SEC Filing | Vertex Pharmaceuticals

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

FORM 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 000-19319

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

MASSACHUSETTS (State or other jurisdiction of incorporation or organization)		04-3039129 (I.R.S. Employer Identification No.)
130 WAVERLY STREET CAMBRIDGE, MASSACHUSETTS (Address of principal executive offices)		02139-4242 (zip code)

(617) 444-6100
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES ý NO o

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Common Stock, par value $0.01 per share		80,309,990
Class		Outstanding at November 4, 2004

Vertex Pharmaceuticals Incorporated
Form 10-Q
For the Quarter Ended September 30, 2004

Table of Contents

Part I. Financial Information
	Item 1.	Condensed Consolidated Financial Statements (unaudited)	1
		Condensed Consolidated Balance Sheets—September 30, 2004 and December 31, 2003	1
		Condensed Consolidated Statements of Operations—Three and Nine Months Ended September 30, 2004 and 2003	2
		Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2004 and 2003	3
		Notes to Condensed Consolidated Financial Statements	4
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4.	Controls and Procedures	25
Part II. Other Information
	Item 1.	Legal Proceedings	26
	Item 5.	Other Information	26
	Item 6.	Exhibits	26
Signatures			28
Exhibit Index			29

Part I. Financial Information

Item 1. Condensed Consolidated Financial Statements

Vertex Pharmaceuticals Incorporated

Condensed Consolidated Balance Sheets

			September 30, 2004			December 31, 2003
			(Unaudited) (In thousands, except share and per share data)
Assets:
Current assets:
	Cash and cash equivalents		$	37,037		$	98,159
	Marketable securities, available for sale			381,390			485,005
	Accounts receivable			8,480			7,324
	Prepaid expenses and other current assets			5,925			3,318

		Total current assets		432,832			593,806
Restricted cash				48,416			26,061
Property and equipment, net				68,179			80,083
Investments				18,863			18,863
Other assets				6,072			5,598

		Total assets	$	574,362		$	724,411

Liabilities and Stockholders' Equity:
Current liabilities:
	Accounts payable		$	9,504		$	12,306
	Accrued expenses and other current liabilities			27,624			26,374
	Accrued restructuring and other expense			50,123			69,526
	Deferred revenue			41,018			7,746
	Accrued interest			1,489			4,455
	Other obligations			4,688			4,660
	Collaborator development loan			—			14,000

		Total current liabilities		134,446			139,067

Deferred revenue (excluding current portion)				27,674			51,771
Collaborator development loan (excluding current portion)				19,997			18,460
Other obligations (excluding current portion)				2,925			7,268
Convertible subordinated notes (due September 2007)				82,552			315,000
Convertible senior subordinated notes (due February 2011)				232,448			—

		Total liabilities		500,042			531,566

Commitments and contingencies
Stockholders' equity:
	Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued and outstanding at September 30, 2004 and December 31, 2003, respectively			—			—
	Common stock, $0.01 par value; 200,000,000 shares authorized; 80,119,002 and 78,025,002 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively			801			780
	Additional paid-in capital			828,210			810,407
	Deferred compensation, net			(10,755	)		(1,112	)
	Accumulated other comprehensive income (loss)			(538	)		2,690
	Accumulated deficit			(743,398	)		(619,920	)

	Total stockholders' equity			74,320			192,845

	Total liabilities and stockholders' equity		$	574,362		$	724,411

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

Vertex Pharmaceuticals Incorporated

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Revenues:
	Royalties	$	4,403		$	2,003		$	10,996		$	5,944
	Collaborative and other research and development revenues		22,425			13,820			51,886			41,820

Total revenues			26,828			15,823			62,882			47,764

Costs and expenses:
	Royalty payments		1,466			797			3,640			2,117
	Research and development		48,790			49,627			137,915			151,336
	Sales, general and administrative		10,600			9,436			30,482			28,608
	Restructuring and other expense		1,561			42,394			5,216			90,424

Total costs and expenses			62,417			102,254			177,253			272,485

	Loss from operations		(35,589	)		(86,431	)		(114,371	)		(224,721	)
	Interest income		2,445			3,164			7,981			12,353
	Interest expense		(4,634	)		(4,334	)		(13,642	)		(13,039	)
	Charge for retirement of a portion of 2007 convertible subordinated notes		(993	)		—			(3,446	)		—

Loss from continuing operations			(38,771	)		(87,601	)		(123,478	)		(225,407	)
Income from discontinued operations
	Gain on sale of assets		—			451			—			69,683
	Income (loss) from discontinued operations		—			729			—			(14	)

Total income from discontinued operations			—			1,180			—			69,669

Net loss		$	(38,771	)	$	(86,421	)	$	(123,478	)	$	(155,738	)

Basic and diluted net loss per common share from continuing operations		$	(0.49	)	$	(1.14	)	$	(1.57	)	$	(2.94	)
Discontinued operations			—		$	0.02			—		$	0.91

Basic and diluted net loss per common share		$	(0.49	)	$	(1.12	)	$	(1.57	)	$	(2.03	)

Basic and diluted weighted average number of common shares outstanding			78,742			77,067			78,403			76,750

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

Vertex Pharmaceuticals Incorporated

Condensed Consolidated Statements of Cash Flows

		Nine Months Ended September 30,
		2004			2003
		(Unaudited) (In thousands)
Cash flows from operating activities
	Net loss	$	(123,478	)		(155,738	)
	Net income from discontinued operations		—			(69,669	)

	Loss from continuing operations		(123,478	)		(225,407	)
	Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization		21,617			17,314
	Non-cash based compensation expense		3,000			2,570
	Non-cash restructuring and other expense		—			4,395
	Loss on disposal of property and equipment		—			116
	Realized gains on marketable securities		(379	)		(1,113	)
	Charge for retirement of a portion of 2007 convertible subordinated notes		3,446			—
	Loss on sale of assets		—			917
	Changes in operating assets and liabilities:
	Accounts receivable		(1,156	)		2,258
	Prepaid expenses		(2,607	)		493
	Accounts payable		(2,802	)		(6,965	)
	Accrued expenses and other current liabilities		(2,965	)		(5,994	)
	Accrued restructuring and other expense		(19,403	)		75,152
	Accrued interest		(2,966	)		(3,937	)
	Deferred revenue		9,175			4,048

	Net cash used in operating activities from continuing operations		(118,518	)		(136,153	)
	Net cash provided by operating activities from discontinued operations		—			(2,769	)

	Net cash used in operating activities		(118,518	)		(138,922	)
Cash flows from investing activities:
	Purchase of marketable securities		(132,010	)		(424,340	)
	Sales and maturities of marketable securities		232,812			430,653
	Expenditures for property and equipment		(8,691	)		(13,230	)
	Proceeds from sale of assets		—			(844	)
	Restricted cash		(22,355	)		30
	Investments and other assets		(219	)		2,103

	Net cash provided by (used in) investing activities from continuing operations		69,537			(5,628	)
	Net cash provided by investing activities from discontinued operations		—			92,929

	Net cash provided by investing activities		69,537			87,301
Cash flows from financing activities
	Issuances of common stock under our employee benefit programs		5,181			8,949
	Proceeds from collaborator development loan		—			13,460
	Principal payments on notes payable, capital lease and other obligations		(100	)		(1,621	)
	Issuance costs related to 2011 convertible senior subordinated notes		(4,722	)		—
	Repayments of collaborator development loan		(12,463	)		—

	Net cash provided by (used in) financing activities from continuing operations		(12,104	)		20,788
	Effect of changes in exchange rates on cash		(37	)		184

	Net decrease in cash and cash equivalents		(61,122	)		(30,649	)
Cash and cash equivalents—beginning of period			98,159			108,098

Cash and cash equivalents—end of period		$	37,037		$	77,449

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

Vertex Pharmaceuticals Incorporated

Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared by Vertex Pharmaceuticals Incorporated ("Vertex" or the "Company") in accordance with accounting principles generally accepted in the United States of America.

The condensed consolidated financial statements reflect the operations of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Certain information and footnote disclosures normally included in the Company's annual financial statements have been condensed or omitted. Certain prior year amounts have been reclassified to conform to current year presentation. The interim financial statements, in the opinion of management, reflect all adjustments (including normal recurring accruals) necessary for a fair statement of the financial position and results of operations for the interim periods ended September 30, 2004 and 2003.

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the fiscal year, although the Company expects to incur a substantial loss for the year ended December 31, 2004. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2003, which are contained in the Company's 2003 Annual Report to its stockholders and in its Form 10-K filed with the Securities and Exchange Commission on March 15, 2004, as amended by Form 10-K/A filed with the Securities and Exchange Commission on September 8, 2004.

2. Accounting Policies

Basic and Diluted Net Loss per Common Share

Basic net loss per share is based upon the weighted average number of common shares outstanding during the period. Diluted net loss per share is based upon the weighted average number of common shares outstanding during the period plus additional weighted average common equivalent shares outstanding during the period when the effect is not anti-dilutive. Common equivalent shares result from the exercise of outstanding stock options (the proceeds of which are then assumed to have been used to repurchase outstanding stock using the treasury stock method), the assumed conversion of convertible notes and the vesting of unvested restricted shares of common stock. Common equivalent shares have not been included in the net loss per share calculations because their effect would have been anti-dilutive. Total potential gross common equivalent shares consisted of the following (in thousands, except per share amounts):

		At September 30,
		2004		2003
Stock Options			15,795		17,317
	Weighted-average exercise price	$	22.98	$	23.70
Convertible Notes			16,454		3,414
	Weighted-average conversion price	$	19.15	$	92.26
Unvested restricted shares			1,288		—

Stock-Based Compensation

In accordance with Statements of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure" ("SFAS 148"), the Company has adopted the

disclosure-only provisions of Statements of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for all stock awards granted to employees. Under APB 25, provided that other criteria are met, when the exercise price of options granted to employees under these plans equals the market price of the common stock on the date of the grant, no compensation cost is required. When the exercise price of options granted to employees under these plans is less than the market price of the common stock on the date of grant, compensation costs are expensed over the vesting period. Subsequent changes to option terms can also give rise to compensation costs.

At September 30, 2004, the Company had one Employee Stock Purchase Plan ("ESPP") and three stock-based employee compensation plans: the 1991 Stock Option Plan, the 1994 Stock and Option Plan and the 1996 Stock and Option Plan (collectively, the "Plans"). No stock-based employee compensation cost related to stock options is reflected in net loss, as all options granted under the Plans had exercise prices equal to the market value of the underlying common stock on the date of grant.

At September 30, 2004, the Company had 1,287,808 restricted shares unvested and outstanding. During the nine months ended September 30, 2004, the Company issued 1,163,327 restricted shares, net of cancellations, to employees, including a one-time grant of 922,500 shares to senior managers and executives on May 6, 2004.

The Company grants restricted shares to employees and the price per share is equal to the par value of the Company's common stock, or $0.01 per share. In general, the restricted shares vest over four years in four equal annual installments. Under the terms of the one-time grant made to senior managers and executives in May 2004, the restricted shares vest in two increments: 50% on May 6, 2007 (the three year anniversary of the grant) and the balance on May 6, 2009, or earlier, if the Company is profitable, as determined by the Board of Directors. The Company has recorded deferred compensation of approximately $10,658,000 related to the issuance of restricted shares during the nine months ended September 30, 2004. The Company recorded deferred compensation expense of approximately $539,000 and $1,015,000 for the three and nine months ended September 30, 2004, respectively, related to all restricted shares outstanding during those periods. There was no compensation expense related to restricted stock grants recorded during the three and nine months ended September 30, 2003.

For stock options granted to non-employees, the Company recognizes compensation costs in accordance with the requirements of SFAS 123. SFAS 123 requires that companies recognize compensation expense for grants of stock, stock options and other equity instruments based on fair value.

The following table illustrates the effect on net loss and net loss per common share if the fair value recognition of SFAS 123 had been applied to the Company's stock-based employee compensation.

Employee stock-based compensation expense is amortized on a straight-line basis, as our valuation of options subject to SFAS 123 assumes a single weighted average expected life for each award.

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2004			2003			2004			2003
	(In thousands)						(In thousands)
Net loss attributable to common shareholders, as reported	$	(38,771	)	$	(86,421	)	$	(123,478	)	$	(155,738	)
Add: Employee stock-based compensation expense included in net loss, net of tax		539			—			1,015			—
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax		(9,657	)		(12,551	)		(29,786	)		(39,980	)

Pro forma net loss	$	(47,889	)	$	(98,972	)	$	(152,249	)	$	(195,718	)
Basic and diluted net loss per common share, as reported	$	(0.49	)	$	(1.12	)	$	(1.57	)	$	(2.03	)
Basic and diluted net loss per common share, pro forma	$	(0.61	)	$	(1.28	)	$	(1.94	)	$	(2.55	)

Research and Development

All research and development costs, including amounts funded in research collaborations, are expensed as incurred. Research and development expenses are comprised of costs incurred in performing research and development activities, including salaries and benefits, facilities costs, overhead costs, clinical trial costs, contract services and other outside costs. Collaborator and Company-sponsored research and development expenses for the three and nine months ended September 30, 2004 and 2003 were as follows:

	For the Three Months Ended September 30, 2004						For the Three Months Ended September 30, 2003
	Research		Development		Total		Research		Development		Total
Collaborator-sponsored	$	14,249	$	3,915	$	18,164	$	14,754	$	5,669	$	20,423
Company-sponsored		14,116		16,510		30,626		11,316		17,888		29,204

Total	$	28,365	$	20,425	$	48,790	$	26,070	$	23,557	$	49,627

	For the Nine Months Ended September 30, 2004						For the Nine Months Ended September 30, 2003
	Research		Development		Total		Research		Development		Total
Collaborator-sponsored	$	43,913	$	10,754	$	54,667	$	44,292	$	15,419	$	59,711
Company-sponsored		38,864		44,384		83,248		40,754		50,871		91,625

Total	$	82,777	$	55,138	$	137,915	$	85,046	$	66,290	$	151,336

Restructuring and Other Expense

The Company records costs and liabilities associated with exit and disposal activities, as defined in Statements of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), at fair value in the period the liability is incurred.

In periods subsequent to initial measurement, changes to the liability are measured using the credit-adjusted risk-free rate applied in the initial period.

Debt Issuance Costs

Debt issuance costs incurred in connection with Vertex's convertible subordinated note offerings are deferred and included in other assets on the consolidated balance sheet. The costs are amortized based on the effective interest method over the term of the related debt issuance. The amortization expense is included in interest expense on the consolidated statement of operations.

3. Discontinued Operations

The Company sold certain assets and liabilities of its Discovery Tools and Services business to Invitrogen Corporation and Telegraph Hill Partners, LP in March and December 2003, respectively. The assets sold in March and December 2003 represented a component of the Company's business that, beginning in 2002, had separately identifiable cash flows. In accordance with Statements of Financial Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived Assets" ("SFAS 144"), the results of operations and cash flows for the assets sold have been reclassified in the condensed consolidated financial statements under the heading "discontinued operations" for the three and nine months ended September 30, 2003. The reclassification of amounts to discontinued operations has been prepared using estimates and assumptions, which were deemed appropriate based upon information available. Amounts reclassified to discontinued operations are not necessarily indicative of what the results would have been had the business operated on a stand-alone basis.

For the three and nine months ended September 30, 2003, income from discontinued operations is comprised of the following revenue and expenses:

	Three Months Ended September 30, 2003		Nine Months Ended September 30, 2003
	(In thousands)		(In thousands)
Revenues from discontinued operations	2,529		10,773
Expenses from discontinued operations	(1,800	)	(10,787	)
Gain from sale of discontinued operations	451		69,683

Income from discontinued operations	1,180		69,669

4. Comprehensive Loss

For the three and nine months ended September 30, 2004 and 2003, comprehensive loss was as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net loss	$	(38,771	)	$	(86,421	)	$	(123,478	)	$	(155,738	)
Changes in other comprehensive income (loss):
Unrealized holding gains (losses) on marketable securities, net of tax		835			(957	)		(3,191	)		(3,265	)
Foreign currency translation adjustment		(28	)		(44	)		(37	)		184

Total change in other comprehensive income (loss)		807			(1,001	)		(3,228	)		(3,081	)

Total comprehensive loss		(37,964	)		(87,422	)		(126,706	)		(158,819	)

5. Restructuring and Other Expense

On June 10, 2003, Vertex adopted a plan to restructure its operations in preparation for investments to advance major products through clinical development to commercialization. The restructuring was designed to re-balance the Company's relative investment in research, development and commercialization, to better enable the Company to pursue its long-term objective of becoming a profitable pharmaceutical company with capabilities in research, development and commercialization of products. The restructuring plan included a workforce reduction, write-offs of certain assets and a decision not to occupy a leased facility located in Cambridge, Massachusetts (the "Kendall Square Facility"). The Kendall Square Facility is approximately 290,000 square feet of specialized laboratory and office space. The lease commenced in January 2003 and has a 15-year term. The Company is actively seeking subtenancies to minimize its ongoing lease obligations. To date, the Company has subleased 45,000 square feet of the Kendall Square Facility.

During the three and nine months ended September 30, 2004, the Company recorded an additional $1.6 million and $5.2 million, respectively, of restructuring and other expense primarily related to the imputed interest cost of the restructuring and other expense accrual. Additionally, in the third quarter of 2004, $8.2 million of cash payments for rent and build-out were charged against the accrual; for the nine months ended September 30, 2004, there were $24.6 million of cash payments for rent and build-out charged against the accrual. The accrual balance at September 30, 2004 of $50.1 million represents the present value of the Company's estimate of its net ongoing lease obligations for the Kendall Square Facility. In the three and nine months ended September 30, 2003, the Company recorded $42.4 million and $90.4 million, respectively, of restructuring and other expense related to the lease obligations. The expense for the nine months ended September 30, 2003 also includes $6.0 million of lease operating expense incurred prior to the decision not to occupy the Kendall Square Facility, as well as costs associated with the reduction of the Company's workforce and the write-off of leasehold improvements and other assets.

In accordance with Statements of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), the Company's initial estimate of its liability for its net ongoing costs associated with the Kendall Square Facility lease obligation was recorded at fair value in the second quarter of 2003. The Company reviews its assumptions and estimates quarterly and updates its estimate of this liability as changes in circumstances require. As prescribed by

SFAS 146, the expense and liability recorded was calculated using probability-weighted discounted cash-flows of the Company's estimated ongoing lease obligations, including contractual rental and build-out commitments net of sublease rentals, offset by related costs.

The expense and liability related to the Company's estimated net ongoing costs associated with its lease obligations for the Kendall Square Facility requires the Company to make significant estimates and assumptions including estimates and assumptions with respect to costs to satisfy build-out commitments under the lease, time to sublease the space, sublease rental rates and the terms of any subleases. The Company validates its estimates and assumptions through consultations with independent third parties having relevant expertise. The Company used a credit-adjusted risk-free rate of 10% to discount the estimated cash flows. The Company will review its estimates and assumptions on at least a quarterly basis, until the outcome is finalized, and make whatever modifications management believes necessary, based on the Company's best judgment, to reflect any changed circumstances. It is possible that such estimates could change in the future resulting in additional adjustments and the effect of any such adjustments could be material. Because the Company's estimate of the liability includes the application of a discount rate to reflect the time-value of money, the estimate of the liability will increase as a result of the passage of time. Any such changes to the Company's estimate of the liability are recorded as additional restructuring and other expense.

The actual amount and timing of the payment of the remaining accrued liability of approximately $50.1 million is dependent upon the ultimate terms of any sublease(s) that the Company may ultimately enter into.

6. Convertible Subordinated Notes

On February 13, 2004, the Company issued approximately $153.1 million in aggregate principal amount of 5.75% Convertible Senior Subordinated Notes due in February 2011 (the "February 2011 Notes") in exchange for an equal principal amount of its outstanding 5% Convertible Subordinated Notes due in 2007 (the "2007 Notes"). On September 17, 2004, the Company issued approximately $79.3 million in aggregate principal amount of 5.75% Convertible Senior Subordinated Notes due in February 2011 (the "New Notes") in exchange for an equal principal amount of its 2007 Notes. The terms of the New Notes are identical to those of the February 2011 Notes (the February 2011 Notes and the New Notes are referred to together as the "2011 Notes"). The 2011 Notes were issued through private offerings to qualified institutional buyers.

The 2011 Notes are convertible, at the option of the holder, into common stock at a price equal to $14.94, subject to adjustment under certain circumstances. The 2011 Notes bear an interest rate of 5.75% per annum, and the Company is required to make semi-annual interest payments on the outstanding principal balance of the notes on February 15 and August 15 of each year. On or after February 15, 2007, the Company may redeem the 2011 Notes at a redemption price equal to the principal amount plus accrued and unpaid interest, if any.

At September 30, 2004, the Company had approximately $82.6 million of the 2007 Notes and approximately $232.4 million of the 2011 Notes outstanding. As a result of the exchanges, the Company recorded a charge on the retirement of $153.1 million of the 2007 Notes in February 2004 in the amount of $2,453,000, and a charge on the retirement of $79.3 million of the 2007 Notes in September 2004 in the amount of $993,000. These charges represent that portion of the unamortized deferred issuance costs applicable to the amount of 2007 Notes retired. The deferred issuance costs associated

with the issuance of the 2011 Notes, which are classified as long-term other assets, were $2,964,853 for the February 2011 Notes and $1,783,899 for the New Notes. For the three and nine months ended September 30, 2004, $330,000 and $1,022,010, respectively, were amortized to interest expense for the issuance costs of the remaining 2007 Notes and the 2011 Notes.

7. Significant Revenue Arrangements

Cystic Fibrosis Foundation

In May 2004, Vertex entered into an agreement with Cystic Fibrosis Foundation Therapeutics Incorporated ("CFFT") that allowed for an expanded collaboration with CFFT to provide funding for Vertex's late-stage cystic fibrosis drug discovery effort through December 31, 2005. Under this agreement, Vertex will retain the right to develop and commercialize any compounds discovered in the course of the research collaboration. Under the expanded collaboration, CFFT agreed to pay up to $21.0 million of contracted research payments through December 31, 2005, and potentially, a milestone payment upon advancement of the first compound into clinical development. CFFT has the right to terminate the agreement without cause effective June 30, 2005 upon 60 days' prior written notice. For the nine months ended September 30, 2004, Vertex recognized $3.5 million in revenue related to this agreement.

Mitsubishi Pharma

In June 2004, Vertex entered into a collaboration with Mitsubishi Pharma Corporation, which will provide financial and other support for the development of VX-950, the Company's oral hepatitis C virus protease inhibitor currently in Phase I clinical trials. Under the terms of the agreement, Mitsubishi has the right to develop and commercialize VX-950 in Japan and certain other Far East countries, while Vertex has retained exclusive development and marketing rights to VX-950 in the rest of the world, including North America and Europe. The agreement provides for Mitsubishi to pay to Vertex up to $33.0 million in pre-commercial payments, including an up-front license fee, development stage milestone payments, contributions to certain drug development costs for VX-950 through Phase II clinical development and royalties on sales of VX-950 in the Mitsubishi territory. Further cost sharing beyond Phase II clinical development will be determined by Mitubishi and Vertex based on the design of registration studies for VX-950. Mitsubishi may terminate the agreement at any time without cause upon 60 days' prior written notice. Vertex recognized $0.9 million of revenue related to this collaboration in the nine months ended September 30, 2004.

Merck

In June 2004, Vertex entered into a global collaboration with Merck & Co., Inc. to develop and commercialize VX-680, Vertex's lead Aurora kinase inhibitor, and possibly additional follow-on compound(s), for the treatment of cancer. The Merck collaboration provides both research funding, in the amount of $14.0 million over two years, and an up-front payment of $20.0 million, which was paid in June 2004. In addition, Vertex could receive as much as $350.0 million in milestone payments, including up to $130.0 million for the successful development of VX-680 in the first oncology indication and additional milestone payments for development of VX-680 and follow-on compounds in subsequent major oncology indications. Merck will be responsible for clinical development and commercialization of VX-680 and on other Aurora kinase inhibitors worldwide and will pay Vertex royalties on product sales. Merck may terminate the agreement without cause at any time after June 30, 2005 upon 90 days'

advance written notice, except that six months' advance written notice is required for termination during the second year of the research term or at anytime when a product has marketing approval in a major market and the termination is not for a valid safety reason. Vertex recognized $3.7 million of revenue related to this collaboration in the nine months ended September 30, 2004.

8. Guarantees

As permitted under Massachusetts law, Vertex's Articles of Organization and Bylaws provide that the Company will indemnify certain of its officers and directors for certain claims asserted against them in connection with their service as an officer or director. The maximum potential amount of future payments that the Company could be required to make under these indemnification provisions is unlimited. However, the Company has purchased certain directors' and officers' liability insurance policies that reduce its monetary exposure and enable it to recover a portion of any future amounts paid. The Company believes the estimated fair value of these indemnification arrangements is minimal.

Vertex customarily agrees in the ordinary course of its business to include indemnification provisions in agreements with clinical trials investigators in its drug development programs, in sponsored research agreements with academic and not-for-profit institutions, in various comparable agreements involving parties performing services for the Company in the ordinary course of business, and in its real estate leases. The Company also customarily agrees to include certain indemnification provisions in its drug discovery and development collaboration agreements. With respect to the Company's clinical trials and sponsored research agreements, these indemnification provisions typically apply to any claim asserted against the investigator or the investigator's institution relating to personal injury or property damage, violations of law or certain breaches of the Company's contractual obligations arising out of the research or clinical testing of the Company's compounds or drug candidates. With respect to lease agreements, the indemnification provisions typically apply to claims asserted against the landlord relating to personal injury or property damage caused by the Company, to violations of law by the Company or to certain breaches of the Company's contractual obligations. The indemnification provisions appearing in the Company's collaboration agreements are similar, but in addition provide some limited indemnification for collaborators in the event of third party claims alleging infringement of intellectual property rights. In each of these cases, the term of these indemnification provisions generally survives the termination of the agreement, although indemnification provisions are most relevant during the contract term and for a short period of time thereafter. The maximum potential amount of future payments that the Company could be required to make under these provisions is generally unlimited. Vertex has purchased insurance policies covering personal injury, property damage and general liability that reduce the Company's exposure for indemnification and would enable the Company in many cases to recover a portion of any future amounts paid. The Company has never paid any material amounts to defend lawsuits or settle claims related to these indemnification provisions. Accordingly, the Company believes the estimated fair value of these indemnification arrangements is minimal.

On March 28, 2003, the Company sold certain assets of its wholly-owned subsidiary, PanVera LLC, to Invitrogen Corporation for approximately $97.0 million. The agreement with Invitrogen requires the Company to indemnify Invitrogen against any loss it may suffer by reason of Vertex's failure to perform certain covenants contained in the agreement. The covenants are of a type customary in agreements of this sort. The Company believes the estimated fair value of these indemnification arrangements is minimal.

Effective on December 3, 2003, the Company sold certain instrumentation assets to Aurora Discovery, Inc. for approximately $4.3 million. The agreement with Aurora Discovery requires the Company to indemnify Aurora Discovery against any loss it may suffer by reason of the Company's breach of certain representations and warranties, or failure to perform certain covenants contained in the agreement. The representations, warranties and covenants are of a type customary in agreements of this sort. The Company's aggregate obligations under the indemnity are capped at one-half of the purchase price and apply to claims under representations and warranties made within fifteen months after closing, although there is no corresponding time limit for claims made based on breaches of covenants. The Company believes the estimated fair value of these indemnification arrangements is minimal.

On February 10, 2004, Vertex entered into a Dealer Manager Agreement with UBS Securities LLC in connection with the exchange of approximately $153.1 million of the February 2011 Notes for approximately $153.1 million of 2007 Notes. On September 13, 2004, the Company entered into a second Dealer Manager Agreement with UBS Securities in connection with the exchange of approximately $79.3 million of New Notes for approximately $79.3 million of 2007 Notes. Each of the Dealer Manager Agreements requires the Company to indemnify UBS Securities against any loss UBS Securities may suffer by reason of the Company's breach of representations, warranties and covenants relating to the exchanges of the convertible notes, the Company's failure to perform certain covenants in those agreements, the inclusion of any untrue statement of material fact in the materials provided to potential investors in the 2011 Notes, the omission of any material fact needed to make those materials not misleading, and any actions taken by the Company or its representatives in connection with the exchanges. The representations, warranties and covenants in the Dealer Manager Agreements are of a type customary in agreements of this sort. The Company believes the estimated fair value of these indemnification obligations is minimal.

9. Legal Proceedings

On September 23, 2003, two purported shareholder class actions, Carlos Marcano v. Vertex Pharmaceuticals, et al. and City of Dearborn Heights General Governmental Employees' Retirement System v. Vertex Pharmaceuticals, et al., were filed in the United States District Court for the District of Massachusetts, naming the Company and certain current and former officers and employees of the Company as defendants. Those actions were followed by three additional lawsuits, Stephen Anish v. Vertex Pharmaceuticals, et al., William Johns v. Vertex Pharmaceuticals, et al., and Ben Harrington v. Vertex Pharmaceuticals, et al., also filed in the District of Massachusetts. All five cases contain substantially identical allegations and have been consolidated by the District Court into one lawsuit. The plaintiffs claim that the defendants made material misrepresentations and/or omissions of material fact regarding VX-745, an investigational agent with potential in the treatment of inflammatory and neurological diseases, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10(b)(5) promulgated by the Securities and Exchange Commission. The plaintiffs seek certification as a class action, compensatory damages in an unspecified amount and unspecified equitable or injunctive relief. In March 2004, the Company filed a motion to dismiss all of the claims brought against it in these lawsuits. The plaintiffs filed an amended complaint in July 2004, and the motion to dismiss remains pending.

The Company believes these claims are without merit and intends to contest them vigorously.

10. New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"), and in December 2003 issued a revised FIN 46 ("FIN 46R") that addresses the period of adoption of FIN 46 for entities created before January 31, 2003. FIN 46 provides a new consolidation model which determines control and consolidation based on potential variability in gains and losses. The provisions of FIN 46 are effective for enterprises with variable interest entities created after January 31, 2003. The Company adopted the provisions of FIN 46 in the first quarter of 2004 as required. The adoption of FIN 46 did not have a material impact on the Company's consolidated financial statements.

In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104"). SAB 104 supercedes Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple-element revenue arrangements, superceded as a result of the issuance of Emerging Issues Task Force 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). Additionally, SAB 104 rescinds the Securities and Exchange Commission's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the "FAQ") issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The Company adopted SAB 104 in the first quarter of fiscal year 2004. The adoption of SAB 104 did not have a material impact on the Company's consolidated financial statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a biotechnology company in the business of discovering, developing and marketing small molecule drugs for serious diseases, including HIV infection, chronic hepatitis C virus (HCV) infection, inflammatory and autoimmune disorders and cancer, independently and with collaborators. Our principal focus is on the development and commercialization of new treatments for viral and inflammatory diseases. To date, we have discovered and advanced two products to the market, Lexiva® (fosamprenavir calcium) and Agenerase® (amprenavir). We earn a royalty on the sales of Lexiva and Agenerase and co-promote these products in collaboration with GlaxoSmithKline plc. Lexiva was approved for sale in the European Union under the trade name Telzir® in July 2004, and was launched by GlaxoSmithKline in the European Union in the third quarter of 2004. We have built a drug discovery capability that integrates advanced biology, chemistry, biophysics, automation and information technologies, with a goal of making the drug discovery process more efficient and productive.

Drug Discovery and Development

Discovery and development of a single new pharmaceutical product is a lengthy and resource-intensive process that may take ten to fifteen years or more. During this process, potential drug candidates are subjected to rigorous evaluation, driven in part by stringent regulatory considerations. This evaluation process is designed to generate information concerning toxicity profiles, efficacy, proper dosage levels and a variety of other characteristics that are important in determining whether a proposed drug candidate should be approved for therapeutic use in humans. Most chemical compounds that are investigated as potential drug candidates never progress into formal development, and most drug candidates that advance into formal development never become commercial products.

We have a variety of drug candidates in clinical development and a broad-based drug discovery effort. Given the uncertainties of the research and development process, it is not possible to predict with confidence which, if any, of these efforts will result in a marketable pharmaceutical product. We constantly monitor the results of our discovery research and our nonclinical and clinical trials and regularly evaluate and re-evaluate our portfolio investments with the objective of balancing risk and potential return in view of new data and scientific, business and commercial insights. This process can result in relatively abrupt changes in focus and priority as new information comes to light and we gain new insights into ongoing programs.

Business Strategy

We have elected to diversify our research and development activities across a relatively broad array of investment opportunities, due in part to the high risks associated with the biotechnology and pharmaceutical business. We focus our efforts both on programs that we expect to control throughout the development and commercialization process in North America, as well as on programs that we anticipate will be controlled by a collaborative partner through the development and commercial process. Since we have incurred losses from our inception and expect to incur losses for the foreseeable future, our business strategy is dependent in large part on our continued ability to raise significant funding to finance our operations and meet our long-term contractual commitments and obligations. In the past, we have secured funds principally through capital market transactions, strategic collaborative agreements, proceeds from the disposition of assets, investment income and the issuance of stock under our employee benefit programs. At September 30, 2004, we had approximately $418.4 million of cash, cash equivalents and available for sale securities, approximately $82.6 million of 5% Convertible Subordinated Notes due 2007 (the "2007 Notes") and approximately $232.4 million of 5.75% Convertible Senior Subordinated Notes due 2011 (the "2011 Notes").

Collaborative Revenue

Collaborations have been and will continue to be an important component of our business strategy. In the second quarter of 2004, we entered into new collaboration agreements with Cystic Fibrosis Foundation Therapeutics Incorporated ("CFFT") (cystic fibrosis drug discovery), Mitsubishi Pharma Corporation (Far East Development of VX-950), and Merck & Co., Inc. (research and development of Aurora kinase inhibitors, including VX-680).

In addition to these new agreements, we currently have collaborations with, among others, Aventis Pharma S.A., GlaxoSmithKline and Novartis Pharma AG. In these collaborations, we have retained a share of downstream product revenue and may be entitled to significant pre-commercial milestone payments as drug candidates progress in development. We currently receive research funding from CFFT, Merck and Novartis, and we currently have drug candidates in clinical development or commercialization under our collaborations with Aventis, GlaxoSmithKline, Kissei Pharmaceutical Company, Ltd., Merck and Mitsubishi. In the third quarter of 2004, we realized $26.8 million in royalties and collaborative revenue, all of which was earned under our pharmaceutical collaborations. Our research collaboration with Laboratories Serono S.A. terminated in September 2004.

In future periods, we will seek to identify collaborative development and commercialization opportunities for additional drug discovery efforts, and for drug candidates outside of our core focus, in order to facilitate clinical advancement of these assets, as we maintain focus on our Company-sponsored opportunities. We may also seek collaborations to assist in the development and commercialization of Company-sponsored opportunities.

Our collaborations with Novartis and GlaxoSmithKline accounted for 54.8% and 19.9%, respectively, of our total revenue for the nine months ended September 30, 2004. A significant portion of our total research effort is being conducted under our collaboration with Novartis, which is scheduled to conclude, along with our research funding from Novartis, in April 2006. Under the terms of our agreement with Novartis, we will retain all rights to the intellectual property that we generate during that collaboration, except for rights licensed to Novartis in connection with the development and commercialization of specific drug candidates that Novartis accepts for development. The intellectual property rights that we may retain from this collaboration may help us initiate other collaborative opportunities in the kinase inhibitor field if our collaboration with Novartis is not extended beyond 2006. We will need to pursue those opportunities as well as other collaborations or financing alternatives in order to maintain our discovery effort at its existing level. It is not possible to predict at present whether any of those collaborations or other financing alternatives will be available in 2006 and beyond.

Financial Guidance

The key financial measures for which we have provided guidance in 2004 are as follows:

•: our full year loss is expected to be between $140.0 and $150.0 million, before any gains or charges, including additional lease restructuring charges and the convertible note exchanges;
•: our total revenue is expected to be in the range of $90.0 to $100.0 million in 2004; this revenue is expected to be comprised of $15.0 to $18.0 million from HIV product royalties and approximately $75.0 million from collaborations;
•: we anticipate that research and development expenses will be in the range of $190.0 to $205.0 million during 2004;
•: we expect sales, general and administrative expenses to be between $38.0 and $43.0 million during 2004; and
•: we expect cash, cash equivalents and available for sale securities to be approximately $375.0 million at the end of 2004.

The financial measures set forth above are forward looking and are subject to risks and uncertainties that could cause our actual results to vary materially, as referenced in the section entitled "Forward-Looking Statements," which appears on page 24 of this Quarterly Report on Form 10-Q.

In this Quarterly Report on Form 10-Q, our guidance for the full year 2004, which excludes any charges or gains, contains financial measures that are not in accordance with generally accepted accounting principles in the United States ("GAAP"). We believe these non-GAAP financial measures help indicate underlying trends in our business. We use these non-GAAP financial measures to establish budgets and operational goals that are communicated internally and externally, to manage our business and to evaluate our performance.

Liquidity and Capital Resources

We have incurred operating losses since our inception and historically have financed our operations principally through public stock offerings, private placements of our equity and debt securities, strategic collaborative agreements (which include research and development funding, milestones and royalties on the sales of products), proceeds from the disposition of assets of our Discovery Tools and Services business, investment income and proceeds from the issuance of stock under our employee benefit programs.

At September 30, 2004, we had cash, cash equivalents and marketable securities of $418.4 million, which is a decrease of $164.8 million from $583.2 million at December 31, 2003. Net cash used in operations for the nine months ended September 30, 2004 was $118.5 million, which includes our net loss of $123.5 million and $19.4 million of cash payments made in connection with the restructuring and other expense accrual. Restricted cash increased by $22.4 million due to the issuance of stand-by letters of credit pursuant to an operating lease agreement. Repayments under our loan facility with Novartis were $12.5 million for the nine months ended September 30, 2004. Cash receipts from the issuance of common stock under our employee benefit programs during the first nine months of 2004 were $5.2 million.

As part of our strategy to manage our long term operational cash needs, in February 2004 we exchanged approximately $153.1 million in aggregate principal amount of newly issued 2011 Notes for an equal principal amount of our 2007 Notes, and in September 2004 we exchanged an additional $79.3 million in aggregate principal amount of newly issued 2011 Notes for an equal principal amount of our 2007 Notes. The 2011 Notes were issued through private offerings to qualified institutional buyers. The 2011 Notes are convertible, at the option of the holder, into common stock at a price equal to $14.94, subject to adjustment under certain circumstances. The 2007 Notes are convertible, at the option of the holder, into common stock at a price equal to $92.26 subject to adjustment under certain circumstances. Issuance costs associated with the February 2004 issuance of 2011 Notes were $3.0 million and issuance costs associated with the September 2004 issuance of 2011 Notes were $1.8 million.

The restructuring accrual relating to our decision not to occupy a leased facility located in Cambridge, Massachusetts (the "Kendall Square Facility"), which was $50.1 million at September 30, 2004, could be paid in full over the next 18 months assuming our estimates underlying the accrual are accurate. However, the actual amount and timing of such payments will be dependent upon the ultimate terms of any new subtenancies or lease restructuring. We review our estimates underlying the restructuring accrual on at least a quarterly basis, and the accrual, and consequently any expected future payment, could change with any change in our estimates.

In connection with new collaborations entered into in the second quarter of 2004, we received approximately $25.0 million in upfront and research support payments. Consistent with our revenue recognition policy, recognition of the majority of these payments is deferred and will be recognized over the related contract term.

At September 30, 2004, we had $20.0 million in loans outstanding under a loan facility established under the original terms of our collaboration agreement with Novartis. Loans under the facility were intended to fund early clinical studies of kinase inhibitor compounds that we selected for development. In February 2004, we amended the terms of the Novartis collaboration agreement. Pursuant to the amended agreement, we will continue to be responsible for drug discovery and Novartis will continue to provide research funding through the balance of the research term ending in April 2006. However, pursuant to the amendment, Novartis will now be responsible for all nonclinical and clinical development of drug candidates that it accepts for development, and, consequently, the loan facility providing funding for development activities by Vertex has been terminated. On June 22, 2004, we gave notice to Novartis of our election to develop VX-680 independent of Novartis and, as a result, we repaid approximately $12.5 million of unspent and uncommitted loan amounts relating to that compound. Loans for collaboration compounds other than VX-680 will be forgiven on a compound by compound basis if any such compounds are selected by Novartis for development. All loans not forgiven under the facility will be repayable, without interest, in May 2008.

We expect to continue to make significant investments in our pipeline, particularly in clinical trials of our anti-HCV and oral anti-cytokine product candidates and in our ion channel and kinase discovery efforts. Consequently, we expect to incur losses on a quarterly and annual basis for the foreseeable future as we continue to develop and commercialize existing and future drug candidates. We also expect to incur substantial administrative expenditures in the future and expenses related to filing, prosecution, defense and enforcement of patent and other intellectual property rights.

For the nine months ended September 30, 2004, there have been no significant changes to our commitments and obligations as reported in our 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2004, as amended on Form 10-K/A filed with the Securities and Exchange Commission on September 8, 2004, except for the exchange of an aggregate principal amount of $232.4 million of newly issued 2011 Notes for an equal principal amount of our 2007 Notes.

In 2005 and in future periods, the adequacy of our available funds to meet our future operating and capital requirements, including repayment of the 2007 Notes and the 2011 Notes, will depend on many factors, including the number, breadth and prospects of our discovery and development programs and the costs and timing of obtaining regulatory approvals for any of our product candidates. Collaborations have been and will continue to be an important component of our business strategy. We will continue to rely on cash receipts from our existing research and development collaborations, including research funding, development reimbursements and potential milestone payments, and from new collaborations, in order to help fund our research and development efforts.

To the extent that our current cash and marketable securities, in addition to the above-mentioned sources, are not sufficient to fund our activities, it will be necessary to raise additional funds through public offerings or private placements of our securities or other methods of financing. We will continue to manage our capital structure and consider financing opportunities to strengthen our long-term liquidity profile. There can be no assurance that such financing will be available on acceptable terms, if at all.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reported periods. These items are constantly monitored and analyzed by management for changes in facts and circumstances, and material changes

in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if these assumptions do not turn out to be substantially accurate.

We believe that the application of the accounting policies for restructuring and other expense, research and development expenses, and revenue recognition, all of which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. Our accounting polices, including the ones discussed below, are more fully described in Note B to our consolidated financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2004, as amended on Form 10K/A filed with the Securities and Exchange Commission on September 8, 2004.

Restructuring and Other Expense

We record liabilities associated with restructuring activities based on estimates of fair value in the period the liabilities are incurred, in accordance with Standards of Financial Statements 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). These estimates are reviewed and may be adjusted in subsequent periods. Adjustments are based, among other things, on management's assessment of changes in factors underlying the estimates, the impact of which is measured using the credit-adjusted risk-free rate applied in the initial period.

In 2003, we announced a plan to restructure our operations in preparation for increased investment in the clinical development and commercialization of our drug candidates. We designed the restructuring to re-balance our relative investment in research, development and commercialization to better support our long-term objective of becoming an integrated drug company. The restructuring included a workforce reduction, write-offs of certain assets and a decision not to occupy the Kendall Square Facility. We are actively seeking subtenancies to offset our ongoing lease obligations. In September, 2004, we entered into a sublease for approximately 45,000 square feet of the Kendall Square Facility.

In accordance with SFAS 146, we have reviewed our assumptions and estimates quarterly and updated the liability as changes in circumstances have required. For the nine months ended September 30, 2004, we recorded $5.2 million of restructuring and other expenses, which is primarily the result of the imputed interest cost related to the restructuring accrual. The remaining restructuring accrual relating to the estimated net ongoing lease obligations for the Kendall Square Facility was $50.1 million at September 30, 2004.

We are required to make significant judgments and assumptions when estimating the liability for the net ongoing lease obligations for the Kendall Square Facility. We used a probability-weighted discounted cash flow analysis to calculate the amount of the liability. In accordance with SFAS 146, we used a credit-adjusted risk-free rate of 10% in discounting our estimated cash flows. The probability-weighted discounted cash flow analysis is based on management's assumptions and estimates of its ongoing lease obligations, including contractual rental and build-out commitments, and sublease rentals, including time to sublease the space, sublease rental rates and sublease rental terms. We validate our estimates and assumptions through consultations with independent third parties having relevant expertise.

It is possible that our estimates and assumptions will change in the future, resulting in additional adjustments to our estimate of the liability, and the effect of such adjustments could be material. For example, if sublease rental rates differ from our assumptions by approximately 10%, our recorded liability will be adjusted by approximately $4.3 million. If the time to secure subtenancies is delayed by six months from our estimated completion dates, the delay could result in up to $6.0 million of additional liability (and the increase would be higher if there is further delay).

We will review our assumptions and judgments related to the liability on at least a quarterly basis, until the outcome is finalized, and make whatever modifications we believe are necessary, based on our best judgment, to reflect any changed circumstances.

Revenue Recognition

Our revenue recognition policies are in accordance with the SEC's Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements," as amended by SEC Staff Accounting Bulletin No. 104, "Revenue Recognition," and for revenue arrangements entered into after June 30, 2003, Emerging Issues Task Force Issue 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21").

Our collaborative and other research and development revenue is generated primarily through collaborative research and development agreements with strategic partners. The terms of these agreements typically include non-refundable up-front license fees, funding of research and development efforts, payments based upon achievement of certain milestones and royalties on product sales.

We recognize revenue from non-refundable, up-front license fees and milestones that are not specifically tied to a separate earnings process ratably over the contracted or estimated period of performance. Changes in estimates could impact revenue in the period the estimate is changed. If our estimate of the period of performance shortens or lengthens, the amount of revenue we recognize from non-refundable, up-front license fees and milestones could increase or decrease in the period the change in estimate becomes known. Future related revenues would be adjusted accordingly. To date, changes to our estimates have not had a material impact on our financial position or results of operations. Research funding is recognized ratably over the period of effort, as earned. Milestones that are based on designated achievement points and that are considered at risk and substantive at the inception of the collaborative contract are recognized as earned when the corresponding payment is considered reasonably assured. We evaluate whether milestones are at risk and substantive based on the contingent nature of the milestone, specifically reviewing factors such as the technological and commercial risk that must be overcome and the level of investment required.

Under EITF 00-21, in multiple element arrangements, license payments are recognized together with any up-front payment and the research and development funding as a single unit of accounting, unless the delivered technology has stand-alone value to the customer and we have objective and reliable evidence of fair value of the undelivered elements in the arrangement. License payments received during the course of a collaboration that do not meet the separation criteria above are recognized, when earned, in proportion to the period of time completed on the contract relative to the total contracted or estimated period of performance on the underlying research and development collaboration, with the remaining amount deferred and recognized ratably over the remaining period of performance. Payments received after performance obligations are complete are recognized when earned.

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

Results of Operations

The following discussion of revenues and expenses is based only on the results of our continuing operations. We sold the assets of our Discovery Tools and Services business in two independent transactions in March and December 2003. In accordance with Statements of Financial Accounting Standards 144, "Accounting for the Impairment of Long-Lived Assets" ("SFAS No. 144"), the results of operations associated with the assets sold have been reclassified on the consolidated financial statements under the heading "discontinued operations" for the three and nine months ended

September 30, 2003. The reclassification of the amounts to discontinued operations has been prepared using estimates and assumptions we have deemed appropriate based upon the information currently available. Amounts reclassified to discontinued operations are not necessarily indicative of the results that would have been achieved had the Discovery Tools and Services business operated on a stand-alone basis during the periods presented.

As a result of the disposition of these assets, we now operate in a single operating segment: Pharmaceuticals.

Three Months Ended September 30, 2004 Compared with Three Months Ended September 30, 2003

Net Loss

Our net loss for the three months ended September 30, 2004 was $38,771,000, or $0.49 per basic and diluted common share, compared to net loss of $86,421,000, or $1.12 per basic and diluted common share, for the three months ended September 30, 2003. Included in the net loss for the quarter ended September 30, 2004 is restructuring and other expense of $1,561,000 and a charge for retirement of a portion of our 2007 notes of $993,000. Our net loss for the quarter ended September 30, 2003 includes restructuring and other expense of $42,394,000 and income from discontinued operations of $1,180,000.

Revenues

Total revenues increased to $26,828,000 for the three months ended September 30, 2004, compared to $15,823,000 for the three months ended September 30, 2003. In the third quarter of 2004, revenue was comprised of $4,403,000 in royalties and $22,425,000 in collaborative and other research and development revenue, as compared with $2,003,000 in royalties and $13,820,000 in collaborative and other research and development revenue in the third quarter of 2003.

Royalties consist of Agenerase and Lexiva royalty revenue. Royalty revenue is based on actual and estimated worldwide net sales of these drug products. We began earning royalties on sales of Lexiva in the United States in November 2003. Lexiva recently received marketing approval in the European Union (under the trade name Telzir) and it was launched in the European Union in the third quarter of 2004. Royalty revenue increased in the third quarter of 2004 as compared with the same period in 2003 primarily as a result of sales of Lexiva in the United States. We have noted a decrease in sales of Agenerase since the launch of Lexiva, which we attribute to the availability and acceptance of Lexiva, and we anticipate that this trend will continue until Agenerase is largely replaced by Lexiva in the market. We pay a royalty to a third party on sales of Agenerase and Lexiva.

Collaborative and other research and development revenue increased $8,605,000, or 62%, for the three months ended September 30, 2004 as compared with the same period in 2003. In the third quarter of 2004, we recognized revenue under our new collaborations with Merck and Mitsubishi in the amount of $4,311,000, and recorded as revenue a $1,500,000 milestone from GlaxoSmithKline as a result of the marketing approval of Telzir in the European Union.

We expect that collaborative and other research and development revenues will continue to be a significant source of our total revenues.

Costs and Expenses

Research and development expenses decreased $837,000, or 2%, to $48,790,000 for the three months ended September 30, 2004 from $49,627,000 for the same period in 2003.

Research and development expenses consist primarily of salary and benefits, laboratory supplies, contractual services and infrastructure costs, including facilities costs and depreciation. Set forth below

is a summary that reconciles our total research and development expenses for the three months ended September 30, 2004 and 2003 (in thousands):

			Three Months Ended, September 30,
			Three Months Ended, September 30,							% Change
			2004		2003		$ Change			% Change
Research Expenses:
	Salary and benefits		$	8,939	$	8,702	$	237		3	%
	Laboratory supplies and other direct expenses			5,156		4,266		890		21	%
	Contractual services			2,509		1,255		1,254		100	%
	Infrastructure costs			11,761		11,847		(86	)	(1	)%

		Total research expenses	$	28,365	$	26,070

Development Expenses:
	Salary and benefits		$	5,224	$	5,273	$	(49	)	(1	)%
	Laboratory supplies and other direct expenses			2,043		1,078		965		90	%
	Contractual services			7,705		12,899		(5,194	)	(40	)%
	Infrastructure costs			5,453		4,307		1,146		27	%

		Total development expenses	$	20,425	$	23,557

Total Research and Development Expenses:
	Salary and benefits		$	14,163	$	13,975	$	188		1	%
	Laboratory supplies and other direct expenses			7,199		5,344		1,855		35	%
	Contractual services			10,214		14,154		(3,940	)	(28	)%
	Infrastructure costs			17,214		16,154		1,060		7	%

		Total research and development expenses	$	48,790	$	49,627

The following table details our Collaborator- and Company-sponsored research and development expenses for the indicated periods (in thousands):

	For the Three Months Ended September 30, 2004						For the Three Months Ended September 30, 2003
	Research		Development		Total		Research		Development		Total
Collaborator-sponsored	$	14,249	$	3,915	$	18,164	$	14,754	$	5,669	$	20,423
Company-sponsored		14,116		16,510		30,626		11,316		17,888		29,204

Total	$	28,365	$	20,425	$	48,790	$	26,070	$	23,557	$	49,627

We continue to focus our drug discovery efforts on the protein kinase and ion channel gene families as well as on several other targeted areas. A significant portion of our investment in research is funded by our collaborative partners. We expect research expenses to remain at relatively constant levels throughout 2004, but the level of development investment will vary depending on the occurrence and timing of clinical trials. In the third quarter of 2004, we continued a Phase IIb (METRO) study of merimepodib (in combination with Pegasys® (peginterferon alfa-2a) and Copegus® (ribavirin)) and completed a Phase Ia study of VX-950 also for the treatment of HCV infection. In the fourth quarter of 2004, we expect to begin dosing on a 28-day clinical study of merimepodib in combination with ribavirin and a Phase II clinical study of VX-765 in patients with psoriasis, in addition to a Phase Ib clinical trial of VX-950 which began in November 2004. We currently are evaluating indications for which we may pursue clinical studies for VX-702 and we plan to update our intentions for VX-702 later this year. We anticipate that development expenses will increase in future periods as we add personnel and capabilities to support the advancement of our lead drug candidates.

Sales, general and administrative expenses increased 12% to $10,600,000 for the three months ended September 30, 2004, compared to $9,436,000 for the same period in 2003. The increase is partially attributable to increased professional consulting expense incurred to comply with the Sarbanes-Oxley Act of 2002. We expect sales, general and administrative expenses for the three months ending December 31, 2004 to be similar to those expenses for the three months ended September 30, 2004.

Restructuring and other expense for the three months ended September 30, 2004 was $1,561,000, compared to $42,394,000 for the three months ended September 30, 2003. The charge in the third quarter of 2004 primarily reflects the imputed interest cost for the period related to the restructuring accrual. In addition, in the third quarter of 2004, $8,200,000 of cash payments were charged against the restructuring and other expense accrual. The charge for the third quarter of 2003 includes $42,394,000 million related to a lease restructuring. The accrual balance at September 30, 2004 was $50,123,000. We will continue to incur the imputed interest costs of the restructuring accrual on a quarterly basis at the credit-adjusted risk-free rate until the outcome is finalized. Calculating the liability related to our estimated ongoing lease obligations for the Kendall Square Facility requires us to make significant estimates and assumptions. These estimates and assumptions are monitored at least quarterly for changes in circumstances. It is reasonably possible that such estimates could change in the future, resulting in additional adjustments, and the effect of any such adjustments could be material.

Interest income decreased $719,000, or 23%, to $2,445,000 for the three months ended September 30, 2004 from $3,164,000 for the three months ended September 30, 2003. The decrease is a result of a lower average balance of funds invested and lower portfolio yields.

Nine Months Ended September 30, 2004 Compared with Nine Months Ended September 30, 2003

Net Loss

Our net loss for the nine months ended September 30, 2004 was $123,478,000, or $1.57 per basic and diluted common share, compared to a net loss of $155,738,000, or $2.03 per basic and diluted common share, for the nine months ended September 30, 2003. Included in the net loss for the nine months ended September 30, 2004 is restructuring and other expense of $5,216,000 and a charge for retirement of a portion of the 2007 Notes of $3,446,000. Our net loss for the nine months ended September 30, 2003 includes restructuring and other expense of $90,424,000 and income from discontinued operations of $69,669,000. Included in the income from discontinued operations is a gain from the sale of assets of $69,683,000.

Revenues

Total revenues increased to $62,882,000 for the nine months ended September 30, 2004, compared to $47,764,000 for the nine months ended September 30, 2003. In the nine months ended September 30, 2004, revenue was comprised of $10,996,000 in royalties and $51,886,000 in collaborative and other research and development revenue, as compared with $5,944,000 in royalties and $41,820,000 in collaborative and other research and development revenue in the nine months ended September 30, 2003.

Collaborative and other research and development revenue increased $10,066,000, or 24%, for the nine months ended September 30, 2004, as compared with the same period in 2003. In the nine months ended 2004, we recognized revenue under our collaboration with Novartis in the amount of $34,481,000, compared with $32,325,000 in the nine months ended September 30, 2003. Under our new collaborations with Merck and Mitsubishi Pharma Corporation, we recognized revenue of $4,583,000 in the nine months ended September 30, 2004.

Costs and Expenses

Research and development expenses decreased $13,421,000, or 9%, to $137,915,000 for the nine months ended September 30, 2004 from $151,336,000 in the nine months ended September 30, 2003.

Set forth below is a summary that reconciles our total research and development expenses for the nine months ended September 30, 2004 and 2003 (in thousands):

			Nine Months Ended, September 30,
			Nine Months Ended, September 30,							% Change
			2004		2003		$ Change			% Change
Research Expenses:
	Salary and benefits		$	27,515	$	29,851	$	(2,336	)	(8	)%
	Laboratory supplies and other direct expenses			13,121		14,914		(1,793	)	(12	)%
	Contractual services			6,118		3,785		2,333		62	%
	Infrastructure costs			36,023		36,496		(473	)	(1	)%

		Total research expenses	$	82,777	$	85,046

Development Expenses:
	Salary and benefits		$	14,626	$	15,860	$	(1,234	)	(8	)%
	Laboratory supplies and other direct expenses			5,195		3,628		1,567		43	%
	Contractual services			19,054		33,599		(14,545	)	(43	)%
	Infrastructure costs			16,263		13,203		3,060		23	%

		Total development expenses	$	55,138	$	66,290

Total Research and Development Expenses:
	Salary and benefits		$	42,141	$	45,711	$	(3,570	)	(8	)%
	Laboratory supplies and other direct expenses			18,316		18,542		226		1	%
	Contractual services			25,172		37,384		(12,212	)	(33	)%
	Infrastructure costs			52,286		49,699		2,587		5	%

		Total research and development expenses	$	137,915	$	151,336

The following table details our Collaborator- and Company-sponsored research and development expenses for the indicated periods (in thousands):

	For the Nine Months Ended September 30, 2004						For the Nine Months Ended September 30, 2003
	Research		Development		Total		Research		Development		Total
Collaborator-sponsored	$	43,913	$	10,754	$	54,667	$	44,292	$	15,419	$	59,711
Company-sponsored		38,864		44,384		83,248		40,754		50,871		91,625

Total	$	82,777	$	55,138	$	137,915	$	85,046	$	66,290	$	151,336

Sales, general and administrative expenses increased 7% to $30,482,000 for the nine months ended September 30, 2004, compared to $28,608,000 for the same period in 2003. The increase is partially attributable to increased professional consulting expense incurred to comply with the Sarbanes-Oxley Act of 2002.

Restructuring and other expense for the nine months ended September 30, 2004 was $5,216,000, compared to $90,424,000 for the nine months ended September 30, 2003. The charge for the nine months ended September 30, 2004 primarily reflects the imputed interest cost for the period related to the restructuring accrual. In addition, in the nine months ended September 30, 2004,

$24,603,000 million of cash payments for rent and build-out were charged against the restructuring and other expense accrual.

Interest income decreased $4,372,000, or 35%, to $7,981,000 for the nine months ended September 30, 2004 from $12,353,000 for the nine months ended September 30, 2003. The decrease is a result of a lower average balance of funds invested and lower portfolio yields.

In the first quarter of 2004, we wrote off $2,453,000 of unamortized issuance costs related to the 2007 Notes that were retired in February 2004. In the third quarter of 2004, we wrote off an additional $993,000 of unamortized issuance costs related to the 2007 Notes that were retired in September 2004.

Forward-Looking Statements

This report contains forward-looking statements about our business, including our expectation that (i) we will incur losses for the foreseeable future; (ii) research expenses for the remainder of 2004 will be consistent with the third quarter of 2004, but the level of development expenses will vary depending on the occurrence and timing of clinical trials; (iii) we will enter into additional strategic collaborations; (iv) we will continue to collaborate with existing and new partners to develop and market Vertex- discovered products for selected major therapeutic areas; (v) our financial results for 2004 will be as set forth in the section titled "Financial Guidance," beginning on page 15 of this Quarterly Report on Form 10-Q; (vi) our guarantee obligations will be as set forth in Footnote 8 to the Condensed Consolidated Financial Statements, beginning on page 11 of this Quarterly Report on Form 10-Q; (vii) our liability under the Kendall Square Facility lease will be as we have estimated and we may pay the full amount in the next 18 months; (viii) sales, general and administrative expenses during the fourth quarter of 2004 will be consistent with those in the third quarter of 2004; (ix) we will initiate clinical studies of certain of our compounds in the fourth quarter of 2004, including new studies in 2004 on merimepodib and VX-765; (x) we will make significant investments in our pipeline, particularly in clinical trials of our anti-HCV and oral anti-cytokine drug products and in our ion channel and kinase discovery efforts; and (xi) Agenerase will be largely replaced by Lexiva in the market.

While we use our best efforts to be accurate in making forward-looking statements, these statements are subject to risks and uncertainties that could cause our actual results to vary materially. These risks and uncertainties include, among other things, our inability to further identify, develop and achieve commercial success for new products and technologies; the possibility of delays in the research and development necessary to select drug development candidates; the possibility of delays in the commencement or completion of clinical trials; the risk that planned clinical and nonclinical activities may not commence as scheduled; the risk that clinical and nonclinical trials may not result in marketable products; the risk that we may be unable to successfully finance and secure regulatory approval of and market our drug candidates; our dependence upon existing and new pharmaceutical and biotechnology collaborations; uncertainties relating to the levels and timing of payments under our collaborative agreements; uncertainties about our ability to obtain new corporate collaborations on satisfactory terms, if at all; the possible development of competing systems; our possible inability to protect our proprietary technologies; possible patent-infringement claims; risks of new, changing and competitive technologies; the risk that there may be changing and new regulations governing our operations or the sale of pharmaceutical products in the U.S. and internationally; and uncertainty about our ability to restructure our obligation under the Kendall Square Facility lease; or the risk that our assumptions and estimates relating to subleases of that space may not prove accurate.

Please see the "Risk Factors" appearing in our 2003 Annual Report to Stockholders and in our Form 10-K filed with the Securities and Exchange Commission on March 15, 2004, as amended by Form 10-K/A filed with the Securities and Exchange Commission on September 8, 2004, for more details regarding these and other risks. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As part of our investment portfolio, we own financial instruments that are sensitive to market risks. The investment portfolio is used to preserve our capital until it is required to fund operations, including our research and development activities. None of these market risk sensitive instruments are held for trading purposes. We do not have derivative financial instruments in its investment portfolio.

Interest Rate Risk

We invest our cash in a variety of financial instruments, principally securities issued by the U.S. government and its agencies, investment grade corporate bonds and notes and money market instruments. These investments are denominated in U.S. dollars. All of our interest-bearing securities are subject to interest rate risk, and could decline in value if interest rates fluctuate. Substantially all of our investment portfolio consists of marketable securities with active secondary or resale markets to help ensure portfolio liquidity, and we have implemented guidelines limiting the term to maturity of its investment instruments. Due to the conservative nature of these instruments, we do not believe that we have a material exposure to interest rate risk.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. The Company's chief executive officer and chief financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Report on Form 10-Q was being prepared. In designing and evaluating the disclosure controls and procedures, the Company's management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Changes in Internal Controls Over Financial Reporting. No change in the Company's internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the third quarter of 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

See Note 9 to the condensed consolidated financial statements.

Item 5. Other Information

On November 8, 2004, the Company's Change of Change of Control Agreements with certain executives were amended, effective as of that date, to add restricted stock to the types of equity grants eligible for accelerated vesting upon termination of the executive's employment in connection with a change of control of the Company. A copy of the form of Amendment to Change of Control Agreement, with an attached schedule identifying the individual parties to that agreement, is attached to this report as Exhibit 10.7.

On November 8, 2004, the Company entered into a Restricted Stock Agreement with 25 of its officers, including the Chief Executive Officer, President, each Senior Vice President, each Vice President and each Program Executive. The Restricted Stock Agreement sets forth the specific terms and conditions of the issuance of a special one-time grant made on May 6, 2004, which vests 50% on May 6, 2007 and 50% on May 6, 2009, subject to acceleration upon the Company achieving profitability. A copy of the form of Restricted Stock Agreement, with an attached schedule of the recipients and number of shares granted, is attached to this report as Exhibit 10.8.

On November 8, 2004, the Company entered into amendments of its employment agreements with each of Dr. Joshua Boger, Chairman and Chief Executive Officer; Dr. Vicki Sato, President; Kenneth Boger, Senior Vice President and General Counsel; Dr. N. Anthony Coles, Senior Vice President, Commercial Operations; and Ian F. Smith, Senior Vice President and Chief Financial Officer. In each case, the Employment Agreements were amended to add restricted stock to the types of equity grants eligible for accelerated vesting upon termination of the executive's employment under specified circumstances. Additionally, Dr. Joshua Boger's and Dr. Sato's employment agreements were revised to eliminate a requirement that the Company provide them 18 months' notice of termination of employment other than for cause, and provide instead for 18 months' severance and accelerated vesting of equity grants held by them on the date of a not-for-cause employment termination. Mr. Kenneth Boger's and Mr. Smith's employment agreements were amended and restated to provide for annual renewal after the initial term, which was four years for Mr. Boger and three years for Mr. Smith and to provide that the severance benefits upon termination of employment during the initial term of those agreements be extended beyond the initial term into all subsequent annual renewal periods. Amendments to the Company's employment agreements with Dr. Joshua Boger, Dr. Sato, and Dr. Coles are attached to this report as Exhibits 10.9, 10.10, and 10.12, respectively. The Company's Amended and Restated Employment Agreements with each of Mr. Kenneth Boger and Mr. Smith are attached to this report as Exhibits 10.11 and 10.13, respectively.

Item 6. Exhibits

4.1		Indenture, dated as of September 17, 2004, between Vertex Pharmaceuticals Incorporated and US Bank National Association, as Trustee, filed as Exhibit 10.2 to Vertex's Current Report on Form 8-K dated September 17, 2004 [File No. 000-19319] and incorporated by reference herein.
10.1		Dealer Manager Agreement, dated September 13, 2004, between the Company and the UBS Securities LLC, filed as Exhibit 10.1 to Vertex's Current Report on Form 8-K dated September 17, 2004 [File No. 000-19319] and incorporated by reference herein.
10.2		Resale Registration Rights Agreement, dated as of September 17, 2004, between the Company and UBS Securities LLC, filed as Exhibit 10.3 to Vertex's Current Report on Form 8-K dated September 17, 2004 [File No. 000-19319] and incorporated by reference herein.
10.3		Research, Development and Commercialization Agreement, dated May 24, 2004, by and between Vertex Pharmaceuticals Incorporated and Cystic Fibrosis Foundation Therapeutics Incorporated, filed (with certain confidential information redacted) as Exhibit 99.2 to Vertex's Current Report on Form 8-K/A dated September 10, 2004 [File No. 000-19319] and incorporated by reference herein.*
10.4		Exclusive Research Collaboration, License and Commercialization Agreement, dated June 21, 2004, by and between Vertex Pharmaceuticals Incorporated and Merck & Co., Inc., filed (with certain confidential information redacted) as Exhibit 99.4 to Vertex's Current Report on Form 8-K/A dated September 10, 2004 [File No. 000-19319] and incorporated by reference herein.*
10.5		License, Development and Commercialization Agreement, dated June 11, 2004, by and between Vertex Pharmaceuticals Incorporated and Mitsubishi Pharma Corporation, filed (with certain confidential information redacted) as Exhibit 99.2 to Vertex's Current Report on Form 8-K/A dated September 10, 2004 [File No. 000-19319] and incorporated by reference herein.*
10.6		First Revised and Restated Research and Early Development Agreement dated February 3, 2004, by and between Vertex Pharmaceuticals Incorporated and Novartis Pharma AG filed (with certain confidential information redacted) as Exhibit 10.35 to Vertex's Annual Report on Form 10-K/A dated September 8, 2004 [File No. 000-19319] and incorporated by reference herein.*
10.7		Form of Amendment, dated November 8, 2004, to Letter Agreement covering special rights upon a change of control transaction with each of the individuals listed on Schedule 1 thereto. (filed herewith).+
10.8		Form of Restricted Stock Agreement between the Company and each of the individuals listed on Schedule 1 thereto.+
10.9		Second Amendment, dated November 8, 2004, to Employment Agreement between Vertex and Joshua S. Boger (filed herewith).+
10.10		Second Amendment, dated November 8, 2004, to Employment Agreement between Vertex and Vicki L. Sato (filed herewith).+
10.11		Amended and Restated Employment Agreement, dated November 8, 2004, between Vertex and Kenneth S. Boger (filed herewith).+
10.12		Amendment, dated November 8, 2004, to Letter Agreement between Vertex and N. Anthony Coles (filed herewith).+
10.13		Amended and Restated Employment Agreement dated November 8, 2004, between Vertex and Ian F. Smith (filed herewith).+

31.1		Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*: Confidential portions of this document have been filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
+: Compensatory plan or agreement applicable to management and/or employees.

Signatures

Pursuant to the requirements 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
November 9, 2004		By:	/s/ IAN F. SMITH Ian F. Smith Senior Vice President and Chief Financial Officer (principal financial officer and duly authorized officer)

Exhibit Index

Exhibit No.		Description
4.1		Indenture, dated as of September 17, 2004, between Vertex Pharmaceuticals Incorporated and US Bank National Association, as Trustee, filed as Exhibit 10.2 to Vertex's Current Report on Form 8-K dated September 17, 2004 [File No. 000-19319] and incorporated by reference herein.
10.1		Dealer Manager Agreement, dated September 13, 2004, between the Company and the UBS Securities LLC, filed as Exhibit 10.1 to Vertex's Current Report on Form 8-K dated September 17, 2004 [File No. 000-19319] and incorporated by reference herein.
10.2		Resale Registration Rights Agreement, dated as of September 17, 2004, between the Company and UBS Securities LLC, filed as Exhibit 10.3 to Vertex's Current Report on Form 8-K dated September 17, 2004 [File No. 000-19319] and incorporated by reference herein.
10.3		Research, Development and Commercialization Agreement, dated May 24, 2004, by and between Vertex Pharmaceuticals Incorporated and Cystic Fibrosis Foundation Therapeutics Incorporated, filed (with certain confidential information redacted) as Exhibit 99.2 to Vertex's Current Report on Form 8-K/A dated September 10, 2004 [File No. 000-19319] and incorporated by reference herein.*
10.4		Exclusive Research Collaboration, License and Commercialization Agreement, dated June 21, 2004, by and between Vertex Pharmaceuticals Incorporated and Merck & Co., Inc., filed (with certain confidential information redacted) as Exhibit 99.4 to Vertex's Current Report on Form 8-K/A dated September 10, 2004 [File No. 000-19319] and incorporated by reference herein.*
10.5		License, Development and Commercialization Agreement, dated June 11, 2004, by and between Vertex Pharmaceuticals Incorporated and Mitsubishi Pharma Corporation, filed (with certain confidential information redacted) as Exhibit 99.2 to Vertex's Current Report on Form 8-K/A dated September 10, 2004 [File No. 000-19319] and incorporated by reference herein.*
10.6		First Revised and Restated Research and Early Development Agreement dated February 3, 2004, by and between Vertex Pharmaceuticals Incorporated and Novartis Pharma AG filed (with certain confidential information redacted) as Exhibit 10.35 to Vertex's Annual Report on Form 10-K/A dated September 8, 2004 [File No. 000-19319] and incorporated by reference herein.*
10.7		Form of Amendment, dated November 8, 2004, to Letter Agreement covering special rights upon a change of control transaction with each of the individuals listed on Schedule 1 thereto. (filed herewith).+
10.8		Form of Restricted Stock Agreement between the Company and each of the individuals listed on Schedule 1 thereto.+
10.9		Second Amendment, dated November 8, 2004, to Employment Agreement between Vertex and Joshua S. Boger (filed herewith).+
10.10		Second Amendment, dated November 8, 2004, to Employment Agreement between Vertex and Vicki L. Sato (filed herewith).+
10.11		Amended and Restated Employment Agreement, dated November 8, 2004, between Vertex and Kenneth S. Boger (filed herewith).+

10.12		Amendment dated November 8, 2004, to Letter Agreement between Vertex and N. Anthony Coles (filed herewith).+
10.13		Amended and Restated Employment Agreement dated November 8, 2004, between Vertex and Ian F. Smith (filed herewith).+
31.1		Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*: Confidential portions of this document have been filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
+: Compensatory plan or agreement applicable to management and/or employees.



                                                                    EXHIBIT 10.7

                                               November 8, 2004






Re:  Amendment to Change of Control Agreement

Dear [______],

       The Change of Control Agreement dated as of March 7, 2003 between you and
Vertex Pharmaceuticals Incorporated (the "AGREEMENT") hereby is amended,
effective November 8, 2004, as follows:

1.     Insert a new Section I.7, which shall state in its entirety:

       I.7  "PRO-RATA SHARE OF RESTRICTED STOCK" shall mean, for any grant of
            restricted stock as to which the Company's repurchase right lapses
            ratably over a specified period (e.g. in equal annual increments
            over four years), that number of shares as to which the Company's
            repurchase right with respect to those shares would have lapsed if
            the Executive's employment by the Company had continued an
            additional 18 month period. For any other shares of restricted
            stock, "Pro-Rata Share of Restricted Stock" shall mean, as to any
            shares of restricted stock which were granted on the same date and
            as to which the Company's repurchase right lapses on the same date,
            that portion of such shares calculated by multiplying the number of
            shares by a fraction, the numerator of which is the number of days
            that have passed since the date of grant, plus the number of days in
            18 months, and the denominator of which is the total number of days
            from the date of the grant until the date (without regard to any
            provisions for earlier vesting upon achievement of a specified goal)
            on which the Company's repurchase right would lapse under the terms
            of the grant.

2.     Delete Section 2, "Accelerated Vesting," in its entirety, and substitute
       the following therefor:

       2.   ACCELERATED VESTING

            (a)  Stock options for the purchase of the Company's securities held
                 by you as of the Termination Date and not then exercisable
                 shall be deemed to have been held by you for an additional 18
                 months, for purposes of calculating the number of options which
                 are exercisable on the Termination Date. The options to which
                 this accelerated vesting applies shall remain exercisable





[                   ]
 -------------------


                 until the earlier of (a) the end of the 90-day period
                 immediately following the Termination Date, or (b) the date the
                 stock option(s) would otherwise expire; and

            (b)  the Company's lapsing repurchase right with respect to shares
                 of restricted stock held by you shall lapse with respect to the
                 Pro-Rata Share of Restricted Stock.

            (c)  Notwithstanding anything to the contrary in this agreement, the
                 terms of any option agreement or restricted stock agreement
                 shall govern the acceleration, if any, of vesting or lapsing of
                 the Company's repurchase rights, as applicable, except to the
                 extent that the terms of this agreement are more favorable to
                 you.


       As so amended, the Change of Control Agreement shall remain in full force
and effect.

       If you agree to the foregoing amendment, please so indicate by signing
and returning the enclosed copy of this letter.


                                         VERTEX PHARMACEUTICALS INCORPORATED



                                         By:
                                            ------------------------------------
                                            Joshua S. Boger
                                            Chairman and Chief Executive Officer


Accepted and Agreed:


- ------------------------
[                   ]
 -------------------






                                   SCHEDULE 1
               PARTIES TO AMENDMENT TO CHANGE OF CONTROL AGREEMENT


                                    John Alam
                                   Lynne Brum
                                  Pamela Fritz
                                  Peter Mueller
                                   Mark Murcko
                                 Steven Schmidt
                                  John Thomson
                                 Jeffrey Wilson




                                                                    EXHIBIT 10.8

                           RESTRICTED STOCK AGREEMENT

                       VERTEX PHARMACEUTICALS INCORPORATED


       AGREEMENT made as of the 6th day of May 2004 (the "GRANT DATE") between
Vertex Pharmaceuticals Incorporated (the "COMPANY"), a Massachusetts corporation
having its principal place of business in Cambridge, Massachusetts and [____]
(the "PARTICIPANT").

       WHEREAS, the Company has adopted the Vertex Pharmaceuticals Incorporated
1996 Stock and Option Plan (the "PLAN") to promote the interests of the Company
by providing an incentive for employees, directors and consultants of the
Company or its Affiliates;

       WHEREAS, pursuant to the provisions of the Plan, the Company desires to
offer for sale to the Participant shares of the Company's common stock, $0.01
par value per share ("COMMON STOCK"), in accordance with the provisions of the
Plan, all on the terms and conditions hereinafter set forth;

       WHEREAS, Participant wishes to accept said offer; and

       WHEREAS, the parties agree that any terms used and not defined herein
have the meanings ascribed to such terms in the Plan.

       NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:

       1. DEFINITIONS.


            1.1 "ACCELERATION DATE" shall mean the date on which the Company's
       Board of Directors determines that the Company has achieved
       Profitability.

            1.2 "CAUSE" shall mean:

            (a) conviction of the Participant of a felony crime of moral
            turpitude;

            (b) the Participant's willful refusal or failure to follow a lawful
            directive or instruction of the Company's Board of Directors or the
            individual(s) to whom the Participant reports PROVIDED that the
            Participant received prior written notice of the directive(s) or
            instruction(s) that the Participant failed to follow, and PROVIDED
            FURTHER that the Participant did not correct any such problems
            within thirty (30) days after receiving notice in good faith from
            the Company;

            (c) the Participant commits (i) willful gross negligence, or (ii)
            willful gross misconduct in carrying out the Participant's duties,
            resulting in either case in material harm to the Company, unless
            such act, or failure to





            act, was believed by the Participant, in good faith, to be in the
            best interests of the Company; or

            (d) the Participant's violation of the Company's policies made known
            to the Participant regarding confidentiality, securities trading or
            inside information.

            1.3 "CHANGE OF CONTROL" shall mean that:


            (a) any "person" or "group" as such terms are used in Sections 13(d)
            and 14(d)(2) of the Securities Exchange Act of 1934 (the "ACT"),
            becomes a beneficial owner, as such term is used in Rule 13d-3
            promulgated under the Act, of securities of the Company representing
            more than fifty percent (50%) of the combined voting power of the
            outstanding securities of the Company having the right to vote in
            the election of directors; or

            (b) all or substantially all the business or assets of the Company
            are sold or disposed of, or the Company or a subsidiary of the
            Company combines with another company pursuant to a merger,
            consolidation, or other similar transaction, OTHER THAN (i) a
            transaction solely for the purpose of reincorporating the Company or
            one of its subsidiaries in a different jurisdiction or
            recapitalizing or reclassifying the Company's stock; or (ii) a
            merger or consolidation in which the shareholders of the Company
            immediately prior to such merger or consolidation continue to own at
            least a majority of the outstanding voting securities of the Company
            or the surviving entity immediately after the merger or
            consolidation.

            1.4 "DISABILITY" shall mean a disability as determined under the
       Company's long-term disability plan or program in effect at the time the
       disability first occurs, or if no such plan or program exists at the time
       of disability, then a "disability" as defined under Internal Revenue Code
       Section 22(e)(3).

            1.5 "GOOD REASON" shall mean that, without the Participant's
       consent, one or more of the following events occurs, and the Participant,
       of his or her own initiative, terminates his or her employment by the
       Company or an affiliate:

            (i) The Participant is assigned to any duties or responsibilities
            that are inconsistent, in any significant respect, with the scope of
            duties and responsibilities performed in the Participant's positions
            and offices on the date hereof, provided that such reassignment of
            duties or responsibilities is not due to the Participant's
            Disability or the Participant's performance, nor is at the
            Participant's request;

            (ii) The Participant suffers a reduction in the authorities, duties,
            and responsibilities associated with the Participant's positions and
            offices on the date hereof on the basis of which the Participant
            makes a determination in good faith that the Participant can no
            longer carry out such positions or offices in the manner
            contemplated on the date



                                       2


            hereof, provided that such reassignment of duties or
            responsibilities is not due to the Participant's Disability or the
            Participant's performance, nor is at the Participant's request;

            (iii) The Participant's base salary is decreased below the level on
            the date hereof;

            (iv) The principal office of the Company, or the location of the
            office to which the Participant is assigned on the date hereof, is
            relocated to a place thirty-five (35) or more miles away; or

            (v) Following a Change of Control, the Company's successor fails to
            assume the Company's rights and obligations under this Agreement.

            1.6 "PROFITABILITY" shall mean that the Company has aggregate
       positive net income for four consecutive financial quarters, as reported
       by the Company, applying generally accepted accounting principles,
       consistently applied, adjusted upwards or downwards to exclude:

            (a) acquisition and merger-related charges;

            (b) gains and losses from the disposition of significant assets
            other than in the ordinary course of the Company's business;

            (c) gains and losses from investments (not including gains and
            losses related to the management of cash and cash equivalents, and
            marketable securities);

            (d) gains and losses from the adoption of new or alternative
            accounting treatments;

            (e) employee stock/equity compensation charges;

            (f) gains or losses associated with conversion or exchange of
            convertible debt;

            (g) special charges related to acquisitions, such as, for example,
            good will adjustments, in-process R&D charges, and adjustments for
            harmonization of accounting principles;

            (h) asset impairment charges;

            (i) legal contingencies; and

            (j) other similar or analogous items;

       PROVIDED, HOWEVER, that in making the determination of the amount of
       aggregate net income, the Company's Board of Directors may include any
       particular item falling within the categories listed above, or exclude or
       include other items as it deems reasonable and appropriate to achieve the
       objectives of the Plan.


       2. TERMS OF PURCHASE. The Participant hereby accepts the offer of the
Company to issue to the Participant, in accordance with the terms of the Plan
and this Agreement, [_________] shares of the Company's Common Stock (such
shares, subject to adjustment pursuant to Section 17 of the Plan and Subsection
3(g) hereof, the "GRANTED SHARES") at a purchase price per share of $0.01 (the
"PURCHASE PRICE"), receipt of which is hereby acknowledged by the Company.


                                       3



       3. COMPANY'S LAPSING REPURCHASE RIGHT.


            (a) LAPSING REPURCHASE RIGHT. Except as set forth in Subsection 3(b)
       hereof, and subject to subsections(i), (ii) and (iii) below, if for any
       reason the Participant no longer is an employee, director or consultant
       of the Company or an affiliate prior to the fifth anniversary of the
       Grant Date, the Company (or its designee) shall have the option, but not
       the obligation, to purchase from the Participant (or the Participant's
       survivor), and, in the event the Company exercises such option, the
       Participant (or the Participant's survivor) shall be obligated to sell to
       the Company (or its designee), at a price per Granted Share equal to the
       Purchase Price, all or any part of the Granted Shares as set forth in
       clauses (i), (ii) and (iii) below (the "LAPSING REPURCHASE RIGHT"). The
       Company's Lapsing Repurchase Right shall be valid for a period of one
       year commencing with the date of such termination of employment or
       service. Notwithstanding any other provision hereof, in the event the
       Company is prohibited during such one year period from exercising its
       Lapsing Repurchase Right by applicable law, then the time period during
       which such Lapsing Repurchase Right may be exercised shall be extended
       until 30 days after the Company is first not so prohibited.
       Notwithstanding the foregoing,

                 (i) the Company's Lapsing Repurchase Right shall lapse with
            respect to 50% of the Granted Shares on the third anniversary of the
            Grant Date, if the Participant continues to serve as an employee,
            director or consultant of the Company on that date;

                 (ii) the Company's Lapsing Repurchase Right shall lapse with
            respect to 50% of the Granted Shares on the earlier of (a) the
            Acceleration Date or (b) the fifth anniversary of the Grant Date, if
            the Participant continues to serve as an employee, director or
            consultant of the Company on that date.

                 (iii) notwithstanding anything to the contrary contained in
            this Agreement, if the Company or an affiliate terminates the
            Participant's employment or service for Cause or in the event the
            Committee determines, within 90 days after the Participant's
            termination, that either prior or subsequent to the Participant's
            termination the Participant engaged in conduct that would constitute
            Cause, the Company shall have the option to repurchase all of the
            Granted Shares acquired by the Participant hereunder for the
            Purchase Price.

            (b) EFFECT OF TERMINATION BY THE COMPANY WITHOUT CAUSE, BY THE
       PARTICIPANT FOR GOOD REASON, OR UPON DISABILITY OR DEATH. Except as
       otherwise provided in Subsection 3 (a)(iii) above, the Company's Lapsing
       Repurchase Right shall terminate, and the Participant's ownership of all
       Granted Shares then owned by the Participant shall become vested, if the
       Company or an affiliate terminates the Participant's employment or
       service other than for Cause, if the Participant terminates his or her
       employment for Good Reason, or if the Participant ceases to be an
       employee, director or consultant of the Company by reason of Disability
       or death.

            (c) CLOSING. If the Company exercises the Lapsing Repurchase Right,
       the Company shall notify the Participant, or, in the case of the
       Participant's death, his or her survivor, in writing of its intent to
       repurchase the Granted Shares. Such notice may be mailed by the Company
       up to and including the last day of the time period provided for above
       for exercise of


                                       4



       the Lapsing Repurchase Right. The notice shall specify the place, time
       and date for payment of the repurchase price (the "CLOSING") and the
       number of Granted Shares with respect to which the Company is exercising
       the Lapsing Repurchase Right. The Closing shall be not less than ten days
       nor more than 60 days from the date of mailing of the notice, and the
       Participant or the Participant's survivor with respect to the Granted
       Shares which the Company elects to repurchase shall have no further
       rights as the owner thereof from and after the date specified in the
       notice. At the Closing, the repurchase price shall be delivered to the
       Participant or the Participant's survivor and the Granted Shares being
       repurchased, duly endorsed for transfer, shall, to the extent that they
       are not then in the possession of the Company, be delivered to the
       Company by the Participant or the Participant's survivor.

            (d) ESCROW. All Granted Shares that are subject to the Lapsing
       Repurchase Right, together with any securities distributed in respect
       thereof such as through a stock split or other recapitalization, shall be
       held by the Company in escrow until such time as the Granted Shares have
       vested. The Company promptly shall release Granted Shares from escrow
       upon termination of the Lapsing Repurchase Right with respect to those
       Granted Shares.

            (e) PROHIBITION ON TRANSFER. The Participant recognizes and agrees
       that all Granted Shares that are subject to the Lapsing Repurchase Right
       may not be sold, transferred, assigned, hypothecated, pledged, encumbered
       or otherwise disposed of, whether voluntarily or by operation of law,
       other than to the Company (or its designee). However, the Participant,
       with the approval of the Committee, may transfer the Granted Shares for
       no consideration to or for the benefit of the Participant's Immediate
       Family (including, without limitation, to a trust for the benefit of the
       Participant's Immediate Family or to a partnership or limited liability
       company for one or more members of the Participant's Immediate Family),
       subject to such limits as the Committee may establish, and the transferee
       shall remain subject to all the terms and conditions applicable to this
       Agreement prior to such transfer and each such transferee shall so
       acknowledge in writing as a condition precedent to the effectiveness of
       such transfer. The term "Immediate Family" shall mean the Participant's
       spouse, former spouse, parents, children, stepchildren, adoptive
       relationships, sisters, brothers, nieces and nephews and grandchildren
       (and, for this purpose, shall also include the Participant). The Company
       shall not be required to transfer any Granted Shares on its books which
       shall have been sold, assigned or otherwise transferred in violation of
       this Subsection 3(e), or to treat as the owner of such Granted Shares, or
       to accord the right to vote as such owner or to pay dividends to, any
       person or organization to which any such Granted Shares shall have been
       so sold, assigned or otherwise transferred, in violation of this
       Subsection 3(e).

            (f) FAILURE TO DELIVER GRANTED SHARES TO BE REPURCHASED. If the
       Granted Shares to be repurchased by the Company under this Agreement are
       not in the Company's possession pursuant to Subsection 3 (d) above or
       otherwise and the Participant or the Participant's survivor fails to
       deliver such Granted Shares to the Company (or its designee), the Company
       may elect (i) to establish a segregated account in the amount of the
       repurchase price, such account to be turned over to the Participant or
       the Participant's survivor upon delivery of such Granted Shares, and (ii)
       immediately to take such action as is appropriate to transfer record
       title of such Granted Shares from the Participant to the Company (or its
       designee) and to treat the Participant and such Granted Shares in all
       respects as if delivery of such Granted Shares had been made as required


                                       5



       by this Agreement. The Participant hereby irrevocably grants the Company
       a power of attorney which shall be coupled with an interest for the
       purpose of effectuating the preceding sentence.

            (g) ADJUSTMENTS. The Plan contains provisions covering the treatment
       of Granted Shares in a number of contingencies such as stock splits and
       mergers. Provisions in the Plan for adjustment with respect to the
       Granted Shares and the related provisions with respect to successors to
       the business of the Company are hereby made applicable hereunder and are
       incorporated herein by reference.


       3. LEGEND. In addition to any legend required pursuant to the Plan, all
certificates representing the Granted Shares to be issued to the Participant
pursuant to this Agreement shall have endorsed thereon a legend substantially as
follows:

            "The shares represented by this certificate are subject to
            restrictions set forth in a Restricted Stock Agreement dated as of
            May 6, 2004 with the Company, a copy of which Agreement is available
            for inspection at the offices of the Company or will be made
            available upon request."

       4. INCORPORATION OF THE PLAN. The Participant specifically understands
and agrees that the Granted Shares issued under the Plan are being sold to the
Participant pursuant to the Plan, a copy of which Plan the Participant
acknowledges he or she has read and understands and by which Plan he or she
agrees to be bound. The provisions of the Plan are incorporated herein by
reference.

       5. TAX LIABILITY OF THE PARTICIPANT AND PAYMENT OF TAXES. The Participant
acknowledges and agrees that any income or other taxes due from the Participant
with respect to the Granted Shares issued pursuant to this Agreement, including,
without limitation, the Lapsing Repurchase Right, shall be the Participant's
responsibility. The Participant agrees and acknowledges that (i) the Company
promptly will withhold from the Participant's pay the amount of taxes the
Company is required to withhold upon the lapsing of any Lapsing Repurchase Right
on the part of the Company pursuant to this Agreement, and (ii) the Participant
shall make immediate payment to the Company in the amount of any tax required to
be withheld by the Company in excess of the Participant's pay available for such
withholding.

       6. EQUITABLE RELIEF. The Participant specifically acknowledges and agrees
that in the event of a breach or threatened breach of the provisions of this
Agreement or the Plan, including the attempted transfer of the Granted Shares by
the Participant in violation of this Agreement, monetary damages may not be
adequate to compensate the Company, and, therefore, in the event of such a
breach or threatened breach, in addition to any right to damages, the Company
shall be entitled to equitable relief in any court having competent
jurisdiction. Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies available to it for any such breach or threatened
breach.

       7. NO OBLIGATION TO MAINTAIN RELATIONSHIP. The Company is not by the Plan
or this Agreement obligated to continue the Participant as an employee, director
or consultant of the Company or an affiliate. The Participant acknowledges: (i)
that the Plan is discretionary in


                                       6


nature and may be suspended or terminated by the Company at any time; (ii) that
the grant of the Granted Shares is a one-time benefit which does not create any
contractual or other right to receive future grants of shares, or benefits in
lieu of shares; (iii) that all determinations with respect to any such future
grants, including, but not limited to, the times when shares shall be granted,
the number of shares to be granted, the purchase price, and the time or times
when each share shall be free from a lapsing repurchase right, will be at the
sole discretion of the Company; (iv) that the Participant's participation in the
Plan is voluntary; (v) that the value of the Granted Shares is an extraordinary
item of compensation which is outside the scope of the Participant's employment
contract, if any; and (vi) that the Granted Shares are not part of normal or
expected compensation for purposes of calculating any severance, resignation,
redundancy, end of service payments, bonuses, long-service awards, pension or
retirement benefits or similar payments.

       9. NOTICES. Any notices required or permitted by the terms of this
Agreement or the Plan shall be given by recognized courier service, facsimile,
registered or certified mail, return receipt requested, addressed as follows:

       If to the Company:


            Vertex Pharmaceuticals Incorporated
            130 Waverly Street
            Cambridge, MA 02139
            Attention: Legal Department-Corporate

       If to the Participant:

            At the Participant's home address then
            listed in the Company's payroll records

or to such other address or addresses of which notice in the same manner has
previously been given. Any such notice shall be deemed to have been given on the
earliest of receipt, one business day following delivery by the sender to a
recognized courier service, or three business days following mailing by
registered or certified mail.

       10. BENEFIT OF AGREEMENT. Subject to the provisions of the Plan and the
other provisions hereof, this Agreement shall be for the benefit of and shall be
binding upon the heirs, executors, administrators, successors and assigns of the
parties hereto.

       11. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of The Commonwealth of Massachusetts, without giving
effect to the conflict of law principles thereof. For the purpose of litigating
any dispute that arises under this Agreement, whether at law or in equity, the
parties hereby consent to exclusive jurisdiction in Massachusetts and agree that
such litigation shall be conducted in the courts of Boston, Massachusetts or the
federal courts of the United States for the District of Massachusetts.

       12. SEVERABILITY. If any provision of this Agreement is held to be
invalid or unenforceable by a court of competent jurisdiction, then such
provision or provisions shall be modified to the extent necessary to make such
provision valid and enforceable, and to the extent that this is impossible, then
such provision shall be deemed to be excised from this Agreement,




                                       7


and the validity, legality and enforceability of the rest of this Agreement
shall not be affected thereby.

       13. ENTIRE AGREEMENT. This Agreement, together with the Plan, constitutes
the entire agreement and understanding between the parties hereto with respect
to the subject matter hereof and supersedes all prior oral or written agreements
and understandings relating to the subject matter hereof. No statement,
representation, warranty, covenant or agreement not expressly set forth in this
Agreement shall affect or be used to interpret, change or restrict the express
terms and provisions of this Agreement provided, however, in any event, this
Agreement shall be subject to and governed by the Plan.

       14. MODIFICATIONS AND AMENDMENTS; WAIVERS AND CONSENTS. The terms and
provisions of this Agreement may be modified or amended as provided in the Plan.
Except as provided in the Plan, the terms and provisions of this Agreement may
be waived, or consent for the departure therefrom granted, only by written
document executed by the party entitled to the benefits of such terms or
provisions. No such waiver or consent shall be deemed to be or shall constitute
a waiver or consent with respect to any other terms or provisions of this
Agreement, whether or not similar. Each such waiver or consent shall be
effective only in the specific instance and for the purpose for which it was
given, and shall not constitute a continuing waiver or consent.

       15. CONSENT OF SPOUSE. If the Participant is married as of the date of
this Agreement, the Participant's spouse shall execute a Consent of Spouse in
the form of EXHIBIT A hereto, effective as of the date hereof. Such consent
shall not be deemed to confer or convey to the spouse any rights in the Granted
Shares that do not otherwise exist by operation of law or the agreement of the
parties. If the Participant marries or remarries subsequent to the date hereof,
the Participant shall, not later than 60 days thereafter, obtain his or her new
spouse's acknowledgement of and consent to the existence and binding effect of
all restrictions contained in this Agreement by such spouse's executing and
delivering a Consent of Spouse in the form of EXHIBIT A.

       16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by different parties hereto on separate counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

       17. DATA PRIVACY. By entering into this Agreement, the Participant: (i)
authorizes the Company and each affiliate, and any agent of the Company or any
affiliate administering the Plan or providing Plan record keeping services, to
disclose to the Company or any of its affiliates such information and data as
the Company or any such affiliate shall request in order to facilitate the grant
of Granted Shares and the administration of the Plan; (ii) waives any data
privacy rights he or she may have with respect to such information; and (iii)
authorizes the Company and each affiliate to store and transmit such information
in electronic form.


                            [Signature page follows]


                                       8



       IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.


                                         VERTEX PHARMACEUTICALS INCORPORATED




                                         By:
                                            ------------------------------------
                                         Name:
                                         Title:


                                         PARTICIPANT:


                                         ---------------------------------------
                                         Print name:



                                       9


                                      EXHIBIT A

                                  CONSENT OF SPOUSE

       I, ____________________________, spouse of _____________________________,
acknowledge that I have read the RESTRICTED STOCK AGREEMENT dated as of
_______________, 200__ (the "AGREEMENT") to which this Consent is attached as
Exhibit A and that I know its contents. Capitalized terms used and not defined
herein shall have the meanings assigned to such terms in the Agreement. I am
aware that by its provisions the Granted Shares granted to my spouse pursuant to
the Agreement are subject to a Lapsing Repurchase Right in favor of VERTEX
PHARMACEUTICALS INCORPORATED (the "COMPANY") and that, accordingly, the Company
has the right to repurchase up to all of the Granted Shares of which I may
become possessed as a result of a gift from my spouse or a court decree and/or
any property settlement in any domestic litigation.

       I hereby agree that my interest, if any, in the Granted Shares subject to
the Agreement shall be irrevocably bound by the Agreement and further understand
and agree that any community property interest I may have in the Granted Shares
shall be similarly bound by the Agreement.

       I agree to the Lapsing Repurchase Right described in the Agreement and I
hereby consent to the repurchase of the Granted Shares by the Company and the
sale of the Granted Shares by my spouse or my spouse's legal representative in
accordance with the provisions of the Agreement. Further, as part of the
consideration for the Agreement, I agree that at my death, if I have not
disposed of any interest of mine in the Granted Shares by an outright bequest of
the Granted Shares to my spouse, then the Company shall have the same rights
against my legal representative to exercise its rights of repurchase with
respect to any interest of mine in the Granted Shares as it would have had
pursuant to the Agreement if I had acquired the Granted Shares pursuant to a
court decree in domestic litigation.

       I AM AWARE THAT THE LEGAL, FINANCIAL AND RELATED MATTERS CONTAINED IN THE
AGREEMENT ARE COMPLEX AND THAT I AM FREE TO SEEK INDEPENDENT PROFESSIONAL
GUIDANCE OR COUNSEL WITH RESPECT TO THIS CONSENT. I HAVE EITHER SOUGHT SUCH
GUIDANCE OR COUNSEL OR DETERMINED AFTER REVIEWING THE AGREEMENT CAREFULLY THAT I
WILL WAIVE SUCH RIGHT.

       Dated as of the _______ day of ________________, 200__.



                                         ---------------------------------------
                                         Print name:


                                      B-1





                                   SCHEDULE 1
                      PARTIES TO RESTRICTED STOCK AGREEMENT


               Individual                                    Number of Shares
               ----------                                    ----------------
               Alam, John J.                                      65,000
               Boger, Joshua S.                                  105,000
               Boger, Kenneth S.                                  65,000
               Brum, Lynne H.                                     35,000
               Coles, N. Anthony                                  65,000
               Fritz, Pamela J.                                   35,000
               Gharakharian, Shahin                               20,000
               Golec, Julian                                      20,000
               Henry, Glinda Louise                               20,000
               Kauffman, Robert S.                                20,000
               Kelley, William S.                                 20,000
               Lyons, Steve                                       20,000
               Mueller, Peter                                     65,000
               Murcko, Mark                                       20,000
               Negulescu, Paul A.                                 20,000
               Olson, Eric                                        20,000
               Randle, John C.R.                                  20,000
               Sato, Vicki L.                                     87,500
               Schmidt, Steven P.                                 20,000
               Smith, Ian F.                                      65,000
               Thomson, John                                      20,000
               Tung, Roger D.                                     20,000
               Vaz, Alfred                                        20,000
               Williams Leslie L.                                 20,000
               Wilson, Jeffrey D.                                 35,000



                                                                    EXHIBIT 10.9

                                           November 8, 2004


Joshua S. Boger
243 Old Pickard Road
Concord, MA 01742

Re:  Second Amendment to Employment Agreement

Dear Joshua,

       The Employment Agreement dated as of November 1, 1994, as amended by
letter agreement dated May 12, 1995, between you and Vertex Pharmaceuticals
Incorporated (the "Agreement") hereby is amended, effective November 8, 2004, by
deleting Section 6.4 in its entirety, and substituting the following:

       6.4  TERMINATION WITHOUT CAUSE. If the Executive's employment is
            terminated by the Company without Cause, the Executive shall be
            entitled to 18 months of Severance Pay. "Severance Pay" shall mean
            an amount equal to the Executive's base salary then in effect, plus
            the amount of the target bonus for the year in which the Executive's
            employment is terminated divided by twelve (12) (each of the 12
            shares to constitute a "month's" Severance Pay). In addition: (i)
            all unexercisable stock options held by the Executive as of the date
            of termination shall be deemed to have been held by the Executive
            for an additional eighteen (18) months after the date of
            termination, for purposes of vesting and exercise rights, and any
            unexercisable stock options that become exercisable as a result
            thereof shall remain exercisable until the earlier of (1) the end of
            the 90-day period following the date of termination and (2) the date
            the option would otherwise expire and (ii) the Company's lapsing
            repurchase right with respect to shares of restricted stock held by
            the Executive shall lapse with respect to the Pro-Rata Share of
            Restricted Stock. The "Pro-Rata Share of Restricted Stock" shall
            mean, for any grant of restricted stock as to which the Company's
            repurchase right lapses ratably over a specified period (e.g. in
            equal annual increments over four years), that number of shares as
            to which the Company's repurchase right with respect to those shares
            would have lapsed if the Executive's employment by the Company had
            continued an additional eighteen month period. For any other shares
            of restricted stock, "Pro-Rata Share of Restricted Stock" shall
            mean, as to any shares of restricted stock which were granted on the
            same date and as to which the Company's repurchase right lapses on
            the same date, that portion of such shares calculated by multiplying
            the number of shares by a fraction, the numerator of which is the
            number of days that have passed since the date of grant, plus the
            number of days in 18 months, and the denominator of which is the
            total number of days from the date of the grant until the date
            (without regard to






Joshua S. Boger
November 8, 2004
Page 2


            any provisions for earlier vesting upon achievement of a specified
            goal) on which the Company's repurchase right would lapse under the
            terms of the grant. Notwithstanding the foregoing, the terms of any
            option agreement or restricted stock agreement shall govern the
            acceleration of vesting or lapsing of the Company's repurchase
            rights, as applicable, except to the extent that the terms of this
            Employment Agreement are more favorable to the Executive.

       As so amended, the Agreement shall remain in full force and effect.

       If you agree to the foregoing amendment, please so indicate by signing
and returning the enclosed copy of this letter.

                                         VERTEX PHARMACEUTICALS INCORPORATED



                                         By: /s/ VICKI L. SATO
                                            ------------------------------------
                                             Vicki L. Sato, President


Accepted and Agreed:


/s/ JOSHUA S. BOGER
- -----------------------------------
Joshua S. Boger

Exhibit 10.10 November 8, 2004 Vicki L. Sato 43 Larch Road Cambridge, MA 02138 Re: Second Amendment to Employment Agreement Dear Vicki, The Employment Agreement dated as of November 1, 1994, as amended by letter agreement dated May 12, 1995, between you and Vertex Pharmaceuticals Incorporated (the "Agreement") hereby is amended, effective November 8, 2004, as follows: 1. Section 6.4 shall be deleted in its entirety, and the following substituted therefor: 6.4 TERMINATION WITHOUT CAUSE. If the Executive's employment is terminated by the Company without Cause, the Executive shall be entitled to 18 months of Severance Pay. "Severance Pay" shall mean an amount equal to the Executive's base salary then in effect, plus the amount of the target bonus for the year in which the Executive's employment is terminated divided by twelve (12) (each of the 12 shares to constitute a "month's" Severance Pay). In addition: (i) all unexercisable stock options held by the Executive as of the date of termination shall be deemed to have been held by the Executive for an additional eighteen (18) months after the date of termination, for purposes of vesting and exercise rights, and any unexercisable stock options that become exercisable as a result thereof shall remain exercisable until the earlier of (1) the end of the 90-day period following the date of termination and (2) the date the option would otherwise expire and (ii) the Company's lapsing repurchase right with respect to shares of restricted stock held by the Executive shall lapse with respect to the Pro-Rata Share of Restricted Stock. The "Pro-Rata Share of Restricted Stock" shall mean, for any grant of restricted stock as to which the Company's repurchase right lapses ratably over a specified period (e.g. in equal annual increments over four years), that number of shares as to which the Company's repurchase right with respect to those shares would have lapsed if the Executive's employment by the Company had continued an additional eighteen month period. For any other shares of restricted stock, "Pro-Rata Share of Restricted Stock" shall mean, as to any shares of restricted stock which were granted on the same date and as to which the Company's repurchase right lapses on the same date, that portion of such shares calculated by multiplying the number of shares by a fraction, the numerator of which is the number of days that have passed since the date of grant, plus the number of days in 18 months, and the denominator of which is

Vicki L. Sato November 8, 2004 Page 2 the total number of days from the date of the grant until the date (without regard to any provisions for earlier vesting upon achievement of a specified goal) on which the Company's repurchase right would lapse under the terms of the grant. Notwithstanding the foregoing, the terms of any option agreement or restricted stock agreement shall govern the acceleration of vesting or lapsing of the Company's repurchase rights, as applicable, except to the extent that the terms of this Employment Agreement are more favorable to the Executive. 2. Appendix A, Section 1.3(i)(a) shall be deleted in its entirety, and the following substituted therefor: (a) substantial adverse alteration in the nature or status of the Executive's position or responsibilities as President of the Company or the condition of her employment as President of the Company; As so amended, the Agreement shall remain in full force and effect. If you agree to the foregoing amendment, please so indicate by signing and returning the enclosed copy of this letter. VERTEX PHARMACEUTICALS INCORPORATED By: /s/ Joshua S. Boger --------------------------------- Joshua S. Boger, Chairman and CEO Accepted and Agreed: /s/ Vicki L. Sato - ------------------------ Vicki L. Sato




                                                                   EXHIBIT 10.11

                    AMENDED AND RESTATED EMPLOYMENT AGREEMENT

       This Amended and Restated Employment Agreement (the "Agreement") amends
and restates, effective as of this 8th day of November, 2004, that certain
Employment Agreement made and entered into as of the 24th day of September, 2001
(the "ORIGINAL AGREEMENT") by and between Vertex Pharmaceuticals Incorporated, a
Massachusetts corporation (together with its successors and assigns, the
"COMPANY"), and Kenneth S. Boger (the "EXECUTIVE").

                               W IT N E S S E T H

       WHEREAS, the Company has employed the Executive as the General Counsel
and a Senior Vice President of the Company since the date of the Original
Agreement; and

       WHEREAS, the Company and the Executive desire to amend the Original
Agreement to extend certain terms of the Original Agreement beyond the Initial
Term, to add certain provisions regarding grants of restricted stock, which the
Company has begun issuing in addition to stock options since the date of the
Original Agreement, and to make certain other changes to clarify the meaning of
some provisions.

       NOW, THEREFORE, in consideration of the promises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (each individually
a "PARTY", and together the "PARTIES") agree as follows:

1. DEFINITIONS.

       (a) "BASE SALARY" shall mean the Executive's base salary in accordance
with SECTION 4 below.

       (b) "BOARD" shall mean the Board of Directors of the Company.

       (c) "CAUSE" shall mean (i) the Executive is convicted of a crime
involving moral turpitude, or (ii) the Executive commits a material breach of
any provision of this Agreement, or (iii) the Executive, in carrying out his
duties, acts or fails to act in a manner which is determined, in the sole
discretion of the Board, to be (A) willful gross neglect or (B) willful gross
misconduct resulting, in either case, in material harm to the Company unless
such act, or failure to act, was believed by the Executive, in good faith, to be
in the best interests of the Company.

       (d) "CHANGE OF CONTROL" shall be deemed to have occurred if:

            (i) any "person" or "group" as such terms are used in Sections 13(d)
       and 14(d)(2) of the Securities Exchange Act of 1934 (the "ACT"), becomes
       a beneficial owner, as such term is used in Rule 13d-3 promulgated under
       the Act, of securities of the Company representing more than 50% of the
       combined voting power of the outstanding securities of the Company,
       having the right to vote in the election of directors (any such owner
       being herein referred to as an "ACQUIRING PERSON");




            (ii) a majority of the Company's Board at any time during the Term
       of this Agreement consists of individuals other than individuals
       nominated or approved by a majority of the Disinterested Directors; or

            (iii) all or substantially all the business or assets of the Company
       are sold or disposed of, or the Company or a Subsidiary of the Company
       combines with another company pursuant to a merger, consolidation, or
       other similar transaction, other than (1) a transaction solely for the
       purpose of reincorporating the company in a different jurisdiction or
       recapitalizing or reclassifying the Company's stock, or (2) a merger or
       consolidation in which the shareholders of the Company immediately prior
       to such merger or consolidation continue to own at least a majority of
       the outstanding voting securities of the Company or the surviving entity
       immediately after the merger or consolidation.

       (e) "COMMON STOCK" shall mean the common stock of the Company.

       (f) "COMPETITIVE ACTIVITY" shall mean engagement directly or indirectly,
individually or through any corporation, partnership, joint venture, trust,
limited liability company or person, as an officer, director, employee, agent,
consultant, partner, proprietor, shareholder or otherwise, in any business
associated with the biopharmaceutical or pharmaceutical industry(other than a
business which is an independent general practice law firm which is so
"associated" only by reason of the business of one or more of its clients),
which, in the sole discretion of the Company, is determined to compete with the
business and/or interests or future interests of the Company, or any of its
affiliates, at any place in which it, or any such affiliate, is then conducting
its business, or at any place where products manufactured or sold by it, or any
such affiliate, are offered for sale, or any place in the United States or any
possessions or protectorates thereof, provided, however, that ownership of five
percent (5%) or less of the outstanding voting securities or equity interests of
any company shall not in itself be deemed to be competition with the Company.

       (g) "DISABILITY" or "DISABLED" shall mean a disability as determined
under the Company's long-term disability plan or program in effect at the time
the disability first occurs, or if no such plan or program exists at the time of
disability, then a "disability" as defined under Internal Revenue Code Section
22(e)(3).

       (h) "DISINTERESTED DIRECTOR" shall mean any member of the Company's Board
(i) who is not an officer or employee of the Company or any of their
subsidiaries, (ii) who is not an Acquiring Person or an affiliate or associate
of an Acquiring Person or of any such affiliate or associate and (iii) who was a
member of the Company's Board prior to the date of this Agreement or was
recommended for election or elected by a majority of the Disinterested Directors
on the Company's Board at the time of such recommendation or election.

       (i) "EFFECTIVE DATE" shall mean the first date written above.

       (j) "GOOD REASON" shall mean that, without the Executive's consent, one
or more of the following events occurs during the Term of this Agreement, and
the Executive, of his own initiative, terminates his employment:

            (i) The Executive is assigned to any material duties or
       responsibilities that are inconsistent, in any significant respect, with
       the scope of duties and responsibilities customarily


                                       2


            associated with the Executive's position and office as described in
            SECTION 3, provided that such reassignment of duties or
            responsibilities is not for Cause, or due to Executive's Disability,
            and is not at the Executive's request;

            (ii) The Executive suffers a reduction in the authorities, duties,
       and responsibilities customarily associated with his position and office
       as described in SECTION 3 on the basis of which Executive makes a
       determination in good faith that Executive can no longer carry out such
       position or office in the manner contemplated at the time this Agreement
       was entered into, provided that such reduction in the authorities, duties
       or responsibilities is not for Cause, or due to Executive's Disability,
       and is not at the Executive's request;

            (iii) The Executive's Base Salary is decreased;

            (iv) The principal executive office of the Company, or the
       Executive's own office location as assigned to him by the Company at the
       Effective Date is relocated to a place thirty-five (35) or more miles
       away, without the Executive's agreement; or

            (v) Failure of the Company's successor, in the event of a Change of
       Control, to assume all obligations and liabilities of this Agreement; or

            (vi) The Company shall materially breach any of the terms of this
       Agreement.

       (k) "Pro-Rata Share of Restricted Stock" for any period shall mean, for
any grant of restricted stock as to which the Company's repurchase right lapses
ratably over a specified period (e.g. in equal annual increments over four
years), that number of shares as to which the Company's repurchase right with
respect to those shares would have lapsed if the Executive's employment by the
Company had continued for such period. For any other shares of restricted stock,
"Pro-Rata Share of Restricted Stock" shall mean, as to any shares of restricted
stock which were granted on the same date and as to which the Company's
repurchase right lapses on the same date, that portion of such shares calculated
by multiplying the number of shares by a fraction, the numerator of which is the
number of days that have passed since the date of grant, plus the number of days
in the period in question, and the denominator of which is the total number of
days from the date of the grant until the date (without regard to any provisions
for earlier vesting upon achievement of a specified goal) on which the Company's
repurchase right would lapse under the terms of the grant.

       (l) "SEVERANCE PAY" shall mean an amount equal to the sum of the Base
Salary in effect on the date of termination of Executive's employment, plus the
amount of the Target Bonus for the Executive for the year in which the
Executive's employment is terminated, divided by twelve (12) (each of the 12
shares to constitute a "month's" Severance Pay); PROVIDED, HOWEVER, that in the
event Executive terminates his employment for Good Reason based on a reduction
in Base Salary, then the Base Salary to be used in calculating Severance Pay
shall be the Base Salary in effect immediately prior to such reduction in Base
Salary.

       (m) "SUBSIDIARY" shall mean a corporation of which the Company owns 50%
or more of the combined voting power of the outstanding securities having the
right to vote in an election of directors, or any other business entity in which
the Company directly or indirectly has an ownership interest of 50% or more.


                                       3



       (n) "TARGET BONUS" shall mean a bonus for which the Executive is eligible
on an annual basis, at a level consistent with his title and responsibilities,
under the Company's bonus program then in effect and applicable to the Company's
senior executives generally, in such amount as may be determined in the sole
discretion of the Board.

2. TERM OF EMPLOYMENT.

       The Company hereby employs the Executive, and the Executive hereby
accepts such employment, for the period commencing on the Effective Date and
ending on the fourth anniversary of the Effective Date, subject to earlier
termination in accordance with the terms of this Agreement. Thereafter, the Term
of Employment shall automatically renew on each anniversary of the Effective
Date for additional one-year period(s), UNLESS (i) the Company notifies the
Executive in writing in accordance with SECTION 23 below, at least 90 days prior
to the expiration of the then-current Term that it does not want the Term of
Employment to so renew, or (ii) the Executive has notified the Company in
writing in accordance with SECTION 23 below that Executive does not want the
Term of Employment to so renew. The initial four year Term of Employment
hereunder is referred to herein as the "INITIAL TERM", and the Initial Term plus
all additional one-year renewal periods (if any), are collectively referred to
herein as the "TERM OF EMPLOYMENT" or the "TERM OF THE AGREEMENT".

3. POSITION, DUTIES AND RESPONSIBILITIES.

       On the Effective Date and continuing for the remainder of the Term of
Employment, the Executive shall be employed as the General Counsel and Senior
Vice President of the Company, and shall be responsible for duties customarily
associated with the position of chief legal officer of the Company. The
Executive shall represent and serve the Company faithfully, conscientiously and
to the best of the Executive's ability and shall promote the interests,
reputation and current and long term plans, objectives and policies of the
Company. The Executive shall devote all of the Executive's time, attention,
knowledge, energy and skills, during normal working hours, and at such other
times as the Executive's duties may reasonably require, to the duties of the
Executive's employment, provided, however, nothing set forth herein shall
prohibit the Executive from engaging in other activities to the extent such
activities do not impair the ability of the Executive to perform his duties and
obligations under this Agreement, nor are contrary to the interests, reputation,
current and long term plans, objectives and policies of the Company. The
Executive, in carrying out his duties under this Agreement, shall report to the
President of the Company.

4. BASE SALARY.

       During the Term of this Agreement, the Executive shall be paid an
annualized Base Salary of $320,000, payable in accordance with the regular
payroll practices of the Company. The Base Salary shall be reviewed no less
frequently than annually, and any increase thereto (which shall thereafter be
deemed the Executive's Base Salary) shall be solely within the discretion of the
Board.

5. TARGET BONUS/INCENTIVE COMPENSATION PROGRAM.

       a) TARGET BONUS PROGRAM: The Executive shall participate in the Company's
Target Bonus program (and other incentive compensation programs) applicable to
the


                                       4



Company's senior executives, as any such programs are established and modified
from time to time by the Board in its sole discretion, and in accordance with
the terms of such program.

       b) SIGN-ON CASH BONUS: The Executive shall receive a sign-on cash bonus
in the amount of $70,000 payable to the Executive on the Effective Date. In the
event the Executive terminates this Agreement without "Good Reason" during the
period commencing on the Effective Date and ending on the first anniversary of
the Effective Date, then the Executive shall repay the sign-on cash bonus to the
Company within thirty (30) days of such termination.

       c) SIGN-ON STOCK OPTION GRANT: An initial stock option grant shall be
awarded to the Executive pursuant to the terms of the Company's stock option
plan. The initial stock option grant shall be for 120,000 shares of Company
capital stock, the option for which will vest and become exercisable in equal
amounts quarterly over the five (5) year period commencing on the Effective
Date, and as otherwise specified herein and in the Company's stock option plan,
and shall be subject to the other terms and conditions specified in a separate
grant agreement.

6. LONG-TERM INCENTIVE COMPENSATION PROGRAMS.

       During the Term of Employment, the Executive shall be eligible to
participate in the Company's long-term incentive compensation programs
applicable to the Company's senior executives, as such programs may be
established and modified from time to time by the Board in its sole discretion.

7. EMPLOYEE BENEFIT PROGRAMS.

       During the Term of Employment, the Executive shall be entitled to
participate in all employee welfare and pension benefit plans, programs and/or
arrangements offered by the Company from time to time to its senior executives,
to the same extent and on the same terms applicable to other senior executives.

8. REIMBURSEMENT OF BUSINESS EXPENSES.

       During the Term of Employment, the Executive is authorized to incur
reasonable business expenses in carrying out his duties and responsibilities
under this Agreement, and the Company shall reimburse him for all such
reasonable business expenses reasonably incurred in connection with carrying out
the business of the Company, subject to documentation in accordance with the
Company's policy.

9. VACATION.

       During the Term of Employment, the Executive shall be entitled to paid
vacation days each calendar year in accordance with the Company's vacation
policy.

10. TERMINATION OF EMPLOYMENT.

       (a) TERMINATION DUE TO DEATH OR DISABILITY. In the event Executive's
employment is terminated due to Executive's death or Disability, the Term of
Employment shall end as of the date of the Executive's death or termination of
employment due to Disability, and Executive, his estate and/or beneficiaries, as
the case may be, shall be entitled to the following:


                                       5



            (i) Base Salary earned by Executive but not paid through the date of
       termination under this SECTION 10(a);

            (ii) all long-term incentive compensation awards earned by Executive
       but not paid prior to the date of termination under this SECTION 10(a);

            (iii) a pro rata Target Bonus award for the year in which
       termination under this SECTION 10(a) occurs, as determined in its sole
       discretion by the Board of Directors;

            (iv) all stock options held by the Executive as of the date of the
       termination under this SECTION 10(a) that are not exercisable as of that
       date shall be deemed to have been held by the Executive for an additional
       12 months, for purposes of vesting and exercise rights, and any
       unexercisable stock options which are deemed exercisable as a result
       thereof shall remain exercisable as provided in SECTION 10(a)(v) below;

            (v) all exercisable stock options held by the Executive as of the
       date of termination under this SECTION 10(a) shall remain exercisable
       until the earlier of (1) the end of the 1-year period following the date
       of termination, or (2) the date the option would otherwise expire;

            (vi) any amounts earned, accrued or owing to the Executive but not
       yet paid under SECTIONS 6, 7, 8, or 9 above, and in the event of
       termination due to Disability, benefits due to Executive under the
       Company's then-current disability program;

            (vii) six months of Severance Pay, commencing on the first day of
       the month following the month in which termination under this SECTION
       10(A) occurred; and

            (viii) the Company's lapsing repurchase right with respect to shares
       of restricted stock held by the Executive shall lapse with respect to the
       Pro-Rata Share of Restricted Stock. The "period" referenced in the first
       sentence of the definition of "Pro-Rata Share of Restricted Stock," and
       the "period in question" referenced in the second sentence of that
       definition shall be 12 months.

       (b) TERMINATION BY THE COMPANY FOR CAUSE; TERMINATION BY THE EXECUTIVE
WITHOUT GOOD REASON; OR NONRENEWAL OF THE AGREEMENT BY THE EXECUTIVE. In the
event the Company terminates the Executive's employment for Cause, or if
Executive terminates his employment without Good Reason, or if the Executive
gives notice of nonrenewal of this Agreement, the Term of Employment shall end
as of the date specified below, and the Executive shall be entitled to the
following:

            (i) Base Salary earned by Executive but not paid through the date of
       termination of Executive's employment under this SECTION 10(b);

            (ii) any amounts earned, accrued or owing to the Executive but not
       yet paid under SECTIONS 6, 7, 8, or 9 above; and

            (iii) a pro rata Target Bonus award for the year in which
       termination under this SECTION 10(b) occurs, as determined in its sole
       discretion by the Board of Directors.


                                       6


       Termination by Company for Cause shall be effective as of the date
noticed by the Company. Termination by Executive without Good Reason shall be
effective upon 90 days' prior written notice to the Company, and shall not be
deemed a breach of this Agreement. In the event that the Executive gives notice
of non-renewal in accordance with SECTION 2 above, the Term of Employment shall
end on the last day of the then-current Term.

       In the event of termination by Executive without Good Reason, the Company
may elect to waive the period of notice, or any portion thereof, and, if the
Company so elects, the Company will pay the Executive his Base Salary for the
notice period or for any remaining portion thereof.

       (c) TERMINATION BY THE COMPANY WITHOUT CAUSE; TERMINATION BY THE
EXECUTIVE FOR GOOD REASON OR NONRENEWAL OF THE AGREEMENT BY THE COMPANY. If the
Executive's employment is terminated by the Company without Cause (other than
due to death or Disability), is terminated by the Executive for Good Reason, or
if the Company gives notice of nonrenewal of this Agreement, the Executive shall
be entitled to the following:

            (i) Base Salary earned by Executive but not paid through the date of
       termination of Executive's employment under this SECTION 10(c);

            (ii) all long-term incentive compensation awards earned by Executive
       but not paid prior to the date of termination of Executive's employment
       under this SECTION 10(c);

            (iii) Twelve months of Severance Pay, commencing on the first day of
       the month following the month during which the Executive's employment is
       terminated under this SECTION 10(c); PROVIDED, HOWEVER, that if the
       Executive dies while receiving benefits under this Section, all payments
       shall immediately cease, but in no event shall the Executive or his
       estate or beneficiaries receive less than a total of six months of
       Severance Pay.

            (iv) a pro rata Target Bonus award for the year in which the
       termination of the Executive's employment occurs under this SECTION
       10(c), as determined in its sole discretion by the Board of Directors;

            (v) all exercisable stock options held by the Executive as of the
       date of the termination of his employment under this SECTION 10(c) shall
       remain exercisable until the earlier of (1) the end of the one-year
       period following the date of the termination of his employment or (2) the
       date the stock option would otherwise expire;

            (vi) all stock options held by the Executive as of the date of the
       termination under this SECTION 10(c) that are not exercisable as of that
       date shall be deemed to have been held by the Executive for an additional
       18 months, for purposes of vesting and exercise rights, and any stock
       options which become exercisable as a result thereof shall remain
       exercisable as provided in SECTION 10(c)(v) above;

            (vii) any amounts earned, accrued or owing to the Executive but not
       yet paid under SECTIONS 6, 7, 8, or 9 above;

            (viii) continued participation, as if the Executive were still an
       employee, in the Company's medical, dental, hospitalization and life
       insurance plans in which Executive


                                       7



       participated on the date of termination of employment under this SECTION
       10(c), until the earlier of:

                 (A) the end of the period during which Severance Pay is payable
            under SECTION 10(D)(III) above; or

                 (B) the date, or dates, the Executive receives equivalent
            coverage and benefits under the plans, programs and/or arrangements
            of a subsequent employer (such coverage and benefits to be
            determined on a coverage-by-coverage or benefit-by-benefit basis);

                            PROVIDED, HOWEVER, THAT:

                 (C) if the Executive is (i) precluded from continuing his
            participation in medical, dental, hospitalization and life insurance
            plans as provided in SECTION 10(c)(viii) because Executive is not an
            employee of the Company, and (ii) not receiving equivalent coverage
            and benefits through a subsequent employer, Executive shall be
            provided with the after-tax economic equivalent of the benefits
            provided under the plan, program or arrangement in which Executive
            is unable to participate for the period specified in SECTION
            10(c)(viii). The economic equivalent of any benefit foregone shall
            be deemed to be the lowest cost that would be incurred by the
            Executive in obtaining an equivalent benefit himself on an
            individual basis. Payment of such after tax economic equivalent
            shall be made quarterly in advance; and

            (ix) the Company's lapsing repurchase right with respect to shares
       of restricted stock held by the Executive shall lapse with respect to the
       Pro-Rata Share of Restricted Stock . The "period" referenced in the first
       sentence of the definition of "Pro-Rata Share of Restricted Stock," and
       the "period in question" referenced in the second sentence of that
       definition shall be 18 months.

       Notwithstanding anything to the contrary in this Section 10, the terms of
any Option Agreement or Restricted Stock Agreement shall govern the
acceleration, if any, of vesting or lapsing of the Company's repurchase rights,
as applicable, except to the extent that the terms of this Employment Agreement
are more favorable to the Executive.

       If the Company gives notice of nonrenewal in accordance with Section 2
above, the Term of Employment shall end on the last day of the then current
term.

11. MITIGATION.

       In the event of any termination of this Agreement, Company is hereby
authorized to offset against any Severance Pay due the Executive during the
period for which Severance Pay is due under SECTION 10 any remuneration earned
by the Executive during that period and attributable to any subsequent
employment or engagement that the Executive may obtain. Executive shall provide
Company written notice of subsequent employment or engagement no later than five
(5) business days after commencement by Executive of such employment or
engagement.

12. CONFIDENTIALITY; ASSIGNMENT OF RIGHTS.

       (a) During the Term of Employment and thereafter, the Executive shall not
disclose to anyone or make use of any trade secret or proprietary or
confidential information of the


                                       8



Company, including such trade secret or proprietary or confidential information
of any customer of the company or other entity that has provided such
information to the Company, which Executive acquires during the Term of
Employment, including but not limited to records kept in the ordinary course of
business, except (i) as such disclosure or use may be required or appropriate in
connection with his work as an employee of the Company, (ii) when required to do
so by a court of law, by any governmental agency having supervisory authority
over the business of the Company or by any administrative or legislative body
(including a committee thereof) with apparent jurisdiction to order him to
divulge, disclose or make accessible such information, or (iii) as to such
confidential information that becomes generally known to the public or trade
without violation of this SECTION 12(a).

       (b) The Executive hereby sells, assigns and transfers to the Company all
of his right, title and interest in and to all inventions, discoveries,
improvements and copyrightable subject matter (the "rights") which during the
Term of Employment are made or conceived by him, alone or with others, and which
are within or arise out of any general field of the Company's business or arise
out of any work Executive performs or information Executive receives regarding
the business of the Company while employed by the Company. The Executive shall
fully disclose to the Company as promptly as available all information known or
possessed by him concerning the rights referred to in the preceding sentence,
and upon request by the Company and without any further remuneration in any form
to him by the Company, but at the expense of the Company, execute all
applications for patents and for copyright registration, assignments thereof and
other instruments and do all things which the Company may deem necessary to vest
and maintain in it the entire right, title and interest in and to all such
rights.

13. NONCOMPETITION; NONSOLICITATION.

       (a) Notwithstanding any of the provisions herein to the contrary, in the
event that the Executive's employment with the Company is terminated for any
reason other than due to Executive's death or termination by Executive for Good
Reason, the Executive shall not engage in Competitive Activity for a period not
to exceed the lesser of 12 months from the date of termination under such
applicable provision listed above or the maximum length of time allowed under
then current Massachusetts State law. The Company may, at its election, waive
its rights of enforcement under this SECTION 13(a).

       (b) The Parties acknowledge that in the event of a breach or threatened
breach of SECTIONS 12 or 13(a), the Company shall not have an adequate remedy at
law. Accordingly, in the event of any breach or threatened breach of SECTIONS 12
OR 13(a), the Company shall be entitled to such equitable and injunctive relief
as may be available to restrain the Executive and any business, firm,
partnership, individual, corporation or entity participating in the breach or
threatened breach from the violation of the provisions of SECTIONS 12 or 13(a)
above. Nothing in this Agreement shall be construed as prohibiting the Company
from pursuing any other remedies available at law or in equity for breach or
threatened breach of SECTIONS 12 or 13(a) including the recovery of damages.

14. ASSIGNABILITY; BINDING NATURE.

       This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of the Executive)
and assigns. No rights or obligations of the Company under this Agreement may be
assigned or transferred by the Company except that


                                       9


such rights or obligations may be assigned or transferred pursuant to a merger
or consolidation in which the Company is not the continuing entity, or the sale
or liquidation of all or substantially all of the assets of the Company;
PROVIDED, HOWEVER, that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law.

15. REPRESENTATIONS.

       The Company represents and warrants that it is fully authorized and
empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any agreement between it and
any other person, firm or organization. The Executive represents and warrants
that no agreement exists between him and any other person, firm or organization
that would be violated by the performance of his obligations under this
Agreement.

16. ENTIRE AGREEMENT.

       This Agreement contains the entire understanding and agreement between
the Parties concerning the subject matter hereof and supersedes all prior
agreements, understandings, discussions, negotiations and undertakings, whether
written or oral, between the Parties with respect thereto.

17. AMENDMENT OR WAIVER.

       No provision in this Agreement may be amended unless such amendment is
agreed to in writing and signed by the Executive and an authorized officer of
the Company. No waiver by either Party of any breach by the other Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent time. Any waiver must be in writing and
signed by the Executive or an authorized officer of the Company, as the case may
be.

18. SEVERABILITY.

       In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.

19. SURVIVORSHIP.

       The respective rights and obligations of the Parties hereunder shall
survive any termination of the Executive's employment to the extent necessary to
the intended preservation of such rights and obligations.

20. BENEFICIARIES/REFERENCES.

       The Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following the Executive's death by
giving the Company written notice thereof. In the event of the Executive's death
or a judicial determination of his incompetence, reference in this


                                       10



Agreement to the Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.

21. GOVERNING LAW/JURISDICTION.

       This Agreement shall be governed by and construed and interpreted in
accordance with the laws of the Commonwealth of Massachusetts without reference
to principles of conflict of laws.

22. RESOLUTION OF DISPUTES.

       Any disputes arising under or in connection with this Agreement may, at
the election of the Executive or the Company, be resolved by binding
arbitration, to be held in Massachusetts in accordance with the Rules and
Procedures of the American Arbitration Association. If arbitration is elected,
the Executive and the Company shall mutually select the arbitrator. If the
Executive and the Company cannot agree on the selection of an arbitrator, each
Party shall select an arbitrator and the two arbitrators shall select a third
arbitrator, and the three arbitrators shall form an arbitration panel which
shall resolve the dispute by majority vote. Judgment upon the award rendered by
the arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. Costs of the arbitrator or arbitrators and other similar costs in
connection with an arbitration shall be shared equally by the Parties; all other
costs, such as attorneys' fees incurred by each Party, shall be borne by the
Party incurring such costs.

23. NOTICES.

       All notices that are required or permitted hereunder shall be in writing
and sufficient if delivered personally, sent by facsimile (and promptly
confirmed by personal delivery, registered or certified mail or overnight
courier), sent by nationally-recognized overnight courier or sent by registered
or certified mail, postage prepaid, addressed as follows:

       If to the Company:   Vertex Pharmaceuticals Incorporated
                            130 Waverly Street
                            Cambridge, MA 02139-4242
                            Attn: Chairman of the Board
                            with a copy to:
                            Vice President of HR


       If to the Executive: Kenneth S. Boger
                            200 Church Street Rear
                            Newton, MA  02458

       Any such notice shall be deemed to have been given: (a) when delivered if
personally delivered or sent by facsimile on a business day: (b) on the business
day after dispatch if sent by nationally-recognized overnight courier; and/or
(c) on the fifth business day following the date of mailing if sent by mail.


                                       11


24. HEADINGS.

       The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.

25. COUNTERPARTS.

       This Agreement may be executed in two or more counterparts.

26. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.

       If any payment or benefit received by Executive pursuant to this
Agreement, but determined without regard to any additional payments required
under this Agreement, would be subject to the excise tax imposed by Section 4999
of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest
or penalties are incurred by the Executive with respect to such excise tax, the
Company will pay to Executive an additional amount in cash (the "Additional
Amount") equal to the amount necessary to cause the aggregate payments and
benefits received by Executive, including such Additional Amount (net of all
federal, state, and local income and payroll taxes and all taxes payable as a
result of the application of Sections 280G and 4999 of the Code and including
any interest and penalties with respect to such taxes) to be equal to the
aggregate payments and benefits Executive would have received, excluding such
Additional Amount (net of all federal, state and local income and payroll taxes)
as if Sections 280G and 4999 of the Code (and any successor provisions thereto)
had not been enacted into law.

       If the Company and the Executive do not agree on the calculation of the
amount of any such Additional Amount, Executive may submit to the Company a
written opinion (the "Opinion") of a nationally recognized accounting firm,
employment consulting firm, or law firm selected by Executive setting forth a
statement and a calculation of the Additional Amount. The determination of such
firm concerning the extent of the Additional Amount (which determination need
not be free from doubt), shall be final and binding on both Executive and the
Company. The Company will pay to Executive the Additional Amount not later than
ten (10) business days after such firm has rendered the Opinion. The Company
agrees to pay the reasonable fees and expenses of such firm in preparing and
rendering the Opinion.

       If, following the payment to Executive of the Additional Amount,
Executive's liability for the excise tax imposed by Section 4999 of the Code on
the payments and benefits received by Executive is finally determined (at such
time as the Internal Revenue Service is unable to make any further adjustment to
the amount of such liability) to be less than the amount thereof set forth in
the Opinion, the Executive shall promptly file for a refund with respect
thereof, and the Executive shall promptly pay to the Company the amount of such
refund when received (together with any interest paid or credited thereon after
taxes applicable thereto). If, following the payment to Executive of the
Additional Amount, Executive's liability for the excise tax imposed by Section
4999 of the Code on the payments and benefits received by Executive is finally
determined (at such time as the Internal Revenue Service is unable to make any
further adjustment to the amount of such liability) to be more than the amount
thereof set forth in the Opinion and the Executive thereafter is required to
make a further payment of any such excise


                                       12



tax, the Company shall promptly pay to or for the benefit of the Executive an
additional Additional Amount in respect of such underpayment.


       IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.

                                         VERTEX PHARMACEUTICALS INCORPORATED


                                       /s/ VICKI L. SATO
                                       -----------------------------------------
                                       Vicki L. Sato, President



                                       /s/ KENNETH S. BOGER
                                       -----------------------------------------
                                       Kenneth S. Boger




                                                                   EXHIBIT 10.12

                                November 8, 2004


N. Anthony Coles, M.D.
166 Fisher Avenue
Brookline, MA  02445

Re:  AMENDMENT TO CHANGE OF CONTROL AGREEMENT

Dear Tony:

       The offer letter from Vertex Pharmaceuticals Incorporated to you dated as
of February 21, 2002 (the "AGREEMENT") hereby is amended, effective November 8,
2004, as follows:

1. Insert the following after the last full paragraph under the heading entitled
"Severance Payment Upon Termination by the Company without Cause or by You for
Good Reason," and after the last full paragraph under the heading "Severance
Payment Upon a Change of Control:"

       "The Company's lapsing repurchase right with respect to shares of
       restricted stock held by you shall lapse with respect to the "Pro-Rata
       Share of Restricted Stock."

2. After the definition of "Cause," insert the following:

       "For purposes of this offer, "PRO-RATA SHARE OF RESTRICTED STOCK" shall
       mean, for any grant of restricted stock as to which the Company's
       repurchase right lapses ratably over a specified period (e.g. in equal
       annual increments over four years), that number of shares as to which the
       Company's repurchase right with respect to those shares would have lapsed
       if the Executive's employment by the Company had continued an additional
       18 month period. For any other shares of restricted stock, "Pro-Rata
       Share of Restricted Stock" shall mean, as to any shares of restricted
       stock which were granted on the same date and as to which the Company's
       repurchase right lapses on the same date, that portion of such shares
       calculated by multiplying the number of shares by a fraction, the
       numerator of which is the number of days that have passed since the date
       of grant, plus the number of days in 18 months, and the denominator of
       which is the total number of days from the date of the grant until the
       date (without regard to any provisions for earlier vesting upon
       achievement of a specified goal) on which the Company's repurchase right
       would lapse under the terms of the grant."







N. Anthony Coles, M.D.
November 8, 2004
Page 2

3. Insert the following after the definition of "Pro-Rata Share of Restricted
Stock:"

       "Notwithstanding anything to the contrary in this letter, the terms of
       any option agreement or restricted stock agreement shall govern the
       acceleration, if any, of vesting or lapsing of the Company's repurchase
       rights, as applicable, except to the extent that the terms of this
       agreement are more favorable to you."

       As so amended, the Agreement shall remain in full force and effect.

       If you agree to the foregoing amendment, please so indicate by signing
and returning the enclosed copy of this letter.

                                         VERTEX PHARMACEUTICALS INCORPORATED



                                         By: /s/ JOSHUA S. BOGER
                                            ------------------------------------
                                            Joshua S. Boger
                                            Chairman and Chief Executive Officer


Accepted and Agreed:


/s/ N. ANTHONY COLES
- -----------------------------------
N. Anthony Coles




                                                                   EXHIBIT 10.13

                    AMENDED AND RESTATED EMPLOYMENT AGREEMENT

       This Amended and Restated Employment Agreement (the "Agreement") amends
and restates, effective as of this 8th day of November, 2004, that certain
Employment Agreement made and entered into as of the 26th day of October, 2001
(the "ORIGINAL AGREEMENT") by and between Vertex Pharmaceuticals Incorporated, a
Massachusetts corporation (together with its successors and assigns, the
"COMPANY"), and Ian F. Smith (the "EXECUTIVE").

                               W I T N E S S E T H

       WHEREAS, the Company has employed the Executive as the Chief Financial
Officer of the Company since the date of the Original Agreement; and

       WHEREAS, the Company and the Executive desire to amend the Original
Agreement to extend certain terms of the Original Agreement beyond the Initial
Term, to add certain provisions regarding grants of restricted stock, which the
Company has begun issuing in addition to stock options since the date of the
Original Agreement, and to make certain other changes to clarify the meaning of
some provisions.

       NOW, THEREFORE, in consideration of the promises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"PARTY" and together the "PARTIES") agree as follows:

1. DEFINITIONS.

       (a) "BASE SALARY" shall mean the Executive's base salary in accordance
with SECTION 4 below.

       (b) "BOARD" shall mean the Board of Directors of the Company.

       (c) "CAUSE" shall mean (i) the Executive is convicted of a crime
involving moral turpitude, or (ii) the Executive commits a material breach of
any provision of this Agreement, or (iii) the Executive, in carrying out his
duties, acts or fails to act in such a manner which is determined, in the sole
discretion of the Board, to be (A) willful gross neglect or (B) willful gross
misconduct resulting, in either case, in material harm to the Company unless
such act, or failure to act, was believed by the Executive, in good faith, to be
in the best interests of the Company.

       (d) "CHANGE OF CONTROL" shall be deemed to have occurred if:

            (i) any "person" or "group" as such terms are used in Sections 13(d)
       and 14(d)(2) of the Securities Exchange Act of 1934 (the "Act"), becomes
       a beneficial owner, as such term is used in Rule 13d-3 promulgated under
       the Act, of securities of the Company representing 51% or more of the
       combined voting power of the outstanding securities of the Company,
       having the right to vote in the election of directors (any such owner
       being herein referred to as an "ACQUIRING PERSON");

            (ii) a majority of the Company's Board during any 12-month period,
       is replaced at a Company Board meeting or a Company shareholders'
       meeting, with individuals other than individuals nominated or approved by
       a majority of the Disinterested Directors;




            (iii) all or substantially all the business of the Company is
       disposed of pursuant to a merger, consolidation or other transaction
       (other than a merger, consolidation or other transaction with a company
       of which 50% or more of the combined voting power of the outstanding
       securities having a right to vote at the election of directors is owned,
       directly or indirectly, by the Company both before and immediately after
       the merger, consolidation or other transaction) in which the Company is
       not the surviving corporation or is materially or completely liquidated;
       or

            (iv) the Company combines with another company and is the surviving
       corporation (other than a merger, consolidation or other transaction with
       a company of which 50% or more of the combined voting power of the
       outstanding securities having a right to vote at the election of
       directors is owned, directly or indirectly, by the Company both before
       and immediately after the merger, consolidation or other transaction)
       but, immediately after the combination, the shareholders of the Company
       hold, directly or indirectly, less than 50% of the total outstanding
       securities of the combined company having the right to vote in the
       election of directors.

       (e) "COMMON STOCK" shall mean the common stock of the Company.

       (f) "COMPETITIVE ACTIVITY" shall mean engagement directly or indirectly,
individually or through any corporation, partnership, joint venture, trust,
limited liability company or person, as an officer, director, employee, agent,
consultant, partner, proprietor, shareholder or otherwise, in any business
associated with the biopharmaceutical or pharmaceutical industry, which, in the
sole discretion of the Company, is determined to compete with the business
and/or interests or future interests of the Company, or any of its affiliates,
at any place in which it, or any such affiliate, is then conducting its
business, or at any place where products manufactured or sold by it, or any such
affiliate, are offered for sale, or any place in the United States or any
possession or protectorates thereof, provided, however, that ownership of five
percent (5%) or less of the outstanding stock of any company whose shares trade
on any national exchange or market shall not be deemed to be competition with
the Company.

       (g) "DISABILITY" or "DISABLED" shall mean a disability as determined
under the Company's long-term disability plan or program in effect at the time
the disability first occurs, or if no such plan or program exists at the time of
disability, then a "disability" as defined under Internal Revenue Code Section
22(e)(3).

       (h) "DISINTERESTED DIRECTOR" shall mean any member of the Company's Board
(i) who is not an officer or employee of the Company or any of their
subsidiaries, (ii) who is not an Acquiring Person or an affiliate or associate
of an Acquiring Person or of any such affiliate or associate and (iii) who was a
member of the Company's Board prior to the date of this Agreement or was
recommended for election or elected by a majority of the Disinterested Directors
then on the Company's Board.

       (i) "EFFECTIVE DATE" shall mean October 26, 2001.

       (j) "GOOD REASON" shall mean that, without the Executive's consent, one
or more of the following events occurs and the Executive, of his own initiative,
terminates his employment:



                                       2



            (i) The Executive is assigned to any duties or responsibilities that
       are inconsistent, in any significant respect, with the scope of duties
       and responsibilities currently performed in his positions and offices as
       described in SECTION 3, provided that such reassignment of duties or
       responsibilities is not due to the Executive's Disability or the
       Executive's performance, nor is at the Executive's request;

            (ii) The Executive suffers a reduction in the authorities, duties,
       and responsibilities associated with his positions and offices as
       described in SECTION 3 on the basis of which the Executive makes a
       determination in good faith that the Executive can no longer carry out
       such positions or offices in the manner contemplated at the time this
       Agreement was entered into, provided that such reassignment of duties or
       responsibilities is not due to the Executive's Disability or the
       Executive's performance, nor is at the Executive's request;

            (iii) The Executive's Base Salary is decreased;

            (iv) The Executive's own office location as assigned to him by the
       Company is relocated thirty-five (35) or more miles from Cambridge,
       Massachusetts; or

            (v) Failure of any entity, in the event of a Change of Control to
       assume all obligations and liabilities of this Agreement.

       (k) "PRO-RATA SHARE OF RESTRICTED STOCK" shall mean for any period shall
mean, for any grant of restricted stock as to which the Company's repurchase
right lapses ratably over a specified period (e.g. in equal annual increments
over four years), that number of shares as to which the Company's repurchase
right with respect to those shares would have lapsed if the Executive's
employment by the Company had continued for such period. For any other shares of
restricted stock, "Pro-Rata Share of Restricted Stock" shall mean, as to any
shares of restricted stock which were granted on the same date and as to which
the Company's repurchase right lapses on the same date, that portion of such
shares calculated by multiplying the number of shares by a fraction, the
numerator of which is the number of days that have passed since the date of
grant, plus the number of days in the period in question, and the denominator of
which is the total number of days from the date of the grant until the date
(without regard to any provisions for earlier vesting upon achievement of a
specified goal) on which the Company's repurchase right would lapse under the
terms of the grant.

       (l) "SEVERANCE PAY" shall mean an amount equal to the sum of the Base
Salary in effect on the date of termination of the Executive's employment, plus
the amount of the Target Bonus for the Executive for the year in which the
Executive's employment is terminated, divided by twelve (12) (each of the 12
shares to constitute a "month's" Severance Pay); PROVIDED, HOWEVER, that in the
event the Executive terminates his employment for Good Reason based on a
reduction in Base Salary, then the Base Salary to be used in calculating
Severance Pay shall be the Base Salary in effect immediately prior to such
reduction in Base Salary.

       (m) "TARGET BONUS" shall mean a bonus for which the Executive is eligible
on an annual basis, at a level consistent with his title and responsibilities,
under the Company's bonus program then in effect and applicable to the Company's
senior executives generally, in such amount as may be determined in the sole
discretion of the Board.


                                       3



2. TERM OF EMPLOYMENT.

       The Company hereby employs the Executive, and the Executive hereby
accepts such employment, for the period commencing on the Effective Date and
ending on the third anniversary of the Effective Date, subject to earlier
termination in accordance with the terms of this Agreement. Absent such earlier
termination, the Term of employment shall automatically renew on each
anniversary of the Effective Date for additional one-year period(s), UNLESS (i)
the Company notifies the Executive in writing in accordance with SECTION 23
below, at least 90 days prior to the anniversary of the Effective Date that it
does not want the Term of employment to so renew, or (ii) the Executive has
notified the Company in writing in accordance with SECTION 23 below that the
Executive does not want the Term of employment to so renew.

3. POSITION, DUTIES AND RESPONSIBILITIES.

       On the Effective Date and continuing for the remainder of the Term of
employment, as extended or renewed, the Executive shall be employed as the Chief
Financial Officer of the Company, and shall be responsible for duties reasonably
associated with such position. The Executive shall represent and serve the
Company faithfully, conscientiously and to the best of the Executive's ability
and shall promote the interests, reputation and current and long term plans,
objectives and policies of the Company. The Executive shall devote all of the
Executive's time, attention, knowledge, energy and skills, during normal working
hours, and at such other times as the Executive's duties may reasonably require,
to the duties of the Executive's employment, provided, however, nothing set
forth herein shall prohibit the Executive from engaging in other activities to
the extent such activities do not impair the ability of the Executive to perform
his duties and obligations under this Agreement, nor are contrary to the
interests, reputation, current and long term plans, objectives and policies of
the Company.

4. BASE SALARY.

       During the Term of this Agreement, the Executive shall be paid an
annualized Base Salary of $300,000, payable in accordance with the regular
payroll practices of the Company. The Base Salary shall be reviewed no less
frequently than annually, and any increase thereto (which shall thereafter be
deemed the Executive's Base Salary) shall be solely within the discretion of the
Board.

5. TARGET BONUS/INCENTIVE COMPENSATION PROGRAM.

       a) TARGET BONUS PROGRAM: The Executive shall participate in the Company's
Target Bonus program (or other incentive compensation program) applicable to
executives, as established and modified from time to time by the Board in its
sole discretion, and in accordance with the terms of such program.

       b) SIGN-ON CASH BONUS: The Executive shall receive a sign-on cash bonus
in the amount of $150,000. Two-thirds ($100,000) of the sign-on cash bonus will
be paid to the Executive on the Effective Date, and the remaining one-third
($50,000) which is hereby deemed accrued and owed to the Executive will be paid
to the Executive upon the one-year anniversary of the Effective Date, regardless
of whether the executive is employed by the Company on the one year anniversary
of the effective date; PROVIDED, HOWEVER, that in the event the Executive
terminates this Agreement without "Good Reason" during the period commencing on


                                       4



the Effective Date and ending on the first anniversary of the Effective Date,
then the Executive shall repay to the Company within thirty (30) days of such
termination the sign-on cash bonus previously paid to the Executive.

       c) SIGN-ON STOCK OPTION GRANT: An initial stock option grant shall be
awarded to the Executive pursuant to the terms of the Company's stock option
plan. The initial stock option grant shall be for 110,000 shares of Company
capital stock and shall be subject to the terms and conditions specified in a
separate grant agreement.

6. LONG-TERM INCENTIVE COMPENSATION PROGRAMS.

       During the Term of employment, the Executive shall be eligible to
participate in the Company's applicable long-term incentive compensation
programs, as may be established and modified from time to time by the Board in
its sole discretion.

7. EMPLOYEE BENEFIT PROGRAMS.

       During the Term of employment, the Executive shall be entitled to
participate in all employee welfare and pension benefit plans, programs and/or
arrangements so offered by the Company from time to time to its senior
executives, to the same extent and on the same terms applicable to other senior
executives.

8. REIMBURSEMENT OF BUSINESS EXPENSES.

       During the Term of employment, the Executive is authorized to incur
reasonable business expenses in carrying out his duties and responsibilities
under this Agreement, and the Company shall reimburse him for all such
reasonable business expenses reasonably incurred in connection with carrying out
the business of the Company, subject to documentation in accordance with the
Company's policy.

9. VACATION.

       During the Term of employment, the Executive shall be entitled to paid
vacation days each calendar year in accordance with the Company's vacation
policy.

10. TERMINATION OF EMPLOYMENT.

       (a) TERMINATION DUE TO DEATH OR DISABILITY. In the event the Executive's
employment is terminated due to the Executive's death or Disability, the Term of
employment shall end as of the date of the Executive's death or termination of
employment due to Disability, and the Executive shall be entitled to the
following:

            (i) Base Salary earned by the Executive but not paid through the
       date of termination under this SECTION 10(a);

            (ii) all long-term incentive compensation awards earned by the
       Executive but not paid prior to the date of termination under this
       SECTION 10(a);

            (iii) a pro rata Target Bonus award for the year in which
       termination under this SECTION 10(a) occurs, as determined in its sole
       discretion by the Board of Directors;


                                       5



            (iv) all stock options held by the Executive as of the date of the
       termination under this SECTION 10(a) that are not exercisable or vested
       as of that date shall be deemed to have been held by the Executive for an
       additional 12 months, for purposes of vesting and exercise rights, and
       any unexercisable stock options which are deemed exercisable as a result
       thereof shall remain exercisable until the earlier of (1) the end of the
       of the 90-day period following the date of termination, or (2) the date
       the stock option would otherwise expire;

            (v) all exercisable and/or vested stock options held by the
       Executive as of the date of termination under this SECTION 10(a) shall
       remain exercisable until the earlier of (1) the end of the 1-year period
       following the date of termination, or (2) the date the option would
       otherwise expire;

            (vi) any amounts earned, accrued or owing to the Executive but not
       yet paid under SECTIONS 5(b), 6, 7, 8, or 9 above, and in the event of
       termination due to Disability, benefits due to the Executive under the
       Company's then-current disability program;

            (vii) six month's of Severance Pay, commencing on the first day of
       the month following the month in which termination under this SECTION
       10(a) occurred; and

            (viii) the Company's lapsing repurchase right with respect to shares
       of restricted stock held by the Executive shall lapse with respect to the
       Pro-Rata Share of Restricted Stock. The "period" referenced in the first
       sentence of the definition of "Pro-Rata Share of Restricted Stock," and
       "period in question" referenced in the second sentence of that definition
       shall be 12 months.

       Any and all payments due under SUBSECTIONS (i), (ii), (iii) and (vi) of
this SECTION 10(a) shall be paid, in the case of the Executive's death, to his
estate and/or beneficiaries within 60 days of his death and, in the case of
Disability, to the Executive within 60 days of his termination due to
Disability.

       (b) TERMINATION BY THE COMPANY FOR CAUSE; TERMINATION BY THE EXECUTIVE
WITHOUT GOOD REASON; OR NONRENEWAL OF AGREEMENT BY THE EXECUTIVE. In the event
the Company terminates the Executive's employment for Cause, or if the Executive
terminates his employment without Good Reason, or if the Executive gives notice
of nonrenewal of this Agreement, the Term of employment shall end as of the date
specified below, and the Executive shall be entitled to the following:

            (i) Base Salary earned by the Executive but not paid through the
       date of termination of the Executive's employment under this SECTION
       10(b);

            (ii) any amounts earned, accrued or owing to the Executive but not
       yet paid under SECTIONS 6, 7, 8, or 9 above;

            (iii) a pro rata Target Bonus award for the year in which
       termination under this SECTION 10(b) occurs, as determined in its sole
       discretion by the Board of Directors;

            (iv) any amount not yet paid under SECTION 5(b); PROVIDED, HOWEVER,
       that payments under SECTION 5(b) shall not be made by the Company in the
       event the Executive terminates this Agreement without "Good Cause" during
       the period


                                       6



       commencing on the Effective Date and ending on the first anniversary of
       the Effective Date; and

            (v) the Executive shall retain any rights associated with his stock
       options consistent with his grant agreement and the applicable stock
       option plan.

       Termination by Company for Cause shall be effective as of the date
noticed by the Company. Termination by the Executive without Good Reason shall
be effective upon 90 days' prior written notice to the Company, and shall not be
deemed a breach of this Agreement. In the event that the Executive gives notice
of non-renewal in accordance with SECTION 2 above, the Term of employment shall
end on the last day of the then-current Term.

       In the event of termination by the Executive without Good Reason, the
Company may elect to waive the period of notice, or any portion thereof, and, if
the Company so elects, the Company will pay the Executive his Base Salary for
the notice period or for any remaining portion thereof.

       Any and all payments due under this SECTION 10(b) shall be paid to the
Executive within 60 days of the date his employment terminates.

       (c) TERMINATION BY THE COMPANY WITHOUT CAUSE; TERMINATION BY THE
EXECUTIVE FOR GOOD REASON OR NONRENEWAL OF THE AGREEMENT BY THE COMPANY. If the
Executive's employment is terminated by the Company without Cause (other than
due to death or Disability ), is terminated by the Executive for Good Reason, or
if the Company gives notice of nonrenewal of this Agreement, the Executive shall
be entitled to the following:

            (i) Base Salary earned by the Executive but not paid through the
       date of termination of the Executive's employment under this SECTION
       10(c);

            (ii) all long-term incentive compensation awards earned by the
       Executive but not paid prior to the date of termination of the
       Executive's employment under this SECTION 10(c);

            (iii) Twelve months of Severance Pay, commencing on the first day of
       the month following the month during which the Executive's employment is
       terminated under this SECTION 10(c); PROVIDED, HOWEVER, that if the
       Executive dies while receiving benefits under this Section, all payments
       shall immediately cease, but in no event shall the Executive or his
       estate or beneficiaries receive less than a total of six months of
       Severance Pay;

            (iv) a pro rata Target Bonus award for the year in which the
       termination of the Executive's employment occurs under this SECTION
       10(c), as determined in its sole discretion by the Board of Directors;

            (v) the Company's lapsing repurchase right with respect to shares of
       restricted stock held by the Executive shall lapse with respect to the
       Pro-Rata Share of Restricted Stock, with the period referenced in the
       first sentence of the definition of "Pro-Rata Share of Restricted Stock"
       and "period in question" referenced in the second sentence of that
       definition being 18 months), PROVIDED, HOWEVER, that if such termination
       (1) is by


                                       7



       the Company without Cause or by the Executive for Good Reason, and (2)
       takes place within (90) days prior to a Change in Control or within
       twelve (12) months after a Change in Control, then the Company's lapsing
       repurchase right with respect to all shares of restricted stock held by
       the Executive shall lapse;

            (vi) all exercisable and/or vested stock options held by the
       Executive as of the date of the termination of his employment under this
       SECTION 10(c) shall remain exercisable until the earlier of (1) the end
       of the 90-day period following the date of the termination of his
       employment or (2) the date the stock option would otherwise expire;

            (vii) all stock options held by the Executive as of the date of the
       termination of his employment under this SECTION 10(c) that are not
       exercisable as of that date shall be deemed to have been held by the
       Executive for an additional 18 months and any stock options which become
       exercisable as a result thereof shall remain vested and exercisable until
       the earlier of (1) the end of the 90-day period following the date of the
       termination or (2) the date the stock option would otherwise expire;
       PROVIDED, HOWEVER, that if such termination (1) is by the Company without
       Cause or by the Executive for Good Reason, and (2) takes place within
       (90) days prior to a Change in Control or within twelve (12) months after
       a Change in Control, then all unexercisable and/or unvested stock options
       held by the Executive as of the date of the termination under this
       SECTION 10(c)(vii) shall be deemed exercisable, and any unexercisable
       and/or unvested stock options which become exercisable as a result
       thereof shall remain exercisable until the earlier of (a) the end of the
       90-day period following the date of the termination or (b) the date the
       stock option would otherwise expire;

            (viii) any amounts earned, accrued or owing to the Executive but not
       yet paid under SECTIONS 5(b), 6, 7, 8, or 9 above; and

            (ix) continued participation, as if the Executive were still an
       employee, in the Company's medical, dental, hospitalization and life
       insurance plans in which the Executive participated on the date of
       termination of employment, until the earlier of:

                 (A) exhaustion of Severance Pay; or

                 (B) the date, or dates, the Executive receives equivalent
            coverage and benefits under the plans, programs and/or arrangements
            of a subsequent employer (such coverage and benefits to be
            determined on a coverage-by-coverage or benefit-by-benefit basis);

                            PROVIDED, HOWEVER, THAT:

                 (C) if the Executive is (i) precluded from continuing his
            participation in medical, dental, hospitalization and life insurance
            plans as provided in SECTION 10(c)(ix) because the Executive is not
            an employee of the Company, and (ii) not receiving equivalent
            coverage and benefits through a subsequent employer, the Executive
            shall be provided with the after-tax economic equivalent of the
            benefits provided under the plan, program or arrangement in which
            the Executive is unable to participate for the period specified in
            SECTION 10(c)(ix). The economic equivalent of any benefit foregone
            shall be deemed to be the lowest cost that would be incurred by the
            Executive in obtaining


                                       8



            such benefit himself on an individual basis. Payment of such after
            tax economic equivalent shall be made quarterly in advance.

       Any and all payments due under subsections (i), (ii), (iv) and (viii) of
this SECTION 10(C) shall be paid to the Executive within 60 days of the date his
employment terminates.

       If the Company gives notice of nonrenewal in accordance with Section 2
above, the term of employment shall end on the last day of the then current
term.

       Notwithstanding anything to the contrary in this Section 10, the terms of
any Option Agreement or Restricted Stock Agreement shall govern the
acceleration, if any, of vesting or lapsing of the Company's repurchase rights,
as applicable, except to the extent that the terms of this Employment Agreement
are more favorable to the Executive.

11. MITIGATION.

       In the event of any termination of this Agreement, the Executive shall be
obligated to seek other employment, and the Company is hereby authorized to
offset against Severance Pay due the Executive under SECTION 10 any Base Salary
attributable to any subsequent employment or engagement that the Executive may
obtain. The Executive shall provide Company written notice of subsequent
employment or engagement no later than five (5) business days after commencement
by the Executive of such employment or engagement.

12. CONFIDENTIALITY; ASSIGNMENT OF RIGHTS.

       (a) During the Term of employment, as extended or renewed, and
thereafter, the Executive shall not disclose to anyone or make use of any trade
secret or proprietary or confidential information of the Company, including such
trade secret or proprietary or confidential information of any customer of the
Company or other entity that has provided such information to the Company, which
the Executive acquires during the Term of employment, as extended or renewed,
including but not limited to records kept in the ordinary course of business,
except (i) as such disclosure or use may be required or appropriate in
connection with his work as an employee of the Company, (ii) when required to do
so by a court of law, by any governmental agency having supervisory authority
over the business of the Company or by any administrative or legislative body
(including a committee thereof) with apparent jurisdiction to order him to
divulge, disclose or make accessible such information, or (iii) as to such
confidential information that becomes generally known to the public or trade
without violation of this SECTION 12(a).

       (b) The Executive hereby sells, assigns and transfers to the Company all
of his right, title and interest in and to all inventions, discoveries,
improvements and copyrightable subject matter (the "rights") which during the
Term of employment are made or conceived by him, alone or with others, and which
are within or arise out of any general field of the Company's business or arise
out of any work the Executive performs or information the Executive receives
regarding the business of the Company while employed by the Company. The
Executive shall fully disclose to the Company as promptly as available all
information known or possessed by him concerning the rights referred to in the
preceding sentence, and upon request by the Company and without any further
remuneration in any form to him by the Company, but at the expense of the
Company, execute all applications for patents and for copyright registration,
assignments thereof and other



                                       9



instruments and do all things which the Company may deem necessary to vest and
maintain in it the entire right, title and interest in and to all such rights.

13. NONCOMPETITION; NONSOLICITATION.

       (a) Notwithstanding any of the provisions herein to the contrary, in the
event that the Executive's employment with the Company is terminated for any
reason other than due to the Executive's death or termination by the Executive
for Good Reason, the Executive shall not engage in Competitive Activity for a
period not to exceed the lesser of 12 months from the date of termination under
such applicable provision listed above or the maximum time allowed under then
current Massachusetts State Law. The Company may, at its election, waive its
rights of enforcement under this SECTION 13(a).

       (b) The Parties acknowledge that in the event of a breach or threatened
breach of SECTIONS 12 or 13(a), the Company shall not have an adequate remedy at
law. Accordingly, in the event of any breach or threatened breach OF SECTIONS 12
OR 13(a), the Company shall be entitled to such equitable and injunctive relief
as may be available to restrain the Executive and any business, firm,
partnership, individual, corporation or entity participating in the breach or
threatened breach from the violation of the provisions of SECTIONS 12 or 13(a)
above. Nothing in this Agreement shall be construed as prohibiting the Company
from pursuing any other remedies available at law or in equity for breach or
threatened breach of SECTIONS 12 or 13(a) including the recovery of damages.

14. ASSIGNABILITY; BINDING NATURE.

       This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of the Executive)
and assigns. No rights or obligations of the Company under this Agreement may be
assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or the sale or liquidation of all or
substantially all of the assets of the Company; PROVIDED, HOWEVER, that the
assignee or transferee is the successor to all or substantially all of the
assets of the Company and such assignee or transferee assumes the liabilities,
obligations and duties of the Company, as contained in this Agreement, either
contractually or as a matter of law.

15. REPRESENTATIONS.

       The Company represents and warrants that it is fully authorized and
empowered to enter into this Agreement and that the performance of its
obligations under this Agreement will not violate any agreement between it and
any other person, firm or organization. The Executive represents and warrants
that no agreement exists between him and any other person, firm or organization
that would be violated by the performance of his obligations under this
Agreement.

16. ENTIRE AGREEMENT.

       This Agreement contains the entire understanding and agreement between
the Parties concerning the subject matter hereof and supersedes all prior
agreements, understandings, discussions, negotiations and undertakings, whether
written or oral, between the Parties with respect thereto.


                                       10



17. AMENDMENT OR WAIVER.

       No provision in this Agreement may be amended unless such amendment is
agreed to in writing and signed by the Executive and an authorized officer of
the Company. No waiver by either Party of any breach by the other Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent time. Any waiver must be in writing and
signed by the Executive or an authorized officer of the Company, as the case may
be.

18. SEVERABILITY.

       In the event that any provision or portion of this Agreement shall be
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.

19. SURVIVORSHIP.

       The respective rights and obligations of the Parties hereunder shall
survive any termination of the Executive's employment to the extent necessary to
the intended preservation of such rights and obligations.

20. BENEFICIARIES/REFERENCES.

       The Executive shall be entitled, to the extent permitted under any
applicable law, to select and change a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following the Executive's death by
giving the Company written notice thereof. In the event of the Executive's death
or a judicial determination of his incompetence, reference in this Agreement to
the Executive shall be deemed, where appropriate, to refer to his beneficiary,
estate or other legal representative.

21. GOVERNING LAW/JURISDICTION.

       This Agreement shall be governed by and construed and interpreted in
accordance with the laws of the Commonwealth of Massachusetts without reference
to principles of conflict of laws.

22. RESOLUTION OF DISPUTES.

       Any disputes arising under or in connection with this Agreement may, at
the election of the Executive or the Company, be resolved by binding
arbitration, to be held in Massachusetts in accordance with the Rules and
Procedures of the American Arbitration Association. If arbitration is elected,
the Executive and the Company shall mutually select the arbitrator. If the
Executive and the Company cannot agree on the selection of an arbitrator, each
Party shall select an arbitrator and the two arbitrators shall select a third
arbitrator, and the three arbitrators shall form an arbitration panel which
shall resolve the dispute by majority vote. Judgment upon the award rendered by
the arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. Costs of the arbitrator or arbitrators and other similar costs in
connection with an arbitration shall


                                       11



be shared equally by the Parties; all other costs, such as attorneys' fees
incurred by each Party, shall be borne by the Party incurring such costs.

23. NOTICES.

       All notices that are required or permitted hereunder shall be in writing
and sufficient if delivered personally, sent by facsimile (and promptly
confirmed by personal delivery, registered or certified mail or overnight
courier), sent by nationally-recognized overnight courier or sent by registered
or certified mail, postage prepaid, addressed as follows:


       If to the Company:   Vertex Pharmaceuticals Incorporated
                            130 Waverly Street
                            Cambridge, MA 02139-4242
                            Attn: Chairman of the Board
                            with a copy to:

       If to the Executive: At the Participant's home address then
                            listed in the Company's payroll records


       Any such notice shall be deemed to have been given: (a) when delivered if
personally delivered or sent by facsimile on a business day: (b) on the business
day after dispatch if sent by nationally-recognized overnight courier; and/or
(c) on the fifth business day following the date of mailing if sent by mail.

24. HEADINGS.

       The headings of the sections contained in this Agreement are for
convenience only and shall not be deemed to control or affect the meaning or
construction of any provision of this Agreement.

25. COUNTERPARTS.

       This Agreement may be executed in two or more counterparts.

26. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY.

       If any payment or benefit received by the Executive pursuant to this
Agreement, but determined without regard to any additional payments required
under this Agreement, would be subject to the excise tax imposed by Section 4999
of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest
or penalties are incurred by the Executive with respect to such excise tax, the
Company will pay to the Executive an additional amount in cash (the "Additional
Amount") equal to the amount necessary to cause the aggregate payments and
benefits received by the Executive, including such Additional Amount (net of all
federal, state, and local income and payroll taxes and all taxes payable as a
result of the application of Sections 280G and 4999 of the Code and including
any interest and penalties with respect to such taxes) to be equal to the
aggregate payments and benefits the Executive would have received, excluding


                                       12



such Additional Amount (net of all federal, state and local income and payroll
taxes) as if Sections 280G and 4999 of the Code (and any successor provisions
thereto) had not been enacted into law.

       Following the termination of the Executive's employment, the Executive
may submit to the Company a written opinion (the "Opinion") of a nationally
recognized accounting firm, employment consulting firm, or law firm selected by
the Executive setting forth a statement and a calculation of the Additional
Amount. The determination of such firm concerning the extent of the Additional
Amount (which determination need not be free from doubt), shall be final and
binding on both the Executive and the Company. The Company will pay to the
Executive the Additional Amount not later than ten (10) business days after such
firm has rendered the Opinion. The Company agrees to pay the reasonable fees and
expenses of such firm in preparing and rendering the Opinion.

       If, following the payment to the Executive of the Additional Amount, the
Executive's liability for the excise tax imposed by Section 4999 of the Code on
the payments and benefits received by the Executive is finally determined (at
such time as the Internal Revenue Service is unable to make any further
adjustment to the amount of such liability) to be less than the amount thereof
set forth in the Opinion, the Executive shall promptly file for a refund with
respect thereof, and the Executive shall promptly pay to the Company the amount
of such refund when received (together with any interest paid or credited
thereon after taxes applicable thereto). If, following the payment to the
Executive of the Additional Amount, the Executive's liability for the excise tax
imposed by Section 4999 of the Code on the payments and benefits received by the
Executive is finally determined (at such time as the Internal Revenue Service is
unable to make any further adjustment to the amount of such liability) to be
more than the amount thereof set forth in the Opinion and the Executive
thereafter is required to make a further payment of any such excise tax, the
Company shall promptly pay to or for the benefit of the Executive an additional
amount in respect of such underpayment.

       IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.



                                         Vertex Pharmaceuticals Incorporated



                                         /s/ JOSHUA S. BOGER
                                         ---------------------------------------
                                         Joshua S. Boger
                                         Chairman and Chief Executive Officer




                                         /s/ IAN F. SMITH
                                         ---------------------------------------
                                         Ian F. Smith





                                       13

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Exhibit 31.1

Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Joshua S. Boger, certify that:

1.

I have reviewed this quarterly report of Vertex Pharmaceuticals Incorporated;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a): designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c): disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a): all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 9, 2004

/s/ JOSHUA S. BOGER

Joshua S. Boger
Chairman and Chief Executive Officer

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Exhibit 31.1

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Exhibit 31.2

Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Ian F. Smith, certify that:

1.

I have reviewed this quarterly report of Vertex Pharmaceuticals Incorporated;

2.

3.

4.

a): designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c): disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5.

a): all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 9, 2004

/s/ IAN F. SMITH

Ian F. Smith
Senior Vice President and Chief Financial Officer

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Exhibit 31.2

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Exhibit 32.1

Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Vertex Pharmaceuticals Incorporated, a Massachusetts corporation (the "Company"), does hereby certify, to such officer's knowledge, that the Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (the "Form 10-Q") of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operation of the Company.

Dated: November 9, 2004		/s/ JOSHUA S. BOGER Joshua S. Boger Chairman and Chief Executive Officer (principal executive officer)
Dated: November 9, 2004		/s/ IAN F. SMITH Ian F. Smith Senior Vice President and Chief Financial Officer (principal financial officer)

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Exhibit 32.1