The

Company may apply for orphan drug status for certain indications of MDR in

cancer.



Under the Drug Price Competition and Patent Term Restoration Act of

1984, a sponsor may be granted marketing exclusivity for a period of time

following FDA approval of certain drug applications if FDA approval is

received before the expiration of the patent's original term. This marketing

exclusivity would prevent a third party from obtaining FDA approval for a

similar or identical drug through an Abbreviated New Drug Application

("ANDA"), 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





Page 19

elapsed between the filing of an IND and the filing of the corresponding NDA

plus the period of time between the filing of the NDA and FDA approval. The

Company intends to seek the benefits of this statute, but there can be no

assurance that the Company will be able to obtain any such benefits.



Whether or not FDA approval has been obtained, approval of a drug product

by regulatory authorities in foreign countries must be obtained prior to the

commencement of commercial sales of the product in such countries.

Historically, the requirements governing the conduct of clinical trials and

product approvals, and the time required for approval, have varied widely

from country to country.



In addition to the statutes and regulations described above, the Company

is also subject to regulation under the Occupational Safety and Health Act,

the Environmental Protection Act, the Toxic Substances Control Act, the

Resource Conservation and Recovery Act and other present and potential future

federal, state and local regulations. See "Risk Factors -- Extensive

Government Regulation."



Human Resources



As of December 31, 1997, Vertex had 220 full-time employees, including 165

in research and development, 25 in laboratory support services and 30 in

general and administrative functions, and three part-time employees. The

Company's scientific staff members (79 of whom hold Ph.D. and/or M.D.

degrees) have diversified experience and expertise in molecular and cell

biology, biochemistry, animal pharmacology, synthetic organic chemistry,

protein x-ray crystallography, protein nuclear magnetic resonance

spectroscopy, computational chemistry, biophysical chemistry, medicinal

chemistry, clinical pharmacology and clinical medicine. In addition, the

Company's Altus subsidiary had 24 full-time employees as of December 31,

1997. The Company's employees are not covered by a collective bargaining

agreement, and the Company considers its relations with its employees to be

good.



EXECUTIVE OFFICERS



The names, ages and positions held by the executive officers of the Company are

as follows:



<TABLE>

<CAPTION>



Name                                          Age   Position

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

<S>                                           <C>   <C>

Joshua S. Boger, Ph.D................         46    Chairman, President and Chief Executive Officer



Richard H. Aldrich.....................       43    Senior Vice President and Chief Business Officer



Vicki L. Sato, Ph.D.....................      49    Senior Vice President of Research and

Development and Chief Scientific Officer;

Chair of the Scientific Advisory Board



Iain P. M. Buchanan....................       44    Vice President of European Operations;

Managing Director of Vertex Pharmaceuticals

(Europe) Limited



Thomas G. Auchincloss, Jr............         36    Vice President of Finance and Treasurer



</TABLE>



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





Page 20

removal.



Dr. Boger is a founder of the Company and was its President and Chief

Scientific Officer from its inception in 1989 until May 1992, when he became

President and Chief Executive Officer. In 1997, Dr. Boger became Chairman,

President and Chief Executive Officer. Dr. Boger has been a director since

the Company's inception. Prior to founding the Company in 1989, Dr. Boger

held the position of Senior Director of Basic Chemistry at Merck Sharp &

Dohme Research Laboratories in Rahway, New Jersey, where he headed both the

Department of Medicinal Chemistry of Immunology & Inflammation and the

Department of Biophysical Chemistry. Dr. Boger is also a Director of

Millennium Pharmaceuticals, Inc. and Altus biologics, Inc. Dr. Boger holds a

B.A. in chemistry and philosophy from Wesleyan University and M.S. and Ph.D.

degrees in chemistry from Harvard University.



Mr. Aldrich served as Vice President of Business Development of the

Company from June 1989 to May 1992, when he became Vice President and Chief

Business Officer. In December 1993, Mr. Aldrich was promoted to Senior Vice

President and Chief Business Officer. He joined Vertex from Integrated

Genetics, where he headed that company's business development group.

Previously, he served as Program Executive at Biogen, Inc., where he

coordinated worldwide commercial development of several biopharmaceuticals,

and as Licensing Manager at Biogen S.A. in Geneva, Switzerland, where he

managed European and Far Eastern licensing. Mr. Aldrich previously worked at

the Boston Consulting Group, an international management consulting firm. Mr.

Aldrich received a B.S. degree from Boston College and an M.B.A. from the

Amos Tuck School of Business, Dartmouth College.



Dr. Sato joined Vertex in September 1992 as Vice President of Research

and was appointed Senior Vice President of Research and Development in

September 1994. Previously, she was Vice President, Research and a member of

the Scientific Board of Biogen, Inc. As research head at Biogen, she directed

research programs in the fields of inflammation, immunology, AIDS therapy and

cardiovascular therapy from early research into advanced product development.

Dr. Sato received an A.B. in biology from Radcliffe College and A.M. and

Ph.D. degrees from Harvard University. Following postdoctoral work in

chemistry and immunology at the University of California at Berkeley and

Stanford Medical School, she was appointed to the faculty of Harvard

University in the Department of Biology. Dr. Sato is also a Director of

Mitotix, Inc.



Mr. Buchanan joined the Company in April 1994 from Cilag AG, a subsidiary

of Johnson & Johnson based in Zug, Switzerland, where he served as its

Regional Licensing Director since 1987. He previously held the position of

Marketing Director of Biogen, Inc. in Switzerland. Prior to Biogen, Mr.

Buchanan served in Product Management at Merck Sharp & Dohme (UK) Limited.

Mr. Buchanan holds a B.Sc. from the University of St. Andrews, Scotland.



Mr. Auchincloss joined the Company in October 1994 after serving as an

investment banker at Bear, Stearns & Co. Inc. since 1988, most recently as

Associate Director of the Corporate Finance Department. Prior to Bear

Stearns, Mr. Auchincloss was a financial analyst for PaineWebber, Inc. Mr.

Auchincloss holds a B.S. from Babson College and an M.B.A. from The Wharton

School, University of Pennsylvania.





Page 21

SCIENTIFIC ADVISORY BOARD



The Company's Scientific Advisory Board consists of individuals with

demonstrated expertise in various fields who advise the Company concerning

long-term scientific planning, research and development. The Scientific

Advisory Board also evaluates the Company's research programs, recommends

personnel to the Company and advises the Company on technological matters.

The members of the Scientific Advisory Board, which is chaired by Dr. Vicki

L. Sato, are:



<TABLE>

<CAPTION>



<S>                                    <C>

Vicki L. Sato, Ph.D..............     Senior Vice President of Research and Development and

Chief Scientific Officer, Vertex Pharmaceuticals Incorporated.



Steven J. Burakoff, M.D..........     Chair, Department of Pediatric Oncology, Dana-Farber

Cancer Institute; Professor of Pediatrics, Harvard Medical

School.



Eugene H. Cordes, Ph.D...........     Professor of Pharmacy and Chemistry, University of

Michigan at Ann Arbor.



Jerome E. Groopman, M.D..........     Chief, Division of Experimental Medicine,

Beth Israel Deaconess Medical Center;

Recanati Chair of Medicine and

Professor of Medicine, Harvard Medical School.



Stephen C. Harrison, Ph.D........     Professor of Biochemistry and Molecular Biology, Harvard

University; Investigator, Howard Hughes Medical Institute;

Professor of Biological Chemistry and Molecular

Pharmacology and Professor of Pediatrics, Harvard Medical

School.



Jeremy R. Knowles, D. Phil.......     Dean of the Faculty of Arts and Sciences, Harvard

University; Amory Houghten Professor of Chemistry and

Biochemistry, Harvard University.



Robert T. Schooley, M.D..........     Tim Gill Professor of Medicine and

Head of Infectious Disease, University of

Colorado Health Sciences Center.



</TABLE>





Other than Dr. Sato, none of the members of the Scientific Advisory Board

is employed by the Company, and members may have other commitments to or

consulting or advisory contracts with their employers or other entities that

may conflict or compete with their obligations to the Company. Accordingly,

such persons are expected to devote only a small portion of their time to the

Company. In addition to its Scientific Advisory Board, Vertex has established

consulting relationships with a number of scientific and medical experts who

advise the Company on a project-specific basis.





Page 22

RISK FACTORS



The following risk factors should be considered carefully in addition to

the other information contained in this Report.



Early Stage of Development; Technological Uncertainty



The Company was founded in 1989 and has not generated any pharmaceutical

product sales. To achieve profitable operations, the Company, alone or with

others, must successfully develop, clinically test, market and sell its

products. Any products resulting from the Company's product development efforts

are not expected to be available for sale in the near future, if at all.



The development of new pharmaceutical products is highly uncertain and

subject to a number of significant risks. Potential products that appear to be

promising at early stages of development may not reach the market for a number

of reasons. Such reasons include the possibilities that the potential products

are found ineffective or cause harmful side effects during preclinical testing

or clinical trials, fail to receive necessary regulatory approvals, are

difficult or uneconomical to manufacture on a large scale, fail to achieve

market acceptance or are precluded from commercialization by proprietary rights

of third parties.



The products that the Company is pursuing will require extensive

additional development, testing and investment, as well as regulatory

approvals, prior to commercialization. No assurance can be given that the

Company's product development efforts will be successful, that required

regulatory approvals will be obtained or that any products, if introduced,

will be commercially successful. Further, the Company has no sales and

marketing capabilities, and even if the Company's products in development are

approved for marketing, there can be no assurance that the Company will be

able to develop such capabilities. In addition, only a limited number of

drugs developed through structure-based drug design have completed clinical

trials successfully, been approved by the FDA and been marketed. One of the

Company's potential products, amprenavir, is an HIV protease inhibitor which

is currently in Phase III clinical trials. To date, HIV has been shown to

develop resistance to antiviral drugs, including currently marketed HIV

protease inhibitors. There can be no assurance that such disease resistance

or other factors will not limit the efficacy of the Company's HIV protease

inhibitor. The clinical efficacy of the suppression of mechanisms of action

of MDR in chemotherapy in the treatment of cancer is unproven, and,

therefore, there can be no assurance that the Company's MDR compounds in

development will improve the efficacy of chemotherapy. There also can be no

assurance that drug candidates being pursued by the Company will be safe and

efficacious, will receive regulatory approvals or will result in commercially

successful products. If any of the Company's development programs is not

successfully completed, required regulatory approvals are not obtained, or

products for which approvals are obtained are not commercially successful,

the Company's business, financial condition and results of operations would

be materially adversely affected. See "Business -- Product Development and

Research Programs."



Uncertainties Related to Clinical Trials



Before obtaining required regulatory approvals for the commercial sale of

products under development, the Company must demonstrate through preclinical

studies and clinical trials that such products are safe and efficacious for

use in each target indication. The results of preclinical and initial

clinical trials of products under development by the Company are not

necessarily predictive of results that will be obtained from large-scale

clinical testing, and there can be no assurance that clinical trials of

products under development will demonstrate the safety and efficacy of such

products or will result in a marketable product. The safety and efficacy of a

therapeutic product under development by the Company must be supported by

extensive data from clinical trials. A number of companies have suffered

significant setbacks in advanced clinical trials, despite promising results

in earlier trials. The Company currently has four product candidates

undergoing





Page 23

clinical trials, amprenavir, Incel, VX-853 and VX-497. In addition, the

Company has a number of products undergoing preclinical development. The data

observed to date is preliminary, and there can be no assurance that the

results of ongoing and future trials will be consistent with results observed

in earlier clinical trials or will be sufficient for approval. The failure to

demonstrate adequately the safety and efficacy of a therapeutic drug under

development could delay or prevent regulatory approval of the product and

could have a material adverse effect on the Company. In addition, the FDA may

require additional clinical trials, which could result in increased costs and

significant development delays.



The administration alone or in combination with other drugs of any

product developed by the Company may produce undesirable side effects in

humans. The occurrence of such side effects could interrupt, delay or halt

clinical trials of such products and could ultimately prevent their approval

by the FDA or foreign regulatory authorities for any or all targeted

indications. The Company or the FDA may suspend or terminate clinical trials

at any time if it is believed that the trial participants are being exposed

to unacceptable health risks. Even after approval by the FDA and foreign

regulatory authorities, products may later exhibit adverse effects that

discourage widespread use or necessitate their withdrawal from the market.

There can be no assurance that any products under development by the Company

will be safe when administered to patients.



The rate of completion of clinical trials of the Company's products is

dependent upon, among other factors, the rate of patient accrual. Patient

accrual is a function of many factors, including the size of the patient

population, the proximity of patients to clinical sites, the eligibility

criteria for the trial and the availability of clinical trial material.

Delays in planned patient enrollment in clinical trials may result in

increased costs, program delays or both, which could have a material adverse

effect on the Company. There can be no assurance that if clinical trials are

completed the Company will be able to submit an NDA or that any such

application will be reviewed and approved by the FDA in a timely manner, if

at all. See "Business -- Government Regulation."



Dependence on Collaborative Partners



The Company is engaged in research and development collaborations with

Glaxo Wellcome, Kissei, BioChem, HMR, and Lilly, pursuant to which these

parties have agreed to fund portions of the Company's research and

development programs and/or to conduct certain research and development

relating to specified products, in exchange for certain technology, product

and marketing rights relating to those products. Some of the Company's

current corporate partners have certain rights to control the planning and

execution of product development and clinical programs, and there can be no

assurance that such corporate partners' rights to control aspects of such

programs will not impede the Company's ability to conduct such programs in

accordance with the schedules and in the manner currently contemplated by the

Company for such programs.



If any of the Company's corporate collaborators were to terminate its

relationship with Vertex, it could have a material adverse effect on the

Company's ability to fund related and other programs and to develop,

manufacture and market any products that may have resulted from such

collaboration. There can be no assurance that these collaborations will be

completed or successful, or that the collaborative partners will not pursue

alternative means of developing treatments for the diseases targeted by their

collaborative programs with the Company. Glaxo Wellcome has the right to

terminate the research collaboration under its agreement with the Company

without cause at any time upon twelve months' notice and has the right to

terminate the license arrangements under its agreement with the Company

without cause upon twelve months' notice, provided such notice is not given

before the research collaboration has been terminated. Termination by Glaxo

Wellcome of the research collaboration under its agreement with the Company

will relieve Glaxo Wellcome of its obligation to make further research

support payments under the agreement. Termination by Glaxo Wellcome of the

license arrangements under the agreement will relieve it of its obligation to

make further commercialization and development milestone and royalty payments

and will end any





Page 24

license granted to Glaxo Wellcome by Vertex. HMR has the right to terminate

its agreement with the Company without cause upon twelve months' notice at

any time. Termination by HMR will relieve HMR of any further payment

obligations under its agreement with the Company. In addition, for a period

of one year after any such termination, HMR retains the right to select one

or more compounds for development and to license such compound or compounds

from Vertex, provided HMR resumes research funding and commercialization

milestone payments and makes all such payments that would otherwise have been

due but for such termination. Lilly has the right to terminate its agreement

with the Company without cause upon six months' notice at any time after June

1999. Termination will relieve Lilly of any further payment obligations under

its agreement with the Company and will also terminate any license granted to

Lilly by Vertex. BioChem has the right to terminate its agreement with the

Company without cause upon six month's notice. Termination will relieve

BioChem of any further payment obligations under its agreement with the

Company and will terminate any license granted to BioChem thereunder. Kissei

has the right to terminate the p38 Map Kinase agreement without cause upon

six months' notice after June 1998. Termination will relieve Kissei of any

further payment obligations under that agreement with the Company and will

also terminate any license granted to Kissei by Vertex thereunder.



The Company may seek additional collaborative arrangements to develop and

commercialize its products in the future. There can be no assurance that the

Company will be able to establish acceptable collaborative arrangements in

the future or that such collaborative arrangements will be successful. In

addition, there can be no assurance that collaborative partners will not

pursue alternative technologies or develop alternative compounds either on

their own or in collaboration with others, including the Company's

competitors, as a means for developing treatments for the diseases targeted

by their collaborative programs with the Company or that disagreements over

rights to technology, other proprietary information or the course of the

research and development program will not occur. Such events could result in

the delay or cancellation of programs or product introduction even if

regulatory approvals are obtained. See "Business -- Corporate Collaborations."



Rapid Technological Change and Competition



The Company is engaged in pharmaceutical fields characterized by

extensive research efforts, rapid technological progress and intense

competition. There are many public and private companies, including

pharmaceutical companies, chemical companies and biotechnology companies,

engaged in developing products for the human therapeutic applications

targeted by Vertex. Further, the Company believes that interest in the

application of structure-based drug design and related technologies may

continue and may accelerate as the technologies become more widely

understood. The Company is aware of efforts by others to develop products in

each of the areas in which the Company has products in development. For

example, Merck & Co., Inc., Abbott Laboratories, Inc., Hoffmann-La Roche, and

Agouron Pharmaceuticals, Inc. have HIV protease inhibitors already on the

market. The Company is also aware of other companies that have HIV protease

inhibitors in development. There also are a number of competitors that have

products under development for the treatment of MDR in cancer. In order for

the Company to compete successfully in these areas, it must demonstrate

improved safety, efficacy, ease of manufacturing and market acceptance over

its competitors, who have received regulatory approval and are currently

marketing. Furthermore, academic institutions, governmental agencies and

other public and private research organizations are conducting research to

develop technologies and products that may compete with those under

development by the Company. In addition, other technologies are, or may in

the future become, the basis for competing products. There can be no

assurance that the Company's competitors will not succeed in developing

technologies and products that are more effective than any being developed by

the Company or that would render the Company's technology and products

obsolete or noncompetitive. In addition, there can be no assurance that the

Company's products in development will be able to compete effectively with

products which are currently on the market.



Page 25

Many of the Company's competitors have substantially greater financial,

technical and human resources than those of the Company. In addition, many of

the Company's competitors have significantly greater experience than the

Company in conducting preclinical testing and human clinical trials of new

pharmaceutical products, and in obtaining FDA and other regulatory approvals

of products. Accordingly, certain of the Company's competitors may succeed in

obtaining regulatory approval for products more rapidly than the Company. If

the Company obtains regulatory approval and commences commercial sales of its

products, it will also compete with respect to manufacturing efficiency and

sales and marketing capabilities, areas in which it currently has no

experience. See "Business -- Competition."



Manufacturing Uncertainties; Reliance on Third Party Manufacturers



The Company's ability to conduct clinical trials and its ability to

commercialize its potential products will depend, in part, on its ability to

manufacture its products on a large scale, either directly or through third

parties, at a competitive cost and in accordance with FDA and other

regulatory requirements. Furthermore, for all of the Company's drugs in

development, completion of clinical trials and submission of an NDA will be

subject to the establishment of a commercial formulation and manufacturing

process. As manufacturing process development and formulation activities are

ongoing throughout the development process, the Company or its collaborators

may encounter difficulties at any time that could result in delays in

clinical trials, regulatory submissions and commercialization of its

products, or cause negative financial and competitive consequences.

Manufacturing process development and formulation activities for VX-478 by

the Company and Glaxo Wellcome are continuing while clinical trials are

underway. There can be no assurance that such activities will be completed in

a timely and successful manner, if at all. The failure to complete such

activities in a timely and successful manner could have a material adverse

effect on the business, financial condition or results of operations of the

Company.



The Company currently does not have the capacity to manufacture its

potential products and is dependent on third party manufacturers or

collaborative partners for the production of its compounds for preclinical

research and clinical trial purposes. The Company expects to be dependent on

such manufacturers or collaborative partners for some or all commercial

production of any of its compounds that are approved for marketing. In the event

that the Company is unable to obtain contract manufacturing, or obtain such

manufacturing on commercially reasonable terms, it may not be able to conduct or

complete clinical trials or, if FDA approval is obtained, commercialize its

products as planned. The Company has no experience in manufacturing

pharmaceutical or other products or in conducting manufacturing testing programs

required to obtain FDA and other regulatory approvals, and there can be no

assurance that the Company will successfully develop such capabilities.



Some of the Company's current corporate partners have certain manufacturing

rights with respect to the Company's products under development, and there can

be no assurance that such corporate partners' manufacturing rights will not

impede the Company's ability to conduct the development programs and

commercialize any resulting products in accordance with the schedules and in the

manner currently contemplated by the Company. See "Business -- Manufacturing."



Extensive Government Regulation; Uncertainty of Product Clearance and Approval



The FDA and comparable agencies in foreign countries impose substantial

requirements on the introduction of therapeutic pharmaceutical products through

lengthy and detailed laboratory and clinical testing procedures, sampling

activities and other costly and time-consuming procedures. Satisfaction of these

requirements typically takes several years or longer and may vary substantially

based upon the type, complexity and novelty of the pharmaceutical product. The

Company has had





Page 26

only limited experience in conducting preclinical testing and human clinical

trials. In addition, the Company has not received FDA or other regulatory

approvals for any of its product candidates. Data obtained from preclinical

and clinical activities are susceptible to varying interpretations, which

could delay, limit or prevent regulatory approval. In addition, delays or

rejections may be encountered based on changes in, or additions to,

regulatory policies for drug approval during the period of product

development and regulatory review.



The effect of government regulation may be to delay or prevent the

commencement of clinical trials or marketing of Company products, if any are

developed and submitted for approval, for a considerable period of time, to

impose costly procedures upon the Company's activities and to provide a

competitive advantage to larger companies or companies more experienced in

regulatory affairs that compete with the Company. There can be no assurance

that FDA or other regulatory approval for clinical trials or marketing of any

products developed by the Company will be granted on a timely basis or at

all. Delay in obtaining or failure to obtain such approvals would adversely

affect the marketing of the Company's products and the Company's liquidity

and capital resources. Moreover, even if approval is granted, such approval

may entail limitations on the indicated uses for which a compound may be

marketed. Even if such regulatory approval is obtained, a marketed drug or

compound and its manufacturer are subject to continual review, and later

discovery of previously unknown problems with a product or manufacturer may

result in restrictions on such product or manufacturer, including withdrawal

of the product from the market. Failure to comply with applicable regulatory

requirements can, among other things, result in fines, suspensions of

regulatory approvals, product recalls, operating restrictions and criminal

prosecution. Further, additional government regulation may be established

which could prevent or delay regulatory approval of the Company's products.



The Company may apply for orphan drug status for certain indications of

MDR in cancer. Orphan drug status may, under present regulations, entitle the

Company to certain marketing exclusivity and tax benefits. While the

marketing exclusivity of an orphan drug would prevent other sponsors from

obtaining approval of the same compound for the same indication, it would not

prevent chemically distinct drugs from being approved for the same use. There

can be no assurance that the Company will receive FDA orphan drug status for

any of its compounds under development for which the Company seeks that

status. Moreover, there can be no assurance that the scope of protection or

the level of exclusivity that is currently afforded by orphan drug status

will remain in effect in the future. See "Business -- Government Regulation."



The Company's research and development activities involve the controlled

use of hazardous materials, chemicals and various radioactive compounds. The

risk of accidental contamination or injury from these materials cannot be

completely eliminated. In the event of an accident, the Company could be held

liable for any damages or fines that result, and the liability could have a

material adverse effect on the Company's business, financial condition and

results of operations. There can be no assurance that statutes or

regulations, applicable to the Company's business which impose substantial

additional costs or otherwise materially adversely affect the Company's

operations, will not be adopted.



Uncertainty Related to Patents and Proprietary Information



The Company's success will depend, in part, on its ability to obtain

United States and foreign patent protection for its products and their uses,

to preserve its trade secrets and to operate without infringing the

proprietary rights of third parties. Because of the substantial length of

time and expense associated with bringing new products through development

and regulatory approval to the marketplace, the pharmaceutical industry

places considerable importance on obtaining patents and maintaining trade

secret protection for new technologies, products and processes. Patent

protection may not be available, however, for compounds for use in certain

medical indications, without a demonstration of how to use the compounds and

proof in clinical trials that such





Page 27

compounds may be useful for such target indications. As of March 13, 1998,

the Company had a total of 27 United States patents and 75 pending United

States patent applications. As of that date, the Company also had a

non-exclusive, worldwide license under certain Searle patent applications

claiming HIV protease inhibitors. The Company also has been granted an

exclusive license under four United States patents, one of which has been

subject to a reissue application and was recently allowed. The Company also

has filed foreign counterparts to some of its United States patents and

patent applications. There can be no assurance that patents will issue from

any of the Company's pending or future patent applications. There can be no

assurance that any issued, licensed, pending or future patent will not be

infringed by the products of others or provide sufficient protection to

exclude others from the Company's present or future technology or products.

The Company has in the past licensed and may in the future license patent

rights from others. There can be no assurance, however, that such licenses

will provide adequate protection for the Company's products.



Issued United States patents are presumed valid under United States

patent law. No assurance can be given, however, that one or more of the

Company's issued patents will not be declared invalid by a court. Legal

standards relating to the validity of patents and the proper scope of their

claims in the biopharmaceutical field are still evolving, and there is no

consistent law or policy regarding the valid breadth of claims in

biopharmaceutical patents or the effect of prior art on them. Furthermore, no

assurance can be given as to the degree of protection any patents will afford

to the Company's technology or as to the Company's ability to avoid

infringing the claims of the patents held by third parties. Further, there

can be no assurance that a license to such patents would be available on

terms acceptable to the Company, if at all. There also can be no assurance

that any patents issued to or licensed by the Company will not be infringed

by others.



In addition to being a potential party to patent infringement litigation,

the Company could become involved in interference proceedings declared by the

United States Patent and Trademark Office. Defense and prosecution of patent

claims, as well as participation in interference proceedings, can be

expensive and time-consuming, even in those instances in which the outcome is

favorable to the Company. If the outcome of any such litigation or proceeding

were adverse, the Company could be subject to significant liabilities to

third parties, could be required to obtain licenses from third parties or

could be required to cease sales of the affected products, any of which could

have a material adverse effect on the Company.



In addition, there can be no assurance that others will not develop

independently substantially equivalent technology, obtain access to the

Company's know-how or be issued patents which may prevent the sale of the

Company's products or require licensing and the payment of significant fees

or royalties by the Company in order for it to carry on its business.

Furthermore, there can be no assurance that any such license will be

available.



The Company's management and scientific personnel have been recruited

from other pharmaceutical and biotechnology companies and academic

institutions. In many cases these individuals are conducting research in

similar areas with which they were involved prior to joining Vertex. As a

result, the Company, as well as these individuals, could be subject to

allegations of violation of trade secrets and similar claims. See "--

Dependence on Collaborative Partners" and "Business -- Corporate

Collaborations" and "-- Patents and Proprietary Information."



Future Capital Needs; Uncertainty of Additional Funding



The Company expects to incur substantially increased research and

development and related supporting expenses as it designs and develops

existing and future compounds and undertakes clinical trials of potential

drugs resulting from such compounds. The Company also expects to incur

substantial administrative and commercialization expenditures in the future

and substantial



Page 28

expenses related to the filing, prosecution, defense and enforcement of

patent and other intellectual property claims. The Company's future capital

requirements will depend on many factors, including the progress of its

research and development programs, the scope and results of preclinical

studies and clinical trials, the cost, timing and outcome of regulatory

reviews, the costs involved in filing, prosecuting and enforcing patent

claims, competing technological and market developments, the establishment of

additional collaborative arrangements and the cost of manufacturing

facilities and of commercialization activities and arrangements. The Company

anticipates that it will finance these substantial cash needs with its

existing cash reserves, together with interest earned thereon, future

payments under its collaborative agreements with Glaxo Wellcome, HMR, Kissei,

BioChem, and Lilly, facilities and equipment financing and additional

collaborative agreements. To the extent that funds from these sources are not

sufficient to fund the Company's activities, it will be necessary to raise

additional funds through public offerings or private placements of debt or

equity securities or other methods of financing. Any equity financings could

result in dilution to the Company's then existing stockholders. Any debt

financing, if available at all, may be on terms which, among other things,

restrict the Company's ability to pay dividends (although the Company does

not intend to pay dividends for the foreseeable future). If adequate funds

are not available, the Company may be required to curtail significantly or

discontinue one or more of its research, drug discovery or development

programs, including clinical trials, or attempt to obtain funds through

arrangements with collaborative partners or others that may require the

Company to relinquish rights to certain of its technologies or products in

research or development. No assurance can be given that additional financing

will be available on acceptable terms, if at all. See "Management's

Discussion and Analysis of Financial Condition and Results of Operations."



History of Operating Losses and Accumulated Deficit



Vertex has incurred losses since its inception in January 1989. As of

December 31, 1997, the Company's accumulated deficit was approximately $117

million. Losses have resulted principally from costs incurred in research and

development of the Company's compounds in development, including clinical

trials and material manufacturing costs, the Company's other research

programs and from general and administrative costs. These costs have exceeded

the Company's revenues, which to date have been generated primarily from

collaborative arrangements, interest income and research grants. The Company

expects to incur additional significant operating losses in the future and

does not expect to achieve profitability from sales of its products in

development for several years, if ever. The Company expects that losses will

fluctuate from quarter to quarter and that such fluctuations may be

substantial. There can be no assurance that the Company will ever achieve

product revenues or profitable operations. Based on the Internal Revenue Code

of 1986, as amended, and changes in the Company's ownership, utilization of

net operating loss carry forwards and research and development credits for

federal income tax purposes may be subject to annual limitations. See

"Management's Discussion and Analysis of Financial Condition and Results of

Operations."



Uncertainty Related to Pharmaceutical Pricing and Reimbursement



The Company's ability to commercialize its products successfully will

depend in part on the extent to which appropriate reimbursement levels for

the cost of such products and related treatment are obtained from government

authorities, private health insurers and other organizations, such as health

maintenance organizations ("HMOs"). Third party payors and government

authorities are continuing efforts to contain or reduce the cost of health

care. For example, in certain foreign markets, pricing and/or profitability

of prescription pharmaceuticals are subject to government control. There can

be no assurance that similar controls will not be implemented in the United

States. Also, the trend toward managed health care in the United States and

the concurrent growth of organizations such as HMOs, which could control or

significantly influence the purchase of health care services and products,

may result in lower prices for the Company's





Page 29

products. The cost containment measures that health care providers and third

party payors are instituting and any proposed or future health care reform

measures, including any reductions in government reimbursement programs such

as Medicaid and Medicare, could affect the Company's ability to sell its

products and may have a material adverse effect on the Company.



The success of the Company's products in the United States and other

significant markets will depend, in part, upon the extent to which a consumer

will be able to obtain reimbursement for the cost of such products from

government health administration authorities, third-party payors and other

organizations. Significant uncertainty exists as to the reimbursement status

of newly approved therapeutic products. Even if a product is approved for

marketing, there can be no assurance that adequate reimbursement will be

available. The Company is unable to predict what additional legislation or

regulation relating to the health care industry or third-party coverage and

reimbursement may be enacted in the future or what effect the legislation or

regulation would have on the Company's business. Failure to obtain

reimbursement could have a material adverse effect on the Company.



Absence of Sales and Marketing Experience



The Company currently has no experience in marketing or selling

pharmaceutical products. The Company must either develop a marketing and

sales force or enter into arrangements with third parties to market and sell

any of its product candidates which are approved by the FDA. In the

territories where the Company retains marketing and co-promotion rights,

there can be no assurance that the Company will successfully develop its own

sales and marketing experience or that it will be able to enter into

marketing and sales agreements with others on acceptable terms, if at all. If

the Company develops its own marketing and sales capability, it will compete

with other companies that currently have experienced and well-funded

marketing and sales operations. To the extent that the Company has or enters

into co-promotion or other sales and marketing arrangements with other

companies, any revenues to be received by the Company will be dependent on

the efforts of others, and there can be no assurance that such efforts will

be successful.



Dependence on Key Management and Qualified Personnel



The Company is highly dependent upon the efforts of its senior management

and scientific team. The loss of the services of one or more members of the

senior management and scientific team might impede the achievement of the

Company's development objectives. Due to the specialized scientific nature of

the Company's business, the Company is also highly dependent upon its ability

to attract and retain qualified scientific, technical and key management

personnel. There is intense competition for qualified personnel in the areas

of the Company's activities, and there can be no assurance that the Company

will be able to continue to attract and retain qualified personnel necessary

for the development of its existing business and its expansion into areas and

activities requiring additional expertise, such as clinical testing,

government approvals, production and marketing. See "Human Resources."



Product Liability and Availability of Insurance



The Company's business will expose it to potential product liability

risks that are inherent in the testing, manufacturing and marketing of

pharmaceutical and other products developed by the Company. The use of the

Company's products in clinical trials also exposes the Company to the

possibility of product liability claims and possible adverse publicity. These

risks will increase to the extent the Company's products receive regulatory

approval and are commercialized. The Company maintains product liability

insurance for clinical trials. The Company does not currently have any other

product liability insurance. There can be no assurance that the Company will

be able to maintain its existing insurance or be able to obtain or maintain

such additional insurance as it may need in the future on acceptable terms or

that the Company's existing insurance or any such





Page 30

additional insurance will provide adequate coverage against potential

liabilities.



Volatility of Share Price; Option Grants



Market prices for securities of companies such as Vertex are highly

volatile, and the market for the securities of such companies, including the

Common Stock of the Company, has from time to time experienced significant price

and volume fluctuations that are unrelated to the operating performance of these

particular companies. Factors such as announcements of results of clinical

trials, technological innovations or new products by Vertex or its competitors,

government regulatory action, public concern as to the safety of products

developed by the Company or others, patent or proprietary rights developments

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

could have a significant adverse effect on the future market price of the Common

Stock.



As of December 31, 1997, the Company had outstanding options for the

purchase of 4,702,000 shares of Common Stock at exercise prices ranging from

$6.48 per share to $49.13 per share. Options for the purchase of 1,944,000

shares of Common Stock were exercisable as of that date.



Anti-Takeover Provisions



The Company's charter provides for staggered terms for the members of

the Board of Directors. The Company's By-laws grant the Directors a right to

adjourn annual meetings of stockholders, and certain provisions of the By-laws

may be amended only with an 80% stockholder vote. Pursuant to the Company's

Stockholder Rights Plan, each share of Common Stock has an associated preferred

share purchase right (a "Right"). The Rights will not trade separately from the

Common Stock until, and are exercisable only upon, the acquisition or the

potential acquisition through tender offer by a person or group of 15% or more

of the outstanding Common Stock. These charter and By-law provisions and the

Company's Stockholder Rights Plan may discourage certain types of transactions

involving an actual or potential change in control of the Company which might be

beneficial to the Company or its stockholders.



Shares of any class or series of preferred stock may be issued by the

Company in the future without stockholder approval and upon such terms as the

Board of Directors may determine. The rights of the holders of Common Stock will

be subject to, and may be adversely affected by, the rights of the holders of

any class or series of preferred stock that may be issued in the future. The

issuance of preferred stock, while providing desirable flexibility in connection

with possible acquisitions and other corporate purposes, could have the effect

of discouraging a third party from acquiring a majority of the outstanding

Common Stock of the Company. The Company has no present plans to issue any

shares of any class or series of Preferred Stock.



ITEM 2.      PROPERTIES



The Company leases an aggregate of approximately 134,000 square feet of

laboratory and office space in five adjacent facilities at 40 Allston Street,

625 Putnam Avenue, 618 Putnam Avenue, 240 Sidney Street and 130 Waverly Street

in Cambridge, Massachusetts. The lease to the 40 Allston Street, 618 Putnam

Avenue and 240 Sidney Street facilities will expire in December 2003. The lease

to the 625 Putnam Avenue facility will expire in December 2000 with an option to

extend through 2003. The Company occupies approximately 60,000 square feet of

space at 130 Waverly Street under a lease expiring in December 2005. In 1999

that lease will include an additional 40,000 square feet at 130 Waverly Street,

with the lease as to that portion of the facility expiring in 2009. The Company

has the option to extend the lease as to both portions of the facility for

additional terms. In addition, the Company leases two smaller facilities

totaling approximately 27,000 square feet at 345 Vassar Street and 60 Hamilton

Street, also in Cambridge,





Page 31

under leases expiring in 2000 with options to extend through 2002. The Company

believes its facilities are adequate for its current needs. The Company believes

it can obtain additional space on commercially reasonable terms.



ITEM 3.       LEGAL PROCEEDINGS



The Company is not a party to any material legal proceedings.



ITEM 4.       SUBMISSION OF MATTERS TO SECURITY HOLDERS



There were no matters submitted to a vote of security holders during

the fourth quarter of the fiscal year ended December 31, 1997.





PART II





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

STOCKHOLDER MATTERS



The Company's Common Stock trades on the Nasdaq National Market

("Nasdaq") under the symbol "VRTX." The following table sets forth the high, low

and last sale prices of each quarter for the Common Stock as reported by Nasdaq

for the periods indicated.

<TABLE>

<CAPTION>



1996                         High             Low               Close

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





<S>                        <C>               <C>              <C>

First quarter              $29 7/8           $22              $26 1/2

Second quarter              38                26               30 3/8

Third quarter               36 1/4            23 1/4           29 1/2

Fourth quarter              40 1/4            28 7/8           40 1/4



1997

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



First quarter              $52 3/4           $37 3/4          $40 1/2

Second quarter              49 3/4            27 5/8           38 1/4

Third quarter               41 5/8            29 3/8           37 3/4

Fourth quarter              38 3/8            25 1/4           33



</TABLE>



The last sale price of the Common Stock on March 16, 1998, as reported

by Nasdaq, was $35.06 per share. As of March 16, 1998, there were 273 holders of

record of the Common Stock (approximately 7,200 beneficial holders).



The Company has never declared or paid any cash dividends on its Common

Stock and currently expects that future earnings will be retained for use in its

business.



Recent Sale of Unregistered Securities



None



ITEM 6.       SELECTED CONSOLIDATED FINANCIAL DATA



The following selected consolidated financial data for each of the five years in

the period ended December 31, 1997 are derived from the Company's Consolidated

Financial Statements. This data should be read in conjunction with the Company's

audited financial statements and related notes,





Page 32

and "Management's Discussion and Analysis of Financial Condition and Results of

Operations."



<TABLE>

<CAPTION>



Year Ended December 31,

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

1997          1996          1995          1994          1993

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

(in thousands, except per share amounts)



<S>                                                 <C>          <C>           <C>           <C>           <C>



Consolidated Statement of Operations Data:

Revenues:

Collaborative and other research and

development revenues..................    $29,926      $  13,341     $  22,081     $19,571      $ 27,885

Investment income.............................     13,873          5,257         5,453       3,574         1,409

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

Total revenues.........................     43,799         18,598        27,534      23,145        29,294

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

Costs and expenses:

Research and development......................     51,624         35,212        41,512      34,761        23,164

General and administrative....................     11,430          7,929         7,069       5,540         3,520

License Payment...............................                    15,000            --          --            --

Interest .....................................        576            462           481         439           493

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

Total costs and expenses...............     63,630         58,603        49,062      40,740        27,177

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

Net (loss) earnings before taxes................    (19,831)       (40,005)      (21,528)    (17,595)        2,117

Tax provision...................................         --          --            --           --              80

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

Net (loss) profit...............................   $(19,831)     $ (40,005)    $ (21,528)   $(17,595)     $  2,037

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

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

Basic and diluted net (loss) earnings per common

share...........................................   $  (0.82)     $   (2.13)    $   (1.25)   $  (1.11)     $   0.16

Weighted average number of common shares

outstanding:

Basic........................................     24,264         18,798        17,231      15,818        12,384

Diluted......................................     24,264         18,798        17,231      15,818        12,452



</TABLE>



<TABLE>

<CAPTION>



December 31,

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

1997         1996          1995          1994          1993

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



<S>                                                 <C>          <C>           <C>          <C>            <C>

Consolidated Balance Sheet Data:

Cash, cash equivalents and investments              $279,671     $130,359      $86,978       $106,470      $52,103

Total assets.........................                295,604      143,499       98,981        116,175       60,992

Obligations under capital leases and

debt, excluding current portion......                  5,905        5,617        4,912          4,729        4,208

Accumulated deficit..................               (116,775)     (96,944)     (56,939)       (35,411)     (17,816)

Total stockholders' equity...........                276,001      130,826       85,272        105,478       49,520





</TABLE>



ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS



This discussion contains forward-looking statements which are subject to certain

risks and uncertainties that can cause actual results to differ materially from

those described. Factors that may cause such differences include but are not

limited to those described in "Risk Factors." Readers are cautioned not to place

undue reliance on these forward-looking statements which speak only as of the

date hereof. The Company undertakes no obligation to publicly update or revise

these forward-looking statements to reflect events or circumstances after the

date hereof.





Page 33

Since its inception in 1989, the Company has been engaged in the discovery,

development and commercialization of novel, small molecule pharmaceuticals for

the treatment of major diseases for which there are currently limited or no

effective treatments. The Company is a leader in the use of structure-based drug

design, an approach to drug discovery that integrates advanced biology,

biophysics and chemistry. The Company is conducting research and development

programs to develop pharmaceuticals for the treatment of viral diseases,

multidrug resistance in cancer, inflammation, immunosuppression and

neurodegenerative disorders.



To date, the Company has not received any revenues from the sale of

pharmaceutical products. The Company's lead product candidate, amprenavir for

the treatment of HIV infection, is presently undergoing Phase III clinical

trials. If such clinical trials are concluded successfully and a New Drug

Application is approved by the FDA and product sales, if any, commence, the

Company will receive a royalty on sales of amprenavir by its partner Glaxo

Wellcome plc ("Glaxo Wellcome"). However, there can be no assurance that Phase

III clinical trials will be completed in a timely fashion, if at all, that such

trials will be successful, or that any approval will be granted by the FDA. The

Company has incurred operating losses since its inception and expects to incur a

loss in 1998. The Company believes that operating losses may continue for the

next several years even if significant royalties are realized on amprenavir

sales because the Company is planning to make significant investments in

research and development for its other potential products. The Company expects

that losses will fluctuate from quarter to quarter and that such fluctuations

may be substantial.



Results of Operations

Year Ended December 31, 1997 Compared with Year Ended December 31, 1996.



The Company's total revenues increased to $43,799,000 in 1997 from

$18,598,000 in 1996. In 1997, revenues consisted of $27,703,000 under the

Company's collaborative agreements, $13,873,000 in investment income, and

$2,223,000 in government grants and other income. The principle reasons for

the increase in revenue in 1997 were the commencement of new collaborations

with Eli Lilly and Company ("Lilly") on the Company's Hepatitis C program and

with Kissei Pharmaceutical Co., Ltd. ("Kissei") on the Company's p38 MAP

kinase program, in addition to greater investment income from higher levels

of cash and investments. The 1997 collaborations with Lilly and Kissei

included up front payments of $3,000,000 and $4,000,000, respectively, and

collaborative revenue of $2,694,000 and $1,500,000, respectively. Other

collaborative revenue in 1997 included $4,310,000 from Kissei, $8,660,000

from Hoechst Marion Roussel ("HMR"), which included a $3,000,000 milestone

payment in December 1997, $3,275,000 from Glaxo Wellcome, and $264,000 from

others. Product research funding requirements under the HMR agreement ended

on December 31, 1997, although HMR continues to have certain development

funding obligations. In 1996, revenues consisted of $12,013,000 under the

Company's collaborative agreements, $5,257,000 in investment income and

$1,328,000 in government grants and other income. Revenue from collaborative

agreements consisted of $6,289,000 from Glaxo Wellcome, $4,196,000 from HMR,

$692,000 from Kissei, and $836,000 from others.



The Company's total costs and expenses increased to $63,630,000 in 1997

from $58,603,000 in 1996. In 1996, the Company paid $15,000,000 to obtain a

non-exclusive, world-wide license under certain G.D. Searle & Co. ("Searle")

patent applications claiming HIV protease inhibitors. Research and development

expenses increased to $51,624,000 in 1997 from $35,212,000 in 1996 principally

due to the commencement of pre-clinical development activities for drug

candidates in the ICE and IMPDH programs as well as the continued expansion of

the Company's core scientific staff. In addition, general and administrative

expenses increased to $11,430,000 in 1997 from $7,929,000 in 1996. The increase

in general and administrative expense principally reflects the impact of

personnel additions, an increase in legal expenses related to patent activity

and an increase in marketing activities. Interest expense increased to $576,000

in 1997 from $462,000 in 1996 due to higher levels of equipment lease financing

during the year.







Page 34

The Company expects that research and development as well as general and

administrative expenses will continue to increase as the Company starts new

research projects, advances current clinical and preclinical candidates, and

expands its marketing and business development activities.



The Company recorded a net loss of $19,831,000 or $0.82 per share in

1997 compared to a net loss of $40,005,000 or $2.13 per share in 1996. The lower

loss per share reflects not only a lower aggregate loss but also an increase in

average common shares outstanding from 18,798,000 in 1996 to 24,264,000 in 1997

due to two Common Stock offerings in August 1996 and March 1997.



Year Ended December 31, 1996 Compared with Year Ended December 31, 1995.



The Company's total revenues decreased to $18,598,000 in 1996 from

$27,534,000 in 1995. In 1996, revenues consisted of $12,013,000 under the

Company's collaborative agreements, $5,257,000 in investment income and

$1,328,000 in government grants and other income. Revenue from collaborative

agreements consisted of $6,289,000 from Glaxo Wellcome, $4,196,000 from HMR,

$692,000 from Kissei, and $836,000 from others. The research funding

requirements of the Kissei HIV collaborative agreement concluded in 1995,

although Kissei continues to have certain development funding obligations. In

1995, revenues consisted of $21,587,000 under the Company's collaborative

agreements, $5,453,000 in investment income and $494,000 in government grants

and other income. Revenue from collaborative agreements consisted of $10,053,000

from Glaxo Wellcome, $5,370,000 from Kissei, $3,749,000 from HMR and $2,415,000

from others.



The Company's total costs and expenses increased to $58,603,000 in 1996

from $49,062,000 in 1995. The increase in total costs and expenses resulted

principally from the Company's payment of $15,000,000 to obtain a non-exclusive,

world-wide license under certain Searle patent applications claiming HIV

protease inhibitors. Research and development expenses declined to $35,212,000

in 1996 from $41,512,000 in 1995. Although the Company expanded scientific

staffing and facilities in 1996, overall research and development expense

decreased due to significant costs incurred in 1995 for manufacturing bulk drug

substance for use in clinical trials. In addition, general and administrative

expenses increased to $7,929,000 in 1996 from $7,069,000 in 1995. The increase

in general and administrative expense principally reflects the impact of

personnel additions, the Company's facilities expansion, and an increase in

marketing costs principally for the Company's subsidiary Altus Biologics Inc.

Interest expense decreased to $462,000 in 1996 from $481,000 in 1995 on higher

levels of equipment lease financing due to lower blended rates of interest

charged.



The Company recorded a net loss of $40,005,000 or $2.13 per share in

1996 compared to a net loss of $21,528,000 or $1.25 per share in 1995.



Liquidity and Capital Resources



The Company's operations have been funded principally through strategic

collaborative agreements, public offerings and private placements of the

Company's equity securities, equipment lease financing, government grants and

investment income. The Company expects to incur increased research and

development and related supporting expenses and, consequently, continued losses

on a quarterly and annual basis as it continues to develop existing and future

compounds and to conduct clinical trials of potential drugs. The Company also

expects to incur substantial administrative and commercialization expenditures

in the future and additional expenses related to the filing, prosecution,

defense and enforcement of patent and other intellectual property rights.



The Company expects to finance these substantial cash needs with its

existing cash and investments of approximately $280 million at December 31,

1997, together with investment









Page 35

income earned thereon, future payments under its existing collaborative

agreements, and facilities and equipment financing. To the extent that funds

from these sources are not sufficient to fund the Company's activities, it will

be necessary to raise additional funds through public offerings or private

placements of securities or other methods of financing. There can be no

assurance that such financing will be available on acceptable terms, if at all.

The Company believes that its existing cash and investments should be sufficient

to meet its anticipated requirements for at least the next two years.



In September 1997, the Company and Kissei entered into a collaborative

agreement to design inhibitors of p38 MAP kinase and to develop them as novel,

orally active drugs for the treatment of inflammatory and neurological diseases.

Under the terms of the agreement, Kissei will pay the Company up to $22 million

composed of a $4 million upfront payment paid in September 1997, $11 million of

product research funding over three years and $7 million of development and

commercialization milestone payments. The Company and Kissei will collaborate to

identify and evaluate compounds that target p38 MAP kinase. Kissei will have the

right to develop and commercialize these compounds in its licensed territories.

Kissei has exclusive rights to p38 MAP kinase compounds in Japan and certain

Southeast Asian countries and semi-exclusive rights in China, Taiwan and South

Korea. The Company retains exclusive marketing rights in the United States,

Canada, Europe, and the rest of the world. In addition, the Company will have

the right to supply bulk drug material to Kissei for sale in its territory, and

will receive royalties and drug supply payments on any product sales. Kissei has

the right to terminate the agreement without cause upon six months' notice after

June 1998.



In June 1997, the Company and Lilly entered into a collaborative

agreement to design inhibitors of the hepatitis C protease enzyme, and to

develop them as novel drugs to treat hepatitis C infection. Under the terms of

the agreement, Lilly will pay the Company up to $51 million composed of a $3

million upfront payment paid in June 1997, $33 million of product research

funding over six years and $15 million of development and commercialization

milestone payments. The Company and Lilly will jointly manage the research,

development, manufacturing and marketing of drug candidates emerging from the

collaboration. The Company will have primary responsibility for drug design,

process development and pre-commercial drug substance manufacturing, and Lilly

will have primary responsibility for formulation, preclinical and clinical

development and global marketing. The Company has the option to supply 100

percent of Lilly's commercial drug substance supply needs. The Company will

receive royalties on future product sales, if any. If the Company exercises its

commercial supply option, the Company will receive drug supply payments in

addition to royalties on future product sales, if any. Lilly has the right to

terminate the agreement without cause upon six months' notice after June 1999.

In connection with this collaboration, Lilly purchased 263,922 shares of the

Company's common stock for $10 million.



In March 1997, the Company completed a public offering of 3,450,000

shares of its Common Stock at $45.50 per share raising net proceeds after

commissions and expenses of $149 million.



At December 31, 1997, the Company leased approximately 134,000 square

feet of space under leases with terms ranging from 3 to 8 years. In addition,

the Company's liability for capitalized equipment lease obligations and other

equipment financing totaled $8.4 million at December 31, 1997.



The Company adopted requirements relating to basic and diluted earnings per

share in accordance with Statement of Financial Accounting Standards No. 128,

"Earnings Per Share" as of the fourth quarter of 1997. Basic earnings per share

is based upon the weighted average number of common shares outstanding during

the period. Diluted earnings per share is based upon the weighted





Page 36

average number of common shares outstanding during the period plus additional

weighted average common equivalent shares outstanding during the period when

the effect is not anti-dilutive. Common equivalent shares result from the

assumed exercise of outstanding stock options, the proceeds of which are then

assumed to have been used to repurchase outstanding stock options using the

treasury stock method.



The Financial Accounting Standards Board ("FASB") has issued Statement of

Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive

Income". This Statement requires that total comprehensive income be reported and

that changes be shown in a financial statement displayed with the same

prominence as other financial statements. SFAS 130 is effective for fiscal years

beginning after December 15, 1997. Reclassification of financial statements for

earlier periods is required for comparative purposes. The Company does not

believe that this will have a material impact on net loss.



The Company is currently assessing the potential impact of the year 2000 on the

processing of date-sensitive information by the Company's computerized

information systems and products purchased by the Company. The Company believes

that its internal information systems are either year 2000 compliant or will be

so prior to the year 2000 without incurring material costs. There can be no

assurance, however, that the Company will not experience unexpected costs and

delays in achieving year 2000 compliance for its internal information systems

and current products, which could result in a material adverse effect on the

Company's future results of operations.



ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The information required by Item 8 is contained on pages F - 1 through F - 17 of

this report.



ITEM 9.       CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS AND

FINANCIAL DISCLOSURE



Not applicable.



PART III



ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The information regarding directors required by this Item is included

in the definitive Proxy Statement for the Company's 1998 Annual Meeting of

Stockholders, to be filed with the Commission on or about April 14, 1998 (the

"1998 Proxy Statement"), under "Election of Directors" and is incorporated

herein by reference. The information regarding executive officers required by

this Item is included in Part I of this Annual Report on Form 10-K.



ITEM 11.        EXECUTIVE COMPENSATION



The information required by this Item is included in the 1998 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 1998 Proxy Statement, which shall not be deemed

incorporated herein).



ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The information required by this Item is included in the 1998 Proxy

Statement under "Security Ownership of Certain Beneficial Owners and Management"

and is incorporated herein by reference.





Page 37

ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Not applicable.



PART IV



ITEM 14.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



(a)(1)   Financial  Statements.  The Financial Statements required to be filed

by Item 8 of this Annual Report on Form 10-K, and filed herewith, are

as follows:

<TABLE>

<CAPTION>



Page Number in

this Form 10-K

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



<S>                                                                                       <C>

Report of Independent Accountants............................................    F-2



Consolidated Balance Sheets as of December 31, 1997 and 1996.................    F-3



Consolidated Statements of Operations for the years ended

December 31, 1997, 1996 and 1995 ............................................    F-4



Consolidated Statements of Stockholders' Equity for the

years ended December 31, 1997, 1996 and 1995 ................................    F-5



Consolidated Statements of Cash Flows for the years ended

December 31, 1997, 1996 and  1995 ...........................................    F-6



Notes to Consolidated Financial Statements...................................    F-7



</TABLE>



(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.



<TABLE>

<CAPTION>

Exhibit                      Exhibit

Number                       Description

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

<S>      <C>



3.1      Restated Articles of Organization filed with the Commonwealth of

Massachusetts on July 31, 1991 (filed herewith).



3.2      Articles of Amendment filed with the Commonwealth of Massachusetts on

June 4, 1997 (filed herewith).



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 herewith).



3.4      By-laws of the Company (filed as Exhibit 3.2 to the Company's

Registration Statement on Form S-1 (Registration No. 33-43874) and

incorporated herein by reference).





Page 38

4.1      Specimen stock certificate (filed as Exhibit 4.1 to the Company's

Registration Statement on Form S-1 (Registration No. 33-40966) or

amendments thereto and incorporated herein by reference).



4.2      Stockholder Rights Plan (filed as Exhibit 4.2 to the Company's

Registration Statement on Form S-1 (Registration No. 33-40966) or

amendments thereto and incorporated herein by reference).



4.3      First Amendment to Rights Agreement dated as of February 21, 1997

(filed as Exhibit 4.3 to the Company's 1996 Annual Report on Form 10-K

(File No. 0-19319) and incorporated herein by reference).



10.1     1991 Stock Option Plan, as amended and restated as of May 13, 1993

(filed as Exhibit 28.1 to the Company's Registration Statement on Form

S-8 (No. 33-65742) and incorporated herein by reference).*



10.2     1994 Stock and Option Plan (filed as Exhibit 10.2 to the Company's 1994

Annual Report on Form 10-K (File No. 0-19319) and incorporated herein

by reference).*



10.3     1996 Stock and Option Plan (filed as Exhibit 10.3 to the Company's 1996

Annual Report on Form 10-K (File No. 0-19319) and incorporated herein

by reference).*



10.4     Amendment to 1996 Stock and Option Plan adopted December 12, 1997

(filed herewith).*



10.5     Non-Competition and Stock Repurchase Agreement between the Company and

Joshua Boger, dated April 20, 1989 (filed as Exhibit 10.2 to the

Company's Registration Statement on Form S-1 (Registration No.

33-40966) or amendments thereto and incorporated herein by reference).*



10.6     Form of Employee Stock Purchase Agreement (filed as Exhibit 10.3 to the

Company's Registration Statement on Form S-1 (Registration No.

33-40966) or amendments thereto and incorporated herein by reference).*



10.7     Form of Employee Non-Disclosure and Inventions Agreement (filed as

Exhibit 10.4 to the Company's Registration Statement on Form S-1

(Registration No. 33-40966) or amendments thereto and incorporated

herein by reference).



10.8     Form of Executive Employment Agreement executed by Richard H. Aldrich,

Joshua S. Boger, and Vicki L. Sato (filed as Exhibit 10.6 to the

Company's 1994 Annual Report on Form 10-K (File No. 0-19319) and

incorporated herein by reference).*



10.9     Form of Amendment to Employment Agreement executed by Richard H.

Aldrich, Joshua S. Boger and Vicki L. Sato (filed as Exhibit 10.1 to

the Company's Quarterly Report on Form 10-Q for the quarter ended June

30, 1995 (File No. 0-19319) and incorporated herein by reference).



10.10    Series C Convertible Preferred Stock Purchase Agreement between the

Company and the party named therein, dated September 21, 1990 (filed as

Exhibit 10.8 to the Company's Registration Statement on Form S-1

(Registration No. 33-40966) or amendments thereto and incorporated

herein by reference).



10.11    Stock Purchase Agreement dated November 10, 1994 between the Company

and







Page 39

Biotech Target S.A. (filed as Exhibit 10.12 to the Company's 1994

Annual Report on Form 10-K (File No. 0-19319) and incorporated herein

by reference).



10.12    Lease dated October 1, 1992 between C. Vincent Vappi and the Company

relating to the premises at 40 Allston Street, 618 Putnam Street, 228

Sidney Street, and 240 Sidney Street (filed as Exhibit 10.14 to the

Company's Annual Report on Form 10-K for the year ended December 31,

1992 (File No. 0-19319) and incorporated herein by reference).



10.13    First Amendment as of March 1, 1995 to the lease between C. Vincent

Vappi and the Company (filed as Exhibit 10.2 to the Company's Quarterly

Report on Form 10-Q for the quarter ended June 30, 1995 (File No.

0-19319) and incorporated herein by reference).



10.14    Second Amendment as of February 12, 1997 to Lease between C. Vincent

Vappi and the Company (filed as Exhibit 10.14 to the Company's Annual

Report on Form 10-K for the year ended December 31, 1996 (File No.

0-19319) and incorporated herein by reference ).



10.15    Lease dated March 1, 1993, between Fort Washington Realty Trust and the

Company, relating to the premises at 625 Putnam Avenue, Cambridge, MA

(filed as Exhibit 10.10 to the Company's Annual Report on Form 10-K for

the year ended December 31, 1993 (File No. 0-19319) and incorporated

herein by reference).



10.16    First Amendment, dated 1 December 1996, to Lease between Fort

Washington Realty Trust and the Company dated 1 March 1993 (filed as

Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year

ended December 31, 1996 (File No. 0-19319) and incorporated herein by

reference).



10.17    Second Amendment, dated 1 February 1998, to Lease between Fort

Washington Realty Trust and the Company dated 1 March 1993 (filed

herewith).



10.18    Lease dated March 3, 1995, between Fort Washington Realty Trust and the

Company, relating to the premises at 130 Waverly Street, Cambridge, MA

(filed as Exhibit 10.15 to the Company's 1994 Annual Report on Form

10-K (File No. 0-19319) and incorporated herein by reference).



10.19    First Amendment to Lease dated March 3, 1995 between Fort Washington

Realty Trust and the Company (filed as Exhibit 10.15 to the Company's

1995 Annual Report on Form 10-K (File No. 0-19319) and incorporated

herein by reference).



10.20    Second Amendment to Lease and Option Agreement dated June 12, 1997

between Fort Washington Realty Trust and the Company (filed herewith).



10.21    Research and Development Agreement dated April 13, 1993 between the

Company and Kissei Pharmaceutical Co., Ltd. (with certain confidential

information deleted) (filed as Exhibit 10.1 to the Company's Quarterly

Report on Form 10-Q for the quarter ended March 31, 1993 (File No.

0-19319) and incorporated herein by reference).



10.22    Research, Development, and License Agreement dated September 8, 1993

between the Company and Roussel Uclaf (with certain confidential

information deleted) (filed as Exhibit 10.1 to the Company's Quarterly

Report on Form 10-Q for the quarter ended September 30, 1993 (File No.

0-19319) and incorporated herein by reference).





Page 40

10.23    Research Agreement and License Agreement, both dated December 16, 1993,

between the Company and Burroughs Wellcome Co. (with certain

confidential information deleted) (filed as Exhibit 10.16 to the

Company's Annual Report on Form 10-K for the year ended December 31,

1993 (File No. 0-19319) and incorporated herein by reference).



10.24    License Agreement and Supply Agreement, both dated May 9, 1996, between

the Company and BioChem Pharma (International) Inc. (with certain

confidential information deleted) (filed as Exhibit 10.1 to the

Company's Quarterly Report on 10-Q for the quarter ended March 31, 1996

(File No. 0-19319) and incorporated herein by reference).



10.25    Research and Development Agreement between the Company and Eli Lilly

and Company effective June 11, 1997 (filed with certain confidential

information deleted as Exhibit 10.1 to the Company's Quarterly Report

on Form 10-Q for the quarter ended June 30, 1997, and incorporated

herein by reference).



10.26    Research and Development Agreement between the Company and Kissei

Pharmaceutical Co. Ltd. effective September 10, 1997 (filed, with

certain confidential information deleted, as Exhibit 10.1 to the

Company's Quarterly Report on Form 10-Q for the quarter ended September

30, 1997, and incorporated herein by reference).



21       Subsidiaries of the Company (filed herewith).



23       Consent of Independent Accountants (filed herewith).



27       Financial Data Schedule (submitted as an exhibit only in the electronic

format of this Annual Report on Form 10-K submitted to the Securities

and Exchange Commission).



</TABLE>



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



*        Compensatory plan or agreement applicable to management and employees.





(b)      Reports on Form 8-K. No reports on Form 8-K were filed by the Company

during the quarter ended December 31, 1997.





Page 41

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities

Exchange Act of 1934, the registrant has duly caused this report to be signed on

its behalf by the undersigned, thereunto duly authorized.



VERTEX PHARMACEUTICALS INCORPORATED







March 26, 1998            By:     /s/ Joshua S. Boger

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

Joshua S. Boger

President and Chief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934,

this report has been signed below by the following persons on behalf of the

registrant and in the capacities and on the dates indicated.



<TABLE>

<CAPTION>





Name                                        Title                           Date

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





<S>                                  <C>                                 <C>

/s/ Joshua S. Boger                  Director, Chairman, President       March 26, 1998

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

Joshua S. Boger                      and Chief Executive Officer

(Principal Executive Officer)





/s/ Thomas G. Auchincloss, Jr.       Vice President of Finance           March 26, 1998

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

Thomas G. Auchincloss, Jr.           and Treasurer

(Principal Financial Officer)



/s/ Hans D. van Houte                Controller                          March 26, 1998

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

Hans D. van Houte





/s/ Barry M. Bloom                   Director                            March 26, 1998

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

Barry M. Bloom





/s/ Donald R. Conklin                Director                            March 26, 1998

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

Donald R. Conklin





/s/ Roger W. Brimblecombe            Director                            March 26, 1998

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

Roger W. Brimblecombe





/s/ William W. Helman IV             Director                            March 26, 1998

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

William W. Helman IV





/s/ Charles A. Sanders               Director                            March 26, 1998

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

Charles A. Sanders







Page 42

/s/ Elaine S. Ullian                 Director                            March 16, 1998

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

Elaine S. Ullian





</TABLE>





Page 43

VERTEX PHARMACEUTICALS INCORPORATED



Index to Consolidated Financial Statements

<TABLE>

<CAPTION>



Page Number

-----------

<S>                                                                   <C>

Report of Independent Accountants                                     F-2



Consolidated Balance Sheets as of December 31, 1997 and 1996          F-3



Consolidated Statements of Operations for the years ended

December 31, 1997, 1996 and 1995                                      F-4



Consolidated Statements of Stockholders' Equity for the

years ended December 31, 1997, 1996 and 1995                          F-5



Consolidated Statements of Cash Flows for the years ended

December 31, 1997, 1996 and  1995                                     F-6



Notes to Consolidated Financial Statements                            F-7



</TABLE>





Page F-1

Report of Independent Accountants





To the Board of Directors and Shareholders of

Vertex Pharmaceuticals Incorporated:



We have audited the accompanying consolidated balance sheets of Vertex

Pharmaceuticals Incorporated as of December 31, 1997 and 1996,

and the related consolidated statements of operations, stockholders' equity and

cash flows for each of the three years in the period ended December 31, 1997.

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on these financial statements based

on our audits.



We conducted our audits in accordance with generally accepted auditing

standards. Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of material

misstatement. An audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the financial statements. An audit also includes

assessing the accounting principles used and significant estimates made by

management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in

all material respects, the consolidated financial position of Vertex

Pharmaceuticals Incorporated as of December 31, 1997 and 1996,

and the consolidated results of its operations and its cash flows for each

of the three years in the period ended December 31, 1997, in conformity with

generally accepted accounting principles.









Coopers & Lybrand L.L.P.



Boston, Massachusetts

February 23, 1998





Page F-2

Consolidated Balance Sheets

Vertex Pharmaceuticals Incorporated

<TABLE>

<CAPTION>





December 31,

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

(Dollars in thousands)                                                                1997         1996

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

<S>                                                                                <C>          <C>

Assets

Current assets:

Cash and cash equivalents                                                   $71,454      $34,851

Investments                                                                 208,217       95,508

Prepaid expenses and other current assets                                     1,952        1,791

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

Total current assets                                                    281,623      132,150

Restricted cash                                                                   2,316        2,316

Property and equipment, net                                                      11,095        8,663

Other assets                                                                        570          370

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

Total assets                                                           $295,604     $143,499

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



Liabilities and Stockholders' Equity

Current liabilities:

Obligations under capital lease and debt                                     $2,510       $2,910

Accounts payable                                                              4,247        1,391

Accrued expenses                                                              6,385        2,755

Deferred revenue                                                                556           --

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

Total current liabilities                                                13,698        7,056

Obligations under capital lease and debt,

excluding current portion                                                     5,905        5,617

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

Total liabilities                                                        19,603       12,673

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

Commitments (Note G)

Stockholders' equity:

Preferred stock, $.01 par value; 1,000,000 shares  authorized;

none issued

Common stock, $.01 par value; 100,000,000 shares authorized; 25,215,617

and 21,097,117 shares issued and outstanding

in 1997 and 1996, respectively                                              252          211

Additional paid-in capital                                                  392,372      227,510

Equity adjustments                                                              152           49

Accumulated deficit                                                        (116,775)     (96,944)

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

Total stockholders' equity                                              276,001      130,826

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

Total liabilities and stockholders' equity                             $295,604     $143,499

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

</TABLE>







The accompanying notes are an integral part of the consolidated financial

statements.





Page F-3

Consolidated Statements of Operations

Vertex Pharmaceuticals Incorporated





<TABLE>

<CAPTION>



Year Ended December 31,

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

(In thousands, except per share data)                       1997           1996            1995

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

<S>                                                      <C>            <C>            <C>



Revenues:

Collaborative and other research and development      $29,926        $13,341        $ 22,081

Investment income                                      13,873          5,257           5,453

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

Total revenues                                     43,799         18,598          27,534

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

Costs and expenses:

Research and development                               51,624         35,212          41,512

General and administrative                             11,430          7,929           7,069

License payment                                          --           15,000             --

Interest                                                  576            462             481

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

Total costs and expenses                           63,630         58,603          49,062

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

Net loss                                                $(19,831)      $(40,005)      $(21,528)

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

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

Basic and diluted loss per common share                   $(0.82)        $(2.13)        $(1.25)

Basic and diluted weighted average number of

common shares outstanding                             24,264         18,798        17,231

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

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

</TABLE>





The accompanying notes are an integral part of the consolidated financial

statements.





Page F-4

Consolidated Statements of Stockholders' Equity

Vertex Pharmaceuticals Incorporated



<TABLE>

<CAPTION>



Common Stock                     Additional                     Total

-------------------      Paid-In       Equity      Accumulated  Stockholders'

(In thousands)                                  Shares       Amount      Capital    Adjustments     Deficit         Equity

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

<S>                                                 <C>          <C>        <C>        <C>           <C>           <C>

Balance, December 31, 1994                          17,189       $172       $140,920   $  (203)      $(35,411)     $105,478

Issuances of common stock:

Benefit plans                                        93          1          1,118                                  1,119

Warrant exercise                                     17

Net change in unrealized holding gains/

losses on investments                                                                    203                         203

Net loss                                                                                              (21,528)      (21,528)

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

Balance, December 31, 1995                          17,299        173        142,038         --       (56,939)       85,272

Issuances of common stock:

Public offering of common stock                   3,450         34         77,481                                 77,515

Private placement of common stock                   152          2          4,998                                  5,000

Benefit plans                                       196          2          2,993                                  2,995

Net change in unrealized holding gains/

losses on investments                                                                     35                          35

Translation adjustments                                                                      14                          14

Net loss                                                                                              (40,005)      (40,005)

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

Balance, December 31, 1996                          21,097        211        227,510         49       (96,944)      130,826

Issuances of common stock:

Public offering of common stock                   3,450         34        148,776                                148,810

Private placement of common stock                   264          3          9,997                                 10,000

Benefit plans                                       405          4          6,089                                  6,093

Net change in unrealized holding gains/

losses on investments                                                                    115                         115

Translation adjustments                                                                     (12)                        (12)

Net loss                                                                                              (19,831)      (19,831)

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

Balance, December 31, 1997                          25,216       $252       $392,372    $   152     $(116,775)     $276,001

===========================================================================================================================





</TABLE>



The accompanying notes are an integral part of the consolidated financial

statements.





Page F-5

Consolidated Statements of Cash Flows

Vertex Pharmaceuticals Incorporated



<TABLE>

<CAPTION>





Year Ended December 31,

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

(In thousands)                                                          1997           1996            1995

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

<S>                                                                 <C>           <C>             <C>

Cash flows from operating activities:

Net loss                                                         $(19,831)      $(40,005)     $(21,528)

Adjustment to reconcile net loss to net

cash used by operating activities:

Depreciation and amortization                                   3,588          3,160         3,710

Changes in assets and liabilities:

Prepaid expenses and other current assets                        (161)          (832)         (549)

Accounts payable                                                2,856         (1,631)        1,624

Accrued expenses                                                3,630           (748)        1,231

Deferred revenue                                                  556           (197)         (438)

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

Net cash provided (used) by operating activities            (9,362)       (40,253)      (15,950)

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

Cash flows from investing activities:

Purchases of investments                                         (303,599)       (73,035)       (61,862)

Sales and maturities of investments                               191,005         36,150         38,304

Deposit to collateralize letter of credit                             --             --          (2,316)

Expenditures for property and equipment                            (6,020)        (3,983)        (3,078)

Other assets                                                         (200)           518            (65)

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

Net cash provided (used) by investing activities          (118,814)       (40,350)       (29,017)

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

Cash flows from financing activities:

Repayment of capital lease obligations and debt                    (3,104)        (2,187)         (1,790)

Proceeds from equipment sale/leaseback                              1,179          3,727           2,385

Proceeds from debt                                                  1,813             --              --

Proceeds from public offerings of common stock                    148,810         77,515              --

Proceeds from private placement of common stock                    10,000          5,000              --

Proceeds from other issuances of capital stock                      6,093          2,995           1,119

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

Net cash provided (used) by financing activities           164,791         87,050           1,714

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

Effect of exchange rates on cash                                      (12)            14              --

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

Increase (decrease) in cash and cash equivalents                      36,603          6,461         (43,253)

Cash and cash equivalents at beginning of year                        34,851         28,390          71,643

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

Cash and cash equivalents at end of year                             $71,454        $34,851         $28,390

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

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

</TABLE>





The accompanying notes are an integral part of the consolidated financial

statements.





Page F-6

Vertex Pharmaceuticals Incorporated

Notes to Financial Statements



A. The Company



Vertex Pharmaceuticals Incorporated ("Vertex" or the "Company") uses a range

of drug discovery technologies to identify, design and develop novel, orally

deliverable compounds that have the potential to treat major human diseases.

To date, the Company has not received any revenues from the sale of

pharmaceutical products. The Company's revenues during 1997, 1996 and 1995

principally resulted from research support payments from corporate partners.

The Company expects to incur significant operating losses over the next

several years as a result of expenditures for its research and development

programs.



The consolidated financial statements include the accounts of the Company and

its subsidiaries: Altus Biologics Inc., Vertex Securities Corp. and Vertex

Pharmaceuticals (Europe) Limited. All material intercompany transactions are

eliminated. The Company sold its majority interest in Versal Technologies,

Inc. at net book value during 1997 and currently accounts for its remaining 19%

ownership under the cost method.



The Company is subject to risks common to companies in the biotechnology

industry including, but not limited to, development by the Company or its

competitors of new technological innovations, dependence on key personnel,

protection of proprietary technology, technological and clinical trial

uncertainty, dependence on collaborative partners, share price volatility, the

need to obtain additional funding, reliance on pharmaceutical pricing and

reimbursement, uncertainties regarding manufacturing and sales and marketing,

product liability and compliance with government regulations.



B.  Accounting Policies



Use of Estimates



The preparation of financial statements in conformity with generally accepted

accounting principles requires management to make certain estimates and

assumptions that affect the reported amounts of assets and liabilities and

disclosure of contingent assets and liabilities at the date of the financial

statements and the reported amounts of revenues and expenses during the reported

period. Actual results could differ from those estimates.



Cash and Cash Equivalents



Cash equivalents, which are money market funds and debt securities, are valued

at cost plus accrued interest. The Company considers all highly liquid

investments with original maturities of three months or less at the date of

purchase to be cash equivalents. Changes in cash and cash equivalents may be

affected by shifts in investment portfolio maturities as well as by actual cash

receipts and disbursements. Financial instruments which potentially subject the

Company to concentration of credit risk consist principally of money market

funds and marketable securities. The Company places these investments in highly

rated financial institutions, and, by policy, limits the amounts of credit

exposure to any one financial institution. These amounts at times may exceed

federally insured limits. The Company has not experienced any losses in such

accounts and does not believe it is exposed to any significant credit risk on

these funds.





Investments



Investments consist of marketable securities which are classified as

available-for-sale. Investments





Page F-7

are stated at fair value with unrealized gains and losses included as a

component of stockholders' equity until realized. The fair value of these

securities is based on quoted market prices. Realized gains and losses are

determined on the specific identification method and are included in investment

income.



Property and Equipment



Property and equipment are recorded at cost. Depreciation and amortization are

provided using the straight-line method over the lesser of the lease terms or

the estimated useful lives of the related assets, generally four or five years

for equipment and furniture and three years for purchased software. When assets

are retired or otherwise disposed of, the assets and related allowances for

depreciation and amortization are eliminated from the accounts and any resulting

gain or loss is reflected in income.



Revenue Recognition



Revenue under research and development arrangements is recognized as earned

under the terms of the respective agreements. License payments are recorded when

received and the license agreements are signed. Product research funding is

recorded as revenue, generally on a quarterly basis, as research effort is

incurred. Deferred revenue arises from payments received which have not yet been

earned under research and development arrangements. The Company recognizes

milestone payments when the milestones are achieved.



Research and Development



All research and development costs are expensed as incurred.



Income Taxes



The Company provides for federal and state taxes on pretax income at applicable

rates in accordance with Statement of Financial Accounting Standards No. 109,

"Accounting for Income Taxes." Potential future income tax benefits resulting

from net operating losses and unused research and experimentation tax credits

are available to offset future income.



Basic and  Diluted Loss per Common Share



The Company adopted requirements relating to basic and diluted earnings per

share in accordance with Statement of Financial Accounting Standards No. 128,

"Earnings Per Share" as of the fourth quarter of 1997. Basic earnings per

share is based upon the weighted average number of common shares outstanding

during the period. Diluted earnings per share is based upon the weighted

average number of common shares outstanding during the period plus additional

weighted average common equivalent shares outstanding during the period when

the effect is not anti-dilutive. Common equivalent shares result from the

assumed exercise of outstanding stock options, the proceeds of which are then

assumed to have been used to repurchase outstanding stock options using the

treasury stock method. Common equivalent shares have not been included in the

per-share calculations as the effect would be anti-dilutive. Total potential

common equivalent shares consist of 4,702,000 stock options outstanding which

has a weighted average excise price of $22.03 as of December 31, 1997.



Recently Issued Accounting Pronouncements



The FASB has recently issued Statement of Financial Accounting Standards No. 130

("SFAS 130"), "Reporting Comprehensive Income". This Statement requires that

total comprehensive income be reported and that changes be shown in a financial

statement displayed with the same prominence as other financial statements. SFAS

130 is effective for fiscal years beginning after December 15, 1997.

Reclassification of financial statements for earlier periods is required for





Page F-8

comparative purposes. The Company does not believe that this will have a

material impact on net loss.



C.  Investments



Investments consist of the following at December 31 (in thousands):



<TABLE>

<CAPTION>



1997                               1996

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

Cost          Fair Value           Cost          Fair Value

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



<S>                                  <C>               <C>             <C>               <C>

Cash and cash equivalents

Cash and money market funds    $43,072           $43,072         $21,253           $21,253

Corporate debt securities       28,382            28,382          13,598            13,598

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

Total cash and cash equivalents      $71,454           $71,454         $34,851           $34,851

======            ======          ======            ======

Investments

US Government securities

Due within 1 year            $4,719            $4,713          $7,555            $7,568

Due within 1 to 5 years      40,167            40,200              --                --

Corporate debt securities

Due within 1 year            71,136            71,165          64,140            64,155

Due within 1 to 5 years      69,771            69,851          23,780            23,785

Due over 5 years             22,276            22,288              --                --

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



Total Investments                   $208,069          $208,217         $95,475           $95,508

=======           =======          ======            ======

</TABLE>



Gross unrealized holding gains and losses at December 31, 1997 were $184,000

and $36,000, respectively, and at December 31, 1996 were $89,000 and $56,000,

respectively. The effect of gross realized gains and losses on the financial

statements for the years 1997, 1996 and 1995 was immaterial. Maturities

stated are final maturities, the effective maturities for certain securities

may be shorter in duration.



D.  Restricted Cash



On March 16, 1995, the Company signed a ten-year operating lease for additional

facilities occupied in 1996. In accordance with the lease agreement, the Company

was required to deposit approximately $2,316,000 with its bank to collateralize

a conditional, stand-by letter of credit in the name of the landlord. The letter

of credit is redeemable only if the Company defaults on the lease under specific

criteria. These funds are restricted from the Company's use during the lease

period, although the Company is entitled to all interest earned on the funds.



E.  Property and Equipment



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



<TABLE>

<CAPTION>





1997              1996

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

<S>                                                 <C>               <C>

Leasehold improvements                               $6,983            $4,719

Furniture and equipment                               4,511             2,260

Purchased software                                    2,823             2,418

Equipment under capital lease                        20,403            19,303

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

34,720            28,700

Less accumulated depreciation and amortization       23,625            20,037

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

$11,095            $8,663

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

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



</TABLE>



The net book value of equipment under capital lease was $5,811,000 and

$7,366,000 at December



Page F-9

31, 1997 and 1996, respectively.





F.  Accrued Expenses



Accrued expenses consist of the following at December 31 (in thousands):

<TABLE>

<CAPTION>



1997                1996

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



<S>                                               <C>                 <C>

Professional fees                                 $1,192              $1,196

Development contract costs                         2,663                 317

Payroll and benefits                               1,145                 567

Other                                              1,385                 675

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

$6,385              $2,755

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

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



</TABLE>



G.  Commitments, Capital Leases and  Debt Obligations



Capital Leases and  Debt Obligations



At December 31, 1997, long-term capital lease and debt obligations were

due as follows (in thousands):



<TABLE>

<CAPTION>



Year ended December 31,     Capital leases      Debt       Total

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

<S>                         <C>                 <C>        <C>

1998                            $2,623          $276       $2,899

1999                             2,034           300        2,334

2000                             1,434           327        1,761

2001                             1,294           355        1,649

2002                                88           531          619

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



Total                         7,473         1,789        9,262

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



Less amount representing

interest payments                 847          --            847

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

Present value of minimum

lease and debt payments          6,626         1,789        8,415

Less current portion             2,234           276        2,510

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

$4,392        $1,513      $5,905

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

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



</TABLE>





During 1997 and 1996, the Company financed under capital lease arrangements an

aggregate of $1,179,000 and $3,727,000, respectively, of asset cost under its

master lease agreements. At the end of the lease term, the Company has the right

to either return the equipment to the lessor or purchase the equipment for fair

market value at that time. These agreements have a term of four or five years,

and require that the Company maintain a certain level of cash and investments.



Also during 1997, the Company financed under a master debt agreement, asset cost

of $676,000 and $1,137,000 with interest rates of 8.59% and 8.38%, respectively.

The Company has certain equipment designated as collateral under these

agreements. These agreements have a term of five years, and require that the

Company maintain a certain level of cash and investments.



Interest paid under capital leases and debt was $576,000 and $462,000 in 1997

and 1996, respectively. At December 31, 1997, the Company had availability under

its 1997 master debt agreement to finance up to an additional $2,187,000 of

equipment.



Commitments



The Company leases its facilities and certain equipment under operating leases.

The Company's leases have terms through the year 2005. Noncancelable future

minimum payments are as follows: $3,742,000 in 1998, $3,499,000 in 1999, and

$3,326,000 in 2000, $2,786,000 in 2001 and $2,450,000 in 2002, and $6,515,000

thereafter. Rental expense was $3,363,000, $3,063,000







Page F-10

and $1,281,000 in 1997, 1996 and 1995, respectively.



The Company has certain license and maintenance contracts that contain future,

committed payments for the support and upgrade of specific software programs

currently used in research. For the years 1998, 1999, 2000 and 2001 these

amounts are $210,000, $314,000, $343,000 and $349,000, respectively.





H.  Income Taxes



The Company's federal statutory income tax rate for 1997, 1996 and 1995 was 34%.

The Company recorded no income tax benefit for 1997, 1996 and 1995 and recorded

a full valuation allowance against net operating losses due to uncertainties

related to realizability of these tax assets.



Deferred tax liabilities and assets are determined based on the difference

between financial statement and tax bases using enacted tax rates in effect for

the year in which the differences are expected to reverse. The components of the

deferred taxes at December 31, were as follows (in thousands):



<TABLE>

<CAPTION>



1997              1996

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

<S>                                  <C>                <C>

Net operating loss                         $38,434            $30,567

Tax credits carryforward                     5,829              4,089

Property, plant and equipment                1,211              1,253

Other                                          468                526

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



Gross deferred tax asset                    45,942             36,435

Valuation allowance                        (45,942)           (36,435)

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



Net deferred tax balance                   $  --              $  --

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

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



</TABLE>





For federal income tax purposes, as of December 31, 1997, the Company has

regular tax net operating loss carryforwards of approximately $113,040,000 and

$5,829,000 of tax credits, which may be used to offset future income. These net

operating loss carryforwards expire beginning in 2005, and the tax credit

carryforwards begin to expire in 2004.



The amount of tax credits and net operating loss carryforwards that the Company

may utilize in any one year is limited in accordance with Internal Revenue Code

Section 382. This limitation arises whenever a cumulative change in ownership in

excess of 50% occurs. A change of ownership has occurred which will limit the

amount of net operating loss and tax credits available prior to the change.

There may also be further changes of ownership subsequent to 1997 which may also

limit the amount of net operating loss and tax credit utilization in a

subsequent year.



I.  Common and Preferred Stock



Common Stock



In June 1997, Eli Lilly and Company ("Lilly") purchased 263,922 shares of the

Company's common stock for $10,000,000. In March 1997, the Company completed a

public offering of 3,450,000 shares of its common stock at a price of $45.50 per

share with net proceeds to the Company of approximately $148,810,000. In August

1996, the Company completed a public





Page F-11

offering of 3,450,000 shares of its Common Stock at a price of $24 per share

with net proceeds to the Company of approximately $77,515,000. In June 1996,

Glaxo Wellcome purchased 151,792 shares of the Company's Common Stock for

approximately $5,000,000.



During 1997, the Company increased the authorized number of shares of Common

Stock by 50,000,000 shares to 100,000,000 shares. At December 31, 1997,

6,690,318 shares of the Company's Common Stock were reserved for exercise of

Common Stock options granted or to be granted under its 1991 Stock Option Plan,

1994 Stock and Option Plan, and 1996 Stock and Option Plan, 47,999 shares were

reserved for exercise of certain other options granted in 1991, 114,219 shares

of Common Stock were reserved for issuance under the Company's 401(k) Plan, and

113,898 shares of Common Stock were reserved for issuance under the Company's

Employee Stock Purchase Plan.



Stock Option Plans



The Company applies APB Opinion No. 25 and related interpretations in

accounting for its stock-based compensation plans. However, pro forma

disclosures as if the Company adopted the cost recognition requirements under

FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123")

in 1997, 1996 and 1995 are presented below. Compensation expense of $66,000

was recognized during 1997. No compensation expense was recognized for these

plans in 1996 and 1995.



The Company has reserved 4,000,000 shares under its 1991 Stock Option Plan (the

"1991 Plan") and 1994 Stock and Option Plan (the "1994 Plan"). The Company's

1996 Stock and Option Plan (the "1996 Plan"; together with the 1991 Plan and the

1994 Plan, the "Plans") reserved an additional 3,250,000 shares, of which

1,250,000 shares were reserved during 1997. Under the 1994 Plan and the 1996

Plan, stock rights, which are either (i) incentive stock options, (ii)

non-qualified stock options ("NQSOs"), or (iii) award shares of Common Stock or

the opportunity to make a direct purchase of shares of Common Stock ("Stock

Awards"), may be granted to employees (including officers and directors who are

employees), consultants, advisors and non-employee directors (NQSOs and stock

awards only), either as options intended to qualify as "incentive stock options"

under the Internal Revenue Code or as non-qualified stock options. Incentive

stock options granted under the Plans may not be granted at a price less than

the fair market value of the Common Stock on the date of grant. Non-qualified

stock options may be granted at an exercise price established by the

Compensation Committee of the Board of Directors, which may be less than, equal

to or greater than the fair value of the Common Stock on the date of grant.

Vesting periods, generally four or five years, are determined by the

Compensation Committee. Incentive stock options granted under the Plans must

expire not more than ten years from the date of grant.



Page F-12

Stock option activity for the years ended December 31, 1997, 1996 and 1995 is as

follows (shares in thousands):



<TABLE>

<CAPTION>



1997                       1996                       1995

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

Weighted                   Weighted                    Weighted

Average                    Average                     Average

Exercise                   Exercise                    Exercise

Shares       Price        Shares        Price       Shares          Price

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

<S>                         <C>        <C>          <C>           <C>          <C>           <C>

Outstanding at

beginning of year           4,033        $18.98        3,196       $14.63        2,523          $13.13

Granted                       1,257        $29.78        1,056       $31.11          829          $18.77

Exercised                     (375)        $13.97        (139)       $12.96         (42)          $11.48

Canceled                      (213)        $23.99         (80)       $16.11        (114)          $12.51

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



Outstanding at end

of year                     4,702        $22.03        4,033       $18.98        3,196          $14.63

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



Options exercisable

at year-end                 1,944        $16.50        1,625       $13.92        1,152          $12.99

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



Weighted average fair

value of options granted

during the year            $13.94                     $15.04                     $9.05

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

</TABLE>



The fair value of each option granted during 1997, 1996 and 1995 was estimated

on the date of grant using the Black-Scholes option-pricing model with the

following weighted average assumptions: (1) expected life of 5.18 years for the

1997 grants and 5.41 years for the 1996 and 1995 grants (2) expected volatility

of 44.7% for the 1997 grants and 42% for the 1996 and 1995 grants (3) risk-free

interest rate of 5.5% for the 1997 grants and 6.30% for the 1996 and 1995 grants

and (4) no dividend yield.



The following table summarizes information about stock options outstanding and

exercisable at December 31, 1997 (shares in thousands):



<TABLE>

<CAPTION>



Options Outstanding                  Options Exercisable

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

Weighted         Weighted                   Weighted

Average          Average                    Average

Range of              Number             Remaining        Exercise      Number       Exercise

exercise prices       Outstanding      Contractual Life       Price     Exercisable      Price

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

<S>                     <C>             <C>                  <C>         <C>             <C>

$ 6.48 - $13.63             1,069              5.89            $11.58           824       $11.41

$13.75 - $19.00             1,416              6.89            $17.09           858       $16.57

$19.50 - $27.34               976              9.84            $27.07            22       $24.12

$27.38 - $33.06               945              8.99            $30.99           179       $31.01

$33.19 - $49.13               296              9.41            $38.12            61       $38.80

---                                             -----



$ 6.48 - $49.13             4,702              7.85            $22.03        1,944        $16.50

-----                                            -----

</TABLE>



Page F-13

Employee Stock Purchase Plan



Under the Company's Employee Stock Purchase Plan, substantially all permanent

employees may, through payroll withholdings, purchase shares of the Company's

Common Stock at a price of 85% of the lesser of fair market value at the

beginning or end of each six-month withholding period. During 1997, 26,213

shares were issued at an average price of $28.00 per share. During 1996, 32,296

shares of Common Stock at an average price of $19.21 per share were issued to

employees under the plan. During 1995, 42,445 shares of Common Stock at a price

of $11.26 per share were issued to employees under the plan. Had the Company

adopted SFAS 123, the weighted average fair value of each purchase right granted

during 1997, 1996 and 1995 would have been $9.16, $5.76 and $3.25, respectively.

The fair value was estimated at the beginning of the withholding period using

the Black-Scholes option-pricing model with the following weighted average

assumptions: (1) expected life of one half year for all years (2) expected

volatility of 51%, 41% and 35% for 1997, 1996 and 1995 respectively (3)

risk-free interest rate of 5.43% for 1997, 5.50% for 1996 and 1995 and (4) no

dividend yield.



Pro forma Disclosures



Had compensation cost for the Company's 1997, 1996 and 1995 grants for

stock-based compensation plans been determined consistent with SFAS 123, the

Company's net loss and net loss per share for 1997, 1996 and 1995 would

approximate the pro forma amounts below (in thousands except per share data):





<TABLE>

<CAPTION>





1997      1996       1995

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

<S>                                <C>          <C>         <C>        <C>

Net loss                           As reported  $(19,831)   $(40,005)  $(21,528)

Pro forma    $(25,154)   $(42,025)  $(21,750)



Basic and diluted loss per share   As reported   $ (0.82)     $(2.13)    $(1.25)

Pro forma     $ (1.04)     $(2.24)    $(1.26)

</TABLE>



The effects of applying SFAS 123 in this pro forma disclosure are not indicative

of future amounts since SFAS 123 does not apply to awards prior to 1995 and

additional awards in future years are anticipated.



Warrants



During 1995, all remaining warrants, originally issued in connection with

equipment lease financing transactions, were exercised in non-cash, net exercise

transactions to acquire an aggregate of 16,801 shares of Common Stock.



Rights



Each holder of a share of outstanding Common Stock also holds one share purchase

right (a "Right") for each share of Common Stock. Each Right entitles the holder

to purchase from the Company one one-hundredth of a share of Series A junior

participating preferred stock, $.01 par value (the "Junior Preferred Shares"),

of the Company at a price of $270 per one one-hundredth of a Junior Preferred

Share (the "Purchase Price"). The Rights are not exercisable until the earlier

of acquisition by a person or group of 15% or more of the outstanding Common

Stock (an "Acquiring Person") or the announcement of an intention to make or

commencement of a tender offer or exchange offer the consummation of which would

result in the beneficial ownership by a person or group of 15% or more of the

outstanding Common Stock. In the event that any person or group becomes an

Acquiring Person, each holder of a Right other than the Acquiring Person will

thereafter have the right to receive upon exercise that number of shares of

Common Stock



Page F-14

having a market value of two times the Purchase Price and, in the event that the

Company is acquired in a business combination transaction or 50% or more of its

assets are sold, each holder of a Right will thereafter have the right to

receive upon exercise that number of shares of Common Stock of the acquiring

company which at the time of the transaction will have a market value of two

times the Purchase Price. Under certain specified circumstances, the Board of

Directors of the Company may cause the Rights (other than Rights owned by such

person or group) to be exchanged, in whole or in part, for Common Stock or

Junior Preferred Shares, at an exchange rate of one share of Common Stock per

Right or one one-hundredth of a Junior Preferred Share per Right. At any time

prior to the acquisition by a person or group of beneficial ownership of 15% or

more of the outstanding Common Stock, the Board of Directors of the Company may

redeem the Rights in whole at a price of $.01 per Right.



J.  Collaborative Research and Development Agreements



The Company and Kissei Pharmaceutical Co., Ltd. ("Kissei") are collaborating to

design inhibitors of p38 MAP kinase and to develop them as novel, orally active

drugs for the treatment of inflammatory and neurological diseases. Under the

terms of the agreement, Kissei will pay the Company up to $22 million composed

of a $4 million license payment, $11 million of product research funding over

three years and $7 million of development and commercialization milestone

payments. From the inception of the agreement in September 1997 through December

31, 1997, $5,500,000, including a $4,000,000 license payment in September 1997,

has been recognized as revenue. The Company and Kissei will collaborate to

identify and evaluate compounds that target p38 MAP kinase. Kissei will have the

right to develop and commercialize these compounds in its licensed territories.

Kissei has exclusive rights to p38 MAP kinase compounds in Japan and certain

Southeast Asian countries and semi-exclusive rights in China, Taiwan and South

Korea. The Company retains exclusive marketing rights in the United States,

Canada, Europe, and the rest of the world. In addition, the Company will have

the right to supply bulk drug material to Kissei for sale in its territory, and

will receive royalties and drug supply payments on future product sales, if any.

Kissei has the right to terminate the agreement without cause upon six months'

notice after June 1998. Revenues earned from Kissei under the MAP kinase

agreement were $5,500,000 in 1997.



The Company and Lilly are collaborating on designing inhibitors of the hepatitis

C protease enzyme and to develop them as novel drugs to treat hepatitis C

infection. Under the terms of the agreement, Lilly will pay the Company up to

$51 million composed of a $3 million up-front payment paid in June 1997, $33

million of product research funding over six years and $15 million of

development and commercialization milestone payments. From the inception of the

agreement in June 1997 through December 31, 1997, $5,694,000, including a

$3,000,000 up-front payment, has been recognized as revenue. The Company and

Lilly will jointly manage the research, development, manufacturing and marketing

of drug candidates emerging from the collaboration. The Company will have

primary responsibility for drug design, process development and pre-commercial

drug substance manufacturing, and Lilly will have primary responsibility for

formulation, preclinical and clinical development and global marketing. The

Company has the option to supply 100 percent of Lilly's commercial drug

substance supply needs. The Company will receive royalties on future product

sales, if any. If the Company exercises its commercial supply option, the

Company will receive drug supply payments in addition to royalties on future

product sales, if any. Lilly has the right to terminate the agreement without

cause upon six months' notice after June 1999. In connection with this

collaboration, Lilly purchased 263,922 shares of the Company's common stock for

$10,000,000. Revenues earned from Lilly were $5,694,000 in 1997.



The Company and BioChem Therapeutic Inc. ("BioChem") are collaborating on the

development and commercialization in Canada of Incel(TM) (VX-710), Vertex's lead

multidrug resistance reversal agent. Under the development agreement, BioChem is

obligated to pay Vertex up to $4,000,000



Page F-15

comprised of an initial licensing fee of $500,000 and development and

commercialization milestones payments. From the inception of the agreement in

May 1996 through the year ended December 31, 1997, $750,000 has been

recognized as license and research revenue. BioChem will fund development of

Incel in Canada, including Phase II clinical trials in two different cancer

indications currently underway. Vertex will supply BioChem's clinical and

commercial drug supply needs. In 1996, the Company also received additional

revenues related to the sale of clinical trial material to BioChem. BioChem

will pay Vertex a portion of its net sales, which will cover Vertex's cost of

supplying material and will provide a profit to Vertex. BioChem has the right

to terminate the agreement without cause upon six months' notice. Termination

will relieve BioChem of any further payment obligations and will end any

license granted to BioChem by Vertex under the agreement. Revenues earned

from BioChem were $251,000 and $577,000 in 1997 and 1996, respectively.



In October 1995, the Company and Alpha Therapeutic Corporation ("Alpha") entered

into an agreement to collaborate on the development and commercialization of

VX-366 for the treatment of sickle cell disease and beta thalassemia. From the

inception of the agreement in October 1995 through August, 1997, $500,000 has

been recognized as revenue. During 1997 and 1996 the Company received additional

revenues related to the sale of clinical trial material to Alpha. Revenues

earned from Alpha were $13,000, $225,000 and $500,000 in 1997, 1996 and 1995,

respectively. In August 1997, the Company and Alpha terminated this agreement.



The Company and Glaxo Wellcome plc ("Glaxo Wellcome") are collaborating on the

development of compounds in connection with the Company's HIV Program. Under the

collaborative agreement, Glaxo Wellcome agreed to pay the Company up to

$42,000,000 comprised of a $15,000,000 initial license payment paid in 1993,

$14,000,000 of product research funding over five years and $13,000,000 of

development and commercialization milestone payments. From the inception of the

agreement in December 1993 through the year ended December 31, 1997, $28,000,000

has been recognized as revenue. Glaxo Wellcome is also obligated to pay to the

Company additional development and commercialization milestone payments for

subsequent drug candidates. In addition, Glaxo Wellcome agreed to bear all costs

of development in its territory of drug candidates under the collaboration. In

1996 and 1995, the Company received additional revenue related to reimbursements

for clinical development. Under the agreement, Glaxo Wellcome is also required

to pay Vertex a royalty on sales. Glaxo Wellcome has the right to terminate the

research collaboration without cause upon twelve months' notice given at any

time and has the right to terminate the license arrangements without cause upon

twelve months' notice given at any time provided such notice is not given before

the research collaboration has been terminated. Termination by Glaxo Wellcome of

the research collaboration will relieve Glaxo Wellcome of its obligation to make

further research support payments under the agreement. Termination by Glaxo

Wellcome of the license arrangements under the agreement will relieve it of its

obligation to make further commercialization and development milestone and

royalty payments and will end any license granted to Glaxo Wellcome by Vertex

thereunder. Revenues earned from Glaxo Wellcome were $3,275,000, $6,289,000 and

$10,053,000 for 1997, 1996 and 1995. In June 1996, the Company and Glaxo

Wellcome obtained a worldwide, non-exclusive license under certain G.D. Searle &

Co. ("Searle") patent applications in the area of HIV protease inhibition.

Vertex paid $15,000,000 and Glaxo Wellcome paid $10,000,000 to Searle for the

license. The Company also agreed to pay Searle a royalty on sales of amprenavir

(VX-478), the Company's lead HIV compound.



The Company and Hoechst Marion Roussel ("HMR") are collaborating on the

development of the interleukin-1 beta converting enzyme inhibitors, VX-740 as an

anti-inflammatory agent. Under the collaborative agreement, HMR is obligated to

pay the Company up to $30,500,000, comprised of $18,500,000 of product research

funding over five years and $12,000,000 of development and commercialization

milestone payments. From the inception of the agreement in September 1993

through the year ended December 31, 1997, $21,500,000, including a $3,000,000

milestone



Page F-16

payment in December 1997 on the commencement of formal preclinical

development, has been recognized as revenue. The Company received additional

revenue related to reimbursements for clinical development in 1997. HMR has the

right to terminate the agreement without cause upon twelve months' notice at any

time. For a period of one year after any such termination, HMR retains the right

to select one or more compounds for development and to license such compound or

compounds from Vertex, provided HMR resumes all research funding and

commercialization milestone payments and makes all such payments that would

otherwise have been due but for such termination. Otherwise, in the case of such

termination, all rights to compounds developed under the research and license

agreements will revert to Vertex. The Company also received additional revenue

related to reimbursement for patent filings in HMR's territories. Revenues

earned under the HMR agreement were $8,660,000, $4,196,000 and $3,749,000 in

1997, 1996 and 1995, respectively. Product research funding under this agreement

ended on December 31, 1997.



The Company and Kissei are collaborating on the research and development of

compounds in connection with the Company's HIV Program. Under the

collaborative agreement, Kissei is obligated to pay the Company up to

$20,000,000, comprised of $9,800,000 of product research funding through

1995, $7,000,000 of development milestone and territory option payments and a

$3,200,000 equity investment. From the inception of the agreement in April

1993 through the year ended December 31, 1997, $14,642,000 has been

recognized as revenue. The Company received additional revenue related to

reimbursements for clinical development in 1997, 1996 and 1995. During 1997,

the Company also received $4,000,000 related to reimbursements of certain

development costs. Under the collaboration, Kissei is also required to pay

Vertex a royalty on sales. Revenues earned under this Kissei agreement were

$4,310,000, $692,000 and $5,370,000 in 1997, 1996 and 1995, respectively.

Product research funding under this agreement ended at December 31, 1995.



The Company and Chugai Pharmaceutical Co., Ltd. ("Chugai") entered into a

collaborative agreement for research and development of immunosuppressive

compounds in conjunction with Vertex's Autoimmune Diseases Program. Research

funding under this agreement ended in the first half of 1995 and the research

collaboration ended in October of 1995. Revenues earned under the Chugai

Agreement were $34,000 and $1,915,000 in 1996 and 1995, respectively.





K.  Employee Benefits



The Company has a 401(k) retirement plan in which substantially all of its

permanent employees are eligible to participate. Participants may contribute up

to 15% of their annual compensation to the plan, subject to statutory

limitations. For 1997, the Company declared discretionary matching contributions

to the plan in the aggregate amount of $482,000, payable in the form of shares

of the Company's Common Stock. Of these shares, 6,458 were issued as of December

31, 1997 with the remaining 7,113 issuable in 1998. For 1996, the Company

declared discretionary matching contributions to the plan in the aggregate

amount of $426,000, payable in the form of shares of the Company's Common Stock.

Of these shares, 7,013 were issued as of December 31, 1996 with the remaining

5,278 issued in 1997. For 1995, the Company declared discretionary matching

contributions to the plan in the aggregate amount of $354,000, payable in the

form of 17,469 shares of the Company's Common Stock, issued in 1996.



L. Related Party



A sibling of the Company's President is a partner in the law firm representing

the Company to which $394,000, $472,000 and $255,000 in legal fees were paid in

1997, 1996 and 1995, respectively.



Page F-17

Exhibits Filed With This Annual Report on Form 10-K:



<TABLE>

<CAPTION>



Exhibit                                                    Exhibit

Number                                                   Description

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

<S>         <C>

3.1      Restated Articles of Organization filed with the Commonwealth of Massachusetts on July 31, 1991.



3.2      Articles of Amendment Filed with the Commonwealth of Massachusetts on June 4, 1997.



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.



10.4      Amendment to 1996 Stock and Option Plan adopted December 12, 1997.*



10.17     Second Amendment, dated 1 February 1998, to Lease between Fort Washington Realty Trust and the Company

dated March 1 1993.



10.20     Second Amendment to Lease and Option Agreement dated June 12, 1997 between Fort Washington Realty Trust

and the Company.



21        Subsidiaries of the Company.



23        Consent of Independent Accountants.



27        Financial Data Schedule (submitted as an exhibit only in the electronic format of this format of this

Annual Report on Form 10-K submitted to the Securities and Exchange Commission.

</TABLE>



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



*    Compensatory plan or agreement applicable to management and employees.